UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________.
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of October 31, 1999, there were 4,748,954 shares of Class A Common
Stock, par value $0.01 per share, and 18,868,606 shares of Class B Common Stock,
par value $0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Quarters Ended September 30,
1999 and 1998 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Income for the Nine Months Ended September 30,
1999 and 1998 (Unaudited) 4
Condensed Consolidated Balance Sheets at September 30,
1999 (Unaudited) and December 31, 1998 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net revenues $104,445 $ 75,655
-------- --------
Costs and expenses
Cost of sales (71,755) (66,558)
Selling and administrative expenses (17,270) (11,539)
-------- --------
Total costs and expenses (89,025) (78,097)
-------- --------
Operating income (loss) 15,420 (2,442)
-------- --------
Nonoperating income (expense)
Investment income 489 19
Interest expense (2,470) (429)
Gain on sale of investments, net 571 --
Equity in income (loss) of investments (2,470) 15
Other, net (269) (94)
-------- --------
Total nonoperating expense (4,149) (489)
-------- --------
Income (loss) before income taxes 11,271 (2,931)
Income tax benefit (expense) (5,939) 242
-------- --------
Net income (loss) 5,332 (2,689)
-------- --------
Other comprehensive income (loss) (net of taxes)
Foreign currency translation adjustment 1 (18)
Unrealized loss on marketable securities (38) (38)
-------- --------
Total other comprehensive loss (37) (56)
-------- --------
Comprehensive income (loss) $ 5,295 $ (2,745)
======== ========
Weighted average number of common shares outstanding
Basic 23,583 20,552
======== ========
Diluted 24,276 21,003
======== ========
Basic and diluted net income (loss) per common share $ 0.24 $ (0.13)
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net revenues $256,150 $225,237
-------- --------
Costs and expenses
Cost of sales (201,046) (191,786)
Selling and administrative expenses (42,655) (30,658)
-------- --------
Total costs and expenses (243,701) (222,444)
-------- --------
Operating income 12,449 2,793
-------- --------
Nonoperating income (expense)
Investment income 1,040 70
Interest expense (5,876) (989)
Gain on sale of investments, net 2,299 --
Equity in loss of investments (3,596) (256)
Other, net (743) (279)
-------- --------
Total nonoperating expense (6,876) (1,454)
-------- --------
Income before income taxes 5,573 1,339
Income tax expense (4,255) (1,889)
-------- --------
Net income (loss) 1,318 (550)
-------- --------
Other comprehensive income (loss) (net of taxes)
Foreign currency translation adjustment (60) (24)
Unrealized gain (loss) on marketable securities 57 (38)
-------- --------
Total other comprehensive loss (3) (62)
-------- --------
Comprehensive income (loss) $ 1,315 $ (612)
======== ========
Weighted average number of common shares outstanding
Basic 22,558 20,541
======== ========
Diluted 23,327 21,053
======== ========
Basic and diluted net income (loss) per common share $ 0.06 $ (0.03)
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 23,506 $ 341
Marketable securities 2,606 505
Receivables, net of allowance for doubtful accounts of
$8,809 and $6,349, respectively 46,535 49,879
Inventories 26,400 25,685
Programming costs 50,691 43,342
Deferred subscription acquisition costs 12,059 11,570
Other current assets 20,554 21,097
-------- --------
Total current assets 182,351 152,419
-------- --------
Property and equipment, at cost 39,682 39,042
Accumulated depreciation (31,286) (29,885)
-------- --------
Property and equipment, net 8,396 9,157
------- -------
Receivables 62,500 --
Programming costs 6,487 5,983
Goodwill, net of amortization of $1,887 and $432, respectively 94,282 2,053
Trademarks 46,384 17,294
Net deferred tax assets -- 6,525
Other noncurrent assets 28,652 18,676
-------- --------
Total assets $429,052 $212,107
======== ========
Liabilities
Short-term borrowings $ -- $ 29,750
Current financing obligations 1,969 --
Accounts payable 26,646 30,834
Accrued salaries, wages and employee benefits 8,140 6,024
Income taxes payable 1,227 819
Deferred revenues 51,292 41,647
Other liabilities and accrued expenses 11,863 9,919
-------- --------
Total current liabilities 101,137 118,993
Long-term financing obligations 88,031 --
Deferred revenues 55,650 --
Net deferred tax liabilities 11,196 --
Other noncurrent liabilities 13,001 8,912
-------- --------
Total liabilities 269,015 127,905
-------- --------
Shareholders' Equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,748,954 and
5,042,381 issued, respectively 47 50
Class B nonvoting - 30,000,000 shares authorized; 19,172,566
and 17,149,691 issued, respectively 192 171
Capital in excess of par value 112,951 44,860
Retained earnings 50,895 49,577
Foreign currency translation adjustment (230) (137)
Unearned compensation restricted stock (3,873) (3,716)
Unrealized gain (loss) on marketable securities 55 (32)
Less cost of treasury stock -- (6,571)
-------- --------
Total shareholders' equity 160,037 84,202
-------- --------
Total liabilities and shareholders' equity $429,052 $212,107
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 1,318 $ (550)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 1,424 1,488
Amortization of intangible assets 4,382 1,298
Gain on sale of investments, net (2,299) --
Amortization of investments in entertainment programming 25,913 17,758
Investments in entertainment programming (28,366) (19,246)
Net change in operating assets and liabilities 15,988 (12,729)
Other, net 376 (4)
-------- --------
Net cash provided by (used for) operating activities 18,736 (11,985)
-------- --------
Cash Flows From Investing Activities
Acquisition of Spice Entertainment Companies, Inc. (64,600) (2,007)
Sale of investments 12,693 --
Additions to property and equipment (687) (801)
Acquisitions and funding of equity interests
in international ventures (12,174) (2,791)
Purchase of marketable securities (2,000) (500)
Other, net 4 32
-------- --------
Net cash used for investing activities (66,764) (6,067)
-------- --------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings (29,750) 19,000
Increase in financing obligations 110,000 --
Repayment of financing obligations (20,000) --
Net proceeds from public equity offering 24,561 --
Payment of debt assumed in acquisition of Spice Entertainment
Companies, Inc. (10,471) --
Deferred financing fees (4,669) (100)
Proceeds from exercise of stock options 1,350 199
Proceeds from sales under employee stock purchase plan 172 156
-------- --------
Net cash provided by financing activities 71,193 19,255
-------- --------
Net increase in cash and cash equivalents 23,165 1,203
Cash and cash equivalents at beginning of period 341 947
-------- --------
Cash and cash equivalents at end of period $ 23,506 $ 2,150
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is unaudited
but, in the opinion of management, reflects all normal recurring adjustments
necessary for a fair presentation of the results for the interim periods. The
interim results of operations and cash flows are not necessarily indicative of
those results and cash flows for the entire year. These financial statements
should be read in conjunction with the financial statements and notes to the
financial statements contained in the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (the "1998 Form 10-K") of Playboy Enterprises, Inc.
and its subsidiaries (the "Company").
(B) ACQUISITION
On March 15, 1999, the Company completed its acquisition of Spice Entertainment
Companies, Inc. ("Spice"), a leading provider of adult television entertainment.
The current determination of the purchase price, including transaction costs and
the assumption of Spice debt, is approximately $128 million. The purchase price
and its allocation are subject to change upon final determination. The purchase
was financed through the issuance of approximately $48 million of the Company's
Class B common stock and the remainder through the payment and issuance of
long-term debt. See Note I Financing Obligations. The acquisition was accounted
for under the purchase method of accounting and, accordingly, the results of
Spice since the acquisition date have been included in the Company's Condensed
Consolidated Statements of Operations and Comprehensive Income. The excess of
the purchase price over the fair value of the net assets acquired is currently
approximately $94 million and has been recorded as goodwill, which is being
amortized over 40 years.
The following unaudited pro forma information presents a summary of the results
of operations of the Company assuming the acquisition occurred on January 1,
1998 (in thousands, except per share amounts):
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
Net revenues ........................................ $262,441 $243,409
Net loss ............................................ (252) (4,775)
Basic and diluted net loss per common share ......... $ (0.01) $ (0.21)
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense
primarily related to goodwill and increased interest expense related to the debt
financing. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on January 1,
1998, or of future results of operations.
(C) PLAYBOY TV INTERNATIONAL, LLC JOINT VENTURE
During the quarter ended September 30, 1999, the Company entered into a joint
venture with a wholly owned subsidiary of the Cisneros Group of Companies. The
venture, Playboy TV International, LLC ("PTVI"), has the exclusive right to
create and launch new television networks under the Playboy and Spice brands in
territories outside of the United States and Canada and, under certain
circumstances, to license programming to third parties. PTVI will also own and
operate existing international Playboy TV and Spice networks, which either have
been or will be sold or contributed by the Company to PTVI. In addition, the
Company and PTVI have entered into program supply and trademark license
agreements. Currently, the Company has a 19.9% interest in PTVI with an option
to increase up to 50% for a certain period of time. Each of the members of PTVI
has committed to fund the capital needs of PTVI in proportion to their
respective equity ownership. The Company expects that the revenues it receives
from the joint venture will exceed its funding obligations.
Under the arrangements with PTVI, the Company will receive $100 million, $30
million of which was received during the current year quarter, with the
remainder to be received over the next five years. PTVI also has a long-term
commitment with the Company to license international television rights to each
year's production output, with payments representing a percentage of the
Company's annual production spending.
7
<PAGE>
(D) SALE OF INVESTMENTS
In the quarter ended September 30, 1999, the Company sold its interests in
certain of its international TV networks to PTVI. Total proceeds under the
contract are $10.0 million, consisting of $3.0 million in cash in the current
year quarter with the remainder to be received over the next five years. The
Company realized a net gain before income taxes of $0.6 million in the current
year periods and recorded a deferred gain of $3.5 million, which is expected to
be realized over the next five years. The taxable gain on the sale was
immaterial and was offset by the application of a capital loss carryforward.
In the quarter ended March 31, 1999, the Company sold its wholly-owned
subsidiary, Playboy Gaming Greece Ltd., which owned a 12% interest in the
Playboy Casino at Hotel des Roses (the "Rhodes Casino"). Total proceeds of $5.2
million were received. These proceeds included a repayment of a loan of $1.2
million owed to the Company by the Rhodes Casino. The Company realized a gain
before income taxes of $1.7 million on the sale. The taxable gain on the sale
was immaterial and was offset by the application of a capital loss carryforward.
(E) INCOME TAXES
Associated with the Spice acquisition, $15.7 million of deferred tax liabilities
were recorded under the purchase method of accounting for certain identifiable
intangible assets, comprising trademarks, non-compete agreements and a film
library. Accordingly, after consideration of this additional $15.7 million of
deferred tax liabilities, at September 30, 1999, the Company was in a net
deferred tax liability position of $3.8 million that consisted of $7.4 million
of current deferred tax assets and $11.2 million of noncurrent deferred tax
liabilities. At December 31, 1998, prior to the Spice acquisition, the Company
was in a net deferred tax asset position of $13.9 million that consisted of $7.4
million of current deferred tax assets and $6.5 million of noncurrent deferred
tax assets.
As reported in the Company's 1998 Form 10-K, the deferred tax assets principally
include the anticipated benefit of net operating loss carryforwards ("NOLs").
Realization of those assets is dependent upon the Company's ability to generate
taxable income in future years. The recognition of benefits in the financial
statements is based upon projections by management of future operating income
and the anticipated reversal of temporary differences that will result in
taxable income. Projections of future earnings were based on adjusted historical
earnings.
In order to fully realize the net deferred tax asset of $13.9 million at
December 31, 1998, the Company will need to generate future taxable income of
approximately $39.7 million prior to the expiration, beginning in 2009, of the
Company's NOLs. Management believes that it is more likely than not that the
required amount of such taxable income will be realized. Management will
periodically reconsider the assumptions utilized in the projection of future
earnings and, if warranted, increase or decrease the amount of deferred tax
assets through an adjustment to the valuation allowance.
(F) COMPREHENSIVE INCOME
The following sets forth the components of other comprehensive income (loss),
and the related tax expense or benefit allocated to each item (in thousands):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Foreign currency translation adjustment (1) . $ 1 $ (18) $ (60) $ (24)
Unrealized gain (loss) on marketable
securities (2) ......................... $ (38) $ (38) $ 57 $ (38)
</TABLE>
(1) Net of a related tax benefit of $33 for the nine months ended September
30, 1999, and $9 and $13 for the quarter and nine months ended September
30, 1998, respectively. There was no related income tax expense for the
quarter ended September 30, 1999.
(2) Net of a related tax benefit of $21 and tax expense of $30 for the quarter
and nine months ended September 30, 1999, respectively, and a related tax
benefit of $21 for both the quarter and nine months ended September 30,
1998.
8
<PAGE>
(G) INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share ("EPS") (in thousands, except per share amounts):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted EPS-net income (loss) $ 5,332 $ (2,689) $ 1,318 $ (550)
======== ======= ======== ========
Denominator:
Denominator for basic EPS-
weighted-average shares ................. 23,583 20,552 22,558 20,541
-------- ------- -------- --------
Effect of dilutive potential common shares:
Stock options ........................... 693 451 769 512
-------- ------- -------- --------
Dilutive potential common shares ...... 693 451 769 512
-------- ------- -------- --------
Denominator for diluted EPS-
adjusted weighted-average shares ........ 24,276 21,003 23,327 21,053
======== ======= ======== ========
Basic and Diluted EPS ....................... $ 0.24 $ (0.13) $ 0.06 $ (0.03)
======== ======= ======== ========
</TABLE>
During the quarter and nine months ended September 30, 1999, approximately
325,000 and 335,000 weighted-average shares of Class B restricted stock awards
outstanding, respectively, were not included in the computation of diluted EPS
as the operating income objectives applicable to these restricted awards were
not met during those periods. Additionally, options to purchase approximately
345,000 and 285,000 weighted-average shares of Class B common stock were
outstanding during the quarter and nine months ended September 30, 1999,
respectively, but were not included in the computation of diluted EPS as the
options' exercise prices were greater than the average market price of the Class
B common stock, the effect of which was antidilutive.
(H) INVENTORIES
Inventories, which are stated at the lower of cost (average cost and specific
cost) or market, consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Paper ............................................... $ 7,190 $ 8,277
Editorial and other prepublication costs ............ 6,865 6,052
Merchandise finished goods .......................... 12,345 11,356
-------- --------
Total inventories ................................ $ 26,400 $ 25,685
======== ========
(I) FINANCING OBLIGATIONS
In connection with financing the Company's acquisition of Spice, the Company
entered into a new $150.0 million credit agreement dated as of February 26,
1999. The new agreement provided financing to (a) purchase all of the
outstanding shares of Spice and pay related acquisition costs; (b) repay the
existing debt of the Company and Spice; and (c) fund future general working
capital and investment needs.
The new agreement originally consisted of three components: a $40.0 million
revolving credit facility with a $10.0 million letter of credit sublimit; a
$35.0 million tranche A term loan; and a $75.0 million tranche B term loan. On
September 16, 1999, the Company used $20.0 million of the cash proceeds from
PTVI to repay the term debt which reduced the credit facility to $130.0 million.
The revolving credit facility and tranche A term loan mature on March 15, 2004.
The tranche B term loan matures on March 15, 2006. Loans bear interest at a rate
equal to specified index rates plus margins that fluctuate based on the
Company's ratio of consolidated debt to consolidated adjusted EBITDA (earnings
before income taxes plus interest expense, depreciation and amortization, less
cash investments in programming). The Company's obligations under the agreement
are unconditionally guaranteed by each of the Company's existing and
subsequently acquired domestic restricted subsidiaries (all domestic
subsidiaries except Playboy Online, Inc.). The agreement and related guarantees
are secured by substantially all of Playboy Enterprises, Inc.'s and its domestic
restricted subsidiaries' assets.
9
<PAGE>
The agreement contains financial covenants requiring the Company to maintain
certain leverage, cash flow, interest coverage and fixed charge coverage ratios.
Other covenants include limitations on other indebtedness, investments, capital
expenditures and dividends. The agreement also requires mandatory prepayments
with net cash proceeds resulting from excess cash flow, asset sales and the
issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement.
For the quarter ended September 30, 1999, the Company received a waiver on the
financial covenants contained in the credit agreement, until January 12, 2000.
During this period, the Company and the banks will reset the covenant levels to
reflect recent business developments, including, among other things, the benefit
of the PTVI venture and the decline in the Catalog business. Management expects
to have the new covenants in place prior to the end of the fiscal year. While
the waiver remains in effect, the Company has agreed to not draw upon the
revolving credit facility. Management believes that the Company's cash and cash
equivalents on hand will provide the necessary liquidity during this period.
(J) CONTINGENCIES
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act of 1996 (the "Telecommunications Act"), which, among
other things, regulates the cable transmission of adult programming, such as the
Company's domestic pay television programs. Enforcement of Section 505 of the
Telecommunications Act ("Section 505") commenced May 18, 1997. The Company's
full case on the merits was heard by the United States District Court in
Wilmington, Delaware (the "Delaware District Court") in March 1998. In December
1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants have appealed this judgment and the United
States Supreme Court (the "Supreme Court") will hear the appeal on November 30,
1999. Management believes that the effect of Section 505 on the Company's
financial performance is likely to continue until the case is finally decided.
(K) PUBLIC EQUITY OFFERING
In May 1999, the Company completed a public equity offering of 2,875,000 shares
of nonvoting Class B common stock at a price of $30.00 per share. Two million
shares were sold by a trust established by, and for the benefit of, Hugh M.
Hefner, the Company's founder and principal stockholder, and 875,000 shares were
sold by the Company. Of the Company's shares, 375,000 were sold upon exercise by
the underwriters of their over-allotment option. The Company did not receive any
of the proceeds from the sale of Class B common stock by Mr. Hefner. Mr. Hefner
is responsible for expenses related to this transaction proportionate to the
number of shares he sold to the total number of shares sold in the offering. Net
proceeds to the Company of $24.6 million are being used for general corporate
purposes.
(L) TREASURY STOCK
There were no Class A or Class B common shares held as treasury stock at
September 30, 1999. All shares of treasury stock were cancelled under terms of
the merger agreement between the Company and Spice. At December 31, 1998,
treasury stock consisted of 293,427 Class A common shares and 951,041 Class B
common shares.
(M) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
The following summarizes non-cash investing and financing activities related to
the Spice acquisition (in thousands):
(Unaudited)
Nine Months
Ended
Sept. 30, 1999
--------------
Fair value of net assets acquired, including goodwill.......... $ 127,562
Acquisition liabilities........................................ (3,735)
Payment of debt assumed........................................ (10,471)
Common stock issued............................................ (48,429)
---------
Cash paid...................................................... 64,927
Less: cash acquired............................................ (327)
---------
Net cash paid for the Spice acquisition........................ $ 64,600
=========
See Note B Acquisition.
10
<PAGE>
(N) SEGMENT INFORMATION
The following tables represent financial information by reportable segment (in
thousands):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues
Publishing (1) .............................. $ 33,586 $ 33,946 $ 97,675 $ 97,111
Entertainment ............................... 52,009 21,942 98,698 65,002
Product Marketing ........................... 1,361 1,556 4,440 5,762
Catalog ..................................... 13,776 16,295 43,812 50,781
Casino Gaming ............................... 300 25 600 25
Playboy Online .............................. 3,294 1,797 8,862 4,797
Corporate Marketing (1) ..................... 119 94 2,063 1,759
-------- -------- -------- --------
Total .................................... $104,445 $ 75,655 $256,150 $225,237
======== ======= ======== ========
Income (Loss) Before Income Taxes
Publishing (1) .............................. $ 542 $ 1,465 $ 3,441 $ 4,902
Entertainment ............................... 25,537 5,825 35,965 18,276
Product Marketing ........................... 75 (985) 542 101
Catalog ..................................... (704) 573 (1,257) 2,127
Casino Gaming ............................... (217) (201) (461) (599)
Playboy Online .............................. (1,919) (2,128) (5,585) (4,319)
Corporate Administration and Promotion (1) .. (7,894) (6,991) (20,196) (17,695)
Investment income ........................... 489 19 1,040 70
Interest expense ............................ (2,470) (429) (5,876) (989)
Gain on sale of investments, net ............ 571 -- 2,299 --
Equity in income (loss) of investments ...... (2,470) 15 (3,596) (256)
Other, net .................................. (269) (94) (743) (279)
-------- -------- -------- --------
Total .................................... $ 11,271 $ (2,931) $ 5,573 $ 1,339
======== ======= ======== ========
</TABLE>
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
-------- --------
Identifiable Assets
Publishing (1) ...................................... $ 44,259 $ 50,171
Entertainment (2) ................................... 289,491 85,783
Product Marketing ................................... 5,519 5,764
Catalog ............................................. 17,653 17,871
Casino Gaming ....................................... 1,717 4,416
Playboy Online ...................................... 1,344 1,282
Corporate Administration and Promotion (1) (3) ...... 69,069 46,820
-------- --------
Total (2) (3) .................................... $429,052 $212,107
======== ========
(1) Corporate amounts now include certain Company-wide marketing activities,
such as the Playboy Jazz Festival and Playmate promotions, that had
previously been reported in the Publishing Group.
(2) The increase in identifiable assets since December 31, 1998 is primarily
due to the Company's acquisition of Spice on March 15, 1999 and the
formation of PTVI in the quarter ended September 30, 1999.
(3) The increase in identifiable assets since December 31, 1998 is primarily
due to the net proceeds from the Company's public equity offering in May
1999.
11
<PAGE>
(O) PLAYBOY ONLINE PUBLIC EQUITY OFFERING
On September 28, 1999, the Company announced that the Board of Directors (the
"Board") approved plans to sell a minority interest in Playboy Online, its
online business group, to the public. The Company intends to file a registration
statement relating to the securities to be offered later this fiscal year.
(P) ACCOUNTING STANDARDS
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 137, Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133 ("Statement 137").
Statement 137 defers the effective date for financial statements issued for
fiscal years beginning after June 15, 2000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues increased 38% to $104.4 million for the quarter
ended September 30, 1999 compared to $75.7 million for the quarter ended
September 30, 1998. Revenues were $256.2 million for the nine months ended
September 30, 1999, a 14% increase over revenues of $225.2 million for the nine
months ended September 30, 1998. These increases were primarily due to higher
revenues from the Entertainment Group, principally due to the formation of PTVI,
a joint venture the Company entered into with the Cisneros Television Group
during the current year quarter. Also contributing to the increases were higher
revenues from the Playboy Online Group, partially offset by lower Catalog Group
revenues.
The Company reported operating income of $15.4 million for the quarter
ended September 30, 1999 compared to an operating loss of $2.4 million in the
prior year quarter. For the nine months ended September 30, 1999, the Company's
operating income was $12.4 million compared to $2.8 million in the prior year.
These increases were primarily due to higher operating income from the
Entertainment Group, principally due to the revenues related to PTVI. Lower
operating performance from the Catalog and Publishing Groups, as well as higher
Corporate Administration and Promotion expenses, partially offset the above for
both the quarter and nine-month period.
Net income for the quarter ended September 30, 1999 was $5.3 million, or
$0.24 per basic and diluted common share, compared to a net loss of $2.7
million, or $0.13 per basic and diluted common share, for the prior year
quarter. Net income for the nine months ended September 30, 1999 was $1.3
million, or $0.06 per basic and diluted common share, compared to a net loss of
$0.6 million, or $0.03 per basic and diluted common share, for the prior year.
Net income for the current year periods included higher interest expense,
primarily due to increased debt resulting from the acquisition of Spice. Both
current year periods also included a $0.6 million net gain from the sale of the
Company's interests in certain of its international TV networks to PTVI. Net
income for the current year nine-month period also reflected a $1.7 million gain
from the sale of the Company's interest in the Rhodes Casino. Additionally, both
of the current year periods included equity losses primarily related to the
Company's interest in PTVI. The current year nine-month period also included an
equity loss related to the Company's interests in its United Kingdom television
networks, which were sold to PTVI in the current year quarter.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary due to the timing of
recognizing library license fees related to PTVI.
PUBLISHING GROUP
Beginning with the quarter ended March 31, 1999, certain Company-wide
marketing activities, such as the Playboy Jazz Festival and Playmate promotions,
that had previously been reported in the Publishing Group are now included in
Corporate Administration and Promotion results. The revenues and operating
income of the Publishing Group were as follows for the periods indicated below
(in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Playboy Magazine ............................ $ 25.9 $ 26.2 $ 76.7 $ 75.8
Other Domestic Publishing ................... 5.6 5.5 13.8 13.9
International Publishing .................... 2.1 2.2 7.2 7.4
-------- ------- -------- --------
Total Revenues ........................... $ 33.6 $ 33.9 $ 97.7 $ 97.1
======== ======= ======== ========
Operating Income ............................ $ 0.5 $ 1.5 $ 3.4 $ 4.9
======== ======= ======== ========
</TABLE>
13
<PAGE>
Publishing Group revenues decreased $0.3 million, or 1%, for the quarter
ended September 30, 1999 compared to the prior year primarily due to lower
revenues from Playboy magazine. For the nine months ended September 30, 1999,
revenues increased $0.6 million, or 1%, compared to the prior year primarily due
to higher revenues from Playboy magazine.
For the quarter, Playboy magazine revenues declined $0.3 million, or 1%,
compared to the prior year. Circulation revenues decreased $1.2 million, or 6%,
primarily due to a $0.9 million, or 14%, decrease in newsstand revenues
principally as a result of fewer copies sold in comparison with the prior year
quarter which included a best-selling issue featuring Cindy Crawford.
Subscription revenues decreased $0.3 million, or 2%, reflecting in part the
problems facing direct marketing stamp sheet agents, which are affecting all
publishers. The lower circulation revenues were mostly offset by a $0.9 million,
or 14%, increase in advertising revenues due to increases in both the average
net revenue per page and ad pages.
For the nine-month period, Playboy magazine revenues increased $0.9
million, or 1%, compared to the prior year. Circulation revenues increased $0.3
million, or 1%, primarily due to a $2.6 million, or 19%, increase in newsstand
revenues largely due to strong sales of the April and September 1999 issues
featuring Rena Mero, the World Wrestling Federation champion formerly known as
Sable. The higher newsstand revenues were mostly offset by a $2.3 million, or
6%, decrease in subscription revenues, reflecting in part the problems facing
direct marketing stamp sheet agents. Additionally, advertising revenues
increased $1.2 million, or 6%, due to increases in both the average net revenue
per page and ad pages. Advertising sales for the fiscal year 1999 fourth quarter
issues of the magazine are closed and the Company expects to report 19%
increases in both ad pages and ad revenues compared to the quarter ended
December 31, 1998, resulting in expected 6% and 10% increases in ad pages and ad
revenues, respectively, for fiscal year 1999 compared to fiscal year 1998.
For the quarter and nine months ended September 30, 1999, other domestic
publishing revenues remained relatively flat. The current year nine-month period
included an additional newsstand special issue.
International publishing revenues remained relatively flat for the quarter
and decreased $0.2 million, or 3%, for the nine-month period compared to the
prior year. The decrease for the nine-month period was caused by lower royalties
from the Brazilian and Russian editions, largely due to economic weakness in
those countries, and were mostly offset by higher revenues from the Polish
edition of Playboy magazine, in which the Company owns a majority interest.
For the quarter, Publishing Group operating income decreased $1.0 million,
or 63%, compared to the prior year. This decrease was primarily due to higher
overhead and ancillary businesses expenses combined with the net lower Playboy
magazine revenues, partially offset by lower paper prices. Operating income
declined $1.5 million, or 30%, for the nine-month period. This decrease was
primarily due to higher overhead and ancillary businesses expenses, higher
editorial costs associated in part with the April and September 1999 issues and
the lower international publishing royalties, partially offset by the net higher
Playboy magazine revenues and lower paper prices.
Many magazines receive a significant portion of their advertising revenues
from companies selling tobacco products. Because only approximately 30% of
Playboy magazines's revenues are from advertising, the 20%-25% of ad pages from
tobacco is a smaller overall percentage than for others. Nevertheless,
significant legislative or regulatory limitations on the ability of those
companies to advertise in magazines could materially adversely affect the
Company's operating performance. The Company does not believe that it will be
impacted by the Food and Drug Administration ("the FDA") regulation announced in
August 1996 which prohibits the publication of tobacco advertisements containing
drawings, colors or pictures because the regulation does not apply to a magazine
which is demonstrated to be an "adult publication." The Company believes that
Playboy magazine qualifies as an "adult publication" and that the regulation is
not applicable. On April 25, 1997, the Federal District Court for the Middle
District of North Carolina ruled that the FDA has no authority anyway under
existing law to restrict the advertising and promotion of tobacco products and
ordered the FDA not to implement any of the advertising and promotion
restrictions contained in the regulation. The government appealed this ruling.
On August 14, 1998, a three-judge panel of the Fourth Circuit Court of Appeals
(the "Fourth Circuit Court") invalidated the FDA's authority to issue
regulations restricting tobacco advertising. The government appealed this
decision to the full Fourth Circuit Court, which in November 1998 denied the
government's motion for a rehearing. The government appealed to the Supreme
Court, which will hear and decide the appeal.
14
<PAGE>
ENTERTAINMENT GROUP
Beginning with the quarter ended March 31, 1999, the international home
video business, previously combined with international TV networks and sales
results, has been combined with the domestic home video business and is now
reported as worldwide home video. Additionally, programming expense for all of
the group's businesses, including certain licensing expenses that were
previously reported as direct costs, are now reported collectively as
programming expense. Previously, results from AdulTVision and movies and other
had been reported net of programming expense. Beginning with the quarter ended
June 30, 1999, all of the Company's domestic TV networks are now reported on a
combined basis. The revenues and operating income of the Entertainment Group
were as follows for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Domestic TV Networks ............................. $ 19.0 $ 15.5 $ 55.1 $ 45.5
International TV ................................. 29.7 2.7 32.9 8.4
Worldwide Home Video ............................. 1.8 3.6 7.8 9.6
Movies and Other ................................. 1.5 0.1 2.9 1.5
-------- -------- -------- --------
Total Revenues ................................. $ 52.0 $ 21.9 $ 98.7 $ 65.0
======== ======== ======== ========
Operating Income
Profit Contribution Before Programming Expense.... $ 38.2 $ 11.8 $ 61.9 $ 36.1
Programming Expense .............................. (12.7) (6.0) (25.9) (17.8)
-------- -------- -------- --------
Total Operating Income ......................... $ 25.5 $ 5.8 $ 36.0 $ 18.3
======== ======== ======== ========
</TABLE>
Entertainment Group revenues increased $30.1 million, or 137%, and $33.7
million, or 52%, for the quarter and nine months ended September 30, 1999,
respectively. These increases were primarily due to international TV revenues in
the current year periods related to the previously discussed new joint venture,
PTVI. Also contributing to these increases were higher revenues from the
domestic TV networks, principally attributable to the acquisition of Spice
effective March 15, 1999. For the quarter and nine-month period, operating
income increased $19.7 million and $17.7 million, respectively, primarily due to
the higher revenues, which were partially offset by higher related expenses.
The following discussion focuses on the profit contribution of each
business before programming expense ("profit contribution").
Domestic TV Networks
For the quarter ended September 30, 1999, revenues of $19.0 million from
the Company's domestic TV networks increased $3.5 million, or 23%, and profit
contribution increased $1.2 million. These increases were primarily due to the
Spice acquisition, partially offset by lower Playboy TV satellite direct-to-home
("DTH") revenues, principally from PrimeStar. In April 1999, PrimeStar was
acquired by Hughes Electronics Corporation, which owns DirecTV. Over the next
two years, PrimeStar subscribers will be transitioned primarily to DirecTV or
other DTH and cable services.
For the nine-month period, revenues of $55.1 million increased $9.6
million, or 21%, and profit contribution increased $3.9 million. These increases
were primarily due to the Spice acquisition.
15
<PAGE>
The approximate number of households for the Company's domestic TV
networks were as follows for the periods indicated below (in millions):
Sept. 30, June 30, Sept. 30,
1999 1999 1998
--------- -------- ---------
Cable (1):
Playboy TV Analog Addressable.................. 12.3 12.3 11.9
Playboy TV Digital............................. 0.7 0.4 0.1
Spice Analog Addressable....................... 14.9 16.6 N/A
Spice Digital.................................. 1.6 1.5 N/A
DTH:
Playboy TV..................................... 11.9 11.2 9.2
(1) Currently there is an overlap in some of the cable digital and analog
addressable households due to some cable operators offering both digital
and analog platforms to the same household.
In June 1999, the Company began the process of transferring AdulTVision
households to the Spice networks.
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act, which, among other things, regulates the cable
transmission of adult programming, such as the Company's domestic pay television
programs. Enforcement of Section 505 commenced May 18, 1997. The Company's full
case on the merits was heard by the Delaware District Court in March 1998. In
December 1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants have appealed this judgment and the Supreme
Court will hear the appeal on November 30, 1999. Management believes that the
effect of Section 505 on the Company's financial performance is likely to
continue until the case is finally decided. See "Legal Proceedings."
Management believes that the slowdown in growth in cable access for the
Company's domestic TV networks over recent years is due to the combination of
constraints on channel capacity and the effects of cable reregulation by the
Federal Communications Commission (the "FCC"), including the "going-forward
rules" which provide cable operators with incentives to add basic services. As
cable operators have utilized available channel space to comply with
"must-carry" provisions, mandated retransmission consent agreements and "leased
access" provisions, competition for channel space has increased.
New technology, primarily digital set-top converters, will dramatically
increase channel capacity, and cable operators have begun to introduce digital
technology in order to upgrade their cable systems and to counteract competition
from DTH operators. Digital cable television has several advantages over analog
cable television, including more channels, better audio and video quality and
advanced set-top boxes that are addressable, provide a secure fully scrambled
signal and have integrated program guides and advanced ordering technology. As
digital technology, which is unaffected by the relevant sections of the
Telecommunications Act, becomes more available, the Company believes that its
domestic TV networks will be available to the majority of cable households on a
24-hour basis.
International TV
For the quarter and nine months ended September 30, 1999, profit
contribution from the international TV business increased $27.2 million and
$25.1 million, respectively, on $27.0 million and $24.5 million increases in
revenues. These increases were primarily due to revenues related to PTVI for
library license fees, trademark royalties and output license fees.
Worldwide Home Video
For the quarter ended September 30, 1999, revenues from the worldwide home
video business decreased $1.8 million, or 51%, while profit contribution
decreased $1.6 million. These decreases were largely due to fewer titles
released domestically in the current year quarter from The Eros Collection.
16
<PAGE>
For the nine-month period, revenues decreased $1.8 million, or 18%, while
profit contribution decreased $1.6 million. These decreases were primarily due
to lower domestic sales of Playboy Home Video titles combined with lower
revenues from continuity series' programs.
Movies and Other
For the quarter and nine months ended September 30, 1999, profit
contribution from movies and other businesses increased $1.4 million and $1.3
million, respectively, on $1.4 million increases in revenues for both periods.
These increases were primarily due to library license fees in the current year
periods from PTVI.
The Entertainment Group's administrative expenses increased $1.8 million
for the quarter and $2.9 million for the nine-month period primarily to support
the group's growth. Both periods also reflected higher performance-related
variable compensation expense.
Programming Expense
Programming amortization expense increased $6.7 million and $8.1 million
for the quarter and nine-month period, respectively. These increases were
primarily related to the revenues in the current year periods from PTVI. Also
contributing to the increases were higher amortization related to regular
programming on the domestic Playboy TV network and programming amortization in
the current year periods related to the Spice network.
PRODUCT MARKETING GROUP
The revenues and operating performance of the Product Marketing Group were
as follows for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .................................... $ 1.4 $ 1.6 $ 4.4 $ 5.8
======== ======= ======== ========
Operating Income (Loss) ..................... $ 0.1 $ (1.0) $ 0.5 $ 0.1
======== ======= ======== ========
</TABLE>
Revenues for the quarter and nine months ended September 30, 1999
decreased $0.2 million, or 13%, and $1.4 million, or 23%, respectively, compared
to the prior year periods. Both the current year quarter and nine-month period
reflect lower international product licensing royalties, largely due to
depressed economic conditions in Asia. Also unfavorably impacting the nine-month
period were lower revenues from Special Editions, Ltd. as a result of a barter
agreement in the prior year related to the sale of prints and posters from the
Company's art publishing inventory.
Operating income of $0.1 million and $0.5 million for the quarter and
nine-month period increased $1.1 million and $0.4 million, respectively,
compared to the prior year periods due to a prior year $1.4 million settlement
of litigation related to BrandsElite International Corporation. Partially
offsetting these increases were the lower Asian royalties and higher salary and
related expenses.
CATALOG GROUP
The revenues and operating performance of the Catalog Group were as
follows for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .................................... $ 13.8 $ 16.3 $ 43.8 $ 50.8
======== ======= ======== ========
Operating Income (Loss) ..................... $ (0.7) $ 0.6 $ (1.3) $ 2.1
======== ======= ======== ========
</TABLE>
17
<PAGE>
For the quarter and nine months ended September 30, 1999, revenues
decreased $2.5 million, or 15%, and $7.0 million, or 14%, respectively, compared
to the prior year periods. These decreases reflected lower revenues for all of
the Company's catalogs, except for the Spice catalog which was launched during
the summer of 1998. These net lower revenues, partially offset by lower related
costs, resulted in operating losses of $0.7 million and $1.3 million for the
quarter and nine-month period, respectively, compared to operating income of
$0.6 million and $2.1 million for the prior year periods, respectively.
The Catalog Group has taken steps to reduce its cost structure and the
Company's management has decided to refocus sales of the former Playboy and
Spice catalogs to the Playboy Online Group, transitioning the print catalogs,
effective October 1, 1999, into direct marketing promotion to support
e-commerce. The Company is working with ING Barings Furman Selz to help it
assess strategic options for the Catalog Group.
CASINO GAMING GROUP
The revenues and operating losses of the Casino Gaming Group were as
follows for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .................................... $ 0.3 $ -- $ 0.6 $ --
======== ======= ======== ========
Operating Loss .............................. $ (0.2) $ (0.2) $ (0.5) $ (0.6)
======== ======= ======== ========
</TABLE>
In the quarter ended March 31, 1999, the Company sold its 12% interest in
the Rhodes Casino, which resulted in a nonoperating gain of $1.7 million. In
connection with the sale, the Company negotiated a minimum guarantee against its
licensing agreement for the Rhodes Casino. The Company reported licensing
revenues of $0.3 million and $0.6 million for the quarter and nine months ended
September 30, 1999 as a result of the opening of the Rhodes Casino in April
1999. Operating performance remained flat and increased $0.1 million for the
quarter and nine-month period, respectively. The Company continues to explore
additional casino gaming opportunities.
PLAYBOY ONLINE GROUP
The revenues and operating losses of the Playboy Online Group were as
follows for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .................................... $ 3.3 $ 1.8 $ 8.9 $ 4.8
======== ======= ======== ========
Operating Loss .............................. $ (1.9) $ (2.1) $ (5.6) $ (4.3)
======== ======= ======== ========
</TABLE>
For the quarter and nine months ended September 30, 1999, Playboy Online
Group revenues increased $1.5 million, or 83%, and $4.1 million, or 85%,
respectively, compared to the prior year periods. These increases were due to
higher advertising, e-commerce and subscription revenues.
For the quarter and nine-month period, the Playboy Online Group reported
operating losses of $1.9 million and $5.6 million, respectively, compared to
operating losses of $2.1 million and $4.3 million in the prior year periods,
respectively. The current year operating losses reflect higher planned
investments related to the group's continued growth and development.
On September 28, 1999, the Company announced that the Board approved plans
to sell a minority interest in Playboy Online to the public. The Company intends
to file a registration statement relating to the securities to be offered later
this fiscal year.
18
<PAGE>
CORPORATE ADMINISTRATION AND PROMOTION
Beginning with the quarter ended March 31, 1999, certain Company-wide
marketing activities, such as the Playboy Jazz Festival and Playmate promotions,
that had previously been reported in the Publishing Group are now included in
Corporate Administration and Promotion results. As a result, revenues are now
reported in Corporate Administration and Promotion.
Corporate Administration and Promotion net expenses for the quarter ended
September 30, 1999 of $7.9 million increased $0.9 million, or 13%, compared to
the prior year quarter. Net expenses for the nine-month period of $20.2 million
increased $2.5 million, or 14%, compared to the prior year period. Both of these
increases were largely due to higher marketing expenses and the timing of
peformance-related variable compensation expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $23.5 million in cash and cash
equivalents, no short-term borrowings and $90.0 million in current and long-term
financing obligations, compared to $0.3 million in cash and cash equivalents,
$29.8 million in short-term borrowings and no current or long-term financing
obligations at December 31, 1998. The Company expects to meet its short-term
cash requirements through its cash and cash equivalents and to meet its
long-term cash requirements through its $130.0 million credit agreement as soon
as the agreement is amended to reflect new financial covenants. Management
expects to have the new covenants in place prior to the end of the fiscal year.
See Cash Flows From Financing Activities.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $18.7 million for the nine
months ended September 30, 1999, which reflected $16.0 million of cash provided
from operating assets and liabilities, largely due to lower Playboy magazine
newsstand and advertising receivables compared to December 31, 1998, which
included higher revenues related to holiday issues. Additionally, the current
year period reflected cash receipts related to films sold to HBO and Showtime.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $66.8 million for the
nine-month period, primarily due to the Company's acquisition of Spice,
resulting in cash paid of $64.6 million in the current year.
During the nine-month period, the Company sold certain investments
totaling $12.7 million. In the quarter ended September 30, 1999, the Company
sold its interests in certain of its international TV networks to PTVI. Total
proceeds under the contract are $10.0 million, consisting of $3.0 million in
cash in the current year quarter with the remainder to be received over the next
five years. In the quarter ended March 31, 1999, the Company sold its
wholly-owned subsidiary, Playboy Gaming Greece Ltd., which owned a 12% interest
in the Rhodes Casino. Total proceeds of $5.2 million were received. These
proceeds included a repayment of a loan of $1.2 million owed to the Company by
the Rhodes Casino. On December 31, 1998, the Company sold to duPont Publishing,
Inc. ("duPont") the shares of duPont's common stock owned by the Company. Total
proceeds were $5.0 million, which consisted of $0.5 million in cash, received in
fiscal year 1998, and a $4.5 million promissory note, which was paid off January
4, 1999.
During the nine-month period, the Company paid $12.2 million related to
its equity interests in international ventures, including the funding of its
19.9% interest in PTVI in the current year quarter.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $71.2 million for the
nine-month period. This increase was principally due to the $110.0 million
increase in current and long-term financing obligations combined with $24.6
million of net proceeds from the Company's public equity offering, partially
offset by the repayment of $29.8 million of short-term borrowings and $20.0
million of long-term financing obligations combined with the payment of $10.5
million of Spice's debt.
In May 1999, the Company completed a public equity offering of 2,875,000
shares of nonvoting Class B common stock at a price of $30.00 per share. Two
million shares were sold by a trust established by, and for the benefit of, Hugh
M. Hefner, the Company's founder and principal stockholder, and 875,000 shares
were sold by the Company. Of the Company's shares, 375,000 were sold upon
exercise by the underwriters of their over-allotment option. The Company did not
receive any of the proceeds from the sale of Class B common stock by Mr. Hefner.
Mr. Hefner is
19
<PAGE>
responsible for expenses related to this transaction proportionate to the number
of shares he sold to the total number of shares sold in the offering. Net
proceeds to the Company of $24.6 million are being used for general corporate
purposes.
In connection with financing the Company's acquisition of Spice, the
Company entered into a new $150.0 million credit agreement dated as of February
26, 1999. The new agreement provided financing to (a) purchase all of the
outstanding shares of Spice and pay related acquisition costs; (b) repay the
existing debt of the Company and Spice; and (c) fund future general working
capital and investment needs.
The new agreement originally consisted of three components: a $40.0
million revolving credit facility with a $10.0 million letter of credit
sublimit; a $35.0 million tranche A term loan; and a $75.0 million tranche B
term loan. On September 16, 1999, the Company used $20.0 million of the cash
proceeds from PTVI to repay the term debt which reduced the credit facility to
$130.0 million. The revolving credit facility and tranche A term loan mature on
March 15, 2004. The tranche B term loan matures on March 15, 2006. Loans bear
interest at a rate equal to specified index rates plus margins that fluctuate
based on the Company's ratio of consolidated debt to consolidated adjusted
EBITDA. The Company's obligations under the agreement are unconditionally
guaranteed by each of the Company's existing and subsequently acquired domestic
restricted subsidiaries (all domestic subsidiaries except Playboy Online, Inc.).
The agreement and related guarantees are secured by substantially all of Playboy
Enterprises, Inc.'s and its domestic restricted subsidiaries' assets.
The agreement contains financial covenants requiring the Company to
maintain certain leverage, cash flow, interest coverage and fixed charge
coverage ratios. Other covenants include limitations on other indebtedness,
investments, capital expenditures and dividends. The agreement also requires
mandatory prepayments with net cash proceeds resulting from excess cash flow,
asset sales and the issuance of certain debt obligations or equity securities,
with certain exceptions as described in the agreement.
For the quarter ended September 30, 1999, the Company received a waiver on
the financial covenants contained in the credit agreement, until January 12,
2000. During this period, the Company and the banks will reset the covenant
levels to reflect recent business developments, including, among other things,
the benefit of the PTVI venture and the decline in the Catalog business.
Management expects to have the new covenants in place prior to the end of the
fiscal year. While the waiver remains in effect, the Company has agreed to not
draw upon the revolving credit facility. Management believes that the Company's
cash and cash equivalents on hand will provide the necessary liquidity during
this period.
INCOME TAXES
Based on current tax law, the Company will need to generate approximately
$39.7 million of future taxable income prior to the expiration of the Company's
NOLs for full realization of the $13.9 million net deferred tax asset at
December 31, 1998. At December 31, 1998, the Company had NOLs of $14.2 million
for tax purposes, with $11.7 million expiring in 2009 and $2.5 million expiring
in 2012.
Management believes that it is more likely than not that the required
amount of such taxable income will be generated in years subsequent to December
31, 1998 and prior to the expiration of the Company's NOLs to realize the $13.9
million net deferred tax asset at December 31, 1998. Associated with the Spice
acquisition, $15.7 million of deferred tax liabilities were recorded under the
purchase method of accounting for certain identifiable intangible assets,
comprising trademarks, non-compete agreements and a film library. Accordingly,
after consideration of this additional $15.7 million of deferred tax
liabilities, at September 30, 1999, the Company was in a net deferred tax
liability position of $3.8 million that consisted of $7.4 million of current
deferred tax assets and $11.2 million of noncurrent deferred tax liabilities.
Following is a summary of the bases for management's belief that a valuation
allowance of $15.4 million at December 31, 1998 is adequate, and that it is more
likely than not that the net deferred tax asset of $13.9 million will be
realized:
o In establishing the net deferred tax asset, management reviewed the
components of the Company's NOLs and determined that they primarily
resulted from several nonrecurring events, which were not indicative of
the Company's ability to generate future earnings.
o Several of the Company's operating groups continue to generate meaningful
earnings, particularly the Entertainment Group, and the Company's
investments in the Entertainment, Playboy Online and Casino Gaming Groups
are anticipated to lead to increased earnings in future years.
20
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o The Company has opportunities to accelerate taxable income into the NOL
carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and amortization
methods for tax purposes and the sale-leaseback of certain property that
would generate taxable income in future years.
YEAR 2000 COMPLIANCE
In response to the Year 2000 problem, the Company has identified and is
implementing changes to its existing computerized business systems. The Company
is addressing the issue through a combination of modifications to existing
programs and conversions to Year 2000 compliant software. In addition, the
Company has communicated with its vendors and other service providers to ensure
that their products and business systems are or will be Year 2000 compliant. If
modifications and conversions by the Company and those it conducts business with
are not made in a timely manner, the Year 2000 problem could have a material
adverse effect on the Company's business, financial condition and results of
operations. All major systems of the Company have either been identified as Year
2000 compliant, or remediation has been completed to ensure Year 2000
compliance. These major systems include financial applications, and key
operating systems for the Entertainment, Catalog and Playboy Online Groups. The
Company is currently evaluating less critical systems, such as desktop
applications, with plans for all systems to be in compliance by the end of
fiscal year 1999. The Company is also reviewing its non-information technology
systems to determine the extent of any modifications and believes that there
will be minimal changes necessary for compliance. The current estimate of the
total costs associated with the required modifications and conversions are
expected to be slightly in excess of $1.0 million, of which approximately $0.9
million has been expensed through September 30, 1999. These costs are being
expensed as incurred. The Company does not separately track internal costs
incurred related to the Year 2000 problem, principally payroll related for its
technology department.
The Company believes its technology systems will be ready for the Year
2000 and, as a result, has not developed a comprehensive contingency plan.
High-risk vendors, however, are being examined throughout the year with
contingency plans developed on a case-by-case basis where needed. Additionally,
the Company is aware that it may experience other isolated incidents of
non-compliance and plans to allocate internal resources and retain dedicated
consultants and vendor representatives to be ready to take action if necessary.
Although the Company values its established relationships with key vendors and
other service providers, if certain vendors are unable to perform on a timely
basis due to their own Year 2000 issues, the Company believes that substitute
products or services are available from other vendors. The Company also
recognizes that it, like all other businesses, is at risk if other key suppliers
in utilities, communications, transportation, banking and government are not
ready for the Year 2000.
OTHER
The Company will adopt the provisions of Statement 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133. Statement 137 defers the effective date for financial
statements issued for fiscal years beginning after June 15, 2000.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. These forward-looking statements involve risks and
uncertainties, which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. The following are some
of the important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements: (1)
government actions or initiatives, including (a) attempts to limit or otherwise
regulate the sale of adult-oriented materials, including print, video and online
materials or businesses such as casino gaming, (b) regulation of the
advertisement of tobacco products, or (c) substantive changes in postal
regulations or rates; (2) increases in paper prices; (3) changes in distribution
technology and/or unforeseen delays in the implementation of that technology by
the cable and satellite industries, which might affect the Company's plans and
assumptions regarding carriage of its program services; (4) increased
competition for transponders and channel space and any decline in the Company's
access to, and acceptance by, cable and DTH systems; (5) increased competition
for advertisers from other publications and media or any significant decrease in
spending by advertisers, either generally or with respect to the adult male
market; (6) effects of the consolidation taking place nationally in the
single-copy magazine distribution system; (7) new competition in the cable
television market; (8) uncertainty of market acceptance of the Internet as a
medium for
21
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information, entertainment, e-commerce and advertising, an increasingly
competitive environment for advertising sales, the impact of competition from
other content and merchandise providers, as well as the Company's reliance on
third parties for technology and distribution for its online business; (9)
potential problems associated with the integration of the Company's business
with Spice's business; and (10) potential adverse effects of unresolved Year
2000 problems, including those that may be experienced by key suppliers.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, which include changes in
interest rates. The Company prepared sensitivity analyses to determine the
impact of a hypothetical one percentage point increase in interest rates on the
Company's consolidated operating results, financial position and cash flows.
Based on its sensitivity analyses at September 30, 1999, such a change in
interest rates would affect the Company's annual consolidated operating results,
financial position and cash flows by approximately $0.9 million. In order to
manage the risk associated with its exposure to such interest rate fluctuations,
the Company uses derivative financial instruments. In the quarter ended June 30,
1999, the Company entered into an interest rate swap agreement to effectively
convert $45.0 million of its floating rate debt to fixed rate debt, thereby
significantly reducing its risk related to interest rate fluctuations.
LEGAL PROCEEDINGS
In February 1996, the Telecommunications Act was enacted. Certain
provisions of the Telecommunications Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to nonsubscribing cable customers. This is
called "bleeding." The practical effect of Section 505 is to require many
existing cable systems to employ additional blocking technology in every
household in every cable system that offers adult programming to prevent any
possibility of bleeding, or to restrict the period during which adult
programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation
of the Telecommunications Act are significant and include fines and
imprisonment.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the Delaware District Court challenging Section 505 on constitutional
grounds. The suit names as defendants The United States of America, The United
States Department of Justice, Attorney General Janet Reno and the FCC. On March
7, 1996, the Company was granted a Temporary Restraining Order ("TRO") staying
the implementation and enforcement of Section 505. In granting the TRO, the
Delaware District Court found that the Company had demonstrated it was likely to
succeed on the merits of its claim that Section 505 is unconstitutional. On
November 8, 1996, eight months after the TRO was granted, a three-judge panel in
the Delaware District Court denied the Company's request for a preliminary
injunction against enforcement of Section 505 and, in so denying, found that the
Company was not likely to succeed on the merits of its claim. The Company
appealed the Delaware District Court's decision to the Supreme Court and
enforcement of Section 505 was stayed pending that appeal. On March 24, 1997,
without opinion, the Supreme Court summarily affirmed the Delaware District
Court's denial of the Company's request for a preliminary injunction.
Enforcement of Section 505 commenced May 18, 1997. On July 22, 1997, the Company
filed a motion for summary judgment on the ground that Section 505 is
unconstitutionally vague based on a Supreme Court decision on June 26, 1997 that
certain provisions of the Telecommunications Act regulating speech on the
Internet were invalid for numerous reasons, including vagueness. On October 31,
1997, the Delaware District Court denied the motion on the grounds that further
discovery in the case was necessary to assist it in resolving the issues posed
in the motion.
The Company's full case on the merits was heard by the Delaware District
Court in March 1998. On December 28, 1998, the Delaware District Court
unanimously declared Section 505 unconstitutional. The defendants have appealed
this judgment and the Supreme Court will hear the appeal on November 30, 1999.
Management believes that the effect of Section 505 on the Company's financial
performance is likely to continue until the case is finally decided.
22
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
#10.1 Operating Agreement for Playboy TV International, LLC dated as of
August 31, 1999 between Playboy Entertainment Group, Inc. and
Victoria Springs Investments Ltd.
#10.2 Program Supply Agreement dated as of August 31, 1999 between Playboy
Entertainment Group, Inc., Playboy TV International LLC and PTV
U.S., LLC
#10.3 Trademark License Agreement dated as of August 31, 1999 between
Playboy Enterprises International, Inc. and Playboy TV
International, LLC
10.4 Playboy Magazine Distribution Agreement dated as of July 2, 1999
between Playboy Enterprises, Inc. and Warner Publisher Services,
Inc.
10.5 Waiver dated as of November 3, 1999 to the Credit Agreement dated as
of February 26, 1999, among Playboy Enterprises, Inc., PEI Holdings,
Inc., the Lenders named in the Credit Agreement, and Credit Suisse
First Boston, as Administrative Agent, as Collateral Agent and as
Issuing Bank
27 Financial Data Schedule
- ---------
# Certain information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
---------------------------------------
(Registrant)
Date November 12, 1999 By /s/ Linda Havard
-------------------- ------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
24
OPERATING AGREEMENT
FOR
PLAYBOY TV INTERNATIONAL, LLC
A DELAWARE LIMITED LIABILITY COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS......................................................1
ARTICLE 2 ORGANIZATIONAL MATTERS..........................................10
2.1 Formation.......................................................10
2.2 Name............................................................10
2.3 Term............................................................10
2.4 Office and Agent................................................10
2.5 Addresses of the Members, the Managers, and the Directors.......10
2.6 Purpose of Company..............................................11
ARTICLE 3 CAPITAL CONTRIBUTIONS...........................................11
3.1 Initial Capital Contribution....................................11
3.2 Additional Capital Contributions................................11
3.3 Mandatory Additional Capital Contributions......................11
3.3.1 Equity Contributions.................................11
3.3.2 Funding Contributions................................11
3.4 Failure to Make Mandatory Additional Capital Contributions......12
3.4.1 Notice...............................................12
3.4.2 Remedies.............................................12
3.4.3 Other Effects........................................14
3.4.4 Remedies Reasonable..................................15
3.4.5 No Waiver............................................15
3.5 Optional Additional Capital Contributions.......................15
3.6 Capital Accounts................................................15
3.7 No Interest.....................................................15
ARTICLE 4 ALLOCATIONS OF NET INCOME AND NET LOSSES AND DISTRIBUTIONS......15
4.1 Allocations of Net Income and Net Loss..........................15
4.2 Distribution of Distributable Cash by the Company...............16
4.3 Form of Distribution............................................16
4.4 Restriction on Distributions....................................16
4.4.1 Restriction..........................................16
4.4.2 Method of Determination..............................16
4.4.3 Personal Liability...................................16
4.5 Return of Distributions.........................................16
ARTICLE 5 MANAGEMENT AND CONTROL OF THE COMPANY...........................17
5.1 Managers and the Management Committee...........................17
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Page
----
5.1.1 Managers.............................................17
5.1.2 General Scope of Authority...........................17
5.1.3 Voting...............................................17
5.1.4 Veto Right...........................................17
5.2 Members of the Management Committee; Appointment and Removal....19
5.3 Matters Determined by Independent Directors.....................20
5.4 Meetings of the Management Committee............................20
5.5 Delegation of Authority; President and Other Officers...........21
5.5.1 General Power to Delegate Authority..................21
5.5.2 The President........................................21
5.5.3 Duties of the President..............................21
5.5.4 Additional Officers..................................22
5.5.5 Officers Serve at the Pleasure of the Management
Committee............................................22
5.6 Interested Party Transactions...................................22
5.6.1 Approval.............................................22
5.6.2 Termination and Remedies.............................22
5.7 Performance of Duties; Liability of Managers; Liability of
Directors.......................................................23
5.8 Offices and Facilities; Staff...................................23
5.8.1 Facilities/Company Location..........................23
5.9 Insurance.......................................................23
ARTICLE 6 BUSINESS PLANS AND ANNUAL BUDGETS; OPERATION OF COMPANY.........24
6.1 The Business Plan...............................................24
6.1.1 The First Business Plan..............................24
6.1.2 Additions to Business Plan...........................24
6.2 Annual Budgets..................................................24
6.3 Carryover Plan or Budget........................................25
6.4 Operation of Company............................................25
6.4.1 Operations During Transition Period..................25
6.4.2 Absorption of Existing Channels......................25
6.4.3 German Venture Expenses..............................25
6.4.4 Services Provided by PEGI............................25
6.4.5 Creation of Local Ventures and Provision for Local
Partners.............................................26
6.4.6 Supplemental Programs................................26
6.4.7 Playboy TV Lite......................................27
6.4.8 Venus and Spice Hot..................................27
6.4.9 U.S. Activities......................................28
6.4.10 Certain Tax Matters..................................28
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Page
----
ARTICLE 7 RIGHTS ACQUISITION FEE..........................................28
7.1 Rights Acquisition Fee..........................................28
7.1.1 Payment of Fee.......................................28
7.1.2 Allocation of Fee....................................29
7.2 Purchase of U.K. Venture, Japan Venture and Danish Companies....29
ARTICLE 8 MEMBERS.........................................................30
8.1 Limited Liability...............................................30
8.2 Admission of Additional Members.................................30
8.3 Withdrawals or Resignations.....................................30
8.4 Termination of Membership Interest..............................30
8.5 Remuneration To Members.........................................30
8.6 Members Are Not Agents; No Management Authority.................31
8.7 Meetings of Members.............................................31
8.7.1 Power to Call Meetings...............................31
ARTICLE 9 TRANSFER AND ASSIGNMENT OF INTERESTS............................31
9.1 Transfer of Membership Interests................................31
9.2 Change of Control...............................................32
9.2.1 Changes in General...................................32
9.2.2 VSI..................................................32
9.2.3 PEI/PEGI.............................................32
9.2.4 ***..................................................33
9.3 Substitution of Members.........................................33
9.4 Effective Date of Permitted Transfers...........................33
9.5 Rights of Legal Representatives.................................33
9.6 PEGI Buy-up Option..............................................33
9.6.1 Option Expiration Date...............................34
9.6.2 Exercise of Buy-up Option............................34
ARTICLE 10 CONSEQUENCES OF DISSOLUTION.....................................35
10.1 Disassociation Event............................................35
10.1.1 Purchase Price.......................................35
10.1.2 Notice of Intent to Purchase.........................35
10.1.3 Election to Purchase Less Than All of the Former
Member's Interest....................................35
10.1.4 Payment of Purchase Price............................35
10.1.5 Closing of Purchase of Former Member's Interest......36
10.1.6 Purchase Terms Varied by Agreement...................36
10.2 Bankruptcy......................................................36
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
iii
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Page
----
ARTICLE 11 ACCOUNTING, RECORDS, REPORTING BY MEMBERS.......................36
11.1 Books and Records...............................................36
11.2 Delivery to Members and Inspection..............................37
11.2.1 Delivery Upon Request................................37
11.2.2 Inspection...........................................37
11.2.3 Authorized Persons...................................37
11.3 Periodic Statements.............................................38
11.3.1 Monthly Report.......................................38
11.3.2 Annual Report........................................38
11.3.3 Tax Information......................................38
11.4 Financial and Other Information.................................38
11.5 Filings.........................................................38
11.6 Bank Accounts...................................................38
11.7 Accounting Decisions and Reliance on Others.....................39
11.8 Tax Matters for the Company Handled by Management Committee
and Tax Matters Member..........................................39
ARTICLE 12 DISSOLUTION AND WINDING UP......................................39
12.1 Term............................................................39
12.2 Dissolution Events..............................................39
12.3 Effect of Dissolution...........................................40
12.4 Dissolution.....................................................41
12.5 Certificate of Dissolution......................................41
12.6 Winding Up......................................................41
12.7 Distributions in Kind...........................................41
12.8 Order of Payment of Liabilities Upon Dissolution................42
12.8.1 Distributions to Members.............................42
12.8.2 Payment of Debts.....................................42
12.9 Certificate of Cancellation.....................................42
12.10 No Action for Dissolution.......................................43
ARTICLE 13 INDEMNIFICATION AND INSURANCE...................................43
13.1 Indemnification of Agents.......................................43
13.2 Insurance.......................................................43
ARTICLE 14 NONCOMPETITION..................................................44
14.1 Non-competition.................................................44
14.2 Separate Covenants..............................................44
14.3 Injunctive Relief...............................................44
14.4 Outside Businesses..............................................44
ARTICLE 15 MEMBER REPRESENTATIONS AND WARRANTIES...........................45
15.1 Representations and Warranties by Each Member...................45
15.1.1 Experience...........................................45
15.1.2 No Advertising.......................................45
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Page
----
15.1.3 Investment Intent....................................45
15.1.4 Purpose of Entity....................................45
15.1.5 Economic Risk........................................45
15.1.6 No Registration of Membership Interest...............45
15.1.7 Membership Interest in Restricted Security...........45
15.1.8 No Obligation to Register............................46
15.1.9 No Disposition in Violation of Law...................46
15.1.10 Investment Risk......................................46
15.1.11 Restrictions on Transferability......................46
15.1.12 Information Reviewed.................................46
15.1.13 No Representations By Company........................46
15.1.14 Consultation with Attorney...........................46
15.1.15 Tax Consequences.....................................47
15.1.16 No Assurance of Tax Benefits.........................47
15.2 VSI Representations and Warranties..............................47
15.3 PEGI Representations and Warranties.............................47
15.4 Indemnity.......................................................48
ARTICLE 16 DISPUTE RESOLUTION..............................................48
16.1 Alternative Dispute Resolution..................................48
16.2 Notification and Negotiation....................................48
16.3 Mediation.......................................................49
16.4 Arbitration.....................................................49
16.5 Damages.........................................................49
16.6 Statute of Limitations..........................................49
16.7 Confidential Negotiations.......................................49
16.8 Service of Process..............................................49
16.9 Additional Arbitration Provisions...............................50
ARTICLE 17 MISCELLANEOUS...................................................50
17.1 Superseding Agreements..........................................50
17.2 Documents and Acts..............................................50
17.3 Time is of the Essence..........................................50
17.4 Remedies Cumulative.............................................50
17.5 Currency; Payments..............................................50
17.6 Governing Law...................................................51
17.7 Assignment; No Third Party Beneficiary..........................51
17.8 Agreement Negotiated............................................51
17.9 Waivers, Remedies Cumulative, Amendments, etc...................51
17.10 Notices.........................................................52
17.11 Public Announcements............................................53
17.12 Survival........................................................53
EXHIBIT A CAPITAL CONTRIBUTION AND ADDRESSES OF MEMBERS AS OF
AUGUST 31, 1999................................................A-1
v
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Page
----
EXHIBIT B TAX ALLOCATIONS................................................B-1
EXHIBIT C SCHEDULE OF MANDATORY ADDITIONAL CAPITAL CONTRIBUTIONS.........C-1
EXHIBIT D BUSINESS PLAN..................................................D-1
EXHIBIT E APPRAISED FAIR MARKET VALUE PROCEDURE..........................E-1
EXHIBIT F ROLL-UP PROCEDURE..............................................F-1
vi
<PAGE>
OPERATING AGREEMENT
FOR
PLAYBOY TV INTERNATIONAL, LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Operating Agreement is made and entered into on August 31, 1999 by
and between Playboy Entertainment Group, Inc., a Delaware corporation ("PEGI"),
and Victoria Springs Investments Ltd., a British Virgin Islands corporation
("VSI"), with reference to the following facts:
A. The parties have formed Playboy TV International, LLC, a limited
liability company under the laws of the State of Delaware.
B. The parties desire to adopt and approve an operating agreement for the
Company.
NOW, THEREFORE, the parties by this Agreement set forth the operating
agreement for the Company under the laws of the State of Delaware upon the terms
and subject to the conditions of this Agreement.
ARTICLE 1
DEFINITIONS
When used in this Agreement, the following terms will have the meanings
set forth below:
"Acquired Interests" has the meaning set forth in Section 7.2.
"Act" means the Delaware Limited Liability Company Act, as the same
may be amended from time to time.
"Adult-Oriented" means, with respect to a Service or program, that
such Service or program is erotic in nature and features nudity.
"Affiliate" means any Person, directly or indirectly through one or
more intermediaries, controlling of, controlled by, or under common control with
the specified Person. The term "control" (and "controlled" and "controlling,"
respectively), as used in the immediately preceding sentence, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the specified Person (whether by the
holding of shares or other equity interests, the possession of voting or
contract rights or otherwise).
"After Tax Basis" means a basis such that any payment (the "Original
Payment") received or deemed to have been received by a Person (the "recipient")
will be supplemented by a further payment to the recipient so that the sum of
the two payments
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<PAGE>
will equal the Original Payment, after taking into account (x) all taxes that
would result from the receipt or accrual of such payments, if legally required,
and (y) any reduction in taxes that would result from the deduction of the
expense indemnified against, if legally permissible. In the event that the
expense indemnified against is used to reduce taxes by way of amortization or
depreciation, payments made on an After Tax Basis will be refunded in each
taxable year of the recipient in which such expense is deductible in an amount
equal to the sum of (i) the tax savings attributable to such deduction plus (ii)
any reduction in taxes that would result from the deduction of any amounts
described in clause (i) as increased hereby. All payments hereunder will be
calculated on the assumptions that the recipient was subject to tax at the
highest marginal rates of tax applicable to such class of taxpayer and that it
could benefit from the deduction of any expense at such rate of tax. In the
event that a taxing authority will treat any indemnification payment as not
includible in gross income or disallow any deduction taken into account
hereunder, the indemnification will be recomputed and further payments or
refunds made.
"Agent" has the meaning set forth in Section 13.1.
"Agreement" means this Operating Agreement, as originally executed
and as amended from time to time in accordance with the terms hereof.
"Agreement Outline" means that certain "Playboy TV International,
LLC Agreement Outline" entered into by and among PEII, PEGI and Bloomfield,
dated as of December 16, 1998, as amended.
"Annual Budget" has the meaning set forth in Section 6.2.
"Bankruptcy" with respect to a Member means: (a) the filing of an
application by a Member for, or such Member's consent to, the appointment of a
trustee, receiver, or custodian of such Member's other assets; (b) the entry of
an order for relief with respect to a Member in proceedings under the United
States Bankruptcy Code, as amended or superseded from time to time; (c) the
making by a Member of a general assignment for the benefit of creditors; (d) the
entry of an order, judgment, or decree by any court of competent jurisdiction
appointing a trustee, receiver, or custodian of the assets of a Member unless
the proceedings and the Person appointed are dismissed within ninety (90) days;
or (e) the failure by a Member generally to pay such Member's debts as the debts
become due within the meaning of Section 303(h)(1) of the United States
Bankruptcy Code, as determined by the Bankruptcy Court, or the admission in
writing of such Member's inability to pay its debts as they become due.
"Bloomfield" means Bloomfield Mercantile, Inc., a Panamanian company
and the assignor of its rights under the Agreement Outline to VSI.
"Business Plan" has the meaning set forth in Section 6.1.
2
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"Capital Account" means with respect to any Member the capital
account that the Company establishes and maintains for such Member pursuant to
Section 3.6 and Article 1 of Exhibit B.
"Capital Contribution" means the total value of cash and fair market
value of property (including promissory notes or other obligation to contribute
cash or property) contributed and/or services rendered or to be rendered to the
Company by Members.
"Certificate" means the Certificate of Formation for the Company
originally filed with the Delaware Secretary of State and as amended from time
to time.
"Channels" mean the television channels operated by the Company or
its subsidiaries, now or in the future (each, a "Channel").
"Claim" has the meaning set forth in Section 15.2.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, the provisions of succeeding law, and to the extent applicable, the
Treasury Regulations.
"Company" means Playboy TV International, LLC, a Delaware limited
liability company.
"Corporate Income Taxes" means, with respect to any entity, such
entity's United States Federal and State income taxes and franchise taxes
(however denominated) based on such entity's actual net earnings or any similar
taxes (however denominated) payable by such entity to any jurisdiction based on
such entity's actual net earnings, it being agreed that any taxes (however
denominated) required to be withheld by any jurisdiction in order to permit the
remittance of monies from any such jurisdiction will not be deemed to be a tax
based on the actual net earnings of such entity.
"Corporations Code" means the Delaware General Corporation Law, as
amended from time to time, and the provisions of any succeeding law.
"Danish Companies" means SEI 2 and SEI 3.
"Defaulting Member" has the meaning set forth in Section 3.4.1.
"Director" has the meaning set forth in Section 5.2.1.
"Disassociation Event" means, with respect to any Member, the
Bankruptcy or dissolution of such Member.
"Dissolution Event" has the meaning set forth in Section 12.2.
3
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"Distributable Cash" means the amount of cash that the Management
Committee deems available for distribution to the Members, taking into account
all debts, liabilities and obligations of the Company then due and amounts that
the Management Committee deems necessary to place into reserves for customary
and usual claims with respect to the Company's business and for future operating
needs of the Company.
"Due Diligence" means the right granted to Bloomfield in the
Agreement Outline to investigate matters relevant to the transactions
contemplated in the Agreement Outline.
"Economic Interest" means a Member's share of one or more of the
Company's Net Income, Net Losses, and distributions of the Company's assets
pursuant to this Agreement and the Act, but will not include any other rights of
a Member, including, but not limited to, the right to vote or participate in the
management, or except as provided in Section 18-305 of the Act, any right to
information concerning the business and affairs, of the Company.
"Equity Matching Right" has the meaning set forth in Section 9.2.3.
"Existing Channel Entities" has the meaning set forth in Section
6.4.2.
"Existing Library Programs" has the meaning set forth in the Program
Supply Agreement.
"Fair Market Value" with respect to the Company or to any asset
means the value determined pursuant to Exhibit E.
"Final First Business Plan" has the meaning set forth in Section
6.1.1.
"Fiscal Year" means the Company's fiscal year, which will be the
calendar year.
"Former Member" has the meaning set forth in Section 10.1.
"Former Member's Interest" has the meaning set forth in Section
10.1.
"Founders' Price" as of a specified date means, with respect to the
price per 1% Percentage Interest, an amount equal to the sum of PEGI's and VSI's
Capital Contributions through and including such date, divided by 100.
"Funding Date" means the date which is ten (10) business days after
this Agreement is executed.
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"Funding Side Letter" means the letter agreement of even date
herewith among PEGI, VSI, PTVI, PTVLA, the German Venture and White Oak
Enterprises Ltd. relating to the payment of amounts with respect to programming
and trademark license fees relating to PTVLA, the German Venture and White Oak
Enterprises Ltd. for periods ending on June 30, 1999 and amounts advanced to the
U.K. Venture after July 1, 1999 and loaned to the U.K. Venture before March 31,
1999.
"German Venture" means Playboy TV - GmbH Germany.
"Guaranty" means the Guaranty by Hampstead of the obligations
hereunder of VSI, executed concurrently herewith.
"Hampstead" means Hampstead Management Company Ltd., a British
Virgin Islands corporation.
"Imagen" means Imagen Satelital, S.A., a corporation formed under
the laws of Argentina.
"Indemnified Parties" has the meaning set forth in Section 15.2.
"Indemnifying Party" has the meaning set forth in Section 15.2.
"Independent Directors" has the meaning set forth in Section 5.2.1.
"Japan Venture" means The Playboy Channel Japan, Inc., a Japanese
corporation.
"Licensor" means the licensor under either the Program Supply
Agreement or under the Trademark License Agreement, as the context dictates.
"Lifford" means Lifford International Co. Ltd., an International
business company incorporated under the laws of the British Virgin Islands.
"Local Partner" has the meaning set forth in Section 6.4.5.
"Majority Interest" means Percentage Interests of one or more
Members that taken together exceed fifty percent (50%) of the aggregate of all
Percentage Interests.
"Management Committee" has the meaning set forth in Section 5.1.1.
"Managers" means the Managers of the Company pursuant to Section
18-402 of the Act.
"Mandatory Additional Capital Contributions" has the meaning set
forth in Section 3.3.2.
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"Mandatory Additional Cash Contribution" has the meaning set forth
in Section 3.3.2.
"Mandatory Additional Equity Contributions" has the meaning set
forth in Section 3.3.1.
"Matching Right" has the meaning set forth in Section 9.1.2.
"Member" means each Person who (a) is an initial signatory to this
Agreement or has been admitted to the Company as a Member in accordance with
this Agreement and (b) has not resigned, withdrawn, been expelled or dissolved.
"Membership Interest" means a Member's entire interest in the
Company including the Member's Economic Interest, the right to vote on or
participate in the management, and the right to receive information concerning
the business and affairs, of the Company.
"Memorandum of Agreement" means that certain Memorandum of Agreement
entered into by and between PEGI and Tohokushinsha Film Corporation dated as of
July 31, 1995, as amended.
"Net Income" and "Net Losses" have the meanings set forth in Article
2 of Exhibit B hereto.
"New Venus" has the meaning set forth in Section 6.4.8(a).
"New Venus Territory" ***
"Non-Independent Director" means any Director who is not an
Independent Director
"Offered Asset" has the meaning set forth in Section 9.2.3.
"Offered Interest" has the meaning set forth in Section 9.1.1.
"Offered Terms" has the meaning set forth in Section 9.1.2.
"Option Expiration Date" has the meaning set forth in Section 9.6.1.
"Option Percentage" has the meaning set forth in Section 9.6.
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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"Optional Additional Capital Contribution" has the meaning set forth
in Section 3.5.
"PEGI" means Playboy Entertainment Group, Inc., a Delaware
corporation.
"PEGI Directors" has the meaning set forth in Section 5.2.1.
"PEGI Parent" has the meaning set forth in Section 9.2.3.
"PEI" means Playboy Enterprises, Inc., a Delaware corporation and
the ultimate parent corporation of PEGI.
"PEII" means Playboy Enterprises International, Inc., a Delaware
corporation and the direct parent corporation of PEGI.
"Percentage Interest" means the percentage of a Member set forth
opposite the name of such Member under the column "Member's Percentage Interest"
in Exhibit A hereto, as such percentage may be adjusted from time to time
pursuant to the terms of this Agreement.
"Person" means an individual, general partnership, limited
partnership, limited liability company, corporation, trust, estate, real estate
investment trust, association or any other entity.
"Playboy TV Lite" has the meaning set forth in Section 6.4.7.
"President" means the President of the Company from time to time.
"Program Supply Agreement" means the Program Supply Agreement
between PEGI and the Company, executed concurrently herewith.
"Proposed Partner" has the meaning set forth in Section 6.4.5(a).
"Proposed Terms" has the meaning set forth in Section 9.2.3.
"PTVH" means Playboy TV Holdings, LLC, a California limited
liability company.
"PTVLA" means Playboy TV-Latin America, LLC, a California limited
liability company.
"PTVLA/I" has the meaning set forth in Section 3.3.1.
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"PTV U.S." means PTV U.S., LLC, a Delaware limited liability
company.
"Reference Rate" means the reference rate as set forth from time to
time by BankAmerica.
"Related Documents" means this Agreement, the Trademark License
Agreement, the Program Supply Agreement, the Stock Purchase Agreements, and the
Guaranty.
"Release" means the Termination of Guaranty by and among PEI, PEGI,
PTVLA and Venevision International, Inc., a Florida corporation, executed
concurrently herewith.
"Remaining Members" has the meaning set forth in Section 10.1.
"Remediable Breach" has the meaning set forth in Section 12.2.2(b).
"Rights Acquisition Fee" has the meaning set forth in Section 7.1.1.
"Securities Act" has the meaning set forth in Section 15.1.6.
"SEI 2" means SEI 2 ApS, a company formed under the laws of Denmark.
"SEI 3" means SEI 3 ApS, a company formed under the laws of Denmark.
"Selling Member" has the meaning set forth in Section 9.1.2.
"Services" means the operation of television channels under the
brand names "Playboy," "Spice" and "AdulTVision" (and variations thereof
permitted under the Trademark License Agreement) in the Territory.
"Share Purchase Agreement" means that certain Share Purchase
Agreement dated as of November 26, 1998, by and among Playboy TV U.K./Benelux
Limited, PEGI, PEI, Continental Shelf 16 Limited, Flextech (1992) Limited,
British Sky Limited and Sky Ventures Limited, as amended.
"Southern Cone" means the countries of Argentina, Chile, Peru,
Bolivia, Paraguay, Uruguay and their territories and possessions.
"Stock Purchase Agreements" means, collectively, (i) the Stock
Purchase Agreement entered into by and between PEGI and the Company as of the
date hereof for the purchase of PEGI's interest in the U.K. Venture (ii) the
Stock Purchase Agreement entered into by and between PEGI and the Company as of
the date hereof for the purchase of PEGI's interest in the Japan Venture; (iii)
the Stock Purchase Agreement entered into by and between PEGI and the Company
for the purchase of PEGI's interest
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in SEI 2; and (iv) the Stock Purchase Agreement entered into by and between PEGI
and the Company for the purchase of PEGI's interest in SEI 3.
"Supplemental Programs" has the meaning set forth in Section 6.4.6.
"Tax Matters Member" means VSI or such Member's successor as
designated pursuant to Section 11.8.
"Term" has the meaning set forth in Section 12.1.
"Territory" means the World, except for the United States and Canada
and their territories and possessions. For certain programs, the Territory will
exclude Bermuda, as set forth in the Program Supply Agreement.
"Third Party Buyer" has the meaning set forth in Section 9.1.2.
"Trademark License Agreement" means the Trademark License Agreement,
to be executed concurrently herewith, between PEII and the Company relating to
the license of certain trademarks.
"Transfer" has the meaning set forth in Section 9.1.1.
"Transition Period" has the meaning set forth in Section 6.4.1.
"Treasury Regulations" has the meaning set forth in Exhibit B.
"Troy" means Troy Limited, a Bahamian company.
"U.K. Venture" means Home Video Channel Limited and its subsidiary
Playboy TV U.K./Benelux, Limited, each a company organized under the laws of
England and Wales.
"US Distribution Agreement" means that certain Distribution
Agreement to be entered into between PEGI and PTV U.S.
"U.S. Taxable Activity" has the meaning set forth in Section 6.4.9.
"Venus" means that certain Adult-Oriented television programming
service owned and operated by Imagen, primarily in Argentina.
"VSI Directors" has the meaning set forth in Section 5.2.1.
"Walk Away Notice" means that certain letter from Cisneros
Television Group (on behalf of Bloomfield) to PEGI dated February 12, 1999, in
which Bloomfield exercised its Walk Away Right, as defined in the Agreement
Outline.
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"Wallpaper" has the meaning set forth in the Program Supply
Agreement.
"Year 1" means the 12-month period commencing on the Funding Date;
"Year 2" means the 12-month period commencing on the first anniversary of the
Funding Date; and subsequent years will be identified in analogous fashion.
ARTICLE 2
ORGANIZATIONAL MATTERS
2.1 Formation. Pursuant to the Act, the Members formed a limited liability
company under the laws of the State of Delaware by causing Christine Tuthill, an
authorized person, to file the Certificate with the Delaware Secretary of State.
The Members ratify and confirm the filing the Certificate. The rights and
liabilities of the Members will be determined pursuant to the Act and this
Agreement. To the extent that the rights or obligations of any Member are
different by reason of any provision of this Agreement than they would be in the
absence of such provision, this Agreement will, to the extent permitted by the
Act, control.
2.2 Name. The name of the Company will be "Playboy TV International, LLC."
The business of the Company may be conducted under such name or, upon compliance
with applicable laws, any other name determined by the Management Committee. The
President or another designated officer of the Company will file any fictitious
name certificates and similar filings, and any amendments thereto, that the
Management Committee considers appropriate or advisable. ***
2.3 Term. The term of this Agreement will be co-terminus with the period
of duration of the Company provided in the Certificate, unless extended or
sooner terminated as hereinafter provided.
2.4 Office and Agent. The Company will continuously maintain an office and
registered agent in the State of Delaware as required by the Act. The principal
office of the Company will be as set forth in Section 5.9.1 or such other
location as the Management Committee may determine. The Company also may have
such offices, anywhere within and without the State of Delaware, as the
Management Committee from time to time may determine, or the business of the
Company may require. The registered agent will be as stated in the Certificate
or as otherwise determined by the Management Committee.
2.5 Addresses of the Members, the Managers, and the Directors. The
respective addresses of the Members are set forth on Exhibit A, which exhibit
will be
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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modified from time to time to reflect changes therein. The respective addresses
of the Managers and the Directors will be maintained in the books of the Company
and made available to any Member, on request.
2.6 Purpose of Company. The purpose of the Company is to engage in any
lawful activity for which a limited liability company may be organized under the
Act. Notwithstanding the foregoing, without the majority approval of the
Management Committee (and subject to the veto rights of the VSI Directors and
the PEGI Directors under Section 5.1.3), the Company will not engage in any
business other than the business of (i) owning, operating and distributing the
Services in the Territory, (ii) licensing programming to third parties; and
(iii) and such other activities which are ancillary and related thereto as may
be necessary, advisable, or appropriate in the reasonable opinion of the
Management Committee, to further the foregoing business, including but not
limited to the promotion of the Services and related marketing, distribution and
advertising activities.
ARTICLE 3
CAPITAL CONTRIBUTIONS
3.1 Initial Capital Contribution. On the Funding Date, each Member will
contribute such amount as is set forth on Exhibit A as its initial Capital
Contribution to be paid on such date. Both VSI's and PEGI's initial Capital
Contributions will be made in cash. Exhibit A will be further revised from time
to time to reflect any additional contributions made in accordance with this
Agreement.
3.2 Additional Capital Contributions. Except as specifically provided in
Section 3.3, no Member will be required to make any additional Capital
Contributions.
3.3 Mandatory Additional Capital Contributions.
3.3.1 Equity Contributions. VSI will use its reasonable best efforts
to acquire *** as soon as reasonably practicable. Promptly after the date of
such acquisitions, both VSI and PEGI will contribute to the Company their equity
interests (or those interests belonging to PEGI Affiliates or VSI Affiliates) in
*** at book value (the "Mandatory Additional Equity Contributions"); provided,
however, that VSI will, *** As of the effective date of such merger, VSI will
contribute such *** to the Company.
3.3.2 Funding Contributions. If necessary to cover the deficits of
the Company, each Member will contribute additional capital pro rata in
accordance with their respective Percentage Interests, with such capital calls
subject to the aggregate
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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maximum (including the initial Capital Contributions described in Section 3.1)
*** (each, a "Mandatory Additional Cash Contribution"; and, together with the
Mandatory Additional Equity Contributions, the "Mandatory Additional Capital
Contributions"). A schedule of anticipated Mandatory Additional Cash
Contributions for the first eight (8) quarters of the Company's operation, which
contributions are expected to occur quarterly at the beginning of each quarter,
will be attached hereto as Exhibit C upon completion of the Final First Business
Plan. Subsequent Mandatory Additional Cash Contributions will be made as set
forth in the Business Plan, as in effect from time to time. The Company will
give written notice to each Member of each Mandatory Additional Capital
Contribution at least fifteen (15) business days prior to the date due, stating
the amount owed by each Member and the date on which such amount is due.
3.4 Failure to Make Mandatory Additional Capital Contributions.
3.4.1 Notice. If a Member does not timely contribute a Mandatory
Additional Capital Contribution when required, that Member will be in default
under this Agreement (a "Defaulting Member"). In such event, the Company will
send the Defaulting Member written notice of such default, giving the Defaulting
Member fifteen (15) days from the date such notice is given to contribute the
entire amount of the Mandatory Additional Capital Contribution.
3.4.2 Remedies. If the Defaulting Member does not contribute the
Mandatory Additional Capital Contribution to the Company within the periods set
forth below, the Management Committee, acting for all purposes of this Section
3.4.2 without the vote of the Directors appointed by the Defaulting Member,
(i.e., acting by a Majority Interest of the members of the Management Committee
appointed by the non-Defaulting Members) may elect any one or more of the
remedies set forth below. Notwithstanding the foregoing, in no event will the
Management Committee be entitled to elect more than one remedy if the effect of
doing so would be duplicative.
(a) Apply Payments. If PEGI (or an Affiliate of PEGI which is
then a Member) is the Defaulting Member, the Management Committee may elect to
withhold the amount that the Defaulting Member has failed to contribute from
amounts otherwise payable to PEGI (or an Affiliate of PEGI) with respect to the
Rights Acquisition Fee or under the Program Supply Agreement or the Trademark
License Agreement and to pay such withheld amount to the Company on behalf of
the Defaulting Member. For all purposes hereunder, the withheld amount will be
treated as though it were paid by the Company to the party entitled to payment
thereof and as though the Defaulting Member made the capital contribution.
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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(b) Advance Funds. If the Defaulting Member does not
contribute the Mandatory Additional Capital Contribution within the fifteen (15)
day period following notice from the Company of default, the Management
Committee may elect to permit non-defaulting Members to advance funds to the
Company to cover those amounts that the Defaulting Member fails to contribute.
Amounts that a non-Defaulting Member so advances on behalf of the Defaulting
Member will become a demand loan due and owing from the Defaulting Member to
such non-defaulting Member, bearing interest at the rate per annum of one
hundred fifty (150) basis points above the Reference Rate as in effect on the
date such Mandatory Additional Capital Contribution was originally due, with
such interest being payable monthly. All cash distributions otherwise
distributable to the Defaulting Member under this Agreement will instead be
paid, on the Defaulting Member's behalf, to the non-Defaulting Members making
such advances until such advances and any accrued but unpaid interest thereon
are paid in full. Any amounts repaid will first be applied to interest and
thereafter to principal. Effective upon a Member becoming a Defaulting Member,
such Member will grant to the non-Defaulting Members who advance funds under
this Section 3.4.2(b) a security interest in its Economic Interest to secure its
obligation to repay such advances and will execute and deliver a promissory
note, security agreement, and such UCC-1 financing statements and assignments of
certificates of membership interest (or other documents of transfer) in such
form as such non-Defaulting Members may reasonably request.
(c) Adjust Percentage Interest. If the Defaulting Member does
not, within a further period of ninety (90) days, contribute the Mandatory
Additional Capital Contribution and/or repay in full any advances made by the
non-Defaulting Members, the Member who has made a loan pursuant to Section
3.4.2(b) may elect to convert all or a portion of such loan (plus any accrued
but unpaid interest thereon) to a Capital Contribution. Upon such election, the
Percentage Interests of the Defaulting Member and the non-Defaulting Member(s)
will be adjusted so that each Member's Percentage Interest will be a fraction,
the numerator of which represents the amount of such Member's Capital Account
and the denominator of which represents the sum of all Members' Capital
Accounts, taking into account the contribution represented by the conversion of
the loan.
(d) Dissolve. If the Defaulting Member does not contribute
Mandatory Additional Capital Contributions on three (3) occasions, whether or
not consecutive, and the Defaulting Member has failed to cure each such failure
to contribute within the fifteen (15) day period specified in Section 3.4.1
above, the Management Committee may propose to dissolve the Company in which
event the Company will be wound-up, liquidated and terminated pursuant to
Article 12.
(e) Purchase Interest. If the Defaulting Member does not
contribute Mandatory Additional Capital Contributions on three (3) occasions,
whether or not consecutive, and the Defaulting Member has failed to cure each
such failure to contribute within the fifteen (15) day period specified in
Section 3.4.1 above, the Management Committee may elect to permit the Company or
the non-Defaulting
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Members to purchase the Defaulting Member's entire Membership Interest for the
positive balance of such Member's Capital Account less the total amount owed by
such Member to the Company and non-Defaulting Members in respect of unpaid
Mandatory Additional Capital Contributions or advances by non-Defaulting Members
in respect thereof. Any such purchase of a Member's Percentage Interest will
occur as promptly as practicable following notice of the purchase election to
the Defaulting Member, subject to the receipt of required regulatory approvals.
3.4.3 Other Effects.
(a) No Distributions. A Defaulting Member will have no right
to receive any distributions from the Company until: (i) the principal and
interest of any outstanding loan made by a non-Defaulting Member pursuant to
Section 3.4.2(a) has been repaid; and (ii) to the extent a non-Defaulting Member
elects to convert any such loan to a Capital Contribution, such non-Defaulting
Member has first received distributions in an amount equal to the amount of such
Capital Contribution, plus a cumulative, compounded return thereon at the rate
per annum of one hundred fifty (150) basis points above the Reference Rate as in
effect on the date such additional capital was contributed. In the event a
non-Defaulting Member receives a distribution of interest on a Capital
Contribution pursuant to clause (ii) of the preceding sentence, the Capital
Account of such non-Defaulting Member will be increased by the amount of such
interest payment.
(b) No Voting. Except as otherwise provided in this Section
3.4.3(b), if the Management Committee exercises any of the remedies set forth in
paragraphs (d) or (e) of Section 3.4.2, the Defaulting Member (directly or
through the Directors appointed by it) will lose its voting and approval rights
under the Act and this Agreement (unless the Defaulting Member cures the default
and the non-Defaulting Member permits such cure). Notwithstanding the foregoing,
the Directors appointed by the Defaulting Member will retain their veto rights
(to the extent such veto rights were continuing prior to the exercise of such
remedy) with respect to the matters described in Sections 5.1.4(b) and Section
5.1.4(c). No reduction in a Member's Membership Interest, pursuant to Section
3.4.2(b) will affect any of the Defaulting Member's voting or approval rights
under this Agreement (other than to the extent such reduction reduces the voting
power of the Defaulting Member's Directors pursuant to Section 5.2.4).
(c) No Participation in Management. Except as provided in
Section 3.4.3(b), if the Management Committee exercises any of the remedies set
forth in paragraphs (d) or (e) of Section 3.4.2, the Defaulting Member will lose
its ability (whether as a Member or through the Directors appointed by it) to
actively participate in the management and operations of the Company until the
completion of dissolution and the winding up of the affairs of the Company, or
such time as the Defaulting Member cures (if the non-Defaulting member
thereafter permits the Defaulting Member to cure) the default or its Percentage
Interest is purchased.
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3.4.4 Remedies Reasonable. Each Member acknowledges and agrees that
the remedies described in this Section 3.4 bear a reasonable relationship to the
damages that the Members estimate may be suffered by the Company and the
non-Defaulting Members by reason of the failure of a Defaulting Member to make
Mandatory Additional Capital Contributions and, subject to the last sentence of
the first paragraph of Section 3.4.2, the election of any or all of the
above-described remedies is not unreasonable.
3.4.5 No Waiver. Subject to the last sentence of the first paragraph
of Section 3.4.2, the election of the Management Committee or of any
non-Defaulting Member to pursue any remedy provided in this Section 3.4 will not
be a waiver or limitation of the right of the Management Committee, the Company
or the non-Defaulting Members to pursue an additional or different remedy
available hereunder or of law or equity with respect to any subsequent default.
3.5 Optional Additional Capital Contributions. To the extent approved by
the Management Committee (subject to the veto rights of the VSI Directors and
PEGI Directors under Section 5.1.3), from time to time, the Members may be
permitted to make additional Capital Contributions if and to the extent they so
desire, and if the Directors determine that such additional Capital
Contributions are necessary or appropriate for the conduct of the Company's
business, including without limitation, expansion or diversification (each, an
"Optional Additional Capital Contribution"). In that event, the Members will
have the opportunity, but not the obligation, to participate in such Optional
Additional Capital Contributions on a pro rata basis in accordance with their
Percentage Interests. Immediately following such Optional Additional Capital
Contributions, the Percentage Interests will be adjusted to reflect the new
relative proportions of the Capital Accounts of the Members.
3.6 Capital Accounts. The Company will establish an individual Capital
Account for each Member in accordance with Article 1 of Exhibit B hereto. If a
Member transfers all or a part of its Membership Interest in accordance with
this Agreement, such Member's Capital Account attributable to the transferred
Membership Interest will carry over to the new owner of such Membership Interest
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(1).
3.7 No Interest. Except as provided in Section 3.4, no Member will be
entitled to receive any interest on its Capital Contributions.
ARTICLE 4
ALLOCATIONS OF NET INCOME AND NET LOSSES AND DISTRIBUTIONS
4.1 Allocations of Net Income and Net Loss. Net Income and Net Loss will
be allocated to the Members in accordance with Article 1 of Exhibit B.
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4.2 Distribution of Distributable Cash by the Company. Subject to
applicable law and any limitations contained elsewhere in this Agreement, the
Management Committee will cause the Company to distribute Distributable Cash on
a quarterly basis to the Members, which distributions will be made to the
Members in proportion to their Percentage Interests as of the end of the
relevant quarter.
4.3 Form of Distribution. Except as provided in Section 12.7, a Member,
regardless of the nature of the Member's Capital Contribution, has no right to
demand and receive any distribution from the Company in any form other than
money. No Member may be compelled to accept from the Company a distribution of
any asset in kind in lieu of a proportionate distribution of money being made to
other Members. Except upon a dissolution and a winding up of the Company, no
Member may be compelled to accept a distribution of any asset in kind.
4.4 Restriction on Distributions.
4.4.1 Restriction. No distribution will be made if, after giving
effect to the distribution:
(a) The Company would not be able to pay its debts as they
become due in the usual course of business.
(b) The Company's total assets would be less than the sum of
its total liabilities.
4.4.2 Method of Determination. The Management Committee may base a
determination that a distribution is not prohibited on any of the following: (i)
financial statements prepared on the basis of accounting practices and
principles that are reasonable in the circumstances; (ii) a fair valuation; or
(iii) any other method that is reasonable in the circumstances.
Except as provided in Section 18-607(b) of the Act, the effect of a
distribution is measured as of the date the distribution is authorized if the
payment occurs within one hundred twenty (120) days after the date of
authorization, or the date payment is made if it occurs more than one hundred
twenty (120) days of the date of authorization.
4.4.3 Personal Liability. A Member who receives a distribution in
violation of this Agreement or the Act will be liable to the Company for the
amount of the distribution that exceeds what could have been distributed without
violating this Agreement or the Act. Any Member who is so liable will be
entitled to compel the Company to seek repayment from each other Member who is
so liable.
4.5 Return of Distributions. Except for distributions made in violation of
the Act or this Agreement, no Member will be obligated to return any
distribution to the Company or pay the amount of any distribution for the
account of the Company or to any
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creditor of the Company. The amount of any distribution returned to the Company
by a Member or paid by a Member for the account of the Company or to a creditor
of the Company will be added to the account or accounts from which it was
subtracted when it was distributed to the Member.
ARTICLE 5
MANAGEMENT AND CONTROL OF THE COMPANY
5.1 Managers and the Management Committee.
5.1.1 Managers. Each Person duly admitted as a Member of the Company
pursuant to this Agreement will be a Manager of the Company until such Member's
Membership Interest has been transferred or terminated or such Member has
withdrawn in accordance with this Agreement. VSI and PEGI will be the initial
Managers of the Company.
5.1.2 General Scope of Authority. The business and affairs of the
Company will be managed by the Managers through a management committee
consisting of representatives appointed by the Managers, and through which the
Managers will exercise their rights and authority hereunder (the "Management
Committee"). The Management Committee will be appointed and constituted in the
manner provided in Section 5.2 hereof. The Management Committee will be
responsible for all aspects of the operations and development of the Company
and, except as otherwise expressly provided for in this Agreement, the
Management Committee will have exclusive authority and full discretion with
respect to the management of the business of the Company and will have the
exclusive right, power and authority to cause the Company to do, or cause to be
done, all acts and actions which in its sole judgment are necessary, proper,
convenient or desirable in order to operate and conduct the business of the
Company and to carry out and fulfill the purposes of the Company.
5.1.3 Voting. Except as provided in Section 5.1.4 and in Section
5.3, all matters submitted to the Management Committee will be decided by a
majority vote of the Non-Independent Directors. The Non-Independent Directors
will have voting power in proportion to the ratio of Percentage Interests held
by the Manager appointing them. All Non-Independent Directors appointed by a
Manager will collectively exercise such voting power and each Manager will
designate one of its Non-Independent Directors to vote on behalf of all
Non-Independent Directors appointed by such Manager in the event of a
disagreement among the Non-Independent Directors appointed by such Manager.
5.1.4 Veto Right. Notwithstanding anything to the contrary contained
in this Agreement: (i) the VSI Directors may (so long as VSI or any of its
Affiliates is a Manager) and the PEGI Directors may (so long as PEGI or any of
its Affiliates is a Manager) veto any decision of the Management Committee to
perform, or cause the Company to perform, any of the acts or transactions
described in subsections (a) and (b)
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below; and (ii) the VSI Directors may (so long as VSI and its Affiliates hold,
in aggregate, Percentage Interests equal to at least 10%) and the PEGI Directors
may (so long as PEGI and its Affiliates hold, in aggregate, Percentage Interests
equal to at least 10%) veto any decision of the Management Committee to perform,
or cause the Company to perform, any of the following acts or transactions:
(a) ***
(b) ***
(c) ***
(d) ***
(e) ***
(f) ***
(g) ***
(h) ***
(i) ***
(j) ***
(k) ***
(l) ***
(m) ***
(n) ***
Notwithstanding the foregoing, if PEGI has not acquired fifty percent
(50%) of the Percentage Interests in the Company prior to the Option Expiration
Date, then thereafter it may not exercise its veto right with respect to a
matter described in clause (h) above.
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5.2 Members of the Management Committee; Appointment and Removal.
5.2.1 For so long as VSI (or its Affiliates) and PEGI (or its
Affiliates) are the only Members and Managers, the Management Committee will
consist of nine members: three Non-Independent Directors selected by VSI (the
"VSI Directors"), three Non-Independent Directors selected by PEGI (the "PEGI
Directors") and three other Directors (each, an "Independent Director") selected
in accordance with the following sentence. VSI and PEGI will each select one
Independent Director, and the two Independent Directors will select a third
Independent Director; provided, however, that such third Independent Director
will be mutually acceptable to both VSI and PEGI. To qualify as an Independent
Director, a person must have, and continue to have, no material business,
financial or familial relationship with either VSI or PEGI or their Affiliates
or with any officer or executive thereof. Each of VSI and PEGI will identify the
Directors it is to appoint prior to the Funding Date. Each member of the
Management Committee is referred to as a "Director", and, collectively, as the
"Directors." A duly-admitted Manager will have the right to appoint at least one
Non-Independent Director (or such greater number as the Management Committee may
determine); provided, however, that no group of Affiliated Members will have the
right to appoint more than that number of Directors that could have been
appointed by that group's initial holder of the Membership Interests. A Director
need not be a resident of the State of Delaware or a citizen of the United
States. To the fullest extent permitted by law, no Director will be deemed an
agent or sub-agent of the Company. Each Manager, by execution of this Agreement,
agrees to, consents to, and acknowledges the delegation of powers and authority
to such Directors and the Management Committee, and to the actions and decisions
of such Directors and the Management Committee within the scope of such
Director's and Management Committee's authority as provided herein. No Director
will have the authority in his capacity as a Director to enter into any
transaction on behalf of the Company. The Independent Directors will receive
compensation as determined from time to time by the Management Committee and as
reflected in the applicable Annual Budget.
(1) At such time as either the VSI Directors or the PEGI
Directors are no longer entitled to exercise a veto on matters that may be
determined by the Independent Directors pursuant to Section 5.3, the Independent
Directors will be dismissed from the Management Committee.
5.2.2 Each Manager will have the absolute and unconditional right
from time to time to designate the Directors appointed by it by delivery of
written notice to the Members. A Director may be removed with or without cause
at the sole discretion of the Manager that appointed that Director by delivery
of written notice to the other Manager(s). A vacancy on the Management Committee
may only be filled by the Manager that originally appointed the Director whose
death, disability, removal or resignation created such vacancy, or, in the case
of the third Independent Director, by the other two Independent Directors. Each
Manager will also have the right to appoint alternates to each Director
designated by such Manager by designating the name of such
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alternates in a written notice to the other Manager(s). In case of the absence
of a Director, any individual designated as an alternate for that Director will
have the right and power to exercise all rights and powers of the absent
Director.
5.3 Matters Determined by Independent Directors. If the VSI Directors or
the PEGI Directors exercise their veto power under Section 5.1.3 with respect to
*** such Directors will negotiate in good faith for a period of fifteen (15)
business days in order to resolve the deadlock. If such negotiations are not
successful, then such deadlocked matter will be ***
5.4 Meetings of the Management Committee.
5.4.1 Regular quarterly meetings of the Management Committee will be
held without call or notice at such time as will from time to time be fixed by
standing resolution of the Management Committee. Special meetings of the
Management Committee may be held at any time whenever called by any Director.
Written notice of a special meeting of the Management Committee will be given to
the other Directors by the Director calling the meeting at least three (3)
business days before such special meeting, and such notice will include a
proposed agenda for the meeting. Only matters on the proposed agenda may be put
to a vote at such special meeting. Special meetings may only take place at the
Company's principal offices or in Los Angeles.
5.4.2 *** The presence of Directors representing a Majority Interest
at a duly noticed meeting of the Management Committee will constitute a quorum
for the transaction of business; provided that to transact business with respect
to which the Directors appointed by any Member have a veto right pursuant to
Section 5.1.4, at least one such Director must be present for a quorum to exist.
Directors may participate in a meeting through the use of conference telephone
or similar communications equipment, and such Directors will be considered
present in person as long as all Directors participating in such meeting can
hear one another.
5.4.3 Every act of the Management Committee taken at any meeting of
the Management Committee, however called and noticed or wherever held, will be
as valid as though made or performed at a meeting duly held after regular call
and notice, if a quorum is present and if, either before or after the meeting,
each of the Managers not present or who, though present, has prior to the
meeting or at its commencement, protested the lack of proper notice to such
meeting, signs a written waiver of notice or a written consent to holding such
meeting or approval of the minutes thereof.
5.4.4 For so long as VSI and PEGI are the only Managers, any action
required or permitted to be taken at any meeting of the Management Committee may
be
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taken without a meeting if one VSI Director and one PEGI Director consent
thereto in writing, and the writing is filed with the minutes of proceedings of
the Management Committee.
5.5 Delegation of Authority; President and Other Officers.
5.5.1 General Power to Delegate Authority. The Management Committee
may delegate the right, power and authority to manage the day-to-day business,
affairs, operations and activities of the Company to the President (which
authority the President may delegate to other Persons), subject to the ultimate
direction, control and supervision of the Management Committee; provided,
however, that no Person will be authorized to take any action or engage in any
activity subject to the veto right of the VSI Directors and PEGI Directors under
Section 5.1.4 or where the approval of a specified Person is required, without
first obtaining the required approvals.
5.5.2 The President. The Managers intend that the Management
Committee delegate the management of the day-to-day business, affairs,
operations and activities of the Company to a President. The President will be
the most senior executive of the Company and will report directly to the
Management Committee. Subject to the supervisory powers of the Management
Committee, the President will have general and active management of the business
of the Company and will see that all orders and resolutions of the Management
Committee are carried into effect. The President will have the power to execute
any agreements and instruments on behalf of the Company, except where the
execution thereof will be expressly reserved by the Management Committee or
delegated by the Management Committee or the President to some other officer or
agent of the Company. The President will have such other powers and duties as
may be prescribed by the Management Committee or this Agreement.
5.5.3 Duties of the President. Unless and until any of the following
duties are delegated to another officer by the Management Committee, the
President's duties will include: preparing the Business Plan and Annual Budget
and presenting them to the Members for approval at least ninety (90) days prior
to commencement of the applicable Fiscal Year; supervision of all key functions
of the Company (including launching and managing Channels; sales and marketing;
program acquisition and production; strategic planning; accounting and financial
planning (including responsibility for the preparation of business plans and
annual budgets); and legal and business affairs); the ability to hire and fire
employees (except employees with compensation packages worth more than *** per
year, in which case such hiring or termination must be approved by the
Management Committee); expending funds in accordance with the approved Business
Plan and Annual Budgets; reporting to the Management Committee on a regular
basis regarding the operations of the Company; and
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responding to reasonable requests for information from any VSI Director or PEGI
Director.
5.5.4 Additional Officers. The Company may have such other officers
with such powers and duties as the Management Committee will determine from time
to time.
5.5.5 Officers Serve at the Pleasure of the Management Committee.
Subject to whatever rights an officer may have under a contract of employment
with the Company, all officers of the Company will serve at the pleasure of the
Management Committee.
5.6 Interested Party Transactions.
5.6.1 Approval. Except for transactions provided for in the Related
Documents, the Company will only engage in a transaction with a Member or any
Affiliate of a Member if the transaction is on terms and conditions fair and
reasonable to the Company and at least as favorable to the Company as those
generally available in a similar transaction between parties operating at arm's
length and is approved by the Management Committee. A transaction will
conclusively be deemed to have met the above requirements if, after full
disclosure, the transaction is unanimously approved by the Non-Independent
Directors. Each Member agrees to disclose to the Management Committee the nature
and extent of the interest of such Member and its Affiliates in any transaction
to be acted on by the Management Committee pursuant to this Section 5.6.1 prior
to such action. If a Member or an Affiliate thereof engages in a transaction
with the Company, such Member and/or such Affiliate will have the same rights
and obligations with respect thereto as would be the case if a Person who is not
a Member were the other party to such transaction.
5.6.2 Termination and Remedies. With respect to any contract between
the Company and a Member or any Affiliate of a Member, including but not limited
to every Related Document, the Directors appointed by the Managers not having an
interest in such contract (other than as a Member) will have the right, acting
by majority vote, to determine what actions, if any, should be taken upon the
other party's default and to cause the Company to exercise any and all remedies
it may have under such contract or applicable law, including without limitation,
the termination of such contract.
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5.7 Performance of Duties; Liability of Managers; Liability of Directors.
5.7.1 A Manager will not be liable to the Company or to any Member
for any loss or damage sustained by the Company or any Member, unless the loss
or damage will have been the result of fraud, deceit, gross negligence, reckless
or intentional misconduct, or a knowing violation of law by the Manager. The
Managers will perform their managerial duties in good faith, in a manner they
reasonably believe to be in the best interests of the Company and its Members,
and with such care, including reasonable inquiry, as an ordinarily prudent
person in a like position would use under similar circumstances. A Manager who
so performs the duties of Manager will not have any liability by reason of being
or having been a Manager of the Company.
5.7.2 A Director will not be liable to the Company or to any Member
for any loss or damage sustained by the Company or any Member, unless the loss
or damage will have been the result of fraud, deceit, gross negligence, reckless
or intentional misconduct, or a knowing violation of law by the Director. The
Directors will perform their duties in good faith, in a manner they reasonably
believe to be in the best interests of the Company and its Members, and with
such care, including reasonable inquiry, as an ordinarily prudent person in a
like position would use under similar circumstances. A Director who so performs
the duties of Director will not have any liability by reason of being or having
been a Director of the Company.
5.8 Offices and Facilities; Staff.
5.8.1 Facilities/Company Location. The Company will maintain offices
located either with VSI in the Cisneros Television Group office in Miami Beach
or at another location near such office, except for any regional sales,
marketing, production, technical, or management functions that are appropriately
located in one or more places in the Territory. ***
5.9 Insurance. The Managers will cause the Company to secure errors and
omissions and other customary liability insurance for the Company covering
exhibitions of programming by the Company, which insurance policies will meet
customary standards, and will maintain liability and other insurance covering
the activities of the Company consistent with good business customs and
practices in the Territory and the other locations in which the Company conducts
business. All insurance policies will name each Member and their respective
Affiliates, the Managers, the Directors, the President and any other officers as
named insureds.
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treatment filed separately with the Securities and Exchange Commission.
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ARTICLE 6
BUSINESS PLANS AND ANNUAL BUDGETS; OPERATION OF COMPANY
6.1 The Business Plan.
6.1.1 The First Business Plan. The Management Committee and the
President will conduct the business of the Company in accordance with the
Business Plans and Annual Budgets (each as defined below). Attached hereto as
Exhibit D is the first Business Plan of the Company (as modified pursuant to the
next two sentences and together with additional years added thereto pursuant to
Section 6.1.2, the "Business Plan"). The Members acknowledge that the first
Business Plan needs to be adjusted to reflect *** (as so adjusted, the "Final
First Business Plan"). The Members agree to cause the first Business Plan to be
adjusted prior to the Funding Date. The Business Plan is the financial model for
the operation of the Company and the Services. The Members have, by the
execution of this Agreement, approved the first Business Plan (subject to the
preceding two sentences), the Annual Budget for 1999 and the Capital
Contributions contemplated to be made thereunder.
6.1.2 Additions to Business Plan. At least ninety (90) days prior to
the end of the first year of the Company and at least ninety (90) days prior to
the end of every succeeding year of the Term thereafter, the President will
cause the Company to prepare an additional year of the Business Plan for review
and approval by the Management Committee such that the Business Plan continues
to have five years of coverage throughout the Term. Such additions to the
Business Plan will be substantially similar to the first Business Plan in scope
and detail, will include such additional information relating to the operating
and capital forecasts and budgets of the Company as the Management Committee may
direct from time to time, and will be accompanied by a report and assessment of
the Company's performance under the preceding five year period of the Business
Plan.
6.2 Annual Budgets. The Business Plan will be updated annually by a budget
(each, an "Annual Budget") for the coming Fiscal Year. The President will cause
the Company to prepare the Annual Budget and present it to the Management
Committee for approval at least ninety (90) days prior to commencement of the
applicable Fiscal Year. The approved Annual Budget for a given Fiscal Year will
supersede the data contained in the Business Plan for that Fiscal Year. The
Annual Budget for fiscal 1999 is included in the Business Plan attached as
Exhibit D. Each new Annual Budget will be substantially similar to the 1999
Annual Budget in scope and detail, and will include a projection of required
capital contributions for such Fiscal Year, if any, and such additional
information relating to the operating and capital forecasts and budgets of the
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Company as the Management Committee may direct from time to time. Each Annual
Budget will be accompanied by a report and assessment of the Company's
performance under the preceding Annual Budget.
6.3 Carryover Plan or Budget. In the event ***, the Company will continue
to operate in accordance with the most recently approved Business Plan or Annual
Budget, as the case may be, until ***
6.4 Operation of Company.
6.4.1 Operations During Transition Period. The parties anticipate
that the Company will require a period of approximately *** after the Funding
Date (the "Transition Period") to arrange appropriate office space and other
facilities and services, hire staff and otherwise be prepared to fully handle
the Company's business. During the Transition Period, PEGI will provide various
services to facilitate the Company's operations (including, but not limited to,
program sales, the servicing of program license agreements and the collection of
license fees) on the Company's behalf and at the Company's direction. Such
services will be at a level which is consistent with the level of services that
PEGI has historically provided for its international operations. The Company
will reimburse PEGI for any direct expenses reasonably incurred in performing
such services during the Transition Period. To the extent VSI or any of its
Affiliates perform services for the Company during the Transition Period, the
Company will also reimburse the entity providing such services for any direct
expenses incurred in performing such services.
6.4.2 Absorption of Existing Channels. As set forth in Section 3.1,
PEGI and VSI will contribute to the Company their equity interests in PTVLA and
the German Venture, and as set forth in Section 7.2, the Company will purchase
PEGI's interests in the U.K. Venture and the Japan Venture. (PTVLA, the German
Venture, the U.K. Venture and the Japan Venture will be collectively referred to
as the "Existing Channel Entities").
6.4.3 German Venture Expenses. Notwithstanding the Percentage
Interests of the Members, VSI and PEGI will each pay the formation expenses of
the German Venture (including the costs associated with obtaining the necessary
operating licenses) on a 50/50 basis.
6.4.4 Services Provided by PEGI. The Company will be entitled to
purchase from PEGI specific services, as the Company may determine, which PEGI
routinely performs for itself (such as creative services, the creation of on-air
promos, and residual accounting) at PEGI's actual direct cost, without mark-up.
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6.4.5 Creation of Local Ventures and Provision for Local Partners.
The Company may invite one or more third parties (each a "Local Partner") to
participate as equity owners in the Company's local venture in a country of the
Territory; provided, however, that the Company may only create a local venture
for the primary purpose of *** The decision to admit a Local Partner will be
determined by a majority vote of the Management Committee, unless *** in which
case the admission of the Local Partner will be subject to the veto rights of
the PEGI Directors and the VSI Directors under Section 5.1.4.*** Management of
each local venture will be controlled by ***
(a) Local Partners for the U.K. and Germany. If at a time when
PEGI (alone, or collectively with one or more of its Affiliates) owns less than
*** interest in the Company, the Company wishes to admit a third party as a
Local Partner for the U.K./Benelux territory or the GS Territory (a "Proposed
Partner"), and such Proposed Partner is to acquire an ownership interest in such
local venture that exceed ***, PEGI may recommend ***
6.4.6 Supplemental Programs. The Company (or its subsidiaries) may
produce and/or acquire programs whose primary use is exhibition on one or more
of the Channels ("Supplemental Programs"). *** PTV U.S. will grant to PEGI the
right to distribute such programming in the United States pursuant to the US
Distribution Agreement. ***
(a) Produced Supplemental Programs. Unless PEGI otherwise
consents and except as set forth in the rest of this paragraph (a), for any
Supplemental Program produced by the Company, the Company will either ***
(b) Acquired Supplemental Programs. If the Company (or its
subsidiaries) acquires the rights to a program for exploitation in any region of
the Territory, it will also acquire the rights for such program in the United
States, or if it does not acquire such US rights, it will ***
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6.4.7 Playboy TV Lite. ***
6.4.8 Venus and Spice Hot. The parties agree to combine the
current television businesses of Venus and Spice Hot as follows:
(a) *** New Venus will be formed for the purpose of
developing, marketing, programming and distributing channels in the genre of the
existing Venus and Spice Hot channels *** New Venus will not license programming
to third parties, other than through the distribution of the channels. The
parties agree and acknowledge that the formation and governance of New Venus
must be structured in accordance with, and not to violate, the covenants and
other obligations of Imagen's indenture dated April 30, 1998. The charter
documents and other documents governing the management of and interests in New
Venus will be subject to the prior approval of both VSI and PEGI.
(b) ***
(c) The Company will cause the distribution contracts of Spice
Hot to be contributed to New Venus in a tax efficient manner, and the Company
and PEII will provide New Venus with a royalty-free exclusive license to use the
Spice marks in connection with the operation, distribution and promotion of the
Spice Hot channel in the New Venus Territory.
(d) New Venus and Imagen will enter into an agreement pursuant
to which Imagen will act as New Venus' exclusive sales agent in the Southern
Cone.
(e) New Venus and Troy will enter into an agreement pursuant
to which Troy will act as New Venus's exclusive sales agent in the New Venus
Territory, other than in the Southern Cone.
(f) Imagen and the Company will enter into a trademark license
agreement pursuant to which Imagen will grant to the Company an exclusive
license to use the Venus name and marks in the Company's discretion on the
Company's "hot" television channels outside of the New Venus Territory. Such
license will bear a royalty of ***% of net channel revenues.
(g) The Company will have day-to-day management control of New
Venus, subject to the terms of a "Control Channel Joint Venture" under the
Imagen indenture.
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(h) The Company, through its subsidiary SEI 2, will supply New
Venus with at least *** of its annual programming requirements, on terms to be
negotiated by the Company and New Venus; provided that the program license fees
per hour of such programming *** The parties acknowledge that the programming
rights held by SEI 2 exclude certain territories *** otherwise included in the
New Venus Territory.
(i) Net profits from New Venus will be split in accordance
with the ownership percentages which Imagen and the Company hold in New Venus.
(j) ***
6.4.9 U.S. Activities. The Company will conduct no activities that
generate income subject to United States Federal income tax when earned by a
foreign corporation or a non-resident alien individual (a "U.S. Taxable
Activity"). VSI and PEGI contemplate conducting certain activities which may be
U.S. Taxable Activities relating to the distribution of programming and channels
in the United States. VSI and PEGI (either directly or through wholly-owned
subsidiaries) intend to form PTV U.S. as a separate limited liability company to
engage in such activities. The ownership structure and management of PTV U.S.
will mirror the Company's as provided in this Agreement, mutatis muntandis, and
notwithstanding anything to the contrary in this Agreement, any exercise of
rights or remedies that has the effect of altering the relative Percentage
Interests of the Members must be equally exercised with respect to PTV U.S. VSI
and PEGI agree to use best efforts to prepare and execute the charter documents
and other agreements relating to the formation and operation of PTV U.S. within
30 days from the date hereof.
6.4.10 Certain Tax Matters. Nothing in this Agreement will be read
to require the Company to conduct its affairs so that: (i) income from the
licensing of programming that might be seen by viewers will be effectively
connected with the conduct of a United States trade or business; and (ii) income
from advertising will be effectively connected with the conduct of a United
States trade or business.
ARTICLE 7
RIGHTS ACQUISITION FEE
7.1 Rights Acquisition Fee.
7.1.1 Payment of Fee. In exchange for the license of the Existing
Library Programs and the Wallpaper material described in the Program Supply
Agreement, the trademark license for Year 1 through Year 10 described in the
Trademark
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License Agreement and the Acquired Interests described in Section 7.2, the
Company will pay to PEGI a "Rights Acquisition Fee" of *** payable as follows:
(a) On the Funding Date: ***
(b) On the first day of Year 2: ***
(c) On the first day of Year 3: ***
(d) On the first day of Year 4: ***
(e) On the first day of Year 5: ***
(f) On the first day of Year 6: ***
7.1.2 Allocation of Fee. ***
(a) ***
(b) ***
(c) ***
(d) ***
(e) ***
(f) ***
***
7.2 Purchase of U.K. Venture, Japan Venture and Danish Companies. On the
date hereof, PEGI and the Company have entered into the Stock Purchase
Agreements pursuant to which PEGI will transfer, convey and assign to the
Company all of its right, title and interest of any kind in and to the U.K.
Venture, the Japan Venture and the Danish Companies (collectively, the "Acquired
Interests"). The Company will assume PEI's (and its Affiliates') obligations
under the Share Purchase Agreement (relating to the U.K. Venture) and the
Memorandum of Agreement (relating to the Japan Venture) on the terms set forth
in the respective Stock Purchase Agreements. Schedule 7.2 describes, as of the
date hereof, the interests of PEGI in the U.K. Venture, the Japan Venture and
the Danish Companies, including the type of entity (corporation,
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partnership, limited liability company, etc.) and the names and percentage
interests of all of the owners of each entity. The Funding Side Letter sets
forth the amount of the funds advanced by PEGI to the U.K. Venture from and
after July 1, 1999, the amount of the funds loaned to the U.K. Venture prior to
March 31, 1999, and the manner in which such amounts will be paid.
ARTICLE 8
MEMBERS
8.1 Limited Liability. Except as required under the Act or as expressly
set forth in this Agreement, no Member will be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise. In the event any Member becomes
personally liable for any debt, obligation or liability of the Company arising
from any action or approval of the Members or Management Committee taken without
the approval of such Member or the Directors appointed by such Member or Manager
where such approval is required under the terms hereof, then, in addition to any
other rights set forth herein, the Members or Managers taking or who appointed
the Directors taking such action will indemnify and hold harmless such Member
from and against any liability, loss, claim or damage, including but not limited
to, reasonable attorneys fees and cost, arising from or relating to such action.
8.2 Admission of Additional Members. The Management Committee will approve
the admission of new (and the terms of such admission) Members through the
issuance of additional Membership Interests, subject to the veto rights of the
VSI Directors and the PEGI Directors under Section 5.13. The Management
Committee will admit to the Company as additional Members any Person who
acquires a Membership Interest in accordance with Article 9 of this Agreement.
8.3 Withdrawals or Resignations. No Member may withdraw or resign from the
Company, except as permitted by this Agreement.
8.4 Termination of Membership Interest. Upon the transfer of a Member's
Membership Interest in violation of this Agreement or the occurrence of a
Disassociation Event, the Membership Interest of a Member will be terminated by
the Management Committee and such Membership Interest will be purchased by the
Company or remaining Members as provided in Article 10. Each Member acknowledges
and agrees that such termination or purchase of a Membership Interest upon the
occurrence of any of the foregoing events is not unreasonable. The rights of the
Company and the non-breaching Members under this Section will be in addition to,
and not in limitation of, any other rights and remedies which the Company and
such other Members may have at law or equity.
8.5 Remuneration To Members. Except as otherwise authorized in, or
pursuant to, this Agreement, no Member is entitled to remuneration for acting in
the
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Company business, subject to the entitlement of Directors, Managers or Members
winding up the affairs of the Company to reasonable compensation.
8.6 Members Are Not Agents; No Management Authority. Pursuant to this
Agreement and the Certificate, the management of the Company is vested in the
Managers, who will exercise their authority through the Management Committee. No
Member, acting solely in the capacity of a Member, is an agent of the Company
nor can any Member in such capacity bind nor execute any instrument on behalf of
the Company. The Members will have no power to participate in the management of
the Company except as expressly authorized by this Agreement and except as
expressly required by the Act.
8.7 Meetings of Members. Meetings of Members may be held at such date,
time and place within or without the State of Delaware as the Management
Committee may fix from time to time. No annual or regular meetings of Members
are required. At any Members' meeting, the President will preside at the meeting
and will act as secretary of the meeting.
8.7.1 Power to Call Meetings. Unless otherwise prescribed by the
Act, meetings of the Members may be called by the Management Committee acting by
majority vote or by any Member or group of Members holding more than ten percent
(10%) of the Percentage Interests for the purpose of addressing any matters on
which the Members may vote.
ARTICLE 9
TRANSFER AND ASSIGNMENT OF INTERESTS
9.1 Transfer of Membership Interests.
9.1.1 No Member may transfer, assign, sell, encumber or in any way
alienate or dispose of (each, a "Transfer"), including to an Affiliate, all of
any portion of its Membership Interest (the "Offered Interest") if such
Transfer: *** If a Member objects to a proposed Transfer on the grounds set
forth above, such dispute must be resolved prior to the consummation of the
proposed Transfer.
9.1.2 Subject to the provisions of Section 9.1.1, if VSI or PEGI (or
any of their respective Affiliates) (a "Selling Member") wishes to Transfer all
or a part of its Membership Interest to an entity which is not an Affiliate of
such Selling Member (a "Third Party Buyer"), the Selling Member must first offer
to sell the Offered Interest to the non-Selling Member. If the Selling Member is
PEGI (or any of its Affiliates) and the Option Expiration Date has not occurred,
the Offered Terms must disclose whether and to
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what extent PEGI (or its Affiliates) intends to exercise the Buy-up Option in
anticipation of such Transfer. If the Selling Member and the non-Selling Member
are not able to reach an agreement after a thirty (30)-day negotiation period,
the Selling Member may Transfer the Offered Interest to the Third Party Buyer;
provided, however, that the Selling Member must give the non-Selling Member: (i)
notice of the terms on which the Selling Member intends to Transfer the Offered
Interest to the Third Party Buyer (the "Offered Terms") and (ii) the right to
acquire the Offered Interest at the price offered by the Third Party Buyer (the
"Matching Right"); provided that to the extent the Offered Terms include
non-cash consideration, the Matching Right will include the right of the
non-Selling Member to pay, in cash, the Fair Market Value to the Selling Member
of such non-cash items, and the time periods prescribed in this Section will be
adjusted to permit the determination of Fair Market Value; but further provided,
that if such non-cash consideration is a promissory note or similar financial
instrument, the non-Selling Member may substitute an equivalent instrument. If
the non-Selling Member fails to exercise the Matching Right within thirty (30)
days after receiving notice of the Offered Terms, the Selling Member may
Transfer the Offered Interest to the Third Party Buyer on terms which are at
least as favorable to the Selling Member as the Offered Terms. If the Selling
Member and Third Party Buyer do not execute a definitive and binding agreement
for the Transfer of the Offered Interest within thirty (30) days after the date
on which the non-Selling Member declines to exercise the Matching Right, the
Selling Buyer must again re-offer the Offered Interest to the non-Selling Member
in accordance with the terms in this Section.
9.2 Change of Control.
9.2.1 Changes in General. Except as provided in this Section, a
Transfer of the equity or voting interests of a Member or of an Affiliate of a
Member which results, directly or indirectly, in a change of control of such
Member will be permitted so long as such transfer does not have a material
adverse effect on the other Member or the Company.
9.2.2 VSI. Notwithstanding Section 9.2.1, the parties agree and
acknowledge that a Transfer of the equity or voting interests of VSI or of an
Affiliate that controls VSI (a "VSI Parent") will be permitted, so long as the
following conditions are satisfied: ***
9.2.3 PEI/PEGI. The terms of this Section 9.2.3 will apply so long
as VSI and its Affiliates hold, in the aggregate, a Percentage Interest of not
less than ***. Notwithstanding Section 9.2.1 of this Section, in the event PEI,
or such other Affiliate of PEI that may control PEGI (a "PEGI Parent"), wishes
to Transfer to one or more third parties, ***
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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9.2.4 ***
9.3 Substitution of Members. A transferee of a Membership Interest will
have the right to become a substitute Member only if (a) the requirements of
Sections 9.1 and 9.2 and any securities or tax requirements of this Agreement
are met, (b) such Person executes an instrument satisfactory to the Management
Committee accepting and adopting the terms and provisions of this Agreement, and
(c) such Person pays any reasonable expenses in connection with its admission as
a new Member. The admission of a substitute Member will not result in the
release of the Member who assigned the Membership Interest from any liability
that such Member may have to the Company.
9.4 Effective Date of Permitted Transfers. Any permitted transfer of all
or any portion of a Membership Interest will be effective as of the first
business day following the date upon which the requirements of Sections 9.1, 9.2
and 9.3 have been met. The President will promptly provide the Members with
written notice of such transfer. Any transferee of a Membership Interest will
take subject to the restrictions on transfer imposed by this Agreement.
9.5 Rights of Legal Representatives. If a Member who is an individual dies
or is adjudged by a court of competent jurisdiction to be incompetent to manage
the Member's person or property, the Member's executor, administrator, guardian,
conservator, or other legal representative may exercise all of the Member's
rights for the purpose of settling the Member's estate or administering the
Member's property, including any power the Member has under this Agreement to
give an assignee the right to become a Member. If a Member is a corporation or
other entity and is dissolved or terminated, the powers of that Member may be
exercised by its legal representative or successor.
9.6 PEGI Buy-up Option. Starting on the Funding Date and continuing
through the Option Expiration Date (as defined in Section 9.6.1), PEGI (or its
Affiliates who are then Members of the Company) has the option to acquire up to
thirty and one-tenths percent (30.1%) of additional Membership Interests in the
Company by purchasing such additional Membership Interests from VSI (and any of
its Affiliates which hold Member Interests, collectively); provided, however,
that if PEGI (and its Affiliates, collectively) transfer Membership Interests to
any Person(s) which is not an Affiliate of PEGI, such thirty and one-tenths
percent (30.1%) will be adjusted downward, pro rata, in accordance with the
decline in PEGI's and its Affiliates' aggregate Membership Interests in the
Company (the applicable percentage from time to time being the "Option
Percentage"; and further provided, that if at any time PEGI and its Affiliates
collectively do not own at least five percent (5%) of the total Membership
Interests, the option
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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provided in this Section 9.6 will terminate. The Percentage Interest of VSI (and
its Affiliates) subject to the option described in this Section 9.6 is referred
to as the "Option Percentage."
9.6.1 Option Expiration Date. The "Option Expiration Date" will be
the earlier to occur of ***
9.6.2 Exercise of Buy-up Option. Until the Option Expiration Date,
PEGI (including for the balance of this Section 9.6.2, its Affiliates who are
then Members) may exercise its option to purchase additional Percentage
Interests of the Company up to the Option Percentage from VSI (including for the
balance of this Section 9.6.2, its Affiliates who are then Members) on December
15 of each year, in increments of ***; provided, however, that PEGI may exercise
its option: (i) immediately prior to the Option Expiration Date, with respect to
any part or all of the then-unpurchased portion of the Option Percentage; and
(ii) immediately prior to a transfer that would decrease the Option Percentage,
with respect to that portion of the Option Percentage that would be lost as a
consequence of such transfer. During Year 1, PEGI may buy such additional
percentage interests from VSI ***. During Year 2, Year 3 and Year 4, the price
at which PEGI may purchase additional Percentage Interests from VSI is ***, plus
interest, compounded annually, at an annual rate equal to the greater of ***
with such interest accruing through the date PEGI pays for such additional
Percentage Interests on an amount equal to the product of the average daily
balance (starting from the Funding Date) of the Members' aggregate unreturned
Capital Contributions multiplied by the Percentage Interest being purchased. In
Year 5 through Year 10, PEGI's buy-in price will be *** at the time of purchase
(as determined in accordance with Exhibit E). PEGI may pay the purchase price
for the additional Percentage Interests in ***, which election will be set forth
in PEGI's notice that it is exercising its buy-up option. *** In the event PEGI
fails to timely pay for any additional Percentage Interests for which it
exercised its buy-up option, VSI may elect either: (i) to terminate PEGI's right
to purchase such Percentage Interests; or (ii) to cause the Company to withhold
any payments otherwise due to PEGI under this Agreement or the Program Supply
Agreement and to pay such amounts to VSI until VSI is paid in full (including
interest at the Reference Rate from the date such payment was due) for such
additional interests, and VSI will then transfer such interests to PEGI.
(a) If PEGI pays for some or all of its purchase in PEI stock,
such stock will be registered or be subject to normal and customary registration
rights.
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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ARTICLE 10
CONSEQUENCES OF DISSOLUTION
OR BANKRUPTCY OF MEMBER
10.1 Disassociation Event. Upon the occurrence of a Disassociation Event,
the Company will not dissolve. Upon the occurrence of a Disassociation Event,
the Members holding all of the remaining Membership Interests (the "Remaining
Members") and/or, if applicable pursuant to Section 10.1.3, the Company, will
purchase, and the Member whose actions or conduct resulted in the Disassociation
Event ("Former Member") or such Former Member's legal representative will sell,
the Former Member's Membership Interest ("Former Member's Interest") as provided
in this Section 10.1.
10.1.1 Purchase Price. The purchase price for the Former Member's
Interest will be the lesser of (i) the positive Capital Account balance of the
Former Member or (ii) the Fair Market Value of the Former Member's Interest.
Notwithstanding the foregoing, if the Disassociation Event results from a breach
of this Agreement by the Former Member, the purchase price paid by the Remaining
Members and/or the Company will be reduced by an amount equal to the damages
suffered by such purchasing parties as a result of such breach.
10.1.2 Notice of Intent to Purchase. Within thirty (30) days after
the President has notified the Remaining Members as to the purchase price of the
Former Member's Interest determined in accordance with Section 10.2, each
Remaining Member will notify the President in writing of its desire to purchase
a portion of the Former Member's Interest. The failure of any Remaining Member
to submit a notice within the applicable period will constitute an election on
the part of the Member not to purchase any of the Former Member's Interest. Each
Remaining Member so electing to purchase will be entitled to purchase a portion
of the Former Member's Interest in the same proportion that the Percentage
Interest of the Remaining Member bears to the aggregate of the Percentage
Interests of all of the Remaining Members electing to purchase the Former
Member's Interest.
10.1.3 Election to Purchase Less Than All of the Former Member's
Interest. If any Remaining Member elects to purchase none or less than all of
its pro rata share of the Former Member's Interest, then the Remaining Members
can elect to purchase more than their pro rata share. If the Remaining Members
fail to purchase the entire interest of the Former Member, the Company will
purchase any remaining share of the Former Member's Interest.
10.1.4 Payment of Purchase Price. The purchase price will be paid by
the Remaining Members and/or the Company, as the case may be, at the closing
one-fifth (1/5) in cash and the balance of the purchase price in four equal
annual principal installments, plus accrued interest, and be payable each year
on the anniversary date of the closing. Any such payment by the Company will be
made solely out of Distributable Cash allocable to the Remaining Members. The
unpaid principal balance will accrue
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interest at the current applicable federal rate as provided in the Code for the
month in which the initial payment is made, but the Company and the Remaining
Members will have the right to prepay in full or in part at any time without
penalty. The obligation to pay the balance due will be evidenced by a promissory
note, and if purchased by a Remaining Member, secured by a pledge of the
Membership Interest being purchased.
10.1.5 Closing of Purchase of Former Member's Interest. The closing
for the sale of a Former Member's Interest pursuant to this Article 10 will be
held on a business day at the principal office of the Company no later than
sixty (60) days after the determination of the purchase price. At the closing,
the Former Member or such Former Member's legal representative will deliver to
the Company or the Remaining Members an instrument of transfer (containing
warranties of title and no encumbrances) conveying the Former Member's Interest.
The Former Member or such Former Member's legal representative, the Company and
the Remaining Members will do all things and execute and deliver all papers as
may be necessary fully to consummate such sale and purchase in accordance with
the terms and provisions of this Agreement.
10.1.6 Purchase Terms Varied by Agreement. Nothing contained herein
is intended to prohibit Members from agreeing upon other terms and conditions
for the purchase by the Company or any Member of the Membership Interest of any
Member in the Company desiring to retire, withdraw or resign, in whole or in
part, as a Member.
10.2 Bankruptcy. Upon the Bankruptcy of a Member, the Membership Interests
of such Member, whether held by such Member, its trustee or other representative
in bankruptcy, will be converted to an Economic Interest.
ARTICLE 11
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
11.1 Books and Records. The books and records of the Company will be kept,
and the financial position and the results of its operations recorded, in
accordance with generally accepted accounting principles as in effect from time
to time and the accounting methods followed for federal income tax purposes. The
books and records of the Company will reflect all the Company transactions and
will be appropriate and adequate for the Company's business. The Company will
maintain at its principal office all of the following:
(a) A current list of the full name and last known business or
residence address of each Member, together with the Capital Contributions,
Capital Account and Percentage Interest of each Member;
(b) A current list of the full name and business or residence
address of each Manager and Director;
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(c) A copy of the Certificate and any and all amendments
thereto together with executed copies of any powers of attorney pursuant to
which amendments thereto have been executed;
(d) Copies of the Company's federal, state, and local income
tax or information returns and reports, if any, for the six most recent taxable
years;
(e) A copy of this Agreement and any and all amendments
thereto together with executed copies of any powers of attorney pursuant to
which this Agreement or any amendments thereto have been executed;
(f) Copies of the financial statements of the Company, if any,
for the six most recent Fiscal Years; and
(g) The Company's books and records as they relate to the
internal affairs of the Company for at least the current and past four Fiscal
Years.
11.2 Delivery to Members and Inspection.
11.2.1 Delivery Upon Request. Upon the request of any Member for
purposes reasonably related to the interest of that Person as a Member, the
President will promptly deliver to the requesting Member, at the expense of the
Company, a copy of the information required to be maintained by Sections
11.1(a), (b) and (d), and a copy of this Agreement, as amended. The President
will promptly furnish to a Member a copy of any amendment to the Certificate or
this Agreement executed by a Manager or Director pursuant to a power of attorney
from the Member.
11.2.2 Inspection. Each Member has the right, upon reasonable
request for purposes reasonably related to the interest of the Person as Member
to:
(a) inspect and copy during normal business hours any of the
Company records described in Sections 11.1(a) through (g); and
(b) obtain from the President, promptly after their becoming
available, a copy of the Company's federal, state, and local income tax or
information returns for each Fiscal Year.
11.2.3 Authorized Persons. Any request, inspection or copying by a
Member under this Section 11.2 may be made by that Person or that Person's agent
or attorney.
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11.3 Periodic Statements.
11.3.1 Monthly Report. The President will cause a monthly report to
be sent to each of the Members not later than thirty (30) days after the end of
each month during a Fiscal Year. The report will contain a balance sheet as of
the last day of such month and an income statement and statement of changes in
financial position for the period then ended. Such financial statements will be
unaudited but will be prepared on a consistent basis with the Company's audited
annual financial statements described below.
11.3.2 Annual Report. The President will cause an annual report to
be sent to each of the Members not later than forty-five (45) days after the
close of the Fiscal Year. The report will contain a balance sheet as of the end
of the Fiscal Year and an income statement and statement of changes in financial
position for the Fiscal Year. Such financial statements will be audited and will
be accompanied by the report thereon prepared by the independent accountants
engaged by the Company.
11.3.3 Tax Information. The President will cause to be prepared at
least annually, at Company expense, information necessary for the preparation of
the Members' federal and state income tax returns. The President will send or
cause to be sent to each Member within forty-five (45) days after the end of
each taxable year such information as is necessary to complete federal, state,
and local income tax or information returns, and a copy of the Company's
federal, state, and local income tax or information returns for that year.
11.4 Financial and Other Information. The President will provide such
financial and other information relating to the Company, as a Member may
reasonably request.
11.5 Filings. The President, at Company expense, will cause the income tax
returns for the Company to be prepared and timely filed with the appropriate
authorities. At least seventy-five (75) days prior to the last date for timely
filing of such returns, the President will deliver to the Tax Matters Member
copies of such returns for their approval prior to the filing due date. The
President, at Company expense, will also cause to be prepared and timely filed,
with appropriate federal and state regulatory and administrative bodies,
amendments to, or restatements of, the Certificate and all reports required to
be filed by the Company with those entities under the Act or other then current
applicable laws, rules, and regulations. If a Manager or Director required by
the Act to execute or file any document fails, after demand, to do so within a
reasonable period of time or refuses to do so, any other Manager or Member may
prepare, execute and file that document with the Delaware Secretary of State.
11.6 Bank Accounts. The President will cause the Company to maintain the
funds of the Company in one or more separate bank accounts in the United States
in the name of the Company, and will not permit the funds of the Company to be
commingled in any fashion with the funds of any other Person.
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11.7 Accounting Decisions and Reliance on Others. All decisions as to
accounting matters, except as otherwise specifically set forth herein, will be
made by the Management Committee. A Manager or Director may rely upon the advice
of the Company's accountants as to whether such decisions are in accordance with
accounting methods followed for federal income tax purposes.
11.8 Tax Matters for the Company Handled by Management Committee and Tax
Matters Member. The Management Committee will from time to time cause the
Company to make such tax elections as it deems to be in the best interests of
the Company; provided, however, that so long as PEGI is a Member, the Management
Committee will not (i) file any tax return or (ii) make any tax election or take
any position with respect to any examination audit or proceeding by a taxing
authority that could have an adverse impact on PEGI, and/or the consolidated tax
group in which PEGI participates, without PEGI's prior written consent, which
consent will not be unreasonably withheld, it being expressly agreed that if
such adverse impact on PEGI or its tax group is not material to such Persons,
PEGI will not withhold its consent. PEGI will respond to any request for its
consent within thirty (30) days after receiving such request in writing, and if
PEGI fails to give such consent, such matter will be determined in accordance
with the dispute resolution procedure set forth in Section 16. The Tax Matters
Member (the equivalent to the Tax Matters Partner as defined in Code Section
6231) will represent the Company (at the Company's expense) in connection with
all examinations of the Company's affairs by tax authorities, including
resulting judicial and administrative proceedings, and will expend the Company's
funds for professional services and costs associated therewith. The Tax Matters
Member will oversee the Company's tax affairs in the overall best interests of
the Company. If for any reason the Tax Matters Member can no longer serve in
that capacity or ceases to be a Member or Manager, as the case may be, Members
holding a Majority Interest may designate another to be Tax Matters Member.
ARTICLE 12
DISSOLUTION AND WINDING UP
12.1 Term. The term (the "Term") of the Company will commence on the date
the Certificate is filed with the Secretary of State of Delaware and terminate
on the earlier to occur of the termination of the Company as provided in the
Certificate or the earlier dissolution of the Company pursuant to the terms of
this Article 12.
12.2 Dissolution Events. The Company may be dissolved prior to the
termination date set forth in the Certificate upon the happening of any of the
following events (each, a "Dissolution Event"):
12.2.1 For so long as VSI (with its Affiliates, in aggregate) or
PEGI (with its Affiliates, in aggregate) holds Percentage Interests equal to
10%, such Member may elect to dissolve the Company or buy out the other Member's
Membership Interest (at a
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price equal to the lower of Fair Market Value and the positive Capital Account
balance of such Member and its Affiliates) if controlling ownership of the other
Member changes (other than as permitted by, and subject to the conditions of,
Section 9.2); provided, however, that the parties acknowledge that PEI is
publicly held and that no change in its ownership will constitute a change of
control of PEGI as long as PEGI remains a controlled subsidiary of PEI. Any such
dissolution or buy-out will be effective as of such change of control.
12.2.2 Any Member may, without prejudice to any other remedies it
may have, elect to dissolve the Company by notice in writing to the other
Members on or after the occurrence of any of the following:
(a) subject to Section 3.4, the commission of one or more
material breaches of this Agreement by the Company or another Member which are
not capable of remedy, provided that any such breach by the Company is not
caused by the Member its seeking dissolution or any of its Affiliates;
(b) the commission of a material breach of this Agreement by
the Company or another Member which is capable of remedy (a "Remediable Breach")
which will not have been remedied within a period of thirty (30) days after the
party in breach has been given notice in writing specifying that Remediable
Breach and requiring it to be remedied; provided, however, that such thirty (30)
day period will be extended for such additional period as will be reasonably
necessary if that Remediable Breach is incapable of remedy within that one month
period and during that thirty (30) day period the party in breach will
diligently endeavor to remedy that Remediable Breach, but only if such extension
would not reasonably be expected to have a material adverse effect on the party
giving notice of such breach and, provided further, that any such breach by the
Company was not caused by the Member seeking dissolution or any of its
Affiliates;
(c) the Bankruptcy, insolvency, general assignment for the
benefit of creditors or similar event of or the appointment of a trustee,
receiver or similar person for any other Member holding Percentage Interests
(collectively with its Affiliates) equal to or greater than ten percent (10%);
or
(d) the uncured material breach of one or more of the Related
Documents by another Member or the Company, provided that any such breach by the
Company was not caused by the Member seeking dissolution or any of its
Affiliates.
12.3 Effect of Dissolution. Upon dissolution of the Company, the Trademark
License Agreement and the Program Supply Agreement will automatically terminate
and all rights and obligations of the respective parties thereunder will
terminate, except for any provisions that expressly survive such termination or
claims that have arisen prior to such termination; provided, however, in the
event such dissolution is due to a breach by PEGI (or an Affiliate of PEGI),
then VSI may cause the Trademark License Agreement and the Program Supply
Agreement to be assigned as set forth in those agreements.
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Upon dissolution of the Company, each Member will have the right to compel the
Company to be promptly wound-up and liquidated.
12.4 Dissolution. The Company will be dissolved, its assets will be
disposed of, and its affairs wound up on the first to occur of the following:
(a) Upon the election of the applicable Member(s) following
the happening of any Dissolution Event;
(b) Upon the entry of a decree of judicial dissolution
pursuant to Section 18-802 of the Act;
(c) The occurrence of a Disassociation Event and the failure
of the Remaining Members to purchase the Former Member's Interest as provided in
Article 10; or
(d) The sale of all or substantially all of the assets of
Company.
12.5 Certificate of Dissolution. As soon as possible following the
occurrence of any of the events specified in Section 12.3, the Directors
appointed by the Members whose breach or Disassociation Event have not caused
the dissolution of the Company or, if none, the Members, will execute a
Certificate of Dissolution in such form as will be prescribed by the Delaware
Secretary of State and file the Certificate of Dissolution as required by the
Act.
12.6 Winding Up. Upon dissolution, the Company will continue solely for
the purpose of winding up its affairs in an orderly manner, liquidating its
assets, and satisfying the claims of its creditors. The Directors appointed the
Member whose breach or Disassociation Event have not caused the dissolution of
the Company or, if none, the Members, will be responsible for overseeing the
winding up and liquidation of Company, will take full account of the liabilities
of Company and assets, will either cause its assets to be sold or distributed,
and if sold as promptly as is consistent with obtaining the fair market value
thereof, will cause the proceeds therefrom, to the extent sufficient therefor,
to be applied and distributed as provided in Section 12.8. The Persons winding
up the affairs of the Company will give written notice of the commencement of
winding up by mail to all known creditors and claimants whose addresses appear
on the records of the Company. The Directors or Members winding up the affairs
of the Company will be entitled to reasonable compensation for such services.
12.7 Distributions in Kind. Any non-cash asset distributed to one or more
Members will first be valued at its Fair Market Value to determine the Net
Income or Net Loss that would have resulted if such asset were sold for such
value, such Net Income or Net Loss will then be allocated pursuant to Article 4,
and the Members' Capital Accounts will be adjusted to reflect such allocations.
The amount distributed and charged to the Capital Account of each Member
receiving an interest in such distributed asset will be the
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Fair Market Value of such interest (net of any liability secured by such asset
that such Member assumes or takes subject to). The Fair Market Value of such
asset will be determined by the Members, or if any Member objects, by an
independent appraiser in accordance with Exhibit E, with a single appraiser
selected by the Members; provided, however, that the Fair Market Value of the
physical embodiment of any intellectual property will be determined based on its
value to a third party (i.e., to a Person other than the owner of such
intellectual property). Except in cases where the Program Supply Agreement and
Trademark License Agreement are not terminated upon dissolution (as set forth in
Section 12.3), PEGI may elect to have distributed to it in kind or destroyed any
assets of the Company that are Playboy-branded, contain Playboy-identified
content or are otherwise identified as a Playboy-related product.
12.8 Order of Payment of Liabilities Upon Dissolution.
12.8.1 Distributions to Members. After determining that all known
debts and liabilities of the Company in the process of winding-up, including,
but not limited to, debts and liabilities to Members that are creditors of the
Company, have been paid or adequately provided for, the remaining assets will be
distributed to the Members in accordance with their positive Capital Account
balances, after taking into account income and loss allocations for the
Company's taxable year during which liquidation occurs. Such liquidating
distributions will be made by the end of the Company's taxable year in which the
Company is liquidated, or, if later, within ninety (90) days after the date of
such liquidation.
12.8.2 Payment of Debts. The payment of a debt or liability, whether
the whereabouts of the creditor is known or unknown, has been adequately
provided for if the payment has been provided for by either of the following
means:
(a) Payment thereof has been assumed or guaranteed in good
faith by one or more financially responsible persons or by the United States
government or any agency thereof, and the provision, including the financial
responsibility of the Person, was determined in good faith and with reasonable
care by the Members or Managers to be adequate at the time of any distribution
of the assets pursuant to this Section 12.8.
(b) The amount of the debt or liability has been deposited as
provided in Section 280 of the Corporations Code.
This Section 12.8.2 will not prescribe the exclusive means of making
adequate provision for debts and liabilities.
12.9 Certificate of Cancellation. The Directors, Managers or Members who
filed the Certificate of Dissolution will cause to be filed in the office of,
and on a form prescribed by, the Delaware Secretary of State, a certificate of
cancellation of the Certificate upon the completion of the winding up of the
affairs of the Company.
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12.10 No Action for Dissolution. Except as expressly permitted in this
Agreement, a Member will not take any voluntary action that directly causes a
Dissolution Event. The Members acknowledge that irreparable damage would be done
to the goodwill and reputation of the Company if any Member should bring an
action in court to dissolve the Company under circumstances where dissolution is
not required by Section 12.4. This Agreement has been drawn carefully to provide
fair treatment of all parties. Accordingly, except where the Managers or
Directors have failed to liquidate the Company as required by this Article 12,
each Member hereby waives and renounces its right to initiate legal action to
seek the appointment of a receiver or trustee to liquidate the Company or to
seek a decree of Judicial dissolution of the Company on the ground that (a) it
is not reasonably practicable to carry on the business of the Company in
conformity with this Agreement, or (b) dissolution is reasonably necessary for
the protection of the rights or interests of the complaining Member. Damages for
breach of this Section 12.10 will be monetary damages only (and not specific
performance), and the damages may be offset against distributions by the Company
to which such Member would otherwise be entitled.
ARTICLE 13
INDEMNIFICATION AND INSURANCE
13.1 Indemnification of Agents. The Company will and hereby agrees to
indemnify any Person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that such Person is or was a Member, Manager, Director, officer,
employee or other agent of the Company or that, being or having been such a
Member, Manager, officer, employee or agent, such Person is or was serving at
the request of the Company as a manager, director, officer, employee or other
agent of another limited liability company, corporation, partnership, joint
venture, trust or other enterprise (all such persons being referred to
hereinafter as an "Agent"), to the fullest extent permitted by applicable law in
effect on the Funding Date and to such greater extent as applicable law may
hereafter from time to time permit. The Managers will be authorized, on behalf
of the Company, to enter into indemnity agreements from time to time with any
Person entitled to be indemnified by the Company hereunder, upon such terms and
conditions as the Managers deem appropriate in their business judgment.
13.2 Insurance. The Company will have the power to purchase and maintain
insurance on behalf of any Person who is or was an agent of the Company against
any liability asserted against such Person and incurred by such Person in any
such capacity, or arising out of such Person's status as an agent, whether or
not the Company would have the power to indemnity such Person against such
liability under the provisions of Section 13.1 or under applicable law.
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ARTICLE 14
NONCOMPETITION
14.1 Non-competition. For so long as VSI or PEGI (or any of their
respective Affiliates) is a Member of the Company, or for any time after a
Member transfers its Membership Interest in violation of this Agreement, such
Member and its Affiliates may not: ***
14.2 Separate Covenants. The agreements contained in Section 14.1 will be
construed as a series of separate covenants, one for each activity of the
Member, capacity in which the Member is prohibited from competing and each part
of the Territory in which the Company is carrying on such activity.
14.3 Injunctive Relief. Each Member acknowledges that (a) the covenants
and the restrictions contained in Section 14.1 are a material factor to such
Member's execution of this Agreement and are necessary and required for the
protection of the Company and the other Members, (b) such covenants are
reasonable and appropriate in scope, (c) such covenants relate to matters that
are of a special, unique and extraordinary character that gives each of such
covenants a special, unique and extraordinary value, and (d) a breach of any of
such covenants will result in irreparable harm and damages to the Company and
the Members in an amount difficult to ascertain and that cannot be adequately
compensated by a monetary award. Accordingly, in addition to any of the relief
to which the Company or the other Members may be entitled at law or in equity,
the Company and the other Members will be entitled to temporary and/or permanent
injunctive relief from any breach or threatened breach by a Member of the
provisions of Section 14.1 without proof of actual damages that have been or may
be caused to the Company or such other Members by such breach or threatened
breach.
14.4 Outside Businesses. Except as provided in Section 14.1, any Member or
Affiliate thereof may engage in or possess an interest in other business
ventures of any nature or description, independently or with others, similar or
dissimilar to the business of the Company, and the Company and the other Members
will have no rights by virtue of this Agreement in and to such independent
ventures or the income or profits derived therefrom, and the pursuit of any such
venture will not be deemed wrongful or improper. No Member or Affiliate thereof
will be obligated to present any particular investment opportunity to the
Company, even if such opportunity is of a character that, if presented to the
Company, could be taken by the Company, and any Member or Affiliate thereof will
have the right to take for its own account, except as expressly provided by this
Agreement, or to recommend to others any such particular investment opportunity.
The provisions of this Section will not in any way limit, modify or amend the
terms of any
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
44
<PAGE>
noncompetition, license or other agreement that may be entered into between the
Company and any Member, which terms will be binding on the parties thereto.
ARTICLE 15
MEMBER REPRESENTATIONS AND WARRANTIES
15.1 Representations and Warranties by Each Member. Each Member hereby
represents and warrants to, and agrees with, the other Members, and the Company,
as follows:
15.1.1 Experience. By reason of such Member's business or financial
experience, such Member is capable of evaluating the risks and merits of an
investment in the Membership Interest and of protecting such Member's own
interests in connection with this investment.
15.1.2 No Advertising. Such Member has not seen, received, been
presented with, or been solicited by any leaflet, public promotional meeting,
newspaper or magazine article or advertisement, radio or television
advertisement, or any other form of advertising or general solicitation with
respect to the sale of the Membership Interest.
15.1.3 Investment Intent. Such Member is acquiring the Membership
Interest for investment purposes for such Member's own account only and not with
a view to or for sale in connection with any distribution of all or any part of
the Membership Interest. No other Person will have any direct or indirect
beneficial interest in or right to the Membership Interest.
15.1.4 Purpose of Entity. Such Member was not organized for the
specific purpose of acquiring the Membership Interest.
15.1.5 Economic Risk. Such Member is financially able to bear the
economic risk of an investment in the Membership Interest, including the total
loss thereof.
15.1.6 No Registration of Membership Interest. Such Member
acknowledges that the Membership Interest has not been registered under the
Securities Act of 1933 (as amended, the "Securities Act"), or qualified under
any applicable blue sky laws in reliance, in part, on such Member's
representations, warranties, and agreements herein.
15.1.7 Membership Interest in Restricted Security. Such Member
understands that the Membership Interest is a "restricted security" under the
Securities Act in that the Membership Interest will be acquired from the Company
in a transaction not involving a public offering, and that the Membership
Interest may be resold without registration under the Securities Act only in
certain limited circumstances and that otherwise the Membership Interest must be
held indefinitely. In this connection, such
45
<PAGE>
Member understands the resale limitations imposed by the Securities Act and is
familiar with Rule 144 thereunder, as presently in effect, and the conditions
which must be met in order for Rule 144 to be available for resale of
"restricted securities".
15.1.8 No Obligation to Register. Such Member represents, warrants,
and agrees that the Company is under no obligation to register or qualify the
Membership Interest under the Securities Act or under any state securities law,
or to assist such Member in complying with any exemption from registration and
qualification.
15.1.9 No Disposition in Violation of Law. Without limiting the
representations set forth above, and without limiting the other provisions of
this Agreement relating to the transfer of Membership Interests, such Member
will not make any disposition of all or any part of the Membership Interest
which will result in the violation by such Member or by the Company of any
applicable securities laws.
15.1.10 Investment Risk. Each Member acknowledges that the
Membership Interest is a speculative investment which involves a substantial
degree of risk of loss by such Member of it' entire investment in the Company,
that such Member understands and takes full cognizance of the risk factors
related to the purchase of the Membership Interest, and that the Company is
newly organized and has no financial or operating history.
15.1.11 Restrictions on Transferability. Such Member acknowledges
that there are substantial restrictions on the transferability of the Membership
Interest pursuant to this Agreement, that there is no public market for the
Membership Interest and none is expected to develop, and that, accordingly, it
may not be possible for such Member to liquidate such Member's investment in the
Company.
15.1.12 Information Reviewed. Such Member has received and reviewed
all information such Member considers necessary or appropriate for deciding
whether to purchase the Membership Interest.
15.1.13 No Representations By Company. No Person has at any time
represented, guaranteed or warranted to such Member that such Member may freely
transfer the Membership Interest, that a percentage of profit and/or amount or
type of consideration will be realized as a result of an investment in the
Membership Interest, that past performance or experience on the part of the
Managers or any other Person in any way indicates the predictable results of the
ownership of the Membership Interest or of the overall Company business, that
any cash distributions from Company operations or otherwise will be made to the
Members by any specific date or will be made at all, or that any specific tax
benefits will accrue as a result of an investment in the Company.
15.1.14 Consultation with Attorney. Such Member has been advised to
consult with such Member's own attorney regarding all legal matters
46
<PAGE>
concerning an investment in the Company and the tax consequences of
participating in the Company, and has done so, to the extent such Member
considers necessary.
15.1.15 Tax Consequences. Such Member acknowledges that the tax
consequences to such Member of investing in the Company will depend on such
Member's particular circumstances, and such Member will look solely to, and rely
upon, such Member's own advisers with respect to the tax consequences of this
investment.
15.1.16 No Assurance of Tax Benefits. Such Member acknowledges that
there can be no assurance that the Code or the Treasury Regulations will not be
amended or interpreted in the future in such a manner so as to deprive the
Company and the Members of some or all of the tax benefits they might now
receive, nor that some of the deductions claimed by the Company or the
allocations of items of income, gain, loss, deduction, or credit among the
Members may not be challenged by the Internal Revenue Service.
15.2 VSI Representations and Warranties. VSI represents and warrants, for
the benefit of the Company and PEGI, that: (i) it is duly authorized to enter
into the transactions contemplated by this Agreement; (ii) this Agreement is a
valid and binding obligation of VSI, enforceable against it in accordance with
its terms; (iii) in entering into this Agreement and consummating the
transactions contemplated hereunder, it will not be in breach of any contract to
which it is a party or in violation of any law, regulation, court order or its
charter documents; (iv) as of the date of transfer thereof, VSI (or its
Affiliates) will own its interest in PTVLA, PTVH and the German Venture free and
clear of any liens or encumbrances and will have the power and authority to
transfer such interests to the Company pursuant to the terms of this Agreement;
and (v) that VSI (or its Affiliates) has disclosed all material information
relating to the transactions contemplated hereunder and that all information
provided by VSI (or its Affiliates) in connection with the negotiation of the
transactions contemplated by this Agreement is true and correct, to the best of
VSI's (or its Affiliate's) knowledge and belief.
15.3 PEGI Representations and Warranties. PEGI represents and warrants,
for the benefit of the Company and VSI, that: (i) it is duly authorized to enter
into the transactions contemplated by this Agreement; (ii) this Agreement is a
valid and binding obligation of PEGI, enforceable against it in accordance with
its terms; (iii) in entering into this Agreement and consummating the
transactions contemplated hereunder, it will not be in breach of any contract to
which it is a party or in violation of any law, regulation, court order or its
charter documents; (iv) that, as of the date of transfer thereof, PEGI (or its
Affiliates) will own all of its interests in PTVLA, PTVH and the German Venture
free and clear of any liens or encumbrances and will have the power and
authority to transfer such interests to the Company pursuant to the terms of
this Agreement; and (v) that PEGI (or its Affiliates) have disclosed all
material information relating to the transactions contemplated hereunder that
all information provided by PEGI (or its Affiliates) in connection with the
negotiation of the transactions contemplated by
47
<PAGE>
this Agreement is true and correct, to the best of PEGI's (or its Affiliate's)
knowledge and belief.
15.4 Indemnity. Each Member (an "Indemnifying Party") will indemnify and
hold harmless the Company, each and every Manager, each and every Director, and
each and every other Member (and such parties' directors, officers,
shareholders, partners, members, employees, agents, representatives, and
Affiliates) (collectively, the "Indemnified Parties"), on an After Tax Basis,
from and against all claims, losses, damages (including loss of profits and
consequential damages awarded to unrelated third parties, if any, but excluding
loss of profits and consequential damages otherwise suffered by the Indemnified
Parties, if any), expenses, judgements, costs and liabilities (including
reasonable attorneys' fees and costs) incurred by the Indemnified Parties
arising from the Indemnifying Party's breach of any obligation, representation
or warranty contained in this Agreement. Notwithstanding the foregoing: (i) any
claims for indemnification that VSI (or its Affiliates) may have pursuant to
this Section 15.4 will exclude claims based on information known by VSI (or its
Affiliates or Bloomfield or its Affiliates) as of the Funding Date, whether or
not such information formed the basis of the issues raised by Bloomfield during
Due Diligence and whether or not asserted prior to the Walk Away Notice or
thereafter; and (ii) any claims for indemnification that PEGI may have pursuant
to this Section 15.4 will exclude claims based on information known by PEGI as
of the Funding Date. In the event of a dispute regarding a claim for
indemnification, the Indemnified Party will have the burden of proof in
establishing the validity and amount of the claim, and the Indemnifying Party
will have the burden of proof in establishing any defense to such claim,
including but not limited to, a defense asserted by PEGI that the applicable
Person had knowledge of the requisite facts.
ARTICLE 16
DISPUTE RESOLUTION
16.1 Alternative Dispute Resolution. Any dispute arising out of or
relating to this Agreement will be resolved in accordance with the procedures
specified in this Article 16, which will be the sole and exclusive procedures
for the resolution of any such disputes; provided, however, that this Article
will not apply to any dispute concerning the validity, ownership or control of
the trademarks licensed by PEII to the Company pursuant to the Trademark License
Agreement or the copyrights to any programming supplied by PEGI pursuant to the
Program Supply Agreement, and instead any such dispute will be litigated in a
court of law. The parties intend that these provisions will be valid, binding,
enforceable and irrevocable and will survive any termination of this Agreement
or of the Related Documents.
16.2 Notification and Negotiation. The parties will promptly notify each
other in writing of any dispute arising out of or relating to this Agreement.
The parties will attempt in good faith to resolve any dispute arising out of or
relating to this Agreement promptly by negotiation between executives who have
authority to settle the controversy. All reasonable requests for information
made by one party to the other will
48
<PAGE>
be honored. All negotiations pursuant to this clause are confidential and will
be treated as compromise and settlement negotiations for purposes of applicable
rules of evidence.
16.3 Mediation. If any such dispute remains unresolved within thirty (30)
days of original notice thereof, the parties will endeavor to resolve any
dispute arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedure for Business Disputes. Unless the parties agree otherwise,
the mediator will be selected from the CPR Panel of Neutrals with notification
to CPR.
16.4 Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach, termination or validity thereof, which remains
unresolved forty-five (45) days after appointment of a mediator, will be settled
by arbitration by a sole arbitrator in accordance with the CPR Non-Administered
Arbitration Rules; provided, however, that if either party will not participate
in a non-binding procedure described above, the other may initiate binding
arbitration before expiration of the above period. The arbitration will be
governed by the United States Arbitration Act, 9 U.S.C. ss. 1-16, and judgment
upon the award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration will be Los Angeles, California.
Pending any final determination by the arbitrator pursuant to this Section 16.4,
a Member may seek preliminary or temporary relief, if appropriate, in any
federal or state court located in Los Angeles County, California.
16.5 Damages. Except as expressly provided below, the arbitrator is not
empowered to award damages in excess of compensatory damages and each party
hereby irrevocably waives any right to recover such damages with respect to any
dispute resolved by arbitration. The arbitrator will have the authority to
include, as an item of damages, the costs of arbitration, including reasonable
legal fees and expenses, incurred by the prevailing party and to apportion such
costs among the parties on a claim by claim basis as such party prevails
thereon. For purposes of the foregoing, the "prevailing party" will mean the
party whose final settlement offer (or other position or monetary claim) prior
to the start of arbitration is closest to the judgement awarded by the
arbitrator, regardless of whether such judgement is entered into in favor of or
against such party.
16.6 Statute of Limitations. The statute of limitations of the State of
California applicable to the commencement of a lawsuit will apply to the
commencement of an arbitration hereunder, except that no defenses will be
available based upon the passage of time during any negotiation or mediation
called for by the preceding paragraphs of this Article 16.
16.7 Confidential Negotiations. All negotiations pursuant to Sections 16.2
and 16.3 are confidential and will be treated as compromise and settlement
negotiations for purposes of applicable rules of evidence.
16.8 Service of Process. Each party agrees that service by registered or
certified mail, return receipt requested, delivered to such party at the address
provided in
49
<PAGE>
Section 17.11 (Notices) below, will be deemed in every respect effective service
of process upon such Person for all purposes of these provisions relating to
mediation and arbitration. Each party irrevocably submits to the jurisdiction of
the courts of the State of California and to any federal court located within
such state for the purpose of any action or judgement with respect to this
Agreement, regardless of where any alleged breach or other action, omission,
fact or occurrence giving rise thereto occurred. Each party hereby irrevocably
waives any claim that any action or proceeding brought in Los Angeles County,
California, has been brought in any inconvenient forum.
16.9 Additional Arbitration Provisions. The parties will negotiate in good
faith and agree on such further or modified arbitration provisions as are
reasonably necessary for awards and other judgements resulting from the
provisions set forth above to be recognized and enforceable in other
jurisdictions in the Territory.
ARTICLE 17
MISCELLANEOUS
17.1 Superseding Agreements. This Agreement, the Program Supply Agreement,
the Trademark License Agreement, the Stock Purchase Agreements and the Release,
when executed by the parties, will supersede and replace the Agreement Outline
and the Agreement Outline will be of no further force or effect.
17.2 Documents and Acts. Each Member agrees to execute and deliver such
additional documents and instruments and to perform such additional acts as may
be necessary or appropriate to effectuate, carry out and perform all of the
terms, provisions, and conditions of this Agreement and the transactions
contemplated hereby.
17.3 Time is of the Essence. All dates and times in this Agreement are of
the essence.
17.4 Remedies Cumulative. The remedies under this Agreement are cumulative
and will not exclude any other remedies to which any Person may be lawfully
entitled.
17.5 Currency; Payments.
17.5.1 All amounts due from one Member to another Member, from the
Company to one or more Members or from one or more Members to the Company
pursuant to this Agreement and the other Related Documents will be paid in U.S.
Dollars. If any portion of such payment is calculated on the basis of revenues
received in other currencies, such revenues will be calculated using the
exchange rate published in the Wall Street Journal, as of the business day
immediately preceding the date on which the payment initially is due. Such
exchange rate will also apply to any portion of a payment
50
<PAGE>
which is permitted to be deferred, regardless of whether such deferred payment
is represented by a promissory note or other instrument.
17.5.2 All payments owing pursuant to this Agreement and the other
Related Documents will be made by wire transfer of immediately available funds,
net of any withholding required by applicable law. Each Member and the Company
will from time to time designate one or more accounts into which such payments
will be made and may designate one or more Affiliates to receive such payments.
17.5.3 Any payment hereunder or under the other Related Documents
not made when due will bear interest from the date due to and including the date
of payment in full at a rate equal to the Reference Rate as in effect on the
date payment was due.
17.6 Governing Law. All questions with respect to this Agreement and the
relationships of the parties hereunder will be governed by the internal laws of
the State of Delaware, regardless of the choice of law principles of the State
of Delaware or any other jurisdiction.
17.7 Assignment; No Third Party Beneficiary. Neither the Company nor any
Member will assign its rights or delegate its obligations hereunder without
written consent of all of the Members except to an Affiliate of the Company or
such Member; provided that no such assignment will relieve the assignor of its
obligations. The provisions of this Agreement are for the benefit only of the
Company and the Members, and no third party may seek to enforce or benefit from
these provisions except that the Persons indemnified by the Company pursuant to
Section 13.1 will be third party beneficiaries of this Agreement with respect to
such Section only and will have independent standing to enforce or benefit from
such Section.
17.8 Agreement Negotiated. The Members are sophisticated and have been
represented by lawyers throughout the negotiation and execution of this
Agreement who have carefully negotiated the provisions hereof. As a consequence,
the parties do not believe the presumption of California Civil Code Section 1654
and similar laws or rules relating to the interpretation of contracts against
the drafter of any particular clause should be applied in this case and
therefore waive its effects.
17.9 Waivers, Remedies Cumulative, Amendments, etc.
17.9.1 No failure or delay by the Company or any Member in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof nor will any single or partial exercise by any of them of any
right, power or privilege preclude any further exercise thereof or the exercise
of any other right, power or privilege.
17.9.2 The rights and remedies herein provided are cumulative and
not exclusive of any rights and remedies provided by law.
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<PAGE>
17.9.3 No provision of this Agreement may be amended, modified,
waived, discharged or terminated, other than by the express written agreement of
all of the Members nor may any breach of any provision of this Agreement be
waived or discharged except with the express written consent of the party(ies)
not in breach.
17.10 Notices. All notices, requests, demands and other communications
required to be given under this Agreement will be in writing and will
conclusively be deemed to have been duly given to each Member (a) when hand
delivered, (b) the next business day if sent by a generally recognized overnight
courier service that provides written acknowledgment by the addressee of
receipt, or (c) when received, if sent by facsimile (with appropriate answer
back) or other generally accepted means of electronic transmission addressed as
follows:
if to PEGI to:
Playboy Entertainment Group, Inc.
Attention: President
9242 Beverly Boulevard
Beverly Hills, CA 90210
United States of America
Fax Number: (310) 246-4065
with a copy to:
Playboy Enterprises, Inc.
Attention: General Counsel
680 North Lake Shore Drive
Chicago, IL 60611
United States of America
Fax Number: (312) 266-2042
if to VSI to:
Victoria Springs Investments Ltd.
c/o Cisneros Television Group
Attention: Director Legal and Business Affairs
404 Washington Avenue
8th Floor
Miami Beach, Florida 33139
Fax Number: (305) 894-3606
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<PAGE>
with a copy to:
Glenn Dryfoos, Esq.
Greenberg Glusker Fields Claman
& Machtinger LLP
1900 Avenue of the Stars
Suite 2100
Los Angeles, CA 90067
United States of America
Fax Number: (310) 553-0687
if to the Company to:
Playboy TV International, LLC
404 Washington Avenue
8th Floor
Miami Beach, Florida 33139
Fax Number: (305) 894-3606
with copies to PEGI and VSI
or to such other address, or facsimile transmission number as the relevant
addressee may hereafter by notice hereunder substitute.
17.11 Public Announcements. Unless otherwise mutually agreed by VSI and
PEGI, or as required by law or by the stock exchange on which any Member's
stock, or the stock of any direct or indirect parent of a Member, is traded, no
public announcement will be made by any of the Company, any Member, any Manager,
any Director, the President or any other officer of the Company or any of their
respective Affiliates with respect to the subject matter of this Agreement.
17.12 Survival. Notwithstanding the termination of this Agreement, the
dissolution of the Company, or a Member's ceasing to be a Member under this
Agreement, the following sections of this Agreement will survive indefinitely
and be enforceable by PEGI or VSI: Section 12.7, Section 13.1, Article 16 and
this Section 17.12.
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IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Agreement, effective as of the Effective Date.
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Anthony J. Lynn
--------------------------------
Name: Anthony J. Lynn
Title: President
VICTORIA SPRINGS INVESTMENTS LTD.
By: /s/ Jay Scharer
--------------------------------
Name: Jay Scharer
Title: Attorney-in-fact
By: /s/ Glenn Dryfoos
--------------------------------
Name: Glenn Dryfoos
Title: Attorney-in-fact
ACKNOWLEDGED, ACCEPTED AND AGREED
AS TO SECTIONS 9.2.3, 9.2.4 AND EXHIBIT F:
PLAYBOY ENTERPRISES, INC.
By: /s/ Anthony J. Lynn
---------------------------------
Name: Anthony J. Lynn
Title: Executive Vice President
54
-------------------------
PLAYBOY TV INTERNATIONAL
PROGRAM SUPPLY AGREEMENT
-------------------------
Among
PLAYBOY ENTERTAINMENT GROUP, INC.
as Licensor
and
PLAYBOY TV INTERNATIONAL LLC
and
PTV U.S., LLC
as Licensee
August 31, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS................................................................1
2. GRANT OF LICENSE...........................................................7
2.1 To PTVI.............................................................7
2.1(a) Existing Library.........................................7
2.1(b) Licensor Output..........................................8
2.1(c) "Wall-to-Wall"Material...................................8
2.2 To PTV U.S..........................................................8
2.3 All Other Rights Retained by Licensor...............................8
2.4 Approved Uses of Company Programming................................8
2.4(a) Operation of the Channels................................8
2.4(b) Sub-licensing............................................9
2.4(c) Editing..................................................9
2.5 Assignment of Existing Licenses.....................................9
2.6 Residuals and Co-Production Payments................................9
2.7 Alta Loma Programs.................................................10
2.7(a) Option to Acquire Rights................................10
2.7(b) Programs for Playboy TV "Lite"..........................10
2.8 Exclusive Program Supplier.........................................10
3. LICENSE TERM AND MEDIA HOLDBACKS..........................................10
3.1 License Term.......................................................10
3.1(a) Program License Agreement...............................10
3.1(b) Existing Library Programs...............................11
3.1(c) Output Programs.........................................11
3.1(d) Licensor Acquired Programs..............................11
3.2 Holdbacks..........................................................11
3.3 Other Home Video Rights............................................11
4. CENSORSHIP; WITHDRAWAL OF PROGRAMS........................................11
4.1 Censorship.........................................................11
4.2 Withdrawal of Programs.............................................12
4.3 Advertising........................................................12
5. DELIVERY AND RETURN.......................................................13
5.1 Access and Delivery Items..........................................13
5.2 Title to Delivery Materials........................................13
6. PROGRAM LICENSE FEES......................................................13
6.1 Existing Program Library and Wallpaper.............................13
6.2 Output Programs....................................................14
i
<PAGE>
6.2(a) General Payment Terms...................................14
6.2(b) Production Budget.......................................14
6.2(c) Licensor Production Obligations.........................14
6.2(d) Calculation of License Fee for Output Programs..........15
6.2(e) Fixed Percentage........................................15
6.2(f) The Reset Mechanism.....................................15
6.2(g) Licensee Production Budget Option.......................16
6.2(h) Production Supply Option................................16
6.3 Maintenance of Records and Audit Rights............................17
7. REPRESENTATIONS AND WARRANTIES; INDEMNITIES...............................18
7.1 Representations and Warranties.....................................18
7.1(a) By Licensor.............................................18
7.1(b) By Licensee.............................................19
7.2 Indemnification....................................................19
7.2(a) By Licensor.............................................19
7.2(b) By the Licensee.........................................20
7.3 Musical Compositions...............................................20
7.4 Procedure..........................................................20
7.5 Taxes..............................................................21
8. TERMINATION...............................................................21
8.1 Expiration of Term.................................................21
8.2 Early Termination on Breach........................................21
9. EFFECTS OF TERMINATION....................................................22
9.1 Survival of Obligations............................................22
9.2 Termination of Rights..............................................22
9.3 Further Assurances.................................................23
10. EQUITABLE RELIEF..........................................................23
11. DISPUTE RESOLUTION........................................................23
11.1 General Agreement Regarding Dispute Resolution.....................23
11.2 Notification and Negotiation.......................................23
11.3 Mediation..........................................................23
11.4 Arbitration........................................................24
11.5 Damages............................................................24
11.6 Statute of Limitations.............................................24
11.7 Confidential Negotiations..........................................24
11.8 Service of Process; Forum..........................................24
11.9 Additional Provisions to Enforce Awards............................25
12. MISCELLANEOUS.............................................................25
12.1 Force Majeure......................................................25
12.2 Binding Effect; No Assignment......................................25
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12.3 Invalidity.........................................................25
12.4 Waivers, Remedies Cumulative, Amendments, etc......................26
12.5 Notices............................................................26
12.6 Governing Law......................................................27
12.7 Entire Agreement...................................................27
12.8 Rules of Construction..............................................28
12.8(a) Headings..................................................28
12.8(b) Tense and Case............................................28
12.8(c) Agreement Negotiated......................................28
12.9 Counterparts.......................................................28
12.10 Relationship Between the Parties...................................28
12.11 Time is of the Essence.............................................28
12.12 Effectiveness......................................................28
iii
<PAGE>
THIS PROGRAM SUPPLY AGREEMENT (this "Agreement") is made and entered into
on August 31, 1999, among Playboy Entertainment Group, Inc., a Delaware
corporation ("PEGI"), Playboy TV International LLC, a Delaware limited liability
company ("PTVI"), and PTV U.S., LLC, a Delaware limited liability company ("PTV
U.S.").
RECITALS
WHEREAS, PTVI and PTV U.S. have been formed to engage in the business of
owning and operating television channels and of selling television programming
to third parties;
WHEREAS, PEGI and certain of its Affiliates are the owner of certain
rights in and to certain television programs and will acquire certain rights in
and to certain additional television programs, as described herein;
WHEREAS, PEGI has transferred to PTVI the stock of certain Danish
companies which own rights in certain of the television programs which are
subject to this Agreement, and Licensee has agreed to certain restrictions with
respect to the use of such programs as set forth in this Agreement;
WHEREAS, PEGI has transferred to PTVI the stock of certain U.K. companies
which own rights in certain of the television programs which are subject to this
Agreement, and Licensee has agreed to certain restrictions with respect to the
use of such programs as set forth in this Agreement;
WHEREAS, PTVI and PTV U.S. each wish to license from Licensor and Licensor
has agreed to license to PTVI and PTV U.S. certain television programs in their
respective territories, on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, and intending to be legally bound, the parties
agree as follows:
1. DEFINITIONS.
In this Agreement (including the Recitals hereto) the following terms will
have the following meanings unless otherwise stated:
"Actual Net Cash Flow" has the meaning set forth in Section 6.2(g).
"Acquired Movie" means a program acquired by Licensor (or any of its
Affiliates) from a third party that is at least 60 minutes in length and
represents an edited version of an adult film (i.e., a film which contains
actual sex acts).
"Affiliate" means any Person, directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control with the
specified
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Person. For purposes of the foregoing, "control" (and "controlled" and
"controlling," respectively), as used in the immediately preceding sentence,
means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of the specified Person (whether by the
holding of shares or other equity interests, the possession of voting or
contract rights or otherwise). Notwithstanding the foregoing, Licensee will not
be deemed an Affiliate of either Licensor or VSI.
"After Tax Basis" means a basis such that any payment (the "Original
Payment") received or deemed to have been received by a Person (the "recipient")
will be supplemented by a further payment to the recipient so that the sum of
the two payments will equal the Original Payment, after taking into account (x)
all taxes that would result from the receipt or accrual of such payments, if
legally required, and (y) any reduction in taxes that would result from the
deduction of the expense indemnified against, if legally permissible. In the
event that the expense indemnified against is used to reduce taxes by way of
amortization or depreciation, payments made on an After Tax Basis will be
refunded in each taxable year of the recipient in which such expense is
deductible in an amount equal to the sum of (i) the tax savings attributable to
such deduction plus (ii) any reduction in taxes that would result from the
deduction of any amounts described in clause (i) as increased hereby. All
payments hereunder will be calculated on the assumptions that the recipient was
subject to tax at the highest marginal rates of tax applicable to such class of
taxpayer and that it could benefit from the deduction of any expense at such
rate of tax. In the event that a taxing authority will treat any indemnification
payment as not includible in gross income or disallow any deduction taken into
account hereunder, the indemnification will be recomputed and further payments
or refunds made.
"Alta Loma Program" has the meaning set forth in Section 2.7.
"Annual Budget" has the meaning set forth in the Operating Agreement.
"Applicable Percentage" has the meaning set forth in Section 6.2(d).
"Basic Cable" has the meaning currently or hereafter commonly understood
in the television industry, but will also include for all purposes of this
Agreement ***
"Business Plan" has the meaning set forth in the Operating Agreement.
"Channels" means television channels operated by Licensee or its
subsidiaries, now or in the future (each, a "Channel").
"Company Aggregate Revenue" has the meaning set forth in Section
6.2(i)(ii).
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treatment filed separately with the Securities and Exchange Commission.
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"Company Programming" means, collectively, the Existing Library Programs,
the Output Programs, the Wallpaper and the Supplemental Programs.
"Delivery Materials" has the meaning set forth in Section 5.1.
"End Date" has the meaning set forth in Section 3.1(a).
"Existing Library" means the Existing Playboy Library, the Existing Spice
Library, and the Existing U.K. Library.
"Existing Playboy Library" means the programs listed on Schedule 2.1(a) -
1.
"Existing Spice Library" means the programs listed on Schedule 2.1(a) - 2.
"Existing U.K. Library" means the programs listed on Schedule 2.1(a) - 3
with respect to PTV U.K. and any and all programs in which HVC owns rights in
the Media in the Territory.
"Fiscal Year" has the meaning set forth in the Operating Agreement.
"Fixed Percentage" has the meaning set forth in Section 6.2(e).
"Force Majeure" has the meaning set forth in Section 12.1.
"Funding Date" has the meaning set forth in the Operating Agreement.
"HVC" means Home Video Channel Limited, a company organized under the laws
of England and Wales.
"License Term" has the meaning set forth in Section 3.1.
"Licensee" means collectively (i) PTVI and any of its Affiliates that hold
any of the rights licensed hereunder, including the Spice Rights Subsidiaries
and the U.K. Subsidiaries; (ii) PTV US; and (iii) any such successor or assignee
of either of them as may be permitted herein.
"Licensee Applicable Revenue" has the meaning set forth in Section
6.2(f)(iii).
"Licensee Indemnified Parties" has the meaning set forth in Section
7.2(a).
"Licensor" means PEGI and any of its Affiliates that hold any of the
rights licensed hereunder, or such successor or assignee as may be permitted
herein.
"Licensor-Acquired Programs" has the meaning set forth in Section 3.2.
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"Licensor Applicable Revenue" has the meaning set forth in Section
6.2(f)(ii).
"Licensor Indemnified Parties" has the meaning set forth in Section
7.2(b).
"Licensor Shortfall" has the meaning set forth in Section 6.2(c).
"Licensor Streaming Revenue" has the meaning set forth in Section
6.2(i)(i).
"Licensor Taxes" has the meaning set forth in Section 7.5.
"Lifford" means Lifford International Co. Ltd., an International Business
Company incorporated under the laws of the British Virgin Islands.
"Losses" has the meaning set forth in Section 7.1(a).
"Measurement Year" has the meaning set forth in Section 6.2(i)(i).
"Media" means ***
"Member" has the meaning set forth in the Operating Agreement.
"Net Channel Revenues" has the meaning set forth in Section 6.2(e)(viii).
"Operating Agreement" means the Operating Agreement for Playboy TV
International, LLC, entered into concurrently herewith, as may be amended from
time to time.
"Option Percentage" has the meaning set forth in Section 6.2(g)(ii).
"Output Programs" has the meaning set forth in Section 2.1(b).
"Out Year Programs" has the meaning set forth in Section 3.1(c).
"Overhead Cap" has the meaning set forth in Section 6.2(b).
"PEGI" means Playboy Entertainment Group, Inc., a Delaware corporation.
"PEI" means Licensor's ultimate parent company, Playboy Enterprises, Inc.,
a Delaware corporation.
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treatment filed separately with the Securities and Exchange Commission.
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"PEII" means Licensor's direct parent company, Playboy Enterprises
International, Inc., a Delaware corporation.
"Person" means an individual, general partnership, limited partnership,
limited liability company, corporation, trust, estate, association or any other
entity.
"Plan Net Cash Flow" has the meaning set forth in Section 6.2(g).
"Production Budget" has the meaning set forth in Section 6.2(b).
"Production Budget Option" has the meaning set forth in Section 6.2(g).
"Production Supply Option" has the meaning set forth in Section 6.2(h).
"Program" means any television program which is, or is scheduled to be,
broadcast or transmitted in the Service, including, but not limited to, any
Company Programming.
"Program License Fees" has the meaning set forth in Section 6.
"PTVI" means Playboy TV International, LLC, a Delaware limited liability
company.
"PTV U.K." means Playboy TV U.K./Benelux, Limited, a company organized
under the laws of England and Wales.
"PTV U.S." means PTV U.S., LLC, a Delaware limited liability company.
"PTVLA" means Playboy TV - Latin America, LLC, a California limited
liability company.
"PTVLA Program Supply Agreements" means Playboy TV - Latin America Program
Supply Agreement and the AdulTVision - Latin America Program Supply Agreement,
each entered into November 10, 1998 (effective as of June 14, 1996) between PEGI
and PTVLA.
"PTVLA Territory" is defined in the PTVLA Program Supply Agreements.
"PTVLA/I" means Playboy TV - Latin American/Iberia, LLC, a Delaware
limited liability company and a subsidiary of PTVI, into which PTVLA will be
merged following the contribution of PTVLA to PTVI.
"PTVLA Service" means the Spanish- and Portuguese-language television
channel known as "Playboy TV Latin American" which is produced by PTVLA and
will, following the contribution of PTVLA to PTVI and the merger of PTVLA into
PTVLA/I, be co-produced by PTVLA/I and PTV U.S.
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"Remediable Breach" has the meaning set forth in Section 8.2(b).
"Reset Mechanism" has the meaning set forth in Section 6.2(f).
"Reset Percentage" has the meaning set forth in Section 6.2(f)(iv).
"Spice Closing" means March 15, 1999, the date on which the Spice
Transaction was consummated.
"Spice Rights Licensor" means SEI Inc. ApS, a company formed under the
laws of Denmark and a subsidiary of PEGI.
"Spice Rights Subsidiaries" means SEI 2 ApS and SEI 3 ApS, each a company
formed under the laws of Denmark, being those companies acquired by the Licensee
pursuant to the Spice Rights Subsidiaries Stock Purchase Agreements of even date
herewith.
"Spice Transaction" means the merger between PEI and one or more of its
Affiliates with Spice Entertainment Companies, Inc. and one or more of its
Affiliates (collectively, "Spice"), which was consummated pursuant to that
certain Agreement and Plan of Merger dated May 29, 1998.
"Supplemental Programs" means programming produced or acquired by PTVI
and/or PTV U.S. in accordance with the Operating Agreement, whose primary use is
exhibition on one or more of the Channels.
"Streaming" means ***
"Termination Date" has the meaning set forth in Section 9.2.
"Territory" means the World, except for the United States and Canada and
their territories and possessions worldwide. For certain Existing Library
Programs and Output Programs, the Territory will exclude certain countries in
the Territory, as set forth in Schedules 2.1(a)-1, 2.1(a)-2, and 2.1(a)-3 hereto
or the extent effecting programs in which HVC owns rights.
"Threshold Revenue" has the meaning set forth in Section 6.2(e)(viii).
"Total Applicable Revenue" has the meaning set forth in Section
6.2(f)(iv).
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treatment filed separately with the Securities and Exchange Commission.
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"Trademark License Agreement" means the Trademark License Agreement
between PEII and PTVI, executed concurrently herewith.
"TV Lite Venture" has the meaning set forth in Section 6.3(b).
"U.K. Subsidiaries" means HVC and its subsidiary, PTV U.K.
"U.S. Hispanic Market" means those cities or regions of the United States
and its territories and possessions with a sufficient number of Spanish-speaking
households such that PTV U.S. elects, now or in the future, to distribute the
PTVLA Service in such city or region.
"VSI" means Victoria Springs Investments Ltd., a British Virgin Islands
corporation and a member of Licensee.
"Wallpaper" has the meaning set forth in Section 2.1(a)(iii).
2. GRANT OF LICENSE.
2.1 To PTVI. Upon and subject to the terms and conditions set forth in
this Agreement and to Licensor's retained rights described in Section 2.3,
Licensor hereby grants to PTVI and PTVI hereby accepts a license of exclusive
rights under copyright during the License Term in the Media throughout the
Territory to the programs and other material described below.
2.1(a) Existing Library. Licensor licenses to PTVI all of the
programs comprising the Existing Playboy Library. To the extent the Existing
Playboy Library includes Acquired Movies, such Movies will be licensed to the
appropriate Spice Rights Subsidiary. Rights in the Existing Spice Library and in
the Existing U.K. Library in the Media throughout the Territory have been
provided to PTVI through its acquisition of the Spice Rights Subsidiaries and
the U.K. Subsidiaries. Licensor represents and warrants that the Existing
Library consists of all programs for which Licensor (and/or its Affiliates) owns
rights in the Media in the Territory as of the date hereof, except for the
series known as "Hot Rocks" (which series or the individual programs thereof may
not be licensed by Licensor or its Affiliates to third parties for exhibition in
the Territory), including (but not limited to) "Playboy"-branded programs,
"Spice"-branded programs, adult films licensed by Licensor, and any other
programming, including the Wallpaper (as described in Section 2.1(c)). For
clarity, the parties acknowledge that the Existing Playboy Library includes all
programs produced or acquired by Licensor and/or its Affiliates pursuant to
Licensor's 1998 production budget, the Existing Spice Library includes all
programs (other than programs which are part of the Existing U.K. Library) that
Licensor (or its Affiliates) acquired in the Spice
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Transaction, and the Existing U.K. Library includes all programs that Licensor
(or its Affiliates) acquired through the U.K. Subsidiaries. ***
2.1(b) Licensor Output. Each Fiscal Year Licensor will license to
PTVI all of the programs which Licensor and/or its Affiliates produce or for
which Licensor and/or its Affiliates have acquired the rights in the Media in
the Territory during that year (the "Output Programs"). The parties acknowledge
that to the extent the rights to Output Programs are controlled by the Spice
Rights Licensor, Licensor will cause the Spice Rights Licensor to license such
programs to the appropriate Spice Rights Subsidiary. For the avoidance of doubt,
the parties acknowledge that the Output Programs for Fiscal Year 1999 include
those programs produced or acquired by Licensor (or its Affiliates) pursuant to
Licensor's 1999 Production Budget, including those programs produced or acquired
prior to the date of this Agreement. ***
2.1(c) "Wall-to-Wall" Material. Licensor will provide PTVI with
copies of, or laboratory access to, all bumpers, promos, interstitials and other
raw materials produced by Licensor and/or its Affiliates for use in its
television business (collectively, the "Wallpaper"). PTVI may exhibit such
materials in the form provided or may modify, edit or utilize them to create
appropriate interstitial and promotional material for the Channels, subject to
the terms and conditions of the Trademark License Agreement.
2.2 To PTV U.S. Upon and subject to the terms and conditions set forth in
this Agreement and to Licensor's retained rights described in Section 2.3,
Licensor hereby grants to PTV U.S., effective upon the effective date of the
Operating Agreement of PTV U.S., and PTV U.S. will accept as of such date, a
license of exclusive rights under copyright during the License Term in and to
the Existing Playboy Library, Output Programs and Wallpaper for the sole
purposes of exhibiting such material on the PTVLA Service and distributing and
promoting the PTVLA Service in the Media throughout the U.S. Hispanic Market.
***
2.3 All Other Rights Retained by Licensor. All rights not expressly
granted to PTVI and PTV U.S. hereunder are reserved to Licensor for its own use
and benefit.
2.4 Approved Uses of Company Programming. PTVI may exploit the Company
Programming as follows:
2.4(a) Operation of the Channels. Throughout the Territory, PTVI
will have the right to exhibit the Company Programming on the Channels. Licensor
and PTVI acknowledge and agree that the accidental or de minimis "spillover"
into the Territory of transmissions to Licensor customers outside of the
Territory will not be a breach of the grant of rights hereunder and that the
accidental or de minimis "spillover" outside of the Territory
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of transmissions to PTVI customers inside the Territory will not be a breach of
the grant of rights hereunder.
2.4(b) Sub-licensing. PTVI will have the right to license the
Company Programming to third parties for exhibition in the Territory. Except as
otherwise specifically provided herein, such sub-licensing may be conducted in
any manner that PTVI determines. ***
2.4(c) Editing. Subject to and consistent with the Trademark License
Agreement, Licensee may edit, dub or subtitle in any language, or otherwise
alter Company Programming as necessary to comply with local language or custom
or local broadcasting requirements; provided that PTV U.S. may only dub or
subtitle into Spanish or Portuguese.
2.5 Assignment of Existing Licenses. Licensor hereby assigns to PTVI all
of Licensor's rights with respect to periods from and after July 1, 1999 under
its existing licenses with third parties for the distribution or exhibition of
Existing Library Programs and Output Programs in the Territory in the Media
including the right to receive payments thereunder; provided, however, that to
the extent such existing licenses contain a grant of trademark rights, such
rights will be retained by Licensor and its Affiliates, including all rights of
approval and control. To the extent that Licensor has existing licenses with
third parties which grant such third parties rights for both the Media and other
media not included hereunder, such licenses will be assigned to PTVI only with
respect to the Media. Licensee hereby assumes and agrees to perform all
obligations of Licensor under such licenses arising with respect to periods from
and after July 1, 1999, and all of Licensor's benefits under such licenses
arising with respect to periods from and after July 1, 1999, including the right
to receive payments, will inure to the benefit of PTVI. Without limiting the
generality of the foregoing, PTVI agrees to comply with the terms of the PTVLA
Program Supply Agreements and agrees that it will not exploit Company
Programming in the PTVLA Territory in any manner which conflicts with such
agreements. PTVI will be entitled to receive all revenues generated in the
Territory by the Output Programs produced or acquired pursuant to Licensor's
1999 Production Budget, including revenues collected by Licensor prior to the
date of the Agreement, net of any amounts actually paid by Licensor or its
Affiliates that would have been PTVI's obligation had the Output Programs been
acquired by PTVI on January 1, 1999 (such as residuals, music clearance fees,
etc.). Schedule 2.5 contains a complete list of the program license agreements
which Licensor is assigning to PTVI. Upon termination of this Agreement, the
foregoing assignment of the existing licenses will automatically terminate and
all rights in the assigned licenses arising from and after the date of such
termination will revert to Licensor.
2.6 Residuals and Co-Production Payments. ***
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treatment filed separately with the Securities and Exchange Commission.
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2.7 Alta Loma Programs. The parties acknowledge that Licensor and/or its
Affiliates produce an additional stream of programs that do not carry the
"Playboy" or "Spice" brands and which do not contain nudity. These programs are
intended for "first run" on domestic television networks or channels other than
Playboy TV, Spice or AdulTVision. Licensor produces and sells such programming
under the Alta Loma banner. This programming stream may consist, from time to
time, of movies, series, and/or specials. (Any such non-nude program, whether
produced by Licensor or one of its Affiliates, and whether carrying the "Alta
Loma" or any other brand, will be referred to as an "Alta Loma Program").
2.7(a) Option to Acquire Rights. At any time prior to the start of
principal photography for each Alta Loma Program, Licensor will offer PTVI the
opportunity to pay a license fee equal to *** of the budget for that program. If
Licensee chooses to pay such license fee, it will obtain the same rights as if
that program were an Output Program (except that the budget for that program
will not be included under the Production Budget for Output Programs for that
year). If PTVI does not choose to obtain a license for a given Alta Loma
Program, PTVI will have the right to act as Licensor's exclusive sales agent for
that program throughout the Territory and will receive a *** distribution fee on
such sales, plus reimbursement of reasonable costs; provided, however, that in
the event an Alta Loma Program is produced pursuant to an agreement which gives
a third-party co-producer or commissioning network the right to distribute such
program in a region or regions of the Territory (or otherwise restricts
Licensor's right to grant Licensee the right to act as sales agent for such
program), Licensor will pay to PTVI *** of the total revenue which Licensor (or
its affiliates) receives from the exploitation of such program in the Media in
such region(s).
2.7(b)Programs for Playboy TV "Lite". ***
2.8 Exclusive Program Supplier. ***
3. LICENSE TERM AND MEDIA HOLDBACKS
3.1 License Term. The term of this Agreement and the license periods for
each type of Company Programming will be as follows:
3.1(a) Program License Agreement. The term of this Agreement will
commence on the date hereof and run through the date which is the *** hereof
(the "End Date"); provided, however, that Licensor may sooner terminate this
Agreement and the license periods described in Sections 3.1(b), 3.1(c), 3.1(d)
and 3.1(e) below in the event: (i) Licensee is in material default of its
obligations under this Agreement and such default, if curable, is not cured with
thirty (30) days after Licensee has received written notice thereof
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from Licensor (provided such default is not the result of action or inaction by
Licensor as a Member of PTVI; e.g., Licensor's failing to make a mandatory
capital contribution); (ii) PEII has terminated the Trademark License Agreement;
(iii) VSI is in material default of its obligations under the Operating
Agreement and Licensor elects to dissolve PTVI as the result of such default; or
(iv) PTVI is in material default of its obligations under the Stock Purchase
Agreements (as defined in the Operating Agreement) and such default, if curable,
is not cured within thirty (30) days after PTVI has received written notice
thereof from Licensor (provided such default is not the result of action or
inaction by Licensor as a Member of PTVI).
3.1(b) Existing Library Programs. The license period for each
Existing Library Program (other than as set forth on Schedules 2.1(a)-1,
2.1(a)-2, and 2.1(a)-3) will begin on the date hereof and end on the End Date,
except with respect to programs in which HVC owns rights which will end on the
dates such rights expire.
3.1(c) Output Programs. The license period for each Output Program
(other than acquired programs) will begin on the date such program is made
available to Licensee pursuant to Section 5.1 and will end on the End Date. ***
3.1(d) Licensor Acquired Programs. The license period for Output
Programs (other than Acquired Movies) which Licensor acquires by license from
third parties will be at least as long as the license period obtained by
Licensor for North America.
3.2 Holdbacks. Several of the Existing Library and Output Programs will
only be available for exhibition via the Media after an "upstream" window in
home video (i.e., an exhibition period prior to any television exhibition by any
party, including Licensee). Licensor warrants that of the Output Programs
produced each year ***
3.3 Other Home Video Rights. Licensor will consult with Licensee prior to
acquiring the rights to a program from a third party for home video distribution
in a region or regions within the Territory where Licensor believes that the
terms for acquiring the television rights for the Territory are not favorable to
Licensee, or the Media rights to such program are not available in some or all
of the Territory. ***
4. CENSORSHIP; WITHDRAWAL OF PROGRAMS.
4.1 Censorship. Licensee is willing to accept and pay for the Existing
Library Programs and Output Programs regardless of censorship regulations or the
potential for same throughout the Territory or in any individual country or
political subdivision within the Territory (or, with respect to PTV U.S., the
U.S. Hispanic Market). *** provided that Licensee will make good faith efforts
to obtain waivers of such restrictions or will permit
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Licensor to make such efforts on behalf of Licensee. Without limiting Licensee's
rights under Section 2.4(c), Licensee will only make such cuts or deletions as
are necessary to conform to applicable censorship regulations.
4.2 Withdrawal of Programs.
4.2(a) Notwithstanding any other term of this Agreement to the
contrary, Licensor may, in its sole discretion, withdraw any Program if Licensor
determines that the transmission thereof would or might reasonably be expected
to (i) infringe upon the rights of others; (ii) violate the law, court order,
government regulation or other ruling of any governmental agency; or (iii)
subject Licensor to any liability, other than due to a breach by Licensor of its
covenants and representations in this Agreement.
4.2(b) If Licensor elects to withdraw any Program as set forth in
paragraph 4.2(a) above before any telecast, Licensee will have the right, in its
sole discretion, to require Licensor to deliver another program of comparable
quality (which program will constitute a Program hereunder). If Licensor elects
to withdraw any Program, any transportation, dubbing and assembly costs incurred
and paid by Licensee with respect to the withdrawn Program will be refunded by
Licensor promptly upon Licensee's presentation of reasonable evidence of such
expenditures.
4.2(c) If a withdrawn Program has been delivered, Licensee will, at
Licensor's request, either promptly erase such program or return it to Licensor
at Licensor's expense.
4.3 Advertising.
4.3(a) In all advertising and publicity relating to any Program or
any transmission thereof, Licensee will comply with the advertising and billing
credit requirements furnished by Licensor. Licensee will not make or permit to
be made, in any advertising, publicity or otherwise, any statements which (i)
constitute or may be understood to be an endorsement of any sponsor, product,
article or service by Licensor or any of its Affiliates or by any person or
entity that appears in or otherwise renders any services or provides any
materials for use in any Program or (ii) indicate or may be understood to
indicate the Licensor, any of its Affiliates, or any person that appears in or
otherwise renders any services or provides any materials for use in any Program
is connected or associated with any sponsor, product, article or service.
4.3(b) Licensee will not advertise or promote, in any manner, any
Program withdrawn by Licensor.
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4.3(c) Licensee will not authorize or permit any excerpt or clip
from any Program to be used ***
4.3(d) ***
5. DELIVERY AND RETURN.
5.1 Access and Delivery Items. Licensee will have full and immediate
access to all masters and versions of Existing Library Programs, completed
Output Programs and completed Wallpaper. Schedule 5.1 sets forth the other
delivery materials which Licensor will supply to Licensee. Any and all masters,
versions or copies of the Existing Library Programs, Output Programs, Wallpaper
and the items described in Schedule 5.1 will be referred to collectively as the
"Delivery Materials."
5.2 Title to Delivery Materials. It is expressly agreed that title in and
to any Delivery Material provided to Licensee hereunder will remain in Licensor
at all times and that title, including copyrights therein, will vest in Licensor
upon the creation thereof, subject only to the possession and control thereof by
Licensee from the date of delivery through the end of the related license period
solely for the purposes of exercising its rights hereunder. Licensee will
execute, acknowledge and deliver to Licensor any instruments of transfer,
conveyance or assignment in or to any such Delivery Materials necessary or
desirable to evidence or effectuate Licensor's ownership thereof and in the
event that Licensee fails or refuses to execute, acknowledge or deliver any such
instrument or documents then Licensor will be deemed to be, and Licensee hereby
nominates, constitutes and appoints Licensor, its true and lawful
attorney-in-fact irrevocably to execute and deliver all such instruments in
Licensee's name or otherwise, it being acknowledged that such power is a power
coupled with an interest. Licensee will not have the right to use any Delivery
Materials except in the exercise of the rights granted to Licensee hereunder and
in accordance with all limitations on said rights as are contained in this
Agreement. Notwithstanding the foregoing, if Licensor wishes to exploit any
version of a Program included in the Delivery Materials that Licensee has caused
to be dubbed into another language, Licensor will reimburse Licensee for *** of
the direct costs of creating such dubbed version ***
6. PROGRAM LICENSE FEES. Licensee will pay Licensor program license fees as set
forth below (collectively, the "Program License Fees"), it being agreed that the
full amount of all payments to be made by "Licensee" under this Agreement will
be made by PTVI and that the portion thereof to be paid by PTV US will be paid
by PTV US to PTVI pursuant to arrangements between them:
6.1 Existing Program Library and Wallpaper. The license fee for the rights
granted hereunder with respect to the Existing Library Programs and the
Wallpaper is
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included in the Rights Acquisition Fee described in the Operating Agreement and
is payable as set forth in the Operating Agreement.
6.2 Output Programs.
6.2(a) General Payment Terms. For the rights granted hereunder with
respect to the Output Programs, Licensee will pay to Licensor a license fee
which will be calculated as a specified percentage of the total cost to Licensor
to produce, or acquire the worldwide rights to, such Output Programs each Fiscal
Year. For each Fiscal Year, the Program License Fee for the Output Programs (as
determined in reference to the Fixed Percentage, Reset Mechanism, Production
Budget Option and Licensor Production Supply Option, as hereinafter defined),
will be paid in *** payable within ten (10) business days after Licensor
delivers to Licensee the last Program produced or acquired under the Production
Budget for the applicable Fiscal Year; provided, however, in the event that in a
given Fiscal Year PEGI actually spends less than the amount of the Production
Budget for the production and acquisition of Output Programs, the final payment
due with respect to such year will be reduced accordingly. Licensee will pay the
installments that otherwise would have been due on March 20, 1999, June 20, 1999
and September 20, 1999 on the Funding Date.
6.2(b) Production Budget. Licensor agrees to produce (and/or acquire
the worldwide rights to) Output Programs. For the purposes of calculating the
Program License Fee for the Output Programs, the Output Programs for Fiscal Year
1 will carry an actual total production/acquisition cost (the "Production
Budget") of no more than *** The Production Budget for each Fiscal Year may
increase by no more than *** over the prior Fiscal Year, except by agreement of
Licensor and Licensee. The Production Budget for Fiscal Year 1 will include
overhead of no more than ***, and overhead may increase in subsequent Production
Budgets by no more than *** per year (the "Overhead Cap"); provided, however,
that in any Fiscal Year that Licensor exercises the Production Supply Option (as
described in Section 6.2(h)), the overhead in that year's Production Budget will
be reduced pro rata with respect to the overhead that would have been includible
had Licensor not elected the Production Supply Option (without otherwise
affecting the growth of the Overhead Cap in Fiscal Years in which the Production
Supply Option is not in effect).
6.2(c) Licensor Production Obligations. Licensor warrants that the
annual Production Budget for Output Programs will *** Relevant information about
the current mix of Licensor programming is set forth in Schedule 6.2(c). In the
event Licensor fails to produce Output Programs at a level of hours and mix
which is substantially similar to such levels as contemplated herein (the
"Licensor Shortfall"), Licensee will have the right to provide for the
production and acquisition of a sufficient supply of programs to replace the
Licensor Shortfall. (For the avoidance of doubt, the parties acknowledge that in
the event
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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of a Licensor Shortfall, the Program License Fee due for such year will be
calculated based on the total cost of the Output Programs actually produced or
acquired during such year.)
6.2(d) Calculation of License Fee for Output Programs. For each
Fiscal Year, the Program License Fee for the Output Programs will be determined
by reference to the Fixed Percentage, Reset Mechanism, Production Budget Option
and Production Supply Option (as defined below). The aggregate amount due with
respect to the percentage of the Production Budget or Licensor Budget Option to
be paid by Licensee as a Program License Fee for the Output Programs pursuant to
this Section (the "Applicable Percentage") is subject to the crediting of
certain amounts pursuant to the Streaming adjustment described in Section
6.2(i), if applicable.
6.2(e) Fixed Percentage. Unless the Reset Mechanism, Production
Budget Option or Production Supply Option otherwise apply, the annual Program
License Fee for Output Programs will be a "Fixed Percentage" of the Production
Budget for the applicable Fiscal Year, as follows:
6.2.(e)(i) For Fiscal Years ***
6.2.(e)(ii) For Fiscal Year ***
6.2.(e)(iii) For Fiscal Year ***
6.2.(e)(iv) For Fiscal Year ***
6.2.(e)(v) For Fiscal Year ***
6.2.(e)(vi) For Fiscal Year ***
6.2.(e)(vii) For Fiscal Year ***
6.2.(e)(viii) For Fiscal Year ***: *** Licensor will refund
the excess Program License Fee actually paid by Licensee for such Fiscal Year
within thirty (30) days after Licensor issues its audited financial statements
for such year. "Net Channel Revenues" will mean all revenues received by the
Channels as reflected in the audited year end statements of Licensee, and
"Threshold Revenues" will mean the Net Channel Revenues for Fiscal Year 10;
provided, that for any Fiscal Year in which Licensee ***
6.2(f) The Reset Mechanism. For each Fiscal Year commencing with
Fiscal Year 6, Licensee and Licensor will recalculate the percentage of the
Production Budget to
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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be paid by Licensee as the Program License Fee for Output Programs (the "Reset
Mechanism"), using the following method:
6.2.(f)(i) ***
6.2.(f)(ii) ***
6.2.(f)(iii) ***
6.2.(f)(iv) ***
6.2.(f)(v) ***
6.2(g) Licensee Production Budget Option. Starting in Fiscal Year 4,
Licensee may choose to fund a reduced percentage of the Production Budget for a
given Fiscal Year (the "Production Budget Option") if either: (i) earnings
before interest and taxes (i.e., EBIT) of Licensee for the Fiscal Year just
ended (according to the audited financial statements of Licensee) (the "Actual
Net Cash Flow") fell below the EBIT projected in the approved Business Plan for
that Fiscal Year (the "Plan Net Cash Flow") by (a) ***
6.2.(g)(i) On or about March 1, Licensee will notify Licensor
of (i) Licensee's Actual Net Cash Flow for the Fiscal Year just completed and
(ii) the Plan Net Cash Flow for that Fiscal Year. If the Actual Net Cash Flow
fell short of the Plan Net Cash Flow so as to satisfy either of the conditions
of Section 6.2(g), Licensee may notify Licensor that Licensee is exercising the
Production Budget Option by the later of March 10 or ten (10) days after
Licensor has received Licensee's audited financial statements for the previous
year.
6.2.(g)(ii) Upon exercising the Production Budget Option,
Licensee will be obliged to pay a license fee for the Output Programs equal to
the product of *** of the Production Budget for that Fiscal Year. This 40% will
be referred to as the "Option Percentage." By way of example, if Licensee timely
notifies Licensor that the difference between the Actual Net Cash Flow for
Fiscal Year 5 and the Plan Net Cash Flow for Fiscal Year 5 satisfies either of
the conditions of Section 6.2(g) and that Licensee is exercising the Production
Budget Option, the *** Option Percentage will supersede whichever of the Fixed
Percentage or the Reset Percentage would have otherwise been in effect for
Fiscal Year 6.
6.2(h) Production Supply Option. In the event that Licensee notifies
Licensor that it is exercising the Production Budget Option for a given Fiscal
Year, Licensor
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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may elect to supply Output Programs for that Fiscal Year (the "Production Supply
Option"), as follows:
6.2.(h)(i) Licensor may elect either: (i) to produce a slate
of programming at the Production Budget for that Fiscal Year, in which case the
Program License Fee will be equal to *** of the Production Budget; or (ii) to
produce a slate of programming whose budget (the "Licensor Budget Option") will
be equal to *** of the Production Budget divided by the Fixed Percentage for
that Fiscal Year, in which case the Program License Fee will be equal to the
product of the Fixed Percentage multiplied by the Licensor Budget Option. If
Licensor elects the Licensor Budget Option, the mix of Output Programs supplied
(as described in Section 6.2(c)) must remain substantially unchanged.
6.2.(h)(ii) Licensor will notify Licensee of its election
under the Production Supply Option within ten (10) days of receiving Licensee's
notice it is exercising the Production Budget Option.
Example: ***
6.2(i) ***
6.2.(i)(i) On or about each March 1 (or as soon thereafter as
PEI's audited financial statements are available) Licensor will notify Licensee
of the ***
6.2.(i)(ii) On or about each March 1 (or as soon thereafter as
Licensee's audited financial statements are available) ***
6.2.(i)(iii) ***
6.2.(i)(iv) ***
6.3 Maintenance of Records and Audit Rights.
6.3(a) Licensor and Licensee will keep accurate books of account and
records covering all transactions relating to or arising out of this Agreement,
including all items necessary to calculate the Program License Fees for Output
Programs (i.e., the Production Budget and Licensor Applicable Revenue for
Licensor, and Net Channel Revenues, Plan Net Cash Flow and Actual Net Cash Flow
for Licensee). Either party will have the right, within 24 months after the end
of a given Fiscal Year, to inspect the books and records of the other party in
connection with the Program License Fees paid with respect to such Fiscal Year.
Upon receipt of written notice that a party wishes to commence such an
inspection or examination, the other party will permit such party and its
employees,
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*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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accountants and agents to (i) have reasonable access to and inspect such books
and records during normal business hours upon reasonable notice, and (ii) to
review and copy all such books and records, to the extent relevant to the
calculation of the Program License Fee. Each party will maintain in good order
and condition all such books and records relating to a given Fiscal Year for not
less than three years after the end of such Fiscal Year, or in the event of a
dispute between the parties, until such dispute is resolved, whichever date is
later. Receipt or acceptance by Licensor, or payment by Licensee, of all or a
portion of the Program License Fee for a given Fiscal Year will not preclude
such party from exercising its rights hereunder.
6.3(b) If an inspection or examination conducted pursuant to Section
6.3(a) discloses, or Licensor or Licensee otherwise discover, an underpayment of
Program License Fees, the amount of such underpayment will be paid by Licensee
to Licensor not later than thirty (30) days after the determination thereof,
and, if such underpayment was due to the misstatement by Licensee of Net Channel
Revenues, Actual Net Cash Flow or Plan Net Cash Flow, then such payment will
also include interest from the date the payment should have been made to and
including the date of payment at the Reference Rate in effect on the date
payment should have been made. If such underpayment of Program License Fees by
Licensee is due to Licensee's misstatement of Net Channel Revenues, Actual Net
Cash Flow or Plan Net Cash Flow and such underpayment is in excess of ten
percent (10%) of the aggregate Program License Fees owed for such Fiscal Year,
Licensee will, in addition to paying Licensor the amount of such underpayment
plus interest, reimburse Licensor for all reasonable costs and expenses of
conducting such inspection or examination.
6.3(c) If an inspection or examination referred to in Section 6.4(a)
discloses, or Licensee otherwise discovers, an overpayment of Program License
Fees for a given Fiscal Year, the amount of such overpayment will be credited
against future payments of Program License Fees, unless the period for which
such overpayment was made is the final period covered by this Agreement, in
which case the amount of the overpayment will be paid by Licensor to Licensee
within thirty (30) days after determination thereof. If such overpayment of
Program License Fees is the result of a misstatement by Licensor of the
Production Budget or Licensor Applicable Revenue, and the amount of such
overpayment is in excess of ten percent (10%) of the Program License Fees
actually owed for such Fiscal Year, Licensor will reimburse Licensee for all
reasonable costs and expenses of conducting such inspection or examination.
7. REPRESENTATIONS AND WARRANTIES; INDEMNITIES.
7.1 Representations and Warranties.
7.1(a) By Licensor. Licensor represents and warrants that, except as
set forth in the Schedules hereto: (i) it is duly authorized to enter into the
transactions contemplated by this Agreement; (ii) this Agreement is a valid and
binding obligation of Licensor, enforceable against it in accordance with its
terms; (iii) the performance of Licensor's obligations hereunder does not
violate any agreement, law, rule, or regulation
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binding on Licensor or Licensor's charter documents; (iv) subject to Section
7.4, it has, and will continue to have, all rights in and to the Existing
Library Programs, Output Programs and Wallpaper necessary to fulfill its
obligations hereunder (except that with respect to the Existing Library, no such
representation is made as to any program not listed on Schedules 2.1(a)-1,
2.1(a)-2 and 2.1(a)-3); (v) except for the license between Licensor and third
parties which Licensor is assigning to Licensee, the Existing Library Programs,
Output Programs and Wallpaper are not subject to licenses which conflict with
the rights granted herein, and the use thereof by Licensee as contemplated
herein will not infringe upon the copyright, literary or dramatic right or right
of privacy of any third party or constitute a libel or slander of any third
party; (vi) the licenses between Licensor and third parties which Licensor is
assigning to Licensee are assignable, valid and enforceable, that the licensees
under such licenses have not pre-paid the license fees, if any, due thereunder
(except in accordance with the terms of such licenses), and, to the best of
Licensor's knowledge and belief, such licensees do not have any claims, offsets
or defenses which are adverse to Licensee's rights hereunder; and (vii) Licensor
has disclosed all material information relating to the rights granted hereunder,
and that all such information is true and correct to the best of Licensor's
knowledge and belief.
7.1(b) By Licensee. Licensee represents and warrants that: (i) it is
duly authorized to enter into the transactions contemplated by this Agreement;
(ii) this Agreement is a valid and binding obligation of Licensee, enforceable
against it in accordance with its terms; (iii) the performance of Licensee's
obligations hereunder does not violate any agreement, law, rule, or regulation
binding on Licensee or Licensee's charter documents; and (iv) it will not use
the Company Programming except as authorized by this Agreement.
7.2 Indemnification.
7.2(a) By Licensor. Licensor will indemnify and hold harmless
Licensee and its and members, managers, directors, officers, shareholders,
employees, agents, representatives and affiliates (collectively, the "Licensee
Indemnified Parties"), on an After Tax Basis, from and against all claims,
losses, damages (including loss of profits and consequential damages awarded to
unrelated third parties, if any, but excluding loss of profits and consequential
damages otherwise suffered by the Licensee Indemnified Parties), expenses,
judgements, costs and liabilities (including reasonable attorneys' fees and
costs) (collectively, "Losses") incurred by the Licensee Indemnified Parties
arising from Licensor's breach of any obligation, representation or warranty
contained in this Agreement. Notwithstanding the foregoing any claims for
indemnification that any Licensee Indemnified Parties may have pursuant to this
Section 7.2(a) will exclude claims based on information known by Lifford (or its
Affiliates, including Bloomfield) as of the Funding Date whether or not such
information formed the basis of the issues raised by Bloomfield during Due
Diligence (as defined in the Operating Agreement) and whether or not asserted
prior to the Walk Away Notice (as defined in the Operating Agreement) or
thereafter. In the event of a dispute regarding a claim for indemnification, the
Licensee Indemnified Party will have the burden of proof in establishing the
validity and amount of the claim, and Licensor will have the burden of proof in
establishing any defense to such claim, including but not limited to,
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a defense asserted by Licensor that Lifford (or its Affiliates) had knowledge of
the requisite facts. Notwithstanding the foregoing, Licensor will not be
obligated to provide indemnification where there is any admission of guilt by
any Licensee Indemnified Party charged with violation of the law as to the
content of any Company Program.
7.2(b) By the Licensee. Licensee will indemnify and hold harmless
Licensor and its directors, officers, shareholders, employees, agents,
representatives and affiliates (collectively, the "Licensor Indemnified
Parties"), on or After Tax Basis, from and against all Losses incurred by the
Licensor Indemnified Parties arising from Licensee's breach of any obligation,
representation or warranty contained in this Agreement.
7.3 Musical Compositions. Licensor warrants and represents that to the
best of its knowledge, information and belief, the performing rights in all
musical compositions contained in the Programs are (a) controlled by a
performing rights society having jurisdiction, (b) controlled by Licensor, or
(c) in the public domain. Licensor does not represent or warrant that Licensee
may exercise the performing rights to said musical compositions without the
payment of a performing rights royalty or license fee. Licensee will be solely
responsible for the payment of such royalty or fee and will hold Licensor free
and harmless therefrom.
7.4 Procedure. If a claim by a third party is made against an indemnified
party, the indemnified party will promptly notify the indemnifying party of such
claim. Failure to so notify the indemnifying party will not relieve the
indemnifying party of any liability which the indemnifying party might have,
except to the extent that such failure materially prejudices the indemnifying
party's legal rights. The indemnifying party will have thirty (30) days after
receipt of such notice to undertake, conduct and control through counsel of its
own choosing (subject to the approval of the indemnified party, such approval
not to be unreasonably withheld) and at its expense, the settlement or defense
of such claim, and the indemnified party will cooperate with the indemnifying
party in connection therewith; provided, however, that (i) the indemnifying
party will permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided that the fees
and expenses of such counsel will be borne by the indemnified party and (ii) the
indemnifying party will reimburse the indemnified party for the full amount of
any Loss resulting from such claim and all related expenses incurred by the
indemnified party within the limits of this Section 7 as such are incurred. If
the indemnifying party does not notify the indemnified party within thirty (30)
days after actual receipt of the indemnified party's notice of a claim of
indemnity hereunder that it elects to undertake the defense thereof (which may
be with a reservation of rights by such indemnifying party) or so notifies the
indemnified party but fails to undertake or maintain such defense promptly and
in good faith so that a default is threatened, the indemnified party will
promptly notify the indemnifying party whether it desires to undertake the
defense of such claim. If the indemnifying party does not within ten (10)
business days thereafter elect to undertake the defense thereof, the indemnified
party will have the right to contest, settle or compromise the claim in the
exercise of its reasonable judgment and without prejudice to the rights of the
indemnified party to indemnification hereunder. Notwithstanding anything
contained herein, the
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indemnified party will not enter into any settlement or compromise that provides
for any remedy other than money damages without the prior written approval of
the indemnifying party, which approval will not be unreasonably withheld.
7.5 Taxes. Licensee will pay, without limitation, any tax, levy or charge
howsoever denominated, imposed or levied (excluding only any applicable net
income or franchise taxes ("Licensor Taxes") imposed or levied against Licensor)
by any statute, law, rule or regulation now in effect or hereinafter enacted
including, without limitation, sales, use, property and excise or other similar
taxes, licenses, import permits, state, county, city or other taxes howsoever
denominated relating to or imposed on license fees, rentals, negatives, tapes or
other material, or the right or privilege to use the same in connection with any
Program hereunder whether or not billed or demanded by Licensor; it being the
intent hereof that the Program License Fees will be a net amount, free and clear
of any tax, levy or charge of whatsoever kind or nature howsoever denominated
except: (i) Licensor Taxes; (ii) any tax imposed on Licensor that would not have
been imposed had it engaged only in the transactions contemplated hereunder; or
(iii) any tax for which Licensor (or any member of its affiliated group) obtains
a foreign tax credit or could have obtained such credit had it sought to. In
regard to Licensor Taxes, if Licensee pays any such tax for Licensor to local
tax authorities, it may do so only if it simultaneously delivers written
evidence of such payment (in the form of a tax payment certificate or other
similar document) to allow Licensor to deduct such tax payment in the United
States. To the extent that any such other taxes, levies, or charges or penalties
and interest thereon are paid by Licensor, Licensee will reimburse Licensor on
demand, and on the failure of Licensee to reimburse Licensor, Licensor will have
available to it all of the remedies provided for herein with respect to unpaid
Program License Fees as well as such other remedies as may be provided by law.
If Licensee denies liability for any tax, levy or charge which Licensor must pay
or collect, Licensee will indemnify Licensor for any liability, penalty or
interest which may result and Licensor will have the immediately aforementioned
remedies against Licensee for the collection of same. Licensor will have no
obligation to contest or to dispute any tax assessed or levied. Licensee will
have the right to do so at its sole cost and expense, and Licensor will provide
Licensee with reasonable cooperation relating to any such contest or dispute.
8. TERMINATION.
8.1 Expiration of Term. The License Term is fifty (50) years commencing on
the date of formation of PTVI unless sooner terminated pursuant to the other
provisions of this Section 8.
8.2 Early Termination on Breach. Licensor may without prejudice to its
other remedies terminate this Agreement by notice in writing to Licensee on or
after the occurrence of any of the following:
8.2(a) PEII has terminated the Trademark License Agreement;
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8.2(b) Licensor elects to dissolve Licensee as the result of VSI's
(or its Affiliates that are members of Licensee) being in default of its
obligations under the Operating Agreement; or
8.2(c) PTVI is in material default of its obligations under the
Stock Purchase Agreements (as defined in the Operating Agreement) and such
default, if curable, is not cured within thirty (30) days after PTVI has
received written notice thereof from Licensor (provided such default is not the
result of action or inaction by Licensor as a Member of PTVI).
A party may without prejudice to its other remedies terminate this
Agreement by notice in writing to the other on or after either of the following:
8.2(d) the commission of one or more material breaches of this
Agreement by the other party which are not capable of remedy; provided that in
the case of a breach by the Licensee, such breach is not caused by Licensor as a
Member of PTVI; or
8.2(e) the commission of a material breach of this Agreement by the
other party which is capable of remedy (a "Remediable Breach") which will not
have been remedied within a period of thirty (30) days after the party in breach
has been given notice in writing specifying that Remediable Breach and requiring
it to be remedied; provided, however, that such thirty (30)-day period will be
extended for such additional period as will be reasonably necessary if that
Remediable Breach is incapable of remedy within that thirty (30) day period and
during that thirty (30)-day period the party in breach will diligently endeavor
to remedy that Remediable Breach, but only if such extension would not
reasonably be expected to have a material adverse effect on the party giving
notice of such breach; and further provided that such breach is not caused by
Licensor as a Member of PTVI. The parties agree that any inadvertent breach
relating to Licensor's obligations with respect to any individual program will
constitute a Remediable Breach and will not constitute grounds for termination
hereof if Licensor provides comparable substitute programming for the applicable
program.
9. EFFECTS OF TERMINATION.
9.1 Survival of Obligations. The termination of this Agreement for
whatever reason will not affect any provision of this Agreement which is
expressed to survive or operate in the event of its termination and will not
prejudice or affect the rights of either party against the other in respect of
any breach of this Agreement or in respect of any moneys payable by one party to
the other in relation to any period prior to termination.
9.2 Termination of Rights. Upon the date on which any termination of this
Agreement for whatever reason takes effect (the "Termination Date") all rights
of Licensee hereunder will immediately terminate and automatically revert to
Licensor and Licensee will cease to make any use of the Programs and other
materials provided by Licensor hereunder.
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9.3 Further Assurances. Upon termination of this Agreement, the parties
will perform all other acts which may be necessary or useful to render effective
the termination of Licensee's interests in the Programs and other materials
furnished by Licensor hereunder and Licensee will execute any assignment,
conveyance, acknowledgment or other document that Licensor may reasonably
request relinquishing such interests.
10. EQUITABLE RELIEF.
Each of Licensor and Licensee acknowledges that any material breach of
this Agreement by such party, including, by way of example, Licensee's failure
to cease using the any programming supplied hereunder upon the expiration or
termination of this Agreement, will result in irreparable harm to the other
party for which there is no adequate remedy at law. Accordingly, in such event,
Licensor or Licensee, as the case may be, will be entitled to preliminary or
temporary equitable relief in any Federal or State Court of competent
jurisdiction located in Los Angeles County, California pending a final
determination in accordance with Section 11, without the necessity of posting
bond unless otherwise required by applicable law by way of any or all of the
temporary and permanent injunctions and such other relief as any court of
competent jurisdiction may deem just and proper.
11. DISPUTE RESOLUTION.
11.1 General Agreement Regarding Dispute Resolution. Any dispute arising
out of or relating to this Agreement will be resolved in accordance with the
procedures specified in this Section 11, which will be the sole and exclusive
procedures for the resolution of any such disputes. The parties intend that
these provisions will be valid, binding, enforceable and irrevocable and will
survive any termination of this Agreement; provided, however, that this Article
will not apply to any dispute concerning the validity, ownership or control of
the trademarks licensed by PEII to the Company pursuant to the Trademark License
Agreement or the copyrights to any programming supplied by Licensor to the
Program Supply Agreement, and instead any such dispute will be litigated in a
court of law.
11.2 Notification and Negotiation. The parties will promptly notify each
other in writing of any dispute arising out of or relating to this Agreement.
The parties will attempt in good faith to resolve any dispute arising out of or
relating to this Agreement promptly by negotiation between executives who have
authority to settle the controversy. All reasonable requests for information
made by one party to the other will be honored. All negotiations pursuant to
this clause are confidential and will be treated as compromise and settlement
negotiations for purposes of applicable rules of evidence.
11.3 Mediation. If any such dispute remains unresolved within thirty (30)
days of original notice thereof, the parties will endeavor to resolve any
dispute arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedure for Business Disputes. Unless the parties agree otherwise,
the mediator will be selected from the CPR Panel of Neutrals with notification
to CPR.
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11.4 Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach, termination or validity thereof, which remains
unresolved forty-five (45) days after appointment of a mediator, will be settled
by arbitration by a sole arbitrator in accordance with the CPR Non-Administered
Arbitration Rules; provided, however, that if either party will not participate
in a non-binding procedure described above in Sections 11.2 and 11.3, the other
may initiate binding arbitration before expiration of the above period for
negotiation and mediation. The arbitration will be governed by the United States
Arbitration Act, 9 U.S.C. ' 1-16, and judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereof. The place of
arbitration will be Los Angeles, California.
11.5 Damages. Except as expressly provided below, the arbitrator is not
empowered to award damages in excess of compensatory damages and each party
hereby irrevocably waives any right to recover such damages with respect to any
dispute resolved by arbitration. The arbitrator will have the authority to
include, as an item of damages, the costs of arbitration, including reasonable
legal fees and expenses, incurred by the prevailing party and to apportion such
costs among the parties on a claim by claim basis as such party prevails
thereon. For purposes of the foregoing, the "prevailing party" will mean the
party whose final settlement offer (or other position or monetary claim) prior
to the start of arbitration is closest to the judgement awarded by the
arbitrator, regardless of whether such judgement is entered into in favor of or
against such party.
11.6 Statute of Limitations. The statute of limitations of the State of
California applicable to the commencement of a lawsuit will apply to the
commencement of an arbitration hereunder, except that no defenses will be
available based upon the passage of time during any negotiation or mediation
called for by the preceding paragraphs of this Section 11.
11.7 Confidential Negotiations. All negotiations pursuant to Sections 11.2
and 11.3 are confidential and will be treated as compromise and settlement
negotiations for purposes of applicable rules of evidence.
11.8 Service of Process; Forum. Each party agrees that service by
registered or certified mail, return receipt requested, delivered to such party
at the address provided in Section 12.6 (Notices) below, will be deemed in every
respect effective service of process upon such person for all purposes of these
provisions relating to mediation and arbitration. Each party irrevocably submits
to the jurisdiction of the courts of the State of California and to any federal
court located within such state for the purpose of any action or judgement with
respect to this Agreement, regardless of where any alleged breach or other
action, omission, fact or occurrence giving rise thereto occurred. Each party
hereby irrevocably waives any claim that any action or proceeding brought in
California has been brought in any inconvenient forum.
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11.9 Additional Provisions to Enforce Awards. The parties will negotiate
in good faith and agree on such further or modified arbitration provisions as
are reasonably necessary for awards and other judgements resulting from the
provisions set forth above to be recognized and enforceable in other
jurisdictions in the Territory.
12. MISCELLANEOUS.
12.1 Force Majeure. Subject to the right to terminate set forth in Section
8.2(e), neither party will be liable to the other for any failure or delay in
delivery of Delivery Materials, or the inability to telecast any of the
Programs, due to accident involving breakdown of any satellite or of
transmission facilities or equipment, labor disputes, acts of God, failure of
carriers, failure or delay of laboratories, of or any other cause beyond the
control of such party (each, an event of "Force Majeure") and such performances
will be excused to the extent that it is prevented by reason of any of the
foregoing conditions. Notwithstanding the foregoing, an event of "Force Majeure"
will not include censorship restrictions or any restriction by any jurisdiction
on a party's right to transfer funds. If at the end of the term the Licensor in
good faith determines that any event of Force Majeure materially decreased the
value of this license, Licensor, in Licensor's sole discretion to be exercised
in good faith, may make an adjustment of said license payments.
12.2 Binding Effect; No Assignment. The provisions of this Agreement will
be binding on and enure to the benefit of the successors of each party hereto;
provided, however, that no party may assign, transfer, pledge, hypothecate,
charge or otherwise dispose of or subcontract any of its rights or obligations
hereunder without the prior written consent of the other party. Notwithstanding
the foregoing: (i) either party may assign its rights and obligations hereunder
to an Affiliate of such party, but the original party will remain responsible
and liable for such Affiliate's compliance with all of such original party's
obligations hereunder, and in the case of an assignment by Licensor, such
Affiliate must be the owner of the rights in the programming and materials
necessary to perform Licensor's obligations hereunder; and (ii) in the event
Lifford (or an Affiliate of Lifford which is then a member of Licensee)
dissolves Licensee due to a breach by Licensor (or an Affiliate of Licensor
which is then a member of Licensee) of the Operating Agreement, Lifford (or such
Affiliate) may cause Licensee's rights hereunder to be assigned to Lifford (or
to an Affiliate of Lifford), provided that Licensee's rights under the Trademark
License Agreement are assigned to the same assignee. Nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective permitted successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
12.3 Invalidity. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provisions in any other jurisdictions.
25
<PAGE>
12.4 Waivers, Remedies Cumulative, Amendments, etc.
12.4(a) No failure or delay by any of the parties hereto in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof nor will any single or partial exercise by any of the parties
hereto of any right, power or privilege preclude any further exercise thereof or
the exercise of any other right, power or privilege.
12.4(b) Except as otherwise provided in this Agreement, the rights
and remedies herein provided are cumulative and not exclusive of any rights and
remedies provided by law.
12.4(c) No provision of this Agreement may be amended, modified,
waived, discharged or terminated, other than by the express written agreement of
the parties hereto nor may any breach of any provision of this Agreement be
waived or discharged except with the express written consent of the party not in
breach.
12.5 Notices.
12.5(a) All notices, requests, demands and other communications
required to be given under this Agreement will conclusively be deemed to have
been duly given (a) when hand delivered, (b) the next business day if sent by a
generally recognized overnight courier service that provides written
acknowledgment by the addressee of receipt, or (c) when received (with
appropriate answerback), if sent by facsimile transmission or other generally
accepted means of electronic transmission addressed as follows:
If to Licensor to:
Playboy Entertainment Group, Inc.
Attention: President
9242 Beverly Boulevard
Beverly Hills, CA 90210
United States of America
Fax Number: (310) 246-4065
With a copy to:
Playboy Enterprises, Inc.
Attention: General Counsel
680 North Lake Shore Drive
Chicago, IL 60611
United States of America
Fax Number: (312) 266-2042
26
<PAGE>
If to PTVI or PTV U.S.:
Playboy TV International LLC
c/o Cisneros Television Group
Attention: Director Legal and Business Affairs
404 Washington Avenue, 8th Floor
Miami Beach, FL 33139
United States of America
Fax Number: (305) 894-3606
With copies to:
Playboy Enterprises, Inc.
Attention: General Counsel
680 North Lake Shore Drive
Chicago, IL 60611
United States of America
Fax Number: (312) 266-2042
and
Glenn Dryfoos, Esq.
Greenberg, Glusker, Fields, Claman & Machtinger LLP
1900 Avenue of the Stars, Suite 2100
Los Angeles, CA 90067
United States of America
Fax Number: (310) 553-0687
or to such other address, or facsimile transmission number as the relevant
addressee may hereafter by notice hereunder substitute.
12.5(b) All notices will be deemed given when received at the
address(es) as provided in paragraph (a) above.
12.6 Governing Law. ALL QUESTIONS WITH RESPECT TO THIS AGREEMENT AND THE
RIGHTS AND LIABILITIES OF THE PARTIES WILL BE GOVERNED BY THE LAWS OF THE STATE
OF DELAWARE, IRRESPECTIVE OF THE CHOICE OF LAWS PROVISIONS OF DELAWARE OR OF ANY
OTHER JURISDICTION.
12.7 Entire Agreement. This Agreement, together with its attachments,
constitutes the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
oral and written, between the parties hereto with respect to the subject matter
hereof.
27
<PAGE>
12.8 Rules of Construction.
12.8(a) Headings. The section headings in this Agreement are
inserted only as a matter of convenience, and in no way define, limit, or extend
or interpret the scope of this Agreement or of any particular section.
12.8(b) Tense and Case. Throughout this Agreement, as the context
may require, references to any word used in one tense or case will include all
other appropriate tenses or cases.
12.8(c) Agreement Negotiated. The parties hereto are sophisticated
and have been represented by lawyers throughout the negotiation and execution of
this Agreement who have carefully negotiated the provisions hereof. As a
consequence, the parties do not believe the presumption of California Civil Code
Section 1654 and similar laws or rules relating to the interpretation of
contracts against the drafter of any particular clause should be applied in this
case and therefore waive its effects.
12.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
12.10 Relationship Between the Parties. This Agreement will not be
construed to place the parties in the relationship of partners or joint
venturers.
12.11 Time is of the Essence. Time will be of the essence with respect to
each and every obligation of Licensee and Licensor hereunder.
12.12 Effectiveness. This Agreement will be binding on, and effective with
respect to PTVI, as of the date hereof. This Agreement will be binding on, and
effective with respect to PTV U.S., as of the date of it executes this
Agreement.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first above
written.
LICENSOR:
Date: 8/31/99 PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Anthony J. Lynn
--------------------------------------
Name: Anthony J. Lynn
-----------------------------------
Title: President
-----------------------------------
Date: 8/31/99 LICENSEE:
PLAYBOY TV INTERNATIONAL LLC
By: /s/ Anthony J. Lynn
--------------------------------------
Name: Anthony J. Lynn
-----------------------------------
Title: Director
-----------------------------------
By: /s/ Jay Scharer
--------------------------------------
Name: Jay Scharer
-----------------------------------
Title: Director
-----------------------------------
Date:____________ PTV U.S., LLC
By:
--------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
ACKNOWLEDGED, ACCEPTED AND AGREED
ON BEHALF OF ALL LICENSOR AFFILIATES:
PLAYBOY ENTERPRISES, INC.
By: /s/ Anthony J. Lynn
---------------------------------
Name: Anthony J. Lynn
------------------------------
Title: Executive Vice President
------------------------------
29
-------------------------
TRADEMARK LICENSE AGREEMENT
-------------------------
Between
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
as Licensor
and
PLAYBOY TV INTERNATIONAL, LLC
as Licensee
August 31, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS.....................................................................4
1. DEFINITIONS............................................................4
2. GRANT OF LICENSE.......................................................8
2.1 Grant of Exclusive License.......................................8
2.2 PEGI's Assignment of Local Revenues Under Existing
Trademark Licenses...............................................9
2.3 Supplemental Programs............................................9
2.4 All Other Rights Retained by Licensor............................9
2.5 Restriction on Sub-Licensing.....................................9
2.6 Duration of License..............................................9
2.7 ***..............................................................9
2.8 Restrictions on Modifications of Trademarks......................9
2.9 Additional Marks................................................10
3. TRADEMARK LICENSE FEE.................................................11
3.1 Trademark License Fee for Trademarks............................11
3.2 Payment Terms...................................................11
3.3 Maintenance of Records and Audit Rights.........................12
4. QUALITY CONTROL.......................................................12
4.1 Program Restrictions............................................12
4.2 Advertising and Home Shopping Restrictions......................13
4.3 Compliance with Program Supply Agreement........................13
4.4 Inspection Rights...............................................13
5. TITLE AND PROTECTION OF THE TRADEMARKS; USE OF THE
TRADEMARKS............................................................13
5.1 Title...........................................................13
5.2 Form............................................................14
5.3 Maintenance of Distinctive Quality of Trademarks................14
5.4 Advertising and Publicity.......................................14
5.5 Licensee Web Sites..............................................15
6. OWNERSHIP OF THE TRADEMARKS...........................................15
6.1 Prosecution and Maintenance of Trademarks.......................15
6.2 Cooperation of Licensee.........................................15
6.3 Covenant of Licensee............................................16
6.4 Covenant of Licensor............................................16
i
<PAGE>
6.5 Cooperation of Parties to Register Trademarks...................16
7. INFRINGEMENTS.........................................................16
7.1 Notice..........................................................16
7.2 Control of Proceedings..........................................16
7.3 Procedures and Costs............................................17
8. REPRESENTATIONS AND WARRANTIES........................................17
8.1 By Licensor.....................................................17
8.2 By Licensee.....................................................17
9. INDEMNIFICATION.......................................................17
9.1 By Licensor.....................................................17
9.2 By Licensee.....................................................18
9.3 Procedure.......................................................18
9.4 Survival........................................................19
100 TERMINATION...........................................................19
10.1 Expiration of Term..............................................19
10.2 Early Termination on Breach.....................................19
110 EFFECTS OF TERMINATION................................................20
11.1 Survival of Obligations.........................................20
11.2 Termination of Rights...........................................20
11.3 Further Assurances..............................................20
12. EQUITABLE RELIEF......................................................20
13. DISPUTE RESOLUTION....................................................20
13.1 General Agreement Regarding Dispute Resolution..................20
13.2 Notification and Negotiation....................................21
13.3 Mediation.......................................................21
13.4 Arbitration.....................................................21
13.5 Damages.........................................................21
13.6 Statute of Limitations..........................................21
13.7 Confidential Negotiations.......................................21
14. MISCELLANEOUS.........................................................22
14.1 Binding Effect; No Assignment...................................22
14.2 Invalidity......................................................22
14.3 Waivers, Remedies Cumulative, Amendments........................22
14.4 Notices.........................................................23
14.5 Governing Law...................................................24
14.6 Service of Process; Forum.......................................24
14.7 Additional Provisions to Enforce Awards.........................24
14.8 Entire Agreement................................................24
ii
<PAGE>
14.9 Rules of Construction...........................................24
14.10 Counterparts....................................................24
14.11 Relationship Between the Parties................................25
14.12 Time is of the Essence..........................................25
SCHEDULE I CURRENT TRADEMARKS
SCHEDULE I REGISTERED AND PENDING TRADEMARKS IN THE TERRITORY
SCHEDULE III LICENSOR'S EXISTING TRADEMARK AGREEMENTS TO BE
ASSIGNED TO LICENSEE
iii
<PAGE>
THIS TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and entered
into on August 31, 1999, between PLAYBOY ENTERPRISES INTERNATIONAL, INC., a
Delaware corporation (the "Licensor") and PLAYBOY TV INTERNATIONAL, LLC, a
Delaware limited liability company (the "Licensee").
RECITALS
WHEREAS, Licensor is the owner of certain rights in and to certain
Trademarks as defined below and identified in Schedule I hereto;
WHEREAS, Licensor wishes to permit Licensee to use the Trademarks in
connection with the operation of its business, pursuant to the Operating
Agreement and the Program Supply Agreement (each, as defined below), on the
terms and subject to the conditions of this Agreement; and
WHEREAS, Licensee acknowledges the reputation and quality of goods and
services heretofore sold or distributed under the Trademarks and Licensor's
desire to safeguard, promote and enhance that reputation by ensuring the future
quality of goods and services sold or distributed under the Trademarks.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, and intending to be legally bound, the parties
agree as follows:
1. DEFINITIONS.
In this Agreement (including the Recitals hereto) the following terms will
have the following meanings:
"Additional Marks" has the meaning set forth in Section 2.9.
"AdulTVision Content Category" means Channels and programming consistent
with the AdulTVision channel as operated by PEGI in the United States prior to
March 15, 1999 and expressly includes any program supplied under the Program
License Agreement that is branded with an "AdulTVision" (or variation thereof)
Trademark. The AdulTVision Content Category expressly excludes any programming
supplied under the Program License Agreement or Supplemental Program that is
branded with a "Playboy" (or variation thereof) Trademark.
"Affiliate" means any Person, directly or indirectly through one or more
intermediaries, controlling of, controlled by, or under common control with the
specified Person. The term "control" (and "controlled" and "controlling,"
respectively), as used in the immediately preceding sentence, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of the specified Person (whether by the
holding of shares or other equity interests, the possession of voting or
contract rights or otherwise). Notwithstanding the foregoing, Licensee will not
be deemed to be an Affiliate of Licensor, PEGI, or VSI.
"Agreement Outline" means the Playboy TV International, LLC Agreement
Outline dated as of December 16, 1998, as amended.
4
<PAGE>
"After Tax Basis" means a basis such that any payment (the "Original
Payment") received or deemed to have been received by a Person (the "recipient")
will be supplemented by a further payment to the recipient so that the sum of
the two payments will equal the Original Payment, after taking into account (x)
all taxes that would result from the receipt or accrual of such payments, if
legally required, and (y) any reduction in taxes that would result from the
deduction of the expense indemnified against, if legally permissible. In the
event that the expense indemnified against is used to reduce taxes by way of
amortization or depreciation, payments made on an After Tax Basis will be
refunded in each taxable year of the recipient in which such expense is
deductible in an amount equal to the sum of (i) the tax savings attributable to
such deduction plus (ii) any reduction in taxes that would result from the
deduction of any amounts described in clause (i) as increased hereby. All
payments hereunder will be calculated on the assumptions that the recipient was
subject to tax at the highest marginal rates of tax applicable to such class of
taxpayer and that it could benefit from the deduction of any expense at such
rate of tax. In the event that a taxing authority will treat any indemnification
payment as not includible in gross income or disallow any deduction taken into
account hereunder, the indemnification will be recomputed and further payments
or refunds made.
"BMI" means Bloomfield Mercantile, Inc., a Panama corporation.
"Channels" means the television channels owned or operated in the Media by
Licensee, or its subsidiaries, now or in the future (each, a "Channel").
"Company Programming" has the meaning set forth in the Program Supply
Agreement.
"Content Category" means the Playboy Content Category, the Spice Content
Category or the AdulTVision Content Category, as applicable.
"End Date" means the date on which the license granted hereunder
terminates, whether as the result of the expiration of the term or as the result
of any earlier termination pursuant to Section 10.
"Existing Library Programs" has the meaning set forth in the Program
Supply Agreement.
"Fiscal Year" means the calendar year. "Fiscal Year 1" means the first
fiscal year of the Licensee, "Fiscal Year 2" means the second fiscal year, and
so on.
"Funding Date" means the date on which PEGI and Lifford make their
respective initial cash capital contributions to the Licensee pursuant to
Section 3.1 of the Operating Agreement.
"Japan Venture" means The Playboy Channel Japan, Inc., a company formed
under the laws of Japan.
"Licensee" has the meaning set forth in the Introduction, or such
successor or assignee as may be permitted herein.
"Licensee Indemnified Parties" has the meaning set forth in Section 9.1.
5
<PAGE>
"Licensee Originated Marks" has the meaning set forth in Section 2.6.
"Licensee Web Sites" has the meaning set forth in Section 5.5.
"Licensor" has the meaning set forth in the Introduction or such successor
or assignee as may be permitted herein.
"Licensor Indemnified Parties" has the meaning set forth in Section 9.2.
"Lifford" means Lifford International, Ltd., an international business
company formed under the laws of the British Virgin Islands.
"Losses" has the meaning set forth in Section 8.1.
"Media" means ***
"Net Channel Revenues" has the meaning set forth in Section 3.1.
"New Venus" means the new entity or entities to be formed by Licensee and
Imagen Satelital, S.A. pursuant to the Operating Agreement.
"Operating Agreement" means the Operating Agreement for Playboy TV
International, LLC, entered into concurrently herewith, as may be amended from
time to time.
"PEGI" means Playboy Entertainment Group, Inc., a Delaware corporation and
a member of Licensee.
"Person" means an individual, general partnership, limited partnership,
limited liability company, corporation, trust, estate, association or any other
entity.
"Playboy Content Category" means Channels and programming consistent with
the "Playboy" channel as operated by PEGI in the United States and expressly
includes any program supplied under the Program License Agreement that is
branded with a "Playboy" (or variation thereof) Trademark. The Playboy Content
Category expressly excludes any programming supplied under the Program License
Agreement or Supplemental Program that is branded with a "Spice" (or variation
thereof) Trademark or an "AdulTVision" (or variation thereof) Trademark.
"Program Supply Agreement" means the Program Supply Agreement between PEGI
and Licensee, executed concurrently herewith, as may be amended from time to
time.
"Proposed Activity" has the meaning set forth in Section 2.7.
"PTVLA Trademark License Agreement" means the Trademark License Agreement
entered into as of November 10, 1998 (effective as of June 14, 1996) between
Licensor and Playboy TV-Latin America, LLC.
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
6
<PAGE>
"Reference Rate" means the reference rate as set by BankAmerica from time
to time.
"Remediable Breach" has the meaning set forth in Section 9.2.
"Spice Content Category" means Channels and programming consistent with
the "Spice" channel as operated by PEGI in the United States and expressly
includes any program supplied under the Program License Agreement that is
branded with a "Spice" (or variation thereof) Trademark. The Spice Content
Category expressly excludes any programming supplied under the Program License
Agreement or Supplemental Program that is branded with a "Playboy" (or variation
thereof) Trademark.
"Streaming" means ***
"Supplemental Programs" has the meaning set forth in the Operating
Agreement.
"Termination Date" has the meaning set forth in Section 10.2.
"Territory" means the World, except for the United States and Canada and
their territories and possessions worldwide.
"Threshold Revenues" has the meaning set forth in Section 3.1.
"Trademark License Fee" means the fees payable by Licensee in
consideration of the rights granted hereunder, which fees will be paid in the
form of the Initial Trademark License Fee and the Annual Trademark License Fee,
each as defined in Section 3.1.
"Trademarks" means the trademarks identified on Schedule I hereto (which
Schedule identifies the Trademarks by applicable Content Category), the URL or
domain name of any Licensee Web Sites and any Additional Marks (each of which
will be identified with a Content Category by Licensor).
"Trade Materials" means trade presentations, business cards, invoices,
stationery and other similar printed matter reflecting the names under which
Licensee conducts business as permitted under the Operating Agreement.
"VSI" means Victoria Springs Investments Ltd., a British Virgin Islands
corporation and a member of Licensee.
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
7
<PAGE>
2. GRANT OF LICENSE.
2.1 Grant of Exclusive License.
(a) Upon and subject to the terms and conditions set forth in this
Agreement, Licensor hereby grants to Licensee, and Licensee hereby accepts, an
exclusive license throughout the Territory to use the Trademarks in connection
with (i) the operation and distribution of the Channels, (ii) the sub-licensing
of Company Programming (other than acquired Supplemental Programs) to third
parties, and (iii) non revenue-generating business activities which are
ancillary and related to the activities described in (i) and (ii), including but
not limited to Trade Materials and the promotion of the Channels and related
marketing, distribution and advertising activities; provided, that *** In
addition to the Trademarks, Licensor grants to Licensee, and Licensee hereby
accepts, a limited license to use such additional trademarks of Licensor (e.g.,
"Playmate of the Month") as are included in the programs provided by PEGI under
the Program Supply Agreement, which license will be limited solely to customary
presentation and logo credits in the title and end credits sequences of such
programs and credit blocks in advertising therefor. Notwithstanding the above,
Licensee's exclusivity will not apply to: (i) customary presentation and logo
credits in the title and end credits sequences of programs licensed to others as
permitted in the Program Supply Agreement and credit blocks in advertising
therefor; (ii) use of the Trademarks in any television service which is not
intended for general reception in the Territory but which is received in the
Territory due to unintentional spillover; or *** as defined in and pursuant to
the terms of the Operating Agreement. Licensee acknowledges that the Content
Categories represent distinct content, style and production values and Licensee
will not use, and will not have the right to permit any other Person to use, any
Trademark for a use outside its designated Content Category.
(b) During the term of this Agreement, Licensor will not itself use
or authorize any other Person to use the Trademarks or any confusingly similar
designation in connection with any television channel or service in the
Territory or the distribution of any programming in the Media in the Territory.
In the event that Licensor (or any of its Affiliates) licenses, or directly
uses, any of the Trademarks in the Territory in connection with an activity
which is not included in the license granted to the Licensee hereunder, but
which activity is likely to harm Licensee, the Channels, or Licensee's rights
under this Agreement or the Program Supply Agreement (taking into account local
customs in the region of the Territory where such activity is being conducted),
Licensee may object to such other license or use. In the event that Licensee so
objects, Licensor and Licensee will attempt in good faith to resolve any such
objection.
(c) Notwithstanding the previous paragraphs of this Section 2.1,
Licensee acknowledges that until Playboy TV-Latin America, LLC is contributed to
it, Licensee's rights in the Trademarks will be limited by and subject to the
rights under the PTVLA Trademark License Agreement.
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
8
<PAGE>
2.2 PEGI's Assignment of Local Revenues Under Existing Trademark Licenses.
To the extent that Licensor (or its Affiliates) has granted existing trademark
licenses to third parties in connection with PEGI's licensing of Library
Programs to such parties in the Territory, and such trademark licenses include a
separate license fee or other payment relating to the trademark license,
Licensor hereby assigns to Licensee all of its rights to receive license fees or
other payments thereunder with respect to periods from and after July 1, 1999
and any rights relating to the accounting for and collection of such license
fees or other payments. A complete list of such existing trademark license
agreements is set forth in Schedule III. Licensor does not assign, and expressly
reserves for itself, all rights of approval and control over the licensed
trademarks and all remedies for breach of the permitted uses of the trademarks
pursuant to such trademark licenses and any other license of trademarks
ancillary to the licensing of Company Programming (as provided in the Program
Supply Agreement).
2.3 Supplemental Programs. The license granted hereunder includes the
Licensee's (and its subsidiaries') right to place the Trademarks on Supplemental
Programs produced by Licensee.
2.4 All Other Rights Retained by Licensor. All rights not expressly
granted to Licensee hereunder are reserved to Licensor for its own use and
benefit and, in its sole discretion to grant to one or more other Persons.
2.5 Restriction on Sub-Licensing. Licensor acknowledges that for Licensee
to conduct its business Licensee will need to procure licenses of the Trademarks
for use by systems operators and other distributors of the Channels and by other
licensees of the Company Programming for the purposes of distributing, marketing
or advertising such Channels or Company Programming, (each, a "Permitted
Sublicensee"). *** Licensor agrees that it will enter into trademark sublicense
agreements with Licensee and Permitted Sublicensees. The terms of such
sublicense agreements will be consistent with Licensor's customary practices for
licenses of similar scope and will provide Licensor with rights of approval and
control reasonably satisfactory to Licensor; provided, that the license fee or
other payment terms will be in the discretion of Licensee. To facilitate the
foregoing, Licensor and Licensee will develop standard form licensing agreements
as soon as reasonably practicable following the date hereof. The Licensee will
not otherwise sub-license any of the Trademarks without the prior written
consent of Licensor.
2.6 Duration of License. The license granted under Section 2.1 will
continue in force until the expiration or termination of this Agreement in
accordance with the provisions of Section 10.
2.7 ***
2.8 Restrictions on Modifications of Trademarks. Licensee will not use,
cause or authorize to be used any word, device, design, slogan or symbol
confusingly similar to any of the
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
9
<PAGE>
Trademarks. Without limiting the generality of the foregoing, during the term of
this Agreement, the following will not be used by Licensee, including but not
limited to use on or in connection with the Channels or the Company Programming
without, in each case, Licensor's prior written approval:
(a) permutations of any or all of the Trademarks; or
(b) secondary or combination marks including or derived from any of
the Trademarks; or
(c) new words, devices, designs, slogans or symbols derived from any
of the Trademarks; or
(d) new words, devices, designs, slogans or symbols created
especially for use with the Channels or the Company Programming as part of the
Channels which do not derive from, include or represent a permutation of any of
the Trademarks ("Licensee Originated Marks").
Notwithstanding the foregoing, Licensor will not withhold consent
for (i) any permutation of any Trademark that is modified to include a
geographic location within the Territory (e.g., "Spice Channel Norway") for use
of such permutation within the identified geographic location; and (ii) any
Licensee Originated Mark unless it reasonably determines that such Licensee
Originated Mark or Licensee's intended use thereof would be detrimental to the
Trademarks or Licensor. Upon termination of this Agreement, Licensee will
immediately cease all use of any Licensee Originated Marks and ownership of such
Licensee Originated Marks will vest equally with Licensee and Licensor; provided
that neither Licensor nor Licensee will make any use of any such Licensee
Originated Marks without the prior written consent of the other.
2.9 Additional Marks. Licensor hereby agrees to include as Trademarks
licensed hereunder in the applicable Content Category (i) any trademarks or
permutations, secondary, combination or derivative marks owned by Licensor and
used in connection with the broadcast, transmission, advertising or promotion of
the Playboy Channel, the Spice Channel or AdulTVision television services in the
United States provided that the same are, in Licensor's reasonable
determination, at such time applicable to the respective Channels or Company
Programming, as the case may be, and are available for use by Licensee pursuant
hereto and are available for registration by Licensor in regions of the
Territory in which Licensee intends to use such trademarks, and (ii) any other
mark to which Licensor consents pursuant to Section 2.8 above (all of such marks
are collectively referred to as the "Additional Marks"). The parties understand
and agree that, notwithstanding anything to the contrary contained herein, no
Additional Marks or Licensee Originated Marks will be subject to any of the
representations, warranties or protection, maintenance or indemnification
obligations of Licensor hereunder and that if in Licensor's reasonable
discretion based on Licensee's use in the Territory of such Additional Marks
Licensor elects to register any such Additional Marks in the Territory, Licensee
will reimburse Licensor for the costs of such registration and the maintenance
thereof during the term of this Agreement. Licensee will at Licensor's request
register and maintain any Licensee Originated Mark that Licensor approves
pursuant to Section 2.8.
10
<PAGE>
3. TRADEMARK LICENSE FEE.
3.1 Trademark License Fee for Trademarks. The license fee for the
trademark license granted hereunder for Fiscal Year 1 through the end of Fiscal
Year 10 (the "Initial Trademark License Fee") is included in the Rights
Acquisition Fee described in the Operating Agreement. Commencing in Fiscal Year
11 and for each Fiscal Year through the End Date, the Licensee will pay to
Licensor a trademark license fee (the "Annual Trademark License Fee") calculated
as a percentage of Net Channel Revenues (as defined below) as compared to Net
Channel Revenues generated in Year 10 ("Threshold Revenues"). Beginning in
Fiscal Year 11, the Annual Trademark License Fee for a given year will equal the
sum of the following: (a) *** plus (b) ***
3.2 Payment Terms.
(a) The Initial Trademark License Fee will be payable by Licensee in
accordance with the terms of payment of the Rights Acquisition Fee as set forth
in the Operating Agreement.
(b) The Annual Trademark License Fee payable for Fiscal Year 11 and
for each subsequent Fiscal Year through the End Date will be payable as follows:
(i) Licensee will pay to Licensor an estimate of the Annual Trademark License
Fee for each Fiscal Year within thirty (30) days after the end of such Fiscal
Year, which will be calculated based on Licensee's unaudited financial
statements for the such Fiscal Year; and (ii) Licensee will calculate the final
Annual Trademark Licensee Fee for such Fiscal Year within thirty (30) days after
the delivery of the Licensee's audited financial statements for the relevant
Fiscal Year and a "true-up" payment will by paid by Licensee or Licensor, as
appropriate to reconcile any underpayment or overpayment of the Annual Trademark
Licensee Fee.
(c) Payments of the Annual Trademark License Fee will be made by
wire transfer of immediately available funds, net of any withholding required by
applicable law. Licensor will from time to time designate one or more accounts
into which such payments will be made and may designate one or more Affiliates
to receive such payments.
(d) Any payment not made within thirty (30) days of its due date
will bear interest from the date due to and including the date payment in full
is made at the Reference Rate in effect on the date payment was due.
(e) The Annual Trademark License Fee will be paid in U.S. Dollars.
To the extent the calculation of the Annual Trademark License Fee is based on
revenues received in other currencies, such revenues will be calculated using
the exchange rate published in the Wall Street Journal, as of the last day of
the Fiscal Year for which such payment applies.
- --------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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3.3 Maintenance of Records and Audit Rights.
(a) Licensee will keep accurate books of account and records
covering all transactions relating to or arising out of this Agreement. Licensee
will permit Licensor and its nominees, employees, accountants, agents and
representatives to (i) have reasonable access to and inspect such books and
records during normal business hours upon reasonable notice, and (ii) to conduct
an examination of all such books and records. Licensee will maintain in good
order and condition all such books and records for a period of two (2) years
after the expiration of the term of this Agreement or the earlier termination of
this Agreement, or, in the event of a dispute between the parties hereto, until
such dispute is resolved, whichever date is latest. Receipt or acceptance by
Licensor of any sums paid by Licensee hereunder will not preclude Licensor from
exercising its rights hereunder.
(b) If an inspection or examination referred to in paragraph (a)
above discloses, or Licensor or Licensee otherwise discovers, an underpayment of
an Annual Trademark License Fee, the amount of such underpayment plus interest
thereon from the date of underpayment to and including the date of payment in
full at the Reference Rate in effect on the date payment was due will be paid by
Licensee to Licensor not later than thirty (30) days after determination
thereof. If such underpayment by Licensee is in excess of ten percent (10%) of
the aggregate fee earned during any period under inspection, Licensee will, in
addition to paying Licensor the amount of such underpayment plus interest,
reimburse Licensor for all reasonable costs and expenses of conducting such
inspection or examination.
(c) If an inspection or examination referred to in paragraph (a)
above discloses, or Licensor or Licensee otherwise discovers, an overpayment of
an Annual Trademark License Fee, the amount of such overpayment will be credited
against future payments owed by Licensee, unless the period for which the
overpayment was made is the final period covered by this Agreement, in which
case the amount of the overpayment will be paid by Licensor to Licensee within
thirty (30) days after determination thereof.
4. QUALITY CONTROL.
All Company Programming and other material transmitted by Licensee or
licensed to third parties will comply with the specifications set forth in this
Section 4.
4.1 Program Restrictions. Although the Company Programming will depict
nudity and will allow strong or explicit language, Licensee is prohibited from
transmitting or licensing and covenants that it will not permit the transmission
or licensing of scenes or other material depicting any of the following: (i) the
glorification of violence or gratuitous violence; (ii) rape, non-consensual
intercourse or other non-consensual sexual activity; (iii) bondage, incest,
sadism or masochism, bestiality, extreme sexual explicitness or the graphic
close-up of genitals; or (iv) child pornography, including, without limitation,
instances where an actor is the legal age for consent but is portrayed as under
the legal age for consent. In that regard, no actor will appear nude or engaged
in sexual conduct in any Company Programming who is not at least eighteen
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(18) years of age. Notwithstanding the foregoing, the standards applied by PEGI
from time to time for the "Playboy TV" and "Spice" channels in the United States
will be the controlling standards for the applicable Content Category and any
materials transmitted by PEGI on either the "Playboy TV" or "Spice" channels (or
supplied by PEGI pursuant to the Program Supply Agreement) will be deemed
acceptable for transmission by the Licensee on its "Playboy" or "Spice"
Channels, respectively.
4.2 Advertising and Home Shopping Restrictions. All advertising
transmitted on the Channels and all direct marketing activities conducted on the
Channels will comply with the specifications set forth in this Section 4.2 and
all applicable laws and regulations in the Territory. Licensee will not transmit
advertising or direct marketing programs which advertise or promote any of the
following: (i) firearms (or advertisements from any gun lobby organization) and
other weapons, explosives or fireworks; (ii) massage parlors, telephone sex
lines, real time interactive internet sex services, sex clubs, sexually explicit
audio-visual products (e.g., X-rated or similar "hard core" videos), sex toys,
materials depicting graphic sexual conduct or depicting any matter subject to
the restrictions set forth in Section 4.1 above; (iii) classified advertising,
including, but not limited to, psychics or similar persons or services; (iv)
religious organizations and cults; or (v) magazines featuring nudity which
compete with any edition of the "Playboy" magazine in the Territory (or any
product or service carrying the brand of any such magazine). Further, Licensee
will not advertise or promote the Channels or otherwise use the Trademarks in
any Media in connection with any of the foregoing. Notwithstanding the
foregoing, any advertising or direct marketing programs provided by PEGI under
the Program Supply Agreement or otherwise expressly approved by PEGI will be
deemed acceptable for transmission over a Channel.
4.3 Compliance with Program Supply Agreement. In addition to and not by
way of limitation of Sections 4.1 or 4.2 above, all Company Programming and
other material transmitted by Licensee will comply with the terms and conditions
of the Program Supply Agreement.
4.4 Inspection Rights. Licensee will submit all new advertising and other
uses of the Trademarks (including any Supplemental Program) for Licensor's
approval at least ten (10) days in advance of the proposed use, or, in the case
of advertisements, at least ten (10) days in advance of the media deadline for
submission of the proposed advertisements. If Licensor does not reply to any
such submission within ten (10) days, such submission will be deemed approved.
5. TITLE AND PROTECTION OF THE TRADEMARKS; USE OF THE TRADEMARKS.
5.1 Title. Licensee hereby acknowledges that except for the license
expressly granted in this Agreement, Licensee has not acquired and will not
acquire any rights, title or interest in the Trademarks by reason of this
Agreement and further acknowledges each of the following: the great value of the
goodwill associated with the Trademarks; the worldwide recognition thereof; that
the proprietary rights therein (including, without limitation, all rights that
Licensor may have by virtue of international agreements that protect famous
marks and common law rights) and the goodwill associated therewith, as between
Licensor and Licensee, are solely
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owned by and belong to Licensor; that the Trademarks and other related words,
devices, designs and symbols are inherently distinctive or have secondary
meaning firmly associated in the mind of the general public with Licensor, its
subsidiaries and Affiliates and its or their activities; and that all additional
goodwill associated with the Trademarks created through the use of such
Trademarks by Licensee will inure to the sole benefit of Licensor. Licensee
agrees not to use the Trademarks in any manner which, directly or indirectly,
would dilute, demean, ridicule or otherwise tarnish the image of the Trademarks
or Licensor or any of its Affiliates. During and after the term hereof, Licensee
will not:
(a) attack or question the validity of, or assist any individual or
entity in attacking or questioning, the title or any rights of or claims by any
or all of Licensor, and its Affiliates and their respective licensees and
sub-licensees, in and to the Trademarks or any other trademark, intellectual
property or intangible property of Licensor or its Affiliates;
(b) directly or indirectly seek for itself or assist any third party
to use or acquire any rights, proprietary or otherwise, in any patent,
trademark, copyright or such other intellectual or intangible property
associated or connected with Licensor, its Affiliates, their publications,
published material or activities, without, in each case, the prior express
written consent of Licensor;
(c) in any way seek to avoid Licensee's duties or obligations under
this Agreement because of the assertion or allegation by any individual or
entity that any or all of the Trademarks are invalid or by reason of any contest
concerning the rights of or claimed by Licensor; or
(d) file or prosecute one or more trademark applications in
connection with Licensee's use or intended use of the Trademarks or any mark or
designation of any kind that is confusingly similar to or dilutive of the
Trademarks, unless expressly requested to do so in writing by Licensor.
5.2 Form. Licensee will use the Trademarks in the form stipulated by
Licensor and will include such trademark and copyright notices as Licensor may
request in connection with the protection of Licensor's ownership of the
Trademarks. Licensee will also observe all reasonable directions given by
Licensor as to colors and size of the representations of the Trademarks and
their manner and disposition in connection with the Company Programming.
5.3 Maintenance of Distinctive Quality of Trademarks. The use of the
Trademarks by Licensee will at all times be in keeping with and seek to maintain
their distinctiveness and reputation as determined by Licensor.
5.4 Advertising and Publicity. Licensee will have the right to develop and
distribute in the Territory advertising, publicity and promotional materials
relating to the Channels and the Company Programming as part of the Channels,
including advertising telecasts of the Company Programming or any person
appearing therein (unless Licensor has specifically notified Licensee to the
contrary) and the sub-licensees of the Company Programming as set forth in
Section 2.3 will have the right to develop and distribute advertising, publicity
and promotional materials
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relating to the Company Programming they have sub-licensed; provided, however,
that any such materials (other than material obtained directly from Licensor)
will comply with the following restrictions:
(a) all such materials will comply with the restrictions set forth
in Section 4.2 and be subject to Licensor's approval rights pursuant to Section
4.4;
(b) all such materials will clearly identify the Trademarks with a
legible credit line with the wording "`Playboy' (or the `Rabbit Head Design',
etc.) is the mark of and used with the permission of Playboy Enterprises
International, Inc." or similar words as Licensor may designate from time to
time; and
(c) in no event may any advertising, publicity or promotional
material using the names of Licensor or any of its Affiliates, the name of any
program supplied under the Program License Agreement or the name of any person
appearing in a program licensed under the Program License Agreement be used to
constitute an endorsement or any party, sponsor, product or service.
Other than as expressly set forth in this Agreement, Licensee will make no use
of the Trademarks or any confusingly similar designation without the prior
express written consent of Licensor. Licensee similarly agrees that it will not
authorize or purport to authorize any third party to make any such use and, if
Licensor's consent thereto is obtained in accordance with Section 2.5, it will
expressly provide in any applicable third party agreements that such third
parties will only be entitled to use such names and marks on material supplied
to them by Licensee in accordance with Licensee's rights hereunder.
5.5 Licensee Web Sites. Licensee will have the right to create and
maintain web sites which are designed for the purpose of promoting one or more
of the Channels and that are created and maintained in accordance with the
Operating Agreement (the "Licensee Web Sites"). The materials included on the
Licensee Web Sites will comply with all restrictions set forth in this
Agreement, including but not limited to Section 4.2, 4.4 and 5.3 hereof.
Licensor will own the URL and domain name for each Licensee Web Site.
6. OWNERSHIP OF THE TRADEMARKS.
6.1 Prosecution and Maintenance of Trademarks. Licensor will pay all
renewal fees and take such other actions as are necessary to prosecute the
applications for and maintain the registrations of the Trademarks set forth in
Schedule I throughout the Territory during the term of this Agreement.
6.2 Cooperation of Licensee. Licensee will on request give to Licensor or
its authorized representative any information as to its use of the Trademarks
which Licensor may require and will during the term of this Agreement render any
assistance reasonably required by Licensor in registering and maintaining the
registrations of the Trademarks.
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6.3 Covenant of Licensee. Licensee will not make any representation or do
any act to the effect that it has any right, title or interest in or to the
ownership or use of any of the Trademarks except pursuant to this Agreement.
6.4 Covenant of Licensor. Licensee acknowledges that the Trademarks are
not registered for the Media in each country of the Territory. Schedule II lists
each country in the Territory where Licensor has obtained a trademark
registration or has an application for such registration pending. Licensor will
make all reasonable efforts to obtain trademark registrations in additional
countries in the Territory as reasonably requested by Licensee. To facilitate
the foregoing, Licensee will provide Licensor with written notice indicating the
Trademarks and countries where Licensee wishes Licensor to obtain trademark
registrations, which will be prioritized by Licensee in accordance with the
timing and scope of its anticipated activities in such countries. Licensor makes
no representation or warranty that it can obtain the requested trademark
registrations in any such country.
6.5 Cooperation of Parties to Register Trademarks. Each party will, if
reasonably requested by the other, do all such acts and execute all such
documents as may be necessary to confirm the license granted hereunder in
respect of any of the Trademarks and to record Licensee as a registered user of
the registered Trademarks on the trademarks register throughout the Territory.
Licensee hereby agrees that any such entry with respect to any Channel or other
activity of Licensee on any trademark register may be canceled by Licensor on
termination of this Agreement with respect to such Channel or other activity of
Licensee, for whatever reason, and that it will assist Licensor insofar as may
be necessary to achieve such cancellation including by executing any necessary
documents.
7. INFRINGEMENTS.
7.1 Notice. Each party will as soon as it becomes aware thereof give the
other written notice of (i) any use or proposed use by any other Person of a
trade name, trademark or trade dress or mode of promotion or advertising which
amounts or might amount either to infringement in the Territory of Licensor's
rights in connection with the Trademarks or to passing-off in the Territory, and
(ii) any allegation or claim by any other Person that any of the Trademarks are
invalid within the Territory or that use of any of the Trademarks infringes any
rights of another party or that any of the Trademarks are otherwise attacked or
open to attack within the Territory.
7.2 Control of Proceedings. Licensor will have the sole right to control
and conduct all proceedings relating to any claim or suit arising out of or
relating to any of the matters described in Section 7.1 and to decide what
action (if any) to take in respect thereof. Licensee expressly covenants no
discussions by Licensee whatsoever with any and all claimants and litigants, no
compromise or settlement by Licensee of any claim or suit and no negotiations by
Licensee with respect to any compromise or settlement will be had, made or
entered into without the prior written approval of Licensor.
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7.3 Procedures and Costs. Licensor will bear the cost of all proceedings
pursuant to this Section 7 and will be entitled to retain any damages recovered
pursuant to such proceeding. Licensee will provide any assistance reasonably
requested by Licensor, and Licensee will agree to being joined as a party in any
such proceeding at the request of Licensor. The parties may mutually agree to
jointly conduct and control any such proceeding, in which case the costs and
proceeds thereof will be borne equally by the parties.
8. REPRESENTATIONS AND WARRANTIES
8.1 By Licensor. Licensor represents and warrants that, except as set
forth in the Schedules hereto (i) it is duly authorized to enter into the
transactions contemplated by this Agreement; (ii) this Agreement is a valid and
binding obligation of Licensor, enforceable against it in accordance with its
terms; (iii) the performance of Licensor's obligations hereunder does not
violate any agreement, law, rule or regulation binding on Licensor or Licensor's
charter documents; (iv) it has, and will continue to have, all rights in and to
the Trademarks necessary to fulfill its obligations hereunder; (v) except for
the licenses between Licensor and third parties listed in Schedule III or
ancillary to the licensing of Company Programming (as provided in the Program
Supply Agreement), the use of the Trademarks by Licensee as contemplated herein
will not infringe on the rights of third parties; (vi) the trademark licenses
between Licensor and third parties which Licensor is assigning to Licensee are
valid, enforceable and assignable, the licensees under such licenses have not
pre-paid the license fees, if any, due thereunder (except in accordance with the
terms of such licenses), and, to the best of Licensor's knowledge and belief,
such licensees do not have any claims, offsets or defenses which are adverse to
Licensee's rights hereunder; and (vii) Licensor has disclosed all material
information relating to the rights granted hereunder, and that all such
information is true and correct to the best of Licensor's knowledge and belief.
8.2 By Licensee. Licensee represents and warrants that: (i) it is duly
authorized to enter into the transactions contemplated by this Agreement; (ii)
this Agreement is a valid and binding obligation of Licensee, enforceable
against it in accordance with its terms; (iii) the performance of Licensee's
obligations hereunder does not violate any agreement, law, rule, or regulation
binding on Licensee or Licensee's charter documents; and (iv) it will not use
the Trademarks except as authorized by this Agreement.
9. INDEMNIFICATION.
9.1 By Licensor. Licensor will indemnify and hold harmless Licensee, and
its respective members, managers, directors, officers, shareholders, employees,
agents, representatives and Affiliates (collectively, the "Licensee Indemnified
Parties"), on an After Tax Basis, from and against all claims, losses, damages
(including loss of profits and consequential damages awarded to unrelated third
parties, if any, but excluding loss of profits and consequential damages
otherwise suffered by the Licensee Indemnified Parties), expenses,
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judgements, costs and liabilities (including reasonable attorneys' fees and
costs) (collectively, "Losses") incurred by the Licensee Indemnified Parties
arising from Licensor's breach of any obligation, representation or warranty
contained in this Agreement, including any Losses resulting from any claim of
infringement or misappropriation relating to Licensee's authorized use of the
Trademarks, but excluding any Losses resulting from the use of any Trademark in
a country where Licensor has not obtained a trademark registration relating to
the Media, does not have a pending application for such registration or where a
pending application is not sufficient, under the laws of such country, to permit
the grant of licensed rights hereunder. Notwithstanding the foregoing, any
claims for indemnification that Licensee Indemnified Parties may have pursuant
to this Section 9.1 will exclude claims based on information known by BMI (or
its Affiliates) as of the Funding Date, whether or not such information formed
the basis of issues raised by BMI during Due Diligence (as defined in the
Operating Agreement) and whether or not asserted prior to the Walk Away Notice
(as defined in the Operating Agreement) or thereafter. In the event of a dispute
regarding a claim for indemnification, the Licensee Indemnified Party will have
the burden or proof in establishing the validity and amount of the claims and
Licensor will have the burden or proof in establishing any defense to such
claim, including but not limited to a defense asserted by Licensor that BMI (or
its Affiliates) had knowledge of the requisite facts.
9.2 By Licensee. Licensee will indemnify and hold harmless Licensor and
its directors, officers, shareholders, employees, agents, representatives and
affiliates (collectively, the "Licensor Indemnified Parties"), on an After Tax
Basis, from and against all Losses incurred by the Licensor Indemnified Parties
arising from Licensor's breach of any obligation, representation or warranty
contained in this Agreement, including Losses resulting from any unauthorized
use by Licensee or any of its authorized sub-licensees of the Trademarks.
9.3 Procedure. If a claim by a third party is made against an indemnified
party, the indemnified party will promptly notify the indemnifying party of such
claim. Failure to so notify the indemnifying party will not relieve the
indemnifying party of any liability which the indemnifying party might have,
except to the extent that such failure materially prejudices the indemnifying
party's legal rights. The indemnifying party will have thirty (30) days after
receipt of such notice to undertake, conduct and control through counsel of its
own choosing (subject to the approval of the indemnified party, such approval
not to be unreasonably withheld) and at its expense, the settlement or defense
of such claim, and the indemnified party will cooperate with the indemnifying
party in connection therewith; provided, however, that (i) the indemnifying
party will permit the indemnified party to participate in such settlement or
defense through counsel chosen by the indemnified party, provided that the fees
and expenses of such counsel will be borne by the indemnified party and (ii) the
indemnifying party will reimburse the indemnified party for the full amount of
any Loss resulting from such claim and all related expenses incurred by the
indemnified party within the limits of this Section 9 as such are incurred. If
the indemnifying party does not notify the indemnified party within thirty (30)
days after actual receipt of the indemnified party's notice of a claim of
indemnity hereunder that it elects to undertake the defense thereof (which may
be with a reservation of rights by such indemnifying party) or so notifies the
indemnified party but fails to undertake or maintain such defense promptly and
in good faith so that a default is threatened, the indemnified party will
promptly notify the indemnifying party whether it desires to undertake the
defense of such claim.
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If the indemnifying party does not within ten (10) business days thereafter
elect to undertake the defense thereof or undertake the defense thereof, as
applicable, the indemnified party will have the right to contest, settle or
compromise the claim in the exercise of its reasonable judgment and without
prejudice to the rights of the indemnified party to indemnification hereunder.
Notwithstanding anything contained herein, the indemnified party will not enter
into any settlement or compromise that provides for any remedy other than money
damages without the prior written approval of the indemnifying party, which
approval will not be unreasonably withheld.
9.4 Survival. The provisions of this Section 9 will survive the
termination or expiration of this Agreement.
10. TERMINATION.
10.1 Expiration of Term. The term of this Agreement is fifty (50) years,
commencing on the date of formation of Licensee.
10.2 Early Termination on Breach. A party may without prejudice to its
other remedies terminate this Agreement by notice in writing to the other on or
after the occurrence of any of the following:
(a) the commission of one or more material breaches of this
Agreement by the other party which are not capable of remedy; provided that in
the case of a breach by the Licensee, such breach is not caused by PEGI as a
member or manager of Licensee.
(b) the commission of a material breach of this Agreement by the
other party which is capable of remedy (a "Remediable Breach") which will not
have been remedied within a period of one (1) month after the party in breach
has been given notice in writing specifying that Remediable Breach and requiring
it to be remedied; provided, however, that such one (1) month period will be
extended for such additional period as will be reasonably necessary if that
Remediable Breach is incapable of remedy within that one (1) month period and
during that one (1) month period the party in breach will diligently endeavor to
remedy that Remediable Breach, but only if such extension would not reasonably
be expected to have a material adverse effect on the party giving notice of such
breach, and further provided that any such breach by Licensee is not caused by
PEGI as a member or manager of Licensee.
(c) with respect to Licensor, PEGI has properly terminated the
Program Supply Agreement.
(d) with respect to Licensor, PEGI elects to dissolve Licensee as
the result of VSI (or its Affiliates that are members of Licensee) being in
default of its obligations under the Operating Agreement.
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11. EFFECTS OF TERMINATION.
11.1 Survival of Obligations. The termination of this Agreement for
whatever reason will not affect any provision of this Agreement which is
expressed to survive or operate in the event of its termination and will not
prejudice or affect the rights of either party against the other in respect of
any breach of this Agreement or in respect of any moneys payable by one party to
the other with respect to any period prior to termination.
11.2 Termination of Rights. Upon the expiration or termination of this
Agreement, all rights of Licensee hereunder will immediately terminate and
automatically revert to Licensor and Licensee will cease to make any use of the
Trademarks. Further, Licensee will immediately amend its charter documents so
that its name no longer includes any reference to any trademark of Licensor or
any confusingly similar designation or mark.
11.3 Further Assurances. Upon the expiration or termination of this
Agreement, the parties will promptly perform all other acts which may be
necessary or useful to render effective the termination of Licensee's interests
in the Trademarks and Licensee will execute any assignment, conveyance,
acknowledgment or other document that Licensor may reasonably request
relinquishing such interests and the goodwill associated therewith. Without
limiting the foregoing, Licensee hereby consents to any application which
Licensor may make to limit or terminate Licensee's status as a registered user
and irrevocably agrees not to contest, oppose or dispute such application.
12. EQUITABLE RELIEF.
Each of Licensor and Licensee acknowledges that any material breach of
this Agreement by such party, including, by way of example, Licensee's failure
to cease using the Trademarks upon the expiration or termination of this
Agreement, will result in irreparable harm to the other party for which there is
no adequate remedy at law. Accordingly, in such event, Licensor or Licensee, as
the case may be, will be entitled to preliminary or temporary equitable relief
in any Federal or State Court of competent jurisdiction located in Los Angeles
County, California pending a final determination in accordance with Section 13,
without the necessity of posting bond unless otherwise required by applicable
law by way of any or all of the temporary and permanent injunctions and such
other relief as any court of competent jurisdiction may deem just and proper.
13. DISPUTE RESOLUTION.
13.1 General Agreement Regarding Dispute Resolution. Except as set forth
in Section 12, any dispute arising out of or relating to this Agreement will be
resolved in accordance with the procedures specified in this Section 13, which
will be the sole and exclusive procedures for the resolution of any such
disputes; provided, however, that this Section will not apply to any dispute
concerning the validity, ownership or control of the Trademarks, and instead
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any such dispute will be litigated in a court of law. The Parties intend that
these provisions will be valid, binding, enforceable and irrevocable and will
survive any termination of this Agreement.
13.2 Notification and Negotiation. The parties will promptly notify each
other in writing of any dispute arising out of or relating to this Agreement.
The parties will attempt in good faith to resolve any dispute arising out of or
relating to this Agreement promptly by negotiation between executives who have
authority to settle the controversy. All reasonable requests for information
made by one party to the other will be honored.
13.3 Mediation. If any such dispute remains unresolved within thirty (30)
days of original notice thereof, the parties will endeavor to resolve any
dispute arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedure for Business Disputes. Unless the parties agree otherwise,
the mediator will be selected from the CPR Panel of Neutrals with notification
to CPR.
13.4 Arbitration. Any controversy or claim arising out of or relating to
this Agreement or the breach, termination or validity thereof, which remains
unresolved forty-five (45) days after appointment of a mediator, will be settled
by arbitration by a sole arbitrator in accordance with the CPR Non-Administered
Arbitration Rules; provided, however, that if either party will not participate
in a non-binding procedure described above in Sections 13.2 and 13.3, the other
may initiate binding arbitration before expiration of the above period for
negotiation and mediation. The arbitration will be governed by the United States
Arbitration Act, 9 U.S.C. ? 1-16, and judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereof. The place of
arbitration will be Los Angeles, California.
13.5 Damages. Except as expressly provided below, the arbitrator is not
empowered to award damages in excess of compensatory damages and each party
hereby irrevocably waives any right to recover such damages with respect to any
dispute resolved by arbitration. The arbitrator will have the authority to
include, as an item of damages, the costs of arbitration, including reasonable
legal fees and expenses, incurred by the prevailing party and to apportion such
costs among the parties on a claim by claim basis as such party prevails
thereon. For purposes of the foregoing, the "prevailing party" will mean the
party whose final settlement offer (or other position or monetary claim) prior
to the start of arbitration is closest to the judgement awarded by the
arbitrator, regardless of whether such judgement is entered into in favor of or
against such party.
13.6 Statute of Limitations. The statute of limitations of the State of
California applicable to the commencement of a lawsuit will apply to the
commencement of an arbitration hereunder, except that no defenses will be
available based upon the passage of time during any negotiation or mediation
called for by the preceding paragraphs of this Section 13.
13.7 Confidential Negotiations. All negotiations pursuant to Sections 13.2
and 13.3 are confidential and will be treated as compromise and settlement
negotiations for purposes of applicable rules of evidence.
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14. MISCELLANEOUS.
14.1 Binding Effect; No Assignment. The provisions of this Agreement will
be binding on and inure to the benefit of the successors of each party hereto;
provided, however, that no party may assign, transfer, pledge, hypothecate,
charge or otherwise dispose of or subcontract any of its rights or obligations
hereunder without the prior written consent of the other party. Notwithstanding
the foregoing; (i) either party may assign its rights and obligations hereunder
to an Affiliate of such party, but the original party will remain responsible
and liable for such Affiliate's compliance with all of such original party's
obligations hereunder, and, in the case of an assignment by Licensor, such
Affiliate must be the owner of the Trademarks; and (ii) in the event Lifford (or
an Affiliate of Lifford which is then a member of Licensee) elects to dissolve
Licensee due to a breach by PEGI (or an Affiliate of PEGI which is then a member
of Licensee) of the Operating Agreement, Lifford (or such Affiliate) cause
Licensee's rights hereunder to be assigned to Lifford (or to an Affiliate of
Lifford), provided that Licensee's rights under the Program Supply Agreement are
assigned to the same assignee. Nothing in this Agreement, expressed or implied,
is intended to confer on any person other than the parties hereto or their
respective permitted successors and assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
14.2 Invalidity. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction will, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provisions in any other jurisdictions.
14.3 Waivers, Remedies Cumulative, Amendments.
(a) No failure or delay by any of the parties hereto in exercising
any right, power or privilege under this Agreement will operate as a waiver
thereof nor will any single or partial exercise by any of the parties hereto of
any right, power or privilege preclude any further exercise thereof or the
exercise of any other right, power or privilege.
(b) Except as otherwise provided in this Agreement, the rights and
remedies herein provided are cumulative and not exclusive of any rights and
remedies provided by law.
(c) No provision of this Agreement may be amended, modified, waived,
discharged or terminated, other than by the express written agreement of the
parties hereto nor may any breach of any provision of this Agreement be waived
or discharged except with the express written consent of the party not in
breach.
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14.4 Notices. All notices, requests, demands and other communications
required to be given under this Agreement will be in writing and will
conclusively be deemed to have been duly given (a) when hand delivered, (b) the
next business day if sent by a generally recognized overnight courier service
that provides written acknowledgment by the addressee of receipt, or (c) when
received (with appropriate answer back), if sent by facsimile transmission or
other generally accepted means of electronic transmission addressed as follows:
if to Licensor to:
Playboy Enterprises, Inc.
Attention: General Counsel
680 North Lake Shore Drive
Chicago, IL 60611
United States of America
Fax Number: (312) 266-2042
with a copy to:
Playboy Entertainment Group, Inc.
Attention: President
9242 Beverly Boulevard
Beverly Hills, CA 90210
United States of America
Fax Number: (310) 246-4065
if to Licensee to:
Playboy TV International, LLC
c/o Cisneros Television Group
Attention: Director Legal and Business Affairs
404 Washington Avenue, 8th Floor
Miami Beach, FL 33139
United States of America
Fax Number: (305) 894-3606
with a copy to:
Glenn Dryfoos, Esq.
Greenberg, Glusker, Fields, Claman & Machtinger LLP
1900 Avenue of the Stars
Suite 2200
Los Angeles, CA 90067
United States of America
Fax Number: (310) 553-0687
or to such other address, or facsimile transmission number as the relevant
addressee may hereafter by notice hereunder substitute.
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14.5 Governing Law. ALL QUESTIONS WITH RESPECT TO THIS AGREEMENT AND THE
RIGHTS AND LIABILITIES OF THE PARTIES WILL BE GOVERNED BY THE LAWS OF THE STATE
OF DELAWARE , IRRESPECTIVE OF THE CHOICE OF LAWS PROVISIONS OF DELAWARE OR OF
ANY OTHER JURISDICTION.
14.6 Service of Process; Forum. Each party agrees that service by
registered or certified mail, return receipt requested, delivered to such party
at the address provided in Section 13.5 (Notices) above, will be deemed in every
respect effective service of process upon such person for all purposes of this
Agreement relating to mediation and arbitration. Each party irrevocably submits
to the jurisdiction of the courts of the State of California and to any federal
court located within such state for the purpose of any action or judgement with
respect to this Agreement, regardless of where any alleged breach or other
action, omission, fact or occurrence giving rise thereto occurred. Each party
hereby irrevocably waives any claim that any action or proceeding brought in
California has been brought in any inconvenient forum.
14.7 Additional Provisions to Enforce Awards. The parties will take all
actions necessary for awards and other judgements relating to this Agreement to
be recognized and enforceable in the respective jurisdictions of organization of
Licensee, Licensor and their respective affiliates and, to the extent necessary,
in other jurisdictions in the Territory.
14.8 Entire Agreement. This Agreement, together with its attachments,
constitutes the entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
oral and written, between the parties hereto with respect to the subject matter
hereof, including, but not limited to, any provisions relating to the Trademarks
contained in the Agreement Outline.
14.9 Rules of Construction.
(a) Headings. The section headings in this Agreement are inserted
only as a matter of convenience, and in no way define, limit, or extend or
interpret the scope of this Agreement or of any particular section.
(b) Tense and Case. Throughout this Agreement, as the context may
require, references to any word used in one tense or case will include all other
appropriate tenses or cases.
(c) Agreement Negotiated. The parties hereto are sophisticated and
have been represented by lawyers throughout the negotiation and execution of
this Agreement who have carefully negotiated the provisions hereof. As a
consequence, the parties do not believe the presumption of California Civil Code
Section 1654 and similar laws or rules relating to the interpretation of
contracts against the drafter of any particular clause should be applied in this
case and therefore waive its effects.
14.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
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14.11 Relationship Between the Parties. This Agreement will not be
construed to place the parties in the relationship of partners or joint
venturers.
14.12 Time is of the Essence. Time will be of the essence with respect to
each and every obligation of Licensee and Licensor hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the date first
above written.
LICENSOR:
PLAYBOY ENTERPRISES, INC.
By: /s/ Anthony J. Lynn
-----------------------------------
Name: Anthony J. Lynn
Title: Executive Vice President
LICENSEE:
PLAYBOY TV INTERNATIONAL, LLC
By: /s/ Anthony J. Lynn
-----------------------------------
Name: Anthony J. Lynn
Title: Director
By: /s/ Jay Scharer
-----------------------------------
Name: Jay Scharer
Title: Director
This agreement dated as of July 2, 1999 between Warner Publisher Services, Inc.,
a New York corporation (herein called "Warner") and Playboy Enterprises, Inc., a
Delaware corporation (herein called "Publisher"),
WITNESSETH:
In consideration of the premises and of the mutual covenants and agreements
herein set forth, the parties hereto hereby agree as follows:
1. Definitions
As used in this agreement, the following terms shall have the following
respective meanings:
a. "Publication(s)" shall mean the English language United States
edition of PLAYBOY Magazine, all PLAYBOY denominated magazine
titles, including PLAYBOY Specials, PLAYBOY Presents, PLAYBOY
Lingerie, PLAYBOY Private Collection and one-shots (as that term is
generally understood in the publishing industry) and PLAYMATE wall
and desk calendars.
b. "Territory" shall mean the United States, its territories and
possessions and Canada.
c. "Printer's Completion Notice" shall mean a notice delivered to
Warner and executed by the traffic manger or shipping manager of the
printer of each issue of the Publication(s) specifying the number of
copies of the Publication(s) shipped in accordance with Warner's
instructions.
d. "Net Sales" shall mean [with respect to each issue of the
Publication(s)] the number of copies of the Publication(s) specified
in each Printer's Completion Notice (as the same may be modified or
amended by additional information furnished by the printer or
Publisher) less the number of copies of that issue of the
Publication(s) returned to Warner pursuant to the provisions of
paragraph 8.
e. "Cover Price" shall mean the suggested retail selling price of the
Publication(s) (as specified by Publisher on the
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cover of each copy thereof), as the same may be increased or
decreased by Publisher during the term of this agreement.
f. "Warner's Commission" shall mean a sum equal to a flat rate per net
sale copy multiplied by all Net Sales of the Publications as
follows:
Flat Rate Per Net Sale Copy Warner's Commission
--------------------------- -------------------
PLAYBOY Magazine twelve (12 cents) cents ($0.12 USD)
per copy sold; on sales 15%-19.99%
above 500,000 copies the rate is
thirteen (13 cents) cents ($0.13
USD); on sales 20% and above 500,000
copies, the rate will be fifteen (15
cents) cents ($0.15 USD).
All other PLAYBOY fifteen (15 cents) cents ($0.15 USD)
Publications [these per copy sold; on sales 15%- 19.99%
are inclusive of: above 150,000 copies the rate will
PLAYBOY Specials be eighteen (18 cents) cents ($0.18
(38580) USD); on sales 20% and above 150,000
PLAYBOY Lingerie copies the rate will be twenty (20
(38581) cents) cents ($0.20 USD).
PLAYBOY Presents
(38590)
PLAYBOY Private Collection
(38597)]
Any titles launched during the term of the contract will be reviewed
and sales levels established as mutually agreed.
Such flat rates per copy net sale shall be adjusted annually for an
amount equal to the increase in the Consumer Price Index for Urban
New York plus two percent (2%) of the flat rate per net copy sold.
Such adjustments will be effective with the August 2000, August
2001, August 2002 and August 2003 issues. The compounding of such
annual adjustments shall not exceed eighteen percent (18%) over the
duration of the contract period (eighteen
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percent (18%) cap for adjustments to flat rates per copy sold).
A minimum commission of forty-six thousand two hundred dollars
($46,200 USD) per issue will apply for PLAYBOY Magazine.
g. "Wholesaler Discount" shall mean the discount off the cover price at
which Warner bills wholesalers for copies of the Publication(s).
h. "Gross Billings" shall mean the cover price, less the Wholesaler
Discount, multiplied by the number of copies of the Publication(s)
specified on a Printer's Completion Notice and less Warner's
Commission with respect to such number of copies.
i. "Final Billings" shall mean the cover price, less the Wholesaler
Discount, multiplied by the Net Sales and less Warner's Commission.
j. "On-Sale Date" shall mean the date (designated by Publisher) on
which each issue of the Publication(s) is to be placed for initial
sale at retail outlets.
k. "Off-Sale Date" shall mean the date (designated by Publisher) for
recall of issues of the Publication(s) from sale at retail outlets,
provided, however, that the Off-Sale Date shall not be later than
one (1) day prior to the On-Sale Date of the next succeeding issue
of the Publication(s).
l. (i) "Term" shall mean the period commencing with the On-Sale Date
of the August, 1999 issue of PLAYBOY Magazine and shall
continue thereafter for a period of four and one-half (4-1/2)
years, terminating on the Off-Sale Date of the January, 2004
issue of PLAYBOY Magazine, unless earlier terminated as
hereinafter provided.
(ii) Notwithstanding any termination of the Term, this agreement
shall continue in full force and effect after the termination
date for the purposes, and only for the purposes, of
distributing the last issue of the Publication(s) and of
handling and crediting returns of unsold copies and making
payments, adjustments and credits, with respect to such
termination date, until the same are completed, made and
settled.
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(iii) Publisher shall send Warner written notice of termination at
least ninety (90) days prior to the end of the Term (the
"Notice Date"). Warner shall have the right, upon the Notice
Date, to suspend any further payments to Publisher relating to
the Publication(s) in an amount not to exceed the total of (A)
the "Overdraft" (as hereinafter defined) as reported on the
last payment statement issued to Publisher pursuant to
subparagraph 7.h. prior to the Notice Date and (B) the
Overdraft as calculated by Warner based upon the sales
performance statement last issued to Publisher pursuant to
subparagraph 7.g. prior to the Notice Date. The total amount
of the Overdrafts as calculated in accordance with (A) and (B)
above, shall be recalculated for each payment and sales
performance statement thereafter issued to Publisher until the
parties are able to effect a final settlement hereunder,
provided, however, the parties shall, in the event of such
termination, effect final settlement hereunder not later than
one hundred fifty (150) days after the Off-Sale Date of the
last issue of PLAYBOY Magazine, flat or special, and not later
than one hundred eighty (180) days after the Off-Sale Date of
the last calendar distributed by Warner hereunder.
(iv) The termination provisions set forth in this subparagraph
1.l., including the settling of accounts and suspension of
payments, shall be applicable to any termination of this
agreement, including any termination pursuant to subparagraphs
14.b., 14.c. and 24. hereof.
2. Rights Granted
a. Publisher hereby agrees to grant, and does hereby grant, to Warner
for the Term of this agreement and throughout the Territory, the
exclusive right to sell and distribute the Publication(s).
b. The provisions of subparagraph 2.a. shall not apply to:
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<PAGE>
(i) copies of the Publication(s) furnished by Publisher to
subscribers or to Publisher's entertainment operations and
(ii) Publications, whether in magazine or pamphlet form, prepared
by Publisher for third parties and not distributed in the
normal channels of the magazine distribution industry.
c. Anything in this agreement to the contrary notwithstanding,
Publisher shall have the right to service retailers with
Publication(s), either directly or through national jobbers,
wholesalers and jobbers, should Warner refuse to do so, subject to
the following conditions:
(i) For any new retailer account (retail stores not serviced by
Warner's wholesale distributors), Publisher, to the extent it
is not prohibited from doing so, shall supply Warner with a
list of such accounts and shall allow Warner to submit a
proposal to compete for such business on a competitive service
and cost basis.
(ii) If Publisher shall be unable to reach an agreement with Warner
with respect to the servicing of any such new retailer
accounts, Publisher shall not grant the right to service any
such accounts to any third party on terms equal to or less
favorable than those offered by Warner, and shall give Warner
the opportunity to acquire said rights on the best terms
offered to Publisher by any third party [such matching right
to apply whether or not Warner submits a proposal as set forth
in paragraph 2.c.(i) above]. Warner shall have two (2)
business days after notice from Publisher to make a proposal
which meets or exceeds such third party terms. If Warner and
Publisher agree that Warner shall acquire said rights, then
any such account shall be serviced by Warner pursuant to the
terms hereof, except as such terms may be expressly modified
or replaced in a fully executed written amendment hereto. In
the event that Warner cannot, does not or will not meet such
third party terms, Publisher may grant such rights to the
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<PAGE>
third party, but in no event may Publisher grant such rights
to Curtis Circulation Co., Eastern News Distributors, Inc.,
ICD/Hearst Corporation, Kable News Co., Inc., Murdoch
Magazines Distribution Division, or a current subsidiary or
current affiliate of any such companies, unless no other means
of distribution are available.
(iii) For retail accounts that wholesaler(s) refuse to serve, or
retail accounts that refuse service from wholesaler(s),
Publisher, if it chooses to award the service of such
business, shall award such service on the same basis as set
forth in subparagraphs 2.c.(i) and 2.c.(ii) above, except as
provided otherwise in paragraph 23.
d. Publisher shall not be obligated to maintain the publication of any
of the Publication(s). Publisher shall have the sole discretion to
determine the frequency of any of the Publication(s).
e. In the event Publisher decides to distribute PLAYBOY denominated
non-magazine products through I.D. wholesalers, it will first
negotiate with Warner for such rights. If within thirty (30) days
after notice from Publisher that Publisher desires such
distribution, Publisher and Warner have not concluded an agreement,
it will be conclusively presumed that the parties cannot reach an
agreement and Publisher will be free to pursue such distribution
free from obligation or liability to Warner on the condition that if
Publisher grants such distribution rights it will be on terms more
favorable to Publisher than the terms offered by Warner.
3. The Publisher Agrees
a. That upon receipt from Warner of the lists of wholesale distributors
to whom copies of the Publication(s) are to be shipped and the
number of copies, Publisher shall cause to be shipped such
designated number of copies in accordance with said lists and shall
cause to be shipped as far enough in advance of the On-Sale Date of
the respective issues of the Publication(s) as will enable
distri-
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<PAGE>
bution to and by wholesale distributors by the On-Sale Dates.
Publisher shall pay all transportation charges relating to the
shipment of the Publication(s) to wholesale distributors as
aforesaid, provided that if Publisher shall so request, Warner shall
advance such transportation charges, which transportation charges
shall be recovered by Warner as provided in subparagraph 9.b.(iv)
hereof.
b. That Warner may deduct from the payments due Publisher, as provided
in subparagraph 9.b.(ii) hereof, amounts attributable to any and all
copies of the Publication(s) lost or damaged in shipment to
wholesale distributors. Subject to the provisions of paragraph 16.
hereof, all such loss or damage adjustments made by Warner for the
benefit of said wholesale distributors shall be conclusive on the
question of loss and/or damage and binding upon Publisher.
c. That Warner shall allow wholesale distributors the privilege of
returning all unsold copies of the Publication(s) and receiving
credit at the rate charged therefor, in accordance with the terms,
conditions and limitations of paragraph 8. hereof.
4. Billings and Collections
Publisher hereby grants and assigns to Warner a continuing security
interest in and to all sums which may be paid or are payable to Warner by
wholesalers or other parties as Gross Billings, Final Billings or
otherwise in connection with the exercise by Warner of its rights pursuant
to this agreement. Although Warner shall not be obligated to segregate any
of the aforesaid sums from any of its other funds, or to pay any interest
thereon to Publisher (other than as may be awarded to Publisher in the
event of non-payment or late payment of such amounts by Warner), Warner
shall be considered a trustee, pledgeholder or fiduciary of Publisher as
to such collected funds.
5. Retail Display Allowance
a. Warner shall perform the work of receiving and collating information
from retail magazine dealers and issuing payments on behalf of
Publisher to them for amounts due
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<PAGE>
to them under retail or checkout display allowance ("RDA") programs
conducted by the Publisher in reference to the Publication(s) as
previously authorized by Publisher in writing for each retail
outlet. Such payment to such dealers for retail or checkout display
allowances shall be charged to the Publisher's account and recovered
and received by Warner as provided in subparagraph 9.b.(iii) hereof.
Warner will perform such services pursuant to the terms and
conditions of the Publisher's RDA contracts on a timely basis and
will make such payments to such dealers on not less than a calendar
quarterly basis.
b. (i) For the services to be performed under subparagraph 5.b. and
Exhibit A attached hereto and made a part hereof, Publisher
agrees to pay Warner an annual fee of twenty-two thousand two
hundred dollars ($22,200 USD) for up to thirty-four (34)
issues with an average retailer base of four thousand (4,000)
retailers per issue. In addition, Warner is entitled to
receive a pro rata portion of the annual fee amount for any
issue and/or retailer in excess of the thirty-four (34) issues
and the retailer base of four thousand (4,000) retailers
average per issue. Such annual fee shall be adjusted annually
for an amount equal to fifty percent (50%) of the increase in
the Consumer Price Index for Urban New York and shall be paid
to Warner in twelve (12) equal monthly payments.
(ii) As a result of Warner's performing auditing services of RDA
claims, Warner is entitled to receive one-third (l/3) of the
total savings recovered by Warner on behalf of the Publisher
from such audits.
c. Publisher, on not less than four (4) months prior written notice to
Warner to the claim form mail date for the final RDA quarter to be
administered by Warner, shall have the right to perform the work
related to and to administer its RDA program or use the services of
a third party to perform such work. In which case the payments to be
made under subparagraph 5.b.(i) will continue for four (4) months
after mailing of the claim forms for the final War-
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<PAGE>
ner administered RDA quarter, but will in no event exceed eight (8)
monthly payments after such notice.
6. Credit to Wholesale Distributors
a. Warner may extend such credit to wholesale distributors as it may
determine, and in connection therewith may take such collection
measures, including, among other things, stopping or holding up
shipment as it may deem advisable with respect to delinquent
accounts. Warner shall bear all losses from uncollectable accounts
and any and all legal fees or other costs or expenses of whatever
nature whatsoever incurred in respect of the Publication(s) for
collection or attempted collection, provided that in the event
Warner gives reasonable notice to Publisher in writing prior to
shipment to stop or hold up shipments to any wholesale distributor
and Publisher nevertheless directs such shipments, Publisher shall
bear the resulting losses of the uncollectable amount only and such
amounts shall be charged to Publisher's account and recovered by
Warner as provided in subparagraph 9.b.(v) hereof.
b. In the event Publisher shall direct shipment of the Publication(s)
as aforesaid, Publisher shall have the right, in its own name and at
its own expense, to institute collection proceedings for such sums
against any such wholesale distributor and to retain any sums so
collected. Nothing herein contained, however, shall require Warner
to institute any such legal action.
7. Warner Agrees
a. To furnish shipping instructions and addressed labels to Publisher a
reasonable time prior to the shipping date for distribution of the
Publication(s).
b. To bill and collect from wholesale distributors for Warner's own
account and to designate wholesale distributors and other customers.
c. To pay to Publisher the sums specified in paragraph 9.
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d. To in good faith consult fully with Publisher's designated
representative(s) with respect to the following, it being
understood, however, that Publisher shall have the final decision
with respect to such matters:
(i) the number of copies of each issue of the Publication(s) to be
printed;
(ii) the number of copies of each issue of the Publication(s) to be
allotted to each wholesale distributor;
(iii) the advertising and promotion campaign for the Publication(s).
e. To designate an employee as the "limited" exclusive Marketing
Director or Marketing Manager for Publisher's Publication(s) and to
designate such employee of Warner to work primarily on coordinating
all distribution relating to Publisher's Publication(s); it being
understood that such designated employee shall perform such services
under Warner's direction and control, that the designation of such
employee shall be in Warner's sole and absolute discretion, that
Warner shall have the sole right to change the employee so
designated and that such employee shall be subject to Publisher's
reasonable right of approval.
Additional activities for other Publishers or other projects shall
be assigned under Warner's direction, control and discretion, but
not to exceed more than twenty percent (20%) of such employee's
total activities.
f. To have Warner's field personnel monitor the sales performance of
the Publication(s) by wholesale distributors.
g. To render to Publisher a sales performance statement for each issue
of the Publication(s) setting forth, in summary form, the issue
date, On-Sale Date and Off-Sale Date, number of copies distributed,
returns received, Net Sales (in both numerical and percentage terms)
and the sales trend of the Publication(s) by comparing, in numerical
form, the Net Sales of the issue of the Publication(s) for which
such statement is being rendered versus that of the one prior issue
and the issue of one year previous.
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h. To render to Publisher a payment statement for each issue of the
Publication(s) setting forth, in summary form, the appropriate
calculations pursuant to this agreement.
i. Unless modified by Warner's marketing plan as agreed to by
Publisher, to make annual marketing calls on not less than two
hundred (200) retailer chains. Results of these marketing calls will
be reported to Publisher within seven (7) days of the time the calls
are made.
j. That neither Warner nor any person, firm or corporation controlling,
controlled by or under common control with Warner, shall, during the
Term hereof, distribute the publication entitled Hustler or
Penthouse and/or any Hustler or Penthouse denominated products. For
purposes of this paragraph 7.j., any publication published by the
publisher of Penthouse or Hustler magazine which bears the name
"Penthouse" or "Hustler," as applicable, on its cover, shall be
deemed to be a Penthouse or Hustler denominated publication.
k. That Warner shall endeavor to require its wholesalers to promptly
notify Warner of any censorship claims regarding the Publication(s)
and Warner agrees to promptly so notify Publisher of such censorship
claims.
l. To use all reasonable efforts to perform the specific distribution
services set forth in subparagraphs 7.i. and 7.k. above and the
Circulation Commitments attached as Exhibit A hereto and made a part
hereof, some of which services have already been implemented. Upon
Warner's receipt of a written notice by Publisher of Warner's
failure to adhere to a particular obligation set forth in
subparagraphs 7.i. and 7.k. above or Exhibit A hereto, Warner shall
immediately commence the cure of any such failure and shall complete
such cure in accordance with a mutually agreed upon timetable.
Neither any failure by Warner that is cured in accordance with the
preceding sentence, nor any such failure by Warner with respect to
which Publisher does not send Warner a written notice, shall be
considered a material breach of this agreement.
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8. Returns
a. In determining the sums payable to Publisher, Warner shall be
entitled to deduct returns of each issue of the Publication(s)
shipped to Warner from wholesalers located in the United States of
America and the Dominion of Canada at any time within one hundred
twenty (120) days of the Off-Sale Date of each Publication(s), but
as to the last issue of the Publication(s) distributed pursuant to
this agreement, or any one-shots or special issues which may
hereafter be published by Publisher and distributed by Warner,
Warner may accept returns shipped at any time within one hundred
fifty (150) days of the Off-Sale Date of such issues of the
Publication(s). The aforesaid one hundred twenty (120) and one
hundred fifty (150) day periods shall be subject to extension, if
agreed to by Publisher in advance, by reason of delay or delays in
mail delivery, "acts of God" or any other cause beyond the
reasonable control of Warner and shall also be subject to extension
if Publisher shall consent in writing to such extension.
b. Accordingly, in the event Warner shall receive returns of any issue
of the Publication(s) after final payment of such issue has been
determined and paid pursuant to subparagraph 9.b. hereof, Warner
shall be entitled to deduct such return at the rate charged therefor
from any remittance due Publisher for any later issues (if any) of
the Publication(s) or, if after termination of this agreement, the
Publisher shall make prompt payment to Warner upon receipt of
Warner's statement regarding such returns. It is the intent and
agreement of the parties that returns of a prior issue can be
deducted from payments made by Warner to Publisher, but only if such
returns are received by Warner within one hundred fifty (150) days
of the Off-Sale Dates of the Publication(s) for which such
deductions are made.
c. Warner may accept returns of unsold copies of the Publication(s) by
means of front covers, headings, affidavits or electronic
notification in form satisfactory to Warner. If Publisher shall
request, in writing, full copy returns, Warner shall use its
reasonable efforts to obtain same and, in such case, Publisher
agrees to pay for return transporta-
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tion and such handling charges as are required, provided that if
Warner shall be unable to obtain such full copy returns from any
wholesaler or other customer, Publisher shall have the right to
require Warner to stop or hold up shipments of the Publication(s)
and subject to paragraph 16. hereof, same shall be accepted by
Publisher as conclusive evidence thereof and Warner is hereby
authorized at its sole cost and expense to destroy any and all front
covers or headings representing such returns.
9. Payment to Publisher
In consideration of the rights granted to Warner by Publisher hereunder
and in consideration of Publisher's warranties and representations, Warner
shall make payment to Publisher of the following:
a. (i) As an advance against any and all sums which may become
payable to Publisher pursuant to subparagraph 9.b. with
respect to each issue of each Publication, except, as set
forth in subparagraph 9.a.(ii) below, an amount equal to sixty
percent (60%) of the estimated Net Sales of the average of the
last three (3) issues of such Publication for which Final
Billings have been determined, payable not later than fourteen
(14) days after the On-Sale Date of the issue and upon receipt
by Warner of the Printer's Completion Notice. Warner may also
withhold an amount equal to the actual charges of the last
three (3) net issues for which Final Billings have been
determined, for the items in subsections 9.b.(ii) through
9.b.(vi) below.
(ii) As an advance against any and all sums which may become
payable to Publisher pursuant to subparagraph 9.b. with
respect to any particular issue of the Publication(s) for
which there is a substantial increase in both the print run
and the projected Net Sales, an amount to be mutually agreed
upon by Warner and Publisher, payable at a mutually agreed
upon time.
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b. An amount equal to one hundred percent (100%) of Warner's estimate
of Final Billings [which estimate of Final Billings shall not
project estimated returns or other charges for the period sixty (60)
to one hundred twenty (120) days after the Off-Sale Date of the
Publication(s)] not later than sixty (60) days from and after the
Off-Sale Date of that issue of the Publication(s) after Warner shall
have deducted and retained from such Final Billings (to the extent
that such amounts have not previously been deducted and retained by
Warner) an amount equal to:
(i) All sums advanced to Publisher pursuant to subparagraph 9.a.
above;
(ii) All loss and damage adjustments made by Warner pursuant to
subparagraph 3.c. above;
(iii) All amounts allowed as retail display allowances and related
administrative fees pursuant to paragraph 5.b. above, if
applicable;
(iv) All transportation charges advanced by Warner pursuant to
subparagraph 3.a. above;
(v) All uncollectable amounts and other items properly chargeable
to Publisher referred to in paragraph 6. above;
(vi) The following special allowances which may be granted by
Warner:
I. With respect to Reshipping Wholesaler Agencies [defined
as those wholesalers who deliver Publisher's
Publication(s) to retailers via mail or common carrier]:
1) there will be a charge of $14.25 USD per cwt. on
all second class and non-second class entry
magazines delivered via common carrier to
retailers for US and Canada Reshipping Wholesaler
Agencies;
14
<PAGE>
2) there will be a charge of $6.40 USD per cwt. on
all second class entry magazines delivered by mail
for U.S. and Canada Reshipping Wholesaler
Agencies.
The charges referred to in subdivision 1) and 2) above
are subject to change only with Publisher's prior
written approval.
Publisher shall have the right to approve any Wholesaler
Agency defined as a Reshipping Wholesaler Agency for
Publisher's Publication(s) prior to any charges being
incurred by Publisher. Warner will document all
reshipping charges by publication issue and Reshipping
Wholesaler Agency. Warner agrees to monitor the accuracy
of Reshipping Wholesaler Agency claims by auditing each
claiming Reshipping Wholesaler Agency's records not less
than every six (6) months. All reshipping charges
determined by such audit to be inaccurate will be
adjusted within thirty (30) days of the audit. Such
adjustments may be waived only with Publisher's prior
written approval.
II. A charge of $2,000 USD will be made if any analysis of
circulation by population for the Publication(s) is
requested and required for the Audit Bureau of
Circulation report. No charge will be made for the State
Circulation analyses which are customarily made twice a
year for the Publication(s).
(vii) All other proper charges, payments or other reimbursements due
Warner pursuant to the terms of this agreement, including all
returns and other charges of the Publication(s) not charged to
Publisher's account at the time of the payment specified in
this paragraph 9.b. is made, shall be charged against any
subsequent payment pursuant to this paragraph 9.b.; provided,
however, that without Publisher's prior approval no such
charges may be deducted from any payment made more than one
15
<PAGE>
hundred twenty (120) days after the Off-Sale Date of the issue
to which the charges relate.
10. New Titles
In the event that during the Term hereof Publisher enters into any third
party agreements for non-PLAYBOY denominated English language
publications, or Publisher itself publishes such a publication, then such
publication(s) shall be included under the terms and conditions of this
agreement, provided that Publisher has the right to so include the
publication(s) in question. Warner's Commission on such publications will
be a sum equal to 2.4% of the U.S. cover price of all Net Sales.
11. Cross-Collateralization/Overdrafts
The estimated Final Billings of each issue of all Publication(s)
distributed by Warner pursuant to this agreement shall be treated as a
unit, it being the intention hereof that if the total of the advance
payments made by Warner pursuant to subparagraph 9.a. with respect to any
Publication(s) and the deductible distribution expenses incurred by Warner
pursuant to subdivisions (ii) through (vii) of subparagraph 9.b. with
respect to any issue of such Publication(s) shall exceed the Estimated
Final Billings for the same issue of that Publication(s) (the
"Overdraft"), the Overdraft may be deducted by Warner from any advance
and/or payment of Final Billings which Warner may be required to make on
any succeeding issue or issues of the same Publication(s), or any other
Publication(s), the distribution rights to which have been granted to
Warner by Publisher under this agreement between Warner and Publisher, or
shall be refunded or paid by Publisher immediately upon demand.
12. Publisher's Warranties; Indemnity
a. Publisher represents and warrants that the rights herein granted to
Warner have not been granted to any other person, firm or
corporation; that it has the right and authority to enter into this
agreement and to perform the obligations hereunder to be performed
by Publisher; and that to the best of Publisher's knowledge, there
are no suits or proceedings pending or threatened against or
af-
16
<PAGE>
fecting Publisher which, if adversely determined, would impair the
rights granted to Warner.
b. Publisher undertakes to indemnify and hold harmless Warner and its
officers, agents or representatives and its wholesalers and
retailers from and against any damages, costs, expenses, judgments,
settlements, penalties, liabilities or losses of any kind or nature
(excluding consequential damages, but including reasonable
attorneys' fees) resulting from any claim, cause of action, suit or
other proceedings, arising out of claims of copyright or trademark
infringement, libel, violations of rights of privacy, publicity or
other proprietary rights in the title, contents or any printed
matter of the Publication(s), including, but not limited to,
advertisements, pictures, photographs, cartoons, caricatures, either
on the cover or in the text thereof or arising out of the breach or
alleged breach of any of the foregoing representations or
warranties. If any such suit, proceeding, claim or demand is brought
or made against Warner, Publisher shall undertake the defense
thereof at its expense, provided that if Publisher shall fail so to
do, Warner shall undertake the defense thereof at Publisher's
expense.
c. Warner represents and warrants that it has the right and authority
to enter into this agreement and to perform the obligations
hereunder to be performed by Warner; and that to the best of
Warner's knowledge, there are no suits or proceedings pending or
threatened against or affecting Warner which, if adversely
determined, would impair the services herein to be provided to
Publisher.
d. Warner agrees to indemnify, defend and save Publisher harmless of
and from any and all loss, claims, damages, excluding consequential
damages, but including reasonable attorneys' fees, which Publisher
may suffer or incur based on a claim, charge or suit instituted
against Publisher as a result of any act or omission or commission
of Warner in performing its services hereunder, other than acts,
omissions or commissions of Warner undertaken in accordance with
Publisher's instructions.
17
<PAGE>
e. Anything in this paragraph 12. to the contrary notwithstanding,
neither party shall be liable to the other party for any such
indemnification unless the party seeking indemnification has
notified the other party of said claim, action, proceeding or demand
as soon as practicable upon receipt of knowledge of same and
afforded the other party the opportunity to defend or participate in
the defense of said claim, action, proceeding or demand, and
further, that no settlement or payment of any claim, action,
proceeding or demand shall be binding on the indemnifying party
unless prior approval and consent is obtained from the indemnifying
party, which said consent will not be unreasonably withheld. Each of
the parties agrees to cooperate with the other in the defense of any
said claim, action, proceeding or demand.
13. Wholesaler/Customer Bankruptcy -- Computation of Net Sales
In the event that a designated wholesale distributor or other
customer to which Warner distributes the Publication(s) on
Publisher's behalf shall take advantage of any federal or state
insolvency laws for relief of debtors, including reorganization, or
shall cease its business operation with the effect that such
wholesale distributor or other customer shall not return its unsold
copies of the Publication(s), Warner shall use the average percent
of Net Sales of the Publication(s) as reported by such wholesale
distributor or customer for the twelve (12) months (or such lesser
period if applicable) prior to those months for which such wholesale
distributor or customer shall not return unsold copies of the
Publication(s) shipped to such wholesale distributor or customer for
said months.
14. Assignment
a. This agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, provided that no
assignment of this agreement, voluntary or by operation of law,
shall be binding upon either of the parties hereto without the prior
written consent of the other, which consent shall not be
unreasonably withheld.
18
<PAGE>
b. Notwithstanding the above, Publisher shall have the right, upon one
hundred twenty (120) days' written notice to Warner, to terminate
this agreement subject to the provisions of subparagraph 1.l. above,
in the event of a sale or transfer (by merger or otherwise) of:
(i) any portion of the stock of Warner to the business entity that
publishes or distributes Penthouse or Hustler magazines or
anyone holding a direct or indirect equity interest in such
business entity; or
(ii) all or substantially all of the assets of Warner or more than
fifty percent (50%) of the stock of Warner to a third party
whose relationship to Warner immediately prior to such sale or
transfer is other than that of a parent, subsidiary,
affiliated or related company. If Publisher does not elect to
terminate this agreement, the new owners of Warner shall
assume this agreement and carry out all of its terms and
provisions.
c. Notwithstanding subparagraphs 14.a. and b. above, Publisher shall
have the right to terminate this agreement if:
(i) Warner's business operations and organization is acquired,
merged or otherwise combined with another national
distributor; or
(ii) Warner combines its "back room" functions (e.g., billing,
collections, RDA processing, data processing) with another
national distributor other than Time Distribution Services.
Warner shall notify Publisher not less than thirty (30) days prior
to the effective date of (i) or (ii) above. Publisher may terminate
this agreement at any time within the six (6) month period after the
ninety (90) days immediately following the effective date of (i) or
(ii) above. The effective date of such termination will be the
Off-Sale Date of that issue of PLAYBOY Magazine closest to ninety
(90) days following the date of such notification by Publisher.
19
<PAGE>
15. Notices
All notices which either party hereto is required or may desire to give to
the other shall be in writing and sent to the address hereinafter in this
paragraph set forth, or at such other address as may be designated in
writing by any such party in a notice to the other given in the manner
prescribed in this paragraph.
Any notice sent by facsimile shall be deemed received on the date that is
set forth on the confirmation of receipt obtained by the sender, unless
within two (2) business days thereafter the recipient shall have sent to
the sender notice that the facsimile was illegible, in which event the
facsimile shall not be deemed received until the facsimile has been resent
and a new confirmation of receipt has been received by the sender. Any
notice sent by registered mail, return receipt requested, DHL, or other
similar express mail courier, shall be deemed conclusively to have been
given when actually received or refused or upon notification of
non-deliverability by the postal authorities, as the case may be.
To Warner: To Publisher:
Warner Publisher Services, Inc. Playboy Enterprises, Inc.
Attention: President Attention: Publisher
1271 Avenue of the Americas 730 Fifth Avenue
New York, NY 10020 New York, NY 10019
With a copy to: With a copy to:
Warner Publisher Services, Inc. Playboy Enterprises, Inc.
Attention: Vice President and Attention: General Counsel
General Counsel 680 North Lake Shore Drive
1271 Avenue of the Americas Chicago, IL 60611
New York, NY 10020
16. Audit Rights
Publisher may, at its own expense, audit the books and records of Warner
relative to the distribution of the Publication(s) pursuant to this
agreement at the place where Warner maintains such books and records in
order to verify statements rendered to Publisher hereunder. Any such audit
shall be conducted by a reputable public accountant or Publisher's
accountant during reasonable business hours in such manner as not to
interfere
20
<PAGE>
with Warner's normal business activities. As true copy of all reports made
by Publisher's accountant shall be delivered to Warner at the same time as
such respective reports are delivered to Publisher by said accountant. In
no event shall audits be made hereunder more frequently than twice
annually.
17. Integration; Waiver; Modification
This agreement, including Exhibit A, sets forth the full understanding of
the parties and supersedes all earlier understandings and agreements with
respect to the subject matter hereof. No waiver, modification or
cancellation of any term or condition of this agreement shall be effective
unless executed in writing by the party charged therewith. No written
waiver shall excuse the performance of any act other than those
specifically referred to therein.
18. No Partnership, Etc.
This agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between Warner and Publisher.
Neither party shall have any right to obligate or bind the other party in
any manner whatsoever, and nothing herein contained shall give, or is
intended to give, any rights of any kind to any third persons.
19. Force Majeure
Neither party shall be liable to the other for the failure to fulfill
their obligations hereunder due to reasons beyond their control,
including, by way of example, governmental restrictions, strikes, war,
invasions, civil riot, breakdown of market distribution facilities or
shortages of labor or material. If any such force majeure event shall
prohibit either party from publishing or distributing (as the case may be)
six (6) consecutive issues of the Publication(s), either party shall have
the right to terminate this agreement upon ten (10) business days' written
notice, which notice shall be in accordance with paragraph 15.
21
<PAGE>
20. Headings
The headings in this agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
21. Governing Law
This agreement shall be interpreted and construed in accordance with the
laws of the State of New York applicable to agreements entered into and
entirely performed therein.
22. Arbitration
Any controversy or claim arising out of or relating to this agreement, or
any breach of it, shall be settled by arbitration to be held in New York,
New York in accordance with the Rules of the American Arbitration
Association, and judgment upon the award rendered by the Arbitrators shall
be entered in any court having jurisdiction.
23. Wholesaler Relationships
a. If Warner decides to change a wholesaler with which it currently has
a distribution relationship and at least ten percent (10%) of the
retail stores that sell the Publication(s) in the effected area (the
"Effected Stores") refuse to be serviced by the new wholesaler and
such refusal continues for longer than sixty (60) days following the
change in wholesaler, then within ten (10) days following the end of
such sixty (60) day period Warner shall submit to Publisher a
proposal to compete for the business of the Effected Stores on a
competitive service and cost basis.
b. If Publisher shall be unable to reach an agreement with Warner with
respect to the servicing of the Effected Stores, then Publisher
shall not grant the right to service the Effected Stores to any
third party on terms equal to or less favorable than those offered
by Warner, and shall give Warner the opportunity to acquire said
rights on the best terms offered to Publisher by any third party
(such matching right to apply whether or not Warner submits a
proposal as set forth in paragraph 23.a. above). If War-
22
<PAGE>
ner and Publisher agree that Warner shall acquire said rights, then
the Effected Stores shall be serviced by Warner pursuant to the
terms hereof, except as such terms may be appropriately modified or
replaced in a fully executed written amendment hereto. In no event
may Publisher grant such rights to Curtis Circulation Co., Eastern
News Distributors, Inc., ICD/Hearst Corporation, Kable News Co.,
Inc., Murdoch Magazines Distribution Division or to a current
subsidiary or current affiliate of any of such companies.
24. Defaults and Right to Cure
If either party shall violate any of its obligations or warranties under
the terms of this agreement, the other party shall have the right and
option, but not the duty, to terminate this agreement upon not less than
ninety (90) days' prior written notice; but no neglect or failure to serve
such notice shall be deemed to be a waiver of any breach of any covenant
or stipulation under this agreement. Such termination of this agreement
shall become effective unless the violation complained of shall be
completely remedied to the satisfaction of such other party within such
ninety (90) day period. If the violation complained of shall be of a kind
that a remedy or cure cannot effectively restore the prior circumstances,
then this agreement, at the option of such other party, shall terminate
forthwith upon service of such notice without any period of grace as
aforesaid. The termination of this agreement shall be without prejudice to
any rights that such other party may otherwise have against the defaulting
party under this agreement or under law.
25. Bankruptcy
If either party shall be adjudicated a bankrupt, shall make any assignment
for the benefit of creditors, shall institute proceedings for voluntary
bankruptcy, shall apply for or consent to the appointment of a receiver,
or if an order shall be entered approving a petition seeking its
reorganization or appointing a receiver of it or its property, then upon
the happening of any one or more of such events, the other party to this
agreement shall have the right to terminate this agreement by giving
written notice of its intention to do so. Any termination of this
agreement pursuant to this paragraph 25. shall not release ei-
23
<PAGE>
ther party from any obligation hereunder due and owing to the other party
up to the date of such termination.
26. Confidentiality
a. Publisher and Warner agree to treat this agreement as proprietary
information and each agrees not to reveal any of the terms hereof to
any third party, for any purpose, without the prior written approval
of the other party, except that each party may disclose this
agreement to outside accountants performing auditing services for
such party or except to the extent required by law. Publisher and
Warner each agree that, after the date hereof, they will take
whatever steps they deem necessary to carry out the intent of this
paragraph.
b. Any confidential or proprietary information obtained by either party
from the other in connection with the furnishing of services
pursuant to this agreement shall be kept confidential and shall not
be disclosed to any third party without the prior written approval
of the other party, except to the extent required by law.
WARNER PUBLISHER SERVICES, INC.
By /s/ Daniel Rubin
------------------------------
Its President
-----------------------------
PLAYBOY ENTERPRISES, INC.
By /s/ Alex Mironovich
------------------------------
Its President
-----------------------------
24
<PAGE>
EXHIBIT A
ATTACHED TO AND MADE A PART OF
AGREEMENT DATED JULY 2, 1999 BETWEEN
WARNER PUBLISHER SERVICES, INC. ("WPS")
AND
PLAYBOY ENTERPRISES, INC. ("PEI")
Warner Publisher Services
PEI Circulation Commitments
June, 1999
I. National Sales and Services Programs
1. Distribution Assignments
A. PLAYBOY
WPS will work the distribution in WPS' base, prime and
selected tertiary and secondary agencies, which should
represent approximately seventy percent (70%) of WPS' Net
Billing Dollars, two (2) times a year as mutually agreed upon
with WPS and Playboy.
B. Flats (Specials, Lingerie, Presents, Private Collection)
WPS will work the distribution of each of the above "flats" in
WPS' base, prime and selected tertiary and secondary agencies,
which should represent approximately seventy percent (70%) of
WPS' Net Billing Dollars, two (2) times a year as mutually
agreed upon with WPS and Playboy.
C. Calendars (Wall and Desk)
WPS will work the distribution of each of the above calendars
in WPS' prime agencies, which should represent approximately
seventy percent (70%) of WPS' Net Billing Dollars, one (1)
time a year.
1
<PAGE>
D. New Magazine Launches
WPS will work the distribution of any new PEI publication with
a frequency of monthly or greater in accordance with the above
distribution commitments for PLAYBOY.
WPS will work the distribution of any new PEI publication with
a frequency of less than monthly in accordance with the above
distribution commitments for the flats or the calendars.
E. Publisher Sales Programs ("PSP")
The above distribution assignments will be scheduled in
conjunction with WPS' quarterly Publisher Sales Programs
assignment schedule.
F. Blitzes (Team Surveys)
WPS will include all pertinent PEI titles, as directed by PEI,
in survey agencies as determined by WPS on a quarterly basis.
2. Marketing Assignments
WPS will complete a targeted marketing assignment quarterly. Targets
will be determined by PEI and mutually agreed upon with WPS. WPS
will make annual marketing calls on not less than two hundred (200)
retailer chains.
3. Point-of-Sale ("POS")
WPS will complete targeted point-of-sale assignments determined by
PEI and mutually agreed upon with WPS.
4. Telemarketing
WPS will continue to use the Telemarketing Department to accomplish
specific objectives in agencies not visited as prime or targeted, as
mutually agreed upon by PEI and WPS.
2
<PAGE>
5. Wholesale Redistribution Program
WPS will attempt to ensure redistribution of all stock and provide a
stock and redistribution report for every issue of each flat in all
agencies with a draw of five hundred (500) copies or more of that
respective flat.
6. Distribution Maintenance Report
To be provided for each issue of each PEI title in all agencies
worked.
7. Authorization Confirmation Report
As mutually agreed upon.
8. Men's General Interest Magazine Sales Trend Report
Monthly.
9. Magazine Category Sales Trend Reports
Annually.
10. Retail Class of Trade Report
Annually.
11. "Unreasonable Sales" Program
As mutually agreed upon.
12. Affidavit Audit Program
PLAYBOY will be included on every affidavit audit. Audit agencies
will be determined and scheduled by WPS quarterly and publisher will
be advised in advance of each quarter.
3
<PAGE>
13. Updated WPS Field Training on PEI Procedures and Policy and Sales
Techniques
Publisher access to Warner field staff sales meetings as mutually
agreed upon.
14. Trade Show Support
WPS will provide personnel support at mutually agreed upon trade
shows.
15. All Assignments Will Be Recapped and Analyzed Promptly
II. Operational Support Services
Promotion Services
o Retail/whole/trade mailings support
o Local promotion support
o Material production support
o Advertising support
Censorship
o Maintain awareness of censorship activity
o Inform, advise and support WPS personnel
o Encourage programs for specific markets
o Periodic attendance of The Media Coalition meetings and
activity reporting
RDA
o Quarterly payment processing
o RDA contract maintenance
o On-line and/or batch reporting of RDA history and activity
o Targeted audits
Order Regulation
o Maintain print order regulation schedule
o Enter allotment changes
o Manage reorders and billing adjustments
4
<PAGE>
Traffic
o Provide shipping documentation to the bindery
o Investigate shortage claims/trace shipments
o Input and maintain poly-wrap editions
o Process Canadian brokerage claims
(additional traffic processing requests will be handled as a
premium service)
ABC Data Gathering and Reporting
o Conduct ABC audit mailings semiannually
o Recap and provide ABC county/state breakdown on request
o Provide WPS ABC sales analyses
E-Mail Communications Link
o WPS client services/PEI communications
o PEI/WPS field communications
(based on mutually agreed to restrictions)
5
Waiver dated as of November 3, 1999 (this "Waiver"), to
the Credit Agreement referred to below among PLAYBOY
ENTERPRISES, INC., a Delaware corporation (the "Company"), PEI
HOLDINGS, INC., a Delaware corporation and wholly owned
subsidiary of the Company ("PHI"), the financial institutions
from time to time party thereto (the "Lenders") and CREDIT
SUISSE FIRST BOSTON, a bank organized under the laws of
Switzerland, acting through its New York Branch, as
administrative agent (in such capacity, the "Administrative
Agent"), as collateral agent and as issuing bank.
A. The parties hereto have entered into a Credit Agreement dated as
of February 26, 1999 (as amended, supplemented or otherwise modified from time
to time, the "Credit Agreement").
B. Pursuant to the Credit Agreement, the Lenders have agreed to
extend credit to the Borrower (as defined in the Credit Agreement) pursuant to
the terms and subject to the conditions set forth therein.
C. The Company and PHI have requested that the Required Lenders
agree to waive certain provisions of the Credit Agreement as set forth herein
and the Lenders are willing, on the terms and subject to the conditions set
forth below, to waive such provisions of the Credit Agreement as provided
herein.
D. Capitalized terms used and not otherwise defined herein shall
have the meanings assigned to them in the Credit Agreement.
Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Waiver. The Required Lenders hereby waive compliance with
Sections 6.13, 6.14, 6.15 and 6.16 of the Credit Agreement in respect of the
period of four consecutive fiscal quarters ending September 30, 1999, provided
that the foregoing waiver shall not be effective for purposes of any additional
Borrowing or other extension of credit that may be requested under the Credit
Agreement and shall cease to be effective on the earlier of (a) January 12, 2000
and (b) the first date after the date hereof upon which any Event of Default
shall occur.
SECTION 2. Representations and Warranties. Each of the Company and
PHI hereby represents and warrants to each Lender, on and as of the date hereof,
and after giving effect to this Waiver, that:
(a) After giving effect to this Waiver, the representations and
warranties set forth in Article III of the Credit Agreement are true and
correct in all material respects with the same effect as if made on and as
of the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date.
(b) After giving effect to this Waiver, no Event of Default or
Default has occurred and is continuing.
<PAGE>
SECTION 3. Effectiveness. This Waiver shall become effective upon
receipt by the Administrative Agent of duly executed counterparts of this Waiver
that, when taken together, bear the authorized signatures of the Company, PHI
and the Required Lenders.
SECTION 4. Governing Law. THIS Waiver SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 5. Expenses. The Borrower shall pay all reasonable
out-of-pocket fees and expenses incurred by the Administrative Agent in
connection with the preparation, negotiation, execution and delivery of this
Waiver, including, but not limited to, the reasonable fees, disbursements and
other charges of Cravath, Swaine & Moore, counsel to the Administrative Agent.
SECTION 6. Counterparts. This Waiver may be executed in any number
of counterparts, each of which shall be an original but all of which, when taken
together, shall constitute but one instrument. Delivery of an executed
counterpart of a signature page of this Waiver by facsimile transmission shall
be as effective as delivery of a manually executed counterpart of this Waiver.
SECTION 7. Headings. Section headings used herein are for
convenience of reference only, are not part of this Waiver and are not to affect
the construction of, or to be taken into consideration in interpreting, this
Waiver.
SECTION 8. Effect of Waiver. Except as specifically stated herein,
the Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof. As used therein, the terms "Agreement", "herein",
"hereunder", "hereinafter", "hereto", "hereof" and words of similar import
shall, unless the context otherwise requires, refer to the Credit Agreement as
modified hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
duly executed by their respective authorized officers as of the date first above
written.
PLAYBOY ENTERPRISES, INC,
By /s/ Robert D. Campbell
---------------------------------------------
Name: Robert D. Campbell
Title: V.P., Treasurer
PEI HOLDINGS, INC.,
By /s/ Robert D. Campbell
---------------------------------------------
Name: Robert D. Campbell
Title: Treasurer
<PAGE>
CREDIT SUISSE FIRST BOSTON, individually and as
Administrative Agent, Collateral Agent and
Issuing Bank,
By /s/ Bill O'Daly /s/ Chris T. Horgan
--------------------- ---------------------
Name: Bill O'Daly Chris T. Horgan
Title: Vice President Vice President
Lender __________________________,
By
---------------------------------------------
Name:
Title:
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,506
<SECURITIES> 2,606
<RECEIVABLES> 55,344
<ALLOWANCES> 8,809
<INVENTORY> 26,400
<CURRENT-ASSETS> 182,351
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0
0
<COMMON> 239
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<TOTAL-LIABILITY-AND-EQUITY> 429,052
<SALES> 256,150
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