<PAGE>
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 March 31, 1997
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 36-2258830
(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 April 30, 1997, there were 4,748,954 shares of Class A Common Stock,
par value $0.01 per share, and 15,594,029 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
____________
Page Number
-----------
Part I. Financial Information
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 1997 and 1996 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended March 31, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Balance Sheets at March 31,
1997 (Unaudited) and June 30, 1996 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1997 and 1996 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II. Other Information 17-18
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Net revenues $ 73,247 $ 66,257
-------- --------
Costs and expenses:
Cost of sales (58,853) (56,702)
Selling and administrative expenses (9,727) (7,720)
-------- --------
Total costs and expenses (68,580) (64,422)
-------- --------
Operating income 4,667 1,835
-------- --------
Nonoperating income (expense):
Investment income 17 12
Interest expense (87) (202)
Other, net (193) (103)
-------- --------
Total nonoperating expense (263) (293)
-------- --------
Income before income taxes 4,404 1,542
Income tax expense (1,894) (866)
-------- --------
Net income $ 2,510 $ 676
======== ========
Weighted average number of common shares outstanding 20,330 20,007
======== ========
Net income per common share $ 0.12 $ 0.03
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Nine Months Ended March 31 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net revenues $ 219,250 $ 200,138
--------- ---------
Costs and expenses:
Cost of sales (180,915) (170,884)
Selling and administrative expenses (25,974) (23,125)
--------- ---------
Total costs and expenses (206,889) (194,009)
--------- ---------
Operating income 12,361 6,129
--------- ---------
Nonoperating income (expense):
Investment income 52 41
Interest expense (386) (508)
Other, net (291) (137)
--------- ---------
Total nonoperating expense (625) (604)
--------- ---------
Income before income taxes 11,736 5,525
Income tax expense (5,364) (2,699)
--------- ---------
Net income $ 6,372 $ 2,826
========= =========
Weighted average number of common shares outstanding 20,304 19,996
========= =========
Net income per common share $ 0.31 $ 0.14
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
1997 1996
----------- --------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 2,001 $ 2,438
Receivables, net of allowance for doubtful accounts of
$3,757 and $3,009, respectively 31,441 29,110
Inventories 21,942 23,499
Programming costs 32,745 33,873
Deferred subscription acquisition costs 11,937 9,569
Other current assets 12,063 10,420
-------- --------
Total current assets 112,129 108,909
-------- --------
Property and equipment, at cost 37,951 37,404
Accumulated depreciation (27,208) (25,510)
-------- --------
Property and equipment, net 10,743 11,894
-------- --------
Programming costs - noncurrent 12,916 3,362
Trademarks 13,084 11,887
Net deferred tax assets 649 4,191
Other noncurrent assets 11,338 10,626
-------- --------
Total assets $160,859 $150,869
======== ========
Liabilities
- -----------
Short-term borrowings $ 5,000 $ 5,000
Current financing obligations 345 340
Accounts payable 23,589 22,745
Accrued salaries, wages and employee benefits 6,479 6,941
Reserves for losses on disposals of discontinued operations 670 707
Income taxes payable 1,120 970
Deferred revenues 48,291 44,378
Other liabilities and accrued expenses 7,024 8,940
-------- --------
Total current liabilities 92,518 90,021
Long-term financing obligations - 347
Other noncurrent liabilities 8,395 8,218
-------- --------
Total liabilities 100,913 98,586
-------- --------
Shareholders' Equity
- --------------------
Common stock, $0.01 par value
Class A - 7,500,000 shares authorized; 5,042,381 issued 50 50
Class B - 30,000,000 shares authorized; 16,989,018 and
16,477,143 issued, respectively 166 165
Capital in excess of par value 37,519 36,323
Retained earnings 29,170 22,798
Foreign currency translation adjustment (55) (17)
Less cost of treasury stock (6,904) (7,036)
-------- --------
Total shareholders' equity 59,946 52,283
-------- --------
Total liabilities and shareholders' equity $160,859 $150,869
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended March 31 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
------------------------------------
Net income $ 6,372 $ 2,826
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 1,711 1,794
Amortization of intangible assets 1,386 1,323
Amortization of investments in entertainment programming 14,538 13,857
Investments in entertainment programming (22,964) (19,002)
Net change in operating assets and liabilities 301 (3,846)
Net cash used for discontinued operations (37) (41)
Other, net (11) 22
-------- --------
Net cash provided by (used for) operating activities 1,296 (3,067)
-------- --------
Cash Flows From Investing Activities
------------------------------------
Additions to property and equipment (570) (471)
Acquisitions and funding of equity interests in international ventures (1,150) (3,180)
Other, net 125 150
-------- --------
Net cash used for investing activities (1,595) (3,501)
-------- --------
Cash Flows From Financing Activities
------------------------------------
Increase in short-term borrowings - 5,500
Repayment of debt (350) (350)
Proceeds from exercise of stock options 77 161
Proceeds from sales under employee stock purchase plan 135 -
-------- --------
Net cash provided by (used for) financing activities (138) 5,311
-------- --------
Net decrease in cash and cash equivalents (437) (1,257)
Cash and cash equivalents at beginning of period 2,438 1,471
-------- --------
Cash and cash equivalents at end of period $ 2,001 $ 214
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
--------------------
The financial information included herein is unaudited, but in the opinion of
management, reflects all adjustments (which include only 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 such results and cash flows for the entire year. These financial
statements should be read in conjunction with the financial statements and
notes thereto contained in the Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 (the "1996 Form 10-K") of Playboy Enterprises, Inc. and
Subsidiaries (the "Company").
(B) INCOME TAXES
------------
The Company's net deferred tax asset declined to $0.9 million at March 31,
1997 based on taxable income for the current quarter and management's
projection of fiscal 1997 taxable income. As reported in the Company's 1996
Form 10-K, the significant components of the gross deferred tax asset include
net operating loss, capital loss and tax credit carryforwards. Of the $0.9
million and $4.5 million net deferred tax assets included in the Condensed
Consolidated Balance Sheets at March 31, 1997 and June 30, 1996, respectively,
$0.3 million is included in "Other current assets" with the remainder
segregated as "Net deferred tax assets".
Realization of the net deferred tax asset 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 $4.5 million recorded
at June 30, 1996, the Company will need to generate future taxable income of
approximately $13.2 million prior to the expiration, beginning in 2001, of the
Company's net operating loss carryforwards. 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 benefits recognized through an adjustment to the
valuation allowance.
(C) INVENTORIES
-----------
Inventories, which are stated at the lower of cost (average cost, specific
cost and first-in, first-out) or market, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
--------- --------
<S> <C> <C>
Paper $ 6,951 $10,771
Editorial and other prepublication costs 5,651 6,566
Merchandise finished goods 9,340 6,162
------- -------
Total inventories $21,942 $23,499
======= =======
</TABLE>
(D) TREASURY STOCK
--------------
Treasury stock consisted of 293,427 Class A common shares and 1,014,848 Class
B common shares at March 31, 1997. At June 30, 1996, treasury stock consisted
of 293,427 Class A common shares and 1,040,045 Class B common shares.
7
<PAGE>
(E) ACCOUNTING STANDARDS
--------------------
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123")
in fiscal 1997. It is the Company's intention to adopt only the disclosure
requirements of Statement 123.
The Company will implement the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("Statement 128") for financial
statements issued for periods ending after December 15, 1997. Statement 128
simplifies the previous standards for computing earnings per share ("EPS"),
replacing the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, which
applies to the Company. Management believes that adoption of Statement 128
will not have a material impact on the Company's EPS amounts.
(F) CONTINGENCIES
-------------
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act of 1996 which, among other things, regulates the cable
transmission of adult programming, such as the Company's domestic pay
television programs. Management believes that the Company's revenues
attributable to its domestic pay television cable services could be materially
adversely affected as a result of enforcement of Section 505, which will
commence on May 18, 1997, due to reduced buy rates from the systems that roll
back carriage to a 10:00 p.m. start time and possibly reduced carriage from
cable operators due to aggressive competition for carriage from all program
suppliers, in particular basic cable networks that frequently pay cash
guarantees for carriage. At this point, the feedback the Company has received
from the cable operators indicates that the Entertainment Group's annual
revenue shortfall will be in the $4 million-to-$5 million range, consistent
with the testimony that Tony Lynn, president of Playboy Entertainment Group,
Inc., gave during the Company's initial court challenge in Delaware in spring
of 1996. See Part II. Item 1. "Legal Proceedings."
In January 1993, the Company received a General Notice from the United States
Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap
& Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin
(the "Resort"), formerly owned by a subsidiary of the Company. The Resort was
sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982.
Two other entities were also identified as PRPs in the notice. The notice
relates to actions that may be ordered taken by the EPA to sample for and
remove contamination in soils and sediments, purportedly caused by skeet
shooting activities at the Resort property. During fiscal 1994, the EPA
advised the Company of its position that the area of land requiring
remediation is approximately twice the size of the initial site. The Company
believes that it has established adequate reserves, which totaled $0.7 million
at March 31, 1997, to cover the eventual cost of its anticipated share (based
on an agreement with one of the other PRPs) of any remediation that may be
agreed upon. The Company is also reviewing available defenses, insurance
coverage and claims it may have against third parties.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
- ---------------------
The Company's revenues increased 11% to $73.2 for the quarter ended March
31, 1997 compared to $66.3 for the prior year quarter. Revenues were $219.3 for
the nine months ended March 31, 1997, a 10% increase over revenues of $200.1 for
the nine months ended March 31, 1996. These increases were primarily due to
higher revenues from the Entertainment Group, largely driven by increases from
Playboy TV. Also contributing to the increases were higher revenues from the
Catalog Group and the international publishing and newsstand specials and other
businesses. Partially offsetting the above for the nine-month period was a
decline in Playboy magazine revenues.
The Company reported operating income of $4.7 for the quarter ended March
31, 1997 compared to $1.8 in the prior year quarter. For the nine months ended
March 31, 1997, the Company had operating income of $12.4 compared to $6.1 in
the prior year. These increases were principally due to increases in operating
income for the Entertainment Group, primarily due to significantly higher
operating income for Playboy TV, partially offset by higher Corporate
Administration and Promotion expenses, largely due to investment spending on
corporate marketing. Also unfavorably impacting the nine-month comparison was a
decline in operating income for the Publishing Group.
Net income for the quarter ended March 31, 1997 was $2.5, or $0.12 per
share, compared to $0.7, or $0.03 per share, for the prior year quarter. For the
nine months ended March 31, 1997, net income was $6.4, or $0.31 per share,
compared to $2.8, or $0.14 per share, for the nine months ended March 31, 1996.
Net income for the quarter ended March 31, 1997, adjusted to eliminate
federal income tax expense that will not be paid due to the Company's net
operating loss carryforwards ("tax-adjusted net income"), was $3.8, or $0.19 per
share, compared to $1.2, or $0.06 per share, for the prior year quarter. For the
nine months ended March 31, 1997, tax-adjusted net income was $9.9, or $0.49 per
share, compared to $4.4, or $0.22 per share, for the nine months ended March 31,
1996.
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 with the timing of
sales to international customers, particularly on a tier basis. To allow greater
flexibility the Company modified how it programs its international networks
effective with the fourth quarter of fiscal 1996. This modification results in
the revenues from these networks now being recorded on a quarterly basis, which
has the effect of smoothing out the fluctuations caused by recording a year's
worth of programming sales in one quarter. Previously, the Company scheduled
programming for a full year in the quarter during which the network was launched
or an agreement was renewed, and recognized the full year of revenues in that
quarter.
9
<PAGE>
PUBLISHING GROUP
The revenues and operating income of the Publishing Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ -------------
1997 1996 1997 1996
----- ----- ------ -----
<S> <C> <C> <C> <C>
REVENUES
Playboy Magazine.............. $24.3 $24.5 $ 76.1 $78.6
Newsstand Specials and Other.. 5.5 4.2 17.0 15.1
International Publishing...... 2.4 1.7 7.6 4.3
----- ----- ------ -----
Total Revenues.............. $32.2 $30.4 $100.7 $98.0
===== ===== ====== =====
OPERATING INCOME................. $ 1.5 $ 1.5 $ 5.2 $ 7.7
===== ===== ====== =====
</TABLE>
Publishing Group revenues increased 6%, or $1.8, and 3%, or $2.7,
respectively, for the quarter and nine months ended March 31, 1997 compared to
the prior year. This was due to continued strong revenue growth in the
international publishing and newsstand specials and other businesses, including
Playboy on-line, partially offset by lower Playboy magazine revenues. Playboy
magazine circulation revenues for the quarter and nine months ended March 31,
1997 decreased 7%, or $1.4, and 3%, or $1.8, respectively, compared to the prior
year. These decreases were primarily due to 19% and 13% lower newsstand
revenues, primarily due to favorable newsstand sales adjustments related to
prior issues in the prior year quarter, and 17% more U.S. and Canadian newsstand
copies sold in the prior year nine-month period, respectively, when two
exceptionally strong-selling issues were published. Subscription revenues were
essentially stable for the quarter, and increased 4% for the nine-month period.
Both the quarter and nine-month periods were impacted by lower revenues from the
rental of Playboy magazine's subscriber list. Playboy magazine advertising
revenues for the quarter ended March 31, 1997 increased 23% compared to the
prior year quarter primarily due to an increase in average net revenue per page
principally due to the mix of pages sold, combined with 7% more ad pages in the
current year quarter. For the nine-month period, advertising revenues decreased
3% compared to the prior year primarily due to 9% fewer ad pages, partially
offset by higher average net revenue per page, principally due to the mix of
pages sold. Advertising sales for the fiscal 1997 fourth quarter issues of the
magazine are closed, and the Company expects to report 19% more ad pages for
the quarter compared to the prior year quarter, resulting in an expected 2%
decrease in ad pages for fiscal 1997 compared to the prior fiscal year.
Revenues from newsstand specials and other increased 32%, or $1.3, and 12%,
or $1.9, respectively, for the quarter and nine months ended March 31, 1997
primarily due to the publication of an additional newsstand special in the
current year periods, combined with higher advertising revenues generated from
Playboy on-line. Additionally, for the nine-month period, a higher average
newsstand special price was mostly offset by 4% lower average U.S. and Canadian
newsstand copies sold in the current year.
International publishing revenues were higher for the quarter and nine
months ended March 31, 1997 principally due to revenues in the current year
related to the purchase of additional equity in March 1996 of VIPress Poland
Sp. z o.o. ("VIPress"), which publishes the Polish edition of Playboy magazine,
which resulted in its consolidation. Additionally, licensing royalties were
lower and higher for the quarter and nine-month periods, respectively, compared
to the prior year.
For the quarter ended March 31, 1997, Publishing Group operating income
remained stable compared to the prior year. The net increase in revenues
discussed above combined with lower manufacturing costs, primarily due to lower
average paper prices, were offset by higher related direct costs, and higher
operating and administrative expenses.
10
<PAGE>
For the nine months ended March 31, 1997, Publishing Group operating income
decreased $2.5, or 33%, compared to the prior year despite lower manufacturing
costs, principally due to lower average paper prices, primarily due to the
previously discussed lower newsstand revenues.
The National Defense Authorization Act of 1997 was signed into law in
September 1996. One section of that legislation that began as the Military Honor
and Decency Act (the "Military Act") bans the sale or rental of sexually
oriented written or videotaped material on property under the jurisdiction of
the Department of Defense. A Federal Court has permanently enjoined enforcement
of the Military Act and has prohibited the Department of Defense from changing
its acquisition and stocking practices based on the Military Act. The government
has filed an appeal and a decision by the Appellate Court is pending. The
Military Act, if applicable to the Company's products and enforceable, would
prohibit the sale of Playboy magazine, newsstand specials and videos at
commissaries, PX's and ship stores, and would adversely affect a portion of the
Company's sales attributable to such products. Based on preliminary estimates
and current sales levels at such locations, the Company believes that any such
impact would be immaterial.
ENTERTAINMENT GROUP
The revenues and operating income of the Entertainment Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------- ---------------
1997 1996 1997 1996
----- ----- ------ ------
<S> <C> <C> <C> <C>
REVENUES
Playboy TV:
Cable.................................... $ 5.7 $ 5.5 $ 16.1 $ 16.4
Satellite Direct-to-Home................. 6.1 4.5 16.0 11.8
Other.................................... 0.2 0.2 2.2 0.4
----- ----- ------ ------
Total Playboy TV.......................... 12.0 10.2 34.3 28.6
Domestic Home Video....................... 3.2 2.9 7.1 7.3
International TV and Home Video........... 2.3 1.0 6.6 4.2
----- ----- ------ ------
Total Playboy Businesses................ 17.5 14.1 48.0 40.1
AdulTVision............................... 1.1 0.5 3.4 1.3
Movies and Other.......................... 0.6 0.5 1.7 1.2
----- ----- ------ ------
Total Revenues.......................... $19.2 $15.1 $ 53.1 $ 42.6
===== ===== ====== ======
OPERATING INCOME
Profit Contribution Before
Playboy Businesses Programming Expense.. $10.7 $ 6.5 $ 27.4 $ 17.1
Playboy Businesses Programming Expense.... (4.5) (4.7) (13.5) (13.4)
----- ----- ------ ------
Total Operating Income................. $ 6.2 $ 1.8 $ 13.9 $ 3.7
===== ===== ====== ======
</TABLE>
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").
Playboy TV
For the quarter ended March 31, 1997, cable pay-per-view revenues of the
Company's branded domestic pay television service, Playboy TV, were 13% higher
primarily due to higher average buy rates combined with larger favorable
adjustments, as reported by cable systems, in the current year quarter. Cable
pay-per-view revenues were 5% higher for the nine months ended March 31, 1997
primarily due to higher average buy rates in the current year. At March 31,
1997, Playboy TV was available to 11.0 million cable addressable households, of
which 4.9 million could receive Playboy TV on a 24-hour basis. The number of
households with 24-hour availability increased 1.3 million, or 36%, from March
31, 1996. However, new launches in cable systems were not sufficient to offset
some system drops leading to a 3% lower total number of cable addressable
households to which Playboy TV was available at March 31, 1997 compared to the
prior year. Historically, buy rates in households receiving Playboy
11
<PAGE>
TV on a 24-hour basis are higher than those receiving Playboy TV on only a ten-
hour basis. The number of total cable addressable households to which Playboy TV
was available at March 31, 1997 decreased 2% from December 31, 1996, while
households with 24-hour availability increased 0.4 million, or 9%, over the same
period. The average annual increase in the number of total cable addressable
households to which Playboy TV was available over the last five complete fiscal
years was 20%. For both the quarter and nine months ended March 31, 1997, cable
monthly subscription revenues decreased 16% compared to the prior year primarily
due to the same system drops as discussed above which resulted in a decline in
the average number of subscribing households.
Management believes that the Company's revenues attributable to its
domestic pay television cable services could be materially adversely affected as
a result of enforcement of Section 505 of the Telecommunications Act of 1996,
which will commence on May 18, 1997, due to reduced buy rates from the systems
that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage
from cable operators due to aggressive competition for carriage from all program
suppliers, in particular basic cable networks that frequently pay cash
guarantees for carriage. At this point, the feedback the Company has received
from the cable operators indicates that the Entertainment Group's annual revenue
shortfall will be in the $4 million-to-$5 million range, consistent with the
testimony that Tony Lynn, president of Playboy Entertainment Group, Inc., gave
during the Company's initial court challenge in Delaware in spring of 1996.
Although the Company's request for a preliminary injunction has been denied, the
Company intends to seek a ruling from the District Court that Section 505 is
unconstitutional. There can be no assurance that the Company will prevail. See
Part II. Item 1. "Legal Proceedings." Additionally, management believes that the
growth in cable access for the Company's domestic pay television businesses has
also slowed in recent years due to the effects of cable reregulation by the
Federal Communications Commission ("FCC"), including the "going-forward rules"
announced in fiscal 1995 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.
Additionally, the delay of new technology, primarily digital set-top converters
which would dramatically increase channel capacity, has contributed to the
slowdown. Management believes that growth will continue to be affected in the
near term as the cable television industry responds to the FCC's rules and
subsequent modifications, and develops new technology. However, as addressable
and digital technology (which is unaffected by Section 505) becomes more
available, the Company believes that ultimately its pay television networks will
be available to the vast majority of cable households on a 24-hour basis.
Playboy TV satellite direct-to-home revenues were 34% and 36% higher for
the quarter and nine months ended March 31, 1997, respectively, compared to the
prior year. These increases were primarily due to higher DirecTV and PrimeStar
revenues, as a result of significant increases in their addressable universes,
partially offset by lower revenues, as expected, from TVRO, or the big-dish
market. Playboy TV was available to approximately 17.0 million cable addressable
and satellite direct-to-home households, including approximately 375,000 monthly
subscribers, at March 31, 1997, an increase of 7% compared to March 31, 1996.
Other revenues remained stable and increased $1.8 for the quarter and nine
months ended March 31, 1997, respectively, compared to the prior year. The nine-
month comparison includes revenues in the current year from licensing episodes
of one of the Company's series to Showtime Networks Inc.
Profit contribution for Playboy TV increased $3.6 and $8.7, respectively,
for the quarter and nine months ended March 31, 1997 primarily due to the net
increases in revenues combined with favorable music licensing settlements, lower
marketing costs and no royalty expense related to the Company's former
distributor in the current year. Royalty payments were discontinued April 30,
1996, when the agreement ended.
Domestic Home Video
Domestic home video revenues increased $0.3 and decreased $0.2,
respectively, for the quarter and nine months ended March 31, 1997, compared to
the prior year. The current year quarter and nine-month periods reflected higher
revenues from a three-year distribution agreement with Universal Music & Video
Distribution (formerly Uni Distribution Corp.) related to backlist titles, which
are subject to certain earn-out provisions in fiscal 1997, the final year of the
agreement. For the quarter and nine-month periods, these increases were
partially and more than, respectively, offset by lower net sales of new releases
and anticipated lower revenues related to the Company's direct-response
continuity series, the second of which was recently launched.
12
<PAGE>
Profit contribution increased $0.5 and decreased $0.3, respectively, on the
net increase and decrease, respectively, in revenues for the quarter and nine
months ended March 31, 1997. Also unfavorably impacting the nine-month
comparison was the timing of promotion costs.
International TV and Home Video
For the quarter and nine months ended March 31, 1997, profit contribution
from the international TV and home video business increased $0.9 and $1.7,
respectively, on $1.3 and $2.4 increases, respectively, in revenues. These
increases were primarily due to higher international TV revenues in the current
year, largely from Playboy TV networks. However, due to the unusually high home
video sales recorded in the prior year fourth quarter, annual net revenues and
profit contribution for the international business for fiscal 1997 are expected
to be lower compared to the prior year. Variations in quarterly performance are
caused by revenues and profit contribution from tier sales being recognized
depending upon the timing of program delivery, license periods and other
factors. To allow greater flexibility the Company modified how it programs its
international networks effective with the fourth quarter of fiscal 1996. See
"Results of Operations."
Playboy Businesses Programming Expense
Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above decreased $0.2 and increased $0.1,
respectively, for the quarter and nine months ended March 31, 1997 compared to
the prior year.
AdulTVision
AdulTVision revenues increased $0.6 and $2.1, respectively, for the quarter
and nine months ended March 31, 1997, compared to the prior year primarily due
to revenues in the current year related to the September 1996 launch of a new
network in Latin America. Also contributing to the increases were higher
revenues from the domestic network, which launched in July 1995, as a result of
an increase in the addressable universe and higher buys.
For the quarter and nine months ended March 31, 1997, operating performance
increased $0.4 and $1.2, respectively, primarily due to the increases in
revenues, partially offset by higher distribution costs due to the launch in
Latin America and an increase in domestic fees in the current year related to
transferring to a new transponder.
Movies and Other
For the quarter and nine months ended March 31, 1997, revenues from movies
and other businesses increased $0.1 and $0.5, respectively, while operating
income decreased $0.1 and remained stable, respectively. The Entertainment
Group's administrative expenses for the quarter and nine months ended March 31,
1997 increased $0.9 and $1.1, respectively, compared to the prior year largely
due to higher variable compensation expense related to performance.
PRODUCT MARKETING GROUP
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES.......... $ 2.0 $ 2.2 $ 6.3 $ 6.0
===== ===== ===== =====
OPERATING INCOME.. $ 0.9 $ 1.4 $ 3.2 $ 3.3
===== ===== ===== =====
</TABLE>
13
<PAGE>
Revenues for the quarter ended March 31, 1997 decreased $0.2 compared to
the prior year quarter primarily due to lower international product licensing
royalties. The timing of reporting of royalties from Asia contributed to the
decreased revenues. Operating income for the quarter declined $0.5 compared to
the prior year quarter due to the decrease in revenues combined with higher
expenses, principally reflecting increased investments in brand marketing and
product design.
For the nine months ended March 31, 1997, revenues increased $0.3 compared
to the prior year primarily due to royalties in the current year related to the
Company's new line of cigars currently being distributed domestically. Operating
income for the nine-month period decreased $0.1 due to higher expenses,
principally reflecting the increased investments in brand marketing and product
design and higher administrative expenses.
CATALOG GROUP
The revenues and operating income of the Catalog Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
QUARTERS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES.......... $19.8 $18.6 $59.2 $53.5
===== ===== ===== =====
OPERATING INCOME.. $ 1.2 $ 1.6 $ 4.1 $ 4.2
===== ===== ===== =====
</TABLE>
For the quarter and nine months ended March 31, 1997, revenues of the
Catalog Group increased 7% and 11%, respectively, compared to the prior year due
to higher sales volume from all of the Company's catalogs, due in part to
increased circulation. Increased revenues related to promotions also contributed
to the higher revenues from the Collectors' Choice Music catalog for the nine-
month period. Revenues from the Playboy catalog were also favorably impacted by
current year sales from the Playboy Store, a version of the catalog on Playboy
on-line.
For the quarter and nine months ended March 31, 1997, operating income
decreased 24% and 2%, respectively, compared to the prior year primarily as a
result of lower-than-anticipated response rates from prospective customers. The
increases in revenues generally were not sufficient to offset higher related
costs, due in part to prospecting, even with the impact of lower paper prices in
the current year periods. Administrative expenses were higher for the group
largely due to higher salary and related expenses. In the summer of 1997, the
catalog operations will move from its current facility to a larger facility,
under terms of a build-to-suit lease, to meet additional space requirements
resulting from growth in the business. The new facility will be located in the
same Chicago suburb.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate administration and promotion expenses of $5.2 and $14.1 for the
quarter and nine months ended March 31, 1997, increased $0.7 and $1.2,
respectively, compared to the prior year periods. These increases were largely
due to investment spending on corporate marketing. Also unfavorably impacting
the nine-month period was the timing of variable compensation expense related to
performance.
CASINO GAMING
In fiscal 1996 the Company announced plans to re-enter the casino gaming
business. The Company, with a consortium of Greek investors, bid for and won an
exclusive casino gaming license on the island of Rhodes, Greece. The Company's
consortium executed the contract with the government in October 1996 and is
presently renovating the historic Hotel des Roses that will be the Playboy
casino hotel, which is expected to open at the end of calendar 1997. The Company
is continuing to explore other casino gaming opportunities with a strategy to
form joint ventures with strong local partners, in which the Company would
receive license fees for the use of the Playboy name and trademarks and would
consider taking equity positions.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1997, the Company had $2.0 in cash and cash equivalents and
$5.0 in short-term borrowings, compared to $2.4 in cash and cash equivalents and
$5.0 in short-term borrowings at June 30, 1996. The Company expects to meet its
short-term and long-term cash requirements through its revolving credit
agreement and cash generated from operations.
Cash Flows From Operating Activities
Net cash provided by operating activities was $1.3 for the nine months
ended March 31, 1997 compared to net cash used of $3.1 for the prior year period
principally due to the Company's improved operating performance in the current
year. Cash provided by operating assets and liabilities was $0.3 in the current
year period compared to cash used of $3.8 in the prior year. This difference was
primarily due to cash provided by inventories in the current year compared to a
use of cash in the prior year primarily due to additional purchases of paper
related to Playboy magazine in the prior year period in part to take advantage
of favorable pricing. Partially offsetting the above was cash used for other
accrued liabilities in the current year compared to cash provided in the prior
year principally due to lower accruals in the current year related to music
licensing and advertising, combined with the timing of tax payments. The Company
invested $23.0 in Company-produced and licensed entertainment programming during
the first nine months of fiscal 1997 compared to $19.0 in the prior year period,
and expects to invest approximately $9.7 in such programming during the
remainder of fiscal 1997. The increase in investments in programming expected
for fiscal 1997 compared to the prior year primarily reflects spending for
businesses other than the Playboy TV network, largely the pre-sold made for
television and home video programming, co-production agreements and a celebrity
event.
Cash Flows From Investing Activities
Net cash used for investing activities was $1.6 for the nine months ended
March 31, 1997 compared to $3.5 for the prior year period. The prior year
included investments in equity interests of $3.2 in the first overseas Playboy
TV networks in the United Kingdom and Japan, the casino gaming venture that was
awarded an exclusive license on the island of Rhodes, Greece, and an additional
equity interest in VIPress. This compares to $1.2 of investments in the current
year period principally related to additional funding of the network in the
United Kingdom and an equity interest as well as additional funding in the new
Playboy TV and AdulTVision networks in Latin America.
Cash Flows From Financing Activities
Net cash used for financing activities was $0.1 for the nine months ended
March 31, 1997 compared to net cash provided of $5.3 for the prior year period.
This difference was principally due to a $5.5 increase in the level of short-
term borrowings under the Company's revolving line of credit in the prior year.
Income Taxes
Based on current tax law, the Company must generate approximately $13.2 of
future taxable income prior to the expiration of the Company's net operating
loss carryforwards ("NOLs") for full realization of the $4.5 net deferred tax
asset recorded at June 30, 1996. At June 30, 1996, the Company had NOLs of $37.7
for tax purposes, with $1.0 expiring in 2001, $8.9 expiring in 2003, $8.2
expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008 and $16.4
expiring in 2009.
Management continues to believe that it is more likely than not that a
sufficient level of taxable income will be generated prior to the expiration of
the Company's NOLs to realize the $4.5 net deferred tax asset recorded at June
30, 1996. The Company's net deferred tax asset declined to $0.9 at March 31,
1997 based on taxable income for the current quarter and management's projection
of fiscal 1997 taxable income. Following is a summary of the bases for
management's belief that a valuation allowance of $28.0 at June 30, 1996 is
adequate, and that it is more likely than not that the net deferred tax asset of
$4.5 at June 30, 1996 will be realized:
. In initially 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.
15
<PAGE>
. The Publishing, Product Marketing and Catalog Groups continue to generate
meaningful earnings, while the Company's substantial investments in the
Entertainment Group resulted in significant earnings growth in fiscal 1996
and are anticipated to lead to increased earnings potential in fiscal 1997
and future years.
. The Company has several 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.
Other
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap &
Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin
(the "Resort"), formerly owned by a subsidiary of the Company. The Resort was
sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two
other entities were also identified as PRPs in the notice. The notice relates to
actions that may be ordered taken by the EPA to sample for and remove
contamination in soils and sediments, purportedly caused by skeet shooting
activities at the Resort property. During fiscal 1994, the EPA advised the
Company of its position that the area of land requiring remediation is
approximately twice the size of the initial site. The Company believes that it
has established adequate reserves, which totaled $0.7 at March 31, 1997, to
cover the eventual cost of its anticipated share (based on an agreement with one
of the other PRPs) of any remediation that may be agreed upon. The Company is
also reviewing available defenses, insurance coverage and claims it may have
against third parties.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123") in fiscal 1997. It is the Company's intention to adopt only
the disclosure requirements of Statement 123.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement 128") for financial
statements issued for periods ending after December 15, 1997. Statement 128
simplifies the previous standards for computing earnings per share ("EPS"),
replacing the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, which applies
to the Company. Management believes that adoption of Statement 128 will not have
a material impact on the Company's EPS amounts.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
In February 1996, Congress passed, and President Clinton signed into law,
the Telecommunications Act of 1996 (the "Telecommunications Act"). 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 non-subscribing cable customers. This is
called "bleeding." The practical effect of Section 505 of the Telecommunications
Act ("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, whether or not customers request it or need it, to
prevent any possibility of bleeding, or to restrict the period during which the
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. Surveying of cable operators indicates that most will choose to
comply by restricting the hours of transmission.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
challenging Section 505 on constitutional grounds. 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 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 United States District Court in
Wilmington, Delaware (the "Court") denied the Company's request for preliminary
injunction against enforcement of Section 505 of the Act and, in so denying,
found that the Company was not likely to succeed on the merits of its claim. The
Company appealed the Court's decision to the United States Supreme Court and
enforcement of Section 505 was stayed pending that appeal. On March 24, 1997,
without opinion, the Supreme Court summarily affirmed the Court's denial of the
Company's request for a preliminary injunction. As a result of the Supreme
Court's action, enforcement of Section 505 will commence on May 18, 1997.
Management believes that the Company's revenues attributable to its domestic pay
television cable services could be materially adversely affected as a result of
enforcement of Section 505 due to reduced buy rates from the systems that roll
back carriage to a 10:00 p.m. start time and possibly reduced carriage from
cable operators due to aggressive competition for carriage from all program
suppliers, in particular basic cable networks that frequently pay cash
guarantees for carriage. At this point, the feedback the Company has received
from the cable operators indicates that the Entertainment Group's annual revenue
shortfall will be in the $4 million-to-$5 million range, consistent with the
testimony that Tony Lynn, president of Playboy Entertainment Group, Inc., gave
during the Company's initial court challenge in Delaware in spring of 1996. The
Company intends to pursue in the Court its case challenging on constitutional
grounds the validity of Section 505 and to seek a permanent injunction against
the enforcement of Section 505. There can be no assurance that the Court will
grant such an injunction. The Company's full case on the merits has not yet been
heard or decided by the Court.
On December 18, 1995, BrandsElite International Corporation, an Ontario,
Canada corporation ("BrandsElite"), filed a complaint against the Company in the
Circuit Court of Cook County, Illinois. In the complaint, BrandsElite, an
international distributor of premium merchandise, including liquor, perfume,
cosmetics and luxury gifts, principally to duty-free retailers, alleges that the
Company breached a product license agreement, shortly after its execution by the
Company in October 1995. The agreement provided for the appointment of
BrandsElite as the exclusive, worldwide licensee of the Playboy trademark and
tradename with respect to the sale of cognac and possibly some deluxe whiskeys.
The Company has admitted that it advised BrandsElite that it had determined not
to proceed with the transaction but disputes strongly BrandsElite's allegation
that as a result of the Company's breach, BrandsElite has suffered millions of
dollars of damages in future lost profits. BrandsElite also seeks to recoup
alleged out-of-pocket expenses, fees and costs incurred in bringing the action,
and specific performance of the agreement. The license agreement provides for
recovery by a party in any judgment entered in its favor of attorneys' fees and
litigation expenses, together with such court costs and damages as are provided
by law. The action is currently in discovery.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.1 Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan
10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and
restated
10.3 Selected Employment, Termination and Other Agreements
a Agreement dated October 16, 1996 amending the Employment Agreement
dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J.
Lynn
b Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J.
Lynn
c Memorandum dated October 11, 1996 regarding special compensation plan
for Herb Laney
d Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M.
Laney
e Employment Agreement dated April 7, 1997 between Playboy Enterprises,
Inc. and Marianne Howatson
f Letter Agreement dated April 18, 1997 regarding employment of Linda
Havard
*10.4 Agreements between Playboy Entertainment Group, Inc. and Bloomfield
Mercantile Inc. related to establishing international networks in Latin
America, Spain and Portugal
a Agreement outline as of March 29, 1996
b Letter agreement dated January 13, 1997
*10.5 Memorandum of Understanding as of February 26, 1997 between Playboy
Entertainment Group, Inc. and Daewoo Corporation related to establishing
international networks in South Korea
10.6 Amendment to March 24, 1995 Distribution Agreement between Playboy
Entertainment Group, Inc. and Universal Music & Video Distribution
(formerly Uni Distribution Corp.) regarding licensing and sale of
domestic home video product dated February 28, 1997
10.7 Amendment to June 27, 1996 Distribution Agreement between Playboy
Entertainment Group, Inc. and Orion Home Video regarding the
distribution of certain home video programs and product dated July 29,
1996
11 Computation of Earnings Per Common Share
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 March 31, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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 May 12, 1997 By s/Rebecca S. Maskey
---------------- ------------------------
Rebecca S. Maskey
Senior Vice President,
Finance
19
<PAGE>
EXHIBIT 10.1
AMENDED AND RESTATED
PLAYBOY ENTERPRISES, INC.
1995 STOCK INCENTIVE PLAN
Playboy Enterprises, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), hereby adopts this Amended and Restated
Playboy Enterprises, Inc. 1995 Stock Incentive Plan.
The purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to certain of its key employees
through the ownership of Company stock and/or rights which recognize such
growth, development and financial success.
(2) To enable the Company to obtain and retain the services of key
employees considered essential to the long-range success of the Company by
providing and offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I
DEFINITIONS
-----------
Whenever the following terms are used in this Plan they shall have the
meaning specified below, unless the context clearly indicates otherwise.
Section 1.1 - Board. "Board" shall mean the Board of Directors of the Company.
- ----------- -----
Section 1.2 - Change of Control. "Change of Control" shall mean the occurrence
- ----------- -----------------
of any of the following events: (i) except in a transaction described in clause
(iii) below, Hugh M. Hefner, Christie Hefner, the Hugh M. Hefner 1991 Trust (for
so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them
is sole trustee), and the Hugh M. Hefner Foundation (for so long as Hugh M.
Hefner and Christie Hefner are joint trustees or one of them is sole trustee)
cease collectively to own a majority of the total number of votes that may be
cast for the election of directors of the Company; or (ii) a sale of Playboy
-------
magazine by the Company; or (iii) the liquidation or dissolution of the Company,
or any merger, consolidation or other reorganization involving the Company
unless (x) the merger, consolidation or other reorganization is initiated by the
Company, and (y) is one in which the stockholders of the Company immediately
prior to such reorganization become the majority stockholders of a successor or
ultimate parent corporation of the Company resulting from such reorganization
and (z) in connection with such event, provision is made for an assumption of
outstanding Options and rights or a substitution thereof of a new Option or
right in such successor or ultimate parent of substantially equivalent value.
<PAGE>
Section 1.3 - Code. "Code" shall mean the Internal Revenue Code of 1986, as
- ----------- ----
amended.
Section 1.4 - Committee. "Committee" shall mean a committee of the Board of
- ----------- ---------
Directors comprised of persons who are both non-employee directors within the
meaning of Rule 16b-3 which has been adopted by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, as such rule
or its equivalent is then in effect ("Rule 16b-3") and "outside directors"
within the meaning of Section 162(m) of the Code.
Section 1.5 - Common Stock. "Common Stock" shall mean the Class B Common Stock,
- ----------- ------------
par value $.01 per share, of the Company.
Section 1.6 - Company. "Company" shall mean Playboy Enterprises, Inc., a
- ----------- -------
Delaware Corporation.
Section 1.7 - Deferred Stock. "Deferred Stock" shall mean Common Stock awarded
- ----------- --------------
under Article VII of the Plan.
Section 1.8 - Director. "Director" shall mean a member of the Board.
- ----------- --------
Section 1.9 - Employee. "Employee" shall mean any officer or other employee (as
- ----------- --------
defined in accordance with the Regulations and Revenue Rulings then applicable
under Section 3401(c) of the Code) of the Company or any Subsidiary.
Section 1.10 - ERISA. "ERISA" shall mean the Employment Retirement Income
- ------------ -----
Security Act of 1974, as amended.
Section 1.11 - Exchange Act. "Exchange Act" shall mean the Securities Exchange
- ------------ ------------
Act of 1934, as amended.
Section 1.12 - Grantee. "Grantee" shall mean an Employee granted a Performance
- ------------ -------
Award, Stock Payment, Section 162(m) Performance Award, Section 162(m) Stock
Payment, or an award of Deferred Stock or Section 162(m) Deferred Stock, under
this Plan.
Section 1.13 - Incentive Stock Option. "Incentive Stock Option" shall mean an
- ------------ ----------------------
Option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
Section 1.14 - Non-Qualified Option. "Non-Qualified Option" shall mean an
- ------------ --------------------
Option which is not designated as an Incentive Stock Option by the Committee.
Section 1.15 - Officer. "Officer" shall mean an officer of the Company.
- ------------ -------
2
<PAGE>
Section 1.16 - Option. "Option" shall mean a stock option granted under Article
- ------------ ------
III of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option.
Section 1.17 - Optionee. "Optionee" shall mean an Employee to whom an Option is
- ------------ --------
granted under the Plan.
Section 1.18 - Performance Award. "Performance Award" shall mean a cash bonus,
- ------------ -----------------
stock bonus or other performance or incentive award that is paid in cash, Common
Stock or a combination of both, awarded under Article VII of this Plan.
Section 1.18A - Performance Criteria. "Performance Criteria" shall mean
- ------------- --------------------
objective, performance criteria established pursuant to this Plan with respect
to awards of Section 162(m) Restricted Stock, Section 162(m) Performance Awards,
Section 162(m) Stock Payments and Section 162(m) Deferred Stock. Performance
Criteria shall be measured in terms of one or more of the following objectives,
described as such objectives relate to corporation-wide objectives or objectives
that are related to the performance of the individual Employee or of the
Subsidiary, division, department or function with the Company or Subsidiary in
which the participant is employed:
(i) market value;
(ii) book value;
(iii) earnings per share;
(iv) market share;
(v) operating profit;
(vi) net income;
(vii) cash flow;
(viii) return on capital;
(ix) return on assets;
(x) return on equity;
(xi) margins;
(xii) shareholder return;
(xiii) sales or product volume growth;
3
<PAGE>
(xiv) productivity improvement; or
(xv) costs or expenses.
Each grant of Section 162(m) Restricted Stock, Section 162(m) Performance
Awards, Section 162(m) Stock Payments, and Section 162(m) Deferred Stock shall
specify the Performance Criteria to be achieved, a minimum acceptable level of
achievement below which no payment or award will be made, and a formula for
determining the amount of any payment or award to be made if performance is at
or above the minimum acceptable level but fall short of full achievement of the
specified Performance Criteria.
If the Committee determines that a change in the business, operations, corporate
structure or capital structure of the Company, or the manner in which it
conducts its business, or other events or circumstances render the Performance
Criteria to be unsuitable, the Committee may modify such Performance Criteria or
the related minimum acceptable level of achievement, in whole or in part, as the
Committee deems appropriate and equitable; provided, however, that no such
modification shall be made if the effect would be to cause the award to fail to
qualify for the performance-based compensation exception to Section 162(m) of
the Code. In addition, at the time the award subject to Performance Criteria is
made and performance goals established, the Committee is authorized to determine
the manner in which the Performance Criteria will be calculated or measured to
take into account certain factors over which the Employees have no or limited
control including market related changes in inventory value, changes in industry
margins, changes in accounting principles, and extraordinary charges to income.
Section 1.19 - Plan. "Plan" shall mean the Amended and Restated Playboy
- ------------ ----
Enterprises, Inc. 1995 Stock Incentive Plan.
Section 1.20 - Restricted Stock. "Restricted Stock" shall mean Common Stock
- ------------ ----------------
awarded under Article VII of this Plan.
Section 1.21 - Restricted Stockholder. "Restricted Stockholder" shall mean an
- ------------ ----------------------
Employee granted an award of Restricted Stock under Article VI of this Plan.
Section 1.22 - Secretary. "Secretary" shall mean the Secretary of the Company.
- ------------ ---------
Section 1.22A - Section 162(m) Deferred Stock. "Section 162(m) Deferred Stock"
- ------------- -----------------------------
shall mean Common Stock awarded under Article VII-A of this Plan.
Section 1.22B - Section 162(m) Performance Award. "Section 162(m) Performance
- ------------- --------------------------------
Award" shall mean a cash bonus, stock bonus, or other performance or incentive
award that is paid in cash, Common Stock or a combination of both, awarded under
Article VII-A of this Plan.
4
<PAGE>
Section 1.22C - Section 162(m) Restricted Stock. "Section 162(m) Restricted
- ------------- -------------------------------
Stock" shall mean Common Stock awarded under Section VI-A of this Plan.
Section 1.22D - Section 162(m) Restricted Stockholder. "Section 162(m)
- ------------- -------------------------------------
Restricted Stockholder" shall mean an Employee granted an award of Section
162(m) Restricted Stock under Article VI-A of this Plan.
Section 1.22E - Section 162(m) Stock Payment. "Section 162(m) Stock Payment"
- ------------- ----------------------------
shall mean (i) a payment in the form of Common Stock, or (ii) an option or other
right to purchase shares of Common Stock, as part of a deferred compensation
arrangement, made in lieu of all or any portion of the compensation, including
without limitation, salary, bonuses and commissions, that would otherwise become
payable to a key Employee in cash, awarded under Article VII-A of this Plan.
Section 1.23 - Securities Act. "Securities Act" shall mean the Securities Act
- ------------ --------------
of 1933, as amended.
Section 1.24 - Stock Payment. "Stock Payment" shall mean (i) a payment in the
- ------------ -------------
form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to a key
Employee in cash, awarded under Article VII of this Plan.
Section 1.25 - Subsidiary. "Subsidiary" shall mean any corporation in an
- ------------ ----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
Section 1.26 - Termination of Employment. "Termination of Employment" shall
- ------------ -------------------------
mean the time when the employee-employer relationship between the Optionee,
Grantee, Restricted Stockholder, or Section 162(m) Restricted Stockholder and
the Company or any Subsidiary is terminated, voluntarily or involuntarily, for
any reason, with or without Cause (as defined below), including, but not by way
of limitation, a termination by resignation, discharge, death, disability or
retirement, but excluding any termination where there is a simultaneous
reemployment by the Company or a Subsidiary. The Committee, subject to the
definition of Cause below, shall determine the effect of all other matters and
questions relating to Termination of Employment, including, but not by way of
limitation, the question of whether particular leaves of absence constitute
Terminations of Employment; provided, however, that, with respect to Incentive
Stock Options, a leave of absence shall constitute a Termination of Employment
if, and to the extent that, such leave of absence interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section. For purposes of the Plan, "Cause" shall
mean an Employee's (a) gross negligence in the performance of the
responsibilities of such Employee's office or
5
<PAGE>
position; (b) any act of dishonesty or moral turpitude materially adversely
affecting the Company or the Company's reputation; (c) commission of any other
willful or intentional act that could reasonably be expected to injure
materially the reputation, business or business relationships of the Company or
any Subsidiary; or (d) conviction of a felony or of any crime involving moral
turpitude, fraud or misrepresentation.
ARTICLE II
SHARES SUBJECT TO PLAN
----------------------
Section 2.1 - Shares Subject to Plan
- ----------- ----------------------
(a) The shares of stock subject to Options, or awards of Restricted Stock,
Section 162(m) Restricted Stock, Performance Awards, Section 162(m) Performance
Awards, Deferred Stock, Section 162(m) Deferred Stock, Stock Payments, or
Section 162(m) Stock Payments shall be Common Stock. The aggregate number of
shares which may be issued upon exercise of such Options or rights or upon any
such awards under the Plan shall not exceed 1,803,000 shares of Common Stock.
(b) The maximum number of shares of Common Stock which may be subject to
Options, rights or other awards granted under the Plan to any Employee in any
calendar year shall not exceed 250,000, and the method of counting such shares
shall conform to any requirements applicable to performance-based compensation
under Section 162(m) of the Code. The shares of Common Stock issuable upon
exercise of such Options or rights or upon any such awards may be either
previously authorized but unissued shares or treasury shares.
(c) With regard to Section 162(m) Performance Awards that are cash bonuses
or other performance or incentive awards expressed as cash awards (without
regard to whether such bonuses or awards are ultimately paid in the form of
cash, stock, or a combination of both as described in Section 7.7A), an Employee
may not be granted during any calendar year such Section 162(m) Performance
Awards in an amount in excess of $1,000,000.
Section 2.2 - Unexercised Options and Awards
- ----------- ------------------------------
If any Option, or other right to acquire shares of Common Stock under any
other award under this Plan, expires or is cancelled without having been fully
exercised (including Restricted Stock, Section 162(m) Restricted Stock or any
other award that is forfeited before applicable vesting requirements are met or
transfer restrictions have lapsed), the number of shares subject to such Option
or other right but as to which such Option or other right was not exercised (or
vested or delivered without restriction, as the case may be) prior to its
expiration or cancellation may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1.
6
<PAGE>
Section 2.3 - Adjustments in Outstanding Options or Rights
- ----------- --------------------------------------------
Subject to Section 4.2(c), in the event that the outstanding shares of the
Common Stock subject to Options or other rights are changed into or exchanged
for a different number or kind of shares of the Company or other securities of
the Company by reason of a recapitalization, reclassification, stock split,
stock dividend or combination of shares or similar transaction, the Committee
shall make an appropriate and equitable adjustment in the number and kind of
shares as to which all outstanding Options or rights, or portions thereof then
unexercised, shall be exercisable, so that the Optionee's, Grantee's, Restricted
Stockholder's or Section 162(m) Restricted Stockholder's proportionate interest
shall be maintained. Such adjustment shall be made without change in the total
price applicable to the unexercised portion of the Option or right (except for
any change in the aggregate price resulting from rounding-off of share
quantities or prices) and with any necessary corresponding adjustment in price
per share; provided, however, that, in the case of Incentive Stock Options, each
such adjustment shall be made in such manner as not to constitute a
"modification" within the meaning of Section 424(h)(3) of the Code. Any such
adjustment made by the Committee shall be final and binding upon all Optionees,
Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the
Company or any Subsidiary, their representatives and all other interested
persons. Such adjustments will also be made in determining Section 2.1
limitations on maximum number and kind of shares which may be issued on exercise
of Options, Restricted Stock, Section 162(m) Restricted Stock or other awards.
The shares of Class B Common Stock reserved under this Plan will be reduced as
Options, Restricted Stock, Section 162(m) Restricted Stock or other awards are
granted or issued so that the aggregate number of any single Class of Stock will
never exceed the total amount of shares authorized under the Plan.
ARTICLE III
GRANTING OF OPTIONS
-------------------
Section 3.1 - Eligibility
- ----------- -----------
Any key Employee of the Company or a Subsidiary except Hugh M. Hefner shall
be eligible to be granted Options.
Section 3.2 - Qualification of Incentive Stock Options.
- ----------- ----------------------------------------
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "incentive stock option" under Section 422 of the Code.
Without limitation of the foregoing, no person shall be granted an Incentive
Stock Option under this Plan if such person, at the time the Incentive Stock
Option is granted, owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company unless such
Incentive Stock Option conforms to the applicable provisions of Section 422 of
the Code.
7
<PAGE>
Section 3.3 - Granting of Options
- ----------- -------------------
(a) The Committee shall from time to time, in its absolute discretion:
(i) Determine which Employees are "key Employees" and select
from among the key Employees (including those to whom Options and/or rights
have been previously granted under the Plan or any other stock option or
other plan of the Company) such of them as in its opinion should be granted
Options; and
(ii) Determine for each Employee the number of shares to be
subject to such Options; and
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Options; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan.
(b) Upon the selection of a key Employee to be granted an Option, the
Committee shall instruct the Secretary or other authorized officer to execute
and deliver a Stock Option Agreement, and may impose such conditions on the
grant of such Option as it deems appropriate, not inconsistent with this Plan.
Without limiting the generality of the preceding sentence, the Committee may, in
its discretion and on such terms as it deems appropriate, require as a condition
on the grant of an Option to an Employee that the Employee surrender for
cancellation some or all of the unexercised Options, awards of Restricted Stock,
Section 162(m) Restricted Stock, Deferred Stock or Section 162(m) Deferred
Stock, Performance Awards, Section 162(m) Performance Awards, Stock Payments or
Section 162(m) Stock Payments or other rights which have been previously granted
to him. An Option, the grant of which is conditioned upon such surrender may
have an Option price lower (or higher) than the Option price of the surrendered
Option, may cover the same (or a lesser or greater) number of shares as the
surrendered Option, may contain such other terms as the Committee deems
appropriate and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, Option period or any other term or
condition of such surrendered Option or award.
(c) Stock Option Agreements evidencing Incentive Stock Options shall
contain such terms and conditions as may be necessary to meet the applicable
provisions of Section 422 of the Code. Any Incentive Stock Option granted under
this Plan may be modified by the Committee to disqualify such option from
treatment as an "incentive stock option" under Section 422 of the Code.
8
<PAGE>
ARTICLE IV
TERMS OF OPTIONS
----------------
Section 4.1 - Option Price
- ----------- ------------
(a) The price of the shares subject to each Non-Qualified Option shall not
be less than 100% of the fair market value of such shares at the end of the
business day immediately preceding the day such Option is granted.
(b) For purposes of the Plan, the fair market value ("Fair Market Value")
of a share of the Company's Common Stock as of a given date shall be: (i) the
closing price of a share of such class of the Company's Common Stock on the
principal exchange on which shares of the Company's Common Stock are then
trading, if any, on the day previous to such date, or, if shares were not traded
on the day previous to such date, then on the next preceding trading day during
which a sale occurred; or (ii) if such Common Stock is not traded on an exchange
but is quoted on NASDAQ or a successor quotation system, (1) the last sales
price (if the Company's Common Stock is then listed as a National Market Issue
under the NASD National Market System) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Company's
Common Stock on the day previous to such date as reported by NASDAQ or such
successor quotation system; or (iii) if such Common Stock is not publicly traded
on an exchange and not quoted on NASDAQ or a successor quotation system, the
mean between the closing bid and asked prices for the Company's Common Stock, on
the day previous to such date, as determined in good faith by the Committee; or
(iv) if the Company's Common Stock is not publicly traded, the fair market value
established by the Committee acting in good faith.
(c) The price of the shares subject to Incentive Stock Options shall not
be less than the greater of (i) 100% of the Fair Market Value of a share of
Common Stock on the date the Incentive Stock Option is granted, or (ii) 110% of
the fair market value of a share of Common Stock on the date such Incentive
Stock Option is granted in the case of an individual then owning (within the
meaning of section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary.
Section 4.2 - Commencement of Exercisability; Change of Control
- ----------- --------------------------------------------------
(a) Subject to the provisions of Sections 4.2(b) and 9.3, Options shall
become exercisable at such times and in such installments (which may be
cumulative) as the Committee shall provide in the terms of each individual
Option; provided, however, that by a resolution adopted after an Option is
granted the Committee may, on such terms and conditions as it may determine to
be appropriate and subject to Sections 4.2(b) and 9.3 and except in connection
with a Change of Control, accelerate the time at which such Option or any
portion thereof may be exercised; provided further, that, to the extent
necessary for this Plan to meet the requirements of Rule 16b-3, no Option
granted
9
<PAGE>
hereunder shall be exercisable for at least six months (or such other period as
may be specified in said Rule) after such Option is granted.
(b) No portion of an Option which is unexercisable at Termination of
Employment shall thereafter become exercisable, except as may be otherwise
provided by the Committee either in the Stock Option Agreement or in a
resolution adopted following the grant of the Option. Except as limited by
requirements of Section 422 of the Code and regulations and rulings thereunder
applicable to Incentive Stock Options, the Committee may extend the term of any
outstanding Option in connection with any Termination of Employment of the
Optionee, or amend any other term or condition of such Option relating to such a
termination.
(c) If an Optionee is terminated without Cause less than one (1) year
after a Change of Control specified in clause (i) or (ii) of the definition
thereof, unless the terms of any Option specifically exclude such right, the
Optionee shall have the right to exercise such Optionee's Option until
expiration thereof pursuant to Section 4.3(a)(ii) with respect to all vested
installments of such Option, and with respect to the next installment (if any)
of such Option that was unvested on the date of such Termination of Employment.
Not less than ninety (90) days prior to the effective date of any Change of
Control specified in clause (iii) of the definition of such term, the Committee
shall give the Employee notice of such event if the Option has then neither been
fully exercised nor become unexercisable under Section 4.3, and shall specify in
such notice a date prior to the effective date of such event when this Option
shall be exercisable with respect to all vested installments thereof, and with
respect to the next installment (if any) of such Option that is unvested on the
date of such Change of Control.
(d) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.2(d), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
Section 4.3 - Expiration of Options
- ----------- ---------------------
(a) Unless an Option expires earlier pursuant to the terms of a Stock
Option Agreement, each Option may be exercised any time until the first of the
following events, after which such Option will become unexercisable:
10
<PAGE>
(i) The expiration of ten (10) years from the date the Option was
granted if the Employee is still employed by the Company or any Subsidiary;
or
(ii) The expiration of three (3) months from the Employee's
Termination of Employment if such Termination of Employment results from
such Employee's retirement, or such Employee's being discharged not for
Cause, unless the Employee dies within said three-month period; or
(iii) The effective date of (i) a Termination of Employment for
Cause, (ii) the Employee's resignation, or (iii) a Change of Control
specified in clause (iii) of the definition of such term; or
(iv) In the case of an Optionee who is disabled (within the
meaning of Section 22(e)(3) of the Code), the expiration of one (1) year
from the date of the Optionee's Termination of Employment; provided,
however, that this subsection (iv) shall not apply if the Optionee dies
within said one-year period; or
(v) One (1) year from the date of the Optionee's death.
(b) Subject to the provisions of Section 4.3(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Options that said Options
expire immediately upon a Termination of Employment for any reason.
(c) The term of any Incentive Stock Option shall not be more than
five (5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of capital stock of
the Company or any Subsidiary.
Section 4.4 - No Right to Continued Employment
- ----------- --------------------------------
Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Optionee any right to continue in the employ of the Company or
any Subsidiary or as a director of the Company, or shall interfere with or
restrict in any way the rights of the Company and any of its Subsidiaries, which
are hereby expressly reserved, to discharge any Optionee at any time for any
reason whatsoever, with or without Cause.
11
<PAGE>
ARTICLE V
EXERCISE OF OPTIONS
-------------------
Section 5.1 - Person Eligible to Exercise
- ----------- ---------------------------
(a) Subject to 5.1(b), during the lifetime of the Optionee, only such
Optionee (or the spouse or former spouse of such Optionee following transfer of
the Option pursuant to a qualified domestic relations order as defined by the
Code or Title I of ERISA, or the rules thereunder) may exercise an Option (or
any portion thereof) granted to such Optionee. After the death of the Optionee,
any exercisable portion of an Option may, within the time frame allowed, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's will or under the then applicable laws of descent
and distribution. To the extent Rule 16b-3 as then in effect permits transfers
of Options other than as provided in this Section 5.1(a), the Committee may by
resolution amend this Section 5.1(a) or the terms of outstanding options to
reflect such other transfer limitation requirements, in the Committee's
discretion.
(b) Should the Optionee be determined under applicable law to have
become a disabled person or the equivalent thereof, the Option may, prior to the
time when the Option becomes unexercisable under the Plan or the applicable
Stock Option Agreement, be exercised by the Optionee's guardian or by any other
person empowered to do so under applicable laws of guardianship. For purposes
of this section 5.1(b), "disabled person" shall mean a person who (i) because of
mental deterioration or physical incapacity is not fully able to manage such
person's person or estate or (ii) is mentally ill and who because of such
person's mental illness is not fully able to manage such person's person or
estate.
Section 5.2 - Partial Exercise
- ----------- ----------------
An exercisable Option may be exercised in whole or in part. However,
an Option shall not be exercisable with respect to fractional shares and the
Committee may require that, by terms of the Option, a partial exercise be with
respect to a minimum number of shares.
Section 5.3 - Manner of Exercise
- ----------- ------------------
All or a portion of an exercisable Option shall be deemed exercised
upon delivery of all of the following to the Secretary of the Company or the
Secretary's office:
(a) A written notice signed by the Optionee (or other person then
entitled to exercise such Option or portion), stating that such Option or
portion thereof is being exercised and such notice complies with all applicable
rules established by the Committee; and
12
<PAGE>
(b) Payment in full for the exercised shares:
(i) In cash or by certified or cashier's check; or
(ii) In shares of the same class of the Company's Common Stock
owned by the Optionee. These shares must be duly endorsed for transfer to
the Company and will be credited at the Fair Market Value on the date of
delivery; or
(iii) With the consent of the Committee and at the sole discretion
of the Company, by a full recourse promissory note bearing interest (at no
less than such rate as shall then preclude the imputation of interest under
the Code or successor provision) and payable upon such terms as may be
prescribed by the Committee. The Committee may also prescribe the form of
such note and the security to be given for such note. No Option may,
however, be exercised by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is
prohibited by law; or
(iv) Any combination of the consideration provided in the
foregoing subsections (i), (ii), and (iii); or
(v) To the extent permitted by law (including then existing
interpretations of Rule 16b-3) a "cashless exercise procedure" satisfactory
to the Committee which permits the Optionee to deliver an exercise notice
to a broker-dealer, who then sells the Option shares, delivers the exercise
price and withholding taxes to the Company and delivers the excess funds
less commission and withholding taxes to the Optionee; and
(c) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share certificates
and issuing stop-transfer orders to transfer agents and registrars; and
(d) Appropriate proof of the right of such person or persons to
exercise the option or portion thereof in the event that the Option or portion
thereof shall be exercised pursuant to Section 5.1 by any person or persons
other than the Optionee; and
(e) Full payment of all amounts which, under federal, state or local
law, it is required to withhold upon exercise of the Option. With the consent
of the Committee, (i) shares of the Company's Common Stock owned by the Employee
duly endorsed for transfer or (ii) subject to the timing requirements of Section
5.4, shares of the Company's Common Stock issuable to the Employee upon exercise
of the Option, valued in
13
<PAGE>
accordance with Section 4.1(b) of the Plan at the date of Option exercise, may
be used to make all or part of such payment.
Section 5.4 - Certain Timing Requirements
- ----------- ---------------------------
At the discretion of the Committee shares of Common Stock issuable to
the Optionee upon exercise of the Option may be used to satisfy the Option
exercise price or the tax withholding consequences of such exercise, in the case
of persons subject to Section 16 of the Exchange Act and to the extent such
limitation is required by Rule 16b-3, as then in effect, only (i) during the
period beginning on the third business day following the date of release of the
quarterly or annual summary statement of sales and earnings of the Company and
ending on the twelfth business day following such date or (ii) pursuant to an
irrevocable written election by the Optionee to use shares of Common Stock
issuable to the Optionee upon exercise of the Option to pay all or part of the
Option price or the withholding taxes made at least six months prior to the
payment of such Option price or withholding taxes.
Section 5.5 - Additional Conditions to Issuance of Stock Certificates
- ----------- -------------------------------------------------------
The shares of Common Stock issuable and deliverable upon the exercise
of an Option shall be fully paid and non-assessable. In addition to
satisfaction of the conditions specified in Sections 5.3 and 5.4, the Company
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations of the
Securities and Exchange Commission or of any other governmental regulatory body,
which the Committee shall, in its absolute discretion, deem necessary or
advisable; and
(b) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(c) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or Board may establish from time to time
for reasons of administrative convenience.
Section 5.6 - Rights as Stockholders
- ----------- ----------------------
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders or the
Company's stock record books reflect the Optionee as a stockholder pursuant to
any book entry procedure approved by the Secretary.
14
<PAGE>
The Committee, in its absolute discretion, may impose such other
restrictions on the transferability of the shares purchasable upon the exercise
of an Option as it deems appropriate. Any such other restriction shall be set
forth in the respective Stock Option Agreement and may be referred to on the
certificates evidencing such shares. The Committee may require the Employee to
give the Company prompt notice of any disposition of shares of Common Stock,
acquired by exercise of an Incentive Stock Option, within (i) two years from the
date of granting such Option or (ii) one year after the transfer of such shares
to such Employee. The Committee may direct that the certificates evidencing
shares acquired by exercise of an Option refer to such requirement to give
prompt notice of disposition.
ARTICLE VI
AWARD OF RESTRICTED STOCK
-------------------------
Section 6.1 - Award of Restricted Stock
- ----------- -------------------------
(a) The Committee shall from time to time, in its absolute
discretion:
(i) Select from among the key Employees (including Employees
who have previously received other awards under this Plan or any other
stock option plan of the Company) such of them as in its opinion should be
awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
(b) In all cases, legal consideration meeting the requirements of
Delaware law shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee to be awarded Restricted
Stock, the Committee shall instruct the Secretary of the Company to issue such
Restricted Stock and may impose such conditions on the issuance of such
Restricted Stock as it deems appropriate.
Section 6.2 - Restricted Stock Agreement
- ----------- --------------------------
Restricted Stock shall be issued only pursuant to a written Restricted
Stock Agreement, which shall be executed by the selected key Employee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
Section 6.3 - No Right to Continued Employment
- ----------- --------------------------------
Nothing in this Plan or in any Restricted Stock Agreement hereunder
shall confer on any Restricted Stockholder any right to continue in the employ
of the
15
<PAGE>
Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Restricted Stockholder at any time for any reason whatsoever,
with or without good cause.
Section 6.4 - Rights as Stockholders
- ----------- ----------------------
Upon delivery of any shares of Restricted Stock that are
certificated to the escrow holder pursuant to Section 6.7, and upon issuance
thereof, if uncertificated, the Restricted Stockholder shall have, unless
otherwise provided by the Committee, all the rights of a stockholder with
respect to said shares, subject to the restrictions in the Restricted Stock
Agreement, including the right to receive all dividends and other distributions
paid or made with respect to the shares; provided, however, that in the
-------- -------
discretion of the Committee, any extraordinary distribution with respect to the
Common Stock shall be subject to the restrictions set forth in Section 6.5.
Section 6.5 - Restrictions
- ----------- ------------
All shares of Restricted Stock issued under this Plan (including
any shares received by holders thereof with respect to shares of Restricted
Stock as a result of stock dividends, stock splits or any other form of
recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company or a Subsidiary, Company performance, individual performance, or a
change of control; provided, however, that by a resolution adopted after the
-------- -------
Restricted Stock is issued, the Committee may, on such terms and conditions as
it may determine to be appropriate, remove any or all of the restrictions
imposed by the terms of the Restricted Stock Agreement. Restricted Stock may
not be sold or encumbered until all restrictions are terminated or expire.
Unless provided otherwise by the Committee, if no consideration (other than
services) was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment for any reason at any time or prior to any date the Committee may
establish.
Section 6.6 - Repurchase of Restricted Stock
- ----------- ------------------------------
If consideration (other than services) was paid for Restricted
Stock, the Committee shall provide in the terms of each individual Restricted
Stock Agreement that the Company shall have the right to repurchase from the
Restricted Stockholder the Restricted Stock then subject to restrictions under
the Restricted Stock Agreement immediately upon a Termination of Employment at a
cash price per share equal to the price paid by the Restricted Stockholder for
such Restricted Stock or such other price as may be specified in the Restricted
Stock Agreement; provided, however, that provision may be made in the Restricted
-------- -------
Stock Agreement in the Committee's discretion that no such right of repurchase
shall exist in the event of a Termination of Employment without
16
<PAGE>
Cause, or following a Change in Control of the Company or because of the
Restricted Stockholder's retirement, death or disability, or otherwise.
Section 6.7 - Escrow
- ----------- ------
The Secretary of the Company or such other escrow holder as the
Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed (or the Secretary shall establish
book entry procedures sufficient to prevent unauthorized transfers of the
Restricted Stock).
Section 6.8 - Legend
- ----------- ------
In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all certificated shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, or
stop transfer instructions with respect to book entry procedures, which legend,
legends or instructions shall make appropriate reference to the conditions
imposed hereby.
ARTICLE VI-A
AWARD OF SECTION 162(m) RESTRICTED STOCK
----------------------------------------
Section 6.1A - Award of Section 162(m) Restricted Stock
- ------------ ----------------------------------------
(a) The Committee shall from time to time, in its absolute
discretion:
(i) Select from among the key Employees (including
Employees who have previously received other awards under this Plan or any
other stock option plan of the Company) such of them as in its opinion
should be awarded Section 162(m) Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms
and conditions applicable to such Section 162(m) Restricted Stock,
consistent with this Plan.
(b) In all cases, legal consideration meeting the requirements of
Delaware law shall be required for each issuance of Section 162(m) Restricted
Stock.
(c) Upon the selection of a key Employee to be awarded Section
162(m) Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Section 162(m) Restricted Stock and may impose such
conditions on the issuance of such Section 162(m) Restricted Stock as it deems
appropriate.
17
<PAGE>
Section 6.2A - Section 162(m) Restricted Stock Agreement
- ------------ -----------------------------------------
Section 162(m) Restricted Stock shall be issued only pursuant to
a written Section 162(m) Restricted Stock Agreement, which shall be executed by
the selected key Employee and an authorized officer of the Company and which
shall contain such terms and conditions as the Committee shall determine,
consistent with this Plan.
Section 6.3A - No Right to Continued Employment
- ------------ --------------------------------
Nothing in this Plan or in any Section 162(m) Restricted Stock
Agreement hereunder shall confer on any Section 162(m) Restricted Stockholder
any right to continue in the employ of the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Section 162(m)
Restricted Stockholder at any time for any reason whatsoever, with or without
good cause.
Section 6.4A - Rights as Stockholders
- ------------ ----------------------
Upon delivery of any shares of Section 162(m) Restricted Stock
that are certificated to the escrow holder pursuant to Section 6.7A, and upon
issuance thereof, if uncertificated, the Section 162(m) Restricted Stockholder
shall have, unless otherwise provided by the Committee, all the rights of a
stockholder with respect to said shares, subject to the restrictions in the
Section 162(m) Restricted Stock Agreement, including the right to receive all
dividends and other distributions paid or made with respect to the shares;
provided, however, that in the discretion of the Committee, any extra ordinary
- -------- -------
distribution with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5A.
Section 6.5A - Restrictions
- ------------ ------------
All shares of Section 162(m) Restricted Stock issued under this
Plan (including any shares received by holders thereof with respect to shares of
Section 162(m) Restricted Stock as a result of stock dividends, stock splits or
any other form of recapitalization) shall, in the terms of each individual
Section 162(m) Restricted Stock Agreement, be subject to such restrictions as
the Committee shall provide, which restrictions may include, without limitation,
restrictions concerning voting rights and transferability. The Section 162(m)
Restricted Stock Agreement shall provide that a Section 162(m) Restricted
Stockholder's rights in Section 162(m) Restricted Stock shall not vest unless
one or more specified Performance Criteria established by the Committee shall
have been achieved. Section 162(m) Restricted Stock may not be sold or
encumbered until all restrictions are terminated or expire. Unless provided
otherwise by the Committee, if no consideration (other than services) was paid
by the Section 162(m) Restricted Stockholder upon issuance, a Section 162(m)
Restricted Stockholder's rights in unvested Section 162(m) Restricted Stock
shall lapse upon Termination of Employment for any reason at any time or prior
to any date the Committee may establish.
18
<PAGE>
Section 6.6A - Repurchase of Section 162(m) Restricted Stock
- ------------ ---------------------------------------------
If consideration (other than services) was paid for Section
162(m) Restricted Stock, the Committee shall provide in the terms of each
individual Section 162(m) Restricted Stock Agreement that the Company shall have
the right to repurchase from the Section 162(m) Restricted Stockholder the
Section 162(m) Restricted Stock then subject to restrictions under the Section
162(m) Restricted Stock Agreement immediately upon a Termination of Employment
at a cash price per share equal to the price paid by the Section 162(m)
Restricted Stockholder for such Section 162(m) Restricted Stock or such other
price as may be specified in the Section 162(m) Restricted Stock Agreement;
provided, however, that provision may be made in the Section 162(m) Restricted
- -------- -------
Stock Agreement in the Committee's discretion that no such right of repurchase
shall exist in the event of a Termination of Employment without Cause, or
following a Change in Control of the Company or because of the Section 162(m)
Restricted Stockholder's retirement, death or disability, or otherwise.
Section 6.7A - Escrow
- ------------ ------
The Secretary of the Company or such other escrow holder as the
Committee may appoint shall retain physical custody of each certificate
representing Section 162(m) Restricted Stock until all of the restrictions
imposed under the Section 162(m) Restricted Stock Agreement with respect to the
shares evidenced by such certificate expire or shall have been removed (or the
Secretary shall establish book entry procedures sufficient to prevent
unauthorized transfers of the Section 162(m) Restricted Stock).
Section 6.8A - Legend
- ------------ ------
In order to enforce the restrictions imposed upon shares of
Section 162(m) Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all certificated shares of
Section 162(m) Restricted Stock that are still subject to restrictions under
Section 162(m) Restricted Stock Agreements, or stop transfer instructions with
respect to book entry procedures, which legend, legends or instructions shall
make appropriate reference to the conditions imposed hereby.
ARTICLE VII
PERFORMANCE AWARDS, DEFERRED STOCK, STOCK PAYMENTS
--------------------------------------------------
Section 7.1 - Performance Awards
- ----------- ------------------
Any key Employee selected by the Committee may be granted one or
more Performance Awards. The value of such Performance Awards may be linked to
the market value, book value, net profits or other measure of the value of
Common Stock or other specific performance criteria determined to be appropriate
by the Committee, in
19
<PAGE>
each case on a specified date or dates or over any period or periods determined
by the Committee, or may be based upon the appreciation in the market value,
book value, net profits or other measure of the value of a specified number of
shares of Common Stock over a fixed period or periods determined by the
Committee. In making such determinations, the Committee shall consider (among
such other factors as it deems relevant in light of the specific type of award)
the contributions, responsibilities and other compensation of the particular key
Employee.
Section 7.2 - Stock Payments
- ----------- --------------
Any key Employee selected by the Committee may receive Stock
Payments in the manner determined from time to time by the Committee. The number
of shares shall be determined by the Committee and may be based upon the Fair
Market Value, book value, net profits or other measure of the value of Common
Stock or other specific performance criteria determined appropriate by the
Committee, determined on the date such Stock Payment is made or on any date
thereafter.
Section 7.3 - Deferred Stock
- ----------- --------------
Any key Employee selected by the Committee may be granted an award
of Deferred Stock in the manner determined from time to time by the Committee.
The number of shares of Deferred Stock shall be determined by the Committee and
may be linked to the market value, book value, net profits or other measure of
the value of Common Stock or other specific performance criteria, in each case
on a specified date or dates or over any period or periods determined by the
Committee. Common Stock underlying a Deferred Stock award will not be issued
until the Deferred Stock award has vested, pursuant to a vesting schedule or
performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
Section 7.4 - Performance Award Agreement, Deferred Stock Agreement, Stock
- ----------- ------------------------------------------------------------
Payment Agreement
- -----------------
Each Performance Award, Deferred Stock Award and/or Stock Payment
shall be evidenced by a written agreement, which shall be executed by the
Grantee and an authorized Officer of the Company and which shall contain such
terms and conditions as the Committee shall determine, consistent with this
Plan.
Section 7.5 - Term
- ----------- ----
The term of a Performance Award Agreement, Deferred Stock Award
and/or Stock Payment shall be set by the Committee in its discretion.
20
<PAGE>
Section 7.6 - Exercise Upon Termination of Employment
- ----------- ---------------------------------------
A Performance Award, Deferred Stock Award and/or Stock Payment is
exercisable or payable only while the Grantee is an Employee; provided that the
Committee may determine that the Performance Award, Deferred Stock Award and/or
Stock Payment may be exercised or paid subsequent to Termination of Employment
without Cause, or following a Change in Control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.
Section 7.7 - Payment
- ----------- -------
Payment of the amount determined under Section 7.1 above shall be
in cash, in Common Stock or a combination of both, as determined by the
Committee. To the extent any payment under this Article VII is effected in
Common Stock, it shall be made subject to satisfaction of all provisions of
Sections 5.3 and 5.5.
Section 7.8 - No Right to Continued Employment
- ----------- --------------------------------
Nothing in this Plan or in any agreement hereunder shall confer on
any Grantee any right to continue in the employ of the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
ARTICLE VII-A
SECTION 162(m) PERFORMANCE AWARDS, SECTION
162(m) DEFERRED STOCK, SECTION 162(m) STOCK PAYMENTS
----------------------------------------------------
Section 7.1A - Section 162(m) Performance Awards
- ------------ ---------------------------------
Any key Employee selected by the Committee may be granted one or
more Section 162(m) Performance Awards. The right to a Section 162(m)
Performance Award shall not vest unless one or more specified Performance
Criteria established by the Committee shall have been achieved.
Section 7.2A - Section 162(m) Stock Payments
- ------------ -----------------------------
Any key Employee selected by the Committee may be granted one or
more Section 162(m) Stock Payments. The right to a Section 162(m) Stock Payment
shall not vest unless one or more specified Performance Criteria established by
the Committee shall have been achieved.
21
<PAGE>
Section 7.3A - Section 162(m) Deferred Stock
- ------------ -----------------------------
Any key Employee selected by the Committee may be granted an
award of Section 162(m) Deferred Stock. An award of Section 162(m) Deferred
Stock shall not vest unless one or more specified Performance Criteria
established by the Committee shall have been achieved. Common Stock underlying a
Section 162(m) Deferred Stock award will not be issued until the Section 162(m)
Deferred Stock award has vested. Unless otherwise provided by the Committee, a
Grantee of Section 162(m) Deferred Stock shall have no rights as a Company
stockholder with respect to such Section 162(m) Deferred Stock until such time
as the award has vested and the Common Stock underlying the award has been
issued.
Section 7.4A - Section 162(m) Performance Award Agreement, Section 162(m)
- ------------ ----------------------------------------------------------
Deferred Stock Agreement, Section 162(m) Stock Payment Agreement
- ----------------------------------------------------------------
Each Section 162(m) Performance Award, Section 162(m) Deferred
Stock Award and/or Section 162(m) Stock Payment shall be evidenced by a written
agreement, which shall be executed by the Grantee and an authorized Officer of
the Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan.
Section 7.5A - Term
- ------------ ----
The term of a Section 162(m) Performance Award Agreement, Section
162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be set by
the Committee in its discretion.
Section 7.6A - Exercise Upon Termination of Employment
- ------------ ---------------------------------------
A Section 162(m) Performance Award, Section 162(m) Deferred Stock
Award and/or Section 162(m) Stock Payment is exercisable or payable only while
the Grantee is an Employee; provided that the Committee may determine that the
Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or
Section 162(m) Stock Payment may be exercised or paid following a Change in
Control of the Company, or because of the Grantee's death or disability.
Section 7.7A - Payment
- ------------ -------
Payment of the amount determined under Section 7.1A above shall
be in cash, in Common Stock or a combination of both, as determined by the
Committee. To the extent any payment under this Article VII-A is effected in
Common Stock, it shall be made subject to satisfaction of all provisions of
Sections 5.3 and 5.5.
22
<PAGE>
Section 7.8A - No Right to Continued Employment
- ------------ --------------------------------
Nothing in this Plan or in any agreement hereunder shall confer
on any Grantee any right to continue in the employ of the Company or any
Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE VIII
ADMINISTRATION
--------------
Section 8.1 - Duties and Powers of Committee
- ----------- ------------------------------
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the agreements pursuant to which
Options, awards of Restricted Stock, Deferred Stock, Section 162(m) Restricted
Stock or Section 162(m) Deferred Stock, Performance Awards, Stock Payments,
Section 162(m) Performance Awards, or Section 162(m) Stock Payments are granted
and awarded and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent herewith and to interpret, amend or
revoke any such rules. Options, awards of Section 162(m) Restricted Stock,
Section 162(m) Deferred Stock, Section 162(m) Performance Awards and Section
162(m) Stock Payments are intended to qualify as performance-based compensation
under Section 162(m) of the Code, and the Committee shall grant or award such
Options, rights or other awards in a manner consistent with the rules governing
performance-based compensation under Section 162(m) of the Code. Any such
interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "incentive stock options"
within the meaning of Section 422 of the Code. In its absolute discretion, the
Board may at any time and from time to time exercise any and all rights and
duties of the Committee under this Plan except with respect to matters which
under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of the
Committee.
Section 8.2 - Majority Rule
- ----------- -------------
The Committee shall act by a majority of its members in attendance
at a meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.
Section 8.3 - Compensation; Professional Assistance; Good Faith Actions
- ----------- ---------------------------------------------------------
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities
23
<PAGE>
incurred by members of the Committee in connection with the administration of
the Plan shall be borne by the Company. The Committee may employ attorneys,
consultants, accountants, appraisers, brokers or other persons. The Committee,
the Company and its Officers and Directors shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee in good faith shall be
final and binding upon all Optionees, Grantees, Restricted Stockholders, Section
162(m) Restricted Stockholders, the Company and all other interested persons.
No member of the Committee shall be personally liable for any action,
determination, or interpretation made in good faith with respect to the Plan or
the Options or other awards, and all members of the Committee shall be fully
protected by the Company in respect to any such action, determination or
interpretation.
ARTICLE IX
OTHER PROVISIONS
----------------
Section 9.1 - Options and Other Rights Are Not Transferable
- ----------- ---------------------------------------------
Except as the Committee may otherwise provide, no Options,
Restricted Stock Awards, Deferred Stock Awards, Performance Awards, Stock
Payments, Section 162(m) Restricted Stock Awards, Section 162(m) Deferred Stock
Awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments or
interest under this Plan or part thereof shall be liable for the debts,
contracts or engagements of any Optionee, Grantee, Restricted Stockholder,
Section 162(m) Restricted Stockholder or their respective successors in interest
or shall be subject to disposition by transfer, alienation, anticipation,
pledge, encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that nothing in this Section 9.1 shall prevent transfers by
will or by the applicable laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of ERISA,
or the rules thereunder.
Section 9.2 - Amendment, Suspension or Termination of the Plan; Modification of
- ----------- -----------------------------------------------------------------
Options
- -------
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board; provided,
however, that no such amendment or modification may (i) increase the maximum
number of shares specified in Section 2.1(a) (except that adjustments authorized
by Section 2.3 of the Plan shall not be limited by this provision) or (ii)
change the Employees eligible to participate in the Plan. Neither the
amendment, suspension nor termination of the Plan shall, without the consent of
the holder of an Option, Restricted Stock, Section 162(m) Restricted Stock or
award, alter or impair any rights or obligations under any such Option,
Restricted Stock, Section 162(m) Restricted Stock or award. No
24
<PAGE>
Option, Restricted Stock, Section 162(m) Restricted Stock or award may be
granted during any period of suspension nor after termination of the Plan, and
in no event may any Option be granted under this Plan after the expiration of
ten years from the date the Plan is approved by the Company's stockholders under
Section 9.3. An Option, Restricted Stock, Section 162(m) Restricted Stock or
award shall be subject in all events to the condition that, if at any time the
Board shall determine, in its discretion, that the listing, registration or
qualification of any of the Company's securities upon any securities exchange or
under any law, regulation or other requirement of any governmental authority is
necessary or desirable, or that any consent or approval from any governmental
authority is necessary or desirable, then the Board may modify the terms of any
Option, Restricted Stock, Section 162(m) Restricted Stock or other award granted
under the Plan, without the consent of the Optionee, Grantee, Restricted
Stockholder or Section 162(m) Restricted Stockholder in any manner which the
Board deems necessary or desirable in order to improve the Company's ability to
obtain such listing, registration, qualification, consent or approval.
Section 9.3 - Approval of Plan by Stockholders
- ----------- --------------------------------
The Plan shall become effective as of the date of Board approval
(the "Effective Date"), subject to the approval of the Company's stockholders
within 12 months after the Effective Date; provided, however, that
-------- -------
notwithstanding anything herein or in any award agreement to the contrary, all
Section 162(m) Performance Awards, Section 162(m) Stock Payments, Section 162(m)
Restricted Stock, and Section 162(m) Deferred Stock awarded prior to such
stockholder approval shall be void if such approval has not been obtained at the
end of said 12-month period.
Section 9.4 - Effect of Plan Upon Other Option and Compensation Plans
- ----------- -------------------------------------------------------
The adoption of this Plan shall not affect any other compensation
or incentive plans in effect for the Company or any Subsidiary. Nothing in this
Plan shall be construed to limit the right of the Company or any Subsidiary (a)
to establish any other forms of incentives or compensation for employees of the
Company or any Subsidiary or (b) to grant or assume options otherwise than under
this Plan in connection with any proper corporate purpose, including, but not by
way of limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, firm or association.
Section 9.5 - No Obligation to Register
- ----------- -------------------------
The Company shall not be deemed, by reason of the granting of any
Option or any other award hereunder, to have any obligation to register the
shares of Common Stock subject to such Option or award under the Securities Act
or to maintain in effect any registration of such shares which may be made at
any time under the Securities Act.
25
<PAGE>
Section 9.6 - Tax Withholding
- ----------- ---------------
The Company shall be entitled to require payment in cash or
deduction from other compensation payable to each Optionee, Grantee, Restricted
Stockholder or Section 162(m) Restricted Stockholder of any sums required by
federal, state or local tax law to be withheld with respect to the issuance,
vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance
Award, Stock Payment, Section 162(m) Restricted Stock, Section 162(m) Deferred
Stock, Section 162(m) Performance Award, or Section 162(m) Stock Payment.
Section 9.7 - Loans
- ----------- -----
The Committee may permit, in its discretion, and subject to the
Company's approval, the extension by the Company of one or more loans to key
Employees in connection with the exercise or receipt of an Option, Performance
Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock
Payment granted under this Plan, or the issuance of Restricted Stock, Deferred
Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded
under this Plan. The terms and conditions of any such loan shall be set by the
Committee, subject to the Company's approval.
Section 9.8 - Limitations Applicable to Section 16 Persons and Performance-Based
- ----------- ------------------------------------------------------------------
Compensation
- ------------
Notwithstanding any other provision of this Plan, any Option,
Performance Award, Stock Payment, Section 162(m) Performance Award, or Section
162(m) Stock Payment granted, or Restricted Stock, Deferred Stock, Section
162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded, to a key
Employee who is then subject to Section 16 of the Exchange Act, shall be subject
to any additional limitations set forth in any applicable exemptive rule under
Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the
Exchange Act) that are requirements for the application of such exemptive rule,
and this Plan shall be deemed amended to the extent necessary to conform to such
limitations. Furthermore, notwithstanding any other provision of this Plan, any
Option, right or award intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall be subject to any additional
limitations set forth in Section 162(m) of the Code (including any amendment to
Section 162(m) of the Code) or any regulations or rulings issued thereunder that
are requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed
amended to the extent necessary to conform to such requirements.
Section 9.9 - Compliance with Laws
- ----------- --------------------
This Plan, the granting and vesting of Options, Restricted Stock
awards, Deferred Stock awards, Performance Awards, Stock Payments, Section
162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section
162(m) Performance
26
<PAGE>
Awards, or Section 162(m) Stock Payments under this Plan and the issuance and
delivery of shares of Common Stock and the payment of money under this Plan or
under Options, Performance Awards, Stock Payments, Section 162(m) Performance
Awards, or Section 162(m) Stock Payments granted or Restricted Stock, Deferred
Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded
hereunder are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
laws and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements. To
the extent permitted by applicable law, the Plan, Options, Restricted Stock
awards, Deferred Stock awards, Performance Awards, Stock Payments, Section
162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section
162(m) Performance Awards, or Section 162(m) Stock Payments granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
Section 9.10 - Transfer Restrictions
- ------------ ---------------------
To the extent required for compliance of the Plan with any
applicable provisions of Rule 16b-3, shares acquired upon exercise of any
Option, award or right under this Plan may not be sold or otherwise transferred
for at least six months (or such other period as provided in such Rule) after
such acquisition.
Section 9.11 - Titles
- ------------ ------
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of the Plan.
Section 9.12 - Governing Law
- ------------ -------------
The laws of the State of Delaware shall govern the
interpretation, validity, administration, enforcement and performance of the
terms of this Agreement regardless of the law that might be applied under
principles of conflicts of laws.
27
<PAGE>
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of Playboy Enterprises, Inc. on __________, 199_.
Executed on this ____ day of ____________, 199_.
-----------------------------
Assistant Secretary
* * * *
I hereby certify that the foregoing Plan was duly approved by the
shareholders of Playboy Enterprises, Inc. on __________, 199_.
Executed on this ____ day of ____________, 199_.
-----------------------------
Secretary
28
<PAGE>
EXHIBIT 10.2
PLAYBOY ENTERPRISES, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE.
This Employee Stock Purchase Plan (the "Plan") is intended to advance the
interests of Playboy Enterprises, Inc. (the "Company") and its stockholders by
allowing employees of the Company and those subsidiaries of the Company that
participate in the Plan the opportunity to purchase shares of the Company's
Class B Common Stock ("Class B Common Stock"). It is intended that the Plan
will constitute an "employee stock purchase plan" within the meaning of Section
423 of the Internal Revenue Code of 1986, as amended from time to time (the
"Code").
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors. The majority of the Committee shall
constitute a quorum, and the action of (a) a majority of the members of the
Committee present at any meeting at which a quorum is present or (b) all members
acting unanimously by written consent, shall be the acts of the Committee.
The interpretation and construction by the Committee of any provision of
the Plan or of any subscription to purchase shares under it shall be final. The
Committee may establish any policies or procedures which in the discretion of
the Committee are relevant to the operation and administration of the Plan and
may adopt rules for the administration of the Plan. The Committee will, from
time to time, designate the subsidiaries (as defined below) of the Company whose
employees will be eligible to participate in the Plan. No member of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any subscription to purchase shares under it. For
purposes of this Plan, the term "subsidiary" means any corporation in which the
Company directly or indirectly owns or controls more than 50 percent of the
total combined voting power of all classes of stock issued by the corporation.
SECTION 3. ELIGIBILITY.
Each employee of the Company or of a participating subsidiary of the
Company whose customary employment is a minimum of 20 hours per week may
subscribe to purchase shares of Class B Common Stock under the terms of the
Plan, except that no employee may subscribe to purchase shares on the
immediately following Purchase Date (as defined below) if, immediately after the
immediately preceding Subscription Date (as defined below), such
<PAGE>
employee would own stock possessing 5 percent or more of the total combined
voting power or value of all classes of stock of the Company or of any
subsidiary of the Company. For purposes of this paragraph, stock ownership of
an individual shall be determined under the rules of Section 424(d) of the Code.
For purposes of the Plan:
(a) The term "Subscription Date" means the first business day of each
fiscal quarter of the Company during which the Plan is effective or, in the case
of a participant who is not an employee of the Company or a participating
subsidiary of the Company as of a particular Subscription Date, the date
thereafter on which such participant became an employee of the Company or a
participating subsidiary of the Company. The first Subscription Date under the
Plan will be July 1, 1996.
(b) The term "Purchase Date" means the last business day of the fiscal
quarter in which the related Subscription Date occurs.
SECTION 4. PARTICIPATION.
(a) An eligible employee shall evidence his or her agreement to subscribe
for shares by completing a written agreement (the "Subscription and
Authorization Form") provided by the Committee and filing it as directed by the
Committee. A Subscription and Authorization Form will take effect within a
reasonable time after it has been filed with the Company. Once an employee
provides the Committee with the Subscription and Authorization Form, he or she
continues as a participant in the Plan on the terms provided in such form until
he or she provides a new form or withdraws from the Plan.
(b) In the Subscription and Authorization Form, an eligible employee shall
designate any whole dollar amount to be withheld from such employee's
compensation in each pay period and used to purchase shares of Common Stock on
the next Purchase Date, subject to the following limitations: (i) the whole
dollar amount (on an annualized basis) shall not exceed 10 percent of his or her
compensation (as defined below) on an annualized basis; (ii) the maximum number
of shares of Class B Common Stock which can be purchased by any one employee on
any Purchase Date shall not exceed 1,000 shares of the Class B Common Stock; and
(iii) the Committee may establish from time to time minimum payroll deductions.
For purposes of this Plan, the term "compensation" means gross regular earnings.
SECTION 5. STOCK.
The stock purchased under the Plan shall be shares of authorized but
unissued or reacquired Class B Common Stock. Subject to the provisions of
Section 6(h), the aggregate number
2
<PAGE>
of shares which may be purchased under the Plan shall not exceed 50,000 shares
of Class B Common Stock. In the event that the dollar amount of shares
subscribed for in any quarter exceeds the number of shares available to be
purchased under the Plan, the shares available to be purchased shall be
allocated on a pro rata basis among the subscriptions.
SECTION 6. TERMS AND CONDITIONS OF SUBSCRIPTIONS.
Subscriptions shall be evidenced by a Subscription and Authorization Form
in such form as the Committee shall from time to time approve, provided that all
employees subscribing to purchase shares shall have the same rights and
privileges (except as otherwise provided in Section 4(b) and subparagraph (d)
below), and provided further that such subscriptions shall comply with and be
subject to the following terms and conditions:
(a) Purchase Price. The purchase price shall be an amount equal to 85
percent of the fair market value of such stock on the Purchase Date. During
such time as the Class B Common Stock is traded on the New York Stock Exchange,
the fair market value per share shall be the closing price of the Class B Common
Stock (as reported in the record of Composite Transactions for New York Stock
Exchange listed securities and printed in The Wall Street Journal) on such
-----------------------
Purchase Date (or on the next regular business date on which shares of the Class
B Common Stock of the Company shall be traded in the event that no shares of the
Class B Common Stock shall have been traded on the Purchase Date). Subject to
the foregoing, the Committee shall have full authority and discretion in fixing
the purchase price.
(b) Medium and Time of Payment. The purchase price shall be payable in
full in United States dollars, pursuant to uniform policies and procedures
established by the Committee. The funds required for such payment will be
derived by withholding from an employee's compensation. An employee shall have
the right at any time to terminate the withholding from his or her compensation
of amounts to be paid toward the purchase price. An employee shall have the
right, one time in each quarter, to change the amount so withheld, by submitting
a written request to the Company at least 10 business days before any Purchase
Date. An employee shall have the right to cancel his or her subscription in
whole or in part and to obtain a refund of amounts withheld from his or her
compensation by submitting a written request to the Company at least 10 business
days before any Purchase Date. Any cancellation of a subscription in whole will
constitute a withdrawal under Section 4(a) of the Plan. Such amounts shall
thereafter be paid to the employee within a reasonable period of time.
(c) No Interest on Employee Funds. No interest shall accrue on any amounts
withheld from an employee's compensation.
3
<PAGE>
(d) Accrual Limitation. No subscription shall permit the rights of an
employee to purchase stock under all "employee stock purchase plans" (as defined
in the Code) of the Company to accrue, under the rules set forth in Section
423(b)(8) of the Code, at a rate which exceeds $25,000 of fair market value of
such stock (determined at the time of subscription) for each calendar year.
(e) Termination of Employment. If an employee who has subscribed for
shares ceases to be employed by the Company or a participating subsidiary before
any applicable Purchase Date:
i. Because of retirement or disability, he or she may elect to
continue making payments equal to the rate of payroll deductions made before
retirement or disability until the first Purchase Date following retirement or
disability; or otherwise the accumulated payment in his or her account at the
time of retirement or disability will be applied to purchase shares at the
applicable purchase price on the first Purchase Date following such retirement
or disability, unless the Company is otherwise notified in writing.
ii. For any other reason, he or she may elect to have the accumulated
payment in his or her account at the time of termination applied to purchase
shares at the applicable purchase price on the first Purchase Date following
such termination; or otherwise the total unused payments credited to his or her
account on the date of termination will be refunded within a reasonable time
without interest, unless the Company is otherwise notified in writing.
(f) Transferability. Neither payments credited to an employee's account
nor any rights to subscribe to purchase shares of Class B Common Stock under the
Plan may be transferred by an employee except by the laws of descent and
distribution. Any such attempted transfer will be without effect, except that
the Company may treat such act as an election by the employee to withdraw in
accordance with Section 6(b). Shares of Class B Common Stock may be purchased
under the Plan only by subscribing employees who have legal capacity as
determined under applicable state law or, in the event of the employee's legal
incapacity, by his or her guardian or legal representative acting in a fiduciary
capacity on behalf of the employee under state law or court supervision.
(g) Death and Designation of Beneficiary. An employee may file with the
Company a written designation of beneficiary and may change such designation of
beneficiary at any time by written notice to the Company. On the death of an
employee, the elections provided on termination of employment for retirement or
disability may be exercised by the employee's beneficiary, executor,
administrator, or other legal representative.
4
<PAGE>
(h) Adjustments. The Committee may make or provide for such adjustments in
the purchase price and in the number or kind of shares of the Class B Common
Stock or other securities covered by outstanding subscriptions, or specified in
the second sentence of Section 5 of the Plan, as the Committee in its sole
discretion, exercised in good faith, may determine is equitably required to
prevent dilution or enlargement of the rights of employees that would otherwise
result from (i) any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Company; (ii)
any merger, consolidation, spin-off, split-off, spin-out, split-up, separation,
reorganization, partial or complete liquidation, or other distribution of
assets, issuance of rights or warrants to purchase stock; or (iii) any other
corporate transaction or event having an effect similar to any of the foregoing.
Moreover, in the event of any such transaction or event, the Committee, in its
discretion, may provide in substitution for any or all outstanding subscriptions
under this Plan such alternative consideration as it, in good faith, may
determine to be equitable in the circumstances.
(i) Rights as a Stockholder. An employee shall have no rights as a
stockholder with respect to any Class B Common Stock covered by his or her
subscription until the Purchase Date following payment in full. No adjustment
shall be made for dividends (ordinary or extraordinary, whether in cash,
securities or other property) or distributions or other rights for which the
record date is prior to the date of such purchase, except as provided in Section
6(h) of the Plan.
(j) Fractional Shares. Fractional shares may be purchased under the Plan
and credited to an account for the employee. The Company, however, shall have
the right to pay cash in lieu of any fractional shares of Class B Common Stock
to be distributed from an employee's account under the Plan.
(k) Other Provisions. The Subscription and Authorization Form authorized
under the Plan shall contain such other provisions as the Committee may deem
advisable, provided that no such provisions may in any way be in conflict with
the terms of the Plan.
SECTION 7. TERM OF PLAN.
Eligible employees may subscribe for shares under the Plan within a period
of ten years from the date the Plan is adopted by the Board of Directors;
provided, however, that the Committee may terminate or suspend the Plan if at
any time there are less than 5 percent of the eligible employees participating
in the Plan.
5
<PAGE>
SECTION 8. AMENDMENT OF THE PLAN.
The Plan may be amended from time to time by the Committee, but without
further approval of the stockholders, no such amendment shall (a) increase the
aggregate number of shares of Class B Common Stock that may be issued and sold
under the Plan (except that adjustments authorized by Section 6(h) of the Plan
shall not be limited by this provision) or (b) materially modify the
requirements as to eligibility for participation in the Plan.
SECTION 9. APPROVAL OF STOCKHOLDERS.
The Plan shall take effect upon adoption by the Board of Directors;
provided, however, that any subscriptions and purchases under the Plan shall be
null and void unless the Plan is approved by a vote of the holders of a majority
of the total number of outstanding shares of voting stock of the Company present
in person or by proxy at a meeting at which a quorum is present in person or by
proxy, which approval must occur within the period of 12 months after the date
the Plan is adopted by the Board of Directors.
6
<PAGE>
EXHIBIT 10.3(a)
AGREEMENT
This Agreement (this "Agreement") is made as of the 16th day of October,
1996, by and between Playboy Enterprises, Inc. (the "Company") and Anthony J.
Lynn ("Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company and Employee are parties to that certain agreement
dated May 21, 1992, as amended (the "Employment Agreement"); and
WHEREAS, the Company and Employee desire to amend the Employment Agreement
to incorporate and reflect all amendments to the date of this Agreement and to
amend such other provisions of the Employment Agreement as are hereinafter set
forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants, and
subject to the terms and conditions herein set forth, the parties hereto agree
as follows:
1. Defined Terms. All capitalized terms used and not otherwise defined
-------------
herein shall have the meanings assigned to such terms in the Employment
Agreement.
2. Amendments to Employment Agreement. The Employment Agreement is hereby
----------------------------------
amended as follows:
2.01 Paragraphs 3.B., 3.D., 12.C. and 12.E. of the Employment Agreement
are hereby terminated and severed from the Employment Agreement, and shall have
no further force or effect from and after the date hereof. From and after the
date of this Agreement, Employee's rights to any compensation in the nature of
Contingent Compensation or Equity Bonuses shall be governed exclusively by the
1996 Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn
(the "Plan), a copy of which has been provided to Employee. Employee
understands and agrees that his entitlement to Contingent Compensation and
Equity Bonuses for periods after June 30, 1996 is subject to, and contingent
upon, approval by the Company's stockholders of the Plan at the Company's annual
meeting of stockholders scheduled to be held November 13, 1996, and any and all
rights thereunder shall be void and of no force and effect should the Company's
stockholders not approve the Plan.
2.02 From and after the date of this Agreement, all references in this
Agreement and the Employment Agreement to (a) "Contingent Compensation" shall
mean "Post-1997 Contingent Compensation" and "1997 Contingent Compensation" (as
defined in the Plan), (b) "Equity Bonus" shall mean and include the terms
<PAGE>
"Post-1997 Equity Bonus" and "1997 Equity Bonus" (as defined in the Plan), (c)
"Equity Disposition Transactions" shall mean and include "Equity Disposition
Transaction" and "1997 Equity Disposition Transaction" (as defined in the Plan),
(d) "Pre-tax Profits" shall mean and include "Pre-tax Profits" and "1997 Pre-tax
Profits" (as defined in the Plan), and (e) "Profits Base" shall mean "Profits
Base" (as defined in the Plan).
2.03 Paragraph 2 of the Employment Agreement is hereby amended by
amending and restating such Paragraph in its entirety as follows:
"2. TERM:
----
The term of this Agreement shall commence on July 1, 1996 and
shall continue until June 30, 2000 or the date upon which this
Agreement is terminated pursuant to the provisions of paragraphs 8 -
11 below, whichever occurs first (the "Employment Term")."
2.04 Paragraph 3.A. of the Employment Agreement is hereby amended by
amending and restating such Paragraph in its entirety as follows:
"A. Basic Compensation: Employee shall receive annual basic
------------------
compensation as follows ("Basic Compensation") and payable bi-weekly
pursuant to the Company's normal payroll practices:
(i) July 1, 1996 through June 1, 1997 - Five Hundred Twenty-
Five Thousand Dollars ($525,000); and
(ii) July 1, 1997 through June 30, 2000 - Five Hundred Fifty
Thousand Dollars ($550,000)."
2.05 Paragraph 12.D. of the Employment Agreement is hereby amended by
amending and restating such Paragraph in its entirety as follows:
"D. If Employee's employment with the Company is terminated by the
Company without cause as provided in Paragraph 10 above, then Employee
shall only be entitled to receive, and the Company shall unconditionally
pay to Employee without offset of any kind or nature, except as described
below, a one-time severance payment equal to your Basic Compensation in the
fiscal year in which such termination occurs.
Any amounts payable to Employee pursuant to this paragraph 12.D.
will be reduced by any amounts paid to Employee pursuant to Employee's
Change in Control Severance Agreement dated as of June 1, 1992."
2
<PAGE>
3. Miscellaneous.
-------------
3.01 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original, and all of which
together shall constitute one and the same instrument.
3.02 Ratification. The Employment Agreement as hereby amended is in
------------
all respects ratified and confirmed, and, as amended, all of the rights and
powers created thereby or thereunder shall be and remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed or caused their duly
authorized representatives to execute, this Agreement as of the date first above
written.
PLAYBOY ENTERPRISES, INC.
By:/s/Howard Shapiro
-------------------------------
/s/Anthony J. Lynn
------------------------------
Anthony J. Lynn
3
<PAGE>
EXHIBIT 10.3(b)
PLAYBOY ENTERPRISES, INC.
INCENTIVE COMPENSATION PLAN FOR ANTHONY J. LYNN
Playboy Enterprises, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), hereby adopts this Playboy Enterprises, Inc.
Incentive Compensation Plan for Anthony J. Lynn (the "Plan"). The Compensation
Committee of the Board of Directors of the Company (the "Committee") and the
Board of Directors of the Company have approved the terms and conditions
reflected in the Plan. The purposes of the Plan are as follows:
(1) To further the growth, development and financial success of the Company
by providing additional incentives to Anthony J. Lynn ("Employee") through
incentive compensation.
(2) To enable the Company to obtain and retain the services of Employee who
is considered essential to the long-range success of the Company by providing
and offering him an opportunity to participate in incentive compensation
arrangements which will reflect the growth, development and financial success of
the Company.
Section 1 - 1997 Contingent Compensation and Post-1997 Contingent
--------- -----------------------------------------------------
Compensation.
- ------------
(a) Employee shall receive contingent compensation for the 1997 fiscal year
("1997 Contingent Compensation"), computed as follows:
(i) Employee shall receive a sum equal to 5% of the amount by which
the 1997 Pre-tax Profits of the Playboy Entertainment Group for the 1997 fiscal
year (July 1 through June 30) exceeds the Profits Base; provided, however, if
the sum of $525,000 plus 1997 Contingent Compensation equals $2,000,000, any
additional 1997 Contingent Compensation payable to Employee will be equal to
2.5% of the amount by which the 1997 Pre-tax Profits of the Playboy
Entertainment Group exceeds the Profits Base.
(ii) The Profits Base is defined as $2,350,000.
(iii) (A) "1997 Pre-tax Profits" of the Playboy Entertainment Group
for the 1997 fiscal year shall be the amount, if any, by which the total net
revenues of the Playboy Entertainment Group, including its subsidiaries and the
Group's pro-rata share of revenues derived from all controlled affiliates
exceeds all reasonable and applicable operating expenses attributable to same,
in accordance with "Generally Accepted Accounting Principles" computed
consistent with methods utilized by the Company in the 1992 fiscal year and used
by the Company's outside auditors in the preparation of the Company's audited
financial statements.
<PAGE>
(B) In computing the 1997 Pre-tax Profits of the Playboy
Entertainment Group for the 1997 fiscal year, there shall be allowed all fair
and reasonable allocation of items of revenue and expenses between divisions,
subsidiaries and affiliates of the Company, including, but not limited to, inter
company sales, expenses such as rents, occupancy, general administrative and
personnel salaries, MIS, insurance, employee benefits costs, security, payroll
processing, legal and tax advisory fees, depreciation, profit sharing and
auditing expenses.
(C) Further, the effect of any One Time Gains or Losses
accounted for as part of the Playboy Entertainment Group shall be amortized
evenly over four (4) years, beginning in the month of occurrence, for purposes
of calculating 1997 Pre-tax Profits, regardless of how the transaction is
accounted for under Generally Accepted Accounting Principles. A "One Time Gain
or Loss" is a gain or loss resulting from a transaction not in the ordinary
course of business and which does not result in a 1997 Equity Bonus or a Post-
1997 Equity Bonus under Section 2 of this Plan.
(D) In no event shall profits or losses, except as described in
Section 1(a)(iii)(C), from any fiscal year be carried over or back to any other
fiscal year or otherwise taken into consideration in computing the 1997 Pre-tax
Profits.
(iv) The 1997 Contingent Compensation to which Employee is entitled
shall be paid on or before the date which is five business days after the
earlier of:
(A) The date on which the Company's outside auditors complete
their field work for the Company with regard to the 1997 fiscal year; or
(B) The date on which such outside auditors approve the release
of the annual earnings of the Company for the 1997 fiscal year; or
(C) 90 days after the end of the 1997 fiscal year.
Notwithstanding anything in this Section 1(a)(iv) to the contrary, Employee
shall not be paid 1997 Contingent Compensation until after the Committee
certifies in writing that the performance goals and any other material terms
specified herein and necessary for Employee to receive such 1997 Contingent
Compensation have been satisfied.
(v) The Company shall, concurrently with payment to Employee of the
1997 Contingent Compensation to which he is entitled hereunder, deliver and
render to Employee a detailed accounting (certified by the Chief Financial
Officer of the
-2-
<PAGE>
Company) setting forth therein the Company's determination of the 1997 Pre-tax
Profits of the Playboy Entertainment Group.
(vi) 1997 Contingent Compensation, if any, due to Employee following
the termination of Employee's employment with the Company shall be governed
solely by the provisions of Section 1(c).
(b) Employee shall receive annual contingent compensation ("Post-1997
Contingent Compensation") for each of the fiscal years during the Section 1(b)
Term, computed as follows:
(i) Employee shall receive a sum equal to 5% of the amount by which
the Pre-tax Profits of the Playboy Entertainment Group for each fiscal year
(July 1 through June 30) during the Section 1(b) Term exceeds the Profits Base;
provided, however, once the sum of $550,000 plus Post-1997 Contingent
Compensation equals $2,000,000 in any fiscal year, any additional Post-1997
Contingent Compensation payable to Employee in such fiscal year will be equal to
2.5% of the amount by which the Pre-tax Profits of the Playboy Entertainment
Group in such fiscal year exceeds the Profits Base. Each fiscal year shall be
deemed a separate accounting period for purposes of computing Post-1997
Contingent Compensation for such fiscal year.
(ii) The Profits Base is defined as $2,350,000.
(iii) (A) "Pre-tax Profits" of the Playboy Entertainment Group for
any fiscal year shall be the amount, if any, by which the total net revenues of
the Playboy Entertainment Group, including its subsidiaries and the Group's pro-
rata share of revenues derived from all controlled affiliates exceeds all
reasonable and applicable operating expenses attributable to same, in accordance
with "Generally Accepted Accounting Principles" computed consistent with methods
utilized by the Company and used by the Company's outside auditors in the
preparation of the Company's audited financial statements.
(B) In computing the Pre-tax Profits of the Playboy
Entertainment Group for any fiscal year, there shall be allowed all fair and
reasonable allocation of items of revenue and expenses between divisions,
subsidiaries and affiliates of the Company, including, but not limited to, inter
company sales, expenses such as rents, occupancy, general administrative and
personnel salaries, MIS, insurance, employee benefits costs, security, payroll
processing, legal and tax advisory fees, depreciation, profit sharing and
auditing expenses.
(C) Further, the effect of any One Time Gains or Losses
accounted for as part of the Playboy Entertainment Group shall be amortized
evenly over four (4) years, beginning in the month of occurrence, for purposes
of calculating Pre-tax Profits, regardless of how the transaction is accounted
for under
-3-
<PAGE>
Generally Accepted Accounting Principles. A "One Time Gain or Loss" is a gain
or loss resulting from a transaction not in the ordinary course of business and
which does not result in a 1997 Equity Bonus or a Post-1997 Equity Bonus under
Section 2 of this Plan.
(D) In no event shall profits or losses, except as described in
Section 1(b)(iii)(C), from any fiscal year be carried over or back to any other
fiscal year or otherwise taken into consideration in computing the Pre-tax
Profits for any other fiscal year.
(iv) The Post-1997 Contingent Compensation for each fiscal year to
which Employee is entitled shall be paid on or before the date which is (5)
business days after the earlier of:
(A) The date on which the Company's outside auditors complete
their field work for the Company with regard to such fiscal year; or
(B) The date on which such outside auditors approve the release
of the annual earnings of the Company for such fiscal year; or
(C) 90 days after the end of such fiscal year.
Notwithstanding anything in this Section 1(b)(iv) to the contrary, Employee
shall not be paid Post-1997 Contingent Compensation for a fiscal year until
after the Committee certifies in writing that the performance goals and any
other material terms specified herein and necessary for Employee to receive such
Post-1997 Contingent Compensation have been satisfied.
(v) The Company shall, concurrently with payment to Employee of the
Post-1997 Contingent Compensation for each fiscal year to which he is entitled
hereunder, deliver and render to Employee a detailed accounting (certified by
the Chief Financial Officer of the Company) setting forth therein the Company's
determination of the Pre-tax Profits of the Playboy Entertainment Group for each
such fiscal year.
(vi) This Section 1(b) shall be in effect for the 1998, 1999 and
2000 fiscal years, and for each fiscal year thereafter unless and until notice
is given by the Committee to Employee that this Section 1(b) shall not apply to
the specified fiscal year following the 2000 fiscal year ("Section 1(b) Term").
Such notice shall be in writing and delivered no later than 30 calendar days
prior to the commencement of the relevant fiscal year.
-4-
<PAGE>
(vii) Post-1997 Contingent Compensation, if any, due to Employee
following the termination of Employee's employment with the Company shall be
governed solely by the provisions of Section 1(c).
(c) (i) If Employee's employment with the Company is effectively
terminated for "cause" as provided for under any then existing employment
agreement between Employee and the Company, then Employee shall only be entitled
to receive, and the Company shall unconditionally pay to Employee, all 1997
Contingent Compensation or Post-1997 Contingent Compensation, as the case may
be, payable with respect to all periods prior to the fiscal year ("Section 1(c)
Termination Year") during which the Company notifies Employee that his
employment with the Company is so terminated.
(ii) If Employee's employment with the Company is effectively
terminated on account of Employee's disability as provided under any then
existing employment agreement between Employee and the Company, or otherwise as
provided in the Company's long-term disability policy, or on account of
Employee's death, then Employee (or Employee's estate or personal
representative, as applicable) shall only be entitled to receive, and the
Company shall unconditionally pay to Employee (or Employee's estate or personal
representative, as applicable), the following amounts:
(A) All unpaid Post-1997 Contingent Compensation and 1997
Contingent Compensation, as the case may be, payable with respect to all periods
prior to the Section 1(c) Termination Year during which the Company notifies
Employee that his employment with the Company is so terminated, or Employee's
death, as the case may be, plus
(B) That percentage of the 1997 Contingent Compensation or
Post-1997 Contingent Compensation, as the case may be, otherwise payable to
Employee for the Section 1(c) Termination Year equal to the fraction, the
numerator of which is the number of calendar days from the beginning of the
Section 1(c) Termination Year through the effective date of termination and the
denominator of which is 365.
(iii) If Employee's employment with the Company is terminated by the
Company without cause as defined under any then existing employment agreement
between Employee and the Company, then Employee shall only be entitled to
receive, and the Company shall pay to Employee, 100% of the 1997 Contingent
Compensation or Post-1997 Contingent Compensation, as the case may be, to which
Employee would have been entitled for and only for the Section 1(c) Termination
Year (based upon the actual 1997 Pre-tax Profits or Pre-tax Profits, as the case
may be, of the Playboy Entertainment Group for such fiscal year). Any amounts
payable to Employee pursuant to this Section 1(c)(iii) will be
-5-
<PAGE>
reduced by any amounts paid to Employee pursuant to Employee's Change in Control
Severance Agreement dated as of June 1, 1992.
Section 2 - 1997 Equity Bonus and Post-1997 Equity Bonus.
--------- --------------------------------------------
(a) Employee shall be entitled to a bonus for the 1997 fiscal year ("1997
Equity Bonus") in accordance with the following provisions:
(i) In the event that the Company directly or indirectly sells,
transfers or otherwise disposes of an equity interest in Playboy Entertainment
Group, Inc. ("PEGI") (or all or a portion of the assets comprising the Playboy
Entertainment Group operations) (except sales of assets or operations that
contributed less than 25% of the Group's total Pre-tax Profits in the fiscal
year immediately preceding the fiscal year in which such sale, transfer or
disposition occurs ("Measuring Year") or less than a 25% equity interest) to a
third party (including a sale to the public) ("1997 Disposition") during the
1997 fiscal year and such 1997 Disposition occurs either (A) while Employee is
employed by the Company or (B) within three (3) months after he is no longer
employed by the Company (a "1997 Equity Disposition Transaction"), then Employee
shall be entitled to a one-time 1997 Equity Bonus, as defined in Section
2(a)(ii) of this Plan. The 1997 Equity Bonus will be paid to Employee in cash
promptly following the closing date of the 1997 Equity Disposition Transaction.
However, Employee shall not be paid the 1997 Equity Bonus until after the
Committee certifies in writing that the performance goals and any other material
terms specified herein and necessary for Employee to receive such 1997 Equity
Bonus have been satisfied.
(ii) The 1997 Equity Bonus shall be computed by multiplying 1997 EB
Pre-Tax Profits times the Remaining Term. "1997 EB Pre-Tax Profits" means (A) in
the case of the sale, transfer or other disposition of an equity interest in
PEGI entitling Employee to a 1997 Equity Bonus hereunder, the total Pre-tax
Profits of PEGI for the Measuring Year times the fully-diluted percentage equity
interest in PEGI acquired by the third party, and (B) in the case of a sale,
transfer or other disposition of all or a portion of the assets comprising the
Playboy Entertainment Group entitling Employee to a 1997 Equity Bonus hereunder,
that portion of the Pre-tax Profits of Playboy Entertainment Group generated or
attributable to such assets for the Measuring Year. "Remaining Term" means the
lesser of (A) three (3) or (B) the number arrived at by dividing the number of
full months remaining in Employee's employment term, as established by the
Committee, by 12.
(iii) It is the express intent of the Plan that the 1997 Equity Bonus
shall only be payable in connection with a
-6-
<PAGE>
1997 Equity Disposition Transaction which constitutes a bona fide transfer of an
equity interest in PEGI or a bona fide sale of assets, and shall not be payable
in connection with any other transaction (whether in the form of joint ventures,
co-productions or otherwise) which represents a financing transaction. In no
event shall the Company structure a transaction which would otherwise constitute
a sale or disposition of an equity interest in PEGI or a sale of assets as a
financing transaction for the purposes of frustrating the provisions of this
Section 2(a)(iii).
(iv) The payment of the 1997 Equity Bonus, if any, will be in
addition to any 1997 Contingent Compensation or Post-1997 Contingent
Compensation payable to Employee under Section 1 of this Plan.
(b) Employee shall be entitled to a bonus ("Post-1997 Equity Bonus") for
all fiscal years beginning with or after the 1998 fiscal year in accordance with
the following provisions:
(i) In the event that the Company directly or indirectly sells,
transfers or otherwise disposes of an equity interest in PEGI (or all or a
portion of the assets comprising the Playboy Entertainment Group operations)
(except sales of assets or operations that contribute less than 25% of the
Group's total Pre-tax Profits in the Measuring Year or less than a 25% equity
interest) to a third party (including a sale to the public) ("Post-1997
Disposition") after June 30, 1997 and such Post-1997 Disposition occurs either
(A) while Employee is employed by the Company or (B) within three (3) months
after he is no longer employed by the Company (an "Equity Disposition
Transaction"), then Employee shall be entitled to a one-time Post-1997 Equity
Bonus, as defined in Section 2(b)(ii) of this Plan. The Post-1997 Equity Bonus
will be paid to Employee in cash promptly following the closing date of the
Equity Disposition Transaction. However, Employee shall not be paid the Post-
1997 Equity Bonus until after the Committee certifies in writing that the
performance goals and any other material terms specified herein and necessary
for Employee to receive such Post-1997 Equity Bonus have been satisfied.
(ii) The Post-1997 Equity Bonus shall be computed by multiplying
Post-1997 EB Pre-Tax Profits times the Remaining Term. "Post-1997 EB Pre-Tax
Profits" means (A) in the case of the sale, transfer or other disposition of an
equity interest in PEGI entitling Employee to a Post-1997 Equity Bonus
hereunder, the total Pre-tax Profits of PEGI for the Measuring Year times the
fully-diluted percentage equity interest in PEGI acquired by the third party,
and (B) in the case of a sale, transfer or other disposition of all or a portion
of the assets comprising the Playboy Entertainment Group entitling Employee to a
Post-1997 Equity Bonus hereunder, that portion of the Pre-tax Profits of Playboy
Entertainment Group generated or attributable to such assets for the Measuring
Year.
-7-
<PAGE>
(iii) It is the express intent of the Plan that the Post-1997 Equity
Bonus shall only be payable in connection with an Equity Disposition Transaction
which constitutes a bona fide transfer of an equity interest in PEGI or a bona
fide sale of assets, and shall not be payable in connection with any other
transaction (whether in the form of joint ventures, co-productions or otherwise)
which represents a financing transaction. In no event shall the Company
structure a transaction which would otherwise constitute a sale or disposition
of an equity interest in PEGI or a sale of assets as a financing transaction for
the purposes of frustrating the provisions of this Section 2(b)(iii).
(iv) The payment of the Post-1997 Equity Bonus, if any, will be in
addition to any 1997 Contingent Compensation or Post-1997 Contingent
Compensation payable to Employee under Section 1 of this Plan.
Section 3 - Approval of Plan by Stockholders. The Plan will be submitted
--------- --------------------------------
for the approval by the Company's stockholder prior to the end of the Company's
1997 fiscal year. The Plan shall not take effect unless and until the Plan
receives such stockholder approval.
Section 4 - Administration.
--------- --------------
(a) It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and to adopt rules for the
administration, interpretation and application of the Plan as are consistent
herewith and to interpret, amend or revoke any such rules.
(b) The Committee shall act by a majority of its members in attendance at
a meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.
(c) Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board of Directors of the
Company. All expenses and liabilities incurred by members of the Committee in
connection with the administration of the Plan shall be borne by the Company.
The Committee may employ attorney, consultants, accountants, appraisers, brokers
or other persons. The Committee, the Company and its officers and directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee in good faith shall be final and binding upon Employee, the
Company and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or awards thereunder, and all
-8-
<PAGE>
members of the Committee shall be fully protected by the Company in respect to
such action, determination or interpretation.
Section 5 - Tax Withholding. The Company shall be entitled to require
--------- ---------------
payment in cash or deduction from other compensation payable to Employee of any
sums required by federal, state or local tax law to be withheld with respect to
the payment or vesting of any award hereunder.
Section 6 - Titles. Titles are provided herein for convenience only and
--------- ------
are not to serve as a basis for interpretation or construction of the Plan.
Section 7 - Governing Law. The laws of the State of Delaware shall govern
--------- -------------
the interpretation, validity, administration, enforcement and performance of the
terms of this Agreement regardless of the law that might be applied under
principles of conflicts of laws.
* * * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Playboy Enterprises, Inc. on October 9, 1996.
Executed on this 22 day of November, 1996.
/s/Robert O. Campbell
---------------------
Assistant Secretary
* * * *
I hereby certify that the foregoing Plan was duly approved by the
shareholders of Playboy Enterprises, Inc. on November 13, 1996.
Executed on this 14th day of November, 1996.
/s/Howard Shapiro
-----------------
Secretary
-9-
<PAGE>
EXHIBIT 10.3(c)
[LETTERHEAD OF PLAYBOY ENTERPISES, INC. APPEARS HERE]
DATE October 11, 1996
--------------------------------------------------------------------------
TO Herb Laney
----------------------------------------------------------------------------
FROM Christie Hefner
--------------------------------------------------------------------------
SUBJECT: Employment Terms
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
This memo restates and supersedes our prior letter to you of February 26,
1993 and my memo to you of this year dated May 1, 1996, both of which are
terminated as of the date hereof.
Effective with the fiscal year commencing July 1, 1996, you will carry the
title of Senior Vice President and President, Catalog Group. Your salary
will continue to be $275,000 per year.
The terms of, and your entitlement to compensation under, your special
incentive compensation plan for the fiscal years ending June 1, 1997, 1998
and 1999 will be governed exclusively by the 1996 Playboy Enterprises, Inc.
Incentive Compensation Plan for Herbert M. Laney (the "Plan"), a copy of
which has been provided to you. You understand and agree that your
entitlement to such compensation with respect to such periods is subject
to, and contingent upon, approval by the Company's stockholders of the Plan
at the Company's annual meeting of stockholders scheduled to be held
November 13, 1996, and any and all rights thereunder shall be void and of
no force and effect should the Company's stockholders not approve the Plan.
If your employment is terminated for any reason other than cause, you will
receive a full year's severance.
Herb, I am very pleased to memorialize the terms of your arrangement with
the Company. You continue to exhibit exceptional performance, innovation
and enthusiasm for the catalog business. We have great expectations for
growth in this group for the next several years.
ACCEPTED AND AGREED TO:
/s/ Herb Laney
-----------------------
Herb Laney
Date October 14, 1996
-------------------
<PAGE>
EXHIBIT 10.3(d)
PLAYBOY ENTERPRISES, INC.
INCENTIVE COMPENSATION PLAN FOR HERBERT M. LANEY
Playboy Enterprises, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), hereby adopts this Playboy Enterprises, Inc.
Incentive Compensation Plan for Herbert M. Laney (the "Plan"). The Compensation
Committee of the Board of Directors of the Company (the "Committee") and the
Board of Directors of the Company have approved the terms and conditions
reflected in the Plan by action taken on April 25, 1996. The purposes of the
Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to Herbert M. Laney ("Employee")
through incentive compensation.
(2) To enable the Company to obtain and retain the services of Employee,
who is considered essential to the long-range success of the Company, by
providing and offering him an opportunity to participate in incentive
compensation arrangements which will reflect the growth, development and
financial success of the Company.
Section 1 - Contingent Compensation. Employee shall receive a sum equal to
--------- -----------------------
5% on all pre-tax operating profits earned by the Catalog Group in excess of the
fiscal 1996 operating profits of the Group based on cumulative profits achieved
over a three year period from Fiscal Year 1997 through Fiscal Year 1999 (the
"Contingent Compensation"). (By way or example, if Fiscal Year 1996 operating
profits for the Group are $5,521,000, Employee would be entitled to 5% of the
cumulative profits in excess of $16,563,000.) Employee shall not be entitled to
the Contingent Compensation unless he is employed by the Company through Fiscal
Year 1999. Furthermore, Employee shall not be paid the Contingent Compensation
until after the Committee certifies in writing that the performance goals and
any other material terms necessary for Employee to receive such Contingent
Compensation have been satisfied.
Section 2 - Approval of Plan by Stockholders. The Plan will be submitted
--------- --------------------------------
for the approval of the Company's stockholders prior to the end of the Company's
1997 fiscal year. The Plan shall not
1
<PAGE>
take effect unless and until the Plan receives such stockholder approval.
Section 3 - Administration.
--------- --------------
(i) It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and to adopt rules for the
administration, interpretation and application of the Plan as are consistent
herewith and to interpret, amend or revoke any such rules.
(ii) The Committee shall act by a majority of its members in attendance at
a meeting at which a quorum is present or by a memorandum or other written
instrument signed by all members of the Committee.
(iii) Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board of Directors of the
Company. All expenses and liabilities incurred by members of the Committee in
connection with the administration of the Plan shall be borne by the Company.
The Committee may employ attorneys, consultants, accountants, appraisers,
brokers or other persons. The Committee, the Company and its Officers and
Directors shall be entitled to rely upon the advice, opinions or valuations of
any such persons. All actions taken and all interpretations and determinations
made by the Committee in good faith shall be final and binding upon Employee,
the Company and all other interested persons. No member of the Committee shall
be personally liable for any action, determination or interpretation made in
good faith with respect to the Plan or awards thereunder, and all members of the
Committee shall be fully protected by the Company in respect to such action,
determination or interpretation.
Section 4 - Tax Withholding. The Company shall be entitled to require
--------- ---------------
payment in cash or deduction from other compensation payable to Employee of any
sums required by federal, state or local tax law to be withheld with respect to
the payment or vesting of any award thereunder.
2
<PAGE>
Section 5 - Titles. Titles are provided herein for convenience only and
--------- ------
are not to serve as a basis for interpretation or construction of the Plan.
Section 6 - Governing Law. The laws of the State of Delaware shall govern
--------- -------------
the interpretation, validity, administration, enforcement and performance of the
terms of this Agreement regardless of the law that might be applied under
principles of conflicts of laws.
****
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Playboy Enterprises, Inc. on Oct. 9 1996.
Executed on this 2nd day of December, 1996.
/s/ [SIGNATURE APPEARS HERE]
-----------------------------------
Ass't. Secretary
****
I hereby certify that the foregoing Plan was duly approved by the
Shareholders of Playboy Enterprises, Inc. on Nov. 13, 1996.
Executed on this 22nd day of November, 1996.
/s/ [SIGNATURE APPEARS HERE]
-----------------------------------
Secretary
3
<PAGE>
EXHIBIT 10.3(e)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT, made and entered into as of the 7th day of April 1997 by and
between Playboy Enterprises, Inc., a Delaware company (together with its
successors and assigns permitted under this Agreement, the "Company"), and Ms.
Marianne Howatson (the "Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company desires to employ the Executive and to enter into an
agreement embodying the terms of such employment (this "Agreement") and the
Executive desires to enter into this Agreement and to accept such employment,
subject to the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
-----------
(a) "Base Salary" shall mean the salary provided for in Section 4
below or any increased salary granted to the Executive pursuant to Section 4.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that, prior to any termination pursuant to
Section 11(c) hereof, the Executive shall have:
(i) been convicted of a criminal violation involving dishonesty,
fraud or breach of trust; or
(ii) willfully engaged in misconduct in the performance of
Executive's duties that materially injures the
<PAGE>
2
Company or any entity in which the Company directly or indirectly beneficially
owns 50% or more of the voting securities (a "Subsidiary").
(d) "Constructive Termination without Cause" shall mean
termination by the Executive of her employment following occurrence of any of
the following events without her written consent:
(i) a reduction in the Executive's compensation (Base
Salary, bonus opportunity or equity opportunity) or material reduction of any
employee benefit or perquisite that is not equally applicable to other members
of senior management of the Company;
(ii) the failure to continue the Executive in a position
which she then holds or removal of her from any such position;
(iii) a material diminution in the Executive's duties, the
assignment to the Executive of duties which are materially inconsistent with her
current duties or, so long as the Executive is serving as President of the
Publishing Group of the Company, a change in the reporting relationship of the
Executive so that she no longer reports directly to the Chief Executive
Officer;
(iv) the relocation of the Executive's office to a location
more than 50 miles from New York, NY; and
(v) the failure of the Company to obtain the assumption of
the Agreement by any successor.
2. Term of Employment.
The Company hereby employs the Executive, and the Executive
hereby accepts such employment, for the period commencing April 21, 1997 and
ending June 30, 2001, subject to earlier termination as provided in Section 11,
below.
3. Position, Duties and Responsibilities.
(a) During the Term of Employment, the Executive shall be
employed as an Executive Vice President of the Company and President of the
Publishing Group. The Executive, in carrying out her duties under this
Agreement, shall report to the Chairman of the Board and Chief Executive
Officer.
<PAGE>
3
(b) Anything herein to the contrary notwithstanding, nothing
shall preclude the Executive from (i) serving, subject to approval of the
Chairman of the Board, on the boards of directors of a reasonable number
of other corporations or the boards of a reasonable number of trade
associations and/or charitable organizations, (ii) engaging in charitable
activities and community affairs, and (iii) managing her personal investments
and affairs, provided that such activities do not interfere with the proper
performance of her duties and responsibilities as the President of the
Publishing Group.
4. Base Salary.
The Executive shall be paid an annualized Base Salary, payable in
accordance with the regular payroll practices of the Company, of no less than
$400,000. The Base Salary shall be increased annually at a rate of no less than
5% commencing July 1, 1998.
5. Annual Incentive Compensation.
Commencing in FY 1998, the Executive shall participate in the
Executive Incentive Compensation Plan with an annual target award opportunity of
60% of Base Salary (80% of which will be tied to Publishing Group performance to
budget and 20% of which will be tied to corporate performance to budget), 50% of
which amount ($120,000) shall be guaranteed in respect of FY 1998 and paid when
incentive compensation is customarily paid to the Company's senior executives.
The Executive shall receive guaranteed incentive compensation for
FY 1997 of an amount equal to the product of $120,000 times a fraction, the
numerator of which is the number of days Executive is in the employ of the
company in FY 1997 and the denominator of which is 365, payable when FY 1997
incentive compensation is paid to the Company's senior executives.
6. Profit Participation.
The Executive shall receive additional annual compensation based
on the profits of Playboy Publishing Group for each fiscal year during the Term
of Employment computed as follows:
(a) The Executive shall receive a sum equal to 5% of the amount
by which the Pre-tax Profits of the Playboy Publishing
<PAGE>
4
Group for each fiscal year (July 1 through June 30) exceeds the Profits Base (as
defined below) for the previous fiscal year. Each fiscal year shall be deemed a
separate accounting period for purposes of computing Profit Participation.
(b) The Profits Base is defined as the amount of Pre-tax Profits
of the Playboy Publishing Group computed in accordance with Generally Accepted
Accounting Principles ("GAAP") by the Company's outside auditors in the
preparation of the Company's audited financial statements for the applicable
fiscal year.
(c) Pre-tax Profits of the Playboy Publishing Group for any
fiscal year shall be the amount, if any, by which the total net revenues of the
Playboy Publishing Group, including its subsidiaries and the Group's pro-rata
share of revenues derived from all controlled affiliates, exceeds all reasonable
and applicable operating expenses attributable to same, in accordance with GAAP
used by the Company's outside auditors in the preparation of the Company's
audited financial statements.
In computing the Pre-tax Profits of the Playboy Publishing
Group for any fiscal year, there shall be allowed all fair and reasonable
allocations of items of revenue and expense between divisions, subsidiaries and
affiliates of the Company, including, but not limited to, inter company sales,
expenses such as rent, occupancy, general administrative and personnel salaries,
MIS, insurance, employee benefit costs, security, payroll processing, legal and
tax advisory fees, depreciation, profit sharing and auditing expenses; provided,
however, the Executive and the Chief Executive Officer of the Company may agree
to exclude from the computation of Pre-tax Profits expenses associated with
acquisitions or investments.
Further, the effect of any one time gains or losses
accounted for as part of the Playboy Publishing Group shall be amortized evenly
over four (4) years, beginning in the month of occurrence, for purposes of
calculating Pre-tax Profit, regardless of how the transaction is accounted for
under GAAP. A "One Time Gain or Loss" is a gain or loss resulting from a
transaction not in the ordinary course of business.
In no event shall profits or losses, except as described in
the preceding paragraph, from any fiscal year be carried over or back to any
fiscal year during the base period or otherwise taken into consideration in
computing the Pre-tax Profits for any other fiscal year during the base period.
<PAGE>
5
(d) Profit Participation, if any, for any fiscal year, including
any Pro Rata Profit Participation as defined below, shall be paid to the
Executive no later than ninety (90) days following the end of such fiscal year.
(e) In the event that the Executive is to receive a Pro Rata
Profit Participation upon termination as provided in Section 11 below, the Pro
Rata Profit Participation shall be that percentage of the Profit Participation
otherwise payable for the fiscal year in which termination occurs equal to a
fraction, the numerator of which is the number of calendar days in the period
commencing July 1 of such fiscal year and ending on the effective date of the
Executive's termination, and the denominator of which is 365.
7. Long-term Incentives.
(a) The Executive shall participate on an ongoing basis in any
long-term incentive programs made available to senior-level executives of the
Company.
(b) As soon as practicable after commencement of the Executive's
employment, the Company shall grant the Executive a 10-year option,
substantially in the form attached to this Agreement as Exhibit A, to purchase
75,000 shares of stock.
(c) As soon as practicable after commencement of the Executive's
employment the Company shall grant the Executive 15,000 shares of restricted
stock substantially in the form attached to this Agreement as Exhibit B.
8. Employee Benefit Programs.
The Executive shall be eligible to participate in the employee
benefit programs of the Company applicable to senior level executives,
including, without limitation, qualified and supplemental retirement and savings
plans, medical/dental and hospitalization plans, life insurance, short- and
long-term disability programs, accidental death and dismemberment protection and
travel accident insurance. In addition, the Executive shall be entitled to five
weeks per annum vacation.
<PAGE>
6
9. Perquisites.
The Executive shall be entitled to perquisites on the same basis
as made available to other senior executives of the Company, including without
limitation, the following:
(a) residential security and
(b) expensing the cost of upgrade certificates or coupons.
10. Reimbursement of Business and Other Expenses.
The Executive is authorized to incur reasonable expenses in
carrying out her duties and responsibilities under this Agreement and the
Company shall promptly reimburse her for all business expenses incurred in
connection with carrying out the business of the Company, including up to
$15,000 for legal expenses incurred in connection with her employment
arrangements with the Company, upon submission of documentation reasonably
satisfactory to the Company of such expenses.
11. Termination of Employment.
(a) Termination Due to Death. In the event the Executive's
employment is terminated due to her death, her estate or her beneficiaries, as
the case may be, shall be entitled to:
(i) Base Salary for a period of 90 days following the date
of death;
(ii) a pro rata Annual Incentive Compensation award (based
on the amount of Incentive Compensation payable for the fiscal year in which the
death occurs;
(iii) if death occurs after the 6th month of the fiscal year,
a pro rata Profit participation award for the year of death, calculated as
provided in Section 6 above;
(iv) the right to exercise any stock option which was
exercisable at the date of the Executive's death for a period of 1 year
following the Executive's death;
(v) any amounts earned, accrued or owing to the Executive
but not yet paid; and
(vi) other benefits in accordance with applicable plans and
programs of the Company.
<PAGE>
7
(b) Termination Due to Disability. In the event the Executive
becomes totally disabled or disabled such that she is rendered unable to perform
substantially all of her usual duties for the Company, and if such disability
shall persist for a continuous period in excess of four (4) months, or an
aggregate period in excess of four (4) months in any one fiscal year, the
Company shall have the right at any time after the end of such period to
terminate the Executive's employment under this Agreement by delivering a thirty
(30) day prior written notice to her.
For purposes of this agreement, if the Executive and the Company
shall disagree as to whether she is totally disabled, or disabled such that she
is rendered unable to perform substantially all of her usual duties for the
Company, the decision of a doctor, mutually agreed upon by the parties, shall be
binding as to both questions. If the parties cannot agree upon a doctor, the
Executive and the Company shall each select a doctor. The two (2) doctors so
selected shall select a third doctor who shall resolve either or both of the
questions referred to above.
In the event the Executive's employment is terminated due to
disability, she shall be entitled to:
(i) Base Salary for six months following the effective date
of her termination due to disability;
(ii) a pro rata Annual Incentive Compensation award (based
on the higher of (A) the actual bonus earned in the prior year or (B) the target
bonus for the year of termination);
(iii) if termination due to disability occurs after the sixth
month of the fiscal year, a pro rata Profit Participation award for the year of
termination, calculated as provided in Section 6 above;
(iv) the right to exercise any option which is exercisable
on the date of termination for a period of one (1) year;
(v) any amounts earned, accrued or owing to the Executive
but not yet paid; and
(vi) disability and other benefits in accordance with the
applicable plans and programs of the Company.
<PAGE>
8
(c) Termination by the Company for Cause. In the event the Company
terminates the Executive's employment for Cause, she shall be entitled to:
(i) Base Salary through the date of the termination of her
employment for Cause;
(ii) any amounts earned, accrued or owing to the Executive but
not yet paid; and
(iii) other benefits, if any, in accordance with applicable
plans and programs of the Company.
A Termination for Cause shall not take effect unless the
Executive is given written notice of the Company's intention to terminate her
for Cause and unless she is given an opportunity to be heard by the Board.
(d) Termination Without Cause or Constructive Termination Without
Cause. In the event the Executive's employment is terminated without Cause or
in the event there is a Constructive Termination Without Cause, the Executive
shall be entitled to:
(i) Base Salary through the date of termination of the
Executive's employment;
(ii) Base Salary, at the annualized rate in effect on the date
of termination of the Executive's employment, (x) for a period of 12 months (the
"Salary Continuation Period") and (y) if termination occurs prior to the end of
the Executive's first year of employment, Base Salary for the remainder of the
first year, all payable in a single installment immediately after her
termination;
(iii) Incentive Compensation payments for the year in which
termination occurs and if termination occurs after the 6th month of such fiscal
year, Incentive Compensation in the next succeeding fiscal year as if
Executive's employment had not been terminated, payable when Incentive
Compensation is paid to the Company's senior executives for such fiscal year.
(iv) if termination occurs after the 6th month of the fiscal
year, a pro rata Profit Participation award for the year of termination,
calculated as provided in Section 6 above;
<PAGE>
9
(v) the right to exercise any stock option which was
exercisable at the date of Executive's termination for a period of 3 months
following the date of termination;
(vi) continued participation in all medical, dental,
hospitalization and life insurance coverage and in other employee benefit plans
or programs in which she was participating on the date of the termination of her
employment and in which she is entitled to continue until the earlier of the end
of the Salary Continuation Period or the date, or dates, she receives equivalent
coverage and benefits under the plans and programs of a subsequent employer; in
the event that any of the benefit plans do not permit the Executive's
participation, the Company shall provide the Executive with the economic
equivalent on an after-tax basis during and only during the Salary Continuation
Period;
(vii) Company-provided executive outplacement;
(viii) any amounts earned, accrued or owing to the Executive but
not yet paid; and
(ix) other benefits in accordance with applicable plans and
programs of the Parent and the Company.
(e) Voluntary Termination. Same consequences as Termination for
Cause.
(f) Termination Following a Change in Control. The Company and the
Executive are entering into a Severance Agreement which is attached to this
Agreement as Exhibit C. In the event the Executive's employment is terminated
following a Change in Control, (as defined in the Severance Agreement), the
Executive's rights and entitlements shall be determined in accordance with the
Severance Agreement.
Any amounts payable to the Executive under Section 11(d) will be
reduced by any amounts paid to her pursuant to the Severance Agreement.
(g) No Mitigation; No Offset. In the event of any termination of
employment, the Executive shall be under no obligation to seek other employment
and there shall be no offset against amounts due her under the Agreement on
account of any remuneration attributable to any subsequent employment that she
may obtain or any claims the Company may have against her.
<PAGE>
10
12. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement shall,
at the election of the Executive or the Company, be resolved by binding
arbitration, to be held in New York, NY in accordance with the rules and
procedures of the American Arbitration Association. Judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Costs of the arbitration or litigation, including, without limitation,
reasonable attorneys' fees of both Parties, shall be borne by the Company.
Pending the resolution of any arbitration or court proceeding, the Company shall
continue payment of all amounts due the Executive under this Agreement and all
benefits to which the Executive is entitled at the time the dispute arises.
13. Indemnification.
(a) The Executive shall be entitled to indemnification by the
Company in accordance with the provisions of Section 6 of the Company's bylaws
and the implementing Board resolutions as in effect on the date of this
agreement or, if more favorable to Executive, the provisions of such bylaws as
in effect at the time indemnification is requested.
(b) The Executive shall be entitled to coverage under any policy of
directors' and officers' liability insurance maintained by the Company, if any.
14. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence of
this Agreement shall not prohibit or restrict the Executive's entitlement to
full participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
15. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. Without the prior written consent of the Company, no rights or
obligations of the Executive under this Agreement may be assigned or
transferred by the Executive other than her rights to compensation and benefits,
which may be
<PAGE>
11
transferred only by will or operation of law, except as provided in Section 20
below.
16. Conflicts of Interest.
(a) It is hereby acknowledged that Executive is aware of Company's
conflict of interest policies (a copy of which is attached hereto as Exhibit "D"
and by this reference made a part hereof), and understands that compliance
therewith is of the essence of and is material to this Agreement. Company
agrees that Executive shall have a period of sixty (60) days from commencement
of services hereunder during which to divest herself of ownership of any firms,
corporation, stock or similar items which are in violation of said conflict of
interest policy. Nothing herein shall be construed to prevent Executive from
owning an interest of less than one percent (1%) of the outstanding stock of any
publicly traded company, whether or not such publicly traded company is in a
business competitive to Company.
(b) Executive recognizes and acknowledges that a breach of the
provisions of this paragraph would result in immeasurable and irreparable harm
to Company. Executive accordingly agrees that in addition to, and not in lieu
of, all other remedies available to Company against Executive by reason of such
breach, Company shall be entitled to temporary and permanent injunctive relief
to prevent the occurrence or continuation thereof.
17. Non-Competition.
Executive acknowledges that (i) by virtue of her employment with the
Company, Executive will obtain knowledge, know-how, confidential and proprietary
information, training and experience, (ii) the Company has a protectible
interest in such knowledge, know-how, training, information and experience and
there is a substantial probability that such knowledge, know-how, training,
information and experience could be used to the substantial advantage of a
competitor of the Company and to the Company's substantial detriment, and (iii)
the agreements and covenants contained in this Agreement are essential to
protect the value of the Company's business and assets, including such
protectible interest. Therefore, Executive agrees that, for the period
commencing on April 21, 1997 and ending at the later of Executive's termination
or the Salary Continuation Period, Executive will not engage in any Competitive
Activity. Competitive Activity means a business that engages in men's
sophisticate publishing, including both print and electronic media.
<PAGE>
12
18. Nondisclosure of Confidential Information.
During and after the term of this Agreement, Executive will not
disclose any information about the Company that is not in the public domain that
was acquired by Executive in the course of her employment by the Company except
(i) as such disclosure is required or appropriate in connection with her work as
an employee of the Company and (ii) when required to do so by a court of law, by
any governmental agency having supervisory authority over the business of the
Company or by any administrative or legislative body with apparent jurisdiction
to order her to disclose such information.
19. Entire Agreement.
This Agreement contains the entire understanding and agreement
between the Parties concerning the subject matter hereof and supersedes all
prior agreements, understandings, discussions, negotiations and undertakings,
whether written or oral, between the Parties with respect thereto.
20. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by the Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by the Executive or an authorized officer of the
Company, as the case may be.
21. Severability.
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, in whole or
in part, the remaining provisions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
22. Survivorship.
The respective rights and obligations of the Parties
<PAGE>
13
hereunder shall survive any termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
23. Beneficiaries/References.
------------------------
The Executive shall be entitled to select (and change, to the
extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following the Executive's
death by giving the Company written notice thereof. In the event of the
Executive's death or a judicial determination of her incompetence, reference in
this Agreement to the Executive shall be deemed, where appropriate, to refer to
her beneficiary, estate or other legal representative.
24. Governing Law.
-------------
This Agreement shall be governed by and construed and interpreted
in accordance with the laws of New York without reference to principles of
conflict of laws.
25. Notices.
-------
Any notice given to a Party shall be in writing and shall be
deemed to have been given when delivered personally or sent by certified or
registered mail, postage prepaid, return receipt requested, duly addressed to
the Party concerned at the address indicated below or to such changed address as
such Party may subsequently give such notice of:
If to the Company: Playboy Enterprises, Inc.
680 North Lake Shore Drive
Chicago, IL 60611
Attention: Howard Shapiro
General Counsel
If to the Executive: Ms. Marianne Howatson
c/o Playboy Enterprises, Inc.
730 Fifth Avenue
New York, New York 10019
<PAGE>
14
26. Headings.
--------
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
27. Counterparts.
------------
This Agreement may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
Playboy Enterprises, Inc.
By: /s/ Christie Hefner
---------------------
Christie Hefner
Chairman, and
Chief Executive Officer
/s/ Marianne Howatson
---------------------
Marianne Howatson
<PAGE>
EXHIBIT 10.3f
PLAYBOY ENTERPRISES, INC.
CHRISTIE HEFNER
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
April 18, 1997
Linda Havard
1413 Rutherford Drive
Pasadena, CA 91103
Dear Linda:
It is with great pleasure that I offer you the position of Executive Vice
President, Chief Financial Officer of Playboy Enterprises, Inc. Your start date
will be Friday, May 16, 1997.
You will be reporting to me. You will be domiciled at the Playboy offices in
Chicago, although you will be expected to do such traveling as may be necessary
and appropriate for the performance of your duties.
You will be paid a base salary of $300,000 per year, to be paid on a biweekly
basis on our normal payroll dates. In addition, you are entitled to participate
in a Board approved incentive plan with a Fiscal 1998 maximum potential of 60%
of your base salary based upon the Company's performance.
You will be entitled to participate in all fringe benefits made available to
Playboy executives. You will also be a member of the Executive Committee of the
Company. You will be entitled to four weeks' paid vacation.
You will be entitled to participate in the "parachute plan" that is described on
page 14 of Playboy's 1996 proxy statement, copy enclosed.
I will recommend to the Company's Compensation Committee that you be granted an
option to purchase 75,000 shares of Playboy's Class B stock and the right to
receive up to 20,000 shares of Class B stock under the Company's restricted
stock plan, vesting 7,500 shares upon the Company's achieving operating income
of $15 million and 12,500 shares on the Company's achieving operating income of
$20 million according to the terms and conditions of the 1995 Playboy
Enterprises, Inc. Stock Incentive Plan.
680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611/312-751-8000
<PAGE>
April 18, 1997
Linda Havard
Page Two
To assist in the sale of your California home, the Company will reimburse you
for brokerage commissions and customary closing costs/attorney fees and title
costs. Also, if you sell your home within the next 18 months for less than
$837,500, Playboy will reimburse you for the difference between the actual
purchase price and $837,500 -- up to a maximum reimbursement of $70,000. Should
you voluntarily terminate your employment within two years from the sale of your
home, you must return any such amount paid to you by Playboy. If you choose to
purchase a new residence in Chicago, you will be reimbursed for customary and
reasonable closing costs, to include title costs and reasonable attorney and
escrow office fees. You will also be reimbursed for the relocation of your
household goods.
Also, to assist in your transition, the Company will also provide you with
temporary furnished housing in Chicago for up to three months. The Company will
also reimburse you for travel back/forth from Chicago/California for you and/or
your family.
The initial term of your employment will commence on May 16, 1997 and end on
June 30, 2001. Within this period, if you are terminated at any time not for
cause (as defined below), you will be entitled to receive 12 months severance
pay based on your salary at that time. "For cause" is defined as conviction of
a crime involving dishonesty, fraud or breach of trust, or engaging in conduct
materially injurious to Playboy. In the event of such termination you will have
no duty to mitigate damages, and you will be free to accept other employment at
your discretion.
If the above is acceptable, please sign, date and return the enclosed copy of
this letter.
<PAGE>
April 18, 1997
Linda Havard
Page Three
Once again, welcome to the Playboy family. I look forward to working with you.
Sincerely,
/s/ Christie Hefner
Christie Hefner
ACCEPTED:
/s/ Linda Havard
- --------------------
Linda Havard
Date 4/23/97
----------------
<PAGE>
EXHIBIT 10.4(a)
PLAYBOY TV/LATIN AMERICA
ADULT VISION/LATIN AMERICA
AGREEMENT OUTLINE
-----------------
(As of March 29, 1996)
1. Overview and Definitions
------------------------
1.1 This Agreement Outline ("Agreement") sets forth the terms for the
formation of a limited liability company (the "Venture") by the Playboy
Entertainment Group, Inc. ("PEGI") and Bloomfield Mercantile Inc., a Panama
corporation and a member of the Cisneros Group of Companies ("Bloomfield"),
that will operate two adult oriented pay television services (the "Services")
throughout the Territory (as defined below): (a) Playboy TV/Latin America
("PTVLA"), a Service based on Playboy TV as currently programmed in the United
State; and (b) AdulTVision/Latin America ("ATV"), a Service based on AdulTVision
as currently programmed in the United States. Bloomfield, together with the
other companies under common control in the Cisneros Group of Companies
participating in the transactions contemplated herein are referred to as the
"Cisneros Affiliates".
As set forth in Section 8, Programming supplied to PTVLA and ATV will be
exclusive to the Services in the Territory.
The parties agree to use their respective best efforts to negotiate and
execute more formal agreement, including the Superseding Agreements described
below, as soon as reasonably practicable and the parties intend that such
agreements will be executed within 60 days of the date hereof. Such agreements
will incorporate the terms of this Agreement and such other terms as the parties
may mutually agree. In furtherance of such best efforts obligations, the parties
will cause their respective executives authorized to make final decisions
regarding these transactions and their counsel and other advisors to be
available on a first priority basis. Until such agreements are executed and if
such agreements are never executed, this Agreement, when executed by both
Bloomfield and PEGI, will constitute a binding agreement between the parties
with regard to all matters covered herein. Specifically, any terms described
herein to be included in a Superseding Agreement will, until such Superseding
Agreement is executed and if such Superseding Agreement is never executed, be
fully operative as terms of this Agreement. Upon execution of the Superseding
Agreements, this Agreement will terminate and be of no further force and effect.
1.2 Terms used in this Agreement are defined in Exhibit "A" attached
hereto, which includes a list of the terms defined in the text of this
Agreement.
1
<PAGE>
2. Superseding Agreements
----------------------
It is contemplated that the Venture, the parties and their respective
affiliates (as the case may be) will execute the following agreements in
connection with the formation of the Venture, all of which will be subject to
the mutual approval of the parties (the "Superseding Agreements"):
2.1 Operating Agreement and Articles of Association. PEGI and
-----------------------------------------------
Bloomfield (together, the "Ventures") will enter into an Operating Agreement and
Articles of Association (collectively, the "Operating Agreement"), which will
establish the limited liability company and outline the structure of the
Venture, including board/governance issues, ownership provisions, option
mechanisms and price, termination provisions, minority owner protections, etc.
The Operating Agreement will contain the terms set forth in Section 14 (Venture
Ownership, Capitalization and Governance) and such further terms as the
Venturers may mutually agree. The parties acknowledge and agree that it is not
their intention by executing this Agreement to form a partnership or other
entity prior to the formation of the limited liability company and the execution
of the Operating Agreement and agree that neither party will take any action
that may subject the other to any liability, including but not limited to making
any agreements or incurring any obligations on behalf of the Venture prior to
such formation and execution.
2.2 Program Supply Agreement for PTVLA. PEGI and the Venture will
----------------------------------
enter into a Program Supply Agreement under which PEGI will license programming
to the Venture for PTVLA on an exclusive basis and receive compensation for such
programming (as described in Sections 8, 9 and 10 below). This agreement will
include PEGI's Standard Terms and Conditions, substantially as attached hereto
as Exhibit "B". If any term in the text of this Agreement is inconsistent with
the provisions of such Standard Terms and Conditions, the term as contained in
the text of this Agreement will prevail.
2.3 Trademark License Agreement. Playboy Enterprises, Inc. ("PEI") and
---------------------------
the Venture will enter into a Trademark License Agreement (the "Trademark
License Agreement") under which PEI, for a ***% royalty (as described in Section
11 below), will grant to the Venture those rights to the "Playboy" name, marks,
etc. as are necessary for the effective marketing of the PTVLA Service. The
Trademark License will contain PEI's customary approval rights and procedures
for trademark usage and advertising, substantially as detailed in the Trademark
Usage Summary attached hereto as Exhibit "C", the terms described in Section 11
below, and such further terms as the parties may mutually agree. The Trademark
License Agreement will also contain similar terms regarding the use of
AdulTVision trademarks on ATV. No royalty will be payable with respect to the
AdulTVision trademarks. If any term in the text of this Agreement is
inconsistent with the provisions of such Trademark Usage Summary, the term as
contained in the text of this Agreement will prevail.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
2
<PAGE>
2.4 Program Supply Agreement for ATV. PEGI and the Venture will enter into
--------------------------------
a Program Supply Agreement under which PEGI will license programming to the
Venture for ATV on an exclusive basis and receive compensation for such
programming (as described in Section 8, 9 and 10 below). This agreement will
include PEGI's Standard Terms and Conditions, substantially as attached hereto
as Exhibit "B". If any term in the text of this Agreement is inconsistent with
the provisions of such Standard Terms and Conditions, the term as contained in
the text of this Agreement will prevail.
2.5 Management Services Contract. The Venture and a Cisneros Affiliate
----------------------------
generally engaged in delivering the following services will enter into a
Management Services Agreement under which such Cisneros Affiliate ("Management
Co.") will, for a ***% fee (as described in Section 13.2 below), provide back
office services, including bookkeeping and accounting, affiliate and subscriber
relations, collections and payables, etc.
These documents together with the Business Plan (Section 3), and any other
documents deemed necessary by the parties, will constitute the formal agreements
which establish and govern the Venture.
3. Business Plan/Annual Fiscal Year Budgets
----------------------------------------
3.1 The Ventures have preliminarily agreed to a 10-year business plan
(dated March 27, 1996, version 9) which is attached hereto as Exhibit "D",
subject to such changes as they shall mutually agree prior to the commencement
of the Venture (as so modified, the "Business Plan"). The Business Plan is the
financial model for the operation of PTVLA and ATV and will be incorporated into
the Operating Agreement. Prior to the end of the fifth year of the Venture and
prior to the end of every succeeding five year period thereafter, the Venturers
will prepare 5 additional years of the Business Plan such that the Business Plan
continues to have between five and ten years of coverage throughout the term of
the Venture. Such additions to the Business Plan will require the approval of
both Venturers.
3.2 The Business Plan will be updated annually by a budget (each, an
"Annual Budget") for the coming fiscal year. The Venture's General Manager (See
Section 14) will prepare the Annual Budget and present it to PEGI and Bloomfield
for approval at least 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 original Business Plan for that fiscal year. The Annual Budget
for any fiscal year will require the approval of both Venturers. The Annual
Budget for fiscal 1996 is included in the Business Plan.
4. Territory
---------
4.1 The "Territory" will include only the following: (a) each country
comprising Central and South America from the U.S.-Mexican border south to
Tierra del Fuego where the national language is Spanish, (b) Brazil and its
territories/possessions, and (c) each
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
country and territory located in the Carribbean where the official language is
Spanish (including Cuba, but excluding Puerto Rico and U.S. Virgin Islands).
4.2 The Venture grant to PEGI an exclusive license to distribute the PTVLA
and ATV Spanish-language Services in the United States (including its
possessions and territories) in all forms of Non-Standard Television (as defined
in Section 7.1) in perpetuity (the "U.S. Rights"). The costs incurred by or on
behalf of the Venture in connection with the U.S. distribution (including but
not limited to uplink and other delivery costs), will be borne by the Venture.
Such cost will exclude the costs of PEGI with respect to the U.S. feed of
AdulTVision.
4.2.1 PEGI will receive a distribution fee equal to ***% of the revenue
received from systems operators on account of the U.S. Rights.
4.2.2 The remaining revenue ("revenue", for purposes of this Agreement,
means cash actually received by the relevant person) from the U.S. Rights (i.e,
----
the revenue from systems operators minus PEGI's ***% fee and minus any costs in
connection with the U.S. distribution (as set forth in Section 4.2) will, after
the Venturer's have received distributions for return of capital equal to their
respective capital contributions, be allocated ***% to Bloomfield and ***% to
PEGI. The costs of dubbing/subtitling or other costs to "localize" the Services,
including but not limited to the costs to create a second language track on the
existing ATV feed, will be borne by the Venture as a regular operating expense
and not allocated to U.S. distribution of the Services.
4.2.3. Not later than 2 years after the date of launch of a Service,
PEGI shall make a good faith effort to distribute the U.S. Rights for that
Service via pay cable in the U.S.
4.2.3.1 With respect to PTVLA, this "good faith" test will be
conclusively deemed to be satisfied if such Service is available in at least 10%
of the Spanish-speaking addressable cable homes in the U.S. ("Spanish Cable
Homes") within such 2-year period.
4.2.3.2 With respect to ATV, this "good faith" test will be
conclusively deemed to be satisfied if such Service is available, within such
2-year period, in at least that percentage of the Spanish Cable Homes equal to
10% multiplied by a fraction, the numerator of which is the number of
addressable cable homes in the U.S. in which AdulTVision is then available
("AdulTVision Homes") and the denominator of which is the number of addressable
cable homes in the U.S. in which Playboy TV is then available ("Playboy Homes").
For example, if two years after the launch of ATV, the number of AdulTVision
Homes equals 500,00 and the number of Playboy Homes equal 1,000,000, then the
"good faith" test for ATV will be deemed satisfied if ATV is available in at
least 5% of the Spanish Cable Homes (10% x 500,000/1,000,000). The parties will
use their best
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
4
<PAGE>
efforts to agree to a source or methodology for determining the number of
Spanish Cable Homes.
4.2.4. PEGI will not be required to take any commercially unreasonable
actions to satisfy the "good faith" test, which may be satisfied notwithstanding
any failure to meet the conclusive thresholds described above. In the event PEGI
fails to satisfy the "good faith" test for either Service, the U.S. Rights for
that Service will revert to the Venture subject to any third party agreements
entered into prior to such time by PEGI, provided, however, that any deals made
by the Venture for distribution in the U.S. will be subject to PEGI's approval,
not to be unreasonably withheld.
5. Term
----
5.1 Term. The term of the Venture shall be 25 years, automatically
----
renewable for additional 10-year periods so long as the Venture is meeting
projections (within the variance permitted in Section 5.2.2).
5.2 Early Termination.
-----------------
5.2.1 Either Venturer may terminate the Venture if controlling
ownership of the other Venturer changes (other than a change to an affiliate of
such Venturer); provided, however, that the parties acknowledge that PEI, the
parent company of PEGI, 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 termination will be effective as of the last day of
the fiscal year in which such termination event occurs.
5.2.2 With respect to a particular Service (i.e., PTVLA or ATV) and
----
starting at the end of fiscal year 7, either party may terminate that Service if
its net revenue per household (as defined in Exhibit "E" attached hereto) for
the previous 3 fiscal year period is below projections in the Business Plan (as
modified by the annual Budgets) for such period by more than 15%. Termination of
one Service does not terminate the other Service if the other Service is meeting
projections.
5.2.2.1 Either Venturer may cure the other Venturer's right to
terminate per Section 5.2.2 by making a payment to the Venture in the amount by
which revenues fall short of projections minus the allowed variance. If such
Venturer elects to invoke its cure right, it will guarantee any shortfall below
100% of budget in the following fiscal year.
5.2.3 If, within 6 months of the date when PEGI notifies the Venture
that sufficient programming to launch a Service is available and that PEGI has
taken all actions required on its part to be taken in connection with such
launch, the Venture is unable to negotiate a carriage agreement with the DTH
service known as Galaxy Latin America
5
<PAGE>
("GLA") that provides for such Service to be available in territories at least
inclusive of Mexico, Brazil, Argentina and Venezuela, PEGI shall have the right
to cause the Venture to seek alternative DTH distribution for any such
territories as are not covered by a GLA carriage agreement. The exercise of
such right shall not constitute an exercise of the Veto Option or result in any
decrease in the Program License Fees payable to PEGI.
5.2.3.1 In negotiating the initial carriage agreement and each
subsequent agreement with GLA, the Venture will use its best efforts to secure
the most favorable terms available from GLA regarding collections and allowances
for bad debt.
5.2.3.2 In the event that GLA breaches its obligation to
distribute the Services in all major countries served by GLA pursuant to the
carriage agreement with the Venture (excluding those countries in which the
distribution of the type of programming contained in the Services is prohibited
by statute regulation, court order or other governmental act or decree), the
Venture will take all appropriate actions (including but not limited to pursuing
litigation) to cause GLA to so distribute the Services (the "Remedial Actions").
In the event Bloomfield prevents the Venture from taking such Remedial Actions,
PEGI shall have the right to take such actions on the Venture's behalf and at
the Venture's cost. If PEGI is prevented from taking such actions in violation
of this Section, PEGI shall, in addition to any other rights or remedies it may
have, have the right to terminate the Venture for material breach on the part of
Bloomfield.
5.2.4 Either party may without prejudice to any other remedies it may
have terminate this Agreement immediately by notice in writing to the other on
or after the occurrence of any of the following:
5.2.4.1 the commission of one or more material breaches of this
Agreement by the other party which are not capable of remedy; or
5.2.4.2 the commission of material breach of this Agreement by
the other party which is capable of remedy (a "remediable breach") which shall
not have been remedied within a period of 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 30 day period shall be extended for
-------- -------
such additional period as shall be reasonably necessary if that remediable
breach is incapable of remedy within that one month period and during that 30
day period the party in breach shall 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; or
5.2.4.3 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 the other party or of the Venture.
6
<PAGE>
5.3 Effect of Termination. Upon termination of the Venture, the
---------------------
Trademark License Agreement, Program License Agreement, Management Agreement and
related agreements will automatically terminate and all rights and obligations
of the respective parties thereto will terminate, except for any claims, etc,
that have arisen prior to such termination. Upon termination of the Venture,
each Venture shall have the right to compel the Venture to be promptly wound-up
and liquidated.
6. Languages
---------
6.1 PEGI will license the Venture to transmit in Spanish, Portuguese,
and English (excluding the U.S., which will be Spanish-only). PEGI may permit
the Venture to transmit in other languages at PEGI's option.
6.2 A Cisneros Affiliate generally engaged in the following services
will provide dubbing/subtitle services to Venture at the prevailing fair market
price. PEGI may purchase dubbed/subtitled programs for use in other territories,
or in other media within the Territory, at ***% of cost. If a Cisneros Affiliate
performs dubbing and/or subtitling services for the Venture, such Cisneros
Affiliate will provide such materials in sufficient time to provide for
efficient implementation by PEGI and/or Venture.
7. Media
-----
7.1 The Venture will be granted the exclusive license to transmit in
all forms of "Non-Standard Television", which means DSS, DTH, pay cable, STV,
MMDS, and SMATV, Non-Standard Television specifically excludes basic cable and
terrestrial broadcast television.
7.2 In no event may PEGI launch a Playboy-branded service or sell a
branded block of programming in basic cable or terrestrial broadcast television
in the Territory (although it may license programs into basic cable or
terrestrial broadcast television in accordance with Section 8).
7.3 The Venture will use its best efforts to launch ATV as a
retransmission of the U.S. feed via GLA on or about June 15, 1996. If such
distribution is not available by such date, the Venture will launch ATV via tape
delivery by such date. PEGI will provide the necessary taped material for such
launch with all costs associated therewith to be borne by the Venture.
7.4 Within 6 months after the launch of a Service, the Venture (via
Management Co.) will make a good faith effort to distribute such Service via pay
cable in Mexico and Argentina. This "good faith" test will be conclusively
deemed to be satisfied if the Venture has initiated contact and, if feasible,
negotiations, with the key cable operators in such countries within such 6
months period. Not later than 2 years after the launch of a Service,
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
7
<PAGE>
the Venture (via Management Co.) shall make a good faith effort to distribute
such Service via pay cable throughout the Territory. This "good faith" test will
be conclusively deemed to be satisfied if the PTVLA Service or ATV Service, as
the case may be, is available in 10% of the addressable cable homes in the
Territory within such 2-year period.
7.5 With respect to forms of Non-Standard Television other than pay cable,
PEGI may make a format request that the Venture distribute the PTVLA Service in
a particular media, and the Venture (via Management Co.) shall commence such
distribution within one year of PEGI's request and shall make a good faith
effort to distribute the Service in such media. This good faith test will be
conclusively deemed to be satisfied if the PTVLA Service is available to 10% of
the applicable homes within 2 years of PEGI's request.
7.6 Management Co. shall receive a fee equal to ***% of the revenue
received by the Venture from systems operators from the distribution described
in Sections 7.4 and 7.5 and the costs of such distribution will be borne by the
Venture .
7.7 The Venture will not be required to take any commercially unreasonable
actions to satisfy the "good faith" test, which may be satisfied notwithstanding
any failure to meet the conclusive thresholds described above. In the event the
Venture (via Management Co.) fails to satisfy the "good faith" requirement for
distribution of either Service in a particular form of Non-Standard Television
As set forth in Sections 7.4 and 7.5, PEGI will have the right to distribute
such Service in that media; provided, however, that any deals made by PEGI to
distribute either Service will be subject to the Venture's approval, not to be
unreasonably withheld. For the distribution of such Service, the Venture will
pay to PEGI a fee equal to ***% of the revenue received from systems operators
for such Service in such media, with the Venture to receive the remainder of
such revenue. The costs of such distribution will be borne by the Venture.
7.8 Each entity engaged in distributing the Services (including PEGI
pursuant to Section 4.2 and the Management Co. as set forth above) will in all
material respects incur costs for the account of the Venture in accordance with
the cost structure set forth in the Business Plan as modified by the Annual
Budget for the applicable period. If such compliance with the applicable Annual
Budget is not feasible, such distributor will obtain the Venture's approval for
variances, which approval will not be unreasonably withheld.
8. License Term and Media Holdbacks
--------------------------------
8.1 The Venture's License Term with respect to each program (the "License
Term") will commence on the later of the first day of the relevant fiscal year
and the date such program is first available in any media (as described and
subject to the limitations in Section 3.3 below) and will end at the termination
of the Window (as defined below). Subject to the terms of this Section 8.1 and
of Section 8.3, the programs will be exclusive to the Venture during the
respective License Terms. The Venture will have a window of 18 months for the
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
8
<PAGE>
transmission of each program (the "Window"), commencing on the date that such
program is first transmitted via the Venture. Following the Window, there will
be a 12-month dark period, after which PEGI may license such program into basic
cable and/or terrestrial television as it sees fit; provided, however, that such
programs cannot be run as part of a "Playboy" service and must be licensed on an
"unbranded" basis (i.e., such licenses shall not allow the use of the "Playboy"
name or trademarks in connection with the programs or the advertising thereof
other than in customary production, presentation and logo credits in the title
or end sequences of such programs, for use solely in the credit block in
advertising for such programs, and the title and content of the programs, where
applicable). Notwithstanding the foregoing, at any time, whether during or
after the Window, PEGI can distribute on a "branded" basis any program in the
home video or other private exhibition market (including, without limitation,
discs, cassettes or other forms of video grams now existing or invented in the
future, collectively, "Home Video").
8.2 The Venture will be entitled to transmit each program on 20
Broadcasting Days. Each Broadcast Day will include three airings of each
program within a consecutive 24 hour period. Attached hereto as Exhibit "F" is
a sample program schedule.
8.3 The starting date of the Venture's License Term for a given program
(other than feature films with a budget of more than $1 million) will be the
date set forth in Section 8.1, unless such program is subject to an agreement
which-pre-dates this Agreement. Notwithstanding the foregoing, PEGI will have
the right to grant earlier release dates for Home Video for not more than 15
core titles and not more than 20 additional films (with production costs under
$1 million), in each case per each 12 month period commencing with the launch
date of PTVLA. Attached hereto as Exhibit "G" are example titles of core
programs and films which may have earlier release dates in Home Video. In
addition, the parties acknowledge that PEGI may not control the Home Video or
other non-television distribution rights of certain programs it acquires from
third parties and, consequently, the starting date of the Venture's License Term
for any such program will be the date the television rights are available to
PEGI in the Territory, which may be after the date such program is released in
Home Video or other media by the parties holding such rights.
9. Program Supply
--------------
9.1 Subject to Section 9.4, PEGI will make available to PTVLA all
Playboy Programming (as defined below) and all related interstitial, promo,
on-air identifications, logos or similar material.
9.2 PEGI will provide, and the Venture will license under the Program
License Agreement, 180 hours of New Programming to PTVLA for each 12 month
period commencing with the launch of PTVLA. For the purposes hereof, "New
Programming" means programs never-before broadcast by either of the Services.
Without limiting the
9
<PAGE>
foregoing, the parties acknowledge that PEGI has previously transmitted
programming in the Territory via HBO Ole, and that such programming will be
considered "New Programming" in the Venture. Home shopping programming will be
included with the 180 hours.
9.3 So long as ATV is a retransmission of the AdulTVision U.S. feed,
PEGI will provide, and the Venture will license under the Program License
Agreement, 204 new movies to ATV for each 12 month period commencing with the
launch of ATV until that Service reaches cash break-even. In addition, in the
first 12 month period, PEGI will provide up to 110 additional "encore" movies in
place of repeats, with the actual number of such movies to be set forth in the
program schedule to be attached to the Program License Agreement. In the event
that PEGI wishes to supply more than 204 new movies in such a 12 month period
prior to cash break-even, the Venture will not pay for such additional movies
(except for up to 110 additional "encore" movies in the first 12 month period as
provided above and in Section 10.1.2 below). After ATV reaches cash break-even,
PEGI may, in its sole discretion, increase the number of movies supplied to that
Service, provided, however, that the number of movies per such a 12 month period
that the Venture must pay PEGI for will be capped at 300. For purposes of the
foregoing, a "movie" is a 90 minute block of programming (e.g., if a particular
film is less than 90 minutes, PEGI will provide additional programming as is
necessary to provide a 90 minute block without additional cost to the Venture).
At any time commencing at the end of the 18th month following the launch of ATV,
the Venture may give PEGI written notice of its intention to offer ATV as an
independent feed, which notice will be given not less than 6 months prior to the
launch of such independent feed. Upon launch of such independent feed, the
Venture will determine the number of movies to be licensed for ATV for each 12
month period, not to be less than 120 movies per 12 month period.
9.4 The Venture acknowledges that PEGI produces and distributes certain
feature films with negative costs of at least $1,000,000. Although these films
are to be excluded from the Program Supply Agreement, the Venture will have a
right of first negotiation to acquire the Non-Standard Television rights to
these films for the Service upon release (or upon the expiration of pre-existing
commitments). The right of first negotiation will exclude films that are
offered by PEGI on a multiple territory basis which includes the Territory. The
right of first negotiation must be with respect to all rights offered (e.g., the
Venture does not have a right of first negotiation for pay cable only if the
film is being offered on an "all rights" basis). If the film is "bundled", the
right of first negotiation is with respect to all programs included in the
bundle. Exhibit "H" hereto provides examples of these films as well as the
rights that have already been sold to third parties in the Territory.
9.5 The Venture acknowledges that Playboy Productions, a division of
PEI, produces certain programming for network television and for other
distributors not controlled by PEI, which is not principally sexually oriented.
Such programming is to be excluded from the Program Supply Agreement. Each such
program, including "The Playboy Interview" series but excluding the Hugh Hefner
mini-series produced in association with David Wolper
10
<PAGE>
Productions and Warner Bros., to the extent PEI owns the distribution rights to
such Program in the Territory, is referred to as an "Option Program". A
Cisneros Affiliate designated by Bloomfield (the "Optionee") will have "first
look" and "last refusal" rights with respect to each Option Program as set forth
below.
9.5.1 Prior to any sale of distribution rights for an Option
Program in the Territory, PEGI will notify the Optionee of the availability of
the Option Program and negotiate in good faith with the Optionee to reach
mutually satisfactory terms for the distribution by the Optionee of such Option
Program. If within 30 days of such notice, PEGI and the Optionee are unable to
reach agreement, PEGI will have the right but not the obligation for a period of
60 days to seek other distribution opportunities. If such 60 day period expires
without PEGI entering into negotiations with an alternative distributor, PEGI
will thereafter be free to exploit such distribution rights in the Territory
without further obligation to the Optionee.
9.5.2 If PEGI enters into negotiations with an alternative
distributor within such 60 day period and wishes to consummate an agreement with
such distributor during such period or within 60 days thereafter, PEGI will
first notify Optionee of the proposed terms of such agreement and Optionee will
have the right to preempt such offer and acquire the distribution rights subject
to such offer by making a binding counter-offer that is more favorable to PEGI
by $1 or more. If Optionee does not exercise such right, PEGI will thereafter
have the right to license such Option Program to any person on terms no less
favorable to PEGI than the proposed terms disclosed to Optionee. If, during
such aggregate 120 day period, PEGI wishes to consummate an agreement to license
such Option Program on terms less favorable to PEGI, Optionee will again have a
right to last refusal with respect to such Option Program as provided in this
Section.
9.5.3 If PEGI licenses any distribution rights to Option
Programs in the Territory other than to Optionee, such program will be licensed
on an "unbranded" basis.
9.6 Notwithstanding the Standard Terms and Conditions attached hereto,
(i) the schedule of programs referenced in Section 1 thereof will be attached to
the Program License Agreement, (ii) PEGI will be responsible for clearing any
music or other copyright material incorporated in the programs (with the
royalties therefore being paid by Venture), (iii) the indemnification provisions
in Section 6 thereof will include lost profits and consequential damages awarded
to third parties, and (iv) the liquidated damages provision in Section 9 thereof
will be limited to the lesser of the licenses fees owing for the balance of the
term or 12 months of license fees and will exclude defaults by the Venture due
to PEGI's failure to make capital contributions to the Venture as required
pursuant to this Agreement.
10. Program License Fees The Venture shall pay PEGI program license fees as set
--------------------
forth below (the "Program License Fees"):
11
<PAGE>
10.1 Program License Fees During the Exclusive Period. During the
------------------------------------------------
Exclusive Period (defined in Section 17.2), the Venture will pay to PEGI Program
License Fees as follows:
10.1.1 For PTVLA, the greater of (a) the PTVLA Guaranteed Minimum
Program License Fee (as defined below) for each 12 month period of (b) the sum
of $*** per subscriber per program hour plus ***% of net pay per view revenue;
----
once (b) is greater than (a), this fee is subject to a cap of ***% of the
aggregate net revenue from subscribers and from pay-per-view. For purposes
hereof, "PTVLA Guaranteed Minimum Program License Fee" means (i) *** and (ii)
for each subsequent 12 month period, such increased amounts as are set forth in
the Business Plan as modified by the Annual Budget for such period.
The PTVLA Program License Fee shall be paid ***% in cash and ***%
deferred until the Venture reaches cash break-even. After cash break-even, free
cash will go ***% to PEGI for the payment of deferred Program License Fees,
until paid in full, and ***% to the venture to be used for the return of
capital.
10.1.2 For ATV, the ATV Guaranteed Program License Fee for a 12 month
period. For purposes hereof, "ATV Guaranteed Program License Fee" means (i) ***
and (ii) for each subsequent 12 month period, such increased amount as is set
forth in the Business Plan as modified by the Annual Budget for such period;
provided, however, that if the Venture elects to offer ATV as an independent
feed and in connection therewith elects to decrease the number of movies
licensed from PEGI as provided in Section 9.3 above, the "ATV Guaranteed Program
License Fee" per movie will be $*** subject to the same percentage increases as
apply to the initial license fees (i.e., as set forth in the Business Plan as
modified by the Annual Budget for the respective period).
10.2 Program License Fees after the Exclusive Period. Prior to the
-----------------------------------------------
expiration of the Exclusive Period as relevant to each Service, the Venture will
negotiate a new carriage agreement with GLA which may or may not provide GLA
with DHT exclusivity for PTVLA and/or ATV. Subsequent to the expiration (if any)
of the Exclusive Period as relevant to a given Service, the Program License Fees
payable to PEGI will be determined as follows:
10.2.1 For PTVLA:
10.2.1.1 The Program License Fee will continue as set forth in
Section 10.1.1 (i.e., continuing to increase for each 12 month period as set
forth in the Business
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities Exchange Commission.
12
<PAGE>
Plan) if (a) the Venture decides to contract with GLA as a non-exclusive DTH
distributor of PTVLA, or (b) the Venture decides to continue its DTH-exclusive
relationship with GLA for PTVLA and PEGI does not exercise its Veto Option (as
defined below).
10.2.1.2 PEGI shall have the right to veto the Venture's
decision to grant DTH, exclusivity for PTVLA to GLA after expiration of the
Exclusive Period (the "Veto Option"), thereby causing the Venture to thereafter
grant GLA a non-exclusive right to distribute PTVLA via DTH. In the event PEGI
exercises the Veto Option, the license fee payable to PEGI for PTVLA will be as
follows:
(i) If the Venture is not harmed by the exercise of the Veto Option,
then the license fee will be as set forth in Section 10.1.1.
(ii) If the Venture is harmed by the exercise of the Veto Option,
then the license fee will be reduced for the portion of the fiscal
year following such exercise and for each subsequent fiscal year by
the amount of the harm suffered in the respective period, subject to a
maximum reduction of such license fee to 2/3 of the amount pursuant
Section 10.1.1 for such fiscal year (i.e., subject to continuing
escalation for subsequent fiscal years as provided in the Business
Plan). The amount owed pursuant to this Section shall be payable in
cash and deferrals in the same ratio as would have been the case if no
such reduction had been made.
For the purposes of this Section 10.2.1.2, the "harm" attributable to
PEGI's exercise of the Veto Option shall be based on the decrease in profits of
the Venture directly attributable to the non-exclusivity of the GLA distribution
rights and shall be determined at the end of each fiscal year following the
exercise of the Veto Option manually by PEGI and Bloomfield by comparing the
profit (or loss) actually realized by the PTVLA Service in the applicable fiscal
year to the profit (or loss) that Service would have realized had PEGI not
exercised the Veto Option. For example, if in a given fiscal year following the
exercise of the Veto Option the PTVLA Service had an actual profit of $100, and
it would have otherwise had a profit of $80, then there was no harm and the
license fee is as provided in Section 10.1.1. As a further example, if in a
given fiscal year following the exercise of the Veto Option the PTVLA Service
had an actual accrual profit of $80, but would have had a profit of $100 had
PEGI not exercised the Veto Option, the Venture was harmed and the license fee
owing for such fiscal year would be $20 less than the amount provided for in
Section 10.1.1 (subject to a maximum reduction to 2/3 of the amount so
provided), and such fee would be payable ***% in cash and ***% deferred until
cash break-even.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
13
<PAGE>
10.2.1.3 If the Venture asserts that the provisions for
reducing the Program License Fees described in Section 10.2.1.2 above should be
effected, the Venture will pay to PEGI the full amount of the Program License
Fee as if such reduction had not been in effect, according to the payment terms
described in Section 10.3 below. At the end of a fiscal year, the Venturers will
calculate the degree of harm, if any, resulting from PEGI's exercise of the Veto
Option for such fiscal year pursuant to Section 10.2.1.2 and the amount owing
from PEGI to the Venture with respect to such reduction in Program License Fees
will be allocated first to offset accrued deferrals owing to PEGI and then to
future payments due from the Venture to PEGI.
10.2.2 For ATV: The Program License Fees payable with respect to ATV
will continue as set forth in Section 10.1.2.
10.3 Payment of Program License Fees. The Program License Fees shall be due
-------------------------------
and payable to PEGI as follows: (a) the PTVLA Guaranteed Minimum Program License
Fee and the ATV Guaranteed Minimum Program License Fee shall be calculated on a
monthly basis and paid quarterly in arrears within 30 days after the close of
the quarter, and (b) any overages above the PTVLA Guaranteed Minimum Program
License Fee shall be calculated on a monthly basis and paid quarterly after the
close of the appropriate quarter.
11. Trademark License Agreement: Royalties
--------------------------------------
11.1 The Venture will pay to PEGI a trademark license royalty (the
"Trademark Royalty") of ***% of adjusted gross revenue from the PTVLA Service.
"Adjusted Gross Revenue" is defined as the gross revenue actually received by
the Venture from subscribers to the PTVLA Service (including pay per view
revenue) and all other revenues from operation of the PTVLA Service by the
Venture, minus consumption and other taxes (other than income taxes). Without
limiting the foregoing, in the event that the revenue of the PTVLA Service
includes streams from advertising and/or home shopping, such revenue will be
included in Adjusted Gross Revenue as defined herein. The Trademark Royalty
shall be calculated on a monthly basis and paid quarterly within 30 days after
the close of the appropriate quarter.
11.2 PEGI will cause PEI to grant to the Venture a license to use in
connection with PTVLA the trademarks "Playboy" and the "Rabbit Head Design" and
such other Playboy trademarks as will be described in the Trademark License
Agreement in and in connection with PTVLA and the marketing and promotion of
PTVLA. PEGI will cause PEI to grant to the Venture a license to use in
connection with ATV the "AdulTVision" trademarks and such other AdulTvision
trademarks owned by Playboy as will be described in the Trademark Agreement in
and in connection with ATV and the marketing and promotion of ATV. The grant of
licenses will be made to the Venture on an exclusive basis for the respective
service but only with respect to Non-Standard Television and only in the
Territory. The only
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
14
<PAGE>
exception to the foregoing exclusivity will be (a) customary presentation and
logo credits in the title and end credits sequences of programs licensed to
others as permitted hereunder and credit blocks in advertising therefor, and (b)
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. The
Venture will not sub-license any trademarks licensed under the Trademark License
Agreement except with the consent of PEI. PEI shall have the right to approve
any and all permutations of the trademarks and any secondary, combination or
derivative marks based on the trademarks, all of which, when approved, shall be
the property of PEI and be licensed to the Venture under the terms of the
Trademark License Agreement. PEI will have the right to control and conduct all
proceedings relating any infringement of the trademarks in the Territory and any
claim that the Venture's use of the trademarks in the Territory infringes the
rights of any third party. The Venture will indemnify and hold harmless PEI from
and against all losses arising from the use by the Venture of the trademarks.
11.3 Although the programs transmitted by the Services will depict nudity
and allow strong or explicit language, PEGI will not deliver and the Venture
will not transmit scenes or other material depicting any of the following: (i)
the glorification of violence of 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 in any program
transmitted by the Services who is not at least 18 years of age. Notwithstanding
the foregoing, the standards applied by PEGI from time to time for Playboy TV
and AdulTVision, respectively, in the United States shall be the controlling
standards and any materials transmitted on either such Playboy service and
shall be deemed acceptable for transmission on the respective Service.
11.4 The parties acknowledge that any material breach of the Trademark
License Agreement or of this Agreement with respect to the use of trademarks
will result in irreparable harm to the other party for which there is no
adequate remedy at law. Accordingly, each party shall be entitled to preliminary
or temporary equitable relief pending a final determination in accordance with
the dispute resolution provisions provided below, without the necessity of
posting bond, by way of any or all of the temporary and permanent injunctions
and such other relief as a court of competent jurisdiction may deem just and
proper.
11.5 Notwithstanding the Trademark Usage Summary attached hereto, (i) PEI
will permit advertising in English without prior approval, and (ii) advertising
and other uses of the trademarks and logos will be submitted for approval at
least 10 days in advance to PEI.
15
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12. PEGI Programming and Operational Responsibilities. Consistent with this
-------------------------------------------------
Agreement and the attachments hereto; PEGI will control and manage all facets of
the programming for PTVLA and ATV. This will include:
12.1 Exclusive Program Supplier. PEGI will be the exclusive supplier of all
--------------------------
programming shown on PTVLA and on ATV, regardless of whether such programming is
produced and owned by PEGI, or whether PEGI acquires such programming for the
Venture. The costs of producing or acquiring such programming for the
Venture will be borne by PEGI. Notwithstanding the foregoing, the Venture will
have the right at its own cost to product its own programming targeted to the
Latin American market pursuant to Section 12.2 ("Venture-produced Programming"
or a "Venture-produced Program").
12.2 Venture-Produced Programming. Venture-produced Programming will be
----------------------------
developed by mutual agreement between Bloomfield and PEGI. Such programming will
be produced locally by a Cisneros Affiliate or under Bloomfield's direction,
consistent with PEGI's standards and subject to PEGI's approval, not to be
unreasonably withheld. A budget for Venture-produced programming will be
identified in the Business Plan and annual Budgets.
12.2.1 PEGI may recommend a supervising producer for a
Venture-produced program. If such person is approved by Bloomfield (which
approval will not be unreasonably withheld), he/she will be paid in accordance
with the Venture's production budget; if not approved, the Venture will allow
such person to supervise production, but at PEGI's expense. Such supervising
producer shall have control over the content and look of the program, consistent
with the standards for the Playboy Programming.
12.2.2 With respect to each Venture-produced Program, PEGI will have
10 business days following the receipt of a program to approve such program or
request changes in writing; if no such approval or request for changes is
delivered to the Venture within this 10 business day period, PEGI will be deemed
to have approved such program. The costs of making changes requested by PEGI
will be borne by the Venture.
12.2.3 After the Venture makes any changes requested by PEGI pursuant
to Section 12.2.2, PEGI will have 5 business days from receipt of the changed
program to approve such program or request additional changes in writing; if no
such approval or request for changes is delivered within this 5 business day
period, PEGI will be deemed to have approved such program. If the changes
initially requested by PEGI have not been made to PEGI's reasonable
satisfaction, the costs of making further changes to conform to such initial
comments will be borne by the Venture. The costs of making any new
changes pursuant to this Section 12.2.3 will be borne by the Venture, up to a
cap of 2.5% or the program's original production cost, with any overage to be
paid by PEGI.
16
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12.2.4 After the Venture makes any changes requested by PEGI
pursuant to Section 12.2.3, PEGI will have 5 business days from receipt of the
changed program to approve such program or request additional changes in
writing; if no such approval or request for changes is delivered in this 5
business day period, PEGI will be deemed to have approved such program. The
costs of making any further changes not initially requested by PEGI will be
borne by PEGI.
12.2.5 The inclusion of Venture-produced Programming in the
Venture's program block will be in addition to the minimum number of hours to be
supplied by PEGI.
12.2.6 The Venture will grant PEGI a license to distribute the
Venture-produced Programming outside the Territory in all media and within the
Territory in all media other than the media for which the Venture has rights
pursuant to Section 7 above. For this distribution, PEGI will receive a
distribution fee equal to ***. Remittance of distribution fees will be on a
quarterly basis, payable within 30 days after the close of the relevant quarter
with the excess, to the extent received by PEGI, to be paid over to the Venture.
Although PEGI makes no guaranties to the Venture regarding such distribution,
PEGI will use its commercially reasonable efforts to maximize the license fees
it obtains from third parties for such Venture-produced Programming. PEGI will
license such programming on terms substantially equivalent to terms applicable
to the licensing of PEGI's own similar programming; provided, that the Venture
will have the right to approve any such transaction within the Territory and
will have the annual right to review the records of PEGI with respect to all
such licensing activities, upon reasonable notice, to ensure compliance with the
terms hereof. If PEGI acquires Venture-produced Programming (or specific
programs or series of programs therefrom) for use in a PEGI-owned or -operated
service or media, PEGI will acquire such programs on arms' length terms to
achieve fair market prices for the Venture with respect to such programs. If the
Venture-produced Programming is "bundled" with other programming by PEGI in the
course of its distribution efforts, PEGI will make a fair and good faith
allocation to such Venture-produced Programming of the fees received.
12.3 Program Mix.
-----------
12.3.1 PTVLA: PEGI will program the PTVLA Service with three
-----
types of programming, as follows: (a) "Playboy Programming", which is
programming produced, co-produced or owned by PEGI or one of its affiliates, or
which is programming acquired by PEGI or one of its affiliates for multiple
territories around the world; (b) "Venture Acquired Programming", which is
programming acquired by PEGI or one of its affiliates specifically for PTVLA,;
and (c) Venture-produced Programming, which is programming produced by the
Venture according to Section 12.2
PEGI will determine the mix of Playboy programming and Venture
Acquired Programming. PEGI and Bloomfield will mutually determine the manner in
which the
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
17
<PAGE>
Venture-produced Programming is scheduled. The 180 hours of New Programming (as
defined in Section 9.2 above) supplied by PEGI each fiscal year will include a
mix of Playboy Programming and Venture Acquired Programming. As per the Business
Plan, the following are the targets for the programming mix of such 180 hours:
Year 1 90% Playboy Programming
10% Venture Acquired Programming
Year 2 85% Playboy Programming
15% Venture Acquired Programming
Year 3 80% Playboy Programming
20% Venture Acquired Programming
Year 4 and 75% Playboy Programming
Thereafter 25% Venture Acquired Programming
The parties acknowledge that these are target ranges and that PEGI will use its
reasonable efforts to meet these targets. Any variance of more than 5% from
these targets will be subject to the Venture's approval. As noted in Section
12.2.5, Venture-produced Programming will be in addition to the 180 hours of New
Programming supplied by PEGI each fiscal year.
12.3.2 ATV: Initially, the ATV Service will be a retransmission of the
---
U.S. AdulTVision feed in the English language. If the Venture determines that a
separate ATV feed is commercially viable and desires to proceed with such
separate feed, the Venture will pay all costs associated with the development
and implementation of such separate feed (including satellite and transponder),
and the number of movies supplied by PEGI will be as set forth in Section 9.3
(subject to the rights of the Venture to decrease the number of movies as
described in such Section).
12.4 Interstitials/Promos/On-Air Look. In consultation with the Venture,
--------------------------------
PEGI will determine and direct the production and compilation of all
interstitial and promotional materials, as well as developing the on-air look of
PTVLA and ATV. The costs of such production and compilation will be borne by the
Venture. Bloomfield intends to produce or cause another Cisneros Affiliate to
produce local host wraps and other interstitial material, under PEGI supervision
and subject to PEGI's approval. The price paid by the Venture for such material
will be prevailing fair market price.
12.5 Delivery Material.
-----------------
12.5.1 For PTVLA: PEGI will supply one copy of each program,
---------
intersitial, promo or other relevant item to the Venture, with the costs of
duplication and shipping from
18
<PAGE>
Los Angeles to be borne by the Venture. Assembly of the finished program block
will be implemented by the Venture at PEGI's direction and to PEGI's
specification. PEGI will provide a nightly program log to enable the Venture's
technical personnel to properly compile a given night's programming. The Venture
will bear the costs of dubbing/subtitling and any necessary format conversions.
PEGI will provide such materials to the Venture in sufficient time to provide
for efficient implementation by the Venture.
12.5.2 For ATV: Initially, the ATV Service will be a retransmission of
-------
the US AdulTVision feed in the English language. Should the Venture determine
that the Service be transmitted off this same US AdulTVision feed in Spanish
and/or Portuguese (via a Second Audio Program or similar means), the costs of
implementing such transmission in these languages will be paid by the Venture.
The transmission to the Venture's ATV customers will be via the Galaxy III-R
satellite or any successor.
12.5.3 Certificate of Erasure. At the end of the Window for each item
----------------------
delivered to the Venture (excluding items that have been dubbed or subtitled and
which PEGI desires to acquire pursuant to the terms hereof), the Venture will
erase the tapes of such items and deliver to PEGI a certificate of erasure with
respect thereto.
12.6 Alternative Means of Performance. In the event the Venture can more
--------------------------------
cost effectively perform some or all of the functions described in Section 12.4,
the Venture may assume such functions, although PEGI will retain control over
control and quality of such transferred functions.
13. Operating Responsibilities
--------------------------
13.1 The Venture will employ a staff of sufficient size to efficiently
handle sales and distribution, affiliate relations, technical matters and other
appropriate matters.
13.2 Pursuant to the Management Services Contract, Management Co. will
handle many of the day-to-day operational and financial responsibilities of the
Venture under the supervision of the General Manager, including but not limited
to financial management, payroll services and accounting; collections and
accounts payable; and facilities acquisition and management. Management Co. will
receive a fee of ***% of the Adjusted Gross Revenue of PTVLA. In the event that
ATV launches prior to PTVLA, the 1996 Annual Budget will be modified to provide
for ATV to manage itself until the launch of PTVLA.
13.3 The Venture will be responsible for making arrangements for satellite
transponders as necessary to insure coverage of the entire Territory. All costs
of assembly, dubbing, subtitling, shipping, duplication, production of original
"wrap around" material, and similar functions will be paid by the Venture. In
the event PEGI expands its own funds for such services, such costs will be
"rebilled" to the Venture, with the Venture to reimburse PEGI within 30 days.
All costs shall be rebilled "at costs" with no markup by PEGI. A
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
19
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Cisneros Affiliate will provide dubbing/subtitle services on the terms set forth
in Section 6.2, payable within 30 days. The Business Plan will attempt to
identify the type and magnitude of these costs, with operating changes to be
made as needed via subsequent Annual Budgets.
13.4 The Venture will obtain office facilities/computer and
telecommunications infrastructure/other support services as needed. Such
facilities and/or services will be provided by a Cisneros Affiliate, and the
Venture will pay the actual or a reasonable allocation of costs of such
facilities and/or services, including a reasonable allocation of the overhead
associated therewith.
14. Venture Ownership, Capitalization and Governance
------------------------------------------------
14.1 Formation of Venture. The Venture will be organized as a limited
--------------------
liability company under the laws of the State of California. The parties intend
that the terms of the limited liability company be sufficient to qualify to be
taxed as if the Venture were a partnership. Consequently, the Venture will have
limited transferability of interests (as described below) and a limited life
(terminating on the 50th anniversary of its organization).
14.2 Ownership Provisions.
--------------------
14.2.1 The Venture will initially be owned 81% by Bloomfield and 19%
by PEGI.
14.2.2 PEGI has the right to increase its percentage interest, but
Bloomfield can never be diluted below 50.1%. PEGI can buy its additional
percentage interests from Bloomfield once per fiscal year, in minimum increments
of 5%. Until the sooner of cash break even or the end of 5 fiscal years, PEGI
can buy additional percentage interests from Bloomfield at the founders' price;
after fiscal year 5 or break even, PEGI's buy-in price will be a pro rata
portion of the going concern value of the Venture, to be mutually-agreed by the
parties or determined by a mutually agreed third-party expert. PEGI's buy-in
cannot be "paid" with deferred license fees.
14.2.3 Restrictions on Transfers of Interests. No member of the
--------------------------------------
Venture may transfer ownership interests to affiliates or any third party
without the consent of all the other members, provided, however, that
Confidential Shelf 16 Limited, a corporation organized under the laws of England
("Flextech"), may obtain an equity interest in the Venture and be admitted as a
member on the terms set forth below.
14.2.4 Flextech Buy-In. On or before the 105th day following the date
---------------
this Agreement is executed by the parties hereto, Flextech may purchase a 10%
equity interest in the Venture from Bloomfield at the founders' price. If
Flextech exercises such option, PEGI's maximum interest in the Venture will be
decreased from 49.9% to 39.9%
20
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14.2.5 Subject to the limitations set forth in this paragraph, and
provided that Flextech has purchased the 10% equity interest in the Venture
described in Section 14.2.4, at any time after July 1, 1996 either Bloomfield or
PEGI may sell to Flextech additional percentage interests in the Venture at a
price to be mutually-agreed between the selling party and Flextech. At any time
while PEGI's buy-in price pursuant to Section 4.2.2 above is the founders'
price, PEGI will have the right to preempt any proposed sale by Bloomfield to
Flextech by purchasing such interest from Bloomfield at the lower of the price
offered by Flextech and the founders' price. PEGI will have 60 days from written
notice from Bloomfield confirming the amount of the interest to be sold, the
terms of such sale, and Flextech's binding commitment to purchase such interest
in the event PEGI does not exercise its preemptive option. Subject to the rights
of PEGI set forth in the preceding two sentences, if any member of the Venture
(the "Selling Party") wishes to sell interests (the "Offered Interest") to any
other member, the third member (the "Non-Selling Party") may "tag-along" in such
sale on the same terms as negotiated by the Selling Party, with each having the
right to sell its pro rata share of the Offered Interest. Notwithstanding
anything to the contrary set forth herein, (i) without PEGI's approval,
Bloomfield cannot sell Flextech any interest that would have the effect of
transferring control of the Venture to Flextech and (ii) without Bloomfield's
and PEGI's approval, PEGI's interest in the Venture cannot fall below 19%.
14.2.5.1 For example, if PEGI wishes to sell a 10% interest in
the Venture to Flextech for $30 at a time when Bloomfield owns 60% of the
Venture, PEGI owns 30% and Flextech owns 10%, then if Bloomfield exercises its
tag-along right, PEGI may sell 3.33% (10% x 30/90) for $10 and Bloomfield may
sell 6.66% (10% x 60/90) for $20.
14.2.6 In connection with Flextech's possible buy-in and participation
in the Venture, PEGI and Bloomfield agree that (i) no information or material
available to the Venture which constitutes confidential or proprietary
information of GLA or DirecTV will be provided or disseminated to Flextech, and
(ii) each will use its best efforts to protect the confidentiality of such
information or material. The foregoing restrictions will be disclosed to
Flextech prior to any acquisition by Flextech of an interest in the Venture.
14.3 Capitalization.
--------------
14.3.1 The initial capital contribution of Bloomfield will be
$1,128,000 and the initial capital contribution of PEGI will be $265,000 (the
anticipated capital requirements of the Venture for the first two fiscal
quarters). Bloomfield shall fund its initial capital contribution in cash.
PEGI's initial capital contribution can be in the form of cash or paid from the
cash portion of the license fees payable pursuant to Section 10; this decision
must be made at the formation of the LLC.
14.3.2 If necessary to cover the deficits of the Venture, each member
shall contribute additional capital pro rata in accordance with their respective
percentage interests,
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<PAGE>
with such capital calls subject to the aggregate maximum of the highest deficit
shown in the Business Plan. The Operating Agreement will include an estimated
schedule of such additional capital calls, which are expected to occur quarterly
at the beginning of the respective quarter, commencing with the third fiscal
quarter. PEGI will have the right to fund its portion of such additional capital
requirements through non-payment of the Program License Fees and Trademark
Royalties, to the extent sufficient to cover such requirements. If any member
fails to make such additional capital contributions, the other members may loan
the Venture the amount of the shortfall, which loan will bear interest and will
be paid out of any distribution or payment otherwise owing from the Venture to
the defaulting member. The parties will negotiate other appropriate terms
regarding required capital contributions to be included in the Operating
Agreement, including but not limited to additional remedies regarding defaulting
members (e.g., the purchase of interest of any member that fails on multiple
occasions to make required captial contributions).
14.4 Governance Provisions
---------------------
14.4.1 The general management of the Venture will be delegated to a
General Manager to be mutually approved by the Venturers. The General Manager
will report to and be subject to the direction of a Management committee
comprised of three representatives of each of Bloomfield and PEGI. If Flextech
purchases an interest in the Venture pursuant to Section 14.2, the Management
Committee will be increased to include on representative of Flextech.
Notwithstanding the number of representatives a member has on the Management
Committee, such representatives will collectively vote the percentage interest
the member holds in the Venture and will collectively exercise each member's
approval rights.
14.4.2 The Operating Agreement will include appropriate minority
protections, including, but not limited, to provisions requiring the appoval of
PEGI prior to the Venture taking any of the following actions: (i) any amendment
to the Superseding Agreements, (ii) any merger or other reorganization of the
Venture, (iii) the issuance of additional interests in the Venture, (iv) any
distribution by the Venture with respect to the interests therin other than
distributions of excess cash (including, but not limited to, any distribution of
non-cash assets), (v) the Venture taking actions that are inconsistent with an
approved Business Plan or Annual Budget, or which are otherwise outside the
ordinary course of business, including but not limited to the incurrence of
indebtness in excess of the levels comtemplated by the applicable Business Plan
or Annual Budget, (vi) the Venture entering into any business activities except
as contemplated herein, (vii) loans by the Venture to any member, (viii) any
transaction with an affiliate of any member (other than the Superseding
Agreements), or (ix) except as expressly provided herein, the termination,
dissolution or liquidation or the Venture.
14.4.3 It is the parties intent that the structure of the Venture as a
limited liability company will limit the liability of the members for
liabilities of the Venture to their respective interests in the Venture.
However, if either Bloomfield or PEGI becomes
22
<PAGE>
directly liable for any liability of the Venture resulting from an action of the
other Venturer taken without the approval (on the terms provided herein) of such
Venturer, then the Venturer taking such action will indemnify and hold the
Venturer suffering such liability harmless from and against any liability
arising from such action (subject to the exclusion for PEGI's responsibility
for local laws regarding censorship as set forth in Section 19).
14.4.4 Each member of the Venture will have the right to examine the
books and records of the Venture, and will have the annual right to audit or
cause an audit of the books and records of the Venture upon not less than 10
business days prior notice. The Management Co. under the supervision of the
General Manager will prepare regular periodic financial statements and annual
financial statements to be prepared in accordance with GAAP. At the request of
any member, the annual financial statements will be audited by a nationally
recognized accounting firm.
15. Distribution of Profits The Venture will make distributions of operating
-----------------------
profits on a quarterly basis to each partner, in proportion to its percentage
interests at the end of that quarter. The Venture will not withhold
distributions except as necessary to provide for the reasonable conduct of the
Venture's Business as detailed in the Business Plan (as modified by the Approved
Budget for a given fiscal year).
16. Advertising It is the intention of the parties that the Venture secure
-----------
cross-channel promotional advertising with the other channels carried by GLA. If
GLA is unable or unwilling to facilitate such promotional advertising, the
Venture will seek promotional advertising directly from the owners of such
channels. Except as set forth above, the Venture shall determine whether and
when to sell advertising time to third-parties. If the Venture decides to carry
advertising, the Services will at all times abide by the following advertising
standards:
16.1 Categories that are not acceptable for advertising are firearms (or
advertisements from any gun lobby organization) and other weapons; explosives or
fireworks; massage parlors; telephone sex lines; sex clubs; sexually explicit
audio visual products (e.g., X-rated or similar "hardcore" videos); sex toys;
materials depicting graphic sexual conduct, violence, sadism, sadomasochism,
bondage, incest, bestiality or child pornography; classified advertising;
advertising for psychics or similar services; religious organizations and/or
cults.
16.2 The Venture will not accept advertisements for magazines which compete
with any edition of the "Playboy" magazine or for any other publication or
audio-visual products published, produced or distributed by any person who is
engaged in the publication and distribution of any magazine which competes with
any edition of the "Playboy" magazine.
16.3 Once advertising commences on a Service (other than cross-channel
promotional advertising), if the Venture decides to offer free or discounted
advertising time
23
<PAGE>
to either Venturer (whether for products bearing trademarks owned or licensed by
such Venturer or by affiliates of such Venturer), the Venture will offer such
advertising time to each Venturer equally and such advertising time will not, in
the aggregate, exceed 5% of the total advertising time on such Service.
17. Non-Competition and Exclusivity
-------------------------------
17.1 Neither of the parties nor their affiliates will hold an ownership
position of any kind in any competing primarily adult-oriented television
service (excluding a Cisneros Affiliates' interest in GLA) or (except as
permitted herein) distribute adult oriented programming to Non-Standard
Television in the Territory without the express written permission of the other.
Further, neither of the parties nor their affiliates will distribute
adult-oriented programming in any media that is "branded" programming of the
publisher of a magazine or other publication that competes with any edition of
the "Playboy" Magazine. The ownership or distribution of R-rated feature film
product for major studios does not represent ownership or distribution of
"adult-oriented" programming for the purposes of this provision. Notwithstanding
the foregoing, a Cisneros Affiliate's distribution in Venezuela pay cable to the
extent currently conducted (i.e., restricted to the current territory, number of
hours type of programming, etc. ) will not constitute a breach of this Section
17.1.
17.2 Subject to Section 5.2.3, the parties agree that GLA will be exclusive
DTH platform for the PTVLA Service through and including June 15, 1999 (the
"Exclusive Period"). GLA will be the exclusive DTH platform for the ATV for a
period of 5 years commencing on the date that ATV is first distributed via GLA
to subscribers.
17.3 In negotiating a carriage agreement with GLA, the Venture will
endeavor to obtain GLA's agreement that PTVLA and ATV will be the only primarily
adult-oriented services carried by GLA during the Exclusive Period. The parties
acknowledge, however, that Bloomfield cannot guarantee that the Venture will be
the exclusive provider of adult-oriented programming to GLA.
18. Mutivision The parties agree that the Venture will negotiate with the
----------
Multivision, a cable and DTH operator in Mexico, regarding the granting of
suitable performance-based incentives for the distribution of the Services in
Mexico via systems owned or controlled by Multivision. Any such agreement will
require the approval of both PEGI and Bloomfield.
19. Censorship
----------
The Venture is willing to accept and pay for programs supplied by PEGI for
the Services regardless of consorship regulations or the potential for same
throughout the Territory or in any individual country or politial subdivision
within the Territory. The Venture will be obliged either to edit the programming
as supplied by PEGI (subject to PEGI's approval) or blackout the territory(ies)
where the censorship problem occurs, with all
24
<PAGE>
costs of editing and/or blackout to be borne by the Venture; provided that the
Venture will make good faith efforts to obtain waivers of such restrictions or
will permit PEGI to make such efforts on behalf of the Venture.
20. Guaranty: Non-Disclosure
------------------------
20.1 A Cisneros Affiliate reasonably acceptable to PEGI will provide a
guaranty in favor of PEGI and PEI guarantying the Cisneros Affiliates'
obligations hereunder and under the Superseding Agreements (including but not
limited to any claims for which PEGI is entitled to satisfaction pursuant to the
dispute resolution provision set forth in Section 21 below). Such guaranty will
be irrevocable and will include financial assurances with respect to the
Cisneros Affiliates (including, if necessary, the infusion of additional
capital). The parties specifically agree that the bankruptcy, insolvency or
other similar financial condition of the Cisneros Affiliates will not in any
event form a defense to any claim by PEGI or PEI under the Guaranty.
20.2 The parties acknowledge that it is Cisneros Groups's intention to hold
its ownership interest in the Venture through an entity which will not be
publicly known to be a Cisneros Affiliate. PEGI will not publicize to
third-parties the participation of the Cisneros family in the Venture, without
Bloomfield's express approval, unless and only to the extent that such
disclosure is required by applicable law or to enforce the provisions of this
Agreement. If such disclosure is so required, PEGI will, to the extent
reasonably feasible, notify Bloomfield in advance of such disclosure and
cooperate with Bloomfield in seeking a protective order or other appropriate
protections. Prior to any investment in the Venture, Flextech will be required
to acknowledge and agree to be similarly bound by the foregoing.
21. Dispute Resolution
------------------
21.1 Any dispute arising out of or relating to this Agreement shall be
resolved in accordance with the procedures specified in this Section 21, which
shall be the sole and exclusive procedures for the resolution of any such
disputes. The parties intend to include substantially similar provisions in the
Superseding Documents so that the following provisions will continue to govern
dispute resolution with respect to the Venture and the Venturers. The parties
intend that these provisions shall be valid, binding, enforceable and
irrevocable and shall survive any termination of this Agreement or the
Superseding Agreements.
21.2 The parties shall promptly notify each other in writing of any dispute
arising out of or relating to this Agreement. The parties shall 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
25
<PAGE>
clause are confidential and shall be treated as compromise and settlement
negotiations for purposes of applicable rules of evidence.
21.3 If any such dispute remains unresolved within 30 days of original
notice thereof, the parties shall 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.
21.4 Any controversy or claim arising out of or relating to this
contract or the breach, termination or validity thereof, which remains
unresolved 45 days after appointment of a mediator, shall 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 shall be
governed by the United States Arbitration Act, 9 U.S.C.(S)1-16, and judgment
upon the award rendered by the arbitrator may be entered by any court having
jurisdiction thereof. The place of arbitration shall be Los Angeles, California.
21.5 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 shall have the authority to
include, as an item of damages, the costs of arbitration, including 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" shall 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.
21.6 The statute of limitations of the State of California applicable to
the commencement of a lawsuit shall apply to the commencement of an arbitration
hereunder, except that no defenses shall be available based upon the passage of
time during any negotiation or mediation called for by the preceding paragraphs
of this Section 21.
21.7 All negotiations pursuant to Sections 21.2 and 22.3 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of applicable rules of evidence.
21.8 Each party agrees that service by registered or certified mail,
return receipt requested, delivered to such party at the address provided in
Section 22.8 (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
26
<PAGE>
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.
21.9 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 the respective jurisdictions of organization of PEGI and the
Cisneros Affiliates and, to the extent necessary, in other jurisdictions in the
Territory.
22. Miscellaneous
-------------
22.1 Currency; Payments
------------------
Except where otherwise expressly provided to the contrary in the
Superseding Agreements:
22.1.1 All amounts due from either party to the other or from the
Venture to a Venturer pursuant to this Agreement shall 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 shall be calculated using the exchange rate
published in the Wall Street Journal or, with respect to Mexico, Brazil,
Argentina and Venezuela, as quoted by the Central Bank of such country, as of
the business day immediately preceding the date on which the payment initially
is due. Such exchange rate shall also apply to any portion of a payment which is
permitted to be deferred, regardless of whether such deferred payment is
represented by a promissory note or other instrument.
22.1.2 All payments owing pursuant to this Agreement will be made by
wire transfer of immediately available funds, net of any withholding required by
applicable law. Each party 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.
22.1.3 Any payment hereunder 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 of the Bank of America for domestic customers as in effect on the
date payment was due.
22.1.4 The parties agree that if any payment owing by it or any of its
affiliates is precluded or limited by a restriction imposed by jurisdiction of
organization or operation of the payor or the jurisdiction where the payor's
funds are deposited, then an affiliate of such payor not subject to such
restriction shall make the required payment.
27
<PAGE>
22.2 Governing Law. This Agreement has been negotiated and entered into in
-------------
the State of California and all questions with respect to the Agreement and the
relationships of the parties hereunder will be governed by the internal laws of
the State of California, regardless of the choice of law principles of
California or any other jurisdiction.
22.3 Authority. Each party represents that (i) it has full power and
---------
authority to enter into and perform this Agreement, (ii) this Agreement is the
valid and binding obligation of such party, enforceable against it in accordance
with its terms, and (iii) the performance by such party of its obligations under
this Agreement does not violate any law, rule or regulation binding on such
party or such party's charter documents.
22.4 Assignment: No Third Party Beneficiary. No party shall assign its
--------------------------------------
rights or delegate its obligations hereunder without written consent of the
other party except to an affiliate of such party; provided that no such
assignment shall relieve the assignor of its obligations. The provisions of this
Agreement are for the benefit only of the parties, and no third party may seek
to enforce or benefit from these provisions.
22.5 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.
22.6 Waivers, Remedies, Cumulative, Amendments, etc.
-----------------------------------------------
22.6.1 No failure or delay by any of the parties hereto in exercising
any right, power or privilege under this Agreement shall operated as a waiver
thereof nor shall any single or partial exercise by any of the parties hereto of
any right, power or privilege precluding any further exercise thereof or the
exercise of any other right, power or privilege.
22.6.2 The rights and remedies herein provided are cumulative and not
exclusive of any rights and remedies provided by law.
22.6.3 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.
22.7 Notices. All notices, requests, demands and other communications
-------
required to be given under this Agreement shall be in writing and shall
conclusively deemed to have been duly given (a) when hand delivered to the other
party, (b) the next business day if sent
28
<PAGE>
by a generally recognized overnight courier services that provides written
acknowledgement by the addressee of receipt, or (c) when received, if sent by
facsimile or other generally accepted means of electronic transmission.
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 Bloomfield to:
-------------------
Bloomfield Mercantile Inc.
c/o 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.
22.8 Confidentiality.
---------------
22.8.1 Each Venturer and its respective affiliates shall maintain
the confidentiality of all information of a confidential or proprietary nature
which it may have or
29
<PAGE>
acquire regarding the customers, business, finances, assets or affairs of the
Venture or the other Venturer and its affiliates except for (a) any information
which is generally available to the public or becomes generally available to the
public other than through disclosure in violation of this provision or (b) which
is required to be disclosed by applicable law or to enforce the provisions of
this Agreement.
22.8.2 In recognition of each party's understanding that the
other may in the future invite third parties to participate as equity or
non-equity investors or other providers of finance in or to such party or its
respective affiliates, the parties agree that each may provide to such entities
copies of the Operating Agreement, Program License Agreement, Trademark License
Agreement and other agreements governing the Venture, the Business Plan,
financial statements and other financial information provided by the Venture to
its members, and such other information as would be reasonable in the
circumstances for a potential investor to require. Notwithstanding the
foregoing, no such information will be provided until a confidentiality
agreement for the benefit of the Venture, the Venturers and their respective
affiliates has been signed by such potential investor.
22.8.3 In recognition of the fact that PEGI is a subsidiary of a
publicly held company, the parties agree that PEGI may provide to institutional
investors and analysts such information concerning the Venturer as in
conventional to assist such investors in deciding whether to invest or such
analysts to prepare their reports; provided, that no information may be
disclosed without the prior consent of the Venture that would reasonably be
expected to cause harm to the Venture, including with respect to its competitive
position.
22.8.4 Notwithstanding Section 22.8.2 and 22.8.3 to the
contrary, neither the Venture nor the parties may disclose any proprietary
information of GLA that would violate the terms of the GLA carriage agreement
(which is expected to include customary confidentiality provisions) without
obtaining GLA's approval thereof. Bloomfield and Management Co. agree to use
their best efforts to obtain such approval upon request by PEGI.
22.9 Public Announcements. Unless otherwise agreed by the parties or as
--------------------
required by law or by the stock exchange on which PEI's stock is traded, no
public announcement
30
<PAGE>
will be made by either party or any of their respective affiliates with respect
to the subject matter of this Agreement.
AGREED AND ACCEPTED:
- -------------------
PLAYBOY ENTERTAINMENT BLOOMFIELD MERCANTILE INC.
GROUP, INC.
By:/s/ Anthony J. Lynn By: /s/ Maria Batista de Upegui
---------------------- ----------------------------
Name: Anthony J. Lynn Name: Maria Batista de Upegui
Title: President Title: President
31
<PAGE>
EXHIBIT "A"
DEFINED TERMS
The following terms are defined in the indicated Sections of the text of the
within Agreement:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Adjusted Gross Revenue 11.1
AdulTVision Homes 4.2.3.2
Agreement 1.1
Annual Budget 3.2
ATV 1.1
ATV Guaranteed Program License Fee 10.1.2
Bloomfield 1.1
Business Plan 3.1
Cisneros Affiliates 1.1
Exclusive Period 17.2
Flextech 14.2.3
GLA 5.2.3
Home Video 8.1
License Term 8.1
Management Co. 2.5
movie 9.3
New Programming 9.2
Non-Selling Party 14.4.2
Non-Standard Television 7.1
Offered Interest 14.4.2
Operating Agreement 2.1
Optionee 9.5
Option Program 9.4
PEGI 1.1
PEI 2.3
Playboy Homes 4.2.3.2
Playboy Programming 12.3.1
Program License Fees 10.1
PTVLA 1.1
PTVLA Guaranteed Minimum Program License Fee 10.1.1
Remedial Actions 5.2.3.1
revenue 4.2.2
Selling Party 14.4.2
Services 1.1
Spanish Cable Homes 4.3.2.1
</TABLE>
EXHIBIT A-1
<PAGE>
DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Superseding Agreements 2
Territory 4.1
Trademark License Agreement 2.3
Trademark Royalty 11.1
U.S. Rights 4.2
Venture 1.1
Venture Acquired Programming 12.3.1
Venture-produced Programming or Venture-produced Program 12.1
Ventures 2.1
Veto Option 10.2.1.2
Window 8.1
</TABLE>
The following additional terms shall have the meanings set forth below:
"affiliate" means any person controlled, controlling or under common
control with the specified person.
"control" (and controlled and controlling, respectively) means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of the relevent person (whether by the holding of
shares, the possession of voting rights or otherwise).
"person" means any individual, corporation, partnership, limited liability
company, trust, association or other legal entity.
EXHIBIT A-2
<PAGE>
EXHIBIT "B"
STANDARD TERMS AND CONDITIONS OF PAY TELEVISION
LICENSE AGREEMENT
1. LICENSE: Subject to the payment of the License Fee and the due
-------
performance by Licensee of the obligations hereunder, Licensor grants and
Licensee accepts a limited license of rights under copyright of each of the
Programs during the periods set forth in Schedule "A" attached hereto by means
of direct broadcast satellite pay television, satellite television and pay cable
television. This license does not grant any right to Licensee to transmit or
authorize others to transmit exhibitions of the Programs over so-called
subscription and/or theatre television rights, i.e., the right to exhibit the
Programs for reception by those paying a fee therefor or in places where an
admission fee is charged. The license does not grant any right to the Licensee
to transmit or to authorize others to transmit exhibitions of the Programs by
means of free broadcast television.
2. DELIVERY AND RETURN: Licensor shall deliver to Licensee one tape of
-------------------
each Program on the dates specified in Schedule "A". Delivery to Licensee at the
address set forth in Schedule "A" shall be deemed delivery hereunder. All costs
of delivery and return of tapes and all risks of loss in transit or while in
Licensee's possession or control shall be borne by Licensee. At all times after
receipt of tapes, Licensee shall keep the tapes in Licensee's exclusive
possession and control until retuned or erased as hereafter provided. Licensee
will not make or authorize others to make copies of the Programs other than the
minimum number of copies necessary to exhibit the Programs. Licensee shall
furnish an affidavit with respect to any lost, stolen or destroyed tapes. All
tapes and parts or replacements thereof shall remain the property of Licensor at
all times. Licensee shall promptly examine each tape and shall give Licensor
immediate written notice if said tape is not physically suitable for telecast
other than the need to dub the tapes into the Spanish and/or Portuguese
language(s). The tape or tapes shall be deemed acceptable unless Licensor is
notified a minimum of ten (10) days prior to any scheduled broadcast that a tape
is defective. At its option, Licensor may furnish another tape of said Program,
or a suitable tape or another program in the series, or grant Licensee a
proportionate credit in the license fees but Licensor shall have no other
obligation or liability whatsoever. Original undubbed Licensor-supplied tapes
and reels of each Program shall be either the subject of a certificate of
erasure delivered to Licensor within sixty (60) days of receipt by Licenses or
returned to Licensor at Licensee's expense (including customs fees) in the same
condition as received, normal wear and tear excepted, either directly to
Licensor or to such address as Licensor may designate. Licensee shall within
sixty (60) days after the date of the last scheduled telecast of each Program,
deliver to Licensor a certificate of erasure concerning all retained copies of
Program tapes of all dubbed sound tracks, subtitled or subtitling material, and
all optical and/or magnetic sound tracks and/or tapes of Programs containing
optical and/or magnetic sound tracks, which were manufactured by or at the
instance of Licensee, whether or not any of said sound tracks, materials or
tapes were actually utilized by Licensee in connection with the exercise of
rights granted to Licensee hereunder. It is expressly agreed that title in and
to any such material provided to Licensee hereunder shall remain in Licensor,
and that title in and to any such material created by, for or at the instance of
Licensee and all rights including copyrights therein shall vest in Licensor upon
the creation thereof, subject only to possession and control thereof by Licensee
during the terms of this license solely for the purpose of exercise of the
rights granted herein. Licensee will execute, acknowledge and deliver to
Licensor any instruments of transfer, conveyance or assignment in or to any such
material 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 shall be deemed to be
and Licensee hereby nominates, constitutes and appoints Licensor its true and
lawful attorney-in-fact
<PAGE>
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. Anything herein to the contrary notwithstanding, Licensee shall not
have the right to use any dubbed sound tracks, sub-titled materials, optical
sound tracks, or tapes made therefor 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. It is distinctly understood and
agreed that all payments, fees, royalties, residual payments and the like shall
be the sole obligation of Licensee with respect to the production of and use of
any and all dubbed magnetic sound tracks, sub-titled materials, and all optical
sound tracks and tapes of Programs containing optical sound tracks made by, for
or at the instance of the Licensee and Licensee hereby indemnifies Licensor with
respect thereto.
3. CREDITS AND ALTERATION OF TAPES: Licensee may make only such cuts or
--------------------------------
deletions as are necessary to make the Programs conform to the orders of any
duly authorized public censorship authority, its time segment requirements and
its continuity acceptance standards and may add commercial matter provided it is
made clear to the television viewers that such commercial matter is not part of
the continuity of the Programs. Additionally, once the editing is completed,
such edited version shall be supplied to Licensor for its prior-to-broadcast
approval (such approval not to be unreasonably delayed or withheld). Licensee
will not delete the copyright notice and/or credits incorporated in the Programs
as delivered by Licensor. Licensee shall replace such cuts and alterations and
delete such commercial matter so that the tapes are returned in the same
condition as received, normal wear and tear excepted. Licensee will not and will
not authorize others to copy, duplicate or sub-license any tape nor part with
possession thereof.
4. PAYMENT: Licensee shall pay Licensor the license fees stipulated in
--------
Schedule "A" at the times and in the manner therein specified. Said license fees
shall be due and payable whether or not any one or more of the Programs is
actually telecast. Any payment not made within thirty (30) days of its due date
shall bear legal interest not to exceed 12% per annum but in no event more than
the maximum legal rate from the due date until paid. Acceptance of any payment
after its due date shall constitute a waiver by Licensor of any of its rights
except as to such payment. All payments shall be made only in United States
dollars by wire transfer of immediately available federal funds to LaSalle
National Bank, 120 South LaSalle Street, Chicago, IL 60603, ABA #071000505
(Playboy Entertainment Group, Inc.), A/C No. 22-9214-8.
5. SUBSTITUTION OF PROGRAMS: CERTIFICATE OF PERFORMANCE:
-----------------------------------------------------
a. Licensor may, in its absolute discretion, withdraw any licensed
Program if Licensor determines that the telecasting thereof would or might (i)
infringe upon the rights of others; (ii) violate the law, court order,
government regulation or other ruling of any governmental agency; (iii)
interfere with the actual or contemplated use of the licensed Program or the
material or rights contained therein for any purpose other than the telecasting
of the Program in Licensee's basic area; or (iv) subject Licensor to any
liability.
b. If Licensor elects to withdraw any Program as set forth in the
preceding sub-paragraph (a) of this Paragraph 6, before its initial telecast.
Licensee shall have the right, in its sole discretion to require Licensor either
to deliver another Program of comparable quality (which Program shall be deemed
to replace the Program withdrawn). Should Licensor's decision to withdraw be
made, any transportation and dubbing costs incurred and paid by Licensee in
regard to the withdrawn Program shall be refunded by Licensor immediately upon
Licensee's presentation of reasonable evidence of such
B-2
<PAGE>
expenditures.
c. If a tape of any withdrawn Program has bee shipped to Licensee.
Licensee will promptly return it to Licensor.
6. WARRANTY AND INDEMNITY: Licensor MAKES NO REPRESENTATIONS. WARRANTIES OR
----------------------
INDEMNITIES, EXPRESS OR IMPLIED EXCEPT AS SPECIFICALLY SET FORTH IN THIS
PARAGRAPH:
a. Subject to Paragraph 18. hereof, Licensor agrees to indemnify and save
Licensee harmless from the amounts of any damages (except loss of profits and
consequential damages, if any) awarded in any final judgement entered against it
together with reasonable costs and expenses of litigation and reasonable counsel
fees of Licensee incurred in connection therewith by reason of any claim which
may be made alleging that any of the Programs infringe upon the copyright,
literary or dramatic right or right of privacy of any claimant or constitutes a
libel or slander of such person, except with respect to any material added by
Licensee and except with respect to music which is specifically covered by
Paragraph 8 below.
b. Licensee shall indemnify and hold Licensor, its officers and directors
harmless from any and all claims, damages, liabilities, reasonable costs and
expenses of litigation, including reasonable counsel fees, arising directly or
indirectly from the breach of any provisions of this Agreement by Licensee from
the broadcasting of any material other than material contained in the Programs
as delivered by Licensor, in connection with, or relating directly or indirectly
to, said Programs.
7. ADDITIONAL WARRANTIES: Licensor warrants and represents that to the best
---------------------
of its knowledge, information and belief, the performing right in all musical
compositions contained in the Program are controlled by (a) a performing rights
society having jurisdiction; or (b) 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. If Licensee is required to pay a performing rights
royalty or license fee, Licensee shall be solely responsible for the payment of
such royalty of fee and shall hold Licensor free and harmless therefrom.
8. FORCE MAJEURE: Neither party shall be liable to the other for any failure
-------------
or delay in delivery of tapes, or the inability to telecast any of the Programs,
due to labor disputes, act of God, failure of carriers, failure of delay of
laboratories, or for any other cause beyond the control of the parties and such
performances shall be excused to the extent that it is prevented by reason of
any of the foregoing conditions. If at the end of the term the Licensor in good
faith determines that any act 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. In no event shall any
governmental action taken which deems the content of any Program to be
unacceptable constitute an event of force majeure.
9. DEFAULT AND TERMINATION: If Licensee defaults in the payment of any
-----------------------
installment of the license fee, or if Licensee defaults in the performance of
any of the other obligations hereunder and such default shall not be cured
within ten (10) days after written notice thereof to Licensee, or if Licensee
(which petition, if filed against Licensee, shall not have been dismissed within
thirty (30) days thereafter), or if Licensee executed an assignment for the
benefit of creditors, or if a receiver is
B-3
<PAGE>
appointed for the assets of Licensee, or if Licensee takes advantage of any
applicable insolvency or any other like statute, or if Licensor notifies
Licensee that it in good faith has reasonable doubts that Licensee can or will
continue to perform hereunder, and Licensee fails to give adequate financial
security and assurances within fifteen (15) days off mailing of said notice (any
of the above acts is hereinafter called "event of default"), then Licensor may,
in addition to any and all other rights which it may have against Licensee,
terminate this Agreement and any other agreements between the parties then in
existence by giving written notice to Licensee at any time after the occurence
of such event of default. Whether or not Licensor exercises such right of
termination, Licensor shall upon the occurrence of such event of default have no
further obligation to deliver tapes of Programs hereunder and shall be entitled
to immediate return of all tapes theretofore delivered to and in possession of
Licensee. Upon termination, Licensor may recover from Licensee the entire unpaid
license fee, plus interest at 12% per annum on that portion of the license fee
which was delinquent prior to the termination, and any consequential damages.
Licensee acknowledges that the terms hereof and the industry custom of licensing
Programs substantially in advance of the scheduled telecast dates, have the
effect of rendering the Programs hereunder unremarkable in the area covered by
the Licensee during any period which includes the period of this license or any
part thereof. Licensee also acknowledges that, by reason of the foregoing, no
method exists for accurate measurement of damages for any breach of Licensee's
agreement to pay Licensor as provided in this Agreement. It is therefore agreed
that, in addition to all other remedies available at law, in equity, or under
other provisions of this Agreement, Licensor shall be entitled (upon breach by
Licensee of such agreement to pay Licensor) to recover from licensee, as
liquidated damages, the total unpaid license fees for all telecasts authorized
hereunder, whether or not such telecasts actually occur, and in addition,
reasonable attorney's fees or collection agency fees if an attorney is retained
by Licensor at any time to enforce the provisions hereof, plus such other
amounts as may be due hereunder. The remedies provided herein are not exclusive
but are cumulative and in addition to all other remedies existing at law, in
equity, or in courts of bankruptcy. In the event that neither party commences
litigation to enforce, interpret or declare any of the terms, covenants,
conditions or obligations of this Agreement, prevailing party shall be entitled
to recover all costs, fees and expenses of or in preparation for, litigation,
appeal, review, or post-judgement or order, collection or enforcement efforts.
All parties to this Agreement agree that the court shall retain and reserve
jurisdiction in any judgement over the parties and the subject matter for
purposes of enforcing this paragraph.
10. COMPLETION OF TELECAST PRIOR TO EXPIRATION OF TERM: Anything herein
--------------------------------------------------
contained to the contrary notwithstanding, if Licensee telecasts such Program
the number of times permitted hereunder prior to the expiration of the terms set
forth in Schedule "A", this license shall for all purposes be deemed terminated
as of the date upon which the last permitted telecast occurs and any then
remaining unpaid portion of the license fee will forthwith become due and
payable. Failure by the Licensee to complete the remaining number of telecasts
permitted hereunder on or before the expiration of the term of the license
granted herein shall not serve to extend the term of this Agreement of the
grant of any other right hereunder.
11. ASSIGNMENT: Except in the case of retransmission of the Programs within the
-----------
Territory and the scope of this Agreement, this Agreement and the rights and
licenses granted hereunder to the Licensee are personal to Licensee and Licensee
shall not sell, assign, mortgage, pledge or hypothecate any such rights of
licenses in whole or in part without obtaining the prior written consent of the
Licensor, nor shall any of said rights or licenses be assigned or transferred by
the Licensee to any third party by operation of law or otherwise. Any assignment
in violation of the foregoing sentence shall be null and void and without
effect. In the event Licensor consents to any such assignment by Licensee.
B-4
<PAGE>
Licensee shall nevertheless continue to remain fully and primarily responsible
and liable to the Licensor for due, full, complete and faithful performance of
all terms and conditions of this Agreement to be performed on the part of the
Licensee. Licensor may assign, transfer, pledge or hypothecate all or any part
of the license fees to be received by Licensor hereunder. Licensee agrees that
in the event of receipt of written notice of assignment by Licensor, monies due
to the Licensor shall be paid to any third party assignee in accordance with
such instruction without offset, deduction, counter-claim, or other credits
which the Licensee may have or claim to have against the Licensor. Licensor may
assign the agreement to any corporation controlling, controlled by or under
common control with Licensor or to any person, firm or corporation which may
hereafter become the Licensor of the Programs.
12. RESERVATION OF RIGHTS: All licenses, rights and interest in, to and with
---------------------
respect to the Programs and the Playboy Marks not specifically granted to
Licensee, including but not limited to all theatrical and non-theatrical rights
and all direct mail and other home video rights shall be and are specifically
and entirely reserved to Licensor and may be fully exploited and utilized by
Licensor, without regard to the extent to which any such rights may be
competitive with Licensee or the license granted hereunder.
13. TAXES: Licensee shall 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 hereafter 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 licensed hereunder whether or not billed or demanded by Licensor, it
being the intent hereof that the license fee specified as the consideration of
the license granted herein shall be net amount, free and clear of any tax,
levy or charge of whatsoever kind or nature howsoever denominated except
Licensor Taxes. 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 tax payment
certificate or other similar document) to allow Licensor to deduct such tax
payment in America. To the extent that any such other taxes, levies or charges
or penalties and interest thereon are paid by Licensor, the Licensee shall
reimburse Licensor on demand, and on the failure of Licensee to reimburse the
Licensor, the Licensee will have available to it all of the remedies provided
for herein with respect to unpaid 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 shall indemnify Licensor for
any liability, penalty or interest which may result and Licensor shall have the
immediately aforementioned remedies against Licensee for the collection of same.
Licensor shall have no obligation to contest or dispute any tax assessed or
levied. Licensee shall have the right to do so at its sole cost and expense.
14. INDEMNITY: Licensee will indemnify Licensor, its officers, directors and
---------
employees from all claims, liabilities and judgments together with reasonable
costs and expenses of litigation and reasonable counsel fees arising from the
breach or alleged breach of any provision of this Agreement by Licensee.
Licensee shall specifically so indemnify Licensor and such other parties from
such claims, liabilities, judgments, costs, expenses and fees made or assessed
against Licensor arising from the telecasting of any material in connection with
or relating to the Program other than material contained in any Program as
delivered by Licensor, or from the temporary or permanent loss of any such
material.
15. RECEPTION FROM OUTSIDE BROADCAST: Licensee acknowledges that broadcasts of
--------------------------------
the
B-5
<PAGE>
Programs in the Language permitted hereunder originating outside the Territory
and broadcasts in other languages originating within and without the Territory
served by Licensee may be received by television sets located within such
exclusive Territory and Licensee agrees that such reception shall not constitute
a breach of this Agreement by Licensor.
16. ADVERTISING CREDITS: Licensee will comply with all instructions furnished
--------------------
to it by Licensor or with respect to advertising credits and Licensee agrees to
and will indemnify and hold Licensor harmless from any loss, damage, cost or
expense (including reasonable attorney's fees) incurred or suffered by Licensor
by reason of the failure by the Licensee to adhere to and observe any such
credit instructions.
17. CONTINGENT ROYALTIES: In the event that any monies are paid to or become
---------------------
due to or can be claimed by Licensee in connection with any use of the subject
copyright or related materials other than as licensed hereunder, such monies
shall be received and held by Licensee in trust for Licensor.
18. REQUIREMENTS FOR LICENSOR CONTENT INDEMNITY: Notwithstanding any other
--------------------------------------------
terms herein to the contrary, Licensor's indemnification will be valid in the
event of a claim involving an allegation of violation of the laws insofar as
the content of the Programs is concerned, only in the event each of the
following conditions is met:
a. Immediate telephone contact be made with both the General Counsel's
office of Licensor in Chicago at 312-751-3000 and Licensor's Senior Vice
President, International Sales, in Beverly Hills at 310-246-4000 or other
numbers hereafter specified by Licensor. Such telephone notification should be
immediately followed with a letter containing copies of all papers that have
been served and giving complete information then available regarding the
incident.
b. Licensor shall have the right to approve Licensee's choice of counsel
and to determine in advance the terms of retention.
c. Licensor will assist in defended actions only and will not be
responsible in cases where there is any admissions of guilt by anyone charged
with violation of the law as to the content of any Program. Settlement or
dismissal of any case will not be allowed, except with Licensor's prior written
consent.
d. Actual or prospective parties involved in such prosecution shall make
no voluntary disclosure regarding support or lack thereof by Licensor under
this policy.
19. WAIVER: A waiver by either party of any breach or default by the other
------
party will not be construed as a continuing waiver of the same or any other
breach or default under this Agreement.
20. CONSTRUCTION, JURISDICTION, DISPUTE RESOLUTION: This Agreement shall be
-----------------------------------------------
deemed to have been made in California and shall be construed in all respects in
accordance with the laws of California applicable to agreements to be performed
wholly within California. Any dispute based on, arising out of or relating,
directly or indirectly, to this Agreement or its subject matter shall be
resolved by an action or proceeding filed and prosecuted in the County of Los
Angeles, State of California. Licensee hereby consents to the exclusive
jurisdiction of the courts of the State of California the United States District
Court for the Central District of California, and the Los Angeles
B-6
<PAGE>
office of the Judicial Arbitration and Mediation Service for the resolution of
such dispute. The parties acknowledge and agree that the County of Los Angeles,
State of California, is the appropriate locale for the resolution of any such
dispute and that such locale will not subject any party to unreasonable
inconvenience or hardship. The party filing or instituting the action or
proceeding may select the forum and that selection shall be binding upon the
other party. Service of any process permitted or required in any such action or
proceeding may be made by personal delivery; telex, telegraph, or facsimile
transmission; or mail at the address for the party specified in Schedule "A."
Service shall be deemed complete upon actual delivery in the case of personal
delivery, transmission in the case of telex, telegraph, or facsimile, or on
deposit in the mail enclosed in a properly addressed envelope with postage
prepaid for the most expeditious form of mail delivery available.
21. NOTICES: All notices required to be given hereunder to the Licensor shall,
--------
in the absence of specific written advice to the contrary, be telexed,
telecopied, or facsimilied to Licensor at its home office, the address of
which is set forth in Schedule "A", or as such other address as Licensor may
hereafter specify; and all notices required to be given to Licensee hereunder
shall, in the absence of specific written advice to the contrary, be sent by
telex, telecopier, or facsimile to the Licensee at the address set forth in
Schedule "A".
22. COUNTERPART EXECUTION: This Agreement may be executed in counterparts but
----------------------
shall not be deemed to be effective until and unless executed by the Licensor
at its home office and the date of execution by the Licensor shall be deemed to
be the effective date of the agreement. When so executed by each party, the
counterparts together shall be deemed an original and shall constitute one and
the same instrument.
23. TIME OF ESSENCE: Time shall be of the essence with respect to each and every
----------------
obligation of Licensee and Licensor hereunder.
24. ENTIRE AGREEMENT: This Agreement, including Schedule "A", constitutes the
-----------------
complete and entire agreement between the parties and all prior understandings
are merged herein. This Agreement cannot be changed or terminated orally and no
amendments, modifications or assignments hereof shall be binding upon Licensor
until accepted in writing by a duly authorized agent or officer of Licensor in
California. The titles of the paragraphs of this Agreement are for convenience
only and shall not in any way affect the interpretation of this Agreement of any
paragraph hereof.
25. INVALIDITY: If any provision or any application of any provision hereof is
-----------
adjudged illegal, unenforceable or invalid and such adjudication has become
final and non-appealable, such provision or application shall be deemed deleted
without affecting the remainder of this Agreement unless such deletion shall
have a material adverse effect upon the rights or obligations of either party
hereto and notice of such effect is given as provided in the following sentence.
Either party may notify the other within forty-five (45) days after such
adjudication has become final and non-appealable that in its opinion such
deletion would have a material adverse effect upon the notifying party and that
this Agreement is terminated by reason thereof; but the existence of such effect
and the termination of this License shall be subject to contest by the
partyreceiving such notice if it notifies the other party, within forty-five
(45) days after service of the notice of termination upon it of its desire so to
contest the matter and thereafter proceeds promptly with a proceeding so to
contest the matter. During such time as the matter is being contested, this
Agreement shall remain in full force and effect.
-END OF DOCUMENT-
B-7
<PAGE>
EXHIBIT "C"
TRADEMARK USAGE SUMMARY
Licensee may publicize and advertise telecasts of the Programs or any person
appearing therein (unless specifically notified to the contrary) in the market
served by Licensee for publicity and exploitation only of the Programs, but in
no event shall the names of such persons or of Licensor be used in such manner
so that such use may be construed as an endorsement, express or implied, of any
party, sponsor, product or service. All such advertising may be only in the
Spanish or Portugese (or, at Playboy's discretion, English) language and shall
be subject to Licensor's prior written approval at least thirty (30) days prior
to its intended distribution.
In regard to those Programs utilizing the Playboy Marks (as defined below) in
the title, Licensor hereby acknowledges that the trade names "Playboy" and
"Playmate" and the registered trademark and service mark "Playboy", the Playboy
"Rabbit Head Design" and trade names "The Playboy Channel", "Playboy At Night"
and "Playboy Television" (collectively, the "Playboy Marks") are the sole and
exclusive property of Licensor and that all uses of the Playboy Marks shall
inure solely to the benefit of Licensor, Licensee shall have the right to
develop and distribute advertising, publicity and promotional materials relating
to the Programs incorporating the Playboy Marks in connection with Licensee's
rights hereunder, provided, however, that any such materials (other than
material obtained directly from Producer) shall:
(a) clearly identify the Playboy Marks with a legible credit line with
the wording "Playboy' (or the 'Rabbit Head Design' or 'The Playboy Channel' or
'Playboy At Night' or 'Playboy Television' or 'Playmate', as the case may be) is
the mark of and used with the permission of Playboy Enterprises, Inc." or such
other words as Licensor may designate;
(b) submit any such materials (except for Licensee's usual and ordinary
program information sheets distributed to the presss and other similar
organizations) in representative form to Licensor for Licensor's prior written
approval at least thirty (30) days prior to their intended distribution.
Licensor may disapprove any use if such use (i) jeopardizes the validity of any
of the Playboy Marks, (ii) does not conform to previously approved uses of the
Playboy Marks, or (iii) does not conform to Licensor's standards, which may vary
from time to time. Licensee will not disseminate any material or packaging that
has not been approved by Licensor, and
(c) be issued only in Spanish, Portuguese or, at Playboy's discretion,
English.
It is expressly understood that Licensor shall retain all good will associated
with the Playboy Marks, and no good will from same will inure to Licensee or to
any portion of the Programs or any other owner of any rights therein or thereto.
Other than as expressly set forth in this Paragraph 9, Licensee shall make no
use of the Playboy Marks or any confusingly similar designation without the
prior express written consent of Licensor in each instance. Licensee shall also
make no use whatsoever of any other trademark, trade name or service mark that
is the property of Licensor or any of its programs, suppliers or producers
without the prior express written consent of Licensor in each instance.
Licensee similarly agrees that it will not authorize or purport to authorize any
third party to make any such use, and it will expressly provide in any
applicable third party agreements that such third parties will only be entitled
to use such names and markes on material supplied to them by Licensee in
accordance with Licensee's rights hereunder.
It is expressly understood that those Programs which may not be otherwise
associated with the Playboy Marks will not be promoted, telecast, exhibited,
advertised or otherwise exploited in any manner using the name "Playboy" or the
Playboy Marks without the express prior aproval of Licensor.
C-1
<PAGE>
Exhibit "D"
-----------
***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
D-1
<PAGE>
EXHIBIT "E"
NET REVENUE PER HOUSEHOLD
-------------------------
1. In this Schedule a "Household" means:
a. for any year (or portion thereof) during which the Service is being
transmitted by means of a satellite (such as, for example, the Galaxy
III-R), any home in the Territory which on January 1 or December 31 (as
the case may be) in that year is equipped with a satellite dish and any
other receiving, decoding equipment or decompression equipment which is
necessary in order to receive and view a television channel transmitted
by such Satellite; and/or
b. any home in the Territory which by January 1 or December 31 (as the case
may be) in that year has been connected to a cable television system in
the Territory by means of which the Service, as of January 1 or December
31 in that year (as the case may be), is being re-transmitted by any
means for reception by subscribers to that cable television system.
2. The "net revenue per household" for any year shall be calculated by dividing
the net revenue of the Venture by the average number of Households for that
Year. The average
1
E-1
<PAGE>
number of Households shall be calculated by aggregating the total numbers
of Households on January 1 and on December 31 in that year and by dividing
the resulting figure by two.
3. The number of Households which on January 1 and December 31 in each year
fall within paragraph 1 (a) of this Schedule shall be determined by
reference to the relevent figures published or provided by any
direct-to-home provider carrying the Service (for example, Galaxy Latin
America), as of January 1 or December 31 in that year (as the case may be)
or as of the date which is closest to January 1 or December 31 in that year
and for which such a figure is available by March 31 in the immediately
following year.
4. The number of Households which on January 1 and December 31 in each year
fall within paragraph 1(b) of this Schedule shall be determined by
reference to the relevant figures published or provided by a source to be
mutually-acceptable to the Venturers, as of January 1 or December 31 in
that year (as the case may be) or as of the date which is closest to
January 1 or December 31 in that year and for which such figure is or are
available by March 31 in the immediate following year.
2
E-2
<PAGE>
EXHIBIT "F"
PLAYBOY TELEVISION
INTERNATIONAL PROGRAMMING MODEL
Product Model
-------------
I. Premiere Programming
--------------------
<TABLE>
<CAPTION>
Categories # Titles per Month/Annual Hours per Month/Annual
---------- ------------------------- ----------------------
<S> <C> <C>
. Playboy Specials 2.0/24 2.0/24
. Couples (every other month) .5/6 .5/6
. Playboy Series 2.5/30 2.5/30
. PBTV Specials & Mini-Series 2.0/24 2.0/24
. Acquired Specials 1.0/12 1.0/12
. "Made by" Playboy Movies 1.0/12 1.5/18
. Acquired Movies 3.5/42 5.25/63
----------- ------------
SUB TOTAL 12.5/150 14.75/177
------------------------------------------------------------------------------
<CAPTION>
II. Additional Programming
- --- ----------------------
<S> <C> <C>
. Encore Product
- Movies 2.0/24 3.5/42
- Specials/Series 3.0/36 3.0/36
----------- ------------
SUB TOTAL 17.5/210 21.25/255
. Locally produced product
(after one or two years
of operation)
- Specials .5/6 .5/6
- LIVE 1.0/12 1.0/12
----------- ------------
GRAND TOTAL 19.0/228 22.75/273
</TABLE>
November 13, 1995
-1-
<PAGE>
TWENTY-FOUR HOUR OPERATIONAL PLAN
8X3 ROTATION
One 8-hour block would include two (2) movies and four (4) special or series
programs...
<TABLE>
<S> <C>
==============================
8:00 p.m. Special
------------------------------
9:00 p.m. Special
------------------------------
10:00 p.m. Movie
------------------------------
12:00 a.m. Special
------------------------------
1:00 a.m. Special
------------------------------
2:00 a.m. Movie
==============================
</TABLE>
Four "special/series" slots x 30 days = 120 slots divided by 11
"specials/series" each month results in 11.0 exhibitions per "special/series"
per month.
Two "movie" slots x 30 days = 60 slots divided by 6.5 "movies" each month
results in 9 exhibitions per "movie" per month.
Therefore, if Playboy TV is to run 24-hours a day in the 8 x 3 block
configuration each; 1) "special/series" would receive 11 exhibition days per
month with a total of 33 exhibitions, 2) "movie" would receive 9 exhibition days
per month with a total of 27 exhibitions.
Notes:
1) A premiering special, series or movie would initially be exhibited over
a two month period.
2) Excluding issues related to the "start-up" of the schedule, each
special, series or movie would be "rested" for a period of 6 to 10
months, after its two month premiere period, before it is "Encored".
3) Only selected, specials, series or movies would be "Encored".
November 13, 1995
-2-
F-2
<PAGE>
CATEGORY EXAMPLES
-----------------
. Playboy Specials
- Playmate of the Year
- Annual Calendar Review
- Celebrity Centerfold
- Maui Playmate Challenge
- Girls of Radio
. Couples
- Love, Sex and Intimacy
- Massage Series
- Secrets of Making Love
- 101 Ways to Excite Your Lover
. Playboy Series
- Eden
- Erotic Fantasies
- Sexy Lingerie
- Love & Sex Test
- Late Night
. Playboy TV Specials and Mini-Series
- Really Naked Truth (4 x 60)
- Women of Color (4 x 60)
- Adult Stars Close-Up
- 360
- StripSearch
. Acquired Specials
- LaToya Jackson Exotic Club Tour
. Made by Playboy Movies (Playboy's Eros Collection & After Dark)
- The Affair
- Lover's Leap
- Watch Me
- Scoring
- Killing for Love
. Acquired Movies
- Varies by Territory
-3-
F-3
<PAGE>
January 1996
Overview - Premiere Product Schedule
<TABLE>
<CAPTION>
=====================================================================================
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 7
Playboy Special Playboy Playboy
#1 Movie Series #1
- -------------------------------------------------------------------------------------
8 9 10 11 12 13 14
PBTV Special Movie Playboy
#1 Series #2
- -------------------------------------------------------------------------------------
15 16 17 18 19 20 21
Playboy Special Movie Playboy
#2 Series #3 or
Couples
- -------------------------------------------------------------------------------------
22 23 24 25 26 27 28
PBTV Special Movie Acquired
#2 Special
- -------------------------------------------------------------------------------------
29 30 31 [Calendar of December 1995] [Calendar of February 1996]
=====================================================================================
</TABLE>
Printed by Calendar Creator Plus on 11/13/95
F-4
<PAGE>
[PLAYBOY LOGO] WEEKLY SCHEDULE
PRIMETIME GRID
=================
PREMIERE PROGRAMS
=================
<TABLE>
<CAPTION>
===================================================================================================
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WEEK #1 8 Special Movie Special Movie PLAYMATE #1 PB MOVIE PB SERIES
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #2 8 Special Movie Special Movie PBTV SPECIAL MOVIE PB SERIES #2
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #3 8 Special Movie Special Movie PLAYMATE #2 MOVIE PB SERIES #3
OR COUPLES
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #4 8 Special Movie Special Movie PBTV SPECIAL 2 MOVIE ACQUIRED
SPECIAL
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
===================================================================================================
</TABLE>
November 13, 1995
F-5
<PAGE>
[PLAYBOY LOGO] WEEKLY SCHEDULE
PRIMETIME GRID
=============
MOVIE PATTERN
=============
<TABLE>
<CAPTION>
===================================================================================================
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
WEEK #1 8 Special Movie Special Movie PLAYMATE #1 PB MOVIE PB SERIES
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #2 8 Special Movie Special Movie PBTV SPECIAL MOVIE PB SERIES #2
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #3 8 Special Movie Special Movie PLAYMATE #2 MOVIE PB SERIES #3
OR COUPLES
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
- ---------------------------------------------------------------------------------------------------
WEEK #4 8 Special Movie Special Movie PBTV SPECIAL 2 MOVIE ACQUIRED
SPECIAL
9 Special Special Special Special
10 Movie Movie Movie Movie Movie Movie Movie
===================================================================================================
</TABLE>
November 13, 1995
F-6
<PAGE>
EXHIBIT "G"
PLAYBOY TV LATIN AMERICA
Types of Products Subject to Home Video Holdback
1. Films with Production Costs under $1 Million
--------------------------------------------
A. Films with pay television holdbacks in Latin America through 1995:
Erotic Showcase I (produced in 1994)
Erotic Showcase II (1994)
Love and Desire (1994)
Tales of Erotica (1988)
Young Lady Chatterly II (1987)
A Matter of Cunning (1983)
Candy the Stripper (1983)
Birds in Paradise I (1984)
Birds in Paradise II (1984)
Carnival in Rio (1983)
Man & Women (1995)
Total Films: 11
B. Films to date with pay television holdbacks in Latin America through 1996:
Erotic Showcase III (1994)
Lusty Liasions I (1988)
Lusty Liasions II (1988)
Passionate Interludes I (1988)
Passionate Interludes II (1988)
Dr. Yes: The Hyannis Affair (1983)
On the Edge (1994)
Lover's Leap (1994)
Scoring (1995)
Playtime (1994)
I Like to Play Games (1994)
Killing for Love (1995)
Romancing Sara (1995)
The Affair (1995)
Watch Me (1995)
Total Films: 15
G-1
<PAGE>
C. Films to date with pay television holdbacks in Latin America through 1997:
Gentlemen's Bet (1995)
Who Killed Buddy Blue? (1995)
Walnut Creek (1995)
Fanny Hill (1995)
Lap Dancing (1995)
Over the Wire (1995)
Other Men's Wives (1995)
Love in the Night (1995)
Ultimate Taboo (1994)
Maui Heat (1996)
Night Shade (1996)
Total Films to Date: 11
D. Films to date with pay television holdbacks in Latin America through 1998:
Hard Time (1996)
Access Denied (1996)
Jane Street (1996)
Phantom Seductress (1996)
Club V.R. (1996)
Charade (1996)
Total Films to Date: 6
Summary: As additional films are produced each year and sold into home video in
Latin America, the number of films subject to pay television holdback in 1996
and beyond will, naturally, increase above these figures (which represent a "to
date" snapshot).
PEG will agree to limit to number of such films subject to holdback to 20 per
year.
G-2
<PAGE>
2. One-Hour Programs ("Core Product")
----------------------------------
A. Core programs with pay television holdbacks in Latin America through 1995:
Secrets of Making Love to the Same Person Forever (produced in 1990)
Secrets of EuroMassage (1991)
Sensual Pleasures of Oriental Massage (1992)
Ultimate Sensual Massage (1991)
Sexy Lingerie II (1990)
Sexy Lingerie III (1991)
Sexy Lingerie IV (1992)
Sexy Lingerie V (1993)
Wet & Wild II (1990)
Wet & Wild III (1991)
Wet & Wild IV (1992)
Playmate Video Calendar 1994 (1993)
Playmate of the Year 1994: Jenny McCarthy (1994)
Total Programs: 13
B. Core programs to date with pay television holdbacks in Latin America
through 1996:
Erotic Fantasies II (1992)
Erotic Fantasies III (1993)
Secret Confessions (1993)
Secret Confessions II (1994)
College Girls (1993)
Erotic Weekend Getaways (1992)
How to Reawaken Your Sexual Powers (1992)
Secrets of Making Love to the Same Person Forever, Volume II (1993)
Wet & Wild V (1993)
Playmate Video Calendar 1995 (1994)
Playmate Video Calendar 1996 (1995)
Playmate of the Year 1995: Julie Cialini (1995)
Playmate of the Year 1996: Playmate to be Determined (1996)
Total Programs: 13
G-3
<PAGE>
C. Core programs to date with pay television holdbacks in Latin America
through 1997:
Erotic Fantasies IV (1995)
Private Diaries (1994)
International Playmates (1993)
Secret Confessions III (1994)
Real Couples (1995)
Fabulous Forties (1994)
Girls of Hawaiian Tropics (1995)
Girls of Radio (1995)
Women of Color : Summer Nights (1994)
Sensual Fantasy for Lovers (1994)
Love, Sex and Intimacy for New Relationships (1993)
Night Dreams (1994)
Sexy Lingerie: Dreams and Desire (1995)
Wet & Wild VI: The Locker Room (1994)
Wet & Wild VII: Hot Holidays (1995)
The Best of Pamela Anderson (1995)
Total Programs to Date: 16
D. Core programs to date with pay television holdbacks in Latin America
through 1996:
Hot Latin Ladies (1996)
Girls of the Internet (1996)
Sisters (1995)
Strip (1995)
Women of Color: Star Island (1995)
Women of Color: Colors (1995)
Arousal, Foreplay and Orgasm (1994)
Tantric Lovemaking (1994)
Ten Secrets for Greatest Sensual Pleasure (1995)
The Best of Anna Nicole Smith (1995)
Total Programs to Date: 10
Summary: As additional core programs are produced each year and sold into home
video in Latin America, the number of core programs subject to pay television
holdback in 1996 and beyond will, naturally, increase above these figures (which
represent a "to date" snapshot).
PEG will agree to limit to number of such core programs subject to holdback to
15 per year.
G-4
<PAGE>
EXHIBIT "H"
PLAYBOY TV LATIN AMERICA
Feature Film Distribution Contracts to Date
1. Films 1-4 (Production Costs in Excess of $1 Million)
----------------------------------------------------
<TABLE>
<CAPTION>
A. Argentina/Bolivia/Chile/Paraguay/Uruguay
<S> <C>
Temptress (produced in 1995) all rights
Cover Me (1995) all rights
Playback (1995) all rights
Glass Cage (1996) all rights
B. Brazil
Temptress (produced in 1995) all rights
Cover Me (1995) all rights
Playback (1995) all rights
Glass Cage (1996) all rights
</TABLE>
Summary: As of this date, we are still in negotiation with potential customers
in several key territories in Latin America. This information is therefore
likely to change in the near future.
H-1
<PAGE>
EX 10.4(b)
[LETTERHEAD OF GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP APPEARS HERE]
January 13, 1997
BY FAX
- ------
Mr. Anthony J. Lynn, President
Playboy Entertainment Group, Inc.
9242 Beverly Boulevard
Beverly Hills, CA 90210
Re: Playboy TV Latin America/Iberia Expansion
-----------------------------------------
Dear Tony:
I am writing to confirm the terms and conditions on which Playboy TV-Latin
America, LLC (the "Venture") will expand its operations into Spain and Portugal
("Iberia").
1. Expansion of Territory. The Venture's Operating Agreement shall be
----------------------
amended to provide that the Venture is authorized to operate the Playboy TV
("PTV") and AdulTVision ("ATV") television services in Iberia. The parties will
mutually approve a Budget and Business Plan for the operations in Iberia, and
the existing Budget and Business Plan (which are exhibits to the Operating
Agreement) will be amended to reflect the joint operations in Latin America and
Iberia.
The Operating Agreement shall be amended to provide that for the
purposes of triggering either party's right to terminate the Venture early for
failure to meet projections, the measure of "net revenue per household" shall be
determined separately for Latin America and Iberia. Therefore, a failure in one
territory will only trigger the right to terminate operations in that territory,
and the Venture will continue to operate in the other territory.
2. Media/Windows. All Playboy-branded programming will be available to the
-------------
Venture after April 31, 1997. The unbranded series "Woman" (consisting of 26
half-hour episodes) is the only Playboy Entertainment Group, Inc. ("PEG")
program licensed in Spain, and that license expires in 2002.
<PAGE>
GREENBERG GLUSKER FIELDS
CLAMAN & MACHTINGER LLP
Mr. Anthony J. Lynn
January 13, 1997
Page 2
Each PTV and ATV program will be licensed to the Venture for the
same term, and with the same windows, as in Latin America. As in the existing
deal, upon the reversion of rights in PTV programs, PEG may not sell those
programs on a block or branded basis.
The Venture will have a license to exploit the PTV and ATV
programs in the same media as in Latin America, with the Venture to also have
the rights for "expanded basic" or "basic" cable if PTV is to be offered to
consumers in that manner.
3. Program Costs.
-------------
3.1 PTV
---
a. Minimum. $*** per hour.
-------
b. Overage. *** per subscriber plus ***% of net
-------
pay-per-view revenue.
c. Cap. ***% of net revenue.
---
d. Escalator. The minimum hourly fee shall increase by ***%
---------
at the end of years ***.
e. Deferral of Program Fees. ***
------------------------
3.2 ATV. $*** per movie, increasing by ***% per year for the
---
first *** years, and *** thereafter.
4. Royalty. Playboy Enterprises Inc. will grant the Venture a license
-------
to use the Playboy trademarks, service marks and trade name in Iberia in
exchange for a royalty payment equal to a percentage of the adjusted gross
revenue (as defined in the Operating Agreement) of the Iberian operations. ***
5. Ownership. The basic structure remains unchanged: 81% Cisneros/19%
---------
PEG, with PEG to have an option to increase to 49.9% at founder's price until
the sooner of cash breakeven (for the aggregate operations of the Venture in
both Latin America and Iberia) or the end of the fifth fiscal year.
The Operating Agreement and the Program License Agreement (for PTV
programs) between the Venture and PEG provide
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
[LETTERHEAD OF GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP APPEARS HERE]
Mr. Anthony J. Lynn
January 13, 1997
Page 3
for the deferral of a portion of the program license fees owed by the Venture
for Latin America (the "Deferred Fees"). With respect to such Deferred Fees:
a. If PEG does not exercise its option to acquire additional percentage
interests in the Venture prior to the date that the Deferred Fees become
payable, PEG will forgive, $*** of Deferred Fees.
b. If PEG exercises its option to acquire additional percentage
interests in the Venture prior to the date that the Deferred Fees become
payable, PEG will forgive an amount of the Deferred Fees equal to: ***
6. Launch Date. The Venture shall launch both the PTV and ATV services in
-----------
Iberia prior to June 30, 1997, subject to the Venture having entered into an
agreement for carriage of the services on a digital platform which permits such
launch to occur by the date.
7. Distribution. The Venture itself will distribute PTV and ATV in Iberia.
------------
If the Venture determines that it would be beneficial for distribution or other
reasons to associate with one or more local parties in Iberia, the Venture may
grant distribution rights to such party(ies). The parties acknowledge that the
Portuguese subsidiary of Grupo Abril would be a desirable equity participant
and/or distributor of the services in Portugal.
8. First Negotiation/Matching Right. In the event PEG (or any of its
--------------------------------
affiliates) decides to operate PTV, ATV or similar services in all or any
territory of Sweden, Finland, Denmark, Norway, Germany, Australia, or
Switzerland via a venture with a non-Playboy entity, Bloomfield Mercantile Inc.
("Bloomfield") shall have a right of first negotiation to participate in such
new venture and a matching right with respect to the terms offered by any third
party. To the extent any third party proposal includes carriage of the services,
Bloomfield would not be required to match that element of the proposal. To the
extent that the entity whose offer Bloomfield has matched is an operator
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
GREENBERG GLUSKER FIELDS
CLAMAN & MACHTINGER LLP
Mr. Anthony J. Lynn
January 13, 1997
Page 4
of a digital platform or a dominant distributor of networks to cable in the
subject territory, Bloomfield will not unreasonably prevent such venture from
offering such distributor or operator an equity participation in the venture.
9. Documentation. Following execution of this letter, the parties agree to
-------------
move expeditiously to amend the Operating Agreement and to execute a trademark
license agreement and program license agreements for Iberia (with the
boilerplate terms and conditions to be identical to those contained in the
corresponding agreements for Latin America.)
11. Announcement. The parties intend to announce this agreement on
------------
January 14, 1997 at the NATPE convention.
Very truly yours,
Greenberg Glusker Fields Claman &
Machtinger LLP
By /s/ Glenn A. Dryfoos
----------------------------
Glenn A. Dryfoos
Attorneys for Bloomfield Mercantile Inc.
AGREED AND ACCEPTED
- -------------------
PLAYBOY ENTERTAINMENT GROUP, INC.
By /s/ Anthony J. Lynn
--------------------------
Anthony J. Lynn, President
GAD:rg
cc: Jay Scharer
Carlos Cisneros
<PAGE>
EXHIBIT 10.5
EXECUTED AGREEMENT
PLAYBOYTV/SOUTH KOREA
"ATV"/SOUTHKOREA
MEMORANDUM OF UNDERSTANDING
---------------------------
(As of February 26, 1997)
1. Overview and Definitions
------------------------
1.1 This Memorandum of Understanding ("Agreement") sets forth the terms
for the formation of a limited liability company or a joint stock corporation,
as shall be mutually determined by the parties, organized under the laws of
South Korea (the "Venture") by Daewoo Corporation, a corporation organized under
the laws of South Korea ("Daewoo"), and the Playboy Entertainment Group, Inc., a
corporation organized under the laws of Delaware ("PEGI"), that will operate
initially one and eventually two adult oriented pay television services (the
"Services") throughout the Territory (as defined below): (a) Playboy TV/South
Korea ("PTVSK"), a Service based on Playboy TV as currently programmed in the
United States, and (b) another Service, the name of which is to be agreed upon
between the parties ("ATV"), which will consist of a mix of programs to be
supplied by Daewoo and PEGI as provided below.
As and to the extent set forth in Section 8 and Section 9, programming
supplied to PTVSK and ATV will be exclusive to the Services in the Territory
with respect to all forms of Non-Standard Television (as defined in Section 8
below).
The parties agree to use their respective best efforts to negotiate and
execute more formal agreements, including the Superseding Agreements described
below, as soon as reasonably practicable, and the parties intend that such
agreements will be executed within 90 days of the date hereof. Such Superseding
Agreements will incorporate the terms of this Agreement and such other terms as
the parties may mutually agree. In furtherance of such best efforts obligations,
the parties will cause their respective executives authorized to make final
decisions regarding these transactions and their counsel and other advisors to
be available on a first priority basis. Until such Superseding Agreements are
executed and if such Superseding Agreements are never executed, this Agreement,
when executed by both Daewoo and PEGI and after attachment of the initial
Business Plan, will constitute a binding agreement between the parties with
regard to all matters covered herein. Specifically, any terms described herein
to be included in a Superseding Agreement will, until such Superseding
Agreement is executed and if such Superseding Agreement is never executed, be
fully
<PAGE>
operative as terms of this Agreement. Upon execution of the Superseding
Agreements, this Agreement will terminate and be of no further force and effect.
1.2 The PTVSK Service initially will be offered to hotels. The Venture
will use its reasonable good faith efforts to launch the PTVSK Service in other
forms of, and the ATV Service in all forms of, Non-Standard Television as soon
as legally feasible and commercially practical (as mutually determined by
Daewoo and PEGI in good faith and based upon reasonable business criteria taking
into account the interests of the Venture and each of the respective Venturers),
with the current outside target date for launch of the PTVSK Service in pay
cable, direct broadcast satellite ("DBS") and other forms of direct-to-homes
delivery, and to inns, beginning January, 1999.
1.3 Terms used in this Agreement are defined in Exhibit "A" attached
hereto, which includes a list of the terms defined in the text of this
Agreement.
2. Superseding Agreements
----------------------
It is contemplated that the Venture, the parties and their respective
affiliates (as the case may be) will execute the following agreements in
connection with the formation of the Venture, all of which will be subject to
the mutual approval of the parties (the "Superseding Agreements"):
2.1 Shareholders Agreement and Articles of Incorporation. Daewoo and PEGI
----------------------------------------------------
(together, the "Venturers") will enter into a Shareholders Agreement and
Articles of Incorporation (collectively, the "Shareholders Agreement"), which
will establish the Venture and outline the structure of the Venture, including
board/governance issues, ownership provisions, option mechanisms and price,
termination provisions, minority owner protections, etc. The Shareholders
Agreement will contain the terms set forth in Section 15 (Venture Ownership,
Capitalization and Governance) and such further terms as the Venturers may
mutually agree. The parties acknowledge and agree that it is not their intention
by executing this Agreement to form a partnership or other entity prior to the
formation of the Venture and the execution of the Articles of Incorporation and
agree that neither party will take any action that may subject the other to any
liability, including but not limited to making any agreements or incurring any
obligations on behalf of the Venture prior to such formation and execution.
2.2 Program Supply Agreement for PTVSK. PEGI and the Venture will enter
----------------------------------
into a Program Supply Agreement under which PEGI will license programming to the
Venture for PTVSK and receive compensation for such programming (as described in
Sections 8,9,10 and 11 below).
2
<PAGE>
2.3 Trademark License Agreement.
---------------------------
2.3.1 Playboy Enterprises, Inc. ("PEI") and the Venture will enter
into a Trademark License Agreement (the "Trademark License Agreement") under
which PEI, for a ***% royalty (as described in Section 12 below), will grant to
the Venture those rights to the "Playboy" name, marks, etc. as are necessary for
the effective marketing of the PTVSK Service. The Trademark License Agreement
will contain PEI's customary approval rights and procedures for trademark usage
and advertising, substantially as detailed in the Trademark Usage Summary
attached hereto as Exhibit "B" (subject to such modifications as may be agreed
upon between the parties in negotiating the Superseding Agreements), the terms
described in Section 12 below, and such further terms as the parties may
mutually agree. If any term in the text of this Agreement is inconsistent with
the provisions of such Trademark Usage Summary, the term as contained in the
text of this Agreement will prevail.
2.3.2 The Venture may choose to license (as described in Section 12
below) from PEI the rights to use the trademark "AdulTVision" and certain
related trademarks in connection with ATV, in which case PEGI will cause PEI to
grant such license. Alternatively, the Venture may develop another name and
related trademarks for use, subject to the approval of Daewoo and PEGI, as the
name of and in connection with ATV. In such event, the Venture will be deemed
the owner of such approved name and related trademarks (as described in Section
12 below).
2.4 Program Supply Agreements for ATV.
---------------------------------
2.4.1 PEGI and the Venture will enter into a Program Supply Agreement
under which PEGI will license programming to the Venture for ATV and receive
compensation for such programming (as described in Sections 8, 9, 10 and 11
below).
2.4.2 Daewoo and the Venture will enter into a Program Supply
Agreement under which Daewoo will license programming to the Venture for,
initially PTVSK, and eventually ATV, and receive compensation for such
programming (as described in Sections 8, 9, 10 and 11 below).
2.5 Management Services Contract. The Venture and Daewoo or a Daewoo
----------------------------
affiliate generally engaged in delivering such services will enter into a
Management Services Contract under which Daewoo or such Daewoo affiliate
("Management Co.") will, for a ***% fee (as described in Section 14.3 below),
provide back office support services for the Venture. The nature and scope of
the services to be provided pursuant to the Management Services Contract will be
agreed upon in negotiating the Superseding Agreements.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
These documents together with the Business Plan (Section 3), and any other
documents required by applicable law or deemed necessary by the parties, will
constitute the formal agreements which establish and govern the Venture.
3. Business Plan/Annual Fiscal Year Budgets
----------------------------------------
3.1 The Venturers will agree, within 60 days after the date of execution
hereof, to a 10-year business plan which will be attached hereto as Exhibit "C"
and will form a part of this Agreement, subject to such changes as to which the
parties shall mutually agree prior to the commencement of the Venture (as so
modified, the "Business Plan"). The Business Plan will be the financial model
for the operation of PTVSK and ATV and will be incorporated into the
Shareholders Agreement. Prior to the end of the fifth year of the Venture and
prior to the end of every succeeding five year period thereafter, the Venturers
will prepare 5 additional years of the Business Plan such that the Business Plan
continues to have between five and ten years of coverage throughout the term of
the Venture. Such additions to the Business Plan will require the approval of
both Venturers.
3.2 The Business Plan will be updated annually by a budget (each, an
"Annual Budget") for the coming fiscal year. The Venture's Representative
Director (See Section 15) will prepare the Annual Budget and present it to PEGI
and Daewoo for approval at least 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 original Business Plan for that fiscal year. The
Annual Budget for any fiscal year will require the approval of both Venturers.
The Annual Budget for fiscal 1997 is included in the Business Plan.
3.3 If the Venturers fail to agree on or approve any matter arising out
of or relating to this Agreement which requires such agreement or approval,
including without limitation a failure to agree or to grant their approval under
Section 3.1 or Section 3.2, the matter will be resolved according to the dispute
resolution provisions of Section 20. During the pendency of any dispute
involving approval of the Business Plan or an Annual Budget, the then existing
Business Plan or the Annual Budget for the fiscal year immediately preceding the
fiscal year of the Annual Budget in dispute, as the case may be, shall continue
in force.
4. Territory
---------
The "Territory" means South Korea.
5. Services; Availability; Etc.
----------------------------
4
<PAGE>
5.1 PTVSK Service. Initially, the PTVSK Service will operate from 8:00
-------------
p.m. until 4:00 a.m. (Korea time).
5.2 ATV Service. If and when government regulations permit and market
-----------
conditions make it commercially practical (as mutual determined by Daewoo and
PEGI in good faith based upon reasonable business criteria taking into account
only the interests of the Venture), the Venture will launch the ATV Service.
Following such launch, each Service will exhibit a minimum of 6 hours of
programming per day, in each case 4 hours of which shall be exhibited between
8:00 p.m. and 2:00 a.m. (Korea time). The Superseding Agreements will provide
decision-making procedures on this matter.
5.3 Viewer Purchase Options. Initially, when offered in forms of
-----------------------
Non-Standard Television beyond pay per view by tape delivery to hotels, the
Services will be offered on a monthly or annual subscription basis only. If and
when market conditions make it commercially practical (as mutually determined by
Daewoo and PEGI in good faith based upon reasonable business criteria taking
into account only the interests of the Venture), pay per view will be added.
5.4 Initial Availability. Initially, the PTVSK Service will be available
--------------------
on a pay per view basis by tape delivery to hotels. The ATV Service shall be
launched and made available in such forms of Non-Standard Television as mutually
determined by Daewoo and PEGI. For purposes of this Agreement, commencement of
availability of a Service to hotels or any other form of Non-Standard Television
constitutes a launch of such Service.
5.5 Continuous Programming. If and when market conditions make it
----------------------
commercially practical (as mutually determined by Daewoo and PEGI in good faith
based upon reasonable business criteria taking into account only the interests
of the Venture), the Services will be made available on a 24-hour per day basis.
5.6 Promotion. All sales, advertising and marketing programs for the
---------
Services shall be subject to Daewoo's and PEGI's reasonable approval.
6. Term
----
6.1 Term. The Venture shall continue in perpetuity until and unless
----
terminated pursuant to Section 6.2.
6.2 Early Termination.
-----------------
6.2.1 Either Venturer may terminate the Venture if controlling
ownership of the other Venturer changes (other than a permitted change to an
affiliate of such
5
<PAGE>
Venturer). Any such termination will be effective as of the last day of the
fiscal year in which such termination event occurs.
6.2.2 With respect to a particular Service (i.e., PTVSK or ATV)
and starting at the end of the seventh fiscal year of the Venture, either party
may terminate that Service if its actual operating income for the previous 3
fiscal year periods is below projections in the Business Plan (as modified by
the Annual Budgets) for such period by more than 20%. Termination of ATV by
either party does not affect the continued operation of PTVSK. Termination of
PTVSK by Daewoo or PEGI gives rise to the right, but not the obligation, of the
other party to terminate ATV.
6.2.2.1 Either Venturer may cure the other Venturer's right to
terminate pursuant to Section 6.2.2 by making a payment to the Venture in the
amount by which revenues fall short of projections minus the allowed variance.
If such Venturer elects to invoke its cure right, it will guarantee any
shortfall below 100% of budget in the following fiscal year. A Venturer's
payment under this Section 6.2.2.1 will be treated as a non-reimbursable payment
to the Venture and shall not affect the Venturers' respective equity interests.
No such payment by a Venturer shall obligate the other Venturer to make a
matching payment to the Venture or to such paying Venturer.
6.2.3 The Venturers may terminate this Agreement and the Venture at
any time by mutual agreement.
6.2.4 Either party may without prejudice to any other remedies it may
have terminate this Agreement and the Venture immediately by notice in writing
to the other on or after the occurrence of any of the following:
6.2.4.1 the commission of one or more material breaches of this
Agreement by the other party which are not capable of remedy; or
6.2.4.2 the commission of a material breach of this Agreement by
the other party which is capable of remedy (a "remediable breach") which shall
not have been remedied within a period of one 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 month period shall be
extended for such additional period as shall be reasonably necessary if that
remediable breach is incapable of remedy within that one month period and during
that one month period the party in breach shall 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;
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6.2.4.3 the bankruptcy, insolvency, general assignment for the
benefit of creditors or similar event, or the appointment of a trustee, receiver
or similar person for the other party or the Venture; or
6.2.4.4 the termination of both Services or, if only one
Service has been launched, the termination of such Service.
6.2.5 PEGI may, without prejudice to any other remedies it may have,
terminate this Agreement by notice in writing to Daewoo if (other than on
account of PEGI's breach or default under this Agreement) the Venture is not
organized as a limited liability company or a joint stock corporation as
mutually determined by the parties as contemplated herein, or the PTVSK Service
has not been launched to hotels as contemplated herein, by the date nine months
after the date of execution hereof; provided, however, that if the execution of
the Superseding Agreements is delayed beyond 90 days from the date of execution
hereof, the parties agree to discuss in good faith an extension of the nine-
month period provided for herein.
6.2.6 Daewoo may, without prejudice to any other remedies it may
have, terminate this Agreement by notice in writing to PEGI if on account of
PEGI's breach or default under this Agreement, the Venture is not organized as a
limited liability company or a joint stock corporation as mutually determined by
the parties as contemplated herein, or the PTVSK Service has not been launched
to hotels as contemplated herein, by the date nine months after the date of
execution hereof.
6.3 Effect of Termination.
---------------------
6.3.1 Subject to Section 6.3.2, upon termination of the Venture, the
Trademark License Agreement, Program Supply Agreements, Management Services
Contract and related agreements will automatically terminate and all rights and
obligations of the respective parties thereto will terminate, except for any
claims, etc. that have arisen prior to such termination. Upon termination of the
Venture, each Venturer shall have the right to compel the Venture to be promptly
wound-up and liquidated.
6.3.2 If the Venture terminates, the parties will agree whether and
for how long (if applicable) the Venture will continue to operate (the "Wind-Up
Period"). The Venture will operate during any Wind-Up Period on the basis of the
last approved Annual Budget, unless the parties otherwise agree. During the
Wind-Up Period, the Superseding Documents will continue in effect and the Board
of Directors will take such actions as are necessary to terminate or otherwise
discharge the Venture's obligations to its customers at the end of such period.
If necessary to terminate or discharge such obligations, the Wind-Up Period may
be extended by unanimous consent of the Venturers, which consent may be withheld
in each Venturer's absolute and sole
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discretion. The dissolution, winding-up and liquidation of the Venture will be
suspended during the Wind-Up Period and will automatically take effect at the
end of such period.
7. Languages
---------
7.1 PEGI will license the Venture to transmit in Korean and English. PEGI
may permit the Venture to transmit in other languages at PEGI's option.
7.2 The Venture will arrange for dubbing/subtitle services to be provided
to the Venture at a competitive price. The Venture will give PEGI access to
dubbed/subtitled programs for use in other territories, or in media other than
Non-Standard Television within the Territory, subject to PEGI's payment of costs
of such access, such as for duplication and delivery.
8. Media
-----
8.1 The Venture will be granted the exclusive license during the License
Term (as defined below) to transmit the Services in the Territory in all forms
of "Non-Standard Television", which means any television service or channel
which is broadcast or distributed by, direct to homes satellite
("DTH")(including, but not limited to DBS and DSS), "over the air pay"
subscription television ("STV"), pay cable, pay per view, multi-point
distribution systems ("MMDS") or satellite master antenna television system
("SMATV"). Non-Standard Television specifically excludes basic cable and
terrestrial broadcast television.
9. License Term and Media Holdbacks
--------------------------------
9.1 The Venture's License Term with respect to each program (the "License
Term") will commence on the day such program is first exhibited on either of the
Services and will end 18 months thereafter. During the License Term for a
program, PEGI will not license such program licensed to the Venture hereunder to
any third party for television exhibition in the Territory. The parties
acknowledge and agree that certain programming to be supplied by PEGI hereunder
is subject to existing license agreements for media other than Non-Standard
Television, which agreements provide for exclusive windows for exhibition in
such other media (e.g., Home Video windows or theatrical windows) and that such
programming cannot be furnished by PEGI hereunder until the expiration of such
windows. PEGI hereby agrees, however, that future Home Video licensing
agreements for programing which is produced, owned and controlled by Playboy
will limit the Home Video window to no more than six months after the date on
which the applicable program is released in Home Video in the Territory. The
parties acknowledge that Daewoo might be the Home Video licensee of certain PEGI
programs in the Territory; with regard to such programs, Daewoo may notify the
Venture on a case-by-case basis if it wishes to modify the length of the Home
Video window for such a
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program as to which it has licensed the Home Video rights, or if it wishes to
reverse the Home Video and television windows for such program. Following the
License Term, each of PEGI and Daewoo may license any program supplied by it
into basic cable and/or terrestrial television as it sees fit; provided,
however, that PEGI may not run any adult-oriented programs as part of a
"Playboy" service. Notwithstanding the foregoing, at any time, whether during or
after the License Term, each of PEGI and Daewoo can distribute on a branded or
unbranded basis any program in the home video or other private exhibition market
(including, without limitation, discs, cassettes or other forms of video grams
now existing or invented in the future, collectively, "Home Video").
9.2 The Venture will be entitled to transmit each program on 18
broadcasting days.
10. Program Supply
--------------
10.1 Subject to Sections 10.3 and 13, PEGI will supply to the Venture all
of the programming to be exhibited on PTVSK and all available related
interstitial, promo, on-air identifications, logos or similar material.
10.2 PEGI will provide, and the Venture will license under the applicable
Program Supply Agreement, 150 program hours of New Programming to PTVSK for each
year of operation commencing with the launch of PTVSK. For the purposes hereof,
"New Programming" means programs never-before broadcast by either of the
Services. In addition, in the first year of operation, PEGI will provide
additional program hours of programming for programs that would otherwise be
repeats at no cost to the Venture.
10.2.1 If and when the Venture launches the ATV Service as
described in Section 5.2, the number of program hours of New Programming set
forth in Section 10.2 will be increased from 150 to 180.
10.2.2 For purposes of this Agreement, program hours will be
calculated as follows: (a) programs of 11-40 minutes in length will be treated
as 30-minute programs, (b) programs of 41-70 minutes in length will be treated
as 60-minute programs, and (c) programs of 71-100 minutes in length will be
treated as 90-minute programs.
10.3 Until the launch of ATV, each of Daewoo and PEGI will provide, and
the Venture will license for PTVSK under the applicable Program Supply
Agreement, 25 New Movies for each year of operation, in addition to the 150
program hours provided by PEGI pursuant to Section 10.2, commencing with the
launch of PTVSK. In addition, in the first year of operation, each of Daewoo and
PEGI will provide up to 6 additional movies for programs that would otherwise
be repeats at no cost to the Venture. For the purposes hereof, "New Movie" means
a movie never before broadcast by either of the
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Services, and for purposes of this Section 10, "movies" means a block of
programming of 71-100 minutes in length. In the event that Daewoo elects not to
provide the 25 New Movies to PTVSK for each year of operation commencing with
the launch of PTVSK, it will so notify PEGI in writing and PEGI will license to
the Venture under the applicable Program Supply Agreement, and at the applicable
fees specified therein, the number of New Movies that Daewoo has not provided.
10.3.1 Daewoo will determine the specific movies under Section
10.3 it supplies to PTVSK, subject to PEGI's approval (not to be unreasonably
withheld), and PEGI will determine the specific movies under Section 10.3 it
supplies to PTVSK, subject to Daewoo's aproval (not to be unreasonably
withheld). The movies supplied by PEGI to PTVSK hereunder will be similar to the
movies licensed or acquired by PEGI from third parties for exhibition on PEGI's
Playboy TV service in the United States as then currently programmed.
10.3.2 If and when ATV is lauched, as described in Section 5.2,
Daewoo and PEGI shall no longer supply any New Movies to PTVSK pursuant to
Sections 10.3 and 10.3.1, and, instead, each of Daewood and PEGI shall supply
to ATV a minimum of 84 New Movies and a maximum of 102 New Movies, with the
precise number of New Movies within such range to be agreed upon by the parties.
Daewoo will determine the specific movies it supplies to ATV, subject to PEGI's
approval (not to be unreasonably withheld), and PEGI will determine the specific
movies it supplies to ATV, subject to Daewoo's approval (not to be unreasonably
withheld). Any programming supplied by PEGI to ATV hereunder will be consistent
with the quality and content standards of PEGI's AdulTVISION service in the
United States as then currently programmed and the terms and conditions of this
Agreement. In the event that Daewoo elects not to provide the number of New
Movies to be provided by it pursuant to this Section 10.3.2, it will so notify
PEGI in writing and PEGI will license to the Venture under the applicable
Program Supply Agreement, and at the fees specified therein, the number of New
Movies that Daewoo has not provided.
10.4 The Venture acknowledges that PEGI produces, commissions and/or
distributes certain feature films ("Premium Films") with negative costs of at
least $1,000,000 and that Premium Films will be excluded from the Program Supply
Agreements.
10.4.1. Subject to any conflicting rights of third parties
heretofore granted pursuant to other agreements to which PEGI is a party prior
to the date of execution hereof, Daewoo shall have a right of first negotiation
and first refusal to acquire all rights to Premimum Films in the Territory.
PEGI will notify Daewoo of the release of each Premimum Film and the principal
terms on which PEGI is proposing to license such Premium Film in the Territory.
For a period of 30 days from the date of such notice, PEGI will negotiate in
good faith with Daewoo with respect to Daewoo's acquition of
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rights in such Premium Film. If Daewoo does not make an offer to acquire such
rights in such Premium Film, PEGI shall be free to license such Premium Film to
any third party on any terms PEGI shall deem acceptable. If Daewoo makes an
offer to acquire such rights but Daewoo and PEGI are unable to reach agreement
therefor prior to the expiration of such 30 day period, PEGI shall thereafter
be free to license such Premium Film to any third party on terms no less
favorable to PEGI than those set forth in the last written offer made by Daewoo
prior to the expiration of such 30 day period. Other specific details
(including any exceptions or limitations) with respect to such rights of first
negotiation and first refusal shall be agreed upon between the parties in
negotiating the Superseding Agreements.
If Daewoo acquires rights to Premium Films in the Territory,
Daewoo may supply such films to the Venture for PTVSK. PEGI will schedule such
films in consultation with Daewoo, and the applicable Program License Fee set
forth in Section 11.1 for each such film will be paid to Daewoo. If Daewoo
supplies any such films for PTVSK, the number of program hours that PEGI is
obligated to provide under Section 10.2 and Section 10.2.1 will be reduced by
the number of program hours of such film.
11. Program License Fees
--------------------
The Venture shall pay program license fees as set forth below (the
"Program License Fees"):
11.1 For programming supplied to PTVSK by PEGI pursuant to Section
10.2, the greater of (a) the Section 10.2 Guaranteed Minimum Program License Fee
(as defined below) for each 12 month period or (b) ***. For purposes hereof,
"Section 10.2 Guaranteed Minimum Program License Fee" means, ***.
11.2 For the movies to be provided by Daewoo or PEGI to either PTVSK
or ATV pursuant to Sections 10.3, 10.3.1 and 10.3.2, the Section 10.3
Guaranteed Program License Fee for the applicable period. For purposes hereof,
"Section 10.3 Guaranteed Program License Fee" means ***.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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***
11.3 Payment of Program License Fees. The Program License Fees shall be
-------------------------------
due and payable to PEGI and Daewoo, as applicable, as follows: (a) the Section
10.2 Guaranteed Minimum Program License Fee and the Section 10.3 Guaranteed
Program License Fee shall be calculated on a monthly basis and paid quarterly in
arrears within 30 days after the close of the quarter, and (b) any overages
above the Section 10.2 Guaranteed Minimum Program License Fee shall be
calculated on a annual basis and paid yearly within 45 days after the close of
the applicable year.
12. Trademark License Agreement; Royalties
--------------------------------------
12.1 The Venture will pay to PEGI a trademark license royalty (the
"Trademark Royalty") of ***% of the Adjusted Gross Revenue for the PTVSK
Service. "Adjusted Gross Revenue" is defined as all revenues actually received
by the Venture from subscribers to the PTVSK Service (including pay per view
revenues) and all other revenues from operation of the PTVSK Service by the
Venture, less (a) consumption and other taxes (other than income taxes), (b)
costs paid by the Venture to protect the trademarks licensed by PEI pursuant to
the Trademark License Agreement, and (c) any other amounts required to be
deducted in calculating trademark license royalties under applicable South
Korean law, as in effect from time to time. Without limiting the foregoing, in
the event that the revenue of the PTVSK Service includes streams from
advertising and/or home shopping, such revenue will be included in the Adjusted
Gross Revenue as defined herein. The Trademark Royalty shall be calculated on a
monthly basis and paid quarterly within 30 days after the close of the
appropriate quarter.
12.2 PEGI will cause PEI to grant to the Venture a license to use the
trademarks "Playboy" and the "Rabbit Head Design" and such other Playboy
trademarks as will be described in the Trademark License Agreement in connection
with PTVSK and the marketing and promotion of PTVSK. The grant of license will
be made to the Venture on an exclusive basis for the Service but only with
respect to Non-Standard Television and only in the Territory. The only
exceptions to the foregoing exclusivity will be (a) customary presentation and
logo credits in the title and end credits sequences of programs licensed to
others as permitted hereunder and credit blocks in advertising therefor, and (b)
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. The
Venture will not sub-license any trademarks licensed under the Trademark License
Agreement except with the consent of PEI. PEI shall have the right to approve
any and all permutations of the trademarks and any secondary, combination or
derivative marks based on the trademarks, all of which, when approved, shall be
the property of PEI and be licensed to the Venture under the terms of the
Trademark License Agreement. PEI will have the right to control and conduct all
proceedings relating to any infringement of
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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the trademarks in the Territory and any claim that the Venture's use of the
trademarks in the Territory infringes the rights of any third party. The Venture
will indemnify and hold harmless PEI from and against all losses arising from
the use by the Venture of the trademarks. The Venture's use of the trademarks
licensed by PEI shall be conditioned on the parties first having duly recorded
the license (or a short form version thereof acceptable to PEI) in the Korean
Industrial Property Office.
The Venture may also choose to license from PEI, and PEGI will
thereupon cause PEI to license to the Venture, the right to use the trademark
"AdulTVision" and such related trademarks as will be described in the Trademark
License Agreement in connection with ATV and the marketing or promotion of ATV.
If the Venture so chooses to license such AdulTVision trademarks, such license
will be on all of the same terms as are applicable with respect to the
trademarks referred to in the above paragraph, provided that no royalty will be
payable with respect to such trademarks. Alternatively, the Venture may wish to
develop another name and related trademarks for use in connection with ATV,
subject to the approval of Daewoo and PEGI, not to be unreasonably withheld. The
Venture will own all rights to such Venture-developed name and trademarks. Upon
any termination of the ATV Service or Venture, ownership of such
Venture-developed name and marks shall vest equally with Daewoo and PEGI;
provided that neither of them make any use of such name or marks without the
prior written consent of the other.
12.3 Although the programs transmitted by the Services will depict nudity
and allow strong or explicit language, PEGI will not deliver and the Venture
will not transmit 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 program transmitted by the Services who is not at
least 18 years of age. Notwithstanding the foregoing, and subject to the
censorship provisions of Section 19, the standards applied by PEGI from time to
time for Playboy TV and AdulTVision, respectively, in the United States shall be
the controlling standards and any materials transmitted on either such Playboy
service and shall be deemed acceptable for transmission on the respective
Service.
12.4 The parties acknowledge that any material breach by the Venture of
the Trademark License Agreement or of this Agreement with respect to the use of
trademarks will result in irreparable harm to PEI or PEGI, as applicable, for
which there is no adequate remedy at law. Accordingly, PEI or PEGI, as
applicable, shall be entitled to preliminary or temporary equitable relief
pending a final determination in accordance with the dispute resolution
provisions provided below, without the necessity of posting
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bond unless otherwise required by applicable law, by way of any or all of the
temporary and permanent injunctions and such other relief as a court of
competent jurisdiction may deem just and proper.
13. PEGI Programming and Operational Responsibilities
-------------------------------------------------
Subject to Sections 10.3 through 10.3.2, PEGI will control and manage all
facets of the programming for PTVSK. This will include:
13.1 Exclusive PTVSK Program Supplier. Subject to Sections 10.3 through
--------------------------------
10.3.2., PEGI will be the exclusive supplier of all programming shown on PTVSK,
regardless of whether such programming is produced or owned by PEGI, or whether
PEGI acquires such programming for the Venture. The costs of producing or
acquiring such programming furnished by PEGI for the Venture will be borne by
PEGI. Notwithstanding the foregoing, the Venture will have the right at its own
cost to produce its own programming targeted to the South Korean market pursuant
to Section 13.2 ("Venture-produced Programming" or a "Venture-produced
Program").
13.2 Venture-Produced Programming. Venture-produced Programming will be
----------------------------
developed by mutual agreement between Daewoo and PEGI. Such programming will be
consistent with PEGI's standards and subject to PEGI's approval, not to be
unreasonably withheld, and will be produced locally by a production company
selected by PEGI from one or more (as necessary) lists of such companies
supplied by Daewoo. A budget for Venture-produced Programming will be identified
in the Business Plan and Annual Budgets.
13.2.1 If the Venture produces such programming, the Venture will (i)
be responsible for arranging and contracting for all production matters,
including engaging talent, payroll and employment matters, securing facilities
and supplies and securing all production and errors and omissions insurance, all
consistent with PEGI's standards and subject to PEGI's approval, not to be
unreasonably withheld and (ii) bear all production and completion risk and
responsibility and will be responsible for compliance with local laws and
regulations.
13.2.2 PEGI may recommend a supervising producer for a Venture-
produced Program. If such person is approved by Daewoo (which approval will not
be unreasonably withheld), such person will be paid in accordance with the
Venture's production budget; if neither such person nor a substitute is
approved, the Venture will allow such person to supervise production, but at
PEGI's expense. Such supervising producer shall have control over the content
and look of the program, consistent with the standards for the Playboy
Programming.
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13.2.3 With respect to each Venture-produced Program, PEGI will have
10 business days following the receipt of a program to approve such program
(which approval will not be unreasonably withheld) or request changes; if no
such approval or request for changes is delivered to the Venture within this 10
business day period, PEGI will be deemed to have approved such program. The
costs of making changes requested by PEGI will be borne by the Venture.
13.2.4 After the Venture makes any changes requested by PEGI pursuant
to Section 13.2.3, PEGI will have 5 business days from receipt of the changed
program to approve such program (which approval will not be unreasonably
withheld) or request additional changes; if no such approval or request for
changes is delivered within this 5 business day period, PEGI will be deemed to
have approved such program. If the changes initially requested by PEGI have not
been made to PEGI's reasonable satisfaction, the costs of making further changes
to conform to such initial comments will be borne by the Venture. Any further
changes not previously requested by PEGI will be borne by PEGI.
13.2.5 After the Venture makes any changes requested by PEGI pursuant
to Section 13.2.4, PEGI will have 5 business days from receipt of the changed
program to approve such program (which approval will not be unreasonably
withheld) or request additional changes; if no such approval or request for
changes is delivered in this 5 business day period, PEGI will be deemed to have
approved such program. The costs of making any changes previously requested by
PEGI but not satisfactorily made shall be borne by the Venture, and any further
changes not initially requested by PEGI will be borne by PEGI.
13.2.6 The inclusion of Venture-produced Programming in the Venture's
program block will be in addition to the minimum number of program hours and
movies to be supplied by Daewoo or PEGI.
13.2.7 PEGI will have the right, in its sole and absolute discretion,
to withhold approval of production by the Venture of any programs or other
materials that are Playboy-branded, contain Playboy-identified content or are
otherwise identified as a Playboy-related product (collectively, "Playboy
Identified Programs"). In the event the Venture wishes to produce any Playboy
Identified Program, PEGI shall have the right, but not the obligation, to elect
to finance fully the Venture's production thereof. Any such Playboy Identified
Program which is so fully financed by PEGI is hereinafter referred to as a "PEGI
Financed Ventured-produced Program". PEGI will own the copyright and all
distribution rights in and to any such PEGI Financed Venture-produced Program.
PEGI will license the same to the Venture for a license fee to be negotiated by
the parties in good faith and to be included in the appropriate Superseding
Agreements.
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13.2.7.1 PEGI will grant Daewoo an exclusive license to
distribute the PEGI Financed Venture-produced Programs within the Territory in
theatrical and home video media. For this distribution, Daewoo will receive a
distribution fee equal to ***% of gross revenues and be entitled to
reimbursement for customary distribution costs and expenses. Accountings to
Playboy will be on a quarterly basis, within 30 days after the close of the
relevant quarter, with the excess of revenues over Daewoo's distribution fee and
distribution costs and expenses to be paid over to PEGI. Although Daewoo makes
no guaranties to PEGI regarding such distribution, Daewoo will use its
commercially reasonable efforts to maximize the license fee it obtains from
third parties for such PEGI Financed Venture-produced Programs. Daewoo will
license such programming on terms substantially equivalent to terms applicable
to the licensing of Daewoo's own similar programming; provided, that PEGI will
have the right to approve any such transaction and will have the annual right to
review the records of Daewoo with respect to all such licensing activities, upon
reasonable notice, to ensure compliance with the terms hereof. If Daewoo
acquires PEGI Financed Venture-produced Programs (or specific programs or series
of programs therefrom) for use in a Daewoo-owned or -operated service or media,
Daewoo will acquire such programs on arms' length terms to achieve fair market
prices for PEGI with respect to such programs. If the PEGI Financed Venture-
produced Programs are "bundled" with other programming by Daewoo in the course
of its distribution efforts, Daewoo will make a fair and good faith allocation
to such PEGI Financed Venture-produced Programs of the fees received. Except as
provided in this Section 13.2.7.1, neither the Venture nor Daewoo shall be
entitled to share in any revenue derived from any such PEGI Financed Venture-
produced Program outside of the Territory or in any media other than Non-
Standard Television in the Territory. With respect to any Playboy Identified
Program which PEGI approves for production by the Venture but does not elect to
fully finance, PEGI would nevertheless own the copyright thereto but (a) during
the term of the Venture, distribution rights to such Venture financed and
produced Playboy Identified Program would be licensed to PEGI pursuant to
Section 13.2.8 below and (b) in the event of any dissolution of the Venture,
Daewoo would continue to share in any revenue derived from any subsequent
exploitation of such program in proportion to the respective interests of Daewoo
and PEGI in the Venture as of the date of dissolution.
13.2.8 The Venture will grant PEGI an exclusive license to
distribute the Venture-produced Programming (other than PEGI Financed
Venture-produced Programs) outside the Territory in all media and within the
Territory in all media other than Non-Standard Television. For this
distribution, PEGI will receive a distribution fee equal to ***% of gross
revenues and be entitled to reimbursement for customary distribution costs and
expenses. Accountings to the Venture will be on a quarterly basis, within 30
days after the close of the relevant quarter, with the excess of revenues over
PEGI's distribution fee and distribution costs and expenses to be paid over to
the Venture. Although PEGI makes no guaranties to the Venture regarding such
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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distribution, PEGI will use its commercially reasonable efforts to maximize the
license fees it obtains from third parties for such Venture-produced
Programming. PEGI will license such programming on terms substantially
equivalent to terms applicable to the licensing of PEGI's own similar
programming; provided, that the Venture will have the right to approve any such
transaction within the Territory and will have the annual right to review the
records of PEGI with respect to all such licensing activities, upon reasonable
notice, to ensure compliance with the terms hereof. If PEGI acquires Venture-
produced Programming (or specific programs or series of programs therefrom) for
use in a PEGI-owned or -operated service or media, PEGI will acquire such
programs on arms' length terms to achieve fair market prices for the Venture
with respect to such programs. If the Venture-produced Programming is "bundled"
with other programming by PEGI in the course of its distribution efforts, PEGI
will make a fair and good faith allocation to such Venture-produced Programming
of the fees received.
13.3 Program Mix.
-----------
13.3.1 PTVSK: PEGI may program the PTVSK Service with any of the
following, provided that such programming shall be of a quality and nature
comparable to the programming shown on Playboy TV as programmed in the United
States from time to time: (a) "Playboy Programming", which is programming
produced, co-produced or owned by PEGI or one of its affiliates, or which is
programming acquired by PEGI or one of its affiliates for multiple territories
around the world, including the Territory; (b) "Venture Specific Programming",
which is programming acquired by PEGI or one of its affiliates specifically for
PTVSK; and (c) Venture-produced Programming, which is programming produced by
the Venture pursuant to Section 13.2; provided, however, that prior to the
launch of ATV, PEGI shall include in the program mix for PTVSK the movies to be
provided by the parties pursuant to Section 10.3.
PEGI will determine the mix of Playboy Programming, Venture Specific
Programming and movies provided by the parties pursuant to Section 10.3, PEGI
will determine the manner in which the Venture-produced Programming is
scheduled. As noted in Section 13.2.6, Venture-produced Programming will be in
addition to the 150 program hours or 180 program hours, as applicable, of New
Programming supplied by PEGI, and the movies supplied by Daewoo and PEGI to
PTVSK each year.
13.3.2 ATV: The parties will agree on the scheduling of the
---
programming on ATV, it being the intent that the rotation/duration/content of
the programs supplied will be reasonably related to the number of New Movies
supplied by each party under Section 10.3.2.
13.4 Interstitials/Promos/On-Air Look. In consultation with the Venture,
--------------------------------
PEGI will determine and direct the production and compilation of all
interstitial and
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promotional materials, as well as developing the on-air look of PTVSK and ATV.
The costs of such production and compilation will be borne by the Venture.
13.4.1 Alternative Means of performance. In the event the Venture can
--------------------------------
more cost effectively perform some or all of the functions described in Section
13.4 the Venture shall, at PEGI's request, assume such functions, although PEGI
will retain control content and quality of such transferred functions.
13.5 Delivery Materials.
------------------
13.5.1 For PTVSK and ATV: PEGI will supply one copy of each program,
-----------------
interstitial, promo or other relevent item it is to furnish to the Venture, with
the costs of duplication and shipping from Los Angeles to be borne by the
Venture. Similarly, Daewoo will provide one copy of all such materials which it
is to furnish to the Venture, with the costs of duplication and shipping to be
borne by the Venture. Assembly of the finished program block for each Service
will be implemented by the Venture at PEGI's direction and to PEGI's
specification. PEGI will provide a nightly program log to enable the Venture's
technical personnel to properly compile a given night's programming. The Venture
will bear the costs of dubbing/subtitling and any necessary format conversions.
PEGI and Daewoo will provide such materials to the Venture in sufficient time to
provide for efficient implementation by the Venture.
13.5.2 Certificate of Erasure. At the end of the License Term for each
----------------------
item delivered to the Venture (excluding items that have been dubbed or
subtitled and which PEGI desires to acquire pursuant to the terms hereof), the
Venture will erase the tapes of such items and deliver to PEGI a certificate of
erasure with respect thereto.
14. Operating Responsibilities
--------------------------
14.1 The Venture will employ a staff of sufficient size to efficiently
handle all day-to-day sales and distribution, marketing, technical matters and
other appropriate matters.
14.2 The Venture will secure errors and omissions and other customary
liability insurance for the Venture covering exhibitions of programming by the
Venture, which insurance policies shall meet PEGI's customary standards and
otherwise be reasonably acceptable to PEGI, and liability and other insurance
covering the activities of the Venturer consistent with good business customs
and practices in South Korea. All insurance policies shall name PEGI, Daewoo and
their respective affiliates as additional insureds.
14.3 Pursuant to the Management Services Contract, Management Co. will
handle many of the day-to-day operational and financial responsibilities of the
Venture
18
<PAGE>
under the supervision of the Representative Director, with the specific nature
and scope of the services to be provided to be agreed upon in negotiating the
Superseding Agreements. Management Co. will receive a fee of ***% of the
Adjusted Gross Revenue of PTVSK.
14.4 The Venture will be responsible for making arrangements for satellite
transponders as necessary to insure coverage of the entire Territory. All costs
of assembly, dubbing, subtitling, shipping, customs and duties, duplication,
production of original "wrap around" material, and similar functions will be
paid by the Venture. In the event PEGI expends its own funds for such services,
such costs will be "rebilled" to the Venture, with the Venture to
reimburse PEGI within 30 days. All costs shall be rebilled "at cost" with no
markup by PEGI. The Venture will provide, or arrange for, dubbing/subtitle
services on the terms set forth in Section 7.2. The Business Plan will attempt
to identify the type and magnitude of these costs, with operating changes to be
made as needed via subsequent Annual Budgets.
14.5 The Venture will obtain office facilities/computer and
telecommunications infrastructure/other support services as needed.
15. Venture Ownership, Capitalization and Governance
------------------------------------------------
15.1 Formation of Venture. The Venture will be organized as a limited
--------------------
liability company or a joint stock corporation, as shall be mutually determined
by the parties, under the laws of South Korea.
15.2 Ownership Provisions.
--------------------
15.2.1 The Venture will initially be owned 85% by Daewoo and 15% by
PEGI.
15.2.2 The parties acknowledge that current South Korean law restricts
the maximum ownership interest that investors are permitted to hold in a company
engaged in the business of the Venture. If and to the extent it becomes
permitted under applicable law, PEGI shall have the right to increase its
percentage interest, up to 49% of the Venture. PEGI can buy its additional
percentage interests in the form of additional shares from Daewoo once per
fiscal year, in minimum increments of 5%. Until the end of the fiscal year in
which cash breakeven occurs, PEGI can buy additional shares from Daewoo at the
Founders' Price; after breakeven, PEGI's buy-in price will be a pro rata portion
of the going concern value of the Venture, to be mutually agreed by the parties
or determined by a mutually agreed third-party expert (i.e., the price per share
will be going concern value divided by 100). The Founders' Price means the total
capitalization (the "Total Capitalization") of the Venture as determined in the
approved Business Plan divided by 100 (a "Price Per Share Point"); provided,
however, that if the
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
19
<PAGE>
projection for Total Capitalization of the Venture according to the approved
Business Plan (as updated by the Annual Budget) at the time PEGI announces its
intention to purchase additional shares is lower than the Total Capitalization
identified in the approved Business Plan attached to this Agreement by 10% or
more, then the Price Per Share Point will be recalculated according to such
lower Total Capitalization.
15.2.3 Restrictions on Transfers of Interests. No member of the
--------------------------------------
Venture may transfer ownership interests to any third party without the consent
of all the other members; provided, however, that a party may transfer ownership
interests to an affiliate if the transferor or its parent guarantees the
financial or in-kind obligations of the transferee and, if any approvals are
required under South Korea law for any such guarantees to be enforceable,
satisfactory written evidence of all such approvals is delivered to the other
Venturers by the proposed transferor.
15.2.4 Additional Rights Regarding Shares. Without limiting the
----------------------------------
requirements described above regarding approval of any transfer of shares in the
Venture, the parties shall have preemptive rights and "come-along" rights and
participation rights on customary terms in the event that either party desires
to sell some or all of such party's shares in the Venture pursuant to a bona
fide third-party offer or pursuant to a public offering of shares by such party.
PEGI will have the right to come-along or otherwise participate in any such
transaction up to a percentage equal to PEGI's then-current ownership interest
in the Venture.
15.3 Capitalization.
--------------
15.3.1 The initial capital contribution of Daewoo will be the
equivalent in Korean Won of U.S. Dollars equal to the greater of (a) the
minimum, if any, required under applicable South Korean law, or (b) the amount
shown in the Business Plan as required of Daewoo with respect to the first
fiscal quarter. The initial capital contribution of PEGI will be the equivalent
in Korean Won of the greater of (a) the minimum, if any, required under
applicable South Korean law, or (b) the amount shown in the Business Plan as
required of PEGI with respect to the first fiscal quarter. Daewoo and PEGI shall
fund their initial capital contributions in cash.
15.3.2 If necessary to cover the deficits of the Venture, each member
shall contribute additional capital pro rata in accordance with its respective
percentage interests, with such capital calls subject to the aggregate maximum
of the equivalent in Korean Won of 5 million U.S. Dollars. The Business Plan
will include an estimated schedule of such additional capital calls, which are
expected to occur quarterly at the beginning of the respective quarter,
commencing with the second fiscal quarter. Once Playboy's contribution reaches
the equivalent in Korean Won of 750,000 U.S. Dollars Playboy shall not be
required to make any further capital contributions, except if and to the extent
required under applicable law. Daewoo or related entities will lend funds to
20
<PAGE>
the Venture as necessary to cover the cash requirements of the Venture to the
extent that such cash requirements cannot be covered out of the Venture's cash
flow, the Venture's capital or any permitted third party borrowings of the
Venture. Such loans to the Venture will bear interest at a rate to be negotiated
by PEGI and Daewoo in good faith and to be included in the appropriate
Superseding Agreements (the "Applicable Rate"). Funds advanced by Daewoo and its
related entities shall be evidenced by promissory notes of the Venture payable
upon the demand of Daewoo; provided, however, that Daewoo shall not make demand
thereon or be entitled to receive payment therefor until and unless and only to
the extent that there is sufficient operating profit in excess of amounts
reserved for payment of current and anticipated liabilities, including any
liabilities owed to Daewoo (including management fees and Program License Fees
payable to Daewoo) and any Trademark Royalties and Program License Fees payable
to PEGI, or otherwise needed for use in the operation of the Venture's business
for the current period, as determined in good faith by the Board of Directors.
PEGI will not be obligated to guarantee loans made to the Venture by third
parties or Daewoo or its related entities.
15.4 Governance Provisions.
---------------------
15.4.1 The day-to-day management of the Venture will be delegated to
a Representative Director to be mutually approved by the Venturers, and subject
to removal by either of the Venturers. The Representative Director will report
to and be subject to the direction of a Board of Directors comprised of four
representatives of Daewoo and two representatives of PEGI.
15.4.2 The Shareholders Agreement will include appropriate minority
protections, including, but not limited to, provisions requiring the approval of
PEGI prior to the Venture taking any of the following actions: (i) any amendment
to the Superseding Agreements, (ii) any merger or other reorganization of the
Venture, (iii) the issuance of additional interests in the Venture, declaration
of dividends, stock splits, reverse stock splits or redemption of shares, (iv)
any distribution by the Venture with respect to the interests therein other than
distributions of operating profits (including, but not limited to, any
distribution of non-cash assets), (v) the Venture taking actions that are
inconsistent with an approved Business Plan or Annual Budget, or which are
otherwise outside the ordinary course of business, including but not limited to
the incurrence of indebtedness in excess of the levels contemplated by the
applicable Business Plan or Annual Budget, (vi) the Venture entering into any
business activities except as contemplated herein, (vii) loans by the Venture to
any member, (viii) any transaction with an affiliate of any member (other than
the Superseding Agreements), (ix) retaining outside counsel or accountants for
the Venture, (x) tax decisions which could have a material adverse impact on
PEGI or the Venture or (xi) except as expressly provided herein, the
termination, dissolution or liquidation of the Venture: provided, however, that
the matters recited in items (iv), (vii), (viii), and (ix) shall be subject to
21
<PAGE>
such modifications as may be agreed upon between the parties in negotiating the
Superseding Agreements.
15.4.3 It is the parties' intent that the structure of the Venture as
a limited liability company or joint stock corporation, as shall be mutually
determined, will limit the liability of the members for liabilities of the
Venture to their respective interests in the Venture. However, if either Daewoo
or PEGI becomes directly liable for any liability of the Venture resulting from
an action of the other Venturer taken without the approval (on the terms
provided herein) of such Venturer, then the Venturer taking such action will
indemnify and hold the Venturer suffering such liability harmless from and
against any liability arising from such action. The prior sentence shall not
apply to liabilities of the Venture arising from censorship matters with respect
to a program supplied in good faith by a Venturer.
15.4.4 Each member of the Venture will have the right to examine the
books and records of the Venture, and will have the annual right to audit or
cause an audit of the books and records of the Venture upon not less than 10
business days prior notice. The Management Co. under the supervision of the
Representative Director will prepare regular periodic financial statements and
annual financial statements to be prepared in accordance with GAAP. At the
request of any member, the annual financial statements will be audited by a
nationally recognized accounting firm.
16. Distribution of Profits
-----------------------
The Venture will make distributions of operating profits on an annual basis
to each Venturer, in proportion to its percentage interests at the end of that
year. If the ownership percentages of the Venture change during a given year,
the Venture will calculate simple arithmetic "mean" ownership positions for each
party for that year. For example, if PEGI is permitted to increase its ownership
in the Venture and chooses to purchase an additional 20% share, and if such
purchase occurs at the beginning of the fourth month of such year, then PEGI's
share of the Venture profits for that year will be [(15% * 3) + (35% * 9)]/12.
The Venture will not withhold distributions except as necessary to provide for
the reasonable conduct of the Venture's business as detailed in the Business
Plan (as modified by the Approved Budget for a given fiscal year).
17. Advertising
-----------
Daewoo and PEGI shall negotiate and mutually determine in the Superseding
Agreements all details regarding advertising, if any, on the Services, including
any advertising by the Venturers, as well as (consistent with the standards set
forth below) all matters relating to the type and nature of advertising to be so
carried. If the Venture carries advertising, the Services will at all times
abide by the following advertising standards:
22
<PAGE>
17.1 Categories that are not acceptable for advertising are firearms (or
advertisements from any gun lobby organization) and other weapons; explosives or
fireworks; massage parlors; telephone sex lines; sex clubs; sexually explicit
audio visual products (e.g., X-rated or similar "hardcore" videos); sex toys;
materials depicting graphic sexual conduct, violence, rape or non-consensual
sex, sadism, sadomasochism, bondage, incest, bestiality, 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 but is portrayed as
under the legal age for consent; classified advertising; advertising for
psychics or similar services; religious organizations and/or cults.
17.2 The Venture will not accept advertisements for magazines which
compete with any edition of the "Playboy" magazine or for any other publication,
product or service published, produced, financed, branded, identified with or
distributed by any person who is engaged in the publication or distribution of
any magazine which competes with any edition of the "Playboy" magazine.
18. Non-Competition and Exclusivity
-------------------------------
18.1 Neither of the parties nor their affiliates will hold an ownership
position of any kind in any competing primarily adult oriented television
service in the Territory without the express written permission of the other.
Further, neither of the parties nor their affiliates will distribute any
product, service or programming in any media that carries the brand or name of
or is identified with the publisher of a magazine or other publication that
competes with any edition of the "Playboy" Magazine. As used in this Agreement,
"adult oriented" means the service or program in question is erotic in nature
and features nudity. The ownership or distribution of R-rated feature film
produced by major studios does not represent ownership or distribution of
"adult-oriented" programming for the purposes of this provision. In addition,
nothing contained in this Agreement shall be deemed to (a) preclude PEGI or any
of its affiliates from owning or operating or providing programming for another
Playboy TV service in the Territory in any media, including Non-Standard
Television, if the PTVSK Service is terminated for any reason, but the Venture
continues to operate the ATV Service, or (b) preclude either party from owning
or operating or providing programming for an adult service primarily featuring
programming of the type primarily featured on the ATV Service if the ATV Service
is terminated for any reason but the Venture continues to operate the PTVSK
Service; provided, however, that the above restriction regarding products,
services or programming that carries the brand or name of or is identified with
the publisher of a magazine or other publication that competes with any edition
of the "Playboy" magazine shall continue to apply.
23
<PAGE>
19. Censorship
----------
If a certain program or series of programs is censored by the Korean
government or the Venture reasonably believes it to violate South Korean
censorship laws, the Venture will, upon consultation with PEGI, edit the program
such that it will be suitable for airing in the Territory. The Venture will use
all reasonable good faith efforts to modify any censored program to comply with
the censorship requirements, with any editing changes to be subject to the
approval of the party that furnished such program. The party that furnished such
program may, at its option, substitute another program for the one in question
if it feels that the integrity of the affected program will be compromised
because of the editing necessary to satisfy censorship officials. If the Venture
believes that the editing is cost prohibitive, it may request that the
applicable party substitute another program for the one in question. All costs
of editing will be borne by the Venture.
20. Dispute Resolution
------------------
20.1 Any dispute arising out of or relating to this Agreement shall be
resolved in accordance with the procedures specified in this Section 20, which
shall be the sole and exclusive procedures for the resolution of any such
disputes; provided, however, that this Section 20 shall not apply to any dispute
concerning the validity, ownership or other rights with respect to the
trademarks licensed by PEI to the Venture pursuant to the Trademark License
Agreement, and instead any such dispute shall be litigated in a court of law.
The parties intend to include substantially similar provisions in the
Superseding Documents so that the following provisions will continue to govern
dispute resolution with respect to the Venture and the Venturers. The parties
intend that these provisions shall be valid, binding, enforceable and
irrevocable and shall survive any termination of this Agreement or the
Superseding Agreements.
20.2 The parties shall promptly notify each other in writing of any
dispute arising out of or relating to this Agreement. The parties shall 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 shall be treated as compromise and settlement negotiations for
purposes of applicable rules of evidence.
20.3 If any such dispute remains unresolved within 30 days of original
notice thereof, each party shall refer the dispute to a more senior executive of
such party who has authority to settle the dispute and who shall likewise meet
with the other to attempt to resolve the dispute.
24
<PAGE>
20.4 Any controversy or claim arising out of or relating to this Agreement
or the breach, termination or validity thereof, which remains unresolved 45 days
after original notice thereof shall be finally settled under the Rules of
Arbitration of the International Chamber of Commerce; 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 tribunal shall consist of a sole arbitrator appointed jointly by the
parties. In the case of the parties failing to choose a sole arbitrator, the
tribunal shall consist of three arbitrators, two of whom shall be appointed by
the respective parties and the third of whom shall be appointed jointly by the
first two. Each arbitrator shall be knowledgeable in matters similar to those
involved in the business of the Venture. The place of arbitration shall be
Sydney, Australia, or such other location as the parties may agree. The language
of the arbitration shall be English. Each arbitrator shall be independent and
unrelated to any of the parties.
20.5 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 shall have the authority to include, as
an item of damages, the costs of arbitration, including 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" shall 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.
20.6 All negotiations pursuant to Sections 20.2,20.3 and 20.4 are
confidential and shall be treated as compromise and settlement negotiations for
purposes of applicable rules of evidence.
20.7 Each party agrees that service by registered or certified mail,
return receipt requested, delivered to such party at the address provided in
Section 21.9 (Notices) below, will be deemed in every respect effective service
of process upon such person for all purposes of these provisions relating to
arbitration. Subject to Section 20.1, each party irrevocably submits to the
jurisdiction of the courts of the State of California and with respect to all
matters governed by the laws of the State of California and to the jurisdiction
of the courts of South Korea with respect to all other matters, in each case
pursuant to Section 21.4, 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 or South Korea in accordance herewith has been brought in any
inconvenient forum.
25
<PAGE>
20.8 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 the respective jurisdictions of organization of Daewoo and PEGI.
21. Miscellaneous
-------------
21.1 Effective Date. This Agreement will become effective as of the date
--------------
on which it is fully executed by the parties.
21.2 Permits; Approvals; Launch. The parties will use their reasonable
--------------------------
best efforts to cause the Venture to obtain promptly the governmental approvals,
permits and other authorizations necessary to operate the Venture as
contemplated herein. The parties acknowledge their mutual desire to have the
Venture organized and the PTVSK Service launched by June 15, 1997, and in this
regard each party agrees to use its reasonable best efforts to accomplish such
objectives.
21.3 Currency: Payments. Except where otherwise expressly provided to the
------------------
contrary herein or in the Superseding Agreements:
21.3.1 All amounts due from either party to the other or from the
Venture to PEGI, PEI or any of PEGI's other affiliates pursuant to this
Agreement shall 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
shall 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 shall also apply to any portion of
a payment which is permitted to be deferred, regardless of whether deferred
payment is represented by a promissory note or other instrument.
21.3.2 All payments owing pursuant to this Agreement will be made by
wire transfer of immediately available funds, subject to any withholding
required by applicable law. Each party will from time to time designate one or
more accounts into which such payments will be made and may designate one or
more accounts into which such payments will be made and may designate one or
more affiliates to receive such payments. Daewoo will cooperate fully with PEGI
in taking, or permitting or causing to be taken such actions as will minimize
any withholding or other taxes or fees applicable to PEGI with respect to
distributions or other payments by the Venture, including the assignment by PEGI
of its rights to receive any payments.
21.3.3 Any payment hereunder not made when due will bear interest
from the date due to and including the date of payment in full at the Applicable
Rate.
21.3.4 The parties agree that if any payment owing by it or any of
its affiliates is precluded or limited by a restriction imposed by jurisdiction
of organization
26
<PAGE>
or operation of the payor or the jurisdiction where the payor's funds are
deposited, then an affiliate of such payor not subject to such restriction shall
make the required payment.
21.4 Governing Law. With respect to matters (including, but not limited
-------------
to program supply and trademark matters) involving the Venture's programming or
intellectual property supplied by PEGI or PEI, this Agreement and the
Superseding Agreements shall be governed by and construed under the laws of the
State of California. Otherwise, with respect to all other matters, including,
without limitation, matters or corporate governance and capitalization, this
Agreement and the Superseding Agreements shall be governed by and construed
under the laws of South Korea without reference to conflicts of laws
principles.
21.5 Authority. Each party represents that (i) it has full power and
---------
authority to enter into and perform this Agreement, (ii) this Agreement is the
valid and binding obligation of such party, enforceable against it in accordance
with its terms, and (iii) the performance by such party of its obligations under
this Agreement does not violate any law, rule or regulation binding on such
party or such party's charter documents. Without limiting the foregoing, Daewoo
represents and warrants that its performance of the obligations required of it
under this Agreement in accordance with the terms hereof shall not be
inconsistent with or restricted or limited by any restrictions or limitations
applicable to it under South Korean law regarding investment, lending or issuing
guarantees.
21.6 Assignment; No Third Party Beneficiary. No party hereto shall
---------------------------------------
assign its rights or delegate its obligations hereunder without written consent
of the other party except to an affiliate of such party; provided that no such
assignment shall relieve the assignor of its obligations. The provisions of
this Agreement are for the benefit only of the parties, and no third party may
seek to enforce or benefit from these provisions.
21.7 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 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 their
effects.
21.8 Waivers, Remedies Cumulative, Amendments, etc.
---------------------------------------------
21.8.1 No failure or delay by any of the parties hereto in exercising
any right, power or privilege under this Agreement shall operate as a waiver
thereof nor shall 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.
27
<PAGE>
21.8.2 The rights and remedies herein provided are cumulative and not
exclusive of any rights and remedies provided by law.
21.8.3 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.
21.9 Notices. All notices, requests, demands and other communications
-------
required to be given under this Agreement shall be in writing and shall
conclusively deemed to have been duly given (a) when hand delivered to the other
party, (b) the next business day if sent by a generally recognized overnight
courier services that provides written acknowledgement by the addressee of
receipt, or (c) when received, if sent by facsimile or other generally accepted
means of electronic transmission.
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 Daewoo to:
---------------
Daewoo Corporation
Attention: Mr. Patrick Woo
526 5-Ga Namdaemoon-Ro
Jung-Gu, Seoul, Korea
Fax number: 82 2 772 5524
or to such other address, or facsimile transmission number as the relevant
addressee may hereafter by notice hereunder substitute.
28
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21.10 Confidentiality.
---------------
21.10.1 Each Venturer and its respective affiliates shall
maintain the confidentiality of all information of a confidential or proprietary
nature which it may have or acquire regarding the customers, business, finances,
assets or affairs of the Venture or the other Venturer and its affiliates except
for (a) any information which is generally available to the public or becomes
generally available to the public other than through disclosure in violation of
this provision or (b) which is required_to be disclosed by applicable law or to
enforce the provisions of this Agreement.
21.10.2 In recognition of each party's understanding that the
other may in the future invite third parties to participate as equity or
non-equity investors or other providers of finance in or to such party or its
respective affiliates, the parties agree that each may provide to such entities
copies of the Shareholders Agreement, Program Supply Agreement, Trademark
License Agreement and other agreements governing the Venture, the Business Plan,
financial statements and other financial information provided by the Venture to
its members, and such other information as would be reasonable in the
circumstances for a potential investor to require. Notwithstanding the
foregoing, no such information will be provided until a confidentiality
agreement for the benefit of the Venture, the Venturers and their respective
affiliates has been signed by such potential investor.
21.10.3 In recognition of the fact that PEGI is a subsidiary of a
publicly held company, the parties agree that PEGI may provide to institutional
investors and analysts such information concerning the Venturer as is
conventional to assist such investors in deciding whether to invest or such
analysts to prepare their reports; provided, that no information may be
disclosed without the prior consent of the Venture that would reasonably be
expected to cause harm to the Venture, including with respect to its competitive
position.
21.11 Public Announcements. Unless otherwise agreed by the parties or
--------------------
as required by law or by the stock exchange on which PEI's stock is traded, no
public
29
<PAGE>
announcement will be made by either party or any of their respective affiliates
with respect to the subject matter of this Agreement.
21.12 Addition of the Venture as a Party to the Shareholders Agreement.
----------------------------------------------------------------
If either party so desires, the parties shall cause the Venture to become a
signatory to the Shareholders Agreement for purposes of confirming its agreement
to the terms thereof insofar as they impose obligations on or otherwise apply to
the Venture.
AGREED AND ACCEPTED:
- -------------------
PLAYBOYENTERTAINMENT GROUP, DAEWOO CORPORATION
INC.
By: /s/ Anthony J.Lynn By: /s/ Ju Ho Jung
-------------------- ----------------
Name: Anthony J. Lynn Name: Ju Ho Jung
Title: PRESIDENT Title: EXECUTIVE V.P.
30
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EXHIBIT "A"
DEFINED TERMS
The following terms are defined in the indicated Sections of the text of the
within Agreement:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Adjusted Gross Revenue 12.1
Adult-oriented 18.1
Agreement 1.1
Annual Budget 3.2
Applicable Rate 15.3.2
ATV 1.1
Business Plan 3.1
Daewoo 1.1
DBS 1.2
Founders' Price 15.2.2
Home Video 9.1
License Term 9.1
Management Co. 2.5
MMDS 8.1
New Movies 10.3
New Programming 10.2
Non-Standard Television 8.1
PEGI 1.1
PEI 2.3.1
Playboy Identified Programs 13.2.7
Playboy Programming 13.3.1
Premium Films 10.4
Price Per Share Point 15.2.2
Program License Fees 11
PTVSK 1.1
Representative Director 15.4
Section 10.2 Guaranteed Minimum Program License Fee 11.1
Section 10.3 Guaranteed Program License Fee 11.2
Services 1.1
SMATV 8.1
STV 8.1
Superseding Agreements 2
Territory 4
Total Capitalization 15.2.2
</TABLE>
EXHIBIT A-1
<PAGE>
Trademark License Agreement 2.3.1
Trademark Royalty 12.1
Venture 1.1
Venture-produced Program 13.1
Venture-produced Programming 13.1
Venture Specific Programming 13.3.1
Venturers 2.1
Wind-Up Period 6.3.2
The following additional terms shall have the meanings set forth below:
"affiliate" means any person controlled, controlling or under common
control with the specified person.
"control" (and controlled and controlling, respectively) means the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of the relevant person (whether by the holding of
shares, the possession of voting rights or otherwise).
"person" means any individual, corporation, partnership, limited liability
company, trust, association or other legal entity.
EXHIBIT A-2
<PAGE>
EXHIBIT "B"
TRADEMARK USAGE SUMMARY
Licensee hereby acknowledges that the trade names "Playboy" and "Playmate" and
the registered trademark and service mark "Playboy," the Playboy "Rabbit Head
Design" and trade names "The Playboy Channel," Playboy TV "Playboy Television"
and all related or derivative names or marks (collectively the "Playboy Marks")
are the sole and exclusive property of Licensor and that all uses of the Playboy
Marks shall inure solely to the benefit of Licensor, Licensee shall have the
right to develop and distribute advertising, publicity, and promotional
materials relating to the Programs incorporating certain Playboy Marks in
connection with Licensee's rights hereunder ; provided, however, that any such
materials shall:
A. Clearly identify the Playboy Marks using a legible credit line with the
wording "Playboy" (or the applicable Playboy Mark, as the case may be) is
the mark of and used with the permission of Playboy Enterprises, Inc." or
such other words as Licensor may designate;
B. Be submitted in representative form to Licensor for Licensor's prior
written approval in each case at least thirty (30) days prior to their
intended distribution. Licensor may disapprove any use if, in Licensor's
opinion, such use (i) jeopardizes the validity of any of the Playboy Marks,
(ii) does not conform to previously approved uses of the Playboy Marks,
(iii) does not conform to Licensor's standards, which may vary from time to
time, or (iv) negatively affects or impacts the good name, good will or
reputation of Licensor. Licensee will not disseminate any material or
packaging that has not been so approved by Licensor; and
C. Be issued only in the Korean Language.
It is expressly understood that Licensor shall retain all good will associated
with the Playboy Marks, and no good will from same will inure to Licensee or to
any person or entity other than Licensor. Licensee also must secure Licensor's
prior written approval of all media of advertising and distribution and the
specific publications, broadcasters and exhibitors which will be running the
advertisements. Licensee will not disseminate any advertising material that has
not been so approved by Licensor in each instance. Other than as expressly set
forth in this Trademark Usage Summary, Licensee shall make no use of the Playboy
Marks or any confusingly similar designation without the prior express written
consent of Licensor in each instance. Licensee shall also make no use whatsoever
of any other trademark, trade name or service mark that is the property of
Licensor or derived from any of Licensor's programs, suppliers or producers
without the prior express written consent of Licensor in each instance. Licensee
similarly agrees that it will not authorize or purport to authorize any third
party to make any such use, and it will expressly provide in any applicable
third party agreements that such third parties will only be entitled to use such
names and marks in accordance with Licensee's rights hereunder.
Licensee shall have no right to promote, telecast, exhibit, advertise, use or
otherwise exploit in any manner any of the Playboy Marks in connection with the
ATV Service or the programming thereof without the express prior written
approval of Licensor in each instance. Rather, the trademarks, service marks and
other identifying names or marks for the ATV Service shall be licensed by
Licensor or Licensor's affiliate to Licensee under similar usage requirements as
in this Trademark Usage Summary.
<PAGE>
EXHIBIT "C"
BUSINESS PLAN
To be attached pursuant to Section 3.1.
<PAGE>
EXHIBIT 10.6
As of February 28, 1997
Universal Music & Video Distribution
70 Universal City Plaza
Universal City, CA 91608
Attention: Michael Ostroff, Esq.
RE: Amendment to Playboy Entertainment Group, Inc. Distribution Agreement
Gentlemen:
Reference is made to that certain letter agreement dated as of August 22, 1991
between Uni Distribution Corp., now known as Universal Music & Video
Distribution ("Uni"), and Playboy Video Enterprises, Inc., the predecessor in
interest to Playboy Entertainment Group, Inc. ("Playboy"), as such letter
agreement has been supplemented and amended, including by that certain letter
amendment dated as of March 24, 1995 between Uni and Playboy (such as of March
24, 1995 letter amendment is referred to as the "First Amendment"; and such
August 22, 1991 letter agreement, as it has been supplemented and amended, is
referred to as the "Agreement"). All defined terms used in this second letter
amendment (the "Second Amendment") and not defined herein are defined in the
Agreement. Uni and Playboy desire further to supplement and amend the Agreement
as follows:
1. Term. The third contract year of the Term for both Catalog Programs and New
Release Programs shall be extended to June 15, 1998, and the Term for both
Catalog Programs and New Release Programs shall terminate on such date,
subject to extension of the Term for only New Release Programs pursuant to
subparagraph 3(a) of the First Amendment.
2. No Extension or Refund for Unrecouped Catalog Program Advances.
Subparagraph 6(b)(vii) of the First Amendment is amended by deleting all of
the remainder of such subparagraph 6(b)(vii) of the First Amendment after
the words "to Playboy pursuant to Paragraph 7 below." in Line 10 of such
subparagraph. Thus, if Uni has not recouped the total amount of the
Advances for all contract years of the Term for Catalog Programs paid to
Playboy pursuant to Paragraph 7 of the First Amendment, there shall be no
potential extension of the Term for Catalog Programs beyond June 15, 1998,
nor shall Playboy be obligated to refund to Uni any portion of the then-
unrecouped amount of such total Advances paid to Playboy.
3. Formats. As of February 28, 1997, the format commonly known as "digital
versatile disc(s)" ("DVD(s)") shall be excluded from the authorized formats
under the
1
<PAGE>
Agreement until the first to occur of the following dates (a) June 15,
1998, or (b) the date on which Uni notifies Playboy (or Playboy notifies
Uni) in writing, accompanied by reasonably satisfactory written evidence,
that published Electronic Industry Association statistics evidence that the
installed base of DVD hardware players in the United States for home video
only use (versus hardware players with computer DVD capabilities) has
reached three million (3,000,000) individual units (the first of such dates
to occur is referred to as the "DVD Termination Date"). If the DVD
Termination Date is prior to June 15, 1998, then as of the DVD Termination
Date the authorized formats under the Agreement shall once again include
DVDs.
4. DVD Distribution.
(a) Image Entertainment, Inc. Playboy shall have the right to grant to
Image Entertainment, Inc. ("Image") the right to distribute any or all
New Release Programs and Catalog Programs in any part of the Territory
in the DVD format, at any time from February 28, 1997 through the DVD
Termination Date.
(b) Grace Period. If the DVD Termination Date is prior to June 15, 1998,
then Playboy also shall have the right to grant to Image a six (6)-
month "grace" period (the "Grace Period") following the DVD
Termination Date during which Image shall continue to be authorized to
manufacture, sell and distribute in the Territory DVDs of any or all
New Release Programs and Catalog Programs that either have been
previously released by Image or for which Image has paid Playboy an
advance against Playboy's share of revenues from the distribution of
such DVDs.
(c) Uni Royalty. Playboy shall cause Image to pay to Uni a royalty equal
to seven and one-half percent (7.5%) of all "net invoiced sales" by
Image (and as otherwise defined in Section 5 of the Agreement) of DVDs
of New Release Programs and Catalog Programs in the Territory during
the period commencing February 28, 1997 and ending on the first to
occur of (i) the end of the Grace Period, or (ii) June 15, 1998 (such
period is referred to as the "DVD Distribution Term"). Such sums shall
be payable by Image to Uni on a calendar quarterly basis. All
allowances for reserves taken during the DVD Distribution Term shall
be retroactively adjusted in accordance with the provisions of the
Agreement regarding allowances for reserves, and any additional
royalties payable to Uni on account of such adjustments shall be paid
at the time of such adjustments, including, if applicable, after the
DVD Distribution Term.
(d) Suggested Retail and Wholesale Pricing for DVD. During the DVD
Distribution Term, Playboy agrees that the suggested retail price
in the Territory for DVDs of New Release Programs and Catalog Programs
shall not be lower than the full suggested retail price for one-half
inch (1/2") VHS videocassette copies ("Videocassettes") of the same
New Release Program or Catalog Program in the Territory, and that the
suggested wholesale price in
2
<PAGE>
the Territory for DVDs of New Release Programs and Catalog Programs
shall not be lower than the full suggested wholesale price for
Videocassettes of the same New Release Program or Catalog Program in
the Territory.
(e) Uni DVD Responsibilities. During the DVD Distribution Term, Uni shall
have no responsibility for the manufacture, sale, collection of
revenue or the distribution of DVDs by Image.
Except as set forth in this Second Amendment, the Agreement is not otherwise
modified in any respect, and the Agreement, as supplemented and amendment by
this Second Amendment, is ratified and confirmed.
If this Second Amendment accurately reflects the agreement between Uni and
Playboy with respect to the subject matter of it, please so indicate by signing
this Second Amendment in the appropriate space provided below.
Very truly yours,
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Myron DuBow
--------------------------------
Myron DuBow
Sr. V.P. Business and Legal Affairs
- -------------------------------------
Name and Title
ACCEPTED AND AGREED TO:
UNIVERSAL MUSIC & VIDEO DISTRIBUTION
By: /s/ Michael Ostroff
--------------------------------
Michael Ostroff
Sr. V.P. Business & Legal Affairs
- -------------------------------------
Name and Title
3
<PAGE>
EXHIBIT 10.7
PLAYBOY ENTERTAINMENT GROUP, INC.
July 29, 1996
Marlon W. Schulman
Director, Business and Legal Affairs
ORION PICTURES CORPORATION
1888 Century Park East, 7th Floor
Los Angeles, California 90067
Dear Mr. Schulman:
This letter, when the enclosed copy has been signed, dated and returned to you,
will evidence our mutual agreement to further amend the Playboy Distribution
Agreement between Playboy Entertainment Group, Inc. ("Playboy") and Orion Home
Entertainment Corporation d/b/a Orion Home Video ("Orion") dated as of June 27,
1996 (the "Agreement") as follows:
1. Effective immediately, "EROS COLLECTION" will be added to the Trademarks as
described under Paragraph 9.B. of the Agreement.
2. Effective immediately, "EROS COLLECTION" will be added to the Playboy Marks
as described under Paragraph 9.C. of the Agreement. Use of the EROS
COLLECTION mark shall include a legible trademark credit line with the
wording, "EROS COLLECTION is a mark of and used with the permission of PEI"
or other such words as Playboy may designate.
3. Except as modified above, all of the other terms and conditions of the
Agreement, as amended, shall remain in full force and effect.
If the above accurately sets forth your understanding of our agreement, please
sign, date and return the enclosed copy of this letter.
Very truly yours,
Playboy Entertainment Group, Inc.
By: /s/ Bill Asher
-------------------------------------
Bill Asher
Vice President of Planning -- New
Business
ACCEPTED and AGREED to:
ORION HOME ENTERTAINMENT CORPORATION
By: /s/ Herb Dorfman
--------------------------------
HERB DORFMAN
Its: President
--------------------------
Dated: 7/30/96
--------
<PAGE>
EXHIBIT 11
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
March 31, March 31,
------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Primary:
- -------
Earnings:
Net income $ 2,510 $ 676 $ 6,372 $ 2,826
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 20,330 20,007 20,304 19,996
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 520 284 482 250
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 20,850 20,291 20,786 20,246
======= ======= ======= =======
Primary earnings per common share:
Net income
$ 0.12 /1/ $ 0.03 /1/ $ 0.31 /1/ $ 0.14 /1/
======= ======= ======= =======
Fully Diluted:
- -------------
Earnings:
Net income $ 2,510 $ 676 $ 6,372 $ 2,826
======= ======= ======= =======
Shares:
Weighted average number of common
shares outstanding 20,330 20,007 20,304 19,996
Assuming exercise of options reduced
by the number of shares which could have
been purchased with the proceeds from
exercise of such options 640 346 522 273
------- ------- ------- -------
Weighted average number of common shares
outstanding as adjusted 20,970 20,353 20,826 20,269
======= ======= ======= =======
Earnings per common share assuming full dilution:
Net income $ 0.12 /1/ $ 0.03 /1/ $ 0.31 /1/ $ 0.14 /1/
======= ======= ======= =======
</TABLE>
/1/ This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,001
<SECURITIES> 0
<RECEIVABLES> 35,198
<ALLOWANCES> 3,757
<INVENTORY> 21,942
<CURRENT-ASSETS> 112,129
<PP&E> 37,951
<DEPRECIATION> 27,208
<TOTAL-ASSETS> 160,859
<CURRENT-LIABILITIES> 92,518
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 59,730
<TOTAL-LIABILITY-AND-EQUITY> 160,859
<SALES> 219,250
<TOTAL-REVENUES> 219,250
<CGS> 180,915
<TOTAL-COSTS> 206,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386
<INCOME-PRETAX> 11,736
<INCOME-TAX> 5,364
<INCOME-CONTINUING> 6,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,372
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
