<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, 1998
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, 1998, there were 4,748,954 shares of Class A Common Stock, par
value $0.01 per share, and 15,792,588 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 1998 and 1997 (Unaudited) 3
Condensed Consolidated Balance Sheets at March 31,
1998 (Unaudited) and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1998 and 1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
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>
1998 1997
-------- --------
<S> <C> <C>
Net revenues $ 71,762 $ 73,247
-------- --------
Costs and expenses
Cost of sales (61,760) (58,853)
Selling and administrative expenses (8,758) (9,727)
-------- --------
Total costs and expenses (70,518) (68,580)
-------- --------
Operating income 1,244 4,667
-------- --------
Nonoperating income (expense)
Investment income 34 17
Interest expense (215) (87)
Other, net (419) (193)
-------- --------
Total nonoperating expense (600) (263)
-------- --------
Income before income taxes 644 4,404
Income tax expense (584) (1,894)
-------- --------
Net income $ 60 $ 2,510
======== ========
Weighted average number of common shares outstanding
Basic 20,531 20,330
======== ========
Diluted 21,035 20,831
======== ========
Basic and diluted net income per common share $ 0.00 $ 0.12
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, Dec. 31,
1998 1997
---------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 982 $ 947
Receivables, net of allowance for doubtful accounts of
$5,137 and $4,467, respectively 31,425 33,324
Inventories 25,703 25,376
Programming costs 41,708 41,504
Deferred subscription acquisition costs 13,000 12,143
Other current assets 9,941 11,910
-------- --------
Total current assets 122,759 125,204
-------- --------
Property and equipment, at cost 38,051 37,945
Accumulated depreciation (28,356) (27,892)
-------- --------
Property and equipment, net 9,695 10,053
-------- --------
Programming costs - noncurrent 9,953 8,329
Trademarks 15,288 14,978
Net deferred tax assets 13,519 13,688
Other noncurrent assets 14,252 13,695
-------- --------
Total assets $185,466 $185,947
======== ========
Liabilities
Short-term borrowings $ 14,500 $ 10,000
Accounts payable 24,911 32,258
Accrued salaries, wages and employee benefits 3,498 4,499
Reserves for losses on disposals of discontinued operations 610 610
Income taxes payable 516 627
Deferred revenues 47,065 43,216
Other liabilities and accrued expenses 6,913 7,706
-------- --------
Total current liabilities 98,013 98,916
Other noncurrent liabilities 8,575 8,348
-------- --------
Total liabilities 106,588 107,264
-------- --------
Shareholders' Equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 5,042,381 issued 50 50
Class B non-voting - 30,000,000 shares authorized; 17,098,582
and 17,076,518 issued, respectively 171 171
Capital in excess of par value 43,933 43,539
Retained earnings 45,317 45,257
Foreign currency translation adjustment (139) (131)
Unearned compensation restricted stock (3,780) (3,511)
Less cost of treasury stock (6,674) (6,692)
-------- --------
Total shareholders' equity 78,878 78,683
-------- --------
Total liabilities and shareholders' equity $185,466 $185,947
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended March 31 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 60 $ 2,510
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 478 576
Amortization of intangible assets 438 483
Amortization of investments in entertainment programming 4,702 4,919
Investments in entertainment programming (6,530) (7,446)
Net change in operating assets and liabilities (3,056) 7,416
Net cash used for discontinued operations - (19)
Other, net (3) (17)
------- -------
Net cash provided by (used for) operating activities (3,911) 8,422
------- -------
Cash Flows From Investing Activities
Additions to property and equipment (141) (139)
Acquisitions and funding of equity
interests in international ventures (572) (419)
Other, net 23 20
------- -------
Net cash used for investing activities (690) (538)
------- -------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings 4,500 (7,000)
Proceeds from exercise of stock options 88 12
Proceeds from sales under employee stock purchase plan 48 44
------- -------
Net cash provided by (used for) financing activities 4,636 (6,944)
------- -------
Net increase in cash and cash equivalents 35 940
Cash and cash equivalents at beginning of period 947 1,061
------- -------
Cash and cash equivalents at end of period $ 982 $ 2,001
======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<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 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 Transition Report on Form 10-K for the period from
July 1, 1997 through December 31, 1997 (the "Transition Report") of Playboy
Enterprises, Inc. and its subsidiaries (the "Company").
(B) INCOME TAXES
The Company's net deferred tax asset declined to $13.8 million at March 31,
1998 based on taxable income for the current quarter and management's
projection of calendar year 1998 taxable income. As reported in the
Company's Transition Report, the deferred tax asset includes principally
the anticipated benefit of net operating loss carryforwards ("NOLs"). Of
the $13.8 million and $14.0 million net deferred tax assets included in the
Condensed Consolidated Balance Sheets at March 31, 1998 and December 31,
1997, 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 $14.0 million at
December 31, 1997, the Company will need to generate future taxable income
of approximately $41.2 million prior to the expiration, beginning in 2004,
of the Company's NOLs. Management believes that it is more likely than not
that the required amount of such taxable income will be realized.
Management will periodically reconsider the assumptions utilized in the
projection of future earnings and, if warranted, increase or decrease the
amount of deferred tax assets through an adjustment to the valuation
allowance.
6
<PAGE>
(C) INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") (in thousands, except per share amounts):
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended
March 31,
---------
1998 1997
----------------------------------------------------------------------
<S> <C> <C>
Numerator:
For basic and diluted EPS--net income
available to common shareholders $ 60 $ 2,510
======================================================================
Denominator:
Denominator for basic EPS--
weighted-average shares 20,531 20,330
----------------------------------------------------------------------
Effect of dilutive potential common shares:
Stock options 504 376
Nonvested restricted stock awards - 125
----------------------------------------------------------------------
Dilutive potential common shares 504 501
----------------------------------------------------------------------
Denominator for diluted EPS--
adjusted weighted-average shares 21,035 20,831
======================================================================
Basic and diluted EPS
Net income $ 0.00 $ 0.12
======================================================================
</TABLE>
During the quarter ended March 31, 1998, approximately 340,000 weighted-
average shares of Class B restricted stock awards outstanding were not
included in the computation of diluted EPS as the operating income
objectives applicable to these restricted awards were not met during that
period.
(D) INVENTORIES
Inventories, which are stated at the lower of cost (average cost and
specific cost) or market, consisted of the following (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
March 31, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
Paper $ 9,415 $ 7,573
Editorial and other prepublication costs 5,690 6,002
Merchandise finished goods 10,598 11,801
------- -------
Total inventories $25,703 $25,376
======= =======
</TABLE>
(E) TREASURY STOCK
Treasury stock consisted of 293,427 Class A common shares and 970,716 Class
B common shares at March 31, 1998. At December 31, 1997, treasury stock
consisted of 293,427 Class A common shares and 974,227 Class B common
shares.
7
<PAGE>
(F) CONTINGENCIES
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 year 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 $0.6 million at March 31,
1998, to cover the eventual cost of its anticipated share (based on an
agreement with one of the other PRPs) of any agreed upon remediation.
(G) SUBSEQUENT EVENT
On April 20, 1998, the Company and Spice Entertainment Companies, Inc.
("Spice"), a competitor in the adult movie service industry, announced that
they had modified the terms of their February 4, 1998 agreement whereby the
Company will acquire all of the outstanding shares of Spice, subject to the
satisfactory completion of the items discussed below. For each share of
Spice stock, shareholders will receive the sum of $3.60 in cash and
approximately 0.1371 shares of the Company's Class B stock. The total
transaction value, including the assumption of debt, is expected to be
approximately $100 million (subject to a collar designed to provide a
minimum value of $2.20 or a maximum value of $2.88 per Spice share). It is
expected that the acquisition will be accounted for under the purchase
method of accounting. The Company expects to initially finance the cash
portion of the purchase price through a new bank credit agreement.
Under the terms of the agreement, Spice's shareholders will retain
ownership of Spice's digital operations center, its option to acquire the
outstanding stock of Emerald Media, Inc., a provider of adult entertainment
in the C-Band market, and certain rights to a library of adult films.
Spice's domestic networks, Spice and Adam & Eve, reached approximately 22.4
million households at December 31, 1997 and reported revenues of $33.6
million for the 12 months ended December 31, 1997.
Consummation of the proposed transaction is subject to definitive
documentation, approval by the shareholders of Spice, receipt of a fairness
opinion by Spice and other customary closing conditions. The waiting period
under the Hart-Scott Rodino Antitrust Improvements Act has expired. Closing
of the transaction is expected to occur during the third quarter of
calendar year 1998, however, there is no assurance that any definitive
agreement regarding the sale of Spice will be reached or that the
transaction will be completed.
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 decreased 2% to $71.8 for the quarter ended March
31, 1998 compared to $73.2 for the quarter ended March 31, 1997 (the "prior year
quarter"). The decrease was primarily as a result of lower Publishing Group
revenues as well as lower revenues from the Entertainment Group as higher
revenues from Playboy TV were more than offset by a guarantee recognized in the
prior year quarter related to domestic home video backlist titles.
The Company reported operating income of $1.2 for the quarter ended March
31, 1998 compared to $4.7 in the prior year quarter. The decrease was primarily
due to lower operating income for the Publishing and Entertainment Groups.
Net income for the quarter ended March 31, 1998 was $0.1, or basic and
diluted EPS of $0.00, compared to $2.5, or basic and diluted EPS of $0.12, for
the prior year quarter.
Net income for the quarter ended March 31, 1998, adjusted to eliminate
federal income tax expense that will not be paid due to the Company's net
operating loss and tax credit carryforwards, was $0.2, or basic and diluted EPS
of $0.01, compared to $3.8, or basic EPS of $0.19 and diluted EPS of $0.18, for
the prior year quarter.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary with the timing of
sales to international customers, particularly on a tier basis.
Publishing Group
The revenues and operating income of the Publishing Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenues
Playboy Magazine................................................ $24.0 $24.3
Other Domestic Publishing....................................... 3.8 5.1
International Publishing........................................ 2.2 2.4
----- -----
Total Revenues.............................................. $30.0 $31.8
===== =====
Operating Income................................................ $ 0.1 $ 1.6
===== =====
</TABLE>
Publishing Group revenues decreased $1.8, or 5%, for the quarter ended
March 31, 1998 compared to the prior year quarter largely due to lower revenues
from newsstand specials.
For the quarter ended March 31, 1998, Playboy magazine revenues declined
$0.3, or 1%, compared to the prior year quarter. Advertising revenues were $0.8,
or 11%, lower primarily due to 12% fewer ad pages in the current year quarter.
Advertising sales for the calendar year 1998 second quarter issues of the
magazine are closed, and the Company expects to report 5% fewer ad pages and 4%
lower ad revenues compared to the quarter ended June 30, 1997. Playboy magazine
circulation revenues remained relatively stable for the quarter ended March 31,
1998 as higher subscription revenues were basically offset by lower newsstand
revenues. Subscription revenues were $1.2, or 9%, higher largely due to more
subscription copies served while newsstand revenues were $1.3, or 30%, lower
principally as the result of 26% fewer U.S. and Canadian newsstand copies sold
in the current year quarter. The lower newsstand
9
<PAGE>
revenues are due in part to the consolidation taking place nationally in the
single-copy magazine distribution system which the Company expects will continue
to adversely affect newsstand revenues. Licensing revenues of $0.5 favorably
impacted the current year quarter.
Revenues from other domestic publishing businesses decreased $1.3, or 24%,
compared to the prior year quarter primarily due to lower revenues from
newsstand specials principally due to fewer copies sold in the current year
quarter.
International publishing revenues decreased $0.2, or 6%, compared to the
prior year quarter primarily due to lower royalties from Russia and Taiwan,
partially offset by higher royalties from Brazil.
For the quarter ended March 31, 1998, Publishing Group operating income
decreased $1.5, or 91%, compared to the prior year quarter primarily due to the
net decrease in revenues discussed above. Operating income is expected to be
materially adversely impacted later in calendar year 1998 due to a 7% paper
price increase effective January 1, 1998. As a result of the timing of
production schedules and paper inventory levels, this increase did not impact
the group's results for the quarter ended March 31, 1998.
Entertainment Group
The revenues and operating income of the Entertainment Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenues
Playboy TV
Cable....................................................... $ 5.4 $ 5.7
Satellite Direct-to-Home.................................... 7.9 6.1
Off-Network Productions and Other........................... 0.2 0.2
----- -----
Total Playboy TV................................................ 13.5 12.0
Domestic Home Video............................................. 1.5 3.2
International TV and Home Video................................. 1.7 2.3
----- -----
Total Playboy Businesses........................................ 16.7 17.5
AdulTVision..................................................... 1.4 1.1
Movies and Other................................................ 0.2 0.6
----- -----
Total Revenues.............................................. $18.3 $19.2
===== =====
Operating Income
Profit Contribution Before Playboy Businesses
Programming Expense............................................ $ 9.4 $10.7
Playboy Businesses Programming Expense.......................... (4.5) (4.5)
----- -----
Total Operating Income...................................... $ 4.9 $ 6.2
===== =====
</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, 1998, revenues of $13.5 from the Company's
branded domestic pay television service, Playboy TV, were $1.5, or 12%, higher
compared to the prior year quarter.
Cable revenues were $0.3, or 7%, lower compared to the prior year quarter
largely due to the estimated negative effect of the enforcement of Section 505
of the Telecommunications Act of 1996 (the "Telecommunications Act"), including
a decline in the average number of subscribing households due to some system
drops, partially offset by higher retail rates. At March 31, 1998, Playboy TV
was available to approximately 11.3 million cable addressable households, a 3%
increase compared to March 31, 1997. Of the 11.3 million cable addressable
households, only an estimated 2.3 million could receive Playboy TV on a 24-hour
basis, a 2.6 million, or 53%, decrease compared to March 31, 1997. The drop in
households with 24-hour availability began in the fourth quarter of fiscal year
1997 concurrent with enforcement of Section 505 of the Telecommunications Act
("Section 505"). The number of total cable addressable households to which
Playboy TV was available at March 31, 1998 decreased 3% from December 31, 1997,
while households with 24-hour availability increased 0.3 million, or 15%, over
the same period.
10
<PAGE>
Management believes that the Company's revenues attributable to its
domestic pay television cable services will continue to be materially adversely
affected as a result of enforcement of Section 505, which commenced May 18,
1997, due to reduced buy rates from the systems that roll back carriage to a
10:00 p.m. start time, subscriber declines and reduced carriage from cable
operators due to aggressive competition for carriage from all program suppliers.
The Company has estimated that the Entertainment Group's calendar year 1998
revenues will be reduced by approximately $3.5, and approximately $25 (at
present value at 6%) over the next ten years, due to Section 505. These amounts
do not take into account the loss of revenues due to the slowing of access to
new homes and of upgrading of old homes from ten to 24 hours. The Company is
pursuing in the United States District Court in Wilmington, Delaware (the
"Delaware District Court") its case challenging on constitutional grounds the
validity of Section 505 and is seeking a permanent injunction against the
enforcement of Section 505. The Company's full case on the merits was heard by
the Delaware District Court in March 1998. A decision is expected by summer
1998. There can be no assurance that the Delaware District Court will grant such
an injunction. See "Legal Proceedings."
Additionally, management believes that the growth in cable access for the
Company's domestic pay television businesses has slowed in recent years due to
the effects of cable reregulation by the Federal Communications Commission (the
"FCC"), including the "going-forward rules" announced in fiscal year 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. Further, the delay of
new technology, primarily digital set-top converters, has constrained the
expected increase in channel capacity. Management believes that growth will
continue to be affected in the near term until digital technology (which is
unaffected by Section 505) becomes more available. Ultimately, the Company
believes that its pay television networks will be available to the vast majority
of cable households on a 24-hour basis.
Higher satellite direct-to-home ("DTH") revenues more than offset the cable
decline and were $1.8, or 30%, higher for the quarter ended March 31, 1998
primarily due to significant increases in addressable universes for DirecTV and
PrimeStar and, beginning in March 1997, the availability of monthly
subscriptions through PrimeStar. DTH is unaffected by Section 505. As expected,
revenues from TVRO, or the big-dish market, continued to decline. Playboy TV was
available to approximately 8.4 million DTH households, including approximately
275,000 monthly subscribers, at March 31, 1998, an increase of 40% and 24%
compared to March 31, 1997 and December 31, 1997, respectively.
Profit contribution for Playboy TV increased $0.7 for the quarter ended
March 31, 1998 primarily due to the net increase in revenues discussed above,
partially offset by favorable music licensing settlements in the prior year
quarter.
Domestic Home Video
Domestic home video revenues and profit contribution decreased $1.7 and
$1.6, respectively, for the quarter ended March 31, 1998 compared to the prior
year quarter. These decreases were primarily due to a guarantee recorded in the
prior year quarter related to the final year of a three-year backlist
distribution agreement with Universal Music & Video Distribution that was
extended through June 1998. The Company is currently in negotiations for a new
distribution agreement which it anticipates executing in the second quarter.
International TV and Home Video
For the quarter ended March 31, 1998, revenues and profit contribution from
the international TV and home video business decreased $0.6 and $0.7,
respectively, compared to the prior year quarter. These decreases were largely
due to lower international home video sales to Taiwan, primarily as a result of
poor economic conditions in that country. Variations in quarterly performance
are caused by revenues and profit contribution from the recognition of tier
sales depending upon the timing of program delivery, license periods and other
factors.
Playboy Businesses Programming Expense
Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above was flat for the quarter ended March 31, 1998
compared to the prior year quarter.
11
<PAGE>
AdulTVision
AdulTVision revenues increased $0.3, or 25%, for the quarter ended March
31, 1998 compared to the prior year quarter primarily due to higher revenues
from the domestic network principally due to an increase in the addressable
universe, despite the estimated negative effect of the enforcement of Section
505 as previously discussed. At March 31, 1998, the network was available
domestically to approximately 7.7 million cable addressable and DTH households,
a 57% and 31% increase from March 31, 1997 and December 31, 1997, respectively.
AdulTVision is also available internationally. For the quarter ended March 31,
1998, operating income increased $0.1 as the higher revenues were largely offset
by higher marketing costs.
Movies and Other
For the quarter ended March 31, 1998, revenues and operating income from
movies and other businesses decreased $0.4 and $0.1, respectively, primarily due
to lower revenues related to feature films. The Entertainment Group's
administrative expenses for the quarter ended March 31, 1998 decreased $0.3
compared to the prior year quarter primarily due to lower performance-related
variable compensation expense.
Product Marketing Group
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenues........................................................ $ 2.6 $ 2.0
===== =====
Operating Income................................................ $ 0.7 $ 0.9
===== =====
</TABLE>
Revenues for the quarter ended March 31, 1998 increased $0.6, or 29%,
compared to the prior year quarter. The increase was primarily due to higher
revenues from Special Editions, Ltd. ("SEL") as a result of a barter agreement
related to the sale of prints and posters from the Company's art publishing
inventory, partially offset by lower international product licensing royalties,
principally from China.
Operating income of $0.7 for the quarter ended March 31, 1998 decreased
$0.2, or 26%, compared to the prior year quarter primarily due to the lower
international royalties. The higher SEL revenues were mostly offset by higher
associated costs.
Catalog Group
The revenues and operating income of the Catalog Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenues........................................................ $19.4 $19.5
===== =====
Operating Income................................................ $ 1.0 $ 1.2
===== =====
</TABLE>
For the quarter ended March 31, 1998, revenues of the Catalog Group were
relatively stable compared to the prior year quarter as higher revenues from the
Collectors' Choice Music catalog, primarily attributable to higher circulation,
were offset by lower revenues from the Critics' Choice Video catalog. Critics'
Choice Video was favorably impacted by sales in the current year quarter from
the The Big Book of Movies catalog first available in October 1997, however
these sales were more than offset by lower circulation and lower response rates.
Catalog Group operating income decreased $0.2, or 10%, for the quarter
ended March 31, 1998 compared to the prior year quarter primarily due to
slightly higher costs.
12
<PAGE>
Casino Gaming Group
The Company anticipates the opening of the Playboy Casino and Beach Hotel
in Rhodes, Greece in calendar year 1998. The Company is also exploring
additional casino gaming opportunities. Expenses of $0.2 were incurred in the
quarter ended March 31, 1998 principally related to executive staffing.
Playboy Online Group
Beginning with the quarter ended March 31, 1998, Playboy Online results,
which were previously reported in the Publishing and Catalog Groups, are now
reported as a separate operating group. The group's results include advertising
sales from Playboy.com, the Company's free site on the Internet; subscription
sales to Playboy Cyber Club, the Company's pay site on the Internet; and e-
commerce sales from all of the Company's online catalog offerings. The revenues
and operating loss of the Playboy Online Group were as follows for the periods
indicated below:
<TABLE>
<CAPTION>
Quarters Ended
March 31,
--------------
1998 1997
----- -----
<S> <C> <C>
Revenues........................................................ $ 1.4 $ 0.8
===== =====
Operating Loss.................................................. $(0.7) $ -
===== =====
</TABLE>
For the quarter ended March 31, 1998, Playboy Online Group revenues
increased $0.6, or 84%, compared to the prior year quarter primarily due to
subscription revenues in the current year quarter related to Playboy Cyber Club,
which launched in the summer of 1997. Additionally, e-commerce revenues
increased compared to the prior year quarter primarily due to the launches of
CCMusic and CCVideo, online versions of the Collectors' Choice Music and
Critics' Choice Video catalogs, in the summer and fall of 1997, respectively.
For the quarter ended March 31, 1998, the Playboy Online Group reported an
operating loss of $0.7 compared to breakeven results in the prior year quarter.
The current year quarter included higher planned investments related to the
group's continued growth and development.
Corporate Administration and Promotion
Corporate administration and promotion expense of $4.6 for the quarter
ended March 31, 1998 decreased $0.6, or 11%, compared to the prior year quarter
primarily due to performance-related variable compensation expense and higher
investment spending on corporate marketing in the prior year quarter. Partially
offsetting the above were higher executive compensation expenses in the current
year quarter due in part to filling the chief financial officer position in May
1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had $1.0 in cash and cash equivalents and
$14.5 in short-term borrowings, compared to $0.9 in cash and cash equivalents
and $10.0 in short-term borrowings at December 31, 1997. The Company expects to
meet its short- and long-term cash requirements through its revolving credit
agreement and cash generated from operations.
Cash Flows From Operating Activities
Net cash used for operating activities was $3.9 for the quarter ended March
31, 1998 compared to net cash provided of $8.4 for the prior year quarter. Cash
used for operating assets and liabilities was $3.1 in the current year quarter
compared to cash provided of $7.4 in the prior year quarter. Cash used for
accounts payable increased $5.7 in the current year quarter primarily due to the
timing of payments for the Critics' Choice Video catalog and Entertainment Group
profit participation. Additionally, cash used for accrued employee costs was
$1.0 in the current year quarter compared to cash provided of $2.4 in the prior
year quarter largely due to the Company's change in fiscal year end. The Company
invested $6.5 in Company-produced and licensed entertainment programming during
the current year quarter compared to $7.4 in the prior year quarter, and expects
to invest approximately $24.8 in such programming during the remainder of
calendar year 1998.
13
<PAGE>
Cash Flows From Investing Activities
Net cash used for investing activities was $0.7 for the quarter ended March
31, 1998 compared to $0.5 in the prior year quarter.
Cash Flows From Financing Activities
Net cash provided by financing activities was $4.6 for the quarter ended
March 31, 1998 compared to net cash used of $6.9 for the prior year quarter.
This increase was principally due to a $4.5 increase in the level of short-term
borrowings under the Company's revolving line of credit in the current year
quarter to finance ongoing operations, compared to a $7.0 decrease in the level
of short-term borrowings in the prior year quarter.
Income Taxes
Based on current tax law, the Company will need to generate approximately
$41.2 of future taxable income prior to the expiration of the Company's NOLs for
full realization of the $14.0 net deferred tax asset recorded at December 31,
1997. At December 31, 1997, the Company had NOLs of $23.2 for tax purposes, with
$1.1 expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008, $16.4
expiring in 2009 and $2.5 expiring in 2012.
Management believes that it is more likely than not that the required
amount of such taxable income will be generated in years subsequent to December
31, 1997 and prior to the expiration of the Company's NOLs to realize the $14.0
net deferred tax asset at December 31, 1997. The Company's net deferred tax
asset declined to $13.8 at March 31, 1998 based on taxable income for the
current quarter and management's projection of calendar year 1998 taxable
income. Following is a summary of the bases for management's belief that a
valuation allowance of $16.5 at December 31, 1997 is adequate, and that it is
more likely than not that the net deferred tax asset of $14.0 at December 31,
1997 will be realized:
. In establishing the net deferred tax asset, management reviewed the
components of the Company's NOLs and determined that they primarily
resulted from several nonrecurring events, which were not indicative of the
Company's ability to generate future earnings.
. The Company continues to generate meaningful earnings, particularly from
the Entertainment Group, and the Company's substantial investments in this
group are anticipated to lead to increased earnings in future years.
. The Company has opportunities to accelerate taxable income into the NOL
carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and amortization
methods for tax purposes and the sale-leaseback of certain property that
would generate taxable income in future years.
Other
In January 1993, the Company received a General Notice from the EPA as a
PRP in connection with a site identified as the Southern Lakes Trap & Skeet
Club, apparently located at 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 year 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 $0.6 at March
31, 1998, to cover the eventual cost of its anticipated share (based on an
agreement with one of the other PRPs) of any agreed upon remediation.
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 (the "Illinois Circuit Court"). 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 had advised BrandsElite that it had
determined not to proceed with the transaction and disputes strongly
BrandsElite's allegation that as a result of the
14
<PAGE>
Company's breach, BrandsElite has suffered millions of dollars of damages in
future lost profits and diminished value of its stock. BrandsElite also seeks to
recoup out-of-pocket expenses, fees and costs incurred in bringing the action.
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 in discovery and
is likely to go to trial during calendar year 1998. On October 22, 1997, the
Company filed a motion for partial summary judgment challenging BrandsElite's
claims for future lost profits and stock market valuation damages. On March 4,
1998, the Illinois Circuit Court granted the portion of the Company's motion
relating to stock market valuation damages but denied the portion of the motion
relating to future lost profits. BrandsElite's expert reports on damages assert
future lost profits damages ranging from $3.5 to $12.5.
In response to the Year 2000 issue, the Company has begun to identify,
evaluate and implement changes to its existing computerized business systems.
The Company is addressing the issue through a combination of modifications to
existing programs and conversions to Year 2000 compliant software. In addition,
the Company is communicating with its vendors and other service providers to
ensure that their products and business systems will be Year 2000 compliant. If
modifications and conversions by the Company and those it conducts business with
were not made in a timely manner, the Year 2000 issue could have a material
adverse affect on the Company's business, financial condition, and results of
operations. Certain key systems of the Company have already been identified as
Year 2000 compliant, including financial applications and Playboy Online
operations. Although the Company is still quantifying the impact, the early
estimate of the total costs associated with the required modifications and
conversions are expected to be approximately $2.0, of which approximately $1.0
is expected to be expensed in calendar year 1998. These costs are being expensed
as incurred.
Forward-Looking Statements
This Form 10-Q Report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. Such forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The following are some of the important
factors that could cause actual results or outcomes to differ materially from
those discussed in the forward-looking statements: (1) government actions or
initiatives, including (a) attempts to limit or otherwise regulate the sale of
adult-oriented materials, including print, video and online materials or
businesses such as casino gaming, (b) regulation of the advertisement of tobacco
products, or (c) substantive changes in postal regulations or rates, (2) further
increases in paper prices, (3) changes in distribution technology and/or
unforeseen delays in the implementation of such technology by the cable and
satellite industries that might affect the Company's plans and assumptions
regarding carriage of its program services, (4) increased competition for
advertisers from other publications and media or any significant decrease in
spending by advertisers generally or with respect to the adult male market, (5)
increased competition for transponders and channel space, and any decline in the
Company's access to, and acceptance by, cable and DTH systems, and (6) the
effects of the consolidation taking place nationally in the single-copy magazine
distribution system.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required as the Company's market capitalization was less than $2.5
billion as of January 28, 1997.
15
<PAGE>
LEGAL PROCEEDINGS
In February 1996, Congress passed the Telecommunications Act, and President
Clinton signed it into law. Certain provisions of the Telecommunications Act are
directed exclusively at cable programming in general and adult cable programming
in particular. In some cable systems, audio or momentary bits of video of
premium or pay-per-view channels may accidentally become available to
nonsubscribing cable customers. This is called "bleeding." The practical effect
of Section 505 is to require many existing cable systems to employ additional
blocking technology in every household in every cable system that offers adult
programming, 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. Based
on the limited information received, the Company believes that most of the cable
operators that were not in compliance with Section 505 have complied by
restricting the hours of transmission.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the Delaware District Court challenging Section 505 on constitutional
grounds. The suit names as defendants The United States of America, The United
States Department of Justice, Attorney General Janet Reno and the FCC. On March
7, 1996, the Company was granted a Temporary Restraining Order ("TRO") staying
the implementation and enforcement of Section 505. In granting the TRO, the
Delaware District Court found that the Company had demonstrated it was likely to
succeed on the merits of its claim that Section 505 is unconstitutional. On
November 8, 1996, eight months after the TRO was granted, a three-judge panel in
the Delaware District Court denied the Company's request for preliminary
injunction against enforcement of Section 505 and, in so denying, found that the
Company was not likely to succeed on the merits of its claim. The Company
appealed the Delaware District Court's decision to the United States Supreme
Court (the "Supreme Court") and enforcement of Section 505 was stayed pending
that appeal. On March 24, 1997, without opinion, the Supreme Court summarily
affirmed the Delaware District Court's denial of the Company's request for a
preliminary injunction. On July 22, 1997, the Company filed a motion for summary
judgment on the ground that Section 505 is unconstitutionally vague based on the
Supreme Court's decision on June 26, 1997 that certain provisions of the
Telecommunications Act regulating speech on the Internet were invalid for
numerous reasons, including vagueness. On October 31, 1997, the Delaware
District Court denied the motion on the grounds that further discovery in the
case was necessary to assist it in resolving the issues posed in the motion.
Management believes that the Company's revenues attributable to its
domestic pay television cable services will continue to be materially adversely
affected as a result of enforcement of Section 505, which commenced May 18,
1997, due to reduced buy rates from the systems that roll back carriage to a
10:00 p.m. start time, subscriber declines and reduced carriage from cable
operators due to aggressive competition for carriage from all program suppliers.
The Company has estimated that the Entertainment Group's calendar year 1998
revenues will be reduced by approximately $3.5 million, and approximately $25
million (at present value at 6%) over the next ten years, due to Section 505.
These amounts do not take into account the loss of revenues due to the slowing
of access to new homes and of upgrading of old homes from ten to 24 hours. The
Company is pursuing in the Delaware District Court its case challenging on
constitutional grounds the validity of Section 505 and is seeking a permanent
injunction against the enforcement of Section 505. The Company's full case on
the merits was heard by the Delaware District Court in March 1998. A decision is
expected by summer 1998. There can be no assurance that the Delaware District
Court will grant such an injunction.
On December 18, 1995, BrandsElite filed a complaint against the Company in
the Illinois Circuit Court. 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 had
advised BrandsElite that it had determined not to proceed with the transaction
and 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 and diminished value of its stock. BrandsElite also seeks to recoup out-
of-pocket expenses, fees and costs incurred in bringing the action. 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 in discovery and is likely to go
to trial during calendar year 1998. On October 22, 1997, the Company filed a
motion for partial summary judgment challenging BrandsElite's claims for future
lost profits and stock market valuation damages. On March 4, 1998, the Illinois
Circuit Court granted the portion of the Company's motion relating to stock
market valuation damages but denied the portion of the motion relating to future
lost profits. BrandsElite's expert reports on damages assert future lost profits
damages ranging from $3.5 million to $12.5 million.
16
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3 Composite bylaws of the Company (as amended)
#10.1 DBS License Agreement dated April 1, 1997 between Playboy
Entertainment Group, Inc. and PrimeStar Partners, L.P. regarding the
satellite distribution of Playboy TV or any other service mark that
retains a Playboy Mark
10.2 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Amendment to June 1, 1979 lease dated January 12, 1998
10.3 Chicago Office Lease Documents
a Fifth Amendment to April 7, 1988 lease dated March 19, 1998
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
During the quarter ended March 31, 1998, the Company filed a Current Report
on Form 8-K dated February 4, 1998 under Item 5 of such report. The purpose
of this report was for the Company and Spice to announce an agreement
whereby the Company will acquire all of the outstanding shares of Spice,
subject to the satisfactory completion of various items.
17
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date May 12, 1998 By s/ Linda Havard
--------------- ------------------------
Linda Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
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EXHIBIT 3
PLAYBOY ENTERPRISES, INC.
-o-O-o-
COMPOSITE
BYLAWS
(as amended)
-o-O-o-
ARTICLE I
OFFICES
Section 1. The principal office shall be in the City of Wilmington, County
of New Castle, State of Delaware.
Section 2. The Corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Meetings of the stockholders for the election of directors
shall be held at such place, either within or without the State of Delaware, as
may be fixed from time to time, by the Board of Directors, and as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Annual meetings of stockholders shall be held on a date and
time designated by the Board of Directors consistent with the Delaware General
Corporation Law, at which meetings they shall elect a Board of Directors by the
vote set forth in Section 8 of this Article II, and transact such other business
as may properly be brought before the meeting.
<PAGE>
Section 3. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten days before every election of
directors, a complete list of the stockholders entitled to vote at said
election, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
election, either at a place within the city, town or village where the election
is to be held and which place shall be specified in the notice of the meeting,
or, if not specified, at the place where said meeting is to be held, and the
list shall be produced and kept at the time and place of election during the
whole time thereof, and subject to the inspection of any stockholder, for any
purpose germane to the meeting, who may be present.
Section 4. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called by the Chief Executive Officer and shall be called
by the Chief Executive Officer or Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of stockholders
owning a majority in amount of the entire capital stock of the Corporation
issued and outstanding and entitled to vote. Such request shall state the
purpose or purposes of the proposed meeting.
Section 5. Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given, which
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at any such meeting not less than ten nor more than sixty days before the
date of the meeting. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at his address as it
appears on the records of the Corporation.
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Section 6. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 7. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 8. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
except for the election of directors of the Corporation, unless the question is
one upon which by express provision of the statutes or of the Certificate of
Incorporation, a different vote is required in which case such express provision
shall govern and control the decision of such question. Each nominee for
director, in order to be elected at a meeting, must receive the vote of the
holders of a majority of the stock having power to vote in the election of the
Board of Directors and present in person or represented by proxy at such
meeting.
Section 9. Each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of capital stock
having voting power held by such stockholder, but no proxy shall be valid unless
it provides that it may only be voted on at a specific meeting of stockholders
or any adjournment or adjournments thereof; except where the transfer
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<PAGE>
books of the Corporation have been closed or a date has been fixed as a record
date for the determination of its stockholders entitled to vote, no share of
stock shall be voted on at any election for directors which has been transferred
on the books of the Corporation within twenty days next preceding such election
for directors.
Section 10. Unless otherwise provided in the Certificate of Incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the Corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted and shall be delivered to the Corporation by delivery to
its registered office in Delaware, its principal place of business, or to an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole Board
shall be such number, not less than five nor more than ten, as may be determined
from time to time by resolution duly adopted by the Board of Directors. The
directors shall be elected at the annual meeting of the
4
<PAGE>
stockholders, except as provided in Section 2. of this Article, and each
director elected shall hold office until his successor is elected and qualified.
Directors need not be stockholders.
Section 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, and the directors so
chosen shall hold office until the next annual election and until their
successors are duly elected and shall qualify, unless sooner displaced.
Section 3. The business of the Corporation shall be managed by its Board
of Directors which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
Section 4. Unless otherwise provided by the Certificate of Incorporation
or by law, any director or the entire Board of Directors may be removed, with or
without cause, by the holders of a majority of shares then entitled to vote at
an election of directors.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 6. The first meeting of each newly elected Board of Directors
shall be held without other notice than this Bylaw, immediately after, and at
the same place, as the annual meeting of stockholders.
Section 7. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 8. Special meetings of the Board may be called by the Chief
Executive Officer on twenty-four hours' notice to each director, either
personally, by telegram or by facsimile, or on
5
<PAGE>
five days' notice by mail; special meetings shall be called by the Chief
Executive Officer or Secretary in like manner and on like notice on the written
request of two directors.
Section 9. At all meetings of the Board, a majority of the number of
directors who have been elected and are then serving in such capacity, but in no
event less than one-third of the total number of authorized directors, shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation.
If a quorum shall not be present at any meeting of the Board of Directors
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 10. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if prior to such action a written consent thereto is signed
by all members of the Board or of such committee as the case may be, and such
written consent is filed with the minutes of proceeding of the Board or
committee.
Section 11. Unless otherwise restricted by the Certificate of
Incorporation or these Bylaws, members of the Board of Directors or of any
committee thereof may participate in a meeting by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
6
<PAGE>
COMMITTEES OF DIRECTORS
Section 12. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of two or more of the directors of the Corporation, which, to the extent
provided in the resolution and permitted by law, shall have and may exercise the
powers of the Board of Directors in the management of the business and affairs
of the Corporation and may authorize the seal of the Corporation to be affixed
to all papers which may require it. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 13. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 14. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid such
compensation as the Board may by resolution determine, including without
limitation a fixed sum for attendance at each meeting of the Board of Directors
and a stated salary as director. No such payment shall preclude any director
from serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed such
compensation for attending committee meetings as the Board may by resolution
determine. (Amended 02/22/90)
ARTICLE IV
NOTICES
Section 1. Notice to directors and stockholders shall be in writing and
delivered personally or mailed to the directors or stockholders at their
addresses appearing on the books of the
7
<PAGE>
Corporation. Notice by mail shall be deemed to be given at the time when the
same shall be mailed. Notice to directors may also be given by telegram or
facsimile.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by the Board of
Directors and shall be the Chairman Emeritus/Editor in Chief, the Chairman of
the Board, the Chief Executive Officer, a Vice President, a Secretary and a
Treasurer. The Board of Directors may also choose additional Vice Presidents,
and one or more Assistant Secretaries and Assistant Treasurers. Two or more
offices may be held by the same person.
Section 2. The Board of Directors at its first meeting after each annual
meeting of stockholders shall choose the Chairman Emeritus/Editor in Chief, the
Chairman of the Board, Chief Executive Officer, a Vice President, a Secretary
and a Treasurer, and may choose one or more additional Vice Presidents and one
or more Assistant Secretaries and Assistant Treasurers.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board of Directors.
Section 4. The Board of Directors shall be responsible for establishing
the compensation and employee benefit policies and programs of the Corporation.
8
<PAGE>
Section 5. The officers of the Corporation shall hold office until their
successors are chosen and qualified. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
CHAIRMAN EMERITUS/EDITOR IN CHIEF
Section 6. The Chairman Emeritus/Editor in Chief shall direct senior
editorial and video production personnel on creative matters and editorial
policy. He will consult with senior management of the Corporation and advise
regarding major strategic business decisions and direction. He shall be entitled
to attend all meetings of the Board whether or not he shall be a director of the
Corporation. He shall be actively involved in promoting the Corporation and
its products and shall be available for publicity, promotional events and
charitable affairs sponsored by the Corporation.
THE CHIEF EXECUTIVE OFFICER
Section 7. The Chief Executive Officer shall be the Chief Executive
Officer of the Corporation, shall have general and active management of the
business and officers of the Corporation, shall see that all orders and
resolutions of the Board of Directors are carried into effect and shall have the
general powers and duties of management usually vested in the chief executive
officer of corporations. The Chief Executive Officer shall be a director of the
Corporation, shall be Chairman of the Board of Directors and as such shall
preside at all meetings of the Board of Directors and stockholders.
THE VICE PRESIDENTS
Section 8. In the election of officers, the Board of Directors may
designate one of the Vice Presidents as the Executive Vice President and one or
more of the Vice Presidents as Senior Vice Presidents. In the absence or
inability or refusal to act of the Chief Executive Officer, the duties
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of such office shall be performed by one of the Vice Presidents, acting singly
in the following order in the absence or inability or refusal to act of their
respective designated predecessors:
(a) The Executive Vice President, if any;
(b) The Senior Vice Presidents, if any, in the order designated by the
Board of Directors or, in the absence of any designation, then in the order
of their election;
(c) All other Vice Presidents in the order designated by the Board of
Directors or, in the absence of any designation, then in the order of their
election.
Each Vice President when performing the duties of the Chief Executive
Officer shall have all the powers of and be subject to all the restrictions upon
the Chief Executive Officer. Each Vice President may sign, with the Secretary
or an Assistant Secretary, certificates for shares of the Corporation and shall
perform such other duties as may be assigned to him from time to time by the
Chief Executive Officer or by the Board of Directors.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 9. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for the purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
Chief Executive Officer, under whose supervision he shall be. He shall have
custody of the corporate seal of the Corporation and he, or an Assistant
Secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such Assistant Secretary. The Board of
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Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his signature.
Section 10. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 11. The Treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all monies
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors.
Section 12. He shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Chief Executive Officer and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all his transactions as Treasurer and of the financial condition
of the Corporation.
Section 13. If required by the Board of Directors, he shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 14. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors,
shall, in the absence or disability of the
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Treasurer, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the Corporation shall be entitled to
have a certificate, signed by, or in the name of the Corporation by, the
Chairman of the Board of Directors, the Chief Executive Officer or Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary of the Corporation, certifying the number of shares
represented by such certificate owned by him in the Corporation.
Section 2. The signatures on any stock certificate of any such Chairman
of the Board of Directors, Chief Executive Officer, Vice President, Treasurer,
Assistant Treasurer, Secretary or Assistant Secretary may be facsimile. In
case any officer or officers who have signed, or whose facsimile signature
or signatures have been used on, any such certificate or certificates shall
cease to be such officer or officers of the Corporation, whether because of
death, resignation or otherwise, before such certificate or certificates have
been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation.
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate
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or certificates, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
Section 4. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
RECORD DATES
Section 5. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of the stockholders, or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record date
which shall be not more than sixty nor less than ten days before the date of any
such meeting, which shall be not earlier than, nor more than ten days after, the
date of adoption of any resolution fixing a record date with respect to a
written consent, and which shall not be more than sixty days prior to any
dividend payment or other such action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting. (Amended May 21,
1990)
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REGISTERED STOCKHOLDERS
Section 6. The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the Corporation, subject
to the provisions of the Certificate of Incorporation, if any, may be declared
by the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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CHECKS
Section 3. All checks or demands for money and notes of the Corporation
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the Corporation shall be fixed by resolution
of the Board of Directors.
SEAL
Section 5. Amended August 31, 1964 by change of corporate name from HMH
CORPORATION to HMH PUBLISHING CO., INC. Further amended February 1, 1971 - The
corporate seal shall be circular in form with the name "PLAYBOY ENTERPRISES,
INC." at top, "Delaware" at the bottom and the words "Corporate Seal" in the
center. Pursuant to the General Corporation Law of Delaware, the Corporation may
use such seal by causing it or a facsimile thereof to be impressed or affixed,
or reproduced, or otherwise, and which corporate seal may be altered at
pleasure.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.
(a) Right to Indemnification. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director
or officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint
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venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the Corporation
to provide broader indemnification rights than said law permitted the
Corporation to provide prior to such amendment) against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that except
as provided in Paragraph (b) hereof, the Corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation. The
right to indemnification conferred in this section shall be a contract
right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that if the Delaware General Corporation
Law requires, the payment of such expenses incurred by a director or
officer in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such person while a
director or officer including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be
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made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not
entitled to be indemnified under this Section or otherwise.
(b) Right of Claimant to Bring Suit. If a claim under Paragraph (a)
of this Section is not paid in full by the Corporation within ninety days
after a written claim has been received by the Corporation, the claimant
may at any time thereafter bring suit against the Corporation to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that
the claimant has not met the standards of conduct which make it permissible
under the Delaware General Corporation Law for the Corporation to indemnify
the claimant for the amount claimed, but the burden of proving such defense
shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action
or create a presumption that the claimant has not met the applicable
standard of conduct.
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(c) Non-Exclusivity of Rights. The right to indemnification and
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this section shall not be exclusive of any
other right which any person may have or hereafter acquired under any
statute, provision of the Certificate of Incorporation, Bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or
not the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation Law.
ARTICLE VIII
AMENDMENTS
Section 1. These Bylaws may be altered or repealed at any regular meeting
of the stockholders or of the Board of Directors or at any special meeting of
the stockholders or of the Board of Directors if notice of such alteration or
repeal be contained in the notice of such special meeting.
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EXHIBIT 10.1
PLAYBOY TELEVISION
DBS LICENSE AGREEMENT
This Agreement made as of April 1, 1997 between PLAYBOY ENTERTAINMENT
GROUP, INC., ("Playboy"), a Delaware corporation, located at 9242 Beverly
Boulevard, Beverly Hills, California 90210 and PRIMESTAR(R) PARTNERS, L.P., a
Delaware limited partnership ("Affiliate"), located at Three Bala Plaza West,
Suite 700, Bala Cynwyd, Pennsylvania 19004, regarding the carriage of the
twenty-four (24) hour adult-oriented television programming service to be
provided to Affiliate hereunder, whether such service is identified as Playboy
TV or by any other service mark that retains a Playboy Mark, as designated by
Playboy (the "Service").
WHEREAS, Affiliate has established a medium power satellite television
direct broadcast service ("DBS") in North America; and
WHEREAS, Affiliate desires to distribute the Service throughout the
Territory (as hereinbelow defined);
NOW, THEREFORE, it is mutually agreed as follows:
1. RIGHTS:
Playboy hereby grants to Affiliate, and Affiliate hereby accepts the non-
exclusive right, and the obligation, to (1) receive the signal of the Service,
(2) digitize, compress, or modify the signal of the Service as set forth in
Paragraph 5 hereof, and to encode/encrypt the signal so that neither video nor
audio are intelligibly received by a non-authorized viewer, and re-uplink and
transmit the Service twenty-four (24) hours per day (or the maximum hours per
day that Playboy offers the Service; referred to as the "Maximum Hours") to the
PrimeStar(R) Satellite for transmission and distribution to K- or Ku-band
satellite reception dishes for reception the Maximum Hours per day by Satellite
Subscribers in the Territory, (3) authorize Affiliate's Distributors to resell
the Service for reception the Maximum Hours per day to Satellite Subscribers in
the Territory, except that Subdistribution (as defined in Paragraph 6) shall be
prohibited, and (4) authorize the reception of the Service the Maximum Hours per
day in the fifty (50) United States and the territories, possessions, and
commonwealths of the United States, and the District of Columbia (the
"Territory") by Satellite Subscribers who receive the signal of the Service by
means of equipment capable of receiving audio/visual/data signals and/or
programming directly from the PrimeStar(R) Satellite.
2. DEFINITIONS:
a. PrimeStar(R) Satellite: The GE2 satellite or its medium power K-
or Ku-band respective successors.
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b. Billing Period: Any calendar month during which the Service is
offered to Affiliate's Satellite Subscribers and/or Demand Purchasers. Only the
initial Billing Period may be a partial month.
c. Demand Purchase: Each individual purchase of the Service from the
Affiliate by a Satellite Subscriber or Office Subscriber for a block of time not
less than one (1) hour and not to exceed one (1) complete program day of the
Service, sometimes herein referred to as "Pay-Per-View." A Satellite Subscriber
who purchases the Service in such manner shall be known as a "Demand Purchaser."
A Demand Purchaser in a Hotel shall be known as a "Hotel Demand Purchaser," and
a Demand Purchaser who is an Office Subscriber shall be known as an "Office
Demand Purchaser."
d. Distributor: Any entity authorized by Affiliate to resell the
Service for reception the Maximum Hours per day to Satellite Subscribers, but
shall not include any entity that retransmits the Service.
e. Marks: The service marks, trademarks, trade names, and logos
owned by Playboy or its parent corporation, Playboy Enterprises, Inc.,
including without limitation "PLAYBOY," "PLAYMATE," "PLAYBOY TELEVISION,"
"PLAYBOY TV," and the RABBIT HEAD DESIGN, all of which are being licensed for
use only in connection with the distribution and the promotion, marketing, and
sale of the Service.
f. Satellite Subscriber: (i) Any single family dwelling (whether a
detached single family dwelling or a multiple dwelling unit) which is receiving
any level of programming services from Affiliate, including, but not limited to,
each such single family dwelling in apartment houses, condominiums, cooperatives
and townhomes; and (ii) each individual sleeping room receiving any level of
programming services from Affiliate in a hotel or motel (a hotel or motel is
referred to as a "Hotel").
g. Guest Room: Each sleeping room in a Hotel (other than a public or
common area) that contains a television set and that is available for nightly
rental by individual members of the public.
h. Office Subscriber: Any private, commercial office space that
receives any level of programming services from Affiliate for private, non-
commercial viewing on a single television monitor in a single office space.
i. Service Subscriber: Any Satellite Subscriber or Office Subscriber
who by an affirmative decision elects to purchase the Service from Affiliate or
Distributor on a monthly or longer period (i.e. quarterly, annually, etc.)
subscription basis (but not on a non-discretionary bulk basis, packaged with
other services). A Service Subscriber in a Hotel shall be known as a "Hotel
Service Subscriber." Service Subscribers who are Office Subscribers shall be
known as "Office Service Subscribers." For Office Subscribers, each television
monitor in a commercial office receiving the Service shall be deemed to be a
separate Office Service Subscriber, and no such television monitor may
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be placed in any public or group viewing area, such as a conference or reception
room. Hotel Service Subscribers and Office Service Subscribers may be treated
differently or separately by Playboy from other Service Subscribers, such as for
payment or reporting purposes, as provided in this Agreement.
j. Special Events: Specific programs or blocks of programs intended
for Pay-Per-View distribution at a higher than usual retail rate and designated
by Playboy as such in advance, in its sole discretion. Notwithstanding anything
contained in this Agreement to the contrary, Affiliate shall have the right not
to distribute any such Special Events.
k. Gross Retail Revenue: The full retail sales price of a Demand
Purchase, net of any sales tax. For purposes of the Service Charges, Playboy
will not honor or recognize any reduction by Affiliate in the full retail sales
price of a Demand Purchase through the use of promotional discounts, rebates,
credits, coupons or other reductions that relate to any product, service or
other matter other than the Service, without Playboy's prior written approval,
not to be unreasonably withheld. Thus, for example, in calculating the Service
Charges, Playboy need not take into account any offer by Affiliate of any rebate
or discount from the full retail sales price if the consumer purchases some
other product or service, without such prior written approval of Playboy.
3. TERM: The initial term of this Agreement shall commence on April 1,
1997 and end on ***; provided, however, that this Agreement shall be deemed
automatically extended for successive one (1)-year periods upon the expiration
of the initial or any succeeding term.*** Either party shall have the right
hereunder to terminate this Agreement, effective at the end of the then-current
term, without liability to the other party, on not less than ninety (90) days
prior written notice prior to the expiration of the initial or any succeeding
term.
4. CONTENT OF THE SERVICE
a. Playboy shall, in its sole discretion, include such programming
in the Service as it deems appropriate from time to time to deliver an adult-
oriented pay television service. Subject to the provisions of Paragraph 5,
Affiliate shall have no right to alter, substitute, delete or otherwise modify
the Service as provided by Playboy. Playboy shall have the exclusive right to
extend, reduce, or otherwise change the hours during which the Service is being
delivered to Affiliate.***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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During the hours of the day, if any, that Playboy is not transmitting the
Service, Affiliate may carry any other programming that Affiliate desires in its
sole and absolute discretion, provided that Affiliate notifies Playboy of such
carriage of other programming and that Affiliate may not in any way imply that
non-Service programming is a part of or is connected in any way with the
Service. Affiliate shall not exhibit or transmit any Service programming at any
time other than as scheduled by Playboy, without express written permission by
Playboy. Affiliate hereby acknowledges that from time to time Playboy may modify
the specific programs and programming schedule (as opposed to materially
changing the adult nature of the Service) to be supplied as part of the Service
without prior notice, and Playboy shall not be held liable in any way by
Affiliate for such changes.
b. Playboy shall, for each month of the Term, send one (1) copy of
its monthly program schedule as soon as it is available to Affiliate, ATTN:
Director, Pay-Per-View.*** Affiliate acknowledges that the Service includes (or,
in the future, may include) 800, 888 and 900 telephone number spots and "Playboy
Home Shopping"*** Affiliate also acknowledges that once per week Playboy
transmits an up-to-sixty (60)-minute block of promotional programming intended
for its affiliates.***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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c. Playboy shall use commercially reasonable efforts to provide
Affiliate with a "clean" entry point to the Service at 11:00 p.m. Eastern time
each day, provided, however, that Playboy's occasional failure to provide such
entry due to live events or other programming shall not be considered a breach
of this Agreement.
d. ***
5. DELIVERY AND DISTRIBUTION OF THE SERVICE:
a. During the Term, Playboy shall, at its own expense, transmit an
analog or digital signal of the Service to Affiliate's uplink facility by
transmitting such signal via a North American satellite commonly used for
transmission of cable television programming to receive sites in the Continental
United States, and shall, at its own expense fully encode the satellite signal
of the Service utilizing scrambling technology commonly used in the domestic
cable television industry. Playboy's obligations to transmit the signal of the
Service and to encode such signal shall be subject to temporary lapses in
connection with service or maintenance, equipment malfunction, or force
majeure or other causes beyond Playboy's sole control. The normal video and
audio signal of the Service shall be of a technical quality substantially
similar to the technical quality of the video and audio signals delivered by
other national cable television programming services in the Territory.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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b. Affiliate shall, at its own expense, obtain and install such earth
station receivers and other equipment, including a complete set of duplicate,
back-up equipment for use in the event of a malfunction in the primary
equipment, as shall be necessary to enable Affiliate to receive, descramble,
digitize, compress, scramble, transmit and deliver the signals comprising the
Service to Satellite Subscribers via the PrimeStar(R) Satellite. The signals,
including authorization data delivered to Service Subscribers and/or Demand
Purchasers shall be securely scrambled by Affiliate using then state-of-the-art
technology.
c. In the event Playboy provides an eastern and western (or other time
zone) feed, with exactly the same programming, but only time shifted, of the
signal of the Service, Affiliate shall have the right to elect, in its sole and
absolute discretion, to exhibit either the eastern or western (or other time
zone) feed of such signal, but not for purposes of selecting particular items of
programming between feeds.
d. Playboy hereby grants Affiliate the right, and Affiliate agrees, to
receive the signal of the Service, to digitize, compress, modify, or otherwise
technologically manipulate the signal, and to transmit the signal as so altered
(the "Altered Signal") to the PrimeStar(R) Satellite for redistribution to
terrestrial reception sites capable of receiving and utilizing the Altered
Signal as set forth in Paragraph 1 of this Agreement, provided that no such
alteration, transmission, redistribution, reception, or other use will cause an
adverse change in a viewer's perception of the video or audio presentation of
the Service. If Playboy changes the signal of the Service in such a way as to
technically or technologically defeat or otherwise materially interfere with
Affiliate's rights under this subparagraph 5.d., such as materially interfering
with or otherwise preventing reception, digitization, compression, modification,
authorized replacement, conversion, utilization or manipulation of the signal of
the Service by Affiliate pursuant to this subparagraph 5.d., then following
such change in the signal of the service by Playboy, Affiliate shall have the
right immediately to suspend carriage of the Service, provided that Affiliate
notifies Playboy in writing of such suspension and the reasons therefor and
promptly following Playboy's remedy of the changes in the signal giving rise to
such suspension right, if any, Affiliate recommences its carriage of the signal
of the Service in accordance of this Agreement.
e. Affiliate retains and reserves any and all rights in and to all
signal distribution capacity (as opposed to the signal of the Service) contained
within the bandwidth of the Service as received by Affiliate, including, without
limitation, the vertical blanking interval, audio subcarriers and any other
portions of the bandwidth of the signal of the Service. Affiliate shall have no
obligation to digitize, compress, re-uplink, or otherwise transmit any of the
signal distribution capacity contained within the bandwidth of the Service as
received by Affiliate, including, without limitation, the vertical blanking
interval, audio channels, and any other portions of the bandwidth that may be
created or made usable as a result of the conversion of the signal of the
Service to a compressed, digital, or other non-analog format, except the
principal audio carriage frequency (including closed captioning information) and
the principal video carriage frequency of the Service. Nothing herein shall
preclude Affiliate from exercising and exploiting such rights by any means
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and in any locations freely and without restriction, except if it competes with,
disparages or lessens the value of the Service or Playboy's business; and
provided that any such use by Affiliate shall not materially degrade, or
otherwise materially interfere with, the picture quality of the Service or the
audio portion of the Service signal that comprises the principal audio carriage
frequency of the Service (including closed captioning information).
f. Distribution or exhibition of the Service in a Hotel in any area
other than a Guest Room, whether or not occupied, or other than to a Hotel
Demand Purchaser or Hotel Service Subscriber who by an affirmative decision
elects to purchase the Service, is expressly prohibited. Additionally, any
charge for admission to a Guest Room or any cover charge or minimum other than
the regular nightly charge for the use of such Guest Room, or the specific
charge for the right to turn on the Service as a Demand Purchase or Service
subscription of one (1) month or longer to the same individual Hotel guest for
the duration of the subscription in such Guest Room, is expressly prohibited.
Exhibition of the Service in any Guest Room contained in a Hotel for which
Playboy does not receive the minimum payment pursuant to Paragraph 8 below is
expressly prohibited.
g. It shall be deemed unauthorized exhibition to allow the Service to
be exhibited to the occupants of a multiple unit dwelling, commercial office
space or Hotel on a free-to-the-viewer or otherwise no-charge basis without
charging a distinct monthly or per-viewing fee for exhibition of the Service,
except as expressly preapproved by Playboy in writing as part of an authorized
"free preview" promotion. It also shall be deemed unauthorized exhibition to
distribute the Service on a bulk basis where individual Service Subscribers or
Demand Purchasers are not each required to make an affirmative decision to
receive the Service. In the event Affiliate or a Distributor breaches any
provision of this subparagraph, Playboy may treat such breach as a material
breach of the Agreement. Furthermore, in the event of any such breach, Affiliate
shall be liable to Playboy for Service Charges for each dwelling unit, office
space and Guest Room receiving the Service as though each such dwelling unit,
office space and Guest Room were an authorized Service Subscriber for each
Billing Period during which the Service was exhibited to the occupants of such
multiple unit dwelling, commercial office space or Hotel.
6. SUBDISTRIBUTION PROHIBITED:
a. Except as explicitly provided for in this Paragraph 6,
Subdistribution of the Service is expressly prohibited. It shall be deemed
"Subdistribution" to transmit the signal or Altered Signal of the Service to a
"Cable Television" system operator, a "C-Band satellite operator," or an
operator of "broadcast television," "low-powered television," "a multichannel
multipoint distribution system," or "a telephone company," as such terms are now
or hereafter generally defined in the pay television industry, or any other
entity for the rebroadcasting or retransmission of the Service or its
programming to any customer or end user of any such entity. As used herein,
"Cable Television" shall refer to programming delivered by any form of cable
technology, including, without limitation, coaxial and fiber-optic and any form
of microwave technology. Any such authorization
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requests received by Affiliate shall be forwarded to Playboy, or another party
designated by Playboy. As an exception to the prohibition on Subdistribution
provided in this subparagraph 6.a., Affiliate may transmit the signal or Altered
Signal of the Service to "Alternative Distribution Facilities" that have been
authorized by Playboy to receive such signal from Affiliate, on the condition
that each Alternative Distribution Facility that receives such signal from
Affiliate shall have a written agreement with Playboy authorizing such receipt
and utilization of such signal from Affiliate and authorizing the exhibition and
distribution of the Service in accordance with the provisions of such written
agreement with Playboy. For purposes of this subparagraph, the term "Alternative
Distribution Facilities" shall mean satellite master antennae television
systems, multipoint distribution systems, multichannel multipoint distribution
systems, Cable Television systems and other terrestrial distribution modalities
that have been authorized by Affiliate to utilize the signal of the Service as
technically modified or reconfigured by Affiliate for resale and retransmission
to the subscribers of the particular Alternative Distribution Facility and for
which Affiliate may receive a service charge (pursuant to terms and conditions,
including service charges, determined by Affiliate). Affiliate shall not
authorize any Alternative Distribution Facility to utilize or receive the signal
of the Service from Affiliate unless and until such Alternative Distribution
Facility first enters into a written agreement with Playboy governing such
Alternative Distribution Facility's exhibition and distribution of the Service.
Neither any Alternative Distribution Facility so authorized by Affiliate and
Playboy nor any of such Alternative Distribution Facility's respective
subscribers or any revenue derived from them shall be counted as Satellite
Subscribers or taken into account in calculating GRPS under this Agreement for
purposes of the payment provisions of this Agreement. It shall also be deemed
prohibited Subdistribution to enter into an agreement to authorize receipt of
the Service by any commercial establishment (other than by an Office Subscriber
in a private office) including, without limitation, restaurants and bars,
subject to the provisions of Paragraphs 2.h. and 7.
b. It shall not be deemed Subdistribution for Distributor to enter
into an arrangement by which it authorizes and deauthorizes Service Subscribers
and/or Demand Purchasers pursuant to requests received from either retailers of
Affiliate's satellite equipment or other such retailers who are among
Distributors of the Service permitted by Playboy from time to time ("Permitted
Subdistributors"); provided that Affiliate shall be responsible for Permitted
Subdistributors' compliance with all the terms of this Agreement, and provided
further that Affiliate shall be wholly responsible for the payment of any
Service Charge required hereunder on behalf of any Permitted Subdistributor. The
parties agree that if any Permitted Subdistributor commences or engages in any
form of prohibited Subdistribution, then promptly after learning of such
prohibited Subdistribution, Affiliate must immediately (i) notify Playboy in
writing that such prohibited Subdistribution has occurred; (ii) notify the
applicable Permitted Subdistributor immediately to cease and desist from the
prohibited Subdistribution; and (iii) prevent Service subscription
authorizations or deauthorizations by such Permitted Subdistributor. Also in
such event, Affiliate shall remain liable for all Service subscriptions and/or
Demand Purchases sold by the Permitted Subdistributor. In addition, Playboy has
the option to demand that Affiliate, within forty-five 945) days of receipt of a
notice from Playboy, pay Playboy all the revenue, if any, due Playboy,
calculated in accordance with
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the Service Charge (Whether due from Affiliate's Subdistributior's Service
Subscribers and/or Demand Purchasers and whether such revenue due is from
monthly or multi-month subscriptions).
7. USE OF THE SERVICE: Affiliate and its Distributors shall market,
transmit, and deliver the Service the Maximum Hours per day on a pay-per-
transaction (e.g. pay-per-hour, pay-per-title, pay-per-day, etc.) basis
(collectively, the "Pay-Per-View Offerings") and as a monthly or longer
subscription service. Affiliate shall not make available all or any part of the
Service or the Marks for any sponsorship, advertising, promotional public
service, or commercial announcement of any third party, product, or service, or
any product or service of Affiliate other than the offering of the Service by
Affiliate in accordance with this Agreement. Affiliate shall not permit, and
shall take appropriate and reasonable precautions necessary to prevent any use
of the Service by (i) any person or entity other than a paying Service
Subscriber and/or Demand Purchase customer; (ii) any person or entity who
charges an admission fee, cover charge or "minimum"; (iii) any commercial
establishment or non-residential building (including without limitation, any
restaurant, tavern, bar, club, fraternal organization, hospital, or correctional
facility) other than an Office Service Subscriber or an Office Demand Purchaser
in a private office, or a Hotel Service Subscriber or Hotel Demand Purchaser in
a Hotel Guest Room; or (iv) any communal room in an otherwise residential
building or Hotel (including, without limitation, any lobby or social room in an
apartment house, Hotel or similar place). Affiliate shall not permit, and shall
take appropriate and reasonable precautions necessary to prevent any
unauthorized or unlawful use, reproduction, exhibition, or distribution of any
part of the Service or the Marks as to entities over which Affiliate has
control.
8. PAYMENT TO PLAYBOY
a. Affiliate shall pay to Playboy, with respect to each Billing
Period, not later than *** calendar days following the expiration of
such Billing Period, the "Service Charge(s)" for all purchases during such
Billing Period calculated as hereinafter set forth in this Agreement.
b. *** the Service Charge for each Demand Purchase (other than
"Special Events") made during the applicable Billing Period payable to Playboy
shall equal the greater of (i) *** per such Demand Purchase, or (ii) *** of the
Gross Retail Revenue "earned" by Affiliate from such Demand Purchase, calculated
separately for each Demand Purchase.
c. The Service Charge payable for Special Events shall be determined
by Playboy in its sole discretion.
d. ***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
9
<PAGE>
the Service Charge for Service subscriptions of Service Subscribers shall be
calculated separately for each category of Service Subscriber (Hotel, Office,
other) for each particular Billing Period, ***. For purposes of this
subparagraph, the average number of Service Subscribers for a particular Billing
Period (calculated separately for each category of Service Subscriber) shall
equal the average of (A) the number of active Service Subscribers as of the last
day of the prior Billing Period, and (B) the number of active Service
Subscribers as of the last day of the current Billing Period.
e. ***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
10
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***
"Gross Revenue Per Subscriber" shall be calculated for each Billing
Period and defined as (A) the total combined Gross Retail Revenue for
a particular Billing Period for all Demand Purchases, other than by
Hotel Demand Purchasers or Office Demand Purchasers, in such Billing
Period, and the "Gross Subscription Revenue" from all Service
subscriptions from all Service Subscribers, other than Hotel Service
Subscribers and Office Service Subscribers, in such Billing Period,
divided by (B) the total number of Affiliate's active Satellite
Subscribers, other than in Hotels and other than Office Subscribers,
on the last day of such Billing Period. The "Gross Subscription
Revenue" from all Service subscriptions from all Service Subscribers,
other than Hotel Service Subscribers and Office Service Subscribers,
shall be calculated by multiplying *** for a particular Billing Period
by the average number of Service Subscribers, other than Hotel Service
Subscribers and Office Service Subscribers, for which *** is
applicable for the Billing Period. The aggregate of all such products
for *** and category of Service Subscriber shall equal the Gross
Subscription Revenue from all Service subscriptions from all Service
Subscribers, other than Hotel Service Subscribers and Office Service
Subscribers, for such Billing Period. The average number of Service
Subscribers for a particular Billing Period shall equal the average of
(1) the number of active Service Subscribers as of the last day of the
prior Billing Period, and (2) the number of active Service Subscribers
as of the last day of the applicable Billing Period.
***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
11
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f. Revenues shall be considered "earned" regardless of whether
Affiliate collects payments due from any Service Subscriber and/or Demand
Purchaser.
g. In calculating Service Charge(s) due as described under
subparagraphs 8.b. and 8.d. above, Service Subscribers shall not include ***
subscribers of Affiliate or Distributor who are authorized to receive the
Service as a free preview, provided that such free preview may be offered only
with Playboy's consent; (iii) commercial business locations where the Service is
provided by Affiliate for the purposes of technical testing and comparison
and/or consumer marketing research, evaluation and analysis of Affiliate's
services and equipment, provided that there is no charge to view the Service at
any of such locations; or (iv) retail locations (e.g., dealer showrooms) and
other public locations (e.g., shopping malls and fairs) where Affiliate or a
Distributor is demonstrating the Service on a "no charge" basis for marketing
and promotional purposes; provided that each such demonstration is available for
viewing only by requesting adults and does not violate any, and complies with
all laws, rules and regulations and the contractual obligations of Affiliate,
the applicable Distributor and all other demonstrators and exhibitors.
h. Affiliate shall provide and install for Playboy, at Affiliate's
sole cost, three (3) satellite antennas integrated receiver decoders with
certain basic program services currently called PRIME Value and Service
subscriptions for the Term, on a "free," "no charge" basis, one (1) at Playboy's
corporate office in Beverly Hills, California, one (1) at the Playboy Mansion in
Los Angeles, California, and one (1) at the private residence of the Chief
Executive Officer of Playboy or his or her designee; such locations shall not be
deemed Service Subscribers for the purposes of the payment provisions hereof.
i. Any amounts not paid by Affiliate within *** days of the end of
the appropriate Billing Period shall accrue interest at the lesser rate of one
and one-half percent (1-1/2%) per month or at the highest lawful rate,
compounded monthly from the
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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date such amounts were first due until they are paid.
j. All payments required under this Paragraph 8 shall be made either
by wire transfer of immediately available funds to a bank account specified by
Playboy, which, until further notice, shall be LaSalle National Bank, 135 S.
LaSalle Street, Department 2657, Chicago, Illinois 60674-2657, ABA #071000505,
A/C #5800010356, Credit: Playboy Entertainment Group, Inc. or by payment via a
check drawn on a United States bank account and sent to Playboy Entertainment
Group, Inc., 9242 Beverly Boulevard, Beverly Hills, CA 90210, Attention:
Accounts Receivable.
9. REPORTS
a. Affiliate shall send to Playboy, as soon as available, but not
later than *** days after the end of each Billing Period during the Term, a
statement on a form mutually acceptable to Affiliate and Playboy. Affiliate
shall deliver such statement to Playboy prior to or along with the amount
payable to Playboy as provided in this Agreement. Each such accounting statement
shall be certified by an appropriate officer of Affiliate or an independent
billing service as to the accuracy of such statement, and shall include:
(i) stated separately for each price level of Demand Purchases
and in the aggregate for all Demand Purchases for the applicable Billing Period,
the Gross Retail Revenue and Service Charge for Demand Purchases during the
Billing Period, including all calculations necessary to arrive at the Service
Charge;
(ii) the *** Service Charge for each category of Service
subscriptions during the Billing Period, including all calculations necessary to
arrive at the Service Charge;
(iii) the origin of all Service Charges for such Billing Period,
itemized by Demand Purchases, subscriptions and ***;
(iv) for each type of Demand Purchase, the number of Satellite
Subscribers (stated separately for Hotels) and Office Subscribers making such a
Demand Purchase and the number of such Demand Purchases during such Billing
Period, itemized on a daily basis if and when available on such daily basis;
(v) the total number of active Service Subscribers, broken out
by Hotel Service Subscribers, Office Service Subscribers and all other Service
Subscribers, at the end of the last day of the applicable Billing Period, and at
the end of the last day of the immediately preceding Billing Period, and, if and
when available, the total number of Service subscription authorizations and
de-authorizations during the applicable Billing Period; and
(vi) the total number of Affiliate's active Satellite
Subscribers (stated separately for Hotels) and Officer Subscribers (also stated
separately) at the end of each
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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<PAGE>
respective Billing Period.
b. Affiliate agrees to keep and maintain accurate books and records
of all matters directly relating to this Agreement in accordance with generally
accepted accounting principles. During the Term and for *** after the
termination of this Agreement, Affiliate's books and records shall be available
to Playboy for inspection and audit, during normal business hours, at Playboy's
expense, at Affiliate's offices upon reasonable notice to Affiliate.***
Affiliate shall pay to Playboy all underpayments revealed by the audit plus
interest thereon pursuant to subparagraph 8.i. Additionally, if any such audit
reveals an underpayment to Playboy of ten percent (10%) or more of the amount
paid to Playboy for any Billing period audited, then Affiliate shall reimburse
Playboy for the reasonable costs of such audit.
c. In addition to the foregoing, Affiliate will supply to Playboy
such additional information relating to the Service as Playboy may reasonably
request from time to time and as Affiliate may reasonably obtain *** subject to
applicable law *** regarding the dissemination of such information.
d. It is expressly understood that Affiliate's obligation to render
statements to Playboy in a timely manner in accordance with this Paragraph 9 is
a material obligation of Affiliate hereunder, whether or not such statement
shall show any sums due to Playboy hereunder. If Affiliate shall fail to timely
render any such statement, and shall fail to cure such breach within *** days of
Playboy's notice to Affiliate thereof, then without limiting any of its other
rights hereunder, Playboy shall have the right immediately to terminate this
Agreement.
10. PROMOTION, MARKETING AND SALES AND TRADEMARK APPROVAL:
a. Playboy shall provide marketing and promotional advice and
information as it deems necessary. Playboy and Affiliate have mutually agreed to
the marketing and promotional activities attached hereto as Schedule 1.
b. Affiliate, both initially in its expansion of the Service hours
and at all times thereafter, will market and promote the Service in order to
maximize the number of Service Subscribers and/or Demand Purchasers ***,
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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c. The parties understand and agree that Affiliate currently expects
to use a range of media (including without limitation, print, advertising, and
cross-channel promotional spots) to market and promote the Service. Affiliate
shall publicize the schedule of the Service in the Territory in a manner similar
to other similar premium and/or pay-per-view services, including without
limitation the publication of the Service programming schedule in both printed
and electronic on-air television listings and program guides that Affiliate
distributes.
d. Affiliate shall exercise its reasonable commercial efforts to
encourage Distributors to allow Playboy reasonable access to each Distributor's
customer service representatives for training by Playboy, ***
e. Affiliate and Playboy shall cooperate with each other in
commercially reasonable marketing tests, surveys, ratings polls and other
research ***; provided, however, that any proprietary information furnished by
one to the other shall be kept confidential and Affiliate and Playboy shall keep
confidential all research delivered to it but funded by the other. Playboy and
Affiliate each agree to forward to the other any and all information and reports
resulting from such research; provided, however, that neither party shall be
required to forward any information protected under confidentiality terms with a
third party.
f. Playboy shall have the right to review and approve, in advance,
any of Affiliate's publicity about the Service, *** Such approval shall not be
unreasonably withheld or delayed.
g. Affiliate has not and will not acquire any proprietary rights in
any of the Marks or any other trade names, trademarks, service marks, or logos
associated with Playboy and/or its parent by reason of this Agreement or
otherwise. Affiliate further acknowledges the great value of the goodwill
associated with the Marks, and the public renown and recognition of the same,
and that the Marks have a distinctiveness and a secondary meaning that is firmly
associated in the minds of the trade and general public with Playboy
Enterprises, Inc. and/or Playboy, and that any additional goodwill in the Marks
which may be created through the use of the Marks by Affiliate or a Distributor
shall inure to the sole benefit of Playboy and/or its parent, as the case may
be. Affiliate may use the Marks only if it is clear that the Marks used are
service marks for the programs and program services of Playboy and/or its parent
that Affiliate distributes and such use shall be in accordance with any further
instructions that may be issued by Playboy and/or its parent from time to time;
provided, however, any use of any Mark that is not consistent with prior
approved uses requires the prior express written approval of Playboy and/or its
parent. Affiliate shall submit any initial use of the Marks to Playboy for
Playboy's prior written approval at least ten (10) working days prior to their
intended
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
15
<PAGE>
distribution. Such submission shall be made simultaneously to Senior Vice
President, Playboy Satelite, Playboy Television, 9242 Beverly Boulevard, Beverly
Hills, California 90210 and to the General Counsel of Playboy Enterprises, Inc.,
680 N. Lake Share Drive, Chicago, Illinois 60611. Playboy, through either of
such officers may disapprove of any use. Affiliate will not disseminate any
material that has not been approved by Playboy in accordance with the terms
hereof.*** Playboy's responses for purposes of this Paragraph may be
given telephonically. Notwithstanding the foregoing, it is agreed and understood
that standard, periodic, or repetitively issued promotional materials (e.g.
Affiliate's monthly program guides), need not be resubmitted for Playboy's prior
written approval so long as such materials and the Marks used therein are being
used by Affiliate in the same manner, for the same purposes and under the same
conditions as previously approved by Playboy. Any promotional materials provided
by Playboy to Affiliate shall be deemed automatically approved, but only for the
purpose and specific context provided, and Affiliate may not couple or link
materials provided by Playboy with other material not provided or previously
approved by Playboy.
11. REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION:
a. Playboy and Affiliate each represent and warrant to the other
that each has the requisite power and authority to enter into this Agreement and
to perform fully its respective obligations hereunder, and that this Agreement
has been duly executed by it and constitutes a valid obligation enforceable
against it in accordance with the terms hereof.
b. Playboy represents and warrants to Affiliate that subject to the
exclusion for music performing rights provided below in this subparagraph 11.b.,
the Service as supplied to Affiliate pursuant to this Agreement, if and when
presented by Affiliate in the manner and at the times authorized herein, will
contain no libelous or slanderous material and will not violate any copyright,
right of privacy or literary or dramatic right of any person. Notwithstanding
anything in this Agreement to the contrary, Playboy's representations,
warranties and indemnify expressly exclude any and all representations,
warranties and indemnities of any kind in regard to music performing rights,***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
16
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c. Affiliate and Playboy shall each indemnify, defend and forever
hold harmless the other, its affiliated corporations and other entities,
partners, officers, directors, employees and agents (collectively the
"Indemnitees") from all liabilities, costs, damages and expenses (including
without limitation, reasonable counsel fees of counsel of Playboy's choice) from
claims by third parties (collectively, "Claims") arising from the breach of any
representation, warranty, or material obligation hereunder, and Affiliate shall
indemnify, defend and hold harmless Playboy and other Indemnitees from all
Claims, including by any Satellite Subscriber, Office Subscriber, Service
Subscriber, or Demand Purchase customer relating to the provision or offering of
the Service by Affiliate or a Distributor (except with respect to Claims
relating to the specific content of the Service); provided that in each case
where such indemnification is sought:
(i) the Indemnitee promptly notifies the indemnitor of the
Claim to which the indemnification relates;
(ii) the indemnitor shall control fully any litigation,
compromise, settlement or other resolution or disposition of such Claim; and
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(iii) the Indemnitee fully cooperates with the *** indemnitor
in the Indemnitor's defense of such Claim.
d. Notwithstanding the above, Playboy's indemnification of Affiliate
will be valid in the event of a prosecution or Claim involving an allegation of
violation of the laws insofar as the content of the Service is concerned, only
in the event each of the following conditions is met:
(i) Immediate telephone contact be made with both the General
Counsel's office of Playboy in Chicago at (312) 751-8000 and Playboy's President
in Beverly Hills at (310) 246-4000, or other numbers hereafter specified by
Playboy. 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.
(ii) Playboy shall have the right to approve Affiliate's
choice of counsel and to determine in advance the terms of retention.
(iii) Playboy will assist in defended actions only and will not
be responsible in cases where there is any admission of guilt by any Indemnitee.
Settlement or dismissal of any case will not be allowed, except with Playboy's
prior written consent.
e. Actual or prospective parties involved in such prosecution shall
make no voluntary disclosure regarding support or lack thereof by Playboy under
this policy.
f. ***
12. EARLY TERMINATION RIGHTS:
a. In addition to Playboy's other rights at law or in equity or
pursuant to other provisions of this Agreement, Playboy may, by so notifying
Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of
this Agreement; provided, however, that if such breach is of the type that is
curable, then Playboy shall not exercise its termination or other rights at
law or in equity hereunder unless Playboy has, by so notifying Affiliate in
writing, given Affiliate at least *** days from the time such notice is
received by Affiliate to fully cure such material breach and to demonstrate to
Playboy that such material breach has been cured; or (ii) if Affiliate has filed
a petition in bankruptcy, is insolvent, or has sought relief under any law
related to Affiliate's financial condition or its ability to meet its payment
obligations; or (iii) if any involuntary petition in bankruptcy has
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
18
<PAGE>
been filed against Affiliate, or any relief under any such law has been sought
by any creditors of Affiliate, unless such involuntary petition is dismissed, or
such relief is denied within *** days after it has been filed or sought.
b. In addition to Affiliate's other rights at law or in equity or
pursuant to other provisions of this Agreement, and in addition to any other
right to terminate provided hereunder, Affiliate may, by so notifying Playboy,
terminate this Agreement: (i) if Playboy is in material breach of this
Agreement; provided, however, if such breach is of the type that is curable,
then Affiliate shall not exercise its termination or other rights at law or in
equity hereunder unless Affiliate has, by so notifying Playboy, given Playboy at
least *** days from the time such notice is received by Playboy, to fully cure
such material breach and to demonstrate to Affiliate that such material breach
has been cured; or (ii) if Playboy has filed a petition in bankruptcy, is
insolvent or has sought relief under any law related to Playboy's financial
condition or its ability to meet its payment obligations; or (iii) if any
involuntary petition in bankruptcy has been filed against Playboy, or any relief
under any such law has been sought by any creditors of Playboy, unless such
involuntary petition is dismissed, or such relief is denied within *** days
after it has been filed or sought; ***
13. FORCE MAJEURE: Except as herein provided to the contrary, neither
Affiliate nor Playboy shall have any rights against the other party hereto for
the non-operation, malfunction, or failure of facilities or equipment or the
non-furnishing of the Service if such non-operation, malfunction, or failure, or
non-furnishing is due to an act of God; inevitable accident; fire; lockout;
flood; tornado; hurricane, strike, or other labor dispute; riot or civil
commotion; earthquake, war; act of government or governmental instrumentality
(whether federal, state or local); failure of performance by a common carrier;
failure in whole or in part of technical facilities; or other cause (financial
inability excepted) beyond such party's reasonable control. In this regard, the
termination or expiration of any of Playboy's arrangements relating to
communications satellite facilities and/or the unavailability to
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
19
<PAGE>
Playboy of such facilities on terms satisfactory to Playboy shall be deemed
excused, and not a breach or default by Playboy under this Agreement, pursuant
to this Paragraph. In the event of non-operation or non-furnishing of the
Service, Affiliate shall have the right, immediately, to insert programming of
its choice on the channel otherwise identified with the Service until such time
as the Service resumes full operation, on the condition that Affiliate makes
clear to the viewers that such other programming is not the Service and is not
related to the Service in any way. ***
14. ASSIGNMENT: Affiliate may not assign this Agreement without the
express written consent of Playboy which shall not be unreasonably withheld or
delayed; *** Playboy may assign this Agreement or any portion of its rights or
obligations hereunder without Affiliate's consent, provided that if, as a result
of such assignment, the Service shall no longer be generally identified as a
"Playboy" Service, Affiliate may cancel this Agreement on not less than ninety
(90) days' prior written notice.
15. NOTICES: All notices, requests, demands, consents, directions and
other communications provided for hereunder shall be in writing and be either
delivered by courier (e.g., messenger or overnight delivery), delivered by
facsimile transmission ("fax"), with confirmed electronic receipt, or sent by
means of U.S. certified mail, return receipt requested; if to Playboy to Playboy
Entertainment Group, Inc., 9242 Beverly Boulevard, Beverly Hills, California
90210, ATTN: Programming Distribution and Senior Vice President, Satellite, Fax
Number 310-246-4050, with a copy by the same method to General Counsel, Playboy
Enterprises, Inc., 680 N. Lake Shore Drive, Chicago, Illinois 60611, Fax Number
312-266-2042; and if to Affiliate to Primestar Partners, L.P., Three Bala Plaza
West, Suite 700, Bala Cynwyd, Pennsylvania 19004, Attention: Claire Cowart, Fax
Number 610-668-2862, or, as to each party, at such other address as shall be
designated by such party in a written notice to the other party. All notices
shall, if mailed, be deemed effective two (2) business days after the date
deposited in the mail, if faxed, on the date receipt of such fax is so
confirmed, and, if delivered by courier, on the date delivered.
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
20
<PAGE>
16. CONFIDENTIALITY: Neither Playboy nor Affiliate shall disclose to any
third party (other than its respective employees, in their capacity as such),
any information with respect to the financial terms and provisions of this
Agreement except: (i) to the extent necessary to comply with law or the valid
order of a court of competent jurisdiction, in which event the party making such
disclosure shall so notify the other and shall seek confidential treatment of
such information, (ii) as part of its bona fide reporting or review procedure
under applicable securities laws or listing or exchange requirements or to its
parent company, its partners, its auditors, and its attorneys; or its investors,
bankers, investment bankers, or business consultants/advisors; provided,
however, that such parent company, partners, auditors, attorneys, investors
bankers, investment bankers, and business consultants/advisors agree to be bound
by the provisions of this paragraph and (iii) in order to enforce its rights
pursuant to this Agreement.
17. MISCELLANEOUS:
a. Entire Agreement; Amendments; Waivers. This Agreement contains
the entire understanding of the parties and supersedes and abrogates all
contemporaneous or prior understandings of the parties, whether written or oral,
relating to the subject matter hereof. This Agreement may not be modified except
in writing executed by both parties hereto. Any waiver of any provision of, or
right included in, this Agreement must be in writing and signed by the party
whose rights are being waived. No waiver by either Affiliate or Playboy of any
breach of any provision hereof shall be or be deemed to be a waiver of any
preceding or subsequent breach of the same or any other provision of this
Agreement. The failure of Affiliate or Playboy to enforce or seek enforcement of
the terms of this Agreement following any breach shall not be construed as a
waiver of such breach.
b. Governing Law. The obligations of Affiliate and Playboy under
this Agreement are subject to all applicable federal, state and local laws,
rules and regulations (including, but not limited to, the Communications Act of
1934, as the same may be amended from time to time, and the rules and
regulations of the FCC promulgated thereunder) and this Agreement and all
matters or issues collateral thereto shall be governed by *** , without regard
to choice of law rules.
c. Relationship. Neither Affiliate no Playboy shall be, or hold
itself out as, the agent of the other under this Agreement. No subscriber of
Affiliate shall be deemed to have any privity of contract of direct contractual
or other relationship with Playboy by virtue of this Agreement or Playboy's
delivery of the Service to Affiliate hereunder. Likewise, no supplier of
advertising or programming or anything else included in the Service by Playboy
shall be deemed to have any privity of contract or direct contractual or other
relationship with Affiliate by virtue of this Agreement or Affiliate's carriage
of the Service hereunder. Nothing contained herein shall be deemed to create,
and the parties do not intend to create, any relationship of partners, joint
venturers or agents, as between Affiliate and Playboy, and neither party is
authorized to or shall act toward third parties or the public in any manner
which would indicate any such relationship with the other.
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
21
<PAGE>
d. Severability. The invalidity under applicable law of any
provision of this Agreement shall not affect the validity of any other provision
of this Agreement, and in the event that any provision hereof is determined to
be invalid or otherwise illegal, this Agreement shall remain effective and shall
be construed in accordance with its terms as if the invalid or illegal provision
were not contained herein; provided however, that both parties shall negotiate
in good faith with respect to an equitable modification of the provision, or
application thereof, held to be invalid and provisions logically related
thereto.
e. No Inference Against. Playboy and Affiliate each acknowledge that
this Agreement was fully negotiated by the parties and, therefore, no provision
of this Agreement shall be interpreted against any party because such party or
its legal representative drafted such provision.
f. No Third Party Beneficiaries. The provisions of this Agreement
are for the exclusive benefit of the parties hereto and their permitted assigns,
and no third party shall be a beneficiary of, or have any rights by virtue of,
this Agreement.
g. Headings. The titles and headings of the sections in this
Agreement are for convenience only and shall not in any way affect the
interpretation of this Agreement.
h. Non-Recourse. Notwithstanding anything contained in this
Agreement to the contrary, it is expressly understood and agreed by the parties
hereto that each and every representation, warranty, covenant, undertaking and
agreement made in this Agreement was not made nor intended to be made as a
personal representation, undertaking, warranty, covenant, or agreement on the
part of any incorporator, stockholder, director, officer, partner, employee or
agent, past, present or future, or any of them, and any recourse, whether known
or unknown, in common law, in equity, by statute or otherwise, against any of
them is hereby forever waived and released.
i. Taxes. Affiliate shall pay and forever hold harmless Playboy from
all taxes and any other governmental charges now or hereafter imposed or based
upon the rental, license, exhibition or possession for, to or by Affiliate of
the Service or any part thereof.
IN WITNESS WHEREOF, Playboy and Affiliate have executed this Agreement as of
April 1, 1997.
PRIMESTAR(R) PARTNERS, L.P. PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Daniel J. O'Brien By: /s/ Doug Lindquist
----------------------------- -----------------------------
Daniel J. O'Brien, President Doug Lindquist, Senior V.P.
- -------------------------------- --------------------------------
Name and Title Name and Title
Date: 4-2-98 Date: 4-7-98
--------------------------- ---------------------------
22
<PAGE>
SCHEDULE 1
PRIMESTAR(R) PARTNERS, L.P.
Playboy and Affiliate have mutually agreed upon the following marketing support:
1. On-Air
a. Cross Channel Avails
(i) Affilate will schedule *** video spot via cross channel
avails to promote the expansion to twenty-four (24) hours,*** The spots will run
on channels designated by Affiliate between the hours of 1:00 a.m. and 6:00 a.m.
Eastern Time or earlier if Affiliate's policy allows. Spots will be distributed
roughly evenly between the designated hours and across channels that reach
Playboy's target audience.
(ii) Affiliate will schedule *** video spot via cross channel
avails to promote the introduction of the monthly subscription service,*** The
spots will run on channels designated by Affiliate between the hours of 1:00
a.m. and 6:00 a.m. Eastern Time or earlier if Affiliate's policy allows. Spots
will be distributed roughly evenly between the designated hours and across
channels that reach Playboy's target audience.
(iii) Affiliate will schedule the Service's product promotion
spots via cross channel avails, including special previews and promotions, ***
The spots will run on channels designated by Affiliate between the hours of 1:00
a.m. and 6:00 a.m. Eastern Time or earlier if Affiliate's policy allows. Spots
will be distributed roughly evenly between the designated hours and across
channels that reach Playboy's target audience.
b. Barker Channel Avails
(i) Affiliate will schedule *** video spot on the PRIMEView One
and PRIMECinema Today twenty-four (24) hour promotional channels to promote the
expansion to twenty-four (24) hours, *** The spots will run between the hours of
1:00 a.m. and 6:00 a.m. Eastern Time or earlier if Affiliate's policy allows.
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
23
<PAGE>
(ii) Affiliate will schedule *** video spot on the PRIMEView
One and PRIMECinema Today twenty-four (24) hour promotional channels to promote
the introduction of the monthly subscription service, *** The spots will run
between the hours of 1:00 a.m. and 6:00 a.m. Eastern Time or earlier if
Affiliate's policy allows.
c. Materials
(i) Playboy will develop and produce, *** video spots that
meet Affiliate's specifications to promote the
(1) expansion of the service from ten (10) to
twenty-four (24) hours; and
(2) introduction of a monthly subscription service.
(ii) Playboy will provide, *** customizable video spots,
approximately four (4) video spots per month, to promote monthly product
premieres. Affiliate, at its expense, will tag the customizable time/space on
these spots.
2. Print
a. Advertising Space
(i) Affiliate will dedicate the full "Adults Only" page in
*** Affiliate's Program Guide, in the pay-per-view insert section currently
known as PRIMECinema. ***
(ii) Affiliate will reserve *** tune-in ad space *** for
placement at Affiliate's discretion in the designated editions of Affiliate's
Program Guide *** Affiliate recognizes that these ads are tied to programs on
specific days of the month; however, Affiliate shall use commercially reasonable
efforts to comply with Playboy's requested dates and times for placement.
(iii) ***
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
24
<PAGE>
(iv) Affiliate will add *** copy in the three (3) daily program
guide grids, directly below the Playboy listings, to advertise the monthly
subscription option in the designated editions of Affiliate's Program Guide ***
b. Materials
(i) Playboy will design and produce, *** pages that meet
Affiliate's specifications, to be placed in the "Adult Only" section in the
designated editions of Affiliate's Program Guide ***
(ii) Playboy will design and produce, *** ads that meet
Affiliate's specifications, for placement in the designated editions of
Affiliate's Program Guide***
(iii) Playboy will design and produce, *** ads that meet
Affiliate's specifications, to promote the monthly subscription service, for
placement in the Playboy product description section in the designated editions
of Affiliate's Program Guide ***
(iv) If requested by Affiliate, Playboy will design bill
inserts and/or direct mail pieces, ***that meet Affiliate's specifications, to
promote the twenty-four (24) hour service expansion and the monthly subscription
option. ***
3. Other
a. ***
b. Upgrade Campaign: Playboy, in conjunction with Affiliate, will
implement one (1) monthly subscription upgrade campaign, in a mutually agreed
upon month, which includes the set-up of a unique toll-free telephone number to
process potential orders. Affiliate and Playboy agree to share in the direct
costs ***
c. Training
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
25
<PAGE>
(i) Playboy will conduct Customer Contact Personnel training,
*** , based on Affiliate Partner MSO requests, provided that sufficient notice
is given to enable Playboy to reasonably comply with requested dates.
(ii) Playboy will design Customer Contact Personnel training
materials, *** , which Affiliate will purchase based on Affiliate's Partner MSO
requests.
d. Incentive Program: Playboy will conduct, *** Customer Contact
Personnel sales incentive program during the 1997 calendar year.
# # #
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
26
<PAGE>
EXHIBIT 10.2(a)
PLAYBOY ENTERPRISES, INC.
January 12, 1998
Hugh M. Hefner
10236 Charing Cross Road
Los Angeles, CA 90024
Dear Mr. Hefner:
By your countersignature of this letter, you will evidence your agreement to
amend that certain Agreement of Lease made as of June 1, 1979, as amended, (the
"Lease") by and between you and Playboy Enterprises, Inc. ("Playboy"). All
capitalized terms used herein shall have the meaning ascribed to them in the
Lease unless otherwise specified.
To coincide with the change in Playboy's fiscal year, the current term of the
Lease shall be extended through December 31, 1998 and shall continue for 12
month periods thereafter unless terminated as provided under the Lease.
The next consumer price index adjustment to your rent and food and beverage
units will be made on the basis of the 18 month period from July 1, 1997 through
December 31, 1998. A rent update covering the 18 month period will be prepared
within 120 days of December 31, 1998 and you will be billed or credited for
actual benefits received.
The next formal appraisal of your accommodations at Mansion West will be made in
calendar 2001.
All other terms of the Lease shall remain in full force and effect.
Playboy Enterprises, Inc.
By /s/ Howard Shapiro /s/ Hugh M. Hefner
------------------------ ------------------------------
Executive Vice President Hugh M. Hefner
680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611/312 751-8000
<PAGE>
EXHIBIT 10.3(a)
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE (this "Amendment") entered into in Chicago,
Illinois, as of the 19th day of March, 1998, by and between AMERICAN NATIONAL
BANK AND TRUST COMPANY OF CHICAGO, not personally, but solely as Trustee under a
Trust Agreement dated May 2, 1989, and known as Trust No. 108237-06 ("Lessor"),
and PLAYBOY ENTERPRISES, INC., a Delaware corporation ("Lessee").
WITNESSETH:
A. LaSalle National Bank, not personally, but solely as Trustee under a
Trust Agreement dated December 21, 1987, and known as Trust No. 112912
("LaSalle"), and Lessee have heretofore entered into that certain Office Lease
dated as of April 7, 1988 (the "Original Lease"), whereby LaSalle leased to
Lessee certain premises (the "Original Premises") known as Suites 1500 and 1600,
consisting of 95,523.05 rentable square feet and comprising the entire 15th and
16th floors of the "Office Area" (as defined in the Original Lease) of that
certain building (the "Building") located at 680 North Lake Shore Drive,
Chicago, Illinois, for a lease term expiring on August 31, 2004.
B. LaSalle has heretofore assigned its interest under the Lease to
Lessor.
C. Lessor and Lessee have heretofore entered into that certain Amendment
to Lease dated as of October 26, 1989 (the "First Amendment"), which amended
certain provisions of the Original Lease, including the leasing to Lessee of
certain additional space in the basement of the Building comprising 1,792 square
feet (the "Additional Premises"; the Original Premises and the Additional
Premises are collectively referred to herein as the "Existing Premises").
D. Lessor and Lessee have heretofore entered into that certain Second
Amendment to Lease dated as of June 1, 1992 (the "Second Amendment"), which
clarified certain provisions of the Lease relating to Taxes (as defined in the
Lease) and Expenses (as defined in the Lease) payable by Lessee.
E. Lessor and Lessee have heretofore entered into that certain Third
Amendment to Lease ("Third Amendment") dated as of August 30, 1993, which
granted to Lessee certain additional expansion rights in the Building and
amended certain other provisions contained in the Original Lease.
F. Lessor and Lessee have heretofore entered into that certain Fourth
Amendment to Lease ("Fourth Amendment") dated as of August 6, 1996, which
extended the Term (as defined in the Lease), granted certain expansion rights in
the Building and amended certain other provisions contained in the Original
Lease and in the First and Third Amendments. The
<PAGE>
Original Lease, the First Amendment, the Second Amendment, Third Amendment and
the Fourth Amendment are collectively referred to herein as the "Lease".
G. Lessor and Lessee now desire to amend the Lease to expand the Premises
and amend certain other provisions contained in the Lease, all upon the terms
and provisions hereinafter set forth.
NOW, THEREFORE, for good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as
follows:
1. Definitions. Each capitalized term used in this Amendment shall have
the same meaning as is ascribed to such capitalized term in the Lease, unless
otherwise provided for herein.
2. Expansion of Premises. Commencing on July 1, 1998 (the "Effective
Date") and expiring on the Expiration Date (as defined in Section 2 of the
Fourth Amendment) the Premises shall consist of the Existing Premises and an
additional Thirty-Two Thousand One Hundred Forty (32,140) rentable square feet
on the fourteenth (14th) floor (Suite 1400) of the Building as shown on Exhibit
A attached hereto and incorporated herein (such additional space being referred
to herein as the "Second Additional Premises").
3. Second Additional Premises Base Rent. Commencing on the Effective
Date, Lessee shall pay monthly Base Rent for the Second Additional Premises on
the first day of each calendar month during the Term hereof in accordance with
Section 1 of the Lease in accordance with the following schedule:
<TABLE>
<CAPTION>
===============================================================================
PERIOD ANNUAL MONTHLY
------ ------ -------
BASE RENT BASE RENT
--------- ---------
- -------------------------------------------------------------------------------
<S> <C> <C>
7/1/98 - 8/31/98 $357,718.20 $29,809.85
- -------------------------------------------------------------------------------
9/1/98 - 8/31/99 $364,788.96 $30,399.08
- -------------------------------------------------------------------------------
9/1/99 - 8/31/00 $409,785.00 $34,148.75
- -------------------------------------------------------------------------------
9/1/00 - 8/31/01 $418,141.44 $34,845.12
- -------------------------------------------------------------------------------
9/1/01 - 8/31/02 $426,497.76 $35,541.48
- -------------------------------------------------------------------------------
9/1/02 - 8/31/03 $434,854.20 $36,237.85
- -------------------------------------------------------------------------------
9/1/03 - 8/31/04 $443,532.00 $36,961.00
- -------------------------------------------------------------------------------
9/1/04 - 8/31/05 $452,531.16 $37,710.93
- -------------------------------------------------------------------------------
9/1/05 - 8/31/06 $461,530.44 $38,460.87
===============================================================================
</TABLE>
2
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
<S> <C> <C>
9/1/06 - 8/31/07 $470,529.60 $39,210.80
===============================================================================
</TABLE>
The foregoing base rent for the Second Additional Premises shall be deemed "Base
Rent" payable by Lessee under the Lease for all purposes under the Lease.
4. Second Additional Premises Rent Adjustments. From and after the
Effective Date, Lessee shall pay to Lessor Rent Adjustment for the Second
Additional Premises in accordance with Section 2 of the Lease, subject to the
following modifications:
(a) Rent Adjustment for the Second Additional Premises shall be
calculated and determined separate from Rent Adjustment for the Existing
Premises. Lessee's Proportionate Share with respect to the Second
Additional Premises shall be 7.69%.
(b) Rent Adjustment for the Existing Premises shall continue to be
determined in accordance with the Lease without regard to the terms of this
Section 4. Solely for the purposes of determining Rent Adjustment for the
Second Additional Premises, the definition of Expenses and Taxes set forth
in Sections 2.A(iv) and 2.A(v), respectively, of the Lease are hereby
amended and restated in their entirety as follows:
"(iv) "Expenses" shall mean and include (a) those expenses paid
or incurred by or on behalf of the Lessor for operating, maintaining,
and repairing the Office Area and the personal property used in
conjunction therewith (said Office Area and personalty being herein
collectively called the "Office Facility" and (b) those expenses
incurred for the benefit of the Office Area and other portions of the
Building to the extent the burden of such Expenses is allocated to the
Office Area by Lessor, in its reasonable discretion, after excluding
all expenses allocable to the residential and private garage
condominium associations pursuant to the 680 North Lake Shore Drive
Operating Agreement and Supplemental Declaration of Easement dated as
of January 1, 1993, as amended or replaced from time to time. Such
Expenses include, without limitation, the cost of operating,
maintaining and repairing systems providing heating and air
conditioning, electricity, steam, water, fuel, gas, lighting, window
cleaning, janitorial service and security, and operating, maintaining
and repairing the "common areas" of the first floor and basement of
the Building, as designated on Exhibit B attached to the Fifth
Amendment, elevators designated on Exhibit B attached to the Fifth
Amendment, exterior of the Building, sidewalks contiguous to the
Building and landscaping of the Building, fire protection life safety
system servicing the Building, insurance (including, but not limited
to, fire, extended coverage, liability, worker's compensation,
elevator, or any other insurance carried by the Lessor and applicable
to the Office Facility), painting, uniforms, customary management fees
applicable to the Office Area, supplies, sundries, sales or use taxes
on supplies or services, cost of wages and salaries of all
3
<PAGE>
persons engaged in the operation, maintenance and repair of the Office
Facility, and so-called fringe benefits (including social security
taxes, unemployment insurance taxes, cost for providing coverage for
disability benefits, cost of any pensions, hospitalization, welfare or
retirement plans, or any other similar or like expenses incurred under
the provisions of any collective bargaining agreement, or any other
cost or expenses which Lessor pays or incurs to provide benefits for
employees so engaged in the operation, maintenance, and repair of the
Office Facility), costs of capital improvements, amortized over the
useful life of such improvements, provided such capital improvements
are required by any government authority with jurisdiction over the
Premises, or which capital improvements are made for the purpose of
decreasing the Expenses of the Office Area, the charges of any
independent contractor who, under contract with the Lessor or its
representatives, does any of the work of operating, maintaining, or
repairing the Office Facility, reasonable legal and accounting
expenses limited to those incurred in connection with seeking or
obtaining reduction in or refunds of real estate taxes, maintenance
and operation of the Office Area, and preparation of annual audited
financial statements for the Building, or any other expense or charge,
whether or not hereinbefore mentioned, which in accordance with
generally accepted accounting and management principles would be
considered an expenses of operating, maintaining, or repairing the
Office Facility.
Any language in this Lease to the contrary notwithstanding,
Expenses shall not include costs or other items included within the
meaning of the term "Taxes" (as hereinafter defined); costs of
alterations of the premises of tenants of the Office Area; costs of
capital improvements to the Office Area not described in subparagraph
(A)(iv) of this Section 2; depreciation charges; interest and
principal payments on mortgages; ground rental payments; real estate
brokerage and leasing commissions; expenses incident to ownership of
the Building, such as land trustee fees, corporate franchise tax, or
legal and accounting fees related solely to the management of any
ownership entity, including key employee and disability insurance
premiums, any expense for which Lessor has been reimbursed from the
proceeds of insurance maintained in an amount and type which a
reasonably prudent owner of a comparable building located in Cook
County would maintain; any cost of repair or replacement necessitated
by the exercise of eminent domain for which Lessor has been reimbursed
from the award in such eminent domain proceeding; advertising and
promotional expenditures; legal and accounting fees; except as set
forth in subparagraph A(iv) herein of this Section 2; the cost of
special services rendered to any other tenant, if such services are
not generally available to tenants of the Building; fines and
penalties, unless caused by Lessee; cost of any repair necessitated by
the negligence of Lessor, its agents, servants or employees;
management fees in excess of a reasonable market management fee for
commercial space comparable to the Office Area; cost of payments
pursuant to any contract between Lessor and an entity which controls,
is controlled by or
4
<PAGE>
is under common control with Lessor in excess of payments under such a
contract in the absence of such relationship, provided that Lessee
agrees that the cost of electricity paid to Streeterville Utility
Company, its successor, or Lessor for the Office Area shall be
included in Expenses; any expenditures for which Lessor has been
reimbursed (other than pursuant to rent adjustment provisions in
leases); or any expenses not incurred in the ordinary course of
business by Lessor. If the Office Area is not a least 90% occupied for
all or any portion of an Adjustment Year, Lessor may elect to adjust
the Expenses for such Adjustment Year, using sound accounting
practices, to estimate the amount of Expenses which would have been
incurred had the Office Area been 90% occupied, provided that only
those Expenses which vary by occupancy shall be so adjusted. At the
date hereof, the Expenses which vary by occupancy of the Office Area
are contract cleaning expenses, heating and ventilation expenses,
chilled water and air conditioning expenses, elevator contract
expenses, scavenger trash removal expenses, water and gas expenses
(for hot water heaters in Office Area restrooms). The amount as so
adjusted shall be deemed the actual amount of Expenses for such
Adjustment Year. Regardless of the formulae, Lessor shall not collect
from Lessee the cost of any Expense which has been fully reimbursed to
Lessor by one or more other tenants of the Building. If any Office
Area expense, though paid in one year, relates to more than one
calendar year, at the reasonably exercised discretion of Lessor, such
expenses may be proportionately allocated among such related calendar
years, provided such allocations must be made if required by generally
accepted accounting principles and, if applicable, based on the
reasonably estimated useful life of each improvement.
(v) "Taxes" shall mean real estate taxes, assessments, sewer
rents, rates, and charges, transit taxes, taxes based upon the receipt
of rent, and any other federal, state or local government charge,
general, special, ordinary or extraordinary (but not including income
or franchise taxes or any other taxes imposed upon or measured by the
Lessor's income or profits, unless the same shall be imposed in lieu
of real estate taxes and other ad valorem taxes, provided that such
substituted taxes are based in whole or in part upon the Building or
the rents or other income therefrom, but only to the extent such taxes
would be payable if the Building were the only property of Lessor and
the income from the Building were the only income of Lessor) which may
now or thereafter be levied or assessed against: (a) the Office
Facility (to the extent of 100% of such taxes, charges, and expenses);
(b) Lot 1 ("Lot 1") of the aforementioned Paul's Subdivision (but only
to the extent of the percentage of such taxes, charges, and expenses
allocated to the Office Facility by Lessor in its reasonable
discretion); and (c) such other portions of the Building as serve or
benefit the Office Area which have been or will be assigned a tax
parcel number and upon which taxes could be levied and assessed (e.g.,
elevator shafts or air shafts) to such an extent as Lessor, in its
reasonably exercised discretion, deems to be equitable and fair
5
<PAGE>
in view of the relative levels of benefit to each of the portions of
the Building, provided that Lessor is obligated to pay such taxes. In
the event any Taxes shall not be separate assessed or charged against
the foregoing, such Taxes shall be allocated based upon the records of
the assessor or other governmental agency imposing such charges, or in
the event such records shall not exist, such allocation shall be made
on a pro rata square footage basis. In case of special taxes or
assessments which may be payable in installments, only the amount of
each installment paid during a calendar year shall be included in
Taxes for that year. Taxes shall be allocated for purposes of this
provision on a year-of-payment basis. Taxes shall also include any
personal property taxes (attributable to the calendar year in which
paid) imposed upon the furniture, fixtures, machinery, equipment,
apparatus, systems, and appurtenances used in connection with the
Office Facility or the operation thereof."
5. Conditions of Second Additional Premises. Simultaneously with the
execution and delivery of this Amendment by both Lessor and Lessee, Lessor shall
deliver possession of the Second Additional Premises to Lessee in broom clean
condition. Lessee shall accept the Second Additional Premises on such date in
their "as is", "where is" physical condition, and Lessee acknowledges that no
promise of Lessor to alter, remodel, improve, repair or decorate the Second
Additional Premises or any part thereof or any portion of the Building has been
made, except, however Lessor shall provide to Lessee Lessor's Contribution as
provided in Exhibit C attached hereto (the "Workletter") and Lessor acknowledges
that Lessee will be constructing certain improvements in the Second Additional
Premises in accordance with said Workletter.
6. Return of Premises. As more fully provided in the Workletter, Lessee
intends on installing a stairway between the 14th floor and the 15th floor of
the Premises. Notwithstanding anything contained in Section 9 or elsewhere in
the Lease to the contrary and without limiting the Lessee's other obligations
set forth in the Lease, prior to the expiration or earlier termination of the
Lease, Lessee shall be responsible for demolishing said stairway and restoring
the floor slab between the 14th and 15 floor of the Building in a manner
satisfactory to Lessor, all at Lessee's sole cost and expense.
7. 14th Floor Expansion Rights. Sections 4 and 7 of the Fourth Amendment
are hereby deleted in their entirety. Notwithstanding such deletion, Section 2
of the Third Amendment, which was deleted by Section 4 of the Fourth Amendment,
remains deleted in its entirety from the Lease. With respect to the right of
first refusal granted to Tenant under Section 5 of the Fourth Amendment, Lessee
acknowledges that the Second Additional Premises incorporates a portion of the
Primary ROFR Space (as defined and depicted in the Fourth Amendment).
Accordingly, that portion of the Primary ROFR Space which is included within the
Second Additional Premises is hereby deleted from the definition of Primarily
ROFR Space and no longer subject to the rights of Lessee under Section 5 of the
Fourth Amendment. With respect to the right of first refusal granted to Lessee
under Sections 5 and 6 of the Fourth
6
<PAGE>
Amendment (which pertain to the Primary ROFR Space and Secondary ROFR Space,
respectively), Lessee acknowledges that such rights are subject and subordinate
to any renewals, extensions or expansions of or into such space by (a) the
existing tenant of a portion of such space identified on Exhibit A attached
hereto as Columbus-Cuneo-Cabrini Medical Center pursuant to written agreements
in affect as of the date hereof of (b) the existing tenants of portions of such
space identified on Exhibit A attached hereto as Elias R. Sabbagha, M.D. and
Souma Diagnostics, regardless of whether those two existing tenants have written
agreements or not for such renewals, extensions or expansions. Except as
modified above, Lessee retains its expansion rights with respect to the Primary
ROFR Space and Secondary ROFR Space as provided under Section 5 and 6 of the
Fourth Amendment.
8. After Hours Heating, Ventilating and Air Conditioning Services for the
Second Additional Premises. Lessee desires additional heating, ventilating and
air conditioning ("HVAC") services for the Second Additional Premises. Lessor
agrees to provide such services in accordance with Section 6.A. of the Lease
8:00 a.m. to 8:00 p.m. Monday through Fridays and 8:00 a.m. to 6:00 p.m.
Saturdays, in either case holidays excepted ("Normal Second Additional Premises
HVAC Hours"). In order to provide such additional HVAC services to the Second
Additional Premises, it will be necessary to operate the air handlers serving
the 14th floor of the Building. Such air handler serving the 14th floor of the
Building are separately metered. In consideration of such extended hours, Lessee
agrees to pay Lessor, within ten (10) days after receipt of invoice for same
from Lessor, an amount equal to 18.3% of the cost of the operating such air
handlers for the 14th Floor, as determined by such separate meters. In
addition to the foregoing, Lessee shall pay to Lessor on the first day of each
month a charge of $51.00 per month for the additional maintenance incurred by
Lessor in connection with such additional HVAC services plus, during the cooling
season (i.e., April 1 through October 31 of each calendar year), a charge of
$263.60 per month for the additional condenser water consumed in connection with
such additional HVAC services (the foregoing charges are hereinafter
collectively referred to as the "Second Additional Premises HVAC Charges"). The
Second Additional Premises HVAC Charges are subject to an adjustment as provided
in Section 9 below. Lessee may request additional HVAC services for the Second
Additional Premises (that is in addition to the Normal Second Additional
Premises HVAC Hours) upon at least 24 hours notice. Lessee shall pay for such
additional after hours HVAC services at Landlord's Building standard rates.
Currently, the Building standard rate is $35.00 per hour. Lessee understands
that such rate is subject to periodic change by Lessor.
Lessee may elect, by prior written notice given to Landlord, to discontinue
such additional HVAC services for the Second Additional Premises (i.e., services
during the Normal Second Additional Premises HVAC Hours), in which event, Lessor
shall only be required to provide HVAC services for the Second Additional
Premises during the normal business hours set forth in Section 6.A. of the
Original Lease. Lessee shall pay any accrued charges under this Section 8 for
the additional HVAC services to the Second Additional Premises up to the
effective date of any such termination, but thereafter shall not be required to
pay the charges described in this Section 8.
7
<PAGE>
9. Second Additional Premises HVAC Charges CPI Adjustment.
A. Definitions. As used herein:
(i) "Base Month" shall mean January, 1998.
(ii) "Base Second Additional Premises HVAC Charges" shall mean
$51.00 per month for the additional maintenance and $263.60 per month
for the additional condenser water.
(iii) "CPI" shall mean the Consumer Price Index for All Urban
Consumers (CPI-U) published by the Bureau of Labor Statistics of the
United States Department of Labor for Chicago-Gary-Lake County, IL-IN-
WI, All Items, (1982-84=100). If the manner in which the CPI is
determined by the Bureau of Labor Statistics shall be substantially
revised, including, without limitation, a change in the base index
year, an adjustment shall be made by Lessor in such revised index
which would produce results equivalent, as nearly as possible, to
those which would have been obtained if the CPI had not been so
revised. If the CPI shall become unavailable to the public because
publication is discontinued, or otherwise, or if equivalent data is
not readily available then Lessor will substitute a comparable index
based upon changes in the cost of living or purchasing power of the
consumer dollar published by any other governmental agency or, if no
such index shall be available, then a comparable index published by a
major bank, financial institution, university or a recognized
financial publication.
B. Adjustment. Effective as of each January 1 falling within
the term hereof, the Second Additional Premises HVAC Charges shall be
increased to an amount equal to the Base Second Additional Premises
HVAC Charges multiplied by a fraction, the numerator of which is the
CPI for the month of January of such calendar year and the denominator
of which is the CPI for the Base Month. In no event shall such CPI
adjustment result in a decrease in the Second Additional Premises HVAC
Charges. Lessor may furnish to Lessee a notice (the "CPI Notice")
showing the CPI and the amount of the CPI adjustment for any calendar
year after Lessor ascertains the CPI to be used in determining the CPI
adjustment for such calendar year. Until Lessor furnishes the CPI
Notice, Lessee shall continue to pay to Lessor monthly installments of
Second Additional Premises HVAC Charges in an amount equal to the
latest monthly installment of Second Additional Premises HVAC Charges.
On or before the first day of the month immediately following the
service of a CPI Notice and on or before the first day of each
following month until Lessee receives a further CPI Notice, Lessee
shall pay to Lessor the monthly installment of Second Additional
Premises HVAC Charges shown in such CPI Notice. Within fifteen (15)
days following service
8
<PAGE>
of each CPI Notice, Lessee shall also pay to Lessor a lump sum payment
equal to the Second Additional Premises HVAC Charges owing by Lessee
to Lessor (as shown in such CPI Notice) for the period commencing on
the first day of the calendar year during which such CPI Notice is
served and expiring on the last day of the month during which such CPI
Notice is served, less all monthly installments of Second Additional
Premises HVAC Charges previously paid by Lessee to Lessor for such
calendar year.
10. Broker. Lessee represents to Lessor that Lessee has not dealt with any
real estate broker, salesperson or finder in connection with this Amendment
other than Golub & Company (the "Broker"), and no other such person initiated or
participated in the negotiation of this Amendment or is entitled to any
commission in connection herewith. Lessee hereby agrees to indemnify, defend and
hold Lessor, its property manager and their respective employees harmless from
and against any and all liabilities, claims, demands, actions, damages, costs
and expenses (including attorneys' fees) arising from a claim for a fee or
commission made by any broker (other than the Broker), claiming to have acted by
or on behalf of Lessee in connection with this Amendment.
11. Submission. Submission of this Amendment by Lessor or Lessor's agent,
or their respective agents or representatives, to Lessee for examination and/or
execution shall not in any manner bind Lessor and no obligations on Lessor shall
arise under this Amendment unless and until this Amendment is fully signed and
delivered by Lessor and Lessee; provided, however, the execution and delivery by
Lessee of this Amendment to Lessor or Lessor's agent, or their respective agents
or representatives, shall constitute an irrevocable offer by Lessee on the terms
and conditions herein contained, which offer may not be revoked for fifteen (15)
days after such delivery.
12. Effect of Amendment. As amended by this Amendment, the Lease shall
remain in full force and effect.
13. Exculpatory Provisions. It is expressly understood and agreed by and
between the parties hereto, anything herein to the contrary notwithstanding,
that each and all of the representations, warranties, covenants, undertakings
and agreements herein made on the part of Lessor while in form purporting to be
the representations, warranties, covenants, undertakings and agreements of
Lessor are nevertheless each and every one of them made and intended, not as
personal representations, warranties, covenants, undertakings and agreements by
Lessor or for the purpose of or with the intention of binding Lessor personally,
but are made and intended for the purpose only of subjecting Lessor's interest
in the Office Area and the Premises to the terms of this Amendment and for no
other purposes whatsoever, and in case of default hereunder by Lessor (or
default through, under or by any of its beneficiaries, or agents or
representatives of said beneficiaries), Lessee shall look solely to the interest
of Lessor in said Office Area, and this Amendment is executed and delivered by
Lessor not in its own right, but solely in the exercise of the powers conferred
upon it as such Trustee; that the Lessor shall have no personal
9
<PAGE>
liability to pay any indebtedness accruing hereunder or to perform any covenant,
either express or implied, herein contained and no liability or duty shall rest
upon Lessor to sequester the trust estate or the rent, issues and profits
arising therefrom, or the proceeds arising from any sale or other responsibility
of any sort is assumed by, nor shall at any time be asserted or enforceable
against, said Lessor, American National Bank and Trust Company of Chicago, a
national banking association, individually or personally, but only as Trustee
under the provisions of a Trust Agreement dated May 2, 1989 and known as Trust
No. 108237-06, on account of this Amendment or on account of any representation,
warranty, covenant, undertaking or agreement of Lessor in this Amendment
contained, either express or implied, all such personal liability, if any, being
expressly waived and released by Lessee and by all persons claiming by, through
or under Lessee.
IN WITNESS WHEREOF, this Amendment is executed as of the day and year
aforesaid.
LESSEE: LESSOR:
- ------ ------
PLAYBOY ENTERPRISES, INC., AMERICAN NATIONAL BANK AND
a Delaware corporation TRUST COMPANY OF CHICAGO,
not personally, but solely as
Trustee under as aforesaid
By: /s/ Howard Shapiro By: /s/ Greg Kasprzyk
-------------------------------- ---------------------------
Title: Ex. VP Title: VP
-------------------------- --------------------------
10
<PAGE>
EXHIBIT A
---------
FLOOR PLAN OF SECOND ADDITIONAL PREMISES
----------------------------------------
[BLUE PRINT APPEARS HERE]
A-1
<PAGE>
EXHIBIT B
---------
PLAN OF PORTIONS OF THE COMMON AREAS
------------------------------------
[BLUE PRINT APPEARS HERE]
Page 1 of 2
<PAGE>
EXHIBIT B
---------
[BLUE PRINT APPEARS HERE]
Page 2 of 2
<PAGE>
EXHIBIT C
WORKLETTER
The terms used herein shall have the meanings ascribed to them in that
certain Fifth Amendment to Lease dated March 19, 1998, by and between LaSalle
National Bank, as Trustee under that certain Trust Agreement dated May 2, 1989
and known as Trust No. 108237-06 ("Lessor") and Playboy Enterprises, Inc. a
Delaware corporation ("Lessee"), unless otherwise stated herein.
I. Construction of the Premises. Lessor and Lessee agree that their respective
rights and obligations in reference to the construction of the Second Amendment
Premises shall be as follows:
A. Lessee's Plans and Specifications.
(1) Lessee, at Lessee's sole cost and expense, except as
provided herein, shall cause a licensed architect satisfactory to Lessor to
prepare complete, finished, detailed architectural, mechanical, structural,
electrical and telephone plans and specifications including all dimensions
and specifications for all work to be performed in the Second Additional
Premises as tenant improvements ("Lessee's Plans").
(2) Lessee's Plans shall also include all information as shall
be required by Lessor's engineers in connection with mechanical plans,
which information shall include, but not be limited to, the following:
(i) Any special floor loading conditions which may exceed
the structural weight limits of any floor;
(ii) Specifications of any heat emanating equipment to be
installed by Lessee which may require special air conditioning;
(iii) Electrical specifications of any equipment that
requires additional electrical power or outlets;
(iv) Complete specifications of any dataline wiring
required, including cable routing, conduit size, cable type, and
similar items; and
(v) Complete plans and specifications for construction of
the contemplated stairway between the 14th and 15th floors of the
Premises.
C-1
<PAGE>
(3) Lessee's Plans are expressly subject to Lessor's prior
written approval, which shall not be unreasonably withheld or delayed,
and in any event Lessor shall provide its approval or disapproval
within ten (10) business days after submission of proposed Lessee's
Plans by Lessee. Upon such approval, Lessee shall cause Lessee's
Plans, at Lessee's sole cost and expense, to be filed with the
governmental agencies having jurisdiction thereof, in order to obtain
all governmental permits and authorizations which may be required in
connection with the work to be done. Lessee may not commence any of
Lessee's Work until Lessee's Plans are approved by Lessor.
(4) Without the prior written consent of Lessor, which consent
shall not be unreasonably withheld or delayed, Lessee shall make no
changes in Lessee's Plans after approval thereof by Lessor.
II. Construction of Lessee's Work.
A. Lessee shall designate in Lessee's Plans all work and materials
necessary for construction of the Second Additional Premises, and Lessee
shall construct and install or cause to be constructed or installed in the
Second Additional Premises all of the work designated in Lessee's Plans
("Lessee's Work"). Prior to solicitation of any bids for the construction
of Lessee's Work, Lessor shall approve, in writing, each of the contractors
to be solicited by Lessee, which approval shall not be unreasonably
withheld or delayed.
B. Lessee shall contribute a maximum of $1,301,991.40 ("Lessor's
Contribution") toward the Cost of Lessee's Work. Lessee is solely
responsible for the Cost of Lessee's Work over $1,301,991.40. Lessee shall
not be entitled to any payment or credit for any unused portion of Lessor's
Contribution. Lessee agrees to cause a portion of the Lessee's Work which
costs no less than $964,200.00 to be completed by no later than December
31, 1998 and to complete the balance of Lessee's Work by no later than July
31, 1999.
C. For the purpose hereof, "Cost of Lessee's Work" shall mean costs
of all labor and materials for construction of the Second Additional
Premises in accordance with Lessee's Plans, general contractor's fees,
architectural fees and costs, fees and costs relating to engineering,
structural, lighting, communications, electrical and construction
consultants, costs of the purchase and installation of permanent lines or
cable for security purposes, computer operations, telephone service and
other forms of communication, costs of built-in furniture, costs of
separately metering electricity to the Second Additional Premises, costs
for the purchase, delivery and installation of any other item which, when
installed in the Second Additional Premises, shall be deemed a fixture or a
permanent improvement to the Second Amendment Premises and a supervisory
fee payable to Lessor in the amount of $25,000.00.
C-2
<PAGE>
D. Lessee's right to receive payment of Lessor's Contribution shall
be contingent upon (a) Lessee not being in default or breach under the
Lease, as amended, at the time Lessee so requests payment and (b) Lessee,
at such time, having completed the work for which Lessor's Contribution is
being so requested in accordance with the terms of this Workletter and
having submitted to Lessor contractor's affidavits and full and final
waivers of lien and receipted bills for labor and materials expended and
used for such work. In the event that Lessee has satisfied all conditions
and requirements as set forth herein and in the Lease, as amended, for the
payment of Lessor's Contribution and Lessor fails to pay in full Lessor's
Contribution to Lessee within ninety (90) days after Lessee's request
therefor as aforesaid and provided that Lessee is not then in breach or
default under the Lease, as amended, Lessee shall, upon the expiration of
said ninety (90) day period, be entitled to offset the unpaid amount of
Lessor's Contribution from the then next due installments of Base Rent
thereafter payable by Lessee under the Lease, as amended, until the full
amount of Lessor's Contribution has been paid or offset as provided herein.
E. In reviewing Lessee's Plans, Lessor may take into consideration
whether, in Lessor's reasonable judgement, Lessee's Work will be
practicable and consistent with existing physical conditions in the
Building and the Office Area and with the Building Plans and any other
plans for the Building which have been filed with the appropriate
municipality or other governmental authorities having jurisdiction thereof,
or may impair Lessor's ability to perform any of Lessor's obligations under
the Lease or any other lease of space in the Building. Lessee's Work shall
not affect any portion of the Building other than the Second Additional
Premises.
F. Lessee's Work shall be performed in strict conformity with
Lessee's Plans and shall be performed at Lessee's sole cost and expense,
except for Lessor's Contribution.
G. Prior to soliciting bids for construction of Lessee's Work, Lessee
shall submit to Lessor for Lessor's approval, the names and addresses of
all contractors to be solicited. Lessee's Work shall be done only by
contractors or mechanics approved by Lessor. Lessee shall not permit
Lessee's contractors and labor to interfere with Lessor or with any other
tenant or its labor. Upon completion of Lessee's Work, Lessee shall furnish
or shall cause to be furnished to Lessor through the construction escrow,
contractor's affidavits, full and final waivers of lien, final architect's
certificates and receipted bills covering all labor and materials expended
and Lessee's Work shall comply with all insurance requirements, all laws,
ordinances, rules and regulations of all governmental authorities, and all
collective bargaining agreements applicable to the Building, and shall be
done in a good and workmanlike manner with the use of high grades of
materials.
C-3
<PAGE>
III. Insurance and Indemnity.
A. Before commencing Lessee's Work, Lessee shall deliver to Lessor
certificates of insurance or copies of insurance policies from all
contractors performing labor or supplying materials for the construction of
Lessee's Work, insuring Lessor, its agents, representatives, successors and
assigns against any and all liability for bodily injury or property damage
arising out of or connected in any way with Lessee's Work.
B. Lessee hereby indemnifies and holds harmless Lessor, its agents,
representatives, successors and assigns, from and against any and all
losses, costs, claims and expenses of every kind and description arising
out or relating to Lessee's Work, except as such may be required under
insurance policies maintained pursuant to Paragraph III.A. above.
C-4
<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 36,562
<ALLOWANCES> 5,137
<INVENTORY> 25,703
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<PP&E> 38,051
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0
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