-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6fTyxJUVGDrAZFemsmGSwuPm1dodq7Amifr5Y57yegeR71v90+aKb7G2niCSkzW Owei74DP0EVvI8zg/ZiWrA== 0001140361-10-044364.txt : 20101109 0001140361-10-044364.hdr.sgml : 20101109 20101109101249 ACCESSION NUMBER: 0001140361-10-044364 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20100930 FILED AS OF DATE: 20101109 DATE AS OF CHANGE: 20101109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0001072341 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 364249478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 101174703 BUSINESS ADDRESS: STREET 1: 680 NORTH LAKE SHORE DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 MAIL ADDRESS: STREET 1: 680 NORTH LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NEW PLAYBOY INC DATE OF NAME CHANGE: 19981020 10-Q 1 form10q.htm PLAYBOY ENTERPRISES INC 10-Q 9-30-2010 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
o
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 001-14790
 
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
36-4249478
(State or other jurisdiction of  incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
680 North Lake Shore Drive
   
Chicago, IL
 
60611
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (312) 751-8000



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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
 
At October 29, 2010, there were 4,864,102 shares of Class A Common Stock and 28,848,232 shares of Class B Common Stock outstanding.
 


 
 

 

FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains “forward-looking statements,” including statements in Part I, Item 2. “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. We use words such as “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “anticipates,” “intends,” “continues” and other similar terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause our actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
 
The following are some of the important factors that could cause our actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements:
 
(1)
Foreign, national, state and local government regulations, actions or initiatives, including:
 
(a)
attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video, Internet and mobile materials;
 
(b)
attempts to limit or otherwise regulate the sale or distribution of certain consumer products sold by our licensees; or
 
(c)
limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue for us;
(2)
Risks associated with our foreign operations, including market acceptance and demand for our products and the products of our licensees and other business partners;
(3)
Our ability to effectively manage our exposure to foreign currency exchange rate fluctuations;
(4)
Further changes in general economic conditions, consumer spending habits, viewing patterns, fashion trends or the retail sales environment, which, in each case, could reduce demand for our programming and products and impact our advertising and licensing revenues;
(5)
Our ability to protect our trademarks, copyrights and other intellectual property;
(6)
Risks as a distributor of media content, including our becoming subject to claims for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials we distribute;
(7)
The risk our outstanding litigation could result in settlements or judgments which are material to us;
(8)
Dilution from any potential issuance of common stock or convertible debt in connection with financings or acquisition activities;
(9)
Further competition for advertisers from other publications, media or online providers or decreases in spending by advertisers, either generally or with respect to the men’s market;
(10)
Competition in the television, men’s magazine, Internet, mobile and product licensing markets;
(11)
Attempts by consumers, distributors, merchants or private advocacy groups to exclude our programming or other products from distribution;
(12)
Our television, Internet and mobile businesses’ reliance on third parties for technology and distribution, and any changes in that technology, distribution and/or delays in implementation which might affect our plans, assumptions and financial results;
(13)
Risks associated with losing access to transponders or technical failure of transponders or other transmitting or playback equipment that is beyond our control;
(14)
Competition for channel space on linear or video-on-demand television platforms;
(15)
Failure to maintain our agreements with multiple system operators and direct-to-home, or DTH, operators on favorable terms, as well as any decline in our access to households or acceptance by DTH, cable and/or telephone company systems and the possible resulting cancellation of fee arrangements, pressure on splits or other deterioration of contract terms with operators of these systems;
(16)
Risks that we may not realize the expected sales and profits and other benefits from acquisitions;
(17)
Any charges or costs we incur in connection with restructuring measures we have taken or may take in the future;
(18)
Increases in paper, printing, postage or other manufacturing costs;
(19)
Effects of the consolidation of the single-copy magazine distribution system in the U.S. and risks associated with the financial stability of major magazine wholesalers;

 
2

 

(20)
Effects of the consolidation and/or bankruptcies of television distribution companies;
(21)
Risks associated with the viability of our subscription, ad-supported and e-commerce Internet models;
(22)
Our ability to sublet our excess space may be negatively impacted by the market for commercial rental real estate as well as by the global economy generally;
(23)
The risk that our common stock could be delisted from the New York Stock Exchange, or NYSE, if we fail to meet the NYSE’s continued listing requirements;
(24)
Risks that adverse market conditions in the securities and credit markets may significantly affect our ability to access the capital markets;
(25)
The risk that we will be unable to refinance our 3.00% convertible senior subordinated notes due 2025, or convertible notes, or the risk that we will need to refinance our convertible notes, prior to the first put date of March 15, 2012, at significantly higher interest rates;
(26)
The risk that we are unable to either extend the maturity date of our existing credit facility beyond the current expiration date of January 31, 2011 or establish a new facility with a later maturity date and acceptable terms; and
(27)
Further downward pressure on our operating results and/or further deterioration of economic conditions could result in impairments of our long-lived assets, including intangible assets.

For a detailed discussion of these and other factors that may affect our performance, see Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 
 
3

 

PLAYBOY ENTERPRISES, INC.
FORM 10-Q


TABLE OF CONTENTS


Page
PART I
FINANCIAL INFORMATION

Item 1.
 
Financial Statements
 
       
   
5
       
   
6
       
   
7
       
   
8
       
   
9
       
Item 2.
 
17
       
Item 3.
 
25
       
Item 4.
 
25
       
       
PART II
OTHER INFORMATION
       
Item 1.
 
26
       
Item 1A.
 
27
       
Item 6.
 
29


PART I
FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS
 
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
 
   
2010
   
2009
 
Net revenues
  $ 52,044     $ 56,005  
Costs and expenses
               
Cost of sales
    (37,881 )     (42,234 )
Selling and administrative expenses
    (13,457 )     (11,070 )
Restructuring expense
    (418 )     (469 )
Impairment charges
    (25,372 )     -  
Total costs and expenses
    (77,128 )     (53,773 )
Operating income (loss)
    (25,084 )     2,232  
Nonoperating income (expense)
               
Investment income
    12       10  
Interest expense
    (2,123 )     (2,194 )
Amortization of deferred financing fees
    (165 )     (164 )
Other, net
    1,056       227  
Total nonoperating expense
    (1,220 )     (2,121 )
Income (loss) before income taxes
    (26,304 )     111  
Income tax expense
    (1,131 )     (1,195 )
Net loss
  $ (27,435 )   $ (1,084 )
                 
Other comprehensive income (loss)
               
Unrealized gain on marketable securities
    -       12  
Foreign currency translation gain (loss)
    176       (129 )
Total other comprehensive income (loss)
    176       (117 )
Comprehensive loss
  $ (27,259 )   $ (1,201 )
                 
Weighted average number of common shares outstanding
               
Basic and diluted
    33,696       33,468  
                 
Basic and diluted loss per common share
  $ (0.81 )   $ (0.03 )


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)

   
2010
   
2009
 
Net revenues
  $ 160,155     $ 179,829  
Costs and expenses
               
Cost of sales
    (118,976 )     (139,844 )
Selling and administrative expenses
    (36,865 )     (34,980 )
Restructuring expense
    (2,676 )     (12,744 )
Impairment charges
    (25,819 )     (5,518 )
Total costs and expenses
    (184,336 )     (193,086 )
Operating loss
    (24,181 )     (13,257 )
Nonoperating income (expense)
               
Investment income
    23       742  
Interest expense
    (6,485 )     (6,516 )
Amortization of deferred financing fees
    (493 )     (553 )
Other, net
    69       (329 )
Total nonoperating expense
    (6,886 )     (6,656 )
Loss before income taxes
    (31,067 )     (19,913 )
Income tax expense
    (2,734 )     (3,593 )
Net loss
  $ (33,801 )   $ (23,506 )
                 
Other comprehensive income (loss)
               
Unrealized loss on marketable securities
    -       (11 )
Foreign currency translation gain
    672       291  
Total other comprehensive income
    672       280  
Comprehensive loss
  $ (33,129 )   $ (23,226 )
                 
Weighted average number of common shares outstanding
               
Basic and diluted
    33,623       33,433  
                 
Basic and diluted loss per common share
  $ (1.01 )   $ (0.70 )


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
   
(Unaudited)
Sept. 30,
2010
   
Dec. 31,
2009
 
Assets
           
Cash and cash equivalents
  $ 26,565     $ 24,569  
Marketable securities and short-term investments
    1,039       -  
Receivables, net of allowance for doubtful accounts of $7,031 and $3,834, respectively
    25,476       31,942  
Receivables from related parties
    1,076       2,897  
Inventories
    3,909       3,951  
Deferred tax asset
    1,426       1,487  
Prepaid expenses and other current assets
    6,789       5,048  
Total current assets
    66,280       69,894  
Property and equipment, net
    15,780       18,438  
Programming costs, net
    26,280       47,516  
Trademarks, net
    44,854       43,964  
Distribution agreements, net of accumulated amortization of $7,183 and $6,751, respectively
    8,042       11,513  
Deferred tax asset
    228       -  
Other noncurrent assets
    4,369       5,507  
Total assets
  $ 165,833     $ 196,832  
                 
Liabilities
               
Acquisition liabilities
  $ 703     $ 4,802  
Accounts payable
    22,208       21,138  
Accrued salaries, wages and employee benefits
    9,143       10,123  
Deferred revenues
    34,700       27,417  
Other current liabilities and accrued expenses
    16,422       17,519  
Total current liabilities
    83,176       80,999  
Financing obligations
    107,611       104,128  
Acquisition liabilities
    -       703  
Deferred tax liability
    8,508       7,706  
Other noncurrent liabilities
    20,965       25,592  
Total liabilities
    220,260       219,128  
                 
Shareholders’ deficit
               
Common stock, $0.01 par value
               
Class A voting – 7,500,000 shares authorized; 4,864,102 issued
    49       49  
Class B nonvoting – 75,000,000 shares authorized; 29,219,228 and 29,014,343 issued, respectively
    292       289  
Capital in excess of par value
    261,374       260,379  
Accumulated deficit
    (308,765 )     (274,964 )
Treasury stock, at cost – 381,971 shares
    (5,000 )     (5,000 )
Accumulated other comprehensive loss
    (2,377 )     (3,049 )
Total shareholders’ deficit
    (54,427 )     (22,296 )
Total liabilities and shareholders’ deficit
  $ 165,833     $ 196,832  


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


PLAYBOY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30 (Unaudited)
(In thousands)
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net loss
  $ (33,801 )   $ (23,506 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation of property and equipment
    3,520       3,856  
Amortization of intangible assets
    1,168       1,287  
Amortization of investments in entertainment programming
    17,638       22,353  
Amortization of deferred financing fees
    493       553  
Stock-based compensation
    1,091       753  
Noncash interest expense
    3,483       3,236  
Impairment charges
    25,819       5,518  
Deferred income taxes
    635       1,552  
Payments of deferred compensation plan
    -       (5,193 )
Net change in operating assets and liabilities
    6,434       9,477  
Investments in entertainment programming
    (18,226 )     (18,397 )
Other, net
    1,640       (617 )
Net cash provided by operating activities
    9,894       872  
Cash flows from investing activities
               
Purchases of investments
    (1,039 )     (94 )
Proceeds from sales of investments
    -       6,762  
Additions to property and equipment
    (1,770 )     (3,092 )
Other, net
    3       -  
Net cash provided by (used for) investing activities
    (2,806 )     3,576  
Cash flows from financing activities
               
Payments of deferred financing fees
    -       (174 )
Payments of acquisition liabilities
    (5,050 )     (3,050 )
Proceeds from stock-based compensation
    93       60  
Net cash used for financing activities
    (4,957 )     (3,164 )
Effect of exchange rate changes on cash and cash equivalents
    (135 )     324  
Net increase in cash and cash equivalents
    1,996       1,608  
Cash and cash equivalents at beginning of period
    24,569       25,192  
Cash and cash equivalents at end of period
  $ 26,565     $ 26,800  


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
(A)
Basis of Preparation
 
The financial information included in these financial statements is unaudited but, in the opinion of management, reflects all normal recurring and other adjustments necessary for a fair presentation of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes to the financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Certain amounts reported for the prior periods have been reclassified to conform to the current year’s presentation.
 
(B)
Recently Issued Accounting Standards
 
In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, or ASU No. 2010-06. ASU No. 2010-06 requires additional disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers between levels of the fair value hierarchy as defined in FASB Accounting Standard Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820. We adopted the provisions of ASU No. 2010-06 beginning with the first quarter of 2010, except for the disclosure presenting disaggregated activity withi n the reconciliation for fair value measurements using significant unobservable inputs (Level 3), which we are required to adopt in the first quarter of 2011. As ASU No. 2010-06 affects disclosures only, the adoption of ASU No. 2010-06 does not affect our results of operations or financial condition.
 
(C)
Restructuring Expense
 
In the second quarter of 2010, we implemented a plan to downsize our organizational structure and reduce overhead costs. As a result of this plan, we recorded a charge of $1.2 million related to a workforce reduction of 18 employees, most of whose positions were eliminated by the end of the third quarter of 2010. Severance payments under this plan began in the third quarter of 2010 and will be completed in 2011.
 
In the first quarter of 2010, we implemented a plan to further reduce headcount and real estate lease obligations. As a result of this plan, we recorded a charge of $0.4 million related to a lease termination fee and a workforce reduction of 10 employees, whose positions will be eliminated in the first quarter of 2011. Severance payments under this plan will begin in the first quarter of 2011 and will be completed in 2011.
 
In the fourth quarter of 2009, we implemented a plan to outsource non-editorial functions of Playboy magazine and other domestic publications to American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., as well as to reduce other overhead costs. As a result of this plan, we recorded a charge of $3.7 million related to a workforce reduction of 26 employees, most of whose positions were eliminated by the end of the first quarter of 2010, and contract termination fees. Severance payments under this plan began in the fourth quarter of 2009 and will be completed in 2011.
 
In the second quarter of 2009, we recorded a charge of $9.3 million related to our plan to vacate our leased New York office space. The charge primarily reflected the discounted value of our remaining lease obligation net of estimated sublease income. We recorded additional restructuring charges related to this plan in 2009 representing depreciation of leasehold improvements and furniture and equipment as well as accretion of the difference between the nominal and discounted remaining lease obligation net of estimated sublease income. We expect to record additional restructuring charges, representing depreciation and accretion, of $8.0 million over the remaining approximate nine-year term of the lease, or approximately $1.0 million on average annually. We recorded $0.3 million and $1.0 million of these restructuring charges representi ng depreciation and accretion during the current year quarter and nine-month period, respectively. We also recorded an unfavorable adjustment of $0.1 million during the current year quarter as a result of changes in assumptions for this plan.
 
In the first quarter of 2009, we implemented a restructuring plan to integrate our print and digital businesses in our Chicago office as well as to streamline operations across the Company, including the elimination of positions.
 
 
As a result of this plan, we recorded a charge of $2.6 million related to a workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan began in the first quarter of 2009 and were completed in the current year quarter. We recorded an unfavorable adjustment of $0.1 million during the prior year quarter as a result of changes in assumptions for this plan.
   
In the fourth quarter of 2008, we implemented a restructuring plan to lower overhead costs, primarily related to senior Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million related to 21 employees, most of whose positions were eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and were largely completed by the end of 2009 with some payments continuing into 2011. We recorded an unfavorable adjustment of $0.8 million during the prior year nine-month period as a result of changes in assumptions for this plan.
 
In the third quarter of 2008, we implemented a restructuring plan to reduce overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose positions were eliminated in the fourth quarter of 2008. Payments under this plan began in the fourth quarter of 2008 and were completed in the current year quarter. We recorded a favorable adjustment of $0.4 million during the prior year nine-month period as a result of changes in assumptions for this plan.
 
The following table sets forth the activity and balances of our restructuring reserves, which are included in “Accrued salaries, wages and employee benefits,” “Other current liabilities and accrued expenses” and “Other noncurrent liabilities” on our Consolidated Balance Sheets (in thousands):
 
   
Workforce Reduction
   
Consolidation of Facilities and Operations
   
Total
 
Balance at December 31, 2009
  $ 4,689     $ 10,667     $ 15,356  
Reserve recorded
    1,352       285       1,637  
Accretion of discount on net lease obligation
    -       606       606  
Adjustments to previous estimates
    (15 )     64       49  
Cash payments
    (2,114 )     (3,222 )     (5,336 )
Balance at September 30, 2010
  $ 3,912     $ 8,400     $ 12,312  

The above table excludes depreciation of leasehold improvements and furniture and equipment related to our leased New York office space.
 
(D)
Impairment Charges
 
In accordance with ASC Topic 360, Property, Plant, and Equipment, we conduct impairment testing on long-lived assets, or asset groups, whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
 
During the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements. We conducted impairment testing on these assets as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV, Inc. We determined the carrying amounts of these assets were not fully recoverable, and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. We also determined the life of programming costs to be generally either 12 or 24 months. We estimated the fair value of the assets using a forecasted-discounted cash flow metho d based in part on our financial results and our expectation of future performance, which are Level 3 inputs within the fair value hierarchy under ASC Topic 820 as described in Note (I), Fair Value Measurement. Of the total impairment charges, $22.3 million related to programming costs and $3.1 million related to distribution agreements. For further discussion of our impairment testing, see Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
 

During the first quarter of 2010, we implemented a plan to further reduce our headcount and real estate lease obligations. As a result, we evaluated the related long-lived assets for recoverability. We determined the carrying amount of this asset group was not recoverable and we recorded an impairment charge of $0.4 million in the first quarter of 2010 representing the entire net book value of these long-lived assets.
 
In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, Intangibles–Goodwill and Other, or ASC Topic 350, we conducted interim impairment testing of goodwill in accordance with ASC Topic 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the forme r Entertainment Group, which contained the digital business’ assets prior to the realignment of our operating segments. We estimated the implied fair value of the goodwill using a combined weighted forecasted-discounted cash flow method and a market multiple approach based in part on our financial results and our expectation of future performance at the time of our impairment testing, which are Level 3 inputs within the fair value hierarchy under ASC Topic 820 as described in Note (I), Fair Value Measurement. As a result of this testing, the implied fair value of goodwill of the Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance of the Print/Digital Group’s goodwill of $5.5 million in the first quarter of 2009.
 
Further downward pressure on our operating results and/or further deterioration of economic conditions could result in additional future impairments of our long-lived assets, including intangible assets.
 
(E)
Earnings Per Common Share
 
The following table sets forth the computations of basic and diluted earnings per share, or EPS (in thousands, except per share amounts):
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
For basic and diluted EPS – net loss
  $ (27,435 )   $ (1,084 )   $ (33,801 )   $ (23,506 )
                                 
Denominator:
                               
For basic and diluted EPS – weighted average shares
    33,696       33,468       33,623       33,433  
                                 
Basic and diluted loss per common share
  $ (0.81 )   $ (0.03 )   $ (1.01 )   $ (0.70 )

The following table sets forth the number of shares related to outstanding options to purchase our Class B common stock, or Class B stock, the number of restricted stock units, or RSUs, that provide for the issuance of Class B stock and the potential number of shares of Class B stock contingently issuable under our 3.00% convertible senior subordinated notes due 2025, or convertible notes. These shares were not included in the computations of diluted EPS for the quarters and nine-month periods ended September 30, 2010 and 2009, as their inclusion would have been antidilutive (in thousands):
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Stock options
    3,624       4,026       3,598       3,929  
RSUs
    362       617       422       541  
Convertible notes
    6,758       6,758       6,758       6,758  
Total
    10,744       11,401       10,778       11,228  


(F)
Inventories
 
The following table sets forth inventories, which are stated at the lower of cost (specific cost and average cost) or fair value (in thousands):
 
   
Sept. 30,
2010
   
Dec. 31,
2009
 
Paper
  $ 921     $ 1,191  
Editorial and other prepublication costs
    2,767       2,230  
Merchandise finished goods
    221       530  
Total
  $ 3,909     $ 3,951  

(G)
Income Taxes
 
Our income tax provision consists primarily of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss, or NOL, position in the U.S. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities.
 
We utilize the liability method of accounting for income taxes as set forth in ASC Topic 740, Income Taxes. Additionally, NOL and tax credit carryforwards are reported as deferred income tax assets. The realization of deferred income tax assets is dependent upon future earnings. A valuation allowance is required against deferred income tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets may not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. As a result of our cumulative losses in the U.S. and cer tain foreign jurisdictions, we have concluded that a full valuation allowance should be recorded for such jurisdictions.
 
At September 30, 2010 and December 31, 2009, we had unrecognized tax benefits of $8.0 million and do not expect this amount to change significantly over the next 12 months. Due to the impact of deferred income tax accounting, the disallowance of these benefits would not affect our effective income tax rate nor would it accelerate the payment of cash to the taxing authorities to an earlier period.
 
Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
 
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2006 through 2009 tax years generally remain subject to examination by federal and most state taxing authorities. In addition, for all tax years prior to 2006 generating an NOL, taxing authorities can adjust the NOL amount. In our international tax jurisdictions, numerous tax years remain subject to examination by taxing authorities, including tax returns for 2003 and subsequent years.
 
(H)
Marketable Securities and Short-term Investments
 
We account for available-for-sale marketable securities and short-term investments under the specific identification method. During the current year quarter and nine-month period, we purchased $1.0 million of investments, which are restricted, and had no sales of investments. During the prior year quarter, we received immaterial proceeds from sales of investments, recorded immaterial losses related to those sales and did not purchase any investments. During the prior year nine-month period, we purchased $0.1 million of investments, received proceeds of $6.8 million from sales of investments and recorded $0.7 million of gains related to those sales. We recorded no net unrealized holding gains or losses in “Other comprehensive income (loss)” during the current year quarter and nine-month period and recorded immaterial net un realized holding gains and losses in “Other comprehensive income (loss)” during the prior year quarter and nine-month period, respectively.
 

(I)
Fair Value Measurement
 
We measure our financial assets and financial liabilities at fair value in accordance with ASC Topic 820. Our financial assets and financial liabilities relate to marketable securities and investments and derivative instruments used to hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro. Derivative instruments in asset positions, if any, are included in “Prepaid expenses and other current assets” and derivative instruments in liability positions, if any, are included in “Other current liabilities and accrued expenses” on our Consolidated Balance Sheets.
 
We utilize the market approach to measure fair value for our assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
ASC Topic 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of three levels: Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or l iabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data; and Level 3 – Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
 
The following table sets forth financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2010 (in thousands):
 
 
Total Fair Value Measurement
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant
Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
 
Marketable securities and investments
 
$
1,039
   
$
1,039
   
$
-
   
$
-
 
Derivative assets
 
$
7
   
$
-
   
$
7
   
$
-
 
Derivative liabilities
 
$
(62
)
 
$
-
   
$
(62
)
 
$
-
 

We measure the fair value of our derivative instruments using broker prices, which use inputs that are readily available in public markets or can be derived from information readily available in public markets. These inputs include spot exchange rates and interest rates.
 
(J)
Financing Obligations
 
Our financing obligations consisted of the $115.0 million principal amount of convertible notes with a carrying value of $107.6 million at September 30, 2010 and $104.1 million at December 31, 2009.
 
The fair value of the convertible notes is influenced by changes in market interest rates, the share price of our Class B stock and our credit quality. At September 30, 2010, the convertible notes had an estimated fair value of $112.7 million. This fair value was estimated using quoted market prices that are Level 2 inputs within the ASC Topic 820 fair value hierarchy.
 
(K)
Contingencies
 
In 2006, we acquired Club Jenna, Inc. and related companies, for which we paid $7.7 million at closing, $1.6 million in 2007, $1.7 million in 2008, $2.3 million in 2009 and $4.3 million in 2010. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments based primarily on DVD sales of
 
 
existing content of the acquired business over a 10-year period and on content produced by the acquired business during the five-year period after the closing of the acquisition. No earnout payments have been made through September 30, 2010 and no future earnout payments are expected.
 
(L)
Benefit Plans
 
We maintain a practice of paying a separation allowance, which is not funded, under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter. We made cash payments under this policy of $0.5 million during the current year quarter, $1.2 million during the current year nine-month period, $0.3 million during the prior year quarter and $0.8 million during the prior year nine-month period.
 
(M)
Stock-Based Compensation
 
The following table sets forth stock-based compensation expense related to stock options, RSUs, other equity awards and our employee stock purchase plan, or ESPP (in thousands):
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Stock options
  $ 237     $ 261     $ 708     $ 471  
RSUs
    78       68       242       84  
Other equity awards
    43       44       128       187  
ESPP
    4       4       13       11  
Total
  $ 362     $ 377     $ 1,091     $ 753  

The total amount of compensation expense recognized reflects the number of stock-based awards that actually vest as of the completion of their respective vesting periods. Upon the vesting of certain stock-based awards, we adjust our stock-based compensation expense to reflect actual versus estimated forfeitures. We recorded immaterial adjustments during the current year quarter and nine-month period and favorable adjustments of $0.1 million and $0.2 million during the prior year quarter and nine-month period, respectively, to reflect actual forfeitures for vested stock-based awards.
 
Stock Options
 
We estimate the value of stock options on the date of grant using the Lattice Binomial model, or Lattice model. The Lattice model requires extensive analysis of actual exercise and cancellation data and involves a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and stock option exercises and cancellations.
 
We granted no stock options during the current year quarter and 346,241 stock options during the current year nine-month period, which are exercisable for shares of our Class B stock and expire 10 years from the grant date. Of the stock options granted during the current year nine-month period, 300,000 stock options vest ratably over a four-year period from the grant date and the remainder vest ratably over a one-year period from the grant date. We granted 1,200,000 stock options during the prior year quarter to Scott N. Flanders, our Chief Executive Officer and a member of our Board of Directors, which are exercisable for shares of Class B stock and expire 10 years from the grant date. These stock options vest ratably over a four-year period from the grant date. We granted 2,205,000 stock options during the prior year nine-month peri od, which are exercisable for shares of Class B stock and expire 10 years from the grant date. Of the stock options granted during the prior year nine-month period, the 1,200,000 stock options granted to Mr. Flanders vest ratably over a four-year period from the grant date and the remainder vest ratably over a three-year period from the grant date.
 

The following table sets forth the assumptions used for the Lattice model:
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Expected volatility
    N/A       47% – 99 %     52% – 100 %     43% – 104 %
Weighted average volatility
    N/A       63 %     70 %     60 %
Risk-free interest rate
    N/A       0.04% – 4.74 %     0.02% – 5.58 %     0.04% – 4.74 %
Expected dividends
    N/A       -       -       -  

The expected life of stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Lattice model. The expected life of stock options is impacted by all of the underlying assumptions and calibration of the Lattice model. The Lattice model assumes that exercise behavior is a function of the stock option’s remaining contractual term, vesting schedule and the extent to which the stock option’s intrinsic value exceeds the exercise price.
 
The weighted average fair value per share was $2.10 for stock options granted during the current year nine-month period, $1.68 for stock options granted during the prior year quarter and $1.25 for stock options granted during the prior year nine-month period. The weighted average expected life was 5.0 years for stock options granted during the current year nine-month period, 6.6 years for stock options granted during the prior year quarter and 6.7 years for stock options granted during the prior year nine-month period.
 
The following table sets forth the activity and balances of our stock options for the current year nine-month period:
 
   
Number of Shares
   
Weighted Average Exercise Price
 
Outstanding at December 31, 2009
    3,808,921     $ 7.48  
Granted
    346,241       3.59  
Exercised
    (17,000 )     1.25  
Forfeited
    (147,500 )     15.47  
Canceled
    (415,669 )     9.74  
Outstanding at September 30, 2010
    3,574,993     $ 6.15  

At September 30, 2010, we had $2.3 million of unrecognized stock-based compensation expense related to nonvested stock options, which will be recognized over a weighted average period of 2.8 years.
 
Restricted Stock Units
 
We granted no RSUs during the current year quarter and 26,080 RSUs with a weighted average grant-date fair value per share of $3.45 during the current year nine-month period, which provide for the issuance of our Class B stock and vest ratably over a one-year period from the grant date. During the prior year quarter, we granted 150,000 RSUs to Mr. Flanders with a grant-date fair value of $2.71, which provide for the issuance of Class B stock and vest ratably over a four-year period from the grant date. During the prior year nine-month period, we granted 485,000 RSUs with a weighted average grant-date fair value of $1.71, which provide for the issuance of Class B stock. Of the RSUs granted during the prior year nine-month period, the 150,000 RSUs granted to Mr. Flanders vest ratably over a four-year period from the grant date and the r emainder vest ratably over a three-year period from the grant date.
 

The following table sets forth the activity and balances of our RSUs for the current year nine-month period:
 
   
Number of Shares
   
Weighted Average Grant-Date Fair Value
 
Outstanding at December 31, 2009
    536,625     $ 1.66  
Granted
    26,080       3.45  
Vested
    (189,005 )     1.54  
Canceled
    (34,501 )     1.52  
Outstanding at September 30, 2010
    339,199     $ 1.88  

At September 30, 2010, we had $0.5 million of unrecognized stock-based compensation expense related to nonvested RSUs, which will be recognized over a weighted average period of 2.1 years.
 
(N)
Segment Information
 
The following table sets forth financial information by reportable segment (in thousands):
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net revenues
                       
Entertainment
  $ 19,567     $ 24,433     $ 66,213     $ 74,442  
Print/Digital
    21,664       22,844       60,786       77,286  
Licensing
    10,813       8,728       33,156       28,101  
Total
  $ 52,044     $ 56,005     $ 160,155     $ 179,829  
Income (loss) before income taxes
                               
Entertainment
  $ 778     $ 2,339     $ 5,977     $ 7,312  
Print/Digital
    1,264       358       (1,013 )     (927 )
Licensing
    6,170       5,553       19,115       15,920  
Corporate
    (7,506 )     (5,549 )     (19,765 )     (17,300 )
Restructuring expense
    (418 )     (469 )     (2,676 )     (12,744 )
Impairment charges
    (25,372 )     -       (25,819 )     (5,518 )
Investment income
    12       10       23       742  
Interest expense
    (2,123 )     (2,194 )     (6,485 )     (6,516 )
Amortization of deferred financing fees
    (165 )     (164 )     (493 )     (553 )
Other, net
    1,056       227       69       (329 )
Total
  $ (26,304 )   $ 111     $ (31,067 )   $ (19,913 )
                                 
                     
Sept. 30,
2010
     
Dec. 31,
2009
 
Identifiable assets
                               
Entertainment
                  $ 53,614     $ 82,119  
Print/Digital
                    17,761       21,468  
Licensing
                    5,962       6,040  
Corporate
                    88,496       87,205  
Total
                  $ 165,833     $ 196,832  

(O)
Subsequent Events
 
We evaluated all of our activity through the issue date of these financial statements and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the Notes to Condensed Consolidated Financial Statements.
 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 
RESULTS OF OPERATIONS
 
The following table sets forth our results of operations (in millions, except per share amounts):
 
   
Quarters Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net revenues
                       
Entertainment
                       
Domestic TV
  $ 9.8     $ 12.5     $ 35.5     $ 38.5  
International TV
    9.0       10.7       28.4       32.4  
Other
    0.7       1.2       2.3       3.5  
Total Entertainment
    19.5       24.4       66.2       74.4  
Print/Digital
                               
Domestic magazine
    10.0       9.4       27.3       39.3  
International magazine
    1.2       1.5       4.1       4.8  
Special editions and other
    2.0       2.4       4.4       5.4  
Digital
    8.5       9.6       25.0       27.8  
Total Print/Digital
    21.7       22.9       60.8       77.3  
Licensing
                               
Consumer products
    9.8       7.2       27.7       21.9  
Location-based entertainment
    0.9       1.2       2.7       3.5  
Marketing events
    0.2       0.2       2.2       2.3  
Other
    -       0.1       0.6       0.4  
Total Licensing
    10.9       8.7       33.2       28.1  
Total net revenues
  $ 52.1     $ 56.0     $ 160.2     $ 179.8  
                                 
Net loss
                               
Entertainment
                               
Before programming amortization
  $ 4.7     $ 9.5     $ 23.6     $ 29.7  
Programming amortization
    (3.9 )     (7.2 )     (17.6 )     (22.4 )
Total Entertainment
    0.8       2.3       6.0       7.3  
Print/Digital
    1.3       0.4       (1.0 )     (0.9 )
Licensing
    6.2       5.5       19.1       15.9  
Corporate
    (7.6 )     (5.5 )     (19.8 )     (17.3 )
Segment income
    0.7       2.7       4.3       5.0  
Restructuring expense
    (0.4 )     (0.5 )     (2.7 )     (12.8 )
Impairment charges
    (25.4 )     -       (25.8 )     (5.5 )
Operating income (loss)
    (25.1 )     2.2       (24.2 )     (13.3 )
Nonoperating income (expense)
                               
Investment income
    -       -       -       0.7  
Interest expense
    (2.1 )     (2.2 )     (6.5 )     (6.5 )
Amortization of deferred financing fees
    (0.2 )     (0.1 )     (0.5 )     (0.5 )
Other, net
    1.1       0.2       0.1       (0.3 )
Total nonoperating expense
    (1.2 )     (2.1 )     (6.9 )     (6.6 )
Income (loss) before income taxes
    (26.3 )     0.1       (31.1 )     (19.9 )
Income tax expense
    (1.1 )     (1.2 )     (2.7 )     (3.6 )
Net loss
  $ (27.4 )   $ (1.1 )   $ (33.8 )   $ (23.5 )
Basic and diluted loss per common share
  $ (0.81 )   $ (0.03 )   $ (1.01 )   $ (0.70 )


Overview
 
Revenues decreased $3.9 million, or 7%, compared to the prior year quarter and $19.6 million, or 11%, compared to the prior year nine-month period. The current year quarter decrease was driven by lower revenues in our Entertainment Group, in part because we did not recognize revenues from DirecTV, Inc., or DirecTV, as a result of a dispute with the satellite TV provider, as well as continued overall weakness in our domestic and international TV businesses. These same factors also contributed to the decrease in Entertainment Group revenues for the current year nine-month period. Also contributing to the decrease for the current year nine-month period was lower Print/Digital Group revenues, which was largely due to a decrease in domestic magazine revenues. The decreases over both periods were partially offset by higher revenues from our Licensing Group, primarily due to higher consumer products royalties.
 
Segment income decreased $2.0 million compared to the prior year quarter and $0.7 million compared to the prior year nine-month period. Higher Corporate expense and lower Entertainment Group results were partially offset by improved results from our Licensing Group over both periods. Print/Digital Group results improved in the current year quarter and were flat in the current year nine-month period.
 
Operating results decreased $27.3 million compared to the prior year quarter and $10.9 million compared to the prior year nine-month period primarily due to $25.4 million of impairment charges in the current year quarter principally related to our Entertainment Group’s programming costs. The decrease in the current year nine-month period was partially offset by lower restructuring charges, primarily due to initial charges related to the closing of our New York office in the prior year period.
 
Net loss increased $26.3 million compared to the prior year quarter and $10.3 million compared to the prior year nine-month period primarily due to the operating results previously discussed.
 
Current Economic Conditions
 
We continue to experience many of the same challenges our partners and competitors in the media industry are facing, namely increased competition for consumers’ attention in the face of volatile overall spending in the television and print businesses, the migration of advertisers to other platforms and the uncertainty created by the state of the global economy. In spite of the strength of our brand and products, our licensing business continues to be challenged by trends in the retail environment as well as a difficult financial environment for potential location-based entertainment business partners to obtain project financing. We have made significant changes to many of our processes and business activities in order to address the current economic climate and industry challenges and will continue to do so. Our goal is to narro w our focus to management of the Playboy brand and lifestyle. We have made progress in building a new business model that will create a leaner organization, accelerate growth and operate more efficiently by finding partners with the size, scope and scale needed to assist us in competing in today’s business environment.
 
Despite the current economic conditions, we believe we continue to have the liquidity to meet our needs. At September 30, 2010, we had $26.6 million in cash and cash equivalents. We also have a $30.0 million revolving credit facility, under which there were no borrowings and $1.0 million in letters of credit outstanding at September 30, 2010, resulting in $29.0 million of available borrowings under this facility. The credit facility will mature on January 31, 2011. We believe our cash generated from operating activities in addition to our cash and cash equivalents will be sufficient to meet our liquidity needs through 2011. See “Liquidity and Capital Resources” below.
 
Recent Events
 
On July 8, 2010, our Board of Directors, or the Board, received a proposal from Hugh M. Hefner to acquire all of the outstanding shares of our Class A common stock and Class B common stock not currently owned by Mr. Hefner for $5.50 per share in cash. Mr. Hefner owns 69.5% of our Class A common stock and 27.7% of our Class B common stock. According to the proposal letter, Mr. Hefner has had discussions with Rizvi Traverse Management LLC, or Rizvi Traverse, with whom Mr. Hefner expresses an intention to partner in connection with the transaction. The proposal letter also states that Rizvi Traverse informed Mr. Hefner that it had contacted major lenders regarding potential financing and that Rizvi Traverse is highly confident ample financial resources will be available to
 
 
complete the transaction. The proposal letter states that Mr. Hefner and Rizvi Traverse contemplate that the definitive agreements would not contain a financing contingency. In the proposal letter, Mr. Hefner advises the Board that out of his concerns for, amongst other matters, the Company’s brand, the editorial direction of Playboy magazine and the Company’s legacy, he is not interested in any sale or merger of the Company, selling his shares to any third party or entering into discussions with any other financial sponsor for a transaction of the nature proposed in the letter. The Board has established a special committee of independent directors to evaluate and determine the Company’s response to the proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. See Part II, Item 1 A. “Risk Factors” of this Quarterly Report on Form 10-Q.
 
On March 26, 2010, DirecTV filed suit against Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., two of the Company’s wholly owned subsidiaries, in the Superior Court of the State of California for the County of Los Angeles. The suit alleges that the subsidiaries are in breach of the most-favored-nation provisions in the parties’ Amended and Restated Affiliation and Licensing Agreement, dated as of August 1, 2007, pursuant to which DirecTV distributes certain of our television programming. As a result of this dispute, DirecTV began withholding payments to us in the current year quarter and we suspended the recognition of revenue related to these payments. We believe we have meritorious defenses to the allegations and intend to defend this case vigorously. See Part II, Item 1. “Legal Proceedings̶ 1; of this Quarterly Report on Form 10-Q.
 
Entertainment Group
 
Domestic TV revenues decreased $2.7 million, or 21%, compared to the prior year quarter and $3.0 million, or 8%, compared to the prior year nine-month period. As previously mentioned, we did not recognize revenues from DirecTV estimated to be over $3.0 million during the current year quarter due to DirecTV’s failure to make payments to us for TV programming, which contributed to the domestic TV revenue declines over both periods. In addition, increased competition from other suppliers and distribution outlets caused decreases in pay-per-view, or PPV, and video-on-demand, or VOD, revenues. We expect the PPV and VOD revenue trends to continue into the future. Partially offsetting these decreases were higher Playboy TV monthly subscription revenues from distributors other than DirecTV, which were in part due to payments received re lated to prior periods.
 
International TV revenues decreased $1.7 million, or 15%, compared to the prior year quarter and $4.0 million, or 12%, compared to the prior year nine-month period primarily due to lower sales in Europe and increased competition for customers, particularly in the U.K. We expect these challenges to continue into the future. The decrease in current year quarter revenues also reflects the impact of unfavorable foreign currency exchange rate fluctuations.
 
Revenues from other businesses decreased $0.5 million, or 49%, compared to the prior year quarter and $1.2 million, or 36%, compared to the prior year nine-month period primarily due to lower revenues related to television series produced by our production company, Alta Loma Entertainment, and the impact of our exiting the DVD business.
 
The group’s segment income decreased $1.5 million compared to the prior year quarter and $1.3 million compared to the prior year nine-month period. During the current year quarter, we recorded $1.2 million of bad debt expense related to existing receivables from DirecTV and incurred higher legal expense compared to the prior year quarter. These expenses, combined with the declines in revenues discussed above, were partially offset by lower programming amortization expense primarily resulting from the impairment charge recorded in the current year quarter, the results of our cost-savings initiatives and lower variable costs.
 
Print/Digital Group
 
Domestic magazine revenues increased $0.6 million, or 6%, compared to the prior year quarter and decreased $12.0 million, or 31%, compared to the prior year nine-month period. In response to industry dynamics, including lower overall spending by advertisers, fewer subscribers and decreasing newsstand sales, we lowered the guaranteed circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) of Playboy magazine to 1.5 million from 2.6 million effective with the January/February 2010 issue. The decrease in current year nine-month period revenues was largely a result of lowering the rate base. For the current year quarter, the
 
 
favorable impact of publishing three issues in the current year quarter compared to two issues in the prior year quarter more than offset the effects of the rate base reduction.
 
Subscription revenues increased $1.2 million, or 20%, compared to the prior year quarter and decreased $8.0 million, or 30%, compared to the prior year nine-month period. We published a combined July/August 2009 issue and recorded revenues reflecting both the July and August 2009 issues in the second quarter of 2009, resulting in recorded revenues for only two issues in the prior year quarter compared to three issues in the current year quarter. The increase in current year quarter subscription revenues was primarily due to the effect of the July/August 2009 issue and an increase in average revenue per subscription copy, partially offset by 25% fewer average paid copies served resulting from the rate base reduction. The decrease in current year nine-month period revenues was primarily due to 31% fewer paid copies served resulting from the rate base reduction.
 
Newsstand revenues increased $0.2 million, or 23%, compared to the prior year quarter and decreased $0.4 million, or 12%, compared to the prior year nine-month period. Revenues for the current year quarter were favorably impacted by publishing one additional issue as compared to the prior year quarter, while both periods reflect continued overall weakness in the newsstand business due to a large number of titles and competition from free content on the Internet.
 
Advertising revenues decreased $0.8 million, or 25%, compared to the prior year quarter and $3.6 million, or 38%, compared to the prior year nine-month period. While advertising pages increased in the current year quarter and nine-month period, advertising revenues decreased primarily due to 43% and 49% lower average net revenue per page largely related to the rate base reduction. Advertising sales for the 2010 fourth quarter magazine issues are closed, and we expect to report advertising revenues to be approximately 35% lower and advertising pages to be approximately 7% higher compared to the fourth quarter of 2009.
 
International magazine revenues decreased $0.3 million, or 18%, compared to the prior year quarter and $0.7 million, or 15%, compared to the prior year nine-month period primarily due to lower royalties from our European editions. Special editions and other revenues decreased $0.4 million, or 19%, compared to the prior year quarter and $1.0 million, or 19%, compared to the prior year nine-month period primarily due to 18% and 20% fewer special editions newsstand copies sold, respectively, and lower revenues from calendar sales as a result of fewer copies sold in the current year periods. The same industry dynamics that are impacting Playboy magazine in the domestic market are also impacting our other print businesses.
 
Digital revenues decreased $1.1 million, or 11%, compared to the prior year quarter and $2.8 million, or 10%, compared to the prior year nine-month period primarily due to a decrease in paysites and advertising revenues. These decreases were primarily due to increasing amounts of competing free content available on the Internet and lower overall spending by advertisers. We continue our focus on efforts to increase profitability of our paysites by building traffic and conversions and improving the customer and advertiser experience and our competitive position. The current year quarter and nine-month period were also impacted by lower e-commerce revenues.
 
Segment income increased $0.9 million compared to the prior year quarter and segment loss was flat compared to the prior year nine-month period. The improvement in the current year quarter was primarily due to the increase in domestic magazine revenues coupled with the effects of our cost-savings initiatives, partially offset by the previously discussed revenue declines of the other businesses within the group. For the current year nine-month period, higher legal expense related to litigation, which resulted in a verdict in our favor, with a former international magazine licensee (see Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q for additional information) coupled with the previously discussed revenue declines were offset by the effects of our cost-savings initiatives, including our decision t o reduce Playboy magazine’s rate base effective with the January/February 2010 issue.
 
In November 2009, we entered into an agreement with American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., or AMI, to outsource non-editorial functions of Playboy magazine and other domestic publications, including production, circulation, advertising sales, marketing and other support services. We began transitioning these functions in 2009 and have completed the transition. We have begun to realize certain cost reductions as a result of our agreement with AMI and continue to work toward optimizing the benefits of our relationship.
 

Licensing Group
 
Licensing Group revenues increased $2.2 million, or 24%, compared to the prior year quarter and $5.1 million, or 18%, compared to the prior year nine-month period primarily due to higher consumer products royalties, largely from licensees in China, partially offset by lower location-based entertainment revenues. Royalties from the 50th Anniversary of the Playboy Club events also contributed to the increased revenues in the current year nine-month period.
 
The group’s segment income increased $0.7 million compared to the prior year quarter and $3.2 million compared to the prior year nine-month period primarily due to the increases in revenues discussed above combined with the impact of senior management costs in the prior year periods, which were transferred to Corporate late in the prior year due to a change in responsibilities. Partially offsetting these items were higher bad debt expense and agency fees in the current year periods.
 
Corporate
 
Corporate expense increased $2.1 million, or 35%, compared to the prior year quarter and $2.5 million, or 14%, compared to the prior year nine-month period primarily due to higher marketing, senior management transition and trademark defense expenses, as well as professional fees related to outstanding litigation, strategic initiatives and the previously mentioned transaction proposal from Mr. Hefner. Partially offsetting the unfavorable variance for the current year nine-month period was the impact of various cost-savings initiatives.
 
Restructuring Expense
 
In the second quarter of 2010, we implemented a plan to downsize our organizational structure and reduce overhead costs. As a result of this plan, we recorded a charge of $1.2 million related to a workforce reduction of 18 employees, most of whose positions were eliminated by the end of the third quarter of 2010. Severance payments under this plan began in the third quarter of 2010 and will be completed in 2011.
 
In the first quarter of 2010, we implemented a plan to further reduce headcount and real estate lease obligations. As a result of this plan, we recorded a charge of $0.4 million related to a lease termination fee and a workforce reduction of 10 employees, whose positions will be eliminated in the first quarter of 2011. Severance payments under this plan will begin in the first quarter of 2011 and will be completed in 2011.
 
In the fourth quarter of 2009, we implemented a plan to outsource non-editorial functions of Playboy magazine and other domestic publications to American Media, Inc. through its wholly owned subsidiary, American Media Operations, Inc., as well as to reduce other overhead costs. As a result of this plan, we recorded a charge of $3.7 million related to a workforce reduction of 26 employees, most of whose positions were eliminated by the end of the first quarter of 2010, and contract termination fees. Severance payments under this plan began in the fourth quarter of 2009 and will be completed in 2011.
 
In the second quarter of 2009, we recorded a charge of $9.3 million related to our plan to vacate our leased New York office space. The charge primarily reflected the discounted value of our remaining lease obligation net of estimated sublease income. We recorded additional restructuring charges related to this plan in 2009 representing depreciation of leasehold improvements and furniture and equipment as well as accretion of the difference between the nominal and discounted remaining lease obligation net of estimated sublease income. We expect to record additional restructuring charges, representing depreciation and accretion, of $8.0 million over the remaining approximate nine-year term of the lease, or approximately $1.0 million on average annually. We recorded $0.3 million and $1.0 million of these restructuring charges representi ng depreciation and accretion during the current year quarter and nine-month period, respectively. We also recorded an unfavorable adjustment of $0.1 million during the current year quarter as a result of changes in assumptions for this plan.
 
In the first quarter of 2009, we implemented a restructuring plan to integrate our print and digital businesses in our Chicago office as well as to streamline operations across the Company, including the elimination of positions. As a result of this plan, we recorded a charge of $2.6 million related to a workforce reduction of 107 employees, whose positions were eliminated by the end of the second quarter of 2009. Severance payments under this plan
 
 
began in the first quarter of 2009 and were completed in the current year quarter. We recorded an unfavorable adjustment of $0.1 million during the prior year quarter as a result of changes in assumptions for this plan.
 
In the fourth quarter of 2008, we implemented a restructuring plan to lower overhead costs, primarily related to senior Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million related to 21 employees, most of whose positions were eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and were largely completed by the end of 2009 with some payments continuing into 2011. We recorded an unfavorable adjustment of $0.8 million during the prior year nine-month period as a result of changes in assumptions for this plan.
 
In the third quarter of 2008, we implemented a restructuring plan to reduce overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose positions were eliminated in the fourth quarter of 2008. Payments under this plan began in the fourth quarter of 2008 and were completed in the current year quarter. We recorded a favorable adjustment of $0.4 million during the prior year nine-month period as a result of changes in assumptions for this plan.
 
Impairment Charges
 
In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 360, Property, Plant, and Equipment, we conduct impairment testing on long-lived assets, or asset groups, whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
 
During the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements. We conducted impairment testing on these assets as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV. We determined the carrying amounts of these assets were not fully recoverable, and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. Of the total impairment charges, $22.3 million related to programming costs and $3.1 million related to distribution agreements. We also determined the life of programming costs to be generally either 12 or 24 months.
 
We estimated the fair value of the assets tested using a forecasted-discounted cash flow method based in part on our financial results and our expectation of future performance. We made assumptions to determine the estimated fair values of the assets tested. Management believes these assumptions are consistent with those that would be utilized by a market participant in performing similar valuations. The assumptions for our forecasted-discounted cash flow analyses include projections of operating cash flows directly associated with our programming costs and distribution agreements over their remaining useful lives. The valuation employs present value techniques to measure fair value and considers market factors. We assumed a discount rate of 13.0% for each analysis, which was based on weighted average costs of capital derived from pub lic companies considered to be reasonably comparable to our Entertainment Group with respect to their cost of equity, cost of debt, capital structure and inherent market risk. We generally estimated that the current trends in revenues and cash flows will continue over the remaining useful lives of the assets tested. If the discount rate used in the forecasted-discounted cash flow analysis for our programming costs was 1.0% lower, the impairment charge would have been $0.5 million lower. If the discount rate used in the forecasted-discounted cash flow analysis for our programming costs was 1.0% higher, the impairment charge would have been $0.5 million higher. Similar changes in the discount rates used in our testing of distribution agreements would not have had a significant effect on the impairment charge.
 
During the first quarter of 2010, we implemented a plan to further reduce our headcount and real estate lease obligations. As a result, we evaluated the related long-lived assets for recoverability. We determined the carrying amount of this asset group was not recoverable and we recorded an impairment charge of $0.4 million in the first quarter of 2010 representing the entire net book value of these long-lived assets.
 
In concert with the integration of our print and digital businesses in the first quarter of 2009, we moved the reporting of our digital business from the Entertainment Group into the Print/Digital Group, which we formerly called the Publishing Group. These businesses were combined in order to better focus on creating brand-consistent content that extends across print and digital platforms. Due to this realignment of our operating segments, which are also our reporting units as defined in ASC Topic 350, Intangibles–Goodwill and Other, or ASC Topic 350, we
 
 
conducted interim impairment testing of goodwill in accordance with ASC Topic 350. Interim testing of goodwill was also necessitated by lower expected financial results in the new Print/Digital Group than that of the former Entertainment Group, which contained the digital business’ assets prior to the realignment of our operating segments. As a result of this testing, the implied fair value of goodwill of the Print/Digital operating segment was lower than its carrying value, and we recorded an impairment charge on the entire balance of the Print/Digital Group’s goodwill of $5.5 million in the first quarter of 2009.
 
We continue to have access to our credit facility after these impairment charges.
 
Further downward pressure on our operating results and/or further deterioration of economic conditions could result in additional future impairments of our long-lived assets, including other intangible assets.
 
Nonoperating Income (Expense)
 
Nonoperating expense decreased $0.9 million for the current year quarter and increased $0.3 million for the current year nine-month period. The decrease in the current year quarter is primarily due to an insurance recovery. In the current year nine-month period, this recovery is more than offset by foreign currency exchange losses due to dividend distribution and settlement of intercompany balances resulting from the strengthening of the U.S. dollar against the pound sterling and euro.
 
Income Tax Expense
 
Income tax expense was flat for the current year quarter and decreased $0.9 million for the current year nine-month period. The decrease in the current year nine-month period was primarily due to a decrease in foreign income tax obligations.

Our effective income tax rate differs from the U.S. statutory rate. Our income tax provision consists of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities.
 
LIQUIDITY AND CAPITAL RESOURCES
 
At September 30, 2010, we had $26.6 million in cash and cash equivalents compared to $24.6 million in cash and cash equivalents at December 31, 2009. At September 30, 2010 and December 31, 2009, our outstanding debt consisted solely of the $115.0 million principal amount of our 3.00% convertible senior subordinated notes due 2025, or convertible notes, with a carrying value of $107.6 million at September 30, 2010 and $104.1 million at December 31, 2009. The difference between the principal amount of $115.0 million and the carrying value of the financing obligation reflects the discount associated with applying the estimated 7.75% nonconvertible borrowing rate at the time of issuance of our convertible notes. The total discount will be amortized to interest expense under the effective interest rate method over a seven-year term, repres enting the period beginning on the issuance date of the convertible notes of March 15, 2005 and ending on the first put date of March 15, 2012.
 
At September 30, 2010, cash generated from our operating activities and existing cash and cash equivalents were fulfilling our liquidity requirements. At September 30, 2010, we also had a $30.0 million credit facility. This facility can be used for revolving borrowings, issuing letters of credit or a combination of both. As of October 29, 2010, there were no borrowings and $1.0 million in letters of credit outstanding under this facility, resulting in $29.0 million of available borrowings under this facility. The credit facility will mature on January 31, 2011. There can be no assurance that we will be able to either extend the maturity date of our existing credit facility or establish a new facility with a later maturity date and acceptable terms.
 
Our future net cash flows from operating activities are dependent on many factors, including industry specific trends and overall economic conditions. As described above, market-driven trends are negatively impacting revenues within our television and print businesses. We expect that these trends will continue for the foreseeable future. In response to these market-driven trends, we have taken a number of significant actions designed to reduce
 
 
our overall cost structure and preserve cash flow, some of which are described in “Restructuring Expense” above. We believe cash generated from operations and our existing cash and cash equivalents will provide sufficient liquidity to fund our operations and meet our expected capital expenditure requirements and other contractual obligations as they become due through 2011. A prolonged continuation of the economic and industry trends described above could adversely affect our future net cash flows from operating activities, which could require us to seek other sources of funds.
 
Holders of our convertible notes may require us to purchase all or a portion of the convertible notes at a purchase price in cash equal to 100% of the principal amount of the convertible notes beginning on the first put date of March 15, 2012. We believe this put option will likely be exercised by holders of our convertible notes because the trading price of the convertible notes is significantly below the put option purchase price. As a result, we expect to be required to refinance this obligation prior to the put date. We cannot be certain whether such refinancing will take the form of debt, equity or a combination thereof. Issuance of debt would likely increase our interest expense, and the issuance of equity could be dilutive to our existing stockholders.
 
Cash Flows from Operating Activities
 
Net cash provided by operating activities was $9.9 million in the current year nine-month period compared to $0.9 million in the prior year nine-month period. This favorable variance was primarily due to increases in deferred revenues primarily related to our Licensing Group in the current year period combined with the impact of the distribution of deferred compensation plan balances in the prior year period, partially offset by other changes in working capital and the operating and nonoperating results previously discussed.
 
Cash Flows from Investing Activities
 
Net cash used for investing activities was $2.8 million in the current year nine-month period compared to net cash provided by investing activities of $3.6 million in the prior year nine-month period. The current year nine-month period reflected additions of $1.8 million to property and equipment and $1.0 million of purchases of short-term investments that are restricted. The prior year nine-month period reflected net proceeds from sales of investments of $6.7 million related to the termination of our deferred compensation plan partially offset by additions of $3.1 million to property and equipment.
 
Cash Flows from Financing Activities
 
Net cash used for financing activities in the current year nine-month period was $5.0 million compared to $3.2 million in the prior year nine-month period. The change reflected payments of deferred acquisition liabilities of $5.1 million for the current year nine-month period compared to $3.1 million in the prior year nine-month period and $0.2 million of financing fees related to amending our credit facility during the prior year nine-month period.
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
 
Foreign currency exchange rate fluctuations did not have a significant effect on our cash and cash equivalents during the current year nine-month period. The $0.3 million positive effect of foreign currency exchange rates on our cash and cash equivalents during the prior year nine-month period was due to the weakening of the U.S. dollar against the pound sterling and euro.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, or ASU No. 2010-06. ASU No. 2010-06 requires additional disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers between levels of the fair value hierarchy as defined in ASC Topic 820, Fair Value Measurements and Disclosures. We adopted the provisions of ASU No. 2010-06 beginning with the first quarter of 2010, except for the disclosure presenting disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), which we are required to adopt in the first quarter of 2011. As ASU No. 2010-06 affects disclosures only, the adoption of ASU No. 2010-06 does not affect our results of operations or financial condition.
 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to certain market risks, including changes in foreign currency exchange rates. We experienced no material change in our exposure to such fluctuations during the quarter ended September 30, 2010. Information regarding market risks as of December 31, 2009 is contained in Item 7A. “Quantitative And Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
 
At September 30, 2010, we did not have any floating interest rate exposure. As of that date, all of our outstanding debt consisted of the convertible notes, which are fixed-rate obligations. The fair value of the $115.0 million aggregate principal amount of the convertible notes is influenced by changes in market interest rates, the share price of our Class B common stock and our credit quality. At September 30, 2010, the convertible notes had an estimated fair value of $112.7 million.
 
ITEM 4.CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
 
Internal Control over Financial Reporting
 
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

PART II
OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state court in Hidalgo County, Texas, against Editorial Caballero SA de CV, or EC, Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants, and us. In the complaint, Gongora alleged that he was injured as a result of the termination of a publishing license agreement, or the License Agreement, between us and EC for the publication of a Mexican edition of Playboy magazine, or the Mexican Edition. We terminated the License Agreement on or about January 29, 1998, due to EC’s failure to pay royalties and other amounts due to us under the License Agreement. On February 18, 1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged that in December 1996 he entered into an o ral agreement with the Editorial Defendants to solicit advertising for the Mexican Edition to be distributed in the U.S. The basis of GSI’s cross-claim was that it was the assignee of EC’s right to distribute the Mexican Edition in the U.S. and other Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in out-of-pocket expenses and approximately $0.3 million for lost profits, even though the jury found that EC had failed to comply with the terms of the License Agreement. On October 24, 2002, the trial court signed a judgment against us for $4.4 million plus pre- and post-judgment interest and costs. On November 22, 2002, we filed post-judgment motions challenging the judgment in the trial court. The trial court overruled those motions and we vigorously pursued an appeal with the State Appellate Court sitting in Corpus Christi challenging the verdict. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest, in connection with the appeal. On May 25, 2006, the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of the plaintiffs’ claims and remanded the remaining claims for a new trial. On July 14, 2006, the plaintiffs filed a motion for rehearing and en banc reconsideration, which we opposed. On October 12, 2006, the State Appellate Court denied plaintiffs’ motion. On December 27, 2006, we filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims were retried. On April 23, 2010, a jury returned a verdict in our favor. On August 16, 2010, the plaintiffs filed a motion for a new trial and a motion to modify, correct and reform the judgment against them. The motion was denied and plaintiffs filed a notice of appeal on October 14, 2010.
 
On April 12, 2004, J. Roger Faherty, or Faherty, filed suit in the United States District Court for the Southern District of New York against Spice Entertainment Companies, or Spice, Playboy Enterprises, Inc., or Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and Logix Development Corporation, or Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in connection with litigation that was settled in 2004, or the Logix litigation. The Logix litigation related to a suit brought by Logix, Keith Howington and Anne Howington against Faherty and other parties alleging certain contract and tort causes of action arising out of an agreement between Emerald Medi a Inc., or EMI, and Logix in which EMI agreed to purchase certain explicit television channels over C-band satellite. The complaint further alleges that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged right to indemnification by excluding him from the settlement of the Logix litigation. On June 18, 2004, a jury entered a special verdict finding Faherty personally liable for $22.5 million in damages to the plaintiffs in the Logix litigation. A judgment was entered on the verdict on or around August 2, 2004. Faherty filed post-trial motions for a judgment notwithstanding the verdict and a new trial, but these motions were both denied on or about September 21, 2004. On October 20, 2004, Faherty filed a notice of appeal from the verdict. As a result of rulings by the California Court of Appeal and the California Supreme Court as recently as February 13, 2008, Logix’s recovery against Faherty has been reduced significantly, although certain port ions of the case have been set for a retrial. In light of these rulings, however, when coupled with any offset as a result of the settlement of the Logix litigation, any ultimate net recovery by Logix against Faherty will be severely reduced and might be entirely eliminated. In consideration of this appeal, Faherty and Playboy have agreed to continue a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York through the end of December 2010. In late June 2008, plaintiffs in the Logix litigation filed a motion in the trial court seeking to amend a $40.0 million judgment previously entered on consent against defendant EMI seeking to add Faherty as a judgment debtor. Although the
 
 
trial court allowed that amendment, that ruling was reversed by the California Court of Appeal on February 18, 2010. In the event Faherty’s indemnification and conspiracy claims go forward against us, we believe they are without merit and that we have good defenses against them. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 450, Contingencies, or ASC Topic 450, no liability has been accrued.
 
Eleven shareholder class action complaints have been filed against Playboy and certain officers and directors thereof in connection with Hugh M. Hefner’s July 8, 2010 proposal to acquire all of the outstanding shares of Class A common stock and Class B common stock not currently owned by Mr. Hefner for $5.50 per share in cash. In each complaint, the plaintiffs challenge Mr. Hefner’s proposal and allege, among other things, that the consideration to be paid in such proposal is unfair and grossly inadequate. The complaints seek, among other relief, to enjoin defendants from consummating Mr. Hefner’s proposal and to direct defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of our shareholders. Seven of these complaints were filed in the Chancery Division of the Circuit Co urt of Cook County, Illinois, and the remaining four complaints were filed in the Court of Chancery in Delaware. On October 6, 2010, all of the Illinois cases were dismissed with prejudice. We have reviewed the allegations contained in the various complaints and believe they are without merit. We intend to defend the litigation vigorously. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with ASC Topic 450, no liability has been accrued.
 
On March 26, 2010, DirecTV, Inc., or DirecTV, filed suit against Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., two of the Company’s wholly owned subsidiaries, in the Superior Court of the State of California for the County of Los Angeles. The suit alleges that the subsidiaries are in breach of the most-favored-nation provisions in the parties’ Amended and Restated Affiliation and Licensing Agreement, dated as of August 1, 2007, pursuant to which DirecTV distributes certain of our television programming. On May 21, 2010, we filed a motion to strike certain portions of DirecTV’s complaint. On July 21, 2010, DirecTV filed an amended complaint with the court, adding the allegation that DirecTV suffered damages of approximately $35.0 million. In light of the filing of the amended complaint, we withd rew the original motion to strike and filed a revised motion to strike portions of the amended complaint. The motion to strike was denied at a hearing held on October 21, 2010. Our answer to the amended complaint is due on or before November 10, 2010. We believe we have meritorious defenses to the allegations contained in the amended complaint and intend to defend this case vigorously. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with ASC Topic 450, no liability has been accrued.
 
ITEM 1A.RISK FACTORS
 
For a detailed discussion of factors that may affect our performance, see Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Except as set forth below, there have been no material changes to these risk factors.
 
There can be no assurance that any definitive offer will be made with respect to Hugh M. Hefner’s proposal to acquire all of our outstanding common stock, that any agreement will be executed or that this or any other transaction will be approved or consummated. The absence of a proposal to acquire our common stock would likely have an adverse effect on the market price of our common stock.
 
On July 8, 2010, our Board of Directors, or the Board, received the proposal from Mr. Hefner described in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. The Board has cautioned our shareholders and others considering trading in our securities that it has only received the proposal and that no decisions have been made by the Board or the special committee of the Board with respect to our response to Mr. Hefner’s proposal. The proposal submitted was not a definitive offer, and there can be no assurance that any definitive offer will be made, that any agreement will be executed or that a definitive offer, if made, with respect to the proposal or any other transaction will be approved or consummated. On the last trading day prior to the announcement of Mr. Hefner’s proposal, our Class A common stock and Class B common stock closed at $4.06 and $3.94 per share, respectively. After the announcement, the price for each class of stock rose to trade close to the $5.50 per share proposal price. If this proposal were rejected or withdrawn, or if no similar transaction presented itself, the stock price would likely fall below its current trading range.
 

If we fail to renew our carriage agreement with DirecTV, on favorable terms or at all, our business, financial condition and results of operations will be adversely affected.
 
We are in negotiations with DirecTV to renew the agreement pursuant to which DirecTV distributes certain of our television programming. The existing agreement is currently scheduled to expire on November 16, 2010. On March 26, 2010, DirecTV filed suit against two of our subsidiaries alleging that we are in breach of the most-favored-nation provisions in the parties’ existing agreement. See Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q. As a result of this dispute, DirecTV began withholding payments to us in the current year quarter. We have suspended the recognition of revenue related to these payments, estimated to be over $3.0 million during the current year quarter, and recorded $1.2 million of bad debt expense related to existing receivables from DirecTV. If we are unable to renew our agreement with DirecTV, or do not renew it on favorable terms, our business, financial condition and results of operations will be adversely affected.
 
In addition, during the current year quarter, we conducted impairment testing on certain finite-lived assets reported in our Entertainment Group, including programming costs and distribution agreements, as a result of continued overall weakness in our domestic and international TV businesses, a reevaluation of programming utilization and a dispute with DirecTV. We determined the carrying amounts of these assets were not fully recoverable and in the current year quarter, we recorded total impairment charges of $25.4 million, representing the difference between the estimated fair values and net book values of these assets. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q. Additional future impairments of our finite-lived as sets, including intangible assets, could result if we fail to renew our agreement with DirecTV, or do not renew it on favorable terms.
 
We are subject to litigation risk.
 
From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business, such as our dispute with DirecTV and the other matters described in Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q. We could incur significant legal expenses defending claims, even those without merit. In addition, an adverse resolution of any lawsuit or claim against us could have a material adverse effect on our business.
 

ITEM 6.EXHIBITS
 
Exhibit Number
 
Description
     
*10.1
 
Product and Trademark License Agreement, dated August 24, 2010, by and between Playboy Enterprises International, Inc. and Glory Rabbit International Investment Co., Limited
     
10.2
 
Amendment to the Amended and Restated Agreement, dated September 1, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.
     
10.3
 
Amended and Restated Employment Agreement, dated September 29, 2010, by and between Playboy Enterprises, Inc. and Scott Flanders
     
10.4
 
Amendment to the Amended and Restated Agreement, dated October 27, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
______
*
Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934.
 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

   
PLAYBOY ENTERPRISES, INC.
   
               (Registrant)
     
     
Date:    November 9, 2010
 
By   
/s/ Christoph Pachler
     
Executive Vice President and
Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)


EXHIBIT INDEX
 
Exhibit Number
 
Description
     
 
Product and Trademark License Agreement, dated August 24, 2010, by and between Playboy Enterprises International, Inc. and Glory Rabbit International Investment Co., Limited
     
 
Amendment to the Amended and Restated Agreement, dated September 1, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.
     
 
Amended and Restated Employment Agreement, dated September 29, 2010, by and between Playboy Enterprises, Inc. and Scott Flanders
     
 
Amendment to the Amended and Restated Agreement, dated October 27, 2010, by and among Playboy Entertainment Group, Inc., Spice Hot Entertainment, Inc. and DirecTV, Inc.
     
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
______
*
Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934.
 
 
31

EX-10.1 2 ex10_1.htm EXHIBIT 10.1 ex10_1.htm


Exhibit  10.1
Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.  The omissions have been indicated by asterisks (“*****”), and the omitted text has been filed separately with the Securities and Exchange Commission.

INDEX TO GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
PRODUCT AND TRADEMARK LICENSE AGREEMENT

THE SCHEDULE


PARAGRAPH
PAGE NO.
   
1.
GRANT OF LICENSE
 
a.
Grant
10 - 12
 
b.
Term
12 - 13
 
c.
License Year and License Quarter
13
 
d.
Territory
13
 
e.
Minimum Net Sales
13
   
2.
COVENANTS OF LICENSEE
 
a.
Use
13 - 14
 
b.
(i)
Maintaining Goodwill
14 - 15
   
(ii)
Compliance with Law
15
 
c.
Distribution Channels
15
 
d.
Royalties
 
   
(i)
Product Development Fee
15
   
(ii)
Guaranteed Royalties
15 - 16
   
(iii)
Earned Royalties
16
   
(iv)
Interest
16
   
(v)
Letter of Credit
16
 
e.
Statements and Payments
16 - 18
 
f.
Records and Audit
18 - 19
 
g.
Expenses of Conducting Examinations
19
 
h.
Product Quality
19
 
i.
Approval of Products and the Materials
20 - 22
 
j.
Title and Protection and Preservation
 
   
of Playboy Properties and Copyrights
22 - 23
 
k.
Right to Subcontract, Licensee Financial Statements
 
   
and Lists of Sources and Accounts
23 - 24
 
l.
Inventory and Holograms
24 - 25
 
m.
Playboy Properties and Non-Competitive Brands
25 - 26
 
n.
Indemnification and Product
 
   
Liability Insurance
26 - 27
 
o.
Marketing Spend, Marketing Fund Payment,
 
   
Advertising Plans and Public Relations
27 - 28
     
3.
ADDITIONAL COVENANTS OF THE PARTIES
 
a.
Reservation of Rights
28
 
b.
Certain Sales
28
   
4.
TITLE AND PROTECTION
 
 
a.
Indemnification by Licensor
28 - 29
 
b.
Enforcement
29


 
 

 


INDEX TO GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
PRODUCT AND TRADEMARK LICENSE AGREEMENT

(Continued)

5.
RELATIONSHIP BETWEEN THE PARTIES
 
 
a.
No Joint Venture
29
 
b.
Assignment
29 - 30
       
6.
SUBLICENSING
30
 
7.
DEFAULTS AND RIGHTS OF TERMINATION
 
 
a.
Defaults and Right to Cure
30
 
b.
Bankruptcy or Assignment for
 
   
 Creditors, Business Discontinuance
30 - 31
 
c.
Loss of Trademark Rights
31
 
d.
Qualified Auditor’s Report
31
 
e.
Cross-Default
31
 
8.
EXPIRATION OR TERMINATION
 
 
a.
Effect of Expiration or Termination
31
 
b.
Reserved Rights
31 - 32
 
c.
Continued Sales After Expiration
 
   
 or Termination
32
 
d.
Inventory After Expiration or Termination
32 - 33
 
e.
Equitable Relief and Legal Fees
33
 
f.
Termination Fee
33
 
g.
Continuity of Sales
33 - 34
 
9.
NOTICES
 
 
a.
Effectiveness
34
 
b.
Address Change
34
 
10.
CONFIDENTIAL INFORMATION
34 - 35
 
11.
SEVERABILITY
35
 
12.
CONSENTS AND APPROVALS
35
 
13.
APPLICABLE LAW
35
 
14.
NO BROKER
35
 
15.
CONSTRUCTION
35
 
16.
LIMITATION OF LIABILITY
35
 
17.
SURVIVABILITY
35
 
18.
RIGHTS CUMULATIVE
36
 
19.
ENTIRE AGREEMENT
36
 
20.
SIGNING DEADLINE
36

 
2

 

THE SCHEDULE referred to in the Agreement made as of the Commencement Date as set forth in Paragraph S.9. of the Schedule hereto and incorporated into the Agreement in its entirety.  In the Agreement, the below words shall have the following meanings:


S.1.
LICENSOR:
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
   
680 North Lake Shore Drive
   
Chicago, IL  60611
     
     
S.2.
LICENSEE:
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
   
锦兔国际投资有限公司
   
Flat A, 7/F, Kwun Ngan House
   
751A Nathan Road
   
Mongkok, Kowloon, Hong Kong
   
Contact:
Li Cai Xia 委托联络人:李彩霞
   
Title:
Chairman Assistant
 
   
Telephone:
86-13795376578  
   
Facsimile:
8621-63322599  
   
Email:
*****  

S.3.-1
LICENSOR’S AGENT:
INTERNATIONAL MANAGEMENT GROUP (UK) LIMITED
                                                   
McCormack House, Burlington Lane
   
Chiswick W4 2TH
   
Contact:  Bruno Maglione
   
Telephone: 44 208 233 5300
   
Facsimile: 44 208 233 5301
     
S.3.-2
COLLECTING AGENT:
IMG Hong Kong
   
11th Floor, Sunning Plaza
   
10 Hysan Avenue, Causeway Bay
   
Hong Kong
   
Telephone:
852 2894 0288
   
Facsimile:
852 2882 2557
       
   
IMG Hong Kong is a group company of Licensor’s Agent.
   
“Collecting Agent” shall mean IMG Hong Kong, which is the
   
agent who collects the payments made by Licensee
   
pursuant to the provisions of this Agreement.
     

S.4.
THE TRADEMARKS:
   
 
- PLAYBOY
 
- Rabbit Head Design
 
logo (HUA HUA GONGZI)
   
 
-The “Labels” (as defined in Paragraph S.5. below) (in their entirety and as depicted in Exhibit A attached hereto and made a part hereof).  Under no circumstances shall Licensee modify the Labels or use any component thereof independently of the Labels.  The Labels must be used only on the Products in the Product categories as specifically set forth in Paragraphs S.5. and S.7. below.
   
 
The Chinese Trademark Registration Numbers and Chinese Trademark Application Numbers for those Trademarks that have not yet registered are set forth on Exhibit B attached hereto and made a part hereof.  As to the Labels Trademarks, for which

 
3

 

  applications have been instructed, Licensor will use commercially reasonable efforts to get the Labels Trademarks registered by the State Trademark Office of the P.R.C. at its own expense within not more than seven (7) years following the Commencement Date.
   
 
THE IMAGES:
   
 
Certain images, patterns and graphics from Licensor’s art and photo archives and style guides, which are approved in advance in writing by Licensor on a case-by-case basis.  Although Licensee may submit to Licensor a request to use certain images, patterns and graphics, any specific images to be added to the Agreement will be granted in Licensor’s sole discretion in writing and based on appropriateness for the Products, Licensor’s current strategic or business plans and availability of rights.
   
   
S.5.
THE TYPE OF LICENSE:
   
 
Non-Exclusive as to the PLAYBOY, Rabbit Head Design and logo2 (HUA HUA GONGZI) Trademarks and the Images.
   
 
Non-Exclusive as to the M PLAYBOY MANSION COLLECTION & Rabbit Head Design Label Trademark.  The M PLAYBOY MANSION COLLECTION & Rabbit Head Design Label may only be used in connection with the “Home Products” (as such term is defined in Paragraph S.7. below).
   
 
Exclusive as to the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label subject to the provisions in Paragraph S.9. below, PLAYBOY BUNNY & Rabbit Head Design Label and PLAYBOY JEANS Label.  These Labels may only be used in connection with the Products in the following Product categories (which are defined in Paragraph S.7. below):

 
Label
 
For Use Only With
       
 
PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label
 
Men’s Apparel Products, Men’s Footwear Products, Men’s Leather Products, and Men’s Formalwear Products
       
 
PLAYBOY BUNNY & Rabbit Head Design Label
 
Women’s Apparel Products
       
 
PLAYBOY JEANS Label
 
Men’s/Women’s Denim Products

 
The PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label, the PLAYBOY BUNNY & Rabbit Head Design Label and the PLAYBOY JEANS Label may sometimes be collectively referred to in this Agreement as the “Exclusive Labels” and the Exclusive Labels and the M PLAYBOY MANSION COLLECTION & Rabbit Head Design Label Trademarks may sometimes be collectively referred to herein as the “Labels.”  The design of the Labels may be changed only by Licensor.  In such event, Licensor shall provide prior written notice to Licensee.  The Playboy Established 1953 Label does not require the use of “Established 1953” in all creative applications on or associated with Products, for example on advertising, point of sale materials, store fixtures or the Products themselves, except, however , that the use of “Established 1953” will occur on hangtags, garment labels and similar branding items as Licensor may determine in its discretion from time to time.

 
4

 
 
 
Licensee acknowledges and accepts that Licensee’s exclusivity is limited solely to the use of the Exclusive Labels on the Product categories set forth above and through the Distribution Channels set forth in Paragraph S.6. below.  Licensor retains the right to, itself and to license to third parties the right to, design, manufacture, advertise, sell and/or distribute in the Territory through any channel of distribution, including, but not limited to, the channels of distribution set forth in Paragraph S.6. below any one of the Products set forth in Paragraph S.7. below provided such exercise or gran t of rights does not violate Licensee’s exclusivity as set forth herein with respect to the Labels and the Product categories and the Distribution Channels.
   
 
Licensor retains the right to, itself and to license to third parties the right to, design, manufacture, advertise, sell and/or distribute in the Territory through any channel of distribution, including, but not limited to the channels of distribution set forth in Paragraph S.6. below, any one of the Products set forth in Paragraph S.7. below using the Trademarks and labels other than or different from the Labels and which may or may not incorporate the PLAYBOY, Rabbit Head Design and/or logo2(HUA HUA GONGZI) Trademarks and/or any of the Images.
   
 
Licensor will in all cases determine in its absolute discretion if products by any other 3rd party constitute Products as defined under this Agreement.


S.6.
DISTRIBUTION CHANNELS:
   
 
(i) Playboy-branded retail stores (i.e., physical stores), which rights shall be non-exclusive and subject to the provisions of Paragraph 1.a.(ii)(c) and Paragraph 1.a.(iii) of the Agreement.
   
 
(ii) Mid-tier department stores and mid-tier specialty stores for all Products and Labels (i.e. physical stores) located in the Territory.
   
 
(iii) Playboy-branded paper (printed) catalogs.
   
 
All of the above shall be referred to herein as the “Distribution Channels.”  Licensee may not sell and distribute the Products to or through duty-free outlets.
   
   
S.7.
THE PRODUCTS:
   
 
Men’s non-technical casual fashion apparel including t-shirts, polo shirts, dress shirts, sweaters, cardigans, handkerchiefs, pants, trousers, shorts, skirts, wool sweaters, cashmere sweaters, knit sweaters, leather clothing, trench coats, overcoats, jackets and blazers (specifically excluding down jackets).  Licensee must only use the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Men’s Apparel Products.”  Technical apparel, such as apparel that is designed and fabricated for specific sports and athletic use and having technical performance features and specialized fabrics and microfibers for such purpose such as, quick-dry, gore-tex, breathability, aerodynamic, weatherproof qualities, etc., is specifically excluded from the Agreement.
   
 
Women’s non-technical casual fashion apparel including t-shirts, polo shirts, dress shirts, sweaters, cardigans, pants, handkerchiefs, wool sweaters, cashmere and cashmere-blend sweaters, knit sweaters, cotton and cotton-blend sweaters, shorts, skirts, jackets and blazers (specifically excluding down jackets).  Licensee must use only the PLAYBOY BUNNY & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Women’s Apparel Products.”  Technical apparel, such apparel that is designed and

 
5

 
 
  fabricated for specific sports and athletic use and having technical performance features and specialized fabrics and microfibers for such purpose such as, quick-dry, gore-tex, weatherproof, breathable, aerodynamic, etc., is specifically excluded from the Agreement.
   
 
Men’s and women’s denim apparel, including pants, skirts, shorts, vests, jackets, and shirts.  Licensee must use only the PLAYBOY JEANS Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Denim Products.”  The composition of the Denim Products must in all cases be over 70% denim.  Licensee may use the PLAYBOY JEANS Label on a limited range of small leather goods for men effective as of the Commencement Date and for women effective as of April 1, 2011 to specifically consist of belts and wallets for men and be lts, wallets, small purses and clutch bags for women provided that such items are in all instances sold together and alongside of (and not independently of) the Denim Products.
   
 
Men’s formal and casualwear footwear, including brown shoes, leather sandals and boots, but specifically excluding athletic shoes/sneakers or specialized technical footwear such as hiking boots or ski boots.  Licensee must use only the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Men’s Footwear Products.”
   
 
Men’s leather goods, including belts, backpacks without trolley wheels, wallets, money purses, key chains, leather folders, slim briefcases (i.e. for avoidance of doubt as in office cases for papers and folders), small satchels without trolley wheels (but not travel luggage which is specifically excluded as a Product under this Agreement).  Licensee must use only the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Men’s Leather Products.” Notwithstanding anything in this Agreement to the contrary, mobile phone cases, PDA holders and laptop cases all for men and all made of leather will be included on a non-exclusive basis through and including December 31, 2011 and, thereafter, exclusive only as to the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label in the men’s leather goods Product category subject to the final clearance of the PLAYBOY, Rabbit Head Design, and logo2(HUA HUA GONGZI) Trademarks and the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label Trademark by Licensor and only upon a subsequent written authorization from Licensor which must be countersigned by Licensee .  As of the date of this Agreement, Licensor’s counsel has been instructed to file all relevant applications in connection therewith.
   
 
Men’s formal suits (i.e., business suits), including formal rimmed hats (non-baseball caps, non-athletic hats), dress shirts, neckties, cufflinks, tie clips, tie pins, and high-end formal (metallic) writing instruments such as formal ballpoint pens, lead pencils and fountain pens.  Licensee must use only the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Men’s Formalwear Products.”
   
 
Home textiles for adults, including pillow cases, blankets, throws, duvet covers, bed sheets, kitchen and bath towels, quilt covers, seat cushions, napkins, handkerchiefs, and tablecloths.  Licensee must use only the M PLAYBOY MANSION COLLECTION & Rabbit Head Design Label on all of the foregoing Products.  For ease of reference, the foregoing Products may sometimes be collectively referred to herein as the “Home Products.”
   
S.8.
THE TERRITORY:
   
 
China (excluding Hong Kong and Taiwan)

 
6

 
 
S.9.
THE COMMENCEMENT DATE:
   
 
As to all Products not bearing the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label, the last date this Agreement becomes fully executed, subject to the provisions of Paragraph 20. of the Agreement.  As to all Products bearing the PLAYBOY ESTABLISHED 1953 & Rabbit Head Design Label, January 1, 2011.
   
   
S.10.
THE EXPIRATION DATE:
   
 
December 31, 2015


S.11.
THE MINIMUM NET SALES:
   
       
 
License Year
 
Amount
 
LY 1 (Commencement Date – 12/31/11)
 
*****
 
LY 2 (01/01/12 – 12/31/12)
 
*****
 
LY 3 (01/01/13 – 12/31/13)
 
*****
 
LY 4 (01/01/14 – 12/31/14)
 
*****
 
LY 5 (01/01/15 – 12/31/15)
 
*****


S.12.
PRODUCT DEVELOPMENT FEE:
   
 
***** due and payable within not more than fifteen (15) days of the date of Licensee’s signing of this Agreement.


S.13.
GUARANTEED ROYALTIES:
       
           
 
License Year
 
Amount
 
Payment Due Date
 
LY 1 (Commencement Date – 12/31/11)
 
*****
 
Due in full upon Licensee’s signing of this Agreement
 
LY 2 (01/01/12 – 12/31/12)
 
*****
 
October 1, 2011
     
*****
 
June 1, 2012
 
LY 3 (01/01/13 – 12/31/13)
 
*****
 
October 1, 2012
     
*****
 
June 1, 2013
 
LY 4 (01/01/14 – 12/31/14)
 
*****
 
October 1, 2013
     
*****
 
June 1, 2014
 
LY 5 (01/01/15 – 12/31/15)
 
*****
 
October 1, 2014
     
*****
 
June 1, 2015

 
Subject to the provisions of Paragraphs 2.e.(v)(a) and (b) of the Agreement, Licensee understands and accepts that all Development Fee, Guaranteed Royalties and Earned Royalties payments to be remitted to Licensor hereunder are intended to be net amounts without any deductions whatsoever so that, for example and purposes of clarification only, the amount of Guaranteed Royalties Licensor receives in License Year 1 is *****.
 
S.14.
ROYALTY RATE:
   
 
***** percent (*****%) of Net Sales until the amount of the Minimum Net Sales are met for each License Year; and ***** percent (*****%) of Net Sales for sales of the Products beyond Minimum Net Sales for each License Year.
 
 
7

 
 
 
Subject to the provisions of Paragraph 2.d.(i) of the Agreement, payments shall be reported on the Statements, broken out by Product item in a format reasonably requested by Licensor from time to time with within not more than fifteen (15) days following the end of each calendar month.
 
S.15.
EARNED ROYALTIES:
   
 
The Earned Royalties, calculated at the Royalty Rate, on the total Net Sales (as defined in Paragraph 2.e.(ii) of the Agreement) of all Products sold during the Term and Sell-Off Period (if any).
   
   
S.16.
MARKET DATE:
   
 
January 1, 2011
   
S.17.
MARKETING SPEND:
   
 
Not less than ***** percent (*****%) of Net Sales for each License Year.
   
S.18.
MARKETING FUND PAYMENT:
   
 
***** percent (*****%) of Net Sales for each License Year.
   
S.19.
SELL-OFF PERIOD:
   
 
Ninety (90) days after the Expiration Date or notice of termination together with Licensor’s consent (pursuant to Paragraph 8.c. below).
   
   
S.20.
THE ADDRESS WHERE BOOKS KEPT:  See Paragraph S.2. above of this Schedule.


S.21.
CREATIVE DIRECTION AND ADDITIONAL TERMS AND CONDITIONS:
     
 
1.
In each License Year, at Licensor’s request, Licensee will provide for Licensor’s promotional purposes, at no charge to Licensor, three (3) units of each SKU of the Products in such mix and in such quantities as Licensor may request.
     
 
2.
Licensee will ensure that the Products will have a consumer target of ages 18-34 and be positioned both in image and pricing as trendy, youth-oriented fashion-forward clothing comparable to competitive fashion casual labels *****.  Product distribution channels and the appearance and quality of store fixtures, catalogues, advertising and other marketing materials will be aligned to this positioning and Licensee will work closely with Licensor and Licensor’s Agent to achieve and fine-tune the targeted design, distribution and price positioning.

 
8

 
 
 
3.
Licensee will assign a 100% dedicated management team to be reasonably agreed with Licensor but which shall at a minimum include a design team or third party design agency of a high caliber capable of working with Licensor and Licensor’s Agent to design the Products to a design and fashion level comparable to competitive fashion casual labels such as those cited in Paragraph 2. above.


GLORY RABBIT INTERNATIONAL
 
PLAYBOY ENTERPRISES
 
 INVESTMENT CO., LIMITED
 
INTERNATIONAL, INC.
 
锦兔国际投资有限公司
 
(LICENSOR)
 
 (LICENSEE)
     
         
By:
/s/ Wang Chengjin
 
By:
/s/ Howard Shapiro
         
Title:
Chairman
 
Title:
Executive Vice Pres.
         
Date:
2010.08.20
 
Date:
8-24-10


SHANGHAI GLORY RABBIT INVESTMENT COMPANY LIMITED
上海锦兔投资有限公司
(As Guarantor subject to the provisions of Paragraph 1.a.(i) of the Agreement)


By:
/s/ Wang Chengjin
   
Title:
Chairman
   
Date:
2010.08.20
   
Chop/Company Seal:

 
9

 

LICENSE AGREEMENT


This Agreement is made as of the Commencement Date as set forth in Paragraph S.9. of the Schedule hereto, by and between the corporation described in Paragraph S.1. of the Schedule attached hereto and made a part hereof (hereinafter referred to as “Licensor”) and the corporation described in Paragraph S.2. of the Schedule (hereinafter referred to as “Licensee”).

RECITALS

WHEREAS, Licensor has certain rights in and to the Trademarks and to Images.  The Trademarks and Images may sometimes be collectively hereinafter referred to as the “Playboy Properties;”

WHEREAS, Licensee recognizes that Licensor is an international multimedia entertainment company that publishes editions of PLAYBOY Magazine around the world; operates television networks and distributes programming globally; owns Playboy.com, a leading men’s lifestyle and entertainment web site; and licenses the Playboy trademarks internationally for a range of consumer products and services, including retail stores; and

WHEREAS, the parties hereto desire that Licensor grant to Licensee a license to use the Playboy Properties in the design, manufacture, advertising, promotion, sale and distribution of the Products.

NOW, THEREFORE, in consideration of the mutual promises herein contained, it is mutually agreed as follows:

1.           GRANT OF LICENSE.

a.           Grant:

(i)           On the condition that Licensee’s parent company, Shanghai Glory Rabbit Investment Company Limited, 上海锦兔投资有限公司, (“Guarantor”), signs this Agreement in the two Guarantor signature blocks and seals its signature with a company chop or seal to evidence its agreement to the Guarantor provisions set forth in Paragraph 1.a.(z) below, then upon and subject to the terms and conditions hereinafter set forth, Licensor hereby grants to Lic ensee, and Licensee hereby accepts, the right, license and privilege specified in Paragraph S.5. of the Schedule to use the Playboy Properties in connection with, and only with, the design, manufacture, advertisement, promotion, sale and distribution of the Products in the Territory through the Distribution Channels.  Such right, license and privilege is hereinafter referred to as the “License.”  It is understood and agreed that while the manufacture of the Products may take place outside the Territory, none of the Products may be advertised, promoted, sold or distributed outside the Territory by Licensee.  Licensee acknowledges and accepts that Licensee’s exclusivity is limited solely to the use of the Exclusive Labels on the Products in the Product categories set forth in Paragraph S.7. of the Schedule hereto and through the Distribution Channels set forth in Paragraph S.6. of the Schedule hereto.

(z)           In order to induce Licensor to enter into this Agreement with Licensee, Guarantor, Licensee’s parent company, hereby guarantees without any limitation of any kind, the performance by Licensee of all the terms and conditions of the Agreement, and, therefore, undertakes to be responsible to Licensor, jointly and severally with Licensee for all liabilities of Licensee arising out of its obligations under or in connection with this Agreement or by reason of any breach thereof.  This Guarantee shall remain in force and may be called upon by Licensor without requiring Licensor to commence any proceedings of any nature against Licensee pursuant to the terms of the Agreement.

 
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(ii)           Anything in this Agreement to the contrary notwithstanding, Licensor (on behalf of itself, its subsidiary and affiliated companies and its third-party licensees) reserves:  (a) the right to produce or have produced the Products to be used in the Territory specifically for promotional and advertising purposes and not for sale, including, but not limited to, as product placement in feature films, television and related platforms; (b) the right to produce or have produced any or all of the Products and to advertise, promote, sell and distribute the Products, in the Territory, through direct marketing channels or sales (including, but not limited to, direct mail, catalog houses, home shopping programs, infomercials and the like), premium sales, incentive sale s, home party plans or through any other means now known or hereafter available; (c) the right to produce or have produced by any third party the Products or similar products and to advertise, sell, promote and distribute the Products through a Playboy-branded retail store located in the Territory; and (d) the right to produce or have produced any or all of the Products and to advertise, promote, sell and distribute any or all of the Products in the Territory, via “Mobile Commerce.”  “Mobile Commerce” shall mean transactions conducted on one or more mobile telecommunications networks exclusively within the Territory and exclusively via the language of each country of the Territory in “Mobile Device” presentations.  “Mobile Device” means a mobile, wireless device existing as of the Commencement Date or developed thereafter that (i) is intended to be mobile and not commonly used at a fixed location; and (ii) is capable of receiving voice, data , and/or video communications.  The definition of “Mobile Device” includes, without limitation, personal digital assistants (PDAs), pagers, mobile phones and other devices receiving communications via wireless fidelity (wi-fi) network and, for the avoidance of doubt, excludes all non-mobile television devices or other devices that function as a receiver or set-top box for a television-type broadcast or other signal, fixed display device or fixed monitor.

(iii)           Licensee acknowledges that there are a number of authorized Playboy-branded stores in various countries around the world.  In the event the licensees for any such Playboy-branded stores wish to purchase any of the Products from Licensee or its distributors for sale through the Playboy-branded stores, Licensee may fulfill such orders subject to the provisions of this Paragraph 1.a.(iii).  While fulfillment of such orders may consist of Licensee or its distributors shipping the Products outside of the Territory, such shipments of the Products to such authorized Playboy-branded stores outside of the Territory will not be a violation of the Territory restrictions set forth in this Agreement; p rovided, however, that (a) Licensee may not solicit such orders outside of the Territory; (b) Licensee must report such sales separately on the “Statements” (as defined in Paragraph 2.e.(i) hereof); (c) Licensee will include such sales in the calculation of “Net Sales” for the purpose of computing Minimum Net Sales  and Earned Royalties; and (d) Licensee must notify Licensor in advance in writing of any such order and must obtain Licensor’s prior written approval to fulfill such orders.  Further, in the event Playboy has opened or opens, itself or through a third party, a Playboy-branded store in the Territory, the licensee for such Playboy-branded store in the Territory may source the Products or similar products through any third party anywhere in the world and sell such Products or similar products through such Playboy-branded store in the Territory and such sourcing and selling will not be a violatio n of the License.

(iv)           Licensee will have the non-exclusive right to open Playboy-branded retails stores, including flagship stores (flagship stores being independently standing street level stores in prominent locations with a selling space of not less than 5,000 square feet), in the Territory during the Term of this Agreement; provided, however, that the details of any such retail store, including, but not limited to location, design concepts, inventory, roll-out plans for such retail stores, royalties on retail sales of products that may be obtained from other vendors, and POS systems, (i) will be subject to Licensor’s prior written approval, and (ii) must be evidenced in a separate retail store license agreement, the terms and conditions of which will be subject to the mutual a greement of the parties hereto, for each such retail store.

 
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(v)           Anything in this Agreement to the contrary notwithstanding, Licensor shall have the right, and such right shall not be a violation of the License, to enter into trademark license agreements directly with retailers for retail stores solely located in the Territory, including, but not limited to, the type of retailers set forth in Paragraph S.6. of the Schedule to this Agreement, for the design, manufacture, advertisement, sale and distribution of any other products and/or services not included in the License.  In addition, Licensor shall have the right, and such right shall not be a violation of the License, to enter into trademark license agreements directly with multi-national retailers for the desig n, manufacture, advertisement, sale and distribution of the Products hereunder, which sale and distribution of the Products bearing any label including, but not limited to, the Exclusive Labels and other products and services shall be directly through such retailers’ stores in the Territory.

(vi)           Licensee shall be responsible for and shall assume and pay for all costs and expenses arising out of or in connection with Licensee’s responsibilities, duties and obligations set forth in this Agreement, including, but not limited to, those costs and expenses related to Licensee’s design, manufacture, advertising, promotion, sale and distribution of the Products.

(vii)           Licensee understands that there are currently third parties with rights to the PLAYBOY Label in the Territory.  In the event such rights become available during the Term of this Agreement, and provided Licensee is in compliance with the provisions of this Agreement, the PLAYBOY Label will be added as a Trademark under Paragraph S.4. of the Schedule hereto upon Licensor’s written notice.

b.           Term:

(i)           The term of the License and this Agreement (hereinafter referred to as the “Term”) shall commence on the Commencement Date and shall expire at midnight, Chicago time, on the Expiration Date, unless sooner terminated as provided in this Agreement.

(ii)           On the conditions that:  (a) Licensee shall be in full compliance with all of the terms and conditions of this Agreement, including, but not limited to, the timely payment of all amounts required under this Agreement; (b) the  total amount of the Earned Royalties payable to Licensor for License Year 4 (1/1/14 – 12/31/14) and License Year 5 (1/1/15 – 12/31/15 is ***** percent (*****%) greater than the total amount of the  Guaranteed Royalties for License Years 4 and 5; and (c) the Minimum Net Sales have been met or exceeded for each License Year of this Agreement, Licensee will have the right to request negotiations for a renewal of this Agreement by sending Licensor written notice of its desire to commence such negotiations .  Licensee must provide Licensor with such notice of its desire to renew this Agreement no later than April 1, 2015.  In the event Licensee fails to provide such notice by such date, Licensor will be free to pursue such licensing opportunities with any third party without obligation or liability to Licensee.  In the event Licensee provides such notice by such date, Licensor and Licensee will commence negotiations for a renewal of the License and this Agreement not later than April 15, 2015.  In the event that Licensor and Licensee cannot reach agreement on the terms and conditions of such renewal, including, but not limited to, Guaranteed Royalties, Earned Royalties and Minimum Net Sales for each License Year of such renewal within not more than thirty (30) days of the commencement of such negotiations, it will be conclusively presumed that Licensor and Licensee cannot reach agreement and Licensor will be free to pursue such licensing opportunities with any third part y without obligation or liability to Licensee, provided, however, that during such thirty (30) days period, Licensee will have the opportunity to match the principal commercial terms of any bona fide third-party offer received by Licensor and which shall duly be communicated by Licensor to Licensee for this purpose.  Anything in this Paragraph 1.b.(ii) to the contrary notwithstanding, Licensor will be under no obligation to accept the principal commercial conditions matched by Licensee.

 
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(iii)           Anything in this Agreement to the contrary notwithstanding, in the event that Licensor’s corporate parent ceases to hold over fifty percent (50%) of the equity in Licensor or Licensor’s Product Licensing Group, or in the event that Licensor’s corporate parent sells, licenses or assigns Licensor’s product licensing business to a third party, then the third party obtaining the equity in Licensor or Licensor’s Product Licensing Group or the third-party purchaser, licensee or assignee of Licensor’s product licensing business shall have the right to terminate this Agreement upon twelve (12) months’ prior written notice to Licensee.

c.           License Year and License Quarter:

(i)           For all purposes under this Agreement, a “License Year” shall be each twelve (12) consecutive calendar month period commencing on each January 1st of the Term and ending at midnight, Chicago time, on each following December 31st of the Term, except that the first License Year will commence on the Commencement Date and end at midnight, Chicago time, on December 31, 2011.  If the expiration or termination of this Agreement is effective other than at the end of any such period, then the final period ending on the effective date of such expiration or termination shall be deemed to be a License Year.

(ii)           For all purposes under this Agreement, a “License Quarter” shall be each three (3) consecutive calendar months of each License Year.  If the expiration or termination of the License and this Agreement is effective other than at the end of a License Year, then the final period ending on the effective date of such expiration or termination shall be deemed to be a License Quarter.

d.           Territory:  The License shall extend only to the Territory, and the use by Licensee of the Playboy Properties shall be confined to the Territory.  Licensor shall have the right, but not the obligation, to terminate this Agreement by deeming any sales or distribution of the Products or use of the Playboy Properties by Licensee outside of the Territory to be an incurable default under this Agreement.  Such sales of the Products or use of the Playboy Properties shall include any sales by Licensee of the Products in the Territory for resale outside of the Territory.

e.           Minimum Net Sales:  Notwithstanding anything in this Agreement to the contrary, if Licensee’s Net Sales in any License Year are less than the Minimum Net Sales for such License Year, then Licensor shall have the right to either:  (i) declare the License to be non-exclusive as to the Exclusive Labels, thereby giving Licensor the rights to design, manufacture, advertise, promote, sell and distribute the Products bearing the Exclusive Labels in competition with Licensee or otherwise grant any or all of such rights to one or more other parties and/or delete the M PLAYBOY MANSION COLLECTION & Rabbit Head Design Label and Home Products from the License; or (ii) terminate the Lice nse and this Agreement by deeming the failure to attain the Minimum Net Sales to be an incurable default under this Agreement.  Such declaration, deletion or termination:  (a) shall be immediately effective upon the receipt by Licensee of written notice from Licensor which shall be sent no later than forty-five (45) days after Licensor’s receipt of the “Statement” for the end of each License Year and which evidences such shortfall; and (b) shall have no effect upon the amounts due and payable to Licensor for periods prior to or after such declaration or termination.

2.           COVENANTS OF LICENSEE.

a.           Use:

(i)            Subject to Licensor’s prior approval as hereinafter required, Licensee shall commence bona fide commercial sales of the Products as soon as practicable after the Commencement Date, but in no event later than the Market Date.  Licensee will promptly notify Licensor of the date of first sale of Products in each country in the Territory together with associated details concerning the distributor and/or sales agent (if any) and top customer accounts pertaining to such sale.  Such notification shall be provided in

 
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writing.  If Licensee fails to commence such sales by the Market Date, Licensor may treat such failure as an incurable default under this Agreement.  In the event during any License Year, Licensee has not on a regular and ongoing basis:  (y) sold and distributed one or more of the Products within all categories of the Products under Paragraph S.7. of the Schedule; or (z) sold and distributed the Products in all countries of the Territory, then Licensor shall have the right to delete, from the Schedule upon not less than thirty (30) days’ prior written notice to Licensee, any Products which, any Product category from which, or any country to which Licensee has not so sold and distributed.  In the event that all Products are deleted from the Schedule or all countries are deleted from the Territory, then the License and this Agreement will automatically terminate due to an incurable default.  For purposes of clarification, the sales discussed in this Paragraph 2.a.(i) are bona fide commercial sales, which are volume sales to the Distribution Channels for sale or distribution to consumers and will specifically exclude sample sales to distributors or wholesalers.

(ii)            Except as otherwise provided in this Agreement, Licensee shall not cause or authorize any use of the Playboy Properties in any area of the world outside the Territory and shall not knowingly manufacture, sell or otherwise deal with or distribute any of the Products on behalf of or to any individual or entity that Licensee believes or has reason to believe intends or intend or is or are likely to sell, deal with or distribute any of the Products in any way outside the Territory.  Licensee shall ensure that all of its distributors, whether affiliated or third-party, to which Licensee sells or through which Licensee otherwise moves any Products are aware of all Territory restrictions on the use of the Playboy Properties and the distribution of the Products and shall obtain an executed “Distributor Contract” (as defined in Paragraph 2.k.(ii) hereof) from all of its third-party distributors as set forth in Paragraph 2.k.(ii) hereof.  Licensee shall immediately notify Licensor should Licensee become aware that any of its distributors, whether third-party or affiliated, have distributed or dealt with the Playboy Properties or Products in any way outside the Territory.

(iii)           Licensee warrants and represents that it has and will continue to have throughout the Term and the Sell-Off Period the legal right and authority to enter into this Agreement and to assume and perform its duties and obligations hereunder and that there is or are no, and Licensee shall not enter into during the Term or the Sell-Off Period, if any, contract, agreement or understanding with any individual or entity which would in any way restrict or prevent Licensee from the performance of its duties and obligations under this Agreement.

(iv)           Licensee shall be responsible for obtaining, at its own expense prior to the Commencement Date, and maintaining at its own expense throughout the Term, any and all licenses, permits and approvals (including governmental and all other licenses, permits and approvals) necessary for Licensee to:  (a) design, manufacture, advertise, promote, sell and distribute the Products; (b) pay Guaranteed Royalties, Earned Royalties, Marketing Fund Payment required to be made pursuant to the provisions of Paragraph 2.o.(i) hereof and taxes; and (c) fulfill any and all other duties and obligations and exercise the rights of Licensee under this Agreement.  In the event Licensee is unable, for any reason, to obtain prior to the Commencement Date or maintain throughout the Term all of such licenses, permits or approvals, such inability shall be an incurable default under this Agreement.

(v)           Licensee will take all necessary actions to ensure that all aspects of its obligations in connection with this Agreement comply with all applicable state and local laws, rules and regulations.  Licensee will not create, initiate, transmit or otherwise participate in the creation, initiation or transmission of any unsolicited bulk email in connection with the Products.  In addition, Licensee will comply with all applicable state laws governing privacy, technology, software and trade secrets.

 
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b.            (i)           Maintaining Goodwill:  Licensee recognizes that the Trademarks are associated with Licensor on a worldwide basis and, therefore, Licensee shall, throughout the Term and the Sell-Off Period, constantly use its best efforts in the advertising, promoting, selling, distributing and in all other dealing with or disposal of the Products to protect the good name and goodwill associated with the Trademarks and Licensor, and to obtain the greatest Net Sales throughout the entire Territory and the entire Term and the Sell-Off Period.  Should Licensee directly or indirectly take any action which negatively affects or impacts the good name, goodwill or reputation of Licensor, Licensor may deem such to be an incurable default by Licensee under this Agreement.

(i)           Compliance with Law:  Licensee shall not cause, condone or authorize in any country of the Territory any violation of any federal, state or local law or regulation, including, but not limited to, the United States Department of the Treasury’s economic and trade sanctions, which include, but are not limited to, any Executive Order Blocking Property of Certain Persons for any reason in any country of the Territory set by the United States Department of the Treasury Office of Foreign Assets Control.  All distributors of Licensee must also agree in writing not to cause, condone or authorize any such violations.  Any such violation by Licensee or any of its distributors s hall be an incurable default under the Agreement.  Licensee agrees to indemnify, protect and hold harmless Licensor and Licensor’s parent, subsidiary and affiliated entities and its and their employees, officers and directors for, from and against any and all costs, claims, suits or causes of action arising out of or in connection with any such violation.

c.           Distribution Channels:  The Products may only be sold in the Territory through and only through the Distribution Channels and only pursuant to Paragraph S.6. of the Schedule to this Agreement.  Except as otherwise set forth in Paragraph 1.a.(v), Licensee acknowledges and agrees that nothing in this Agreement shall prevent Licensor from using (or licensing to any third party the right to use) (i) the exclusive Playboy Properties on or in connection with the exclusive Products in any channel of distribution anywhere in the world outside of the Territory, and (ii) the non-excl usive Playboy Properties on or in connection with the non-exclusive Products or any goods similar to the non-exclusive Products in any channel of distribution anywhere in the world including the Territory.  Licensor shall have the sole and absolute discretion to reasonably determine if a store, club or other distribution channel falls within the definition of Distribution Channel.

d.           Payments:

(i)             Product Development Fee:  Licensee shall pay to Licensor a non-refundable product development fee in the amount of *****; which fee shall be payable within not more than fifteen (15) days following the date of Licensee’s execution of this Agreement and will entitle Licensee to develop Products between the Commencement Date and December 31, 2011.

(ii)            Guaranteed Royalties:  Licensee will pay to Licensor or its designee Guaranteed Royalties in the amount and for each License Year specified in Paragraph S.13. of the Schedule.  Guaranteed Royalties for each such License Year shall be paid in accordance with Paragraph S.13. of the Schedule.  Under no circumstances whatsoever will Licensor return to Licensee all or any part(s) of Guaranteed Royalties, except as provided in Paragraph 8.b. hereof.  In the event that Licensee is late in making any Gua ranteed Royalty installment payment in any License Year, and Licensee fails to remit such payment to Licensor within not more than ten (10) days following the date of Licensor written demand for such payment, Licensor will have the right upon written notice to Licensee to accelerate the payment of the unpaid remaining Guaranteed Royalty installments due and payable for the remainder of the License Year in which such installment was late, which along with the past due amount will be due and payable to Licensor within not more five (5) days after the date of such notice, and (z) declare the Guaranteed Royalties due and payable for remaining License Years to be payable in full

 
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on or before the first day of each such License Year, respectively.  Any such notice from Licensor is without prejudice to Licensor’s default and termination rights set forth in Paragraphs 7.a.(i) and 7.a.(ii).

(iii)           Earned Royalties:  Licensee shall pay to Licensor or its designee Earned Royalties but only to the extent that for each License Year the amount of the Earned Royalties exceeds Guaranteed Royalties for such License Year. Earned Royalties shall be payable in accordance with the terms and conditions of Paragraph 2.e. hereof.  In the event Licensee marks down its standard invoice price for any Product in excess of thirty percent (30%), Earned Royalties on such sales will be computed as if such invoice price was marked down not more than thirty percent (30%).  In the event the amount of the Earned Royalties exceeds the amount of the Guaranteed Royalties in any License Year, Licensee may not use the amount of such overage as an offset against any other minimums or guarantees hereunder including, but not limited to, any Guaranteed Royalties due and payable in any other License Year.

(iv)           Interest:  Each sum, including, but not limited to, the product development fee set forth in Paragraph 2.d.(i) above, Guaranteed Royalties and Earned Royalties, that shall not be paid on the due date by Licensee shall bear interest from such due date until the date on which such sum is paid in full at an amount equal to four percent (4%) over the prime rate of interest as established by JP Morgan Chase on the date such sums should have been paid.

(v)           Letter of Credit:  Licensee will deliver to Licensor, within not more than twenty (20) days after the Commencement Date, an Irrevocable Stand-By Letter of Credit (the “Letter of Credit”) in the amount of ***** to be effective throughout the Term of this Agreement, in favor of Licensor confirmed and advised through a bank designated by Licensor and on terms and in the form and content as directed by Licensor, which shall include, but may not be limited to the following terms and conditions:  (i) the Letter of Credit must contain the condition that it will be automatically extended without amendment for additional periods of twelve (12) months from the current or any future exp iration date unless notice is sent sixty (60) days from the expiry date to the advising bank by authenticated swift and to Licensor by courier that the Letter of Credit will not be renewed, (ii) that Licensor will have the right, at any time, to draw upon the Letter of Credit if Licensee fails to make any payment as provided under this Agreement; and (iii) that if during any term of the Letter of Credit, a partial or full draw becomes necessary, the Letter of Credit will automatically be reinstated to the original value pursuant to the terms and conditions of this Paragraph 2.d.(v). of this Agreement.  Licensor will give notice of its intention to draw on the Letter of Credit if Licensee fails to make any payment due as provided under this Agreement.  Licensor must receive the extended Letter of Credit not less than thirty (30) days before the start of each such subsequent twelve (12) month period.  In the event the Letter of Credit is not extended as set forth herein above, Licensor shall have the right to draw from the current Letter of Credit the full amount of the Letter of Credit and apply such amount to current and future payment obligations of Licensee under this Agreement.  Such draw shall not be deemed to relieve Licensee from having to obtain and maintain the Letter of Credit pursuant to the provisions of this Agreement and Licensor shall still have the right to deem any failure by Licensee to obtain and maintain the Letter of Credit pursuant to the provisions of this Paragraph 2.d. to be an incurable default.  All costs and expenses associated with such Letter of Credit, including, but not limited to, opening, extending, amending and drawing fees, will be borne by Licensee.  Licensee’s failure to provide Licensor with a Letter of Credit as herein above provided shall be an incurable default under this Agreement.

e.           Statements and Payments:

(i)             Within not more than fifteen (15) days after each calendar month during the Term and the Sell-Off Period, if any, or within ten (10) days of a written request by Licensor Licensee shall furnish to Licensor or its designee a complete and accurate

 
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statement in a format acceptable to Licensor and certified to be true by the Chief Financial Officer of Licensee (hereinafter referred to as the “Statement”) showing for such calendar month and the License Year through such period or for the Sell-Off Period:  (a) a listing of Licensee’s accounts and the accounts of Licensee’s affiliated and third-party distributors in the Territory and the units and description of all of the Products sold and distributed to each such account or otherwise disposed of by Licensee or by Licensee’s affiliated and third-party distributors; (b) the computations of Net Sales on all such sales; (c) the computation of the Marketing Fund Payment due and payable pursuant to Paragraph 2.o.(ii) hereof and the Earned Roy alties and the amount of Earned Royalties due and payable; (d) the Marketing Spend made by Licensee pursuant to Paragraph 2.o.(i) hereof and the details of all such expenditures, supported by copies of vouchers and copies of all advertising for or relating to the period covered by such Statement; and (e) an accounting of Holograms (as hereinafter defined) comprising identification of the quantity of Holograms placed on Product sold or otherwise distributed (with an explanation of where the Product was distributed to), the quantity of Holograms placed on Product in inventory, and the quantity of Holograms in storage and not yet placed on Products, as well as the corresponding Hologram numbers for each of the above.  When, during any License Year, the amount of Guaranteed Royalties for such License Year has been exceeded by Earned Royalties for such License Year, Licensee shall commence payment of Earned Royalties.  Licensee shall pay all accrued and unpaid Earned Royalties by remittance accompanying each of the Statements.

(ii)           As used in this Agreement, the term “Net Sales” means the gross wholesale invoice price charged by Licensee or any of Licensee’s subsidiary or affiliated companies to unrelated, unaffiliated third-party customers or consumers for the Products less (x) refunds, credits and allowances actually made or allowed to customers for returned defective Products; and (y) value added tax assessed on sales (only where applicable). No other deduction or recoupments of any kind shall be deducted from the gross wholesale invoice price, including by way of example, cash discounts, early payment discounts, year-end rebates, costs incurred in manufacturing, selling, distributing, shipping or handling Product s, advertising (including cooperative and promotional allowances, fixturing, merchandising guides, displays and/or the like), uncollectible accounts, commissions, rush-transportation costs on otherwise late deliveries, make-good costs for defective product, design errors or lost or damaged product.  Products will be considered “sold,” and, therefore, subject to inclusion in the calculation of Earned Royalties, as of the date on which such Products are invoiced, shipped or paid for, whichever first occurs.  For the avoidance of doubt, there will be no deduction from “Net Sales” for uncollectable accounts.

(iii)           In the event the percentage of returns of Products in any License Year exceeds twenty percent (20%) of Net Sales for such License Year, then Licensor may elect to treat such an occurrence as an incurable default by Licensee under this Agreement.

(iv)           Licensee acknowledges that any significant reduction in the wholesale price (or the retail price where Licensee sells directly to the public) or material liquidation of the Products would cause serious and perhaps irreparable harm to Licensor and Licensor’s business activities and reputation in the Territory.

(v)           If Licensee sells any of the Products to any individual or entity that is directly or indirectly owned or controlled by Licensee or is under common ownership with Licensee, in whole or in part, the invoice price used to compute Net Sales hereunder shall be the invoice price that would have been charged to an unrelated purchaser in an arm’s-length transaction for such Products.

 
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(vi)           (a)           All Guaranteed Royalty and Earned Royalty payments Licensee is required to make by the terms of this Agreement shall be made by wire transfer in United States Dollars in cleared funds to the Collecting Agent by bank transfer to the following account

Bank:
*****
Branch:
*****
Account name:
*****
Account number:
*****
Swift Code:
*****

All Marketing Fund Payments Licensee is required to make by the terms of this Agreement shall be made by wire transfer in United States Dollars in cleared funds to Licensor by bank transfer to the account specified by Licensor from time to time.

Any and all costs associated with the wire transfer payments shall be borne by Licensee.  Licensee will remit the gross amount of the Guaranteed Royalties and Earned Royalties.  In the event any withholding or similar taxes are due in respect of any royalty or other payments hereunder, the amount of such payments will be grossed up such that Licensor will receive the same amount of royalty or such other payment as if such withholding or similar tax(es) had not applied.  Licensee shall pay any withholding or similar taxes in a timely manner and shall promptly provide Licensor with a receipt evidencing such payment.

(b)           Licensor and Licensee agree that the Licensor will not be liable for any withholding tax, including any interest, penalties or other associated costs, relating to any withholding obligation imposed by the government or taxing authority of any country, state, province, municipality or any other government jurisdiction arising as a result of this Agreement.  Licensee further agrees to indemnify, reimburse and otherwise hold harmless, Licensor for any such costs imposed on Licensor.  Licensee’s obligation to pay taxes shall survive any expiration or termination of this Agreement.  In the event payments in the manner provided in this Paragraph 2.e. shall become impossible or ill egal by reason of the action of governmental authority, and such impossibility or illegality shall remain in force for a period of ninety (90) consecutive days, then, at Licensor’s option, this Agreement may be terminated; and whether or not Licensor exercises such option, while such restrictions remain in effect, all payments due Licensor shall be made to an account in the Territory, or elsewhere where permitted by law, to be designated by Licensor.

(c)           In determining the proper rate of exchange to be applied to the payments due hereunder, it is agreed that:

(1)           Licensee shall calculate Earned Royalties on a calendar month basis in local currency (with each such month considered to be a separate accounting period for the purpose of computing Earned Royalties);

(2)           Licensee shall compute a conversion of each such monthly total into United Stated currency utilizing the mid-range rates as quoted by Reuters and other sources as published from Bank of America on the last business day of each relevant calendar month;

(3)           The converted amounts (in U.S. currency) shall be added together on a cumulative basis and will be reflected in the Statement required under this Paragraph 2.e.

 
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f.           Records and Audit:  Licensee shall:  (i) keep accurate books of account and records (including but not limited to utilization of consecutively numbered invoices which reconcile to each Statement and Licensee’s general ledger) covering all transactions relating to or arising out of the License and this Agreement (which books and records shall be maintained separately from Licensee’s documentation relating to other items manufactured or sold by Licensee); and (ii) permit Licensor or its nominees, employees, agents or representatives to have full access to such books and records in order to inspect such books and records at all reasonable hours of the day and upon prior writ ten notice to Licensee, to conduct an examination of and to copy (at Licensor’s expense), all such books and records; provided, however, that Licensor will keep, and require its nominees, employees, agents and representatives to keep, such information confidential subject to all applicable governmental laws, rules and regulations and except to the extent that such information may be shared with Licensor’s auditors and lawyers and may be used in connection with any lawsuit or other cause of action arising out of this Agreement.  Licensee shall maintain in good order and condition all such books and records for a period of two (2) years after the expiration or termination of the License and this Agreement or, in the event of a dispute between the parties hereto, until such dispute is resolved, whichever date is later, and such books and records shall be kept at the address stated in Paragraph S.20. of the Schedule, except as such add ress may be changed from time to time in accordance with Paragraph 9.b. hereof.  Receipt or acceptance by Licensor of any Statement furnished pursuant hereto or any sums paid by Licensee hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and if one or more inconsistencies or mistakes are discovered by Licensor in such Statement, it or they shall be rectified in an amended Statement received by Licensor no later than ten (10) days after the date of receipt by Licensee of notice of that which should be rectified.

g.           Expenses of Conducting Examinations:  If any inspection or examination referred to in Paragraph 2.f. hereof discloses, or Licensor or Licensee otherwise discovers, an underpayment of Earned Royalties or Marketing Fund Payments required to be made pursuant to the provisions of Paragraph 2.o.(ii) hereof or either thereof, the amount of such underpayment shall be paid by Licensee to Licensor no later than thirty (30) days after receipt of notice or knowledge thereof by Licensee.  In the event of such an underpayment by Licensee in excess of nine percent (9%) in any License Yea r, then Licensor may elect to treat such occurrence as an incurable default by Licensee under this Agreement.  If such inspection or examination:  (i) discloses or Licensor or Licensee otherwise discovers an overpayment of Earned Royalties or Marketing Fund Payment or either thereof (or, pursuant to Paragraph 8.b. hereof, an overpayment of Guaranteed Royalties), the amount of such overpayment shall be credited against future payment of any or all of the Guaranteed Royalties, Earned Royalties and Marketing Fund Payment or, in the event of the expiration or termination of the License and this Agreement and there is or are no such future payments, such amount shall be paid by Licensor to Licensee not later than thirty (30) days after the discovery thereof by Licensor, subject to Licensor’s rights of setoff, recoupment and counterclaim; or (ii) reveals that for the period covered by such inspection or examination there is an error of ten percent (10%) or more in the Earned Royalties, the Marketing Spend or the Marketing Fund Payment previously reported on the Statement(s) as being due from Licensee, all expenses involved in the conducting of such inspection or examination shall be borne by Licensee.  Licensee shall pay to Licensor the amount of such expenses no later than ten (10) days after Licensee’s receipt of Licensor’s invoice therefor.  If such error is less than ten percent (10%), such expenses shall be borne by Licensor.

h.           Product Quality:  Licensee hereby warrants and agrees that the Products designed, manufactured, advertised, promoted, sold or distributed under this Agreement shall bear the Playboy Properties faithfully produced and shall meet the high standards of quality, workmanship, material, design, size, color and style established by Licensor from time to time and in accordance with the terms and conditions of this Agreement.  Licensee will not knowingly or negligently cause or authorize any or all of the Products not conforming to this Agreement to be sold or distributed, as doing so may adversely affect Licensor’s goodwill in the Trademarks and any such non-conforming Products shall b e destroyed at Licensee’s expense.  All of the Products shall conform to and comply with, in all respects, all applicable, state and local laws, rules and regulations governing the design, quality, labeling and safety of such Products.  Licensee shall not cause, condone or authorize:  (i) the use of any substandard or offensive materials in or in

 
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connection with any of the Products; (ii) any violation of any applicable, state or local law or regulation, including, but not limited to, provisions thereof imposing advertising standards or requiring trade or content description of the Products; or (iii) the use of the Playboy Properties or any other word, device or symbol associated in any way with any or all of Licensor and its subsidiaries and affiliates in connection with any product or activity that is not the subject of the License and this Agreement.

i.           Approval of Products and the Materials:

(i)           Licensee understands and agrees that each of the Products and any other items bearing the Playboy Properties or intended for use in connection with the Products and the advertisement and promotions of the Products (hereinafter collectively referred to as the “Materials”) must be approved in advance by Licensor.  The Materials include, but are not limited to, prototypes, photography, shop-in-shop signs, catalogs, booklets, posters, shopping bags, cartons, containers, labels, wrappers, packaging and other inner and outer packaging materials, fixtures, displays, artwork and printing, advertising, sales, marketing and promotional materials.  Licensee shall, at its own expense, submit to Licensor or its designee for written approval, sampl es of each of the Products and the Materials at each stage of development thereof, which shall include, but not be limited to:  (a) an initial sketch or photograph; (b) a sample prototype (pre-production sample) or equivalent acceptable to Licensor; and (c) two final production-quality samples of that which will be mass produced or manufactured.  Licensee must obtain Licensor’s written approval of each stage of development before proceeding to the next stage, and in no event shall Licensee commence or permit the mass manufacture, advertising, promotion, sale or distribution of any of the Products or the Materials unless and until Licensee has received Licensor’s written approval of the samples provided pursuant to (b) of this Paragraph 2.i.(i).  In the event Licensor fails to provide its approval or disapproval of any or all things submitted to Licensor pursuant to this Paragraph 2.i.(i) within fourteen (14) days of Licensor’s receipt thereof, Licensee may send written notice to Licensor advising no response was received.  If Licensor does not respond within five (5) days of Licensor’s receipt thereof, then Licensor shall be deemed to have given disapproval.  Licensor shall not unreasonably withhold approval of the Products or Materials.  In the event Licensee fails to provide the two final production-quality samples pursuant to (c) of this Paragraph 2.i.(i), Licensor may either purchase the two final production-quality samples and Licensee shall immediately pay Licensor for all related costs and expenses incurred by Licensor including the purchase prices and all delivery and shipment costs or such Products or Materials shall be considered unapproved.

(ii)           Licensee understands and agrees that if Licensor approves any Products or Materials for production or manufacture, such approval shall be valid for one season only.  In each and every season that Licensee seeks to manufacture, advertise, promote, sell or distribute previously approved Products or Materials, Licensee must resubmit such Products or Materials to Licensor for written approval.  When resubmitting Products or Materials for approval for another season, Licensee shall utilize the same Product style number/ designation for the Products or Materials and shall indicate that such Products and/or Materials were previously approved for production and/or manufacture.  If Licensee fails to resubmit Products or Materials for approval a nd manufactures, promotes, or sells such Products or Materials in a season for which Licensor has not granted written approval, then such Products and Materials shall be considered unapproved.

(iii)           Licensee shall not use the same style number/designation on more than one style or design for Products or Materials.  The determination as to whether Products or Materials conform to a prior submission for the same style number/designation in all respects, including without limitation, with respect to materials, colors, workmanship, dimensions, styling, detail and quality, and whether Licensee should have used a different style number/designation because of variations shall be made by Licensor in its sole and absolute discretion.  Licensee shall not use an approved style number/designation in

 
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connection with non-conforming Products or Materials.

(iv)           To ensure that each of the Products and the Materials are constantly maintained per season, per License Year in conformance with the samples previously approved for such season in such License Year pursuant to this Paragraph 2.i., Licensee shall, within seven (7) days of receipt of a request from Licensor, send or cause to be sent to Licensor at Licensee’s expense:  (a) such actual samples requested by Licensor of the Products and the Materials Licensee is using, manufacturing, selling, distributing or otherwise disposing of; and (b) a listing or revised listing of each location where any of the Products and the Materials or either thereof are designed, manufactured, stored or otherwise dealt w ith, except to the extent such listing or revised listing duplicates currently accurate information provided pursuant to Paragraph 2.i.(iii) hereof.  Upon written notice to Licensee, Licensor and its nominees, employees, agents and representatives shall have the right to enter upon and inspect, at all reasonable hours of the day, any and all such location(s) and to take, without payment, such samples of any of the Products and the Materials as Licensor reasonably requires for the purposes of such inspection.

(v)           If any of the Products or Materials sent or taken pursuant to Paragraph 2.i.(ii) above or that otherwise come to the attention of Licensor does or do not conform in Licensor’s sole opinion to the previously approved samples for the relevant season in the relevant License Year, Licensor shall so notify Licensee, in writing, specifying in what respect such of the Products or Materials is or are unacceptable.  Immediately upon receipt of such notice, Licensee shall suspend all manufacture, sale and distribution of and shall obtain back from Licensee’s accounts all such Products and Materials and shall not resume the manufacture, sale or distribution thereof unless and until Licensee has made all necessary changes to the satisfaction of Licensor and has received Licensor’s written reapproval of each of such Products and Materials.

(vi)           All of the Products and the Materials that are not approved by Licensor or that are determined by Licensor to be unapproved, non-conforming or unacceptable shall not be sold, distributed or otherwise dealt with by Licensee.  All such Products and Materials may be confiscated, seized and/or destroyed by Licensor or, if directed by Licensor, by Licensee at Licensee’s cost and expense, with an appropriate certificate of destruction furnished by Licensee.

(vii)           Any and all sales, distribution or use by Licensee of unapproved, non-conforming or unacceptable Products or Materials shall not only constitute an incurable default under the terms of this Agreement, but such Products or Materials also shall be considered unlicensed and an infringement of Licensor’s proprietary rights, and Licensor shall have the right to bring legal action against Licensee for any and all remedies available to Licensor in addition to the remedies available under this Agreement.

(a)           So that there is no misunderstanding regarding the approval process, Licensee hereby agrees that in the submission of requests for approvals of proposed Products, unless Licensor gives written approval in advance, Licensee will:  [1] use an Image in its entirety; [2] not crop the Image; [3] reproduce the Image with fidelity to the original; [4] not distort or mutilate the Image; and [5] not create a reproduction of the Image which would be prejudicial to the honor or reputation of the artist.  Licensee further acknowledges that there may be certain works of art which Licensor, in its sole discretion, may determine are not appropriate for use on the Products.  Licensor’s refusal of an approval request based on a violation of any o f the foregoing shall be a legitimate reason for the refusal of an approval pursuant to this License and the Agreement.

(b)           Licensor shall have final approval with respect to the following elements of the Products:

(i)           Selection of Licensor’s Images for use on the Products.

 
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(ii)           Manipulation and adaptation of the Playboy Properties for reproduction on the Products.

(iii)           Approval of “strike offs” or other pre-production samples as the parties may agree.

(iv)           Approval of actual materials to be used for manufacture of the Products.

(c)           It is specifically agreed by Licensee that there shall be no approval by default.  Products may not be manufactured unless there is a written approval by Licensor.

(viii)           Licensee agrees and acknowledges that Licensor shall own all right, title and interest to the sample prototypes, final production-quality samples, and actual samples submitted by Licensee pursuant to this paragraph (the “Samples”).  Licensor may store, display, destroy, sell (including without limitation sample sales to the trade), or otherwise dispose of the Samples as determined by Licensor in its sole discretion and without any obligation or payment to Licensee.

j.           Title and Protection and Preservation of Playboy Properties and Copyrights:

(i)           Licensee hereby acknowledges each of the following:  the great value of the goodwill associated with the Trademarks; the worldwide recognition thereof; that the proprietary rights therein and goodwill associated therewith are solely owned by and belong to Licensor; that the Trademarks and other related words, devices, designs and symbols are inherently distinctive or have secondary meaning firmly associated in the mind of the general public with Licensor, its subsidiaries and affiliates and its or their activities; and that all additional goodwill associated with the Trademarks created through the use of such Trademarks by Licensee shall inure to the sole benefit of Licensor.  During and after the Term, Licensee shall not:

(a)           attack or question the validity of, or assist any individual or entity in attacking or questioning, the title or any rights of or claimed by Licensor, its subsidiaries and affiliates and their respective licensees and sublicensees in and to the Playboy Properties or any other trademarks, copyrights or such other intellectual or intangible property associated or connected with any or all of Licensor, its subsidiaries and affiliates, their publications, published material, activities, licensees and sublicensees;

(b)           directly or indirectly seek for itself, or assist any third party or parties to use or acquire, any rights, proprietary or otherwise, in any patent, trademark, copyright or such other intellectual or intangible property so associated or connected (including without limitation URLs and domain names), without the prior written approval of Licensor;

(c)           in any way seek to avoid Licensee’s duties or obligations under this Agreement because of the assertion or allegation by any individual(s), entity or entities that any or all of the Playboy Properties are invalid or by reason of any contest concerning the rights of or claimed by Licensor; or

(d)           file or prosecute one or more trademark applications regarding Licensee’s use of the Playboy Properties, unless first requested to do so in writing by Licensor.  (Licensee will cooperate with Licensor in connection with any and all such filings in the Territory.)

(ii)           Licensee shall:

 
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(a)           use the Playboy Properties as permitted under this Agreement in the Territory strictly in accordance with the legal requirements in the Territory.  At Licensor’s request, Licensee shall cooperate fully with Licensor in preparing and causing to be recorded in the Territory registered user agreements and all other documents or filings which may be necessary or desirable to evidence, protect and implement the rights of or claimed by Licensor pursuant to this Agreement.  In the event of any ambiguities between any registered user agreement or other similar document or filing and this Agreement, the terms and conditions of this Agreement shall govern and control.  Upon expiration or termination of this Agreement for any reason whatsoe ver, Licensee shall execute and file any and all documents, as required and directed by Licensor, terminating any and all registered user agreements or other filings.  Licensee hereby authorizes and empowers Licensor to terminate all registered user agreements in the event of expiration or termination of this Agreement on Licensee’s behalf and in Licensee’s name;

(b)           affix or imprint irremovably and legibly on each of the Products and on or within all of the Materials such Playboy Properties, trademark notices, copyright notices, legends and Licensor’s Hologram as Licensor directs;

(c)           manufacture, sell, distribute or otherwise deal with the Materials solely in connection with the Products (except for any or all of the Materials which do not bear one or more of the Playboy Properties or otherwise are not associated with any or all of the Products by virtue of, but not limited to, such things as design, color or content); and

(d)           not cause or grant permission to any third party or parties to acquire any copyright or other proprietary right in connection with any word, device, design or symbol used by Licensee in connection with any of the Products or the Materials.

k.           Right to Subcontract, Licensee Financial Statements and Lists of Sources and Accounts:

(i)           Licensee may subcontract the manufacture of any or all component parts of any or all of the Products bearing the Playboy Properties pursuant to this Agreement, provided:  (x) Licensee notifies Licensor in advance of any intended supplier/subcontractor and obtains Licensor’s prior written approval of such supplier/subcontractor; (y) Licensee obtains from each such supplier/subcontractor an executed written agreement in the form attached hereto and made a part hereof as Exhibit C; and (z) furnishes a copy of each such executed agreement to Licensor. Licensee shall comply, and shall procure any supplier/subcontractor to comply, with the Code of Conduct set out in Exhibit D in connection with the manufacture, packaging, supply and distribution of Products.

(ii)           Licensee may subcontract with a third-party distributor for the distribution of the Products in the Territory pursuant to this Agreement, provided:  (x) Licensee notifies Licensor in advance of any intended third-party distributor and obtains Licensor’s prior written approval of any such third-party distributor; (y) Licensee obtains from each Licensor-approved third-party distributor an executed written agreement (the “Distributor Contract”) attached hereto and made a part hereof as Exhibit E; and (z) Licensee furnishes a copy of each Distributor Contract to Licensor.  For purposes of this Paragraph 2.k.(ii), third-pa rty distributors shall not include any distribution entity which is wholly-owned or controlled by Licensee.  However, nothing contained in this Paragraph 2.k.(ii) shall be construed to relieve Licensee of its obligation and responsibility to ensure that its distributors, whether third-party or wholly or partially owned, perform their duties in accordance with the terms and conditions of this Agreement and the Distributor Contract, including, but not limited to approved distribution channels and Territory restrictions.  Licensee shall be responsible to Licensor for any violations by its distributors, whether third-party or affiliated, of the terms and conditions of this Agreement (which responsibility shall be included as part of Licensee’s obligations under Paragraph 2.n.(i) hereof) or the Distributor Contract.

 
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In the event of any such violation, Licensor shall have the right, but not the obligation, to require Licensee to:  (i) immediately terminate, upon receipt of written notice from Licensor, the Distributor Contract with such distributor; and (ii) immediately and permanently cease supplying any or all of the Products to such distributor.  In the event Licensee fails to terminate the Distributor Contract with such distributor immediately upon Licensee’s receipt of Licensor’s notice or fails to cease supplying any or all of the Products to such distributor, Licensor shall have the option, but not the obligation to terminate the License and this Agreement, immediately upon receipt by Licensee of written notice, by deeming any such failure to be an incurable default by Licensee under this Agreement.  0;In addition, Licensee shall be responsible for obtaining from each of its distributors, whether third-party or affiliated, a complete listing of each such distributor’s inventory of the Products on hand at the time of termination or expiration of this Agreement and upon the expiration or termination of the “Sell-Off Period” (if any) and supplying a copy to Licensor of such inventory listing within the time frames set forth in Paragraph 8.d. hereof.

(iii)           With the Statement submitted at the end of each License Year pursuant to Paragraph 2.e.(i) hereof and at any other time so requested by Licensor during the Term and the Sell-Off Period, Licensee shall provide Licensor with:  (a) copies of Licensee’s most recent audited financial statements (including without limitation footnotes) and annual reports, 10-K’s, balance sheets or other similar documents that indicate Licensee’s financial status; and (b) an updated list of the names and addresses of all manufacturing sources, subcontractors, distributors, suppliers, dealers, wholesalers, retailers, accounts and others which have been engaged in the design, manufacture, advertising, promo tion, sale, distribution or other dealings with any or all of the Products and the Materials during the Term and the Sell-Off Period or either thereof.  Such list shall, if so requested by Licensor, contain the full specification of all designs or trademarks that may be involved, directly or indirectly, in the manufacture, production or distribution of any or all of the Products and the Materials.

l.           Inventory and Holograms:

(i)           Insofar as reasonable, Licensee shall at all times during the Term be able to fulfill all orders for the Products promptly and yet not have an excessive inventory on hand at the time of the expiration or termination of the License.  Within forty-five (45) days after each License Year or within ten (10) days of receipt of a request from Licensor, Licensee will furnish Licensor with a complete and accurate statement (the “Inventory Statement”) signed by the Chief Financial Officer of Licensee, setting forth in detail the quantities and description of each of the Products in work in process and finished goods inventories of the Products and the locations thereof.

(ii)           All Products shall have affixed to the label, hang tag, packaging, or elsewhere on the Products, as approved by Licensor, Licensor’s official hologram (“Hologram”).  Licensee shall purchase Holograms from Licensor’s official Hologram supplier (“Hologram Supplier”) (which Licensor may change from time to time in its sole discretion and upon written notice to Licensee) through completed purchase orders (“Purchase Orders”) which shall be sent to Licensor with a report (hereinafter referred to as the “Hologram Report”) identifying (a) the quantity of Holograms used on Products sold by Licensee or otherwise distributed (with an explanation of where such Products were sold or distributed) since the pri or submission of a Purchase Order; (b) the quantity of Holograms on Products on hand and intended for placement on Products in process; and (c) the requested quantity of Holograms.  Licensor (itself or through the Hologram Supplier) may withhold approval of Purchase Orders if Licensee fails to provide the Hologram Report.  Licensor (itself or through the Hologram Supplier) may reject

 
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Licensee’s Purchase Orders, if, in Licensor's sole and absolute discretion, the Hologram request is excessive or otherwise inconsistent with (i) the sales information in Licensee's Statements; (ii) royalty payment history; (iii) submissions for Products approvals; or (iv) Inventory Statements.  Licensee shall pay for all Hologram costs and expenses, including without limitation shipping and handling costs, required by Licensor’s Hologram Supplier.  If Licensee, directly or indirectly, ships, sells or otherwise distributes Products without Licensor’s approved hang tags and Holograms, Licensee shall be in default of this Agreement.  Licensee agrees that any and all such Products may, at Licensor’s sole and absolute discretion, be treated as unapproved and/or counterfeit merchandise a nd may be seized, confiscated, and/or destroyed.  Within ten (10) days of receipt of a request from Licensor, Licensee will furnish to Licensor or its designee a report in a format acceptable to Licensor identifying (a) the quantity of Holograms used on Products sold by Licensee or otherwise distributed (with an explanation of where such Products were sold or distributed); and (b) the quantity of Holograms on Products on hand and intended for placement on Products in process.  If Licensor determines that a significant discrepancy (i.e., larger than two percent (2%) of Licensee’s then-current inventory of holograms) exists between (i) the total quantity of Holograms used on Products sold, Products on hand, and Products in process; and (ii) the quantity of Holograms sent to Licensee, such discrepancy shall be an incurable default under the terms and conditions of this Agreement.

(iii)           Licensee shall at all times during the Term and the Sell-Off Period be responsible for the safekeeping, protecting, and tracking of the inventory of Licensor’s Holograms, including any actions or inactions taken by Licensee's manufacturing sources, subcontractors, distributors, suppliers, dealers, and/or wholesalers regarding the Holograms.  If any Holograms sent to or for Licensee are misplaced, lost, stolen, or misused, in any manner whatsoever (including use on unapproved, non-conforming or unacceptable Products or Materials pursuant to Paragraph 2.i. hereof), Licensee shall be in default of this Agreement.  Licensee shall be responsible for and shall pay Licensor for any and all reasonable and necessary expenses incurred by Licensor to recover such Holograms, including without limitation, legal fees and costs, investigative fees and costs, and/or expenses to purchase unapproved Products bearing such Holograms to have the Products removed from commerce, or to otherwise protect Licensor’s rights.

m.           Playboy Properties and Non-Competitive Brands:

(i)           During and after the Term, Licensee shall not use, cause or authorize to be used any word, device, design, slogan or symbol confusingly similar, in whole or in part, to any or all of the Playboy Properties, or any permutation of the Playboy Properties.  During the Term and the Sell-Off Period, any or all of the following shall not be used on or in connection with the Products or the Materials without Licensor’s prior written consent:  (a) portions or permutations of any or all of the Playboy Properties; (b) secondary marks; or (c) new words, devices, designs, slogans or symbols.  Upon such authorization by Licensor and use by Licensee, any use by Licensee of a portion, permutation, secondary mark, word, device, design, slogan and/ or symbol shall inure to the benefit of the Licensor, shall be the property of Licensor and shall be included as one of the Playboy Properties subject to this Agreement.  Should Licensee create or develop any advertising, promotion, packaging or trade dress unique to the Products, all such advertising, promotion, packaging or trade dress shall be the property of Licensor and shall not be used by Licensee on or in connection with any other product or merchandise during and after the Term.  No later than ten (10) days after expiration or termination of this Agreement or at any other time Licensor so requests, Licensee will assign to Licensor, without charge, all of Licensee’s right, title and interest (including without limitation all goodwill associated therewith and all copyrights) in and to such advertising, promotion, packaging or trade dress and shall cooperate fully with Licensor in preparing and recording whatever documentation may be necessary or desirable or requested by Lice nsor to effect such assignment.

 
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(ii)           Without Licensor’s prior written consent, Licensee shall not design, manufacture, advertise, promote, distribute, sell or deal with in any way in the Territory any product or material that is or are in Licensor’s reasonable judgment competitive with or confusingly similar to any or all of the Products and the Materials.

(iii)           Licensee shall not use color combinations, designs, styles, logo treatments, graphics or packaging unique to any or all of the Products on or in connection with any other product, and Licensee, without charge, will assign to Licensor ownership of all right, title and interest, including, but not limited to, all rights of copyright and trademark (including goodwill associated therewith), that Licensee has acquired or may acquire in such color combinations, designs or styles no later than ten (10) days after expiration or termination of this Agreement or at any other time Licensor so requests.

(iv)           Licensee hereby assigns, transfers and conveys to Licensor, to the maximum extent permitted by applicable law, all of Licensee’s right, title and interest, including, but not limited to, all rights of copyright, trademark (including goodwill associated therewith), trade secret and any other rights in and to all aspects of the Products created by Licensee under or in connection with this Agreement so that Licensor shall be the sole owner of all such rights therein.  Licensee shall, upon the reasonable request of Licensor, either during the Term or at any time thereafter, execute and deliver to Licensor whatever documentation Licensor may request to effect such assignment, transfer or conveyance.  Licensee shall not have any rights to use an y of the elements uniquely developed by Licensee for the Products itself or in connection with any third party following expiration or termination of the Agreement.  In the event Licensee engages, employs or utilizes artists, designers or other third parties (collectively, the “Designers”) to develop Products and/or Materials, Licensee shall obtain a written assignment, and shall supply Licensor with a copy of each such assignment, from any Designer in favor of Licensor under which all of such Designer’s right, title and interest, including, but not limited to, all rights of copyright, trademark, and all rights in and to all aspects of the Products (including trade secret protection), in and to such Designer’s work product is transferred and conveyed to Licensor to the maximum extent permitted by applicable law so that Licensor will be the sole owner of all rights therein.

(v)           Licensee shall not during the Term of this Agreement enter into any retail business or business arrangement involving retail identified with or by the names or trademarks of any men’s lifestyle publications, products or services *****.  In the event Licensee commences any such dealing with any such publications, whether directly or indirectly, or in the event the publishers or any substantial holder of the interest in any such publication or in any men’s sophisticate publication ***** acquires or otherwise comes to hold any financial or equity interest in Licensee, Licensor shall have the right to terminate this Agreement as the result of an incurable default.

n.           Indemnification and Product Liability Insurance:

Licensee shall:

(i)           indemnify, defend and hold harmless Licensor, its subsidiaries and affiliates, their respective shareholders, licensees and franchisees and the agents, officers, directors and employees of each and Licensor’s Agent (hereinafter collectively referred to as “Indemnitees”) from all costs, claims, suits, losses, damages and expenses (including without limitation attorneys’ fees and litigation or other expenses) arising out of or in connection with:  (a) the design, manufacture, advertising, promotion, sale or distribution of or any other dealing whatsoever with the Products or Materials (including, but not limited to, any breach of Licensee’s obligations under Paragraph S.6. of the Schedule); (b) any alleged action or failure to act whatsoever by Licensee; (c) any alleged defect in any or all of the Products; (d) any alleged non-conformity to or non-compliance with any applicable law pertaining to the design, quality, safety, advertising, promotion or marketing of any or all of the Products and the Materials; or (e) any breach by Licensee of

 
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any of its representations, warranties or undertakings hereunder;

(ii)           obtain and maintain, at Licensee’s own expense, product liability insurance satisfactory to Licensor in the minimum amount of One Million U.S. Dollars (U.S.$1,000,000) of primary and umbrella coverage from one or more insurance companies, each with a Best’s rating of “A” (or better), and qualified to transact business in the Territory (each such insurance policy shall name each of the Indemnitees as additional insureds and/or loss payees as their interests may appear and by reason of the indemnity contained in Paragraph 2.n.(i) above and shall evidence the insurer’s agreement that such insurance shall not be amended, canceled, terminated or permitted to lapse without thirty (30) d ays’ prior written notice to Licensor), and provide Licensor with a certificate of such insurance upon execution of this Agreement by Licensee and on each anniversary date of the grant or issuance of each such policy during the Term and the Sell-Off Period evidencing that each such policy has not been altered with respect to the Indemnitees in any way whatsoever nor permitted to lapse for any reason, and evidencing the payment of premium of each such policy; and

(iii)           cause each such policy to be in full force and effect prior to the commencement of any design, manufacture, advertising, promotion, sale, distribution or dealing with any or all of the Products whatsoever.  Failure by Licensee to obtain the required insurance prior to such commencement or failure by Licensee to adequately maintain such insurance during the Term and the Sell-Off Period shall be an incurable default by Licensee under this Agreement.

o.           Marketing Spend, Marketing Fund Payment, Advertising Plans and Public Relations:

(i)           In addition to any other amounts or payments to be made by Licensee under this Agreement, and not to be credited to or offset against any Guaranteed Royalties or Earned Royalties payable hereunder, Licensee agrees to expend within each License Year for advertising and promoting the Products in media directed to the consumer (including without limitation point-of-sale materials, newspapers, magazines, outdoor street-side billboards, television and radio, but specifically excluding all marketing trade shows and trade promotions, and travel and expenditure costs associated with trade shows and/or trade promotions, and all fixtures and displays, except those specifically provided by Licensor) not less than the Marketing Spend.  If the Statement for the last ca lendar month of a License Year shows that such amount has not been spent as set forth herein, the difference between the amount actually spent and the amount required to be spent must be remitted to Licensor along with such Statement for use in Licensor’s advertising and promotion pool.  Licensee will meet with Licensor or Licensor’s Agent periodically, but not less than two (2) times per calendar year, to discuss, plan and review Licensee’s Marketing Spend in full detail.

(ii)           On or before the first day of each License Year, Licensee will remit to Licensor for use in Licensor’s marketing and promotion pool the minimum amount of the Marketing Fund Payment for that License Year, which is the amount equal to ***** percent (*****%) of the Minimum Net Sales for such License Year.  In the event that the Net Sales for such License Year exceeds the Minimum Net Sales for such License Year, Licensee will remit to Licensor, along with the submission of the Statement for the period during which such excess occurs the amount by which ***** percent (*****%) of Net Sales exceeds ***** percent (*****%) of Minimum Net Sales.

(iii)           Licensee must submit to Licensor, for Licensor’s approval, its advertising/promotional plan and marketing plan in the format provided by Licensor for the Products for each ensuing calendar year.  Such plans must be submitted not later than September 15th of each calendar year.  In the event Licensor, in its reasonable discretion, does not approve of any such plan, Licensee must submit a revised plan or plans to Licensor, for its approval, within not more than fifteen (15) days following Licensee’s

 
27

 

receipt of Licensor’s notice of disapproval and Licensee must incorporate revisions into the plan or plans that address Licensor’s concerns or reasons for disapproval.

(iv)           Within ten (10) days following the end of each calendar month during the Term, Licensee will submit to Licensor, a list of all upcoming public relations efforts regarding the Products (the “PR”), which may include, but will not be limited to, interviews, press releases and press events.  In the event Licensee wishes to sanction or schedule any PR after the submission to Licensor of such monthly list, Licensee will immediately notify Licensor of such additional PR.  Licensee must obtain Licensor’s prior written approval prior to any PR effort taking place.  In the event any PR consists of interviews, all talking points for same must be approved in advance in writing by Licensor.  In the event Licensor, in its sole discretion, wishes to participate in any PR Licensor will so notify Licensee.  In the event Licensor fails to provide its approval or disapproval of any or all things submitted to Licensor pursuant to this Paragraph 2.o.(iv) within fourteen (14) days of Licensor’s receipt thereof, Licensor shall be deemed to have disapproved of such things.  In the event Licensor disapproves any PR, Licensee will cancel such disapproved PR.  Failure by Licensee to cancel any disapproved PR or engaging in any PR that has not been submitted to Licensor in advance for approval shall be an incurable default by Licensee under this Agreement.

p.           Licensor shall commence the procedures for the registration and recordal of this Agreement with the Trademark Office of the Peoples Republic of China within not more than three (3) months following the Commencement Date and Licensee will assist Licensor with such registration and recordal as requested by Licensor.

3.           ADDITIONAL COVENANTS OF THE PARTIES.

a.           Reservation of Rights:  All rights not expressly and specifically granted herein to Licensee are reserved by Licensor.

b.           Certain Sales:

(i)           In the event Licensor during the Term chooses to exercise some or all of Licensor’s rights pursuant to Paragraph 1.a.(ii) hereof, Licensee, if requested to do so by Licensor, will sell to Licensor and its licensee(s) or either thereof any or all of the Products at the best prices and terms given to other customers of the Products ordering substantially the same quantities of similar merchandise from Licensee.

(ii)           In the event of any such sale of the Products by Licensee to Licensor, Licensee shall ship or deliver such Products either directly to Licensor or, as Licensor may direct, to any other individual(s), entity or entities.  Any or all such sales of the Products by Licensee to Licensor shall be at the prices described in Paragraph 3.b.(i) above.  Licensee will not be obligated to include such sale(s) in the computation of Net Sales.  Licensee shall bill Licensor and its licensee(s) or either thereof in accordance with Licensee’s normal billing procedures for all such Products shipped or delivered.

4.           TITLE AND PROTECTION.

a.           Indemnification by Licensor:  Licensor represents and warrants that:  (i) it is the owner of the Trademarks; (ii) it has all necessary rights to the Images for the purposes set forth in this Agreement; (iii) the Trademarks are valid in the Territory; and (iv) the Trademarks are, to the best of Licensor’s knowledge, free from any claim by any third party that would unreasonably interfere with the rights granted to Licensee under this Agreement.  Licensor shall indemnify, defend and hold harmless Licensee, its subsidiaries and affiliates, their respective shareholders and the agents, officers, directors and employees of each against and from all claims or suits (provide d prompt notice of each such claim or suit which comes to the attention of Licensee is given to Licensor by Licensee) arising solely and directly out of the authorized use of the Playboy Properties on or in connection with the Products by Licensee in the Territory, but in no event shall

 
28

 

such indemnification include incidental or consequential damages, including, but not limited to compensation or reimbursement for loss of prospective profits, anticipated sales or other losses occasioned by termination of this Agreement or any other reason(s).  Licensor shall have the option to settle or to undertake and conduct the defense of any such claim or suit, but Licensee shall, upon receipt of notice from Licensor and pursuant to Licensor’s instructions, handle, undertake and conduct the defense of any such claim or suit at Licensor’s expense.  If Licensor does not provide such notice to Licensee, Licensee may, through counsel of Licensee’s own choice and at its own expense, participate in any such claim or suit, but in such event Licensor shall have sole and exclusive control over such d efense, and Licensor’s decisions with respect thereto shall govern and control.  Licensee expressly covenants that no discussions by Licensee whatsoever with claimant or litigant, no compromise or settlement by Licensee of any claim or suit and no negotiations by Licensee with respect to any compromise or settlement shall be had, made or entered into without the prior written approval of Licensor.

b.           Enforcement:  Licensee shall promptly notify Licensor in writing of each actual, suspected or apparent infringement or imitation of the Playboy Properties or the Materials that comes to the attention of Licensee.  Licensor shall take such action in regard to such infringement or imitation as Licensor, in its sole and absolute judgment, deems to be appropriate.  Licensor shall, in its sole and absolute discretion, decide whether to assert any claim or undertake or conduct any suit with respect to such infringement or imitation, but Licensee shall, upon receipt of notice from Licensor and pursuant to Licensor’s instructions, on behalf of Licensor, assert any such claim or handle, undertake and conduct any such suit at Licensor’s expense in the name of Licensor or Licensee or in both names as Licensor may direct.  Licensee expressly covenants that no discussions whatsoever with the infringing or imitating party or parties, no compromise or settlement of any such claim or suit and no negotiations with respect to any compromise or settlement of any such claim or suit shall be had, made or entered into without the prior written approval of Licensor.  Licensee may share in as much as fifty percent (50%) of any damage recovery or settlement obtained by Licensor or on Licensor’s behalf by Licensee as a result of any such claim or suit only if Licensee notified Licensor upon the initiation of such claim or suit that Licensee desires to participate financially in such claim or suit by contributing to the payment of the costs and expenses thereof and only in an amount that shall bear the same ratio to the damage recovery or settlement as the amount of Licensee’s financial participation permitted by Licensor bears to the total costs and expenses incurred in obtaining such damage recovery or settlement.  In no event shall Licensor be responsible to Licensee for consequential or incidental damages that result from any such infringement or imitation.  Under no circumstances may Licensee enforce Licensor’s rights to the Playboy Properties without Licensor’s prior written approval and in no event may Licensee take any action on account of any such infringements without Licensor’s prior written approval.

5.           RELATIONSHIP BETWEEN THE PARTIES.

a.           No Joint Venture:  Nothing herein contained shall be construed to place the parties hereto in the relationship of partners or joint venturers, and Licensee shall have no power to obligate or bind Licensor or its subsidiaries or affiliates in any manner whatsoever.  Licensor will have no fiduciary duty or fiduciary obligation to Licensee under this Agreement.

b.           Assignment:

(i)           Licensor, in entering into this Agreement, is relying entirely upon Licensee’s skills, reputation and personnel, including without limitation its officers, managers, directors and shareholders.  This Agreement and all rights, duties and obligations hereunder are personal to Licensee and shall not, without the prior written consent of Licensor (which may be given or withheld in the sole discretion of Licensor), be assigned, delegated, sold, transferred, leased, mortgaged or otherwise encumbered by Licensee or by operation of law.  Any attempt to do so without such consent shall be void and shall constitute an incurable default under this Agreement.  If Licensor in its sole discretion believes that any change in any or all of the of ficers, managers, directors and shareholders of Licensee has, will or could materially interfere with or materially and

 
29

 

adversely affect Licensee’s performance hereunder or the relationship between the parties hereto, Licensor may deem such change to be an incurable default under this Agreement and shall so notify Licensee and Licensee shall take whatever steps or actions are necessary to remedy Licensor’s concerns; failing which Licensor shall have the right to terminate this Agreement.  The consent of Licensor to any such assignment, delegation, sale, transfer, lease, mortgage, other encumbrance or change shall not be deemed to be consent to any subsequent assignment, delegation, sale, transfer, lease, mortgage, other encumbrance or change.

(ii)           Licensor may assign this Agreement or assign or delegate any or all of its rights, duties and obligations under this Agreement to any of its parents, subsidiaries or affiliates or to any individual or entity.

6.           SUBLICENSING.   Licensee may not, without the prior written approval of Licensor, whose discretion shall be final and absolute, enter into any sublicense agreement or grant any sublicense for any or all of the rights or obligations of Licensee under this Agreement. If Licensor grants consent for any sublicense, such consent shall be restricted to the sublicense at issue and shall not be deemed to be a consent to any subsequent sublicense. Any commercialization of the rights gran ted herein between Licensee and a third party, other than approved third party sub-contracted manufacturers (valid only with a signed agreement as set forth on Exhibit C herein) or approved third-party distributors (valid only with a signed agreement as set forth on Exhibit D), shall be considered an invalid sublicense agreement hereunder and will constitute a material breach of this Agreement for which Licensor can immediately terminate this Agreement as the result of an incurable default hereunder.  Under no circumstances, may a manufacturer or any of its affiliates also be a distributor, wholesaler or retailer of the Products and vice versa.

7.           DEFAULTS AND RIGHTS OF TERMINATION.

a.           Defaults and Right to Cure:

(i)           Except as otherwise provided in this Agreement, if Licensee fails to make any timely payments under the terms of this Agreement or fails to submit to Licensor the Letter of Credit within the time frame set forth in Paragraph 2.d.(v) above, Licensor shall have the right and option, but not the duty, to terminate the License and this Agreement upon not less than ten (10) days’ prior written notice, but no neglect or failure to serve such notice shall be deemed to be a waiver of any such violation or default.  Such termination shall become effective unless such violation or default described in such notice shall be completely remedied to the satisfaction of Licensor within such ten (10) day period.

(ii)           Except as otherwise provided in this Agreement and, specifically, Paragraph 7.a.(i) above, if Licensee shall violate any of the terms or conditions hereof or default on any of its duties, obligations or warranties hereunder, Licensor shall have the right and option, but not the duty, to terminate the License and this Agreement upon not less than thirty (30) days’ prior written notice, but no neglect or failure to serve such notice shall be deemed to be a waiver of any such violation or default.  Such termination shall become effective unless such violation or default described in such notice shall be completely remedied to the satisfaction of Licensor within such thirty (30) day period. &# 160;Upon such termination, Licensee shall immediately pay all amounts owed under this Agreement.

(iii)           Notwithstanding the provisions of Paragraphs 7.a.(i) and 7.a.(ii) above, if such violation or default:  (a) is of a kind that a remedy or cure cannot effectively restore the prior circumstances; or (b) is described in this Agreement as an incurable default, then the License and this Agreement shall terminate upon receipt by Licensee of written notice thereof without any period of remedy or cure whatsoever.  The termination of the License and this Agreement shall be without prejudice to any rights that Licensor otherwise has against Licensee under this Agreement or under law.

 
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b.           Bankruptcy or Assignment for Creditors, Business Discontinuance:  If:  (i) Licensee files a petition in bankruptcy or is adjudicated a bankrupt; (ii) an involuntary petition in bankruptcy is filed against Licensee, which petition is not dismissed within ninety (90) days of the date of such filing; (iii) Licensee publicly acknowledges that it is insolvent; (iv) Licensee makes or agrees to make an assignment for the benefit of creditors or an arrangement pursuant to any bankruptcy law; (iv) Licensee discontinues business; or (v) a receiver is appointed for Licensee and such order appointing the receiver is not vacated or modified to terminate the receivership within ninety (90) days of such appointment or order, the License and this Agreement shall automatically terminate without the necessity of any notice whatsoever.  If the License and this Agreement are so terminated, any and all of Licensee and its receivers, representatives, trustees, agents, administrators, successors and assigns shall have no right to sell or in any way deal with any of the Playboy Properties, Products or the Materials, except with the special prior written consent and under the instructions of Licensor that it or they shall be obligated to follow.

c.           Loss of Trademark Rights:  If Licensee’s right to use any or all of the Trademarks is adjudged illegal, invalid or restricted and either (i) such adjudication has become final and non-appealable; (ii) Licensor in its sole discretion chooses not to appeal therefrom; or (iii) if a settlement agreement is entered into by Licensor that prohibits or restricts Licensor’s or Licensee’s right(s) to use the Trademarks, the License and this Agreement shall automatically terminate without the necessity of any notice whatsoever as of the date (x) such adjudication becomes final and non-appealable; (y) Licensor makes such choice; or (z) of the execution and delivery of such settlement agr eement.  Notwithstanding anything to the contrary in this Agreement, Licensee shall have no claim of any nature against Licensor for the loss of any or all rights to use the Trademarks provided that Licensor is in compliance with the terms and conditions of this Agreement.

d.           Qualified Auditor’s Report:  If Licensee receives a qualified opinion from its independent auditor regarding Licensee’s financial statements or an opinion stating that the Licensee’s financial situation raises substantial doubt about Licensee’s ability to continue as a going concern (or the equivalent of such an opinion), and Licensee cannot get the qualified or other opinion reversed or vacated within not more than three (3) months following the date of such qualified or other opinion, the License and this Agreement shall automatically terminate without the necessity of any notice whatsoever.

e.           Cross-Default:  In addition to, and without derogating from any other rights Licensor may have hereunder or under any other agreement between Licensor and Licensee, or otherwise, any breach or default by Licensee (or its successors or assigns) of any other agreement (collectively, the “Other Agreements”), between Licensor (or any affiliate or assignee of Licensor) and Licensee (or its successors or assigns) may also be deemed by Licensor to be a breach or default by Licensee under this Agreement, and any breach or default by Licensee (or its successors or assigns) under this Agreement may also be deemed to be a breach or default by Licensee (or its successors or assigns) of any or all Other Agreements, and Licensor (or the applicable affiliate or assignee of Licensor) shall be entitled to exercise any and all of its rights and remedies under the applicable agreements with respect thereto as if such breach or default occurred under such agreements.

8.           EXPIRATION OR TERMINATION.

a.           Effect of Expiration or Termination:  Upon and after the expiration or termination of the License and this Agreement, all rights granted to Licensee under this Agreement shall immediately revert to Licensor.  Licensee will refrain from any further use of the Playboy Properties or any further reference to anything similar to the Playboy Properties (including, but not limited to, words, devices, designs and symbols) or in any way associated with any or all of the Products, Licensor and its subsidiaries or affiliates, except with the prior written consent of Licensor or as expressly provided in Paragraph 8.c. hereof.

b.           Reserved Rights:  The expiration or termination of the License and this

 
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Agreement shall not:  (i) relieve Licensor or Licensee, respectively, of any obligations incurred prior or subsequent to such expiration or termination; or (ii) impair or prejudice any of the rights of Licensor or Licensee, respectively, accruing prior or subsequent thereto as provided in this Agreement.  Upon termination of the License and this Agreement pursuant to Paragraph 7.c. hereof, Guaranteed Royalties for the then current License Year shall be prorated based on the ratio that the number of days in such License Year prior to termination bears to the number of days in the License Year had the License and this Agreement not been terminated.  Earned Royalties due for such License Year shall be the excess of Earned Royalties over such prorated Gu aranteed Royalties.  Any overpayment or underpayment of Guaranteed Royalties or Earned Royalties based on such proration shall be immediately adjusted by the parties hereto.

c.           Continued Sales After Expiration or Termination:  Provided that Licensee is not in arrears in the payment of any amounts due to Licensor and that Licensee is in compliance with all of the terms and conditions of this Agreement, then upon the expiration of the License and this Agreement, or if this Agreement is terminated pursuant to any paragraph of this Agreement prior to the Expiration Date and then only upon Licensor’s prior written approval (which may be withheld at Licensor’s discretion), and except as provided in Paragraph 8.d. hereof, Licensee may, during the Sell-Off Period, sell through Licensee’s existing, reco gnized network of distributors or accounts all of the Products that have been approved by Licensor and that are in process or on hand on the Expiration Date or at the time such notice of termination together with Licensor’s approval of such Sell-Off Period is received.  In such event, Licensee shall pay Earned Royalties and furnish Statements with respect to the Sell-Off Period in accordance with the terms and conditions of this Agreement as though the License and this Agreement were still in effect.  It is expressly understood and agreed by Licensee that the Sell-Off Period shall be:  (i) non-exclusive; and (ii) considered a separate accounting period for the purpose of computing Earned Royalties due to Licensor for sales during such period.  Sales during the Sell-Off Period shall not be applied against any Guaranteed Royalties due or payable prior to the Sell-Off Period.

d.           Inventory After Expiration or Termination:

(i)           Licensee shall furnish to Licensor an Inventory Statement:

(a)           not more than thirty (30) days after the expiration of this Agreement;

(b)           not more than thirty (30) days after the expiration of the Sell-Off Period (if any); and

(c)           not more than ten (10) days after:  (i) receipt by Licensee of notice of termination of this Agreement or the Sell-Off Period (if any); or (ii) the happening of any event that terminates the License and this Agreement where no such notice is required.

(ii)           Not more than ten (10) days after the expiration or termination of this Agreement or the Sell-Off Period (if any), Licensee must supply Licensor with a certificate of destruction for all Materials, including, but not limited to, Holograms, labels, hang tags, buttons, boxes, zippers, decals, advertising material and equipment capable of recreating the Playboy Properties, including, but not limited to:  molds, tools, dies and printing screens.

(iii)           Upon the expiration or termination (for any reason) of this Agreement during the Term or the Sell-Off Period (if any), Licensor reserves the right to purchase all remaining inventory at Licensee’s direct variable manufacturing cost, however, if Licensor chooses not to purchase such inventory, it shall be promptly destroyed by Licensee unless otherwise agreed between Licensee and Licensor.  Licensor shall inform Licensee of its decision within fifteen (15) days after Licensor’s receipt of the Inventory Statement from Licensee.

 
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(iv)           Should Licensor choose not to purchase Licensee’s inventory as provided under Paragraph 8.d.(iii) above, Licensee, within ten (10) days after Licensor’s notice, shall provide Licensor with a certificate of destruction for all inventory of the Product on hand or in process.

(v)           Licensor and its agents shall have the right to conduct physical inspections of any and all locations where the Products may be designed, manufactured and/or held to ascertain Licensee’s compliance with this Paragraph 8.d. and, in order to enable Licensor to conduct such inspections, Licensee will provide to Licensor within not more than ten (10) days of the date of Licensor’s written request a listing of the places and addresses at which the Products are designed, manufactured and/or held.  Any refusal by Licensee to submit to such inspection shall forfeit Licensee’s right to a Sell-Off Period, and Licensor shall retain all other legal equitable rights it has in the circumstances, w hich rights are hereby specifically reserved.

(vi)           Licensee understands and acknowledges that it is essential for Licensor to have accurate, complete and timely information with regard to existing inventory of the Products and the inventory of the Products that is destroyed.  Failure to provide Licensor with timely and accurate Inventory Statements is a material default under the Agreement and, in such event, Licensor will have the right to revoke Licensee’s right to the Sell-Off Period.  Further, Licensee will, prior to any destruction of the Products pursuant to the provisions of Paragraphs 8.d.(ii) and 8.d.(iii) above, provide Licensor with the date, time and location of such destruction and allow Licensor or its nominee to witness such destruction if Licensor so wishes.  Licensee’s failure to submit to Licensor any Inventory Statement within the required time frames is a material violation of the provisions of the Agreement and Licensor hereby reserves its rights under the Agreement and under law.

e.           Equitable Relief and Legal Fees:

(i)           Subject to Paragraph 8.c. hereof, Licensee hereby acknowledges that its failure to cease the design, manufacture, advertising, promotion, sale or distribution of the Products and the Materials upon the expiration or termination of this Agreement will result in irreparable harm to Licensor and its business interests for which there is no adequate remedy at law.  Accordingly, in the event of such failure or in the event of any violation or default by Licensee under this Agreement (after giving effect to the provisions of Paragraph 7.a.(i) hereof), Licensor shall be entitled to equitable relief without the necessity of posting bond by way of any tem porary and permanent injunctions and such other relief as any court of competent jurisdiction may deem just and proper.

(ii)           In the event either party hereto files any action against the other to enforce any of the provisions of this Agreement or to secure or protect such party’s rights under this Agreement, such party shall be entitled to recover, in any judgment in its favor entered therein, the attorneys’ fees and litigation expenses of such party, together with such court costs and damages as are provided by law.

f.           Termination Fee:  Notwithstanding anything to the contrary in this Agreement, if Licensor terminates this Agreement as a result of a default by Licensee or a default that is not cured by Licensee within the time frame set forth in Paragraph 7.a.(i) hereof, the payment of all Guaranteed Royalties payable through the Expiration Date will be accelerated and Licensee shall pay to Licensor as a termination fee no later than ten (10) days after the date of such termination all outstanding Guaranteed Royalties required to be paid during the Term of this Agreement in addition to all Earned Royalties due through the effective date of termination, and Licensor may immediately draw down on any outstanding Letter of Credit required under Paragraph 2.d.(v) hereof, which such drawing shall not preclude Licensor from seeking from Licensee any deficiency that remains after such drawing.

g.           Continuity of Sales:  If the License granted under this Agreement is exclusive, either in whole or in part, in order to enable Licensor to maintain continuity of sales of the Products upon

 
33

 

expiration or termination of this Agreement, Licensor shall have the right, notwithstanding anything to the contrary contained in Paragraph 1.a. hereof, to authorize one or more individuals or entities to design and manufacture sell the Products in the Territory for four (4) months preceding the expiration of this Agreement or from the sooner of the time that notice is received by Licensee of termination of this Agreement or when this Agreement is terminated.  Such individual(s), entity or entities shall not, however, be authorized to advertise, promote, sell, ship or distribute to its or their customers any or all of the Products until after this Agreement has expired or has been terminated, but may ship the Products to such customers during the Sell-Off Period, if any .

9.           NOTICES.

a.           Effectiveness:  Unless otherwise expressly indicated in this Agreement, each notice, request, approval, consent, payment and Statement (hereinafter referred to as a “Submission”) specifically provided for in this Agreement shall be in writing and shall be considered effective or received the earliest of:  (i) five (5) days after the date when such Submission is mailed by certified or registered mail with postage prepaid to the party hereto at the address set forth below; (ii) two (2) business days after the date when such Submission is sent by overnight courier service addressed to such party at such address or the date indicated as received on the overnight courier servi ce confirmation receipt, whichever is earlier; (iii) except for payments, when such Submission is sent by facsimile addressed to such party at such address and the sender thereof requests and receives written confirmation from such party that such Submission has been received and is legible; or (iv) when such Submission is actually received by such party at such address:

 
To Licensor:
Address:
680 North Lake Shore Drive
     
Chicago, IL  60611
   
Attention:
Sarah Haney
     
c/o Veronica Reyes
   
Facsimile:
312 988 9857
   
Telephone:
312 373 2369

 
With a copy to:
Address:
680 North Lake Shore Drive
                                 
Chicago, IL  60611
   
Attention:
General Counsel
   
Facsimile:
312 266 2042
   
Telephone:
312 751 8000

 
And to:
Address:
IMG
     
McCormack House
     
Hogarth Business Park
     
Burlington Lane
     
Chiswick London W4 2TH
   
Attention:
Bruno Maglione
   
Facsimile:
44 208 233 5301
   
Telephone:
44 208 233 5300

 
To Licensee:
The address specified in Paragraph S.2. of the Schedule
   
Attention:
Li Cai Xia 委托联络人:李彩霞
   
Facsimile:
8621-63322599
   
Telephone:
86-13795376578

b.           Address Change:  Notwithstanding the provisions of Paragraph 9.a. hereof, each party hereto may give written notice to the other party of some other address to which Submissions shall be sent, in which event such Submissions to such party subsequently shall be sent to such address.

10.           CONFIDENTIAL INFORMATION.  Licensor shall from time to time during the Term of this Agreement, make available to Licensee materials, including, but not limited to, style guides and licensing manuals, and other information, all of which is non-public, confidential or proprietary to Licensor.  Such

 
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materials, information and the terms and conditions of the License and this Agreement, which is confidential between Licensee and Licensor, will be collectively referred to herein as the “Proprietary Material.”  Licensee shall not disclose the Proprietary Material to third-parties or use the Proprietary Material for any purpose other than in connection with its duties and obligations as set forth in this Agreement.  Licensee will ensure that the Proprietary Material will be kept confidential by Licensee and its directors, officers, employees, agents, distributors, designers and supplier/subcontractors (collectively “Representatives”), and that all such Representatives shall be made aware of the confidential nature of the Proprietary Material.  In the event Licensee is requested or r equired (by oral question, interrogatories, subpoena, civil investigative demand or similar process) to disclose any of the Proprietary Material, Licensee will promptly notify Licensor of such request or requirement and cooperate with Licensor so that Licensor may seek an appropriate protective order or otherwise seek appropriate protection of the Proprietary Material.  In the event that such protection is not obtained or that Licensor waives compliance, Licensee shall furnish only that portion of the Proprietary Material which Licensee is advised by written opinion of counsel is legally required to be furnished.  Immediately upon the expiration or termination of this Agreement, or within ten (10) days from the date of the Licensor’s prior written request, Licensee will return to Licensor, or destroy at Licensor’s request, all Proprietary Material and all copies of the Proprietary Material produced by Licensee or its Representatives or any notes, analysis or other materials pr epared or produced by Licensee or its Representatives.

Anything in this Agreement to the contrary notwithstanding, unless mandated by law or a governmental agency, Licensee will keep all terms and conditions of this Agreement confidential both during and after the Term of the Agreement.

11.           SEVERABILITY.  Each provision of this Agreement shall be severable.  If, for any reason, any provision herein is finally determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, such determination shall not impair the operation or affect the remaining provisions of this Agreement, and such remaining provisions will continue to be given full force and effect and bind the parties hereto.  Each invalid provision shall be curtailed only to the extent neces sary to bring it within the requirements of such law or regulation.

12.           CONSENTS AND APPROVALS.  If Licensor fails or refuses to grant to Licensee any request, consent or approval, Licensor may, but shall not be required to, give the reason therefore, but Licensor shall not be liable for any events or circumstances that arise as a result of such failure or refusal.

13.           APPLICABLE LAW.  This Agreement shall be governed by and interpreted under the laws of the State of Illinois without regard to its conflicts of laws provisions.  Licensee hereby submits to personal jurisdiction in Cook County, Illinois or any other court of competent jurisdiction chosen by Licensor.  The parties hereto agree that any and all disputes arising out of or relating in any way to this Agreement shall be litigated only in courts sitting in Cook County, Illinois or any other court of competent jurisdiction chosen by Licensor.

14.           NO BROKER.  Licensee warrants and represents that Licensee used no broker in connection with the execution and delivery of this Agreement.

15.           CONSTRUCTION.  The headings used herein are for convenience only and shall not be deemed to define, limit or construe the contents of any provision of this Agreement.  The wording of this Agreement will be deemed to be the wording chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any such party.  Time is the essence of this Agreement.  The Recitals and the Exhibits attached hereto shall be deemed to be part of this Agreement.  This Agreement may be executed in separate counterparts, each of which is deemed to be an original, and all of which taken together constitute one and the same agreement.

16.           LIMITATION OF LIABILITY:  EXCEPT FOR THE PARTIES’ INDEMNIFICATION OBLIGATIONS SET FORTH IN PARAGRAPHS 2.N.(I) AND 4.A. ABOVE WITH RESPECT TO THIRD PARTIES, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY LOST PROFITS, LOST REVENUE, OR ANY INCIDENTAL, CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES OF ANY KIND, REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE.

 
35

 
 
17.           SURVIVABILITY.  The expiration or termination of the License and this Agreement shall not affect those provisions hereof that are meant to survive such expiration or termination.

18.           RIGHTS CUMULATIVE.  The respective rights and remedies of the parties hereto, whether herein specified or otherwise, shall be cumulative, and the exercise of one or more of them shall not preclude the exercise of any or all other rights and remedies each such party has hereunder or by law.

19.           ENTIRE AGREEMENT.  This Agreement (with the Recitals, Schedule and Exhibits A through E) represents the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements and understandings, whether written or oral, pertaining to the subject matter hereof.  None of the terms of this Agreement can be waived or modified except by an express agreement in writing signed by the parties her eto.  There are no representations, promises, warranties, covenants or undertakings other than those contained in this Agreement and Licensee acknowledges that in entering into this Agreement, it has not relied upon any representations, warranties or promises, whether oral or written, not expressly contained herein.  No custom or practice of the parties hereto at variance with the terms hereof shall constitute a waiver of Licensor’s right to demand exact compliance with any of the terms herein at any time.  The failure of either party hereto to enforce, or the delay by either party hereto in enforcing, any or all of its rights under this Agreement shall not be deemed as constituting a waiver or a modification thereof, and either party hereto may, within the time provided by applicable law, commence appropriate proceedings to enforce any or all of such rights.  Except as expressly provided in this Agreement, no individual or entity other than Licensee and Licensor shall be deemed to have acquired any rights by reason of anything contained in this Agreement.

20.           SIGNING DEADLINE.  This Agreement will become null and void, and Licensor will have no further obligation to enter into this Agreement with Licensee if Licensee has not executed this Agreement and returned it to Licensor so that Licensor receives the executed Agreement by September 17, 2010.

IN WITNESS WHEREOF, the parties hereto, intending this Agreement to be effective as of the Commencement Date, have caused this Agreement to be executed by the duly authorized representative of each.

GLORY RABBIT INTERNATIONAL    
INVESTMENT CO., LIMITED    
锦兔国际投资有限公司    
(LICENSEE)    
           
By:
/s/ Wang Chengjin
 
By:
/s/ Howard Shapiro
 
           
Title:
Chairman
 
Title:
Executive Vice Pres.
 
           
Date:
2010.08.20
 
Date:
8-24-10
 


SHANGHAI GLORY RABBIT INVESTMENT COMPANY LIMITED
上海锦兔投资有限公司
(As Guarantor subject to the provisions of Paragraph 1.a.(i) of the Agreement)

By:
/s/ Wang Chengjin
 
     
Title:
Chairman
 
     
Date:
2010.08.20
 
     
Chop/Company Seal:
 

 
36

 

EXHIBIT A
ATTACHED TO AND MADE A PART OF
THE PRODUCT LICENSE AGREEMENT BETWEEN
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
AND
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
DATED AS OF THE COMMENCEMENT DATE

THE PLAYBOY PROPERTIES*

PLAYBOY

logo3
logo4

 
37

 

M PLAYBOY MANSION COLLECTION & Rabbit Head Design
logo5
PLAYBOY ESTABLISHED 1953 & Rabbit Head Design

logo6

 
38

 


PLAYBOY BUNNY & Rabbit Head Design
logo7

PLAYBOY JEANS
logo8
 
*
Any revisions to the above list and depictions will be granted only upon Licensor’s receipt of a fully-signed amendment to this Exhibit A.

 
39

 

EXHIBIT B
ATTACHED TO AND MADE A PART OF
THE PRODUCT LICENSE AGREEMENT BETWEEN
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
AND
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
DATED AS OF THE COMMENCEMENT DATE

TRADEMARK REGISTRATION AND APPLICATION NUMBERS


TRADEMARKS
CLASS
APPLICATION OR
 REGISTRATION NUMBER
       
PLAYBOY
14
Reg. No.
272935
 
16
Reg. No.
272934
 
18
Reg. No.
743057
 
20
Reg. No.
3063158
 
24
Reg. No.
Reg. No.
644920
382729
 
25
Reg. No.
727725
 
34
Reg. No.
271776
       
Rabbit Head Design
14
Reg. No.
271791
 
16
Reg. No.
271793
 
18
Reg. No.
756057
 
20
Reg. No.
3094698
 
24
Reg. No.
Reg. No.
271792
644921
 
25
Reg. No.
807637
 
34
Reg. No.
271780
       
HUA HUA GONGZI
14
Application Instructed
 
16
Application Instructed
 
18
Reg. No.
1926928
 
20
Reg. No.
3063157
 
24
App. No.
5277706
 
25
Reg. No.
4082284
 
34
Reg. No.
App. No.
882803
7281740

 
40

 

EXHIBIT C
ATTACHED HERETO AND MADE A PART OF
THE PRODUCT LICENSE AGREEMENT BETWEEN
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
AND
GLORY RABBIT INTERNATIONAL INVESTMENT CO. LIMITED
上海锦兔投资有限公司
DATED AS OF THE COMMENCEMENT DATE

SUPPLIER/SUBCONTRACTOR CONTRACT

1.
By execution of this Supplier/Subcontractor Contract (“Contract”), _______________ (“Supplier”) agrees and acknowledges that:  (i) all images and/or trademarks including, but not limited to PLAYBOY, (the “Playboy Properties”) applied at the request of Glory Rabbit International Investment Co., Limited (锦兔国际投资有限公司) (“Purchaser”) to merchandise covered by this Contract are properties of Playboy Enterprises International, Inc. (“Playboy”), and when used upon merchandise means that such merchandise is sponsored, approved, recommended or sold by Playboy or its licensees; (ii) Supplier will not sell, ship or otherwise dispose of any such merchandise except upon the order of Purchaser or Playboy; (iii) Supplier will never make, cause others to make or assist others in making, any claim whatsoever to any or all of the Playboy Properties or any trademark, image, designation, name, phrase, design or symbol similar thereto in connection with the manufacture, advertising, promotion, sale or distribution of merchandise; and (iv) Supplier will defend, indemnify and hold harmless Purchaser and Playboy and the distributors and dealers and the officers and employees of each of the foregoing against all liability whatsoever which may be incurred by them or any of them as a result of any alleged defects in material or workmanship in the merchandise covered by this Contract.

2.
Supplier agrees that no production or manufacture of any merchandise covered by this Contract will commence until this Contract has been signed, dated and returned by Supplier to Purchaser.  Supplier further agrees that it will not produce, cause to be produced or assist in the production of more units than are specified by Purchaser nor will Supplier produce, cause to be produced or assist in the production of any product or item not specifically requested by Purchaser using any or all of the Playboy Properties or any trademarks, images, designations, names, phrases, designs or symbols similar to any or all of the Playboy Properties during or at any time after the completion of merchandise requested by this Contract.

3.
Supplier will, upon request from Purchaser or Playboy, deliver to Purchaser or will destroy in the presence of Purchaser or its representative(s), all molds, designs or any other elements used in reproducing any or all of the Playboy Properties.

4.
Playboy is an intended third-party beneficiary of this Contract.

5.
This Contract, when attached to a purchase order, shall consist of the entire agreement between the parties and shall supersede any conflicting or contrary terms and conditions of any purchase order or other order form whether supplied by Purchaser or Supplier.

6.
This Contract may not be modified or terminated except in writing, and no claimed modification, termination or waiver shall be binding unless also signed by an authorized representative of Playboy.

7.
Supplier will comply with Playboy’s Code of Conduct (attached hereto and incorporated herein by reference) in connection with the manufacture, packaging, supply and distribution of any merchandise covered by this Contract

 
41

 

8.
VIOLATION OF THIS AGREEMENT BY SUPPLIER MAY RESULT IN PROSECUTION FOR TRADEMARK INFRINGEMENT, UNFAIR COMPETITION AND OTHER CAUSES OF ACTION AND THE IMPOSITION OF FINES AND/OR CRIMINAL PENALTIES.
 
SUPPLIER
 
PURCHASER
 
           
   
GLORY RABBIT INTERNATIONAL
 
(Name of Company - Please Print)
 
INVESTMENT CO., LIMITED
 
     
锦兔国际投资有限公司
 
           
           
           
By:
   
By:
/s/ Wang Chengjin
 
           
Title:
   
Title:
Chairman
 
           
Date:
   
Date:
2010.08.20
 
           
           
SUPPLIER INFORMATION  
PLAYBOY
 
       
 
 
           
Name:
   
Name:
PLAYBOY ENTERPRISES
 
        INTERNATIONAL, INC.  
       
 
 
Address:
   
Address:
680 North Lake Shore Drive
 
       
 
 
       
Chicago, IL  60611
 
           
Contact:
   
Contact:
Sarah Haney
 
       
c/o Veronica Reyes
 
       
 
 
Telephone:
   
Telephone:
312 373 2369
 
           
Facsimile:
   
Facsimile:
312 988 9857
 

 
42

 

ATTACHMENT 1
ATTACHED TO AND MADE A PART OF THE
SUPPLIER/SUBCONTRACTOR AGREEMENT
BETWEEN
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司 AND
___________________________________
DATED AS OF ____________________

CODE OF CONDUCT

At a minimum, Playboy requires that all manufacturers of Playboy merchandise meet the following standards:

Child Labor
Manufacturers will not use child labor.  The term “child” refers to a person younger than 16 (or 14 where local law allows) or, if higher, the local legal minimum age for employment or the age for completing compulsory education.  Manufacturers employing young persons who do not fall within the definition of “children” will also comply with any laws and regulations applicable to such persons.
   
Involuntary Labor
Manufacturers will not use any forced or involuntary labor, whether prison, bonded, indentured or otherwise.
   
Coercion and Harassment
Manufacturers will treat each employee with dignity and respect, and will not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse.
   
   
Nondiscrimination
Manufacturers will not discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability.
   
Association
Manufacturers will respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, in accordance with all applicable laws, without penalty or interference.
   
Health and Safety
Manufacturers will provide employees with a safe and healthy workplace in compliance with all applicable laws and regulations, ensuring at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation.
   
 
Manufacturers will also ensure that the same standards of health and safety are applied in any housing that they provide for employees.
   
Compensation
We expect manufacturers to recognize that wages are essential to meeting employees’ basic needs.  Manufacturers will, at a minimum, comply with all applicable wage and hour laws and regulations, including those relating to minimum wages, overtime, maximum hours, piece rates and other elements of compensation, and provide legally mandated benefits.  If local laws do not provide for overtime pay, manufacturers will pay at least regular wages for overtime work.  Except in extraordinary business circumstances, manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtim e.  In addition, except in extraordinary

 
43

 

 
business circumstances, employees will be entitled to at least one day off in every 7-day period.
   
 
Where local industry standards are higher than applicable legal requirements, we expect manufacturers to meet the higher standards.
   
Protection of the Environment
Manufacturers will comply with all applicable environmental laws and regulations.
   
Other Laws
Manufacturers will comply with all applicable laws and regulations, including those pertaining to the manufacture, pricing, sale and distribution of merchandise.
   
 
All references to “applicable laws and regulations” in this Code of Conduct include local and national codes, rules and regulations as well as applicable treaties and voluntary industry standards.
   
Subcontracting
Manufacturers will not use subcontractors for the manufacture of Playboy merchandise or components thereof without Playboy’s express written consent, and only after the subcontractor has entered into a written commitment with Playboy to comply with this Code of Conduct.
   
Monitoring and Compliance
Manufacturers will authorize Playboy and its designated agents (including third parties) to engage in monitoring activities to confirm compliance with this Code of Conduct, including unannounced on site inspections of manufacturing facilities and employer-provided housing; reviews of books and records relating to employment matters; and private interviews with employees.  Manufacturers will maintain on site all documentation that may be needed to demonstrate compliance with this Code of Conduct.
   
Publication
Manufacturers will take appropriate steps to ensure that the provisions of this Code of Conduct are communicated to employees, including the prominent posting of a copy of this Code of Conduct, in the local language and in a place readily accessible to employees, at all times.

 
44

 

EXHIBIT D
ATTACHED TO AND MADE A PART OF THE
PRODCUT LICENSE AGREEMENT BETWEEN
PLAYBOY ENTERPRISE INTERNATIONAL, INC.
AND
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
DATED AS OF THE COMMENCEMENT DATE

CODE OF CONDUCT

At a minimum, Playboy requires that all manufacturers of Playboy merchandise meet the following standards:

Child Labor
Manufacturers will not use child labor.  The term “child” refers to a person younger than 16 (or 14 where local law allows) or, if higher, the local legal minimum age for employment or the age for completing compulsory education.  Manufacturers employing young persons who do not fall within the definition of “children” will also comply with any laws and regulations applicable to such persons.
   
Involuntary Labor
Manufacturers will not use any forced or involuntary labor, whether prison, bonded, indentured or otherwise.
   
Coercion and Harassment
Manufacturers will treat each employee with dignity and respect, and will not use corporal punishment, threats of violence or other forms of physical, sexual, psychological or verbal harassment or abuse.
   
Nondiscrimination
Manufacturers will not discriminate in hiring and employment practices, including salary, benefits, advancement, discipline, termination or retirement, on the basis of race, religion, age, nationality, social or ethnic origin, sexual orientation, gender, political opinion or disability.
   
Association
Manufacturers will respect the rights of employees to associate, organize and bargain collectively in a lawful and peaceful manner, in accordance with all applicable laws, without penalty or interference.
   
Health and Safety
Manufacturers will provide employees with a safe and healthy workplace in compliance with all applicable laws and regulations, ensuring at a minimum, reasonable access to potable water and sanitary facilities, fire safety, and adequate lighting and ventilation.
   
 
Manufacturers will also ensure that the same standards of health and safety are applied in any housing that they provide for employees.
   
Compensation
We expect manufacturers to recognize that wages are essential to meeting employees’ basic needs.  Manufacturers will, at a minimum, comply with all applicable wage and hour laws and regulations, including those relating to minimum wages, overtime, maximum hours, piece rates and other elements of compensation, and provide legally mandated benefits.  If local laws do not provide for overtime pay, manufacturers will pay at least regular wages for overtime work.  Except in extraordinary business circumstances, manufacturers will not require employees to work more than the lesser of (a) 48 hours per week and 12 hours overtime or (b) the limits on regular and overtime hours allowed by local law or, where local law does not limit the hours of work, the regular work week in such country plus 12 hours overtim e.  In addition, except in extraordinary business circumstances, employees will be entitled to at least one day off in every

 
45

 

 
7-day period.
   
 
Where local industry standards are higher than applicable legal requirements, we expect manufacturers to meet the higher standards.
   
Protection of the Environment
Manufacturers will comply with all applicable environmental laws and regulations.
   
Other Laws
Manufacturers will comply with all applicable laws and regulations, including those pertaining to the manufacture, pricing, sale and distribution of merchandise.
   
 
All references to “applicable laws and regulations” in this Code of Conduct include local and national codes, rules and regulations as well as applicable treaties and voluntary industry standards.
   
Subcontracting
Manufacturers will not use subcontractors for the manufacture of Playboy merchandise or components thereof without Playboy’s express written consent, and only after the subcontractor has entered into a written commitment with Playboy to comply with this Code of Conduct.
   
Monitoring and Compliance
Manufacturers will authorize Playboy and its designated agents (including third parties) to engage in monitoring activities to confirm compliance with this Code of Conduct, including unannounced on site inspections of manufacturing facilities and employer-provided housing; reviews of books and records relating to employment matters; and private interviews with employees.  Manufacturers will maintain on site all documentation that may be needed to demonstrate compliance with this Code of Conduct.
   
Publication
Manufacturers will take appropriate steps to ensure that the provisions of this Code of Conduct are communicated to employees, including the prominent posting of a copy of this Code of Conduct, in the local language and in a place readily accessible to employees, at all times.

 
46

 

EXHIBIT E
ATTACHED HERETO AND MADE A PART OF
THE PRODUCT LICENSE AGREEMENT BETWEEN
PLAYBOY ENTERPRISES INTERNATIONAL, INC.
AND
GLORY RABBIT INTERNATIONAL INVESTMENT CO., LIMITED
锦兔国际投资有限公司
DATED AS OF THE COMMENCEMENT DATE

DISTRIBUTOR CONTRACT

1.
By execution of this Distributor Contract (“Contract”), _______________ (“Distributor”) agrees and acknowledges that:  (i) all trademarks and/or images including, but not limited to, PLAYBOY (the “Playboy Properties”) used on _______________ (the “Products”) distributed in China (the “Territory”) at the request of Glory Rabbit International Investment Co., Limited (锦兔国际投资有限公司) (“Playboy’s Licensee”) are trademarks of Playboy Enterprises International, Inc. (“Playboy”), and when used upon the Products means that such Products are sponsored, approved, recommended or sold by Playboy or its licensees; (ii) Distributor will not sell, ship or otherwise dispose of any Products except up on the order and within the specifications and guidelines of Playboy’s Licensee or Playboy; (iii) Distributor will never make, cause others to make or assist others in making, any claim whatsoever to any or all of the Trademarks or any trademark, designation, name, phrase, design or symbol similar thereto in connection with the manufacture, advertising, promotion, sale or distribution of merchandise; and (iv) Distributor will defend, indemnify and hold harmless Playboy’s Licensee and Playboy and the distributors and dealers and the officers and employees of each of the foregoing against all liability whatsoever which may be incurred by them or any of them as a result of Distributor’s distribution of the Products covered by this Contract.  In no event may Distributor advertise, sell or distribute the Products outside of the Territory.

2.
Distributor agrees that no distribution of the Products covered by this Contract will commence until this Contract has been signed, dated and returned by Distributor to Playboy’s Licensee.  Distributor further agrees that it will not distribute, cause to be distributed or assist in the distribution of the Products outside the Territory or other than as specified by Playboy’s Licensee nor will Distributor distribute, cause to be distributed or assist in the distribution of any product or item not specifically requested by Playboy’s Licensee which bears any or all of the Playboy Properties or any trademarks, images, designations, names, phrases, designs or symbols similar to any or all of the Trademarks during or at any time after the distribution of the Products requested by this Contract.

3.
Distributor will be responsible for ensuring all of its distributors (not retailers) for the Products adhere to and perform their duties in accordance with the terms and conditions of this Contract including adhering to the Territory restrictions.

4.
Distributor will maintain accurate records concerning the distribution of the Products and shall supply within ten (10) days of a request from Playboy or Playboy’s Licensee a statement detailing Distributor’s accounts for the Products.  Upon request from Playboy’s Licensee and/or Playboy, Playboy’s Licensee and/or Playboy shall also have the right at all reasonable hours to conduct an examination of Distributor’s books and records and shall have the right to make extracts therefrom in order to ensure Distributor’s compliance with this Contract.

5.
Playboy is an intended third-party beneficiary of this Contract.

6.
This Contract, when attached to a distribution order, shall consist of the entire agreement between the parties and shall supersede any conflicting or contrary terms and conditions of any distribution order or other order form whether supplied by Distributor or Playboy’s Licensee.

7.
This Contract may not be modified or terminated except in writing, and no claimed modification, termination or waiver shall be binding unless also signed by an authorized representative of

 
47

 
 
 Playboy.

8.
If Distributor violates any of the terms and conditions of this Contract, Playboy’s Licensee will have the right to immediately terminate this Contract upon written notice to Distributor.  In such event, Distributor must provide Playboy’s Licensee within ten (10) days of the date of such notice of termination with a statement setting forth the number of Products on hand and a listing of all of Distributor’s accounts for the Products.

9.
In the event the Product License Agreement between Playboy and Playboy’s Licensee dated as of the Commencement Date (the “Agreement”) expires or is terminated, this Distributor Contract shall immediately terminate upon the expiration or termination of the Agreement.

10.
VIOLATION OF THIS AGREEMENT BY DISTRIBUTOR MAY RESULT IN PROSECUTION FOR TRADEMARK INFRINGEMENT, UNFAIR COMPETITION AND OTHER CAUSES OF ACTION AND THE IMPOSITION OF FINES AND/OR CRIMINAL PENALTIES.
 
DISTRIBUTOR
 
PLAYBOY'S LICENSEE
 
           
   
GLORY RABBIT INTERNATIONAL
 
(Name of Company - Please Print)
 
INVESTMENT CO., LIMITED
 
     
锦兔国际投资有限公司
 
           
           
           
By:
   
By:
/s/ Wang Chengjin
 
           
Title:
   
Title:
Chairman
 
           
Date:
   
Date:
2010.08.20
 
           
           
SUPPLIER INFORMATION  
PLAYBOY
 
       
 
 
           
Name:
   
Name:
PLAYBOY ENTERPRISES
 
        INTERNATIONAL, INC.  
       
 
 
Address:
   
Address:
680 North Lake Shore Drive
 
       
 
 
       
Chicago, IL  60611
 
           
Contact:
   
Contact:
Sarah Haney
 
       
c/o Veronica Reyes
 
       
 
 
Telephone:
   
Telephone:
312 373 2369
 
           
Facsimile:
   
Facsimile:
312 988 9857
 
 
 
48


EX-10.2 3 ex10_2.htm EXHIBIT 10.2 ex10_2.htm

Exhibit 10.2


September 1, 2010


Playboy Enterprises, Inc.
2706 Media Center Drive
Los Angeles, CA  90065
Attn:  Gary Rosenson

Dear Gary:

Reference is made to that certain Amended And Restated Affiliation And License Agreement For DTH Satellite Exhibition Of Programming between DIRECTV, Inc. ("Affiliate") and Playboy Entertainment Group and Spice Hot Entertainment, Inc. ("Programmer") made as of August 1, 2007 as extended by the Letter Agreements dated October 12, 2009, November 13, 2009, December 14, 2009, January 14, 2010, February 12, 2010, March 11, 2010, April 8, 2010 and June 25, 2010 (the "Agreement").

Except as modified expressly below, all terms of the Agreement are hereby ratified and remain in full force and effect.  All capitalized terms used herein shall have the meanings ascribed to them as set forth in the Agreement.

Affiliate and Programmer hereby agree to extend the Term of the Agreement as set forth in Paragraph 6.(a) through the earlier of the parties entering into a replacement agreement or November 2, 2010.

Very truly yours,

DIRECTV, Inc.

/s/ Toby Berlin

Toby Berlin
Vice President, Programming Acquisition


ACCEPTED AND AGREED:
 
PLAYBOY ENTERTAINMENT GROUP, INC.   SPICE HOT ENTERTAINMENT, INC.
         
         
By: 
/s/ Roy J. Liebrecht
   
By: 
/s/ Roy J. Liebrecht
 
         
Title: 
Roy J. Liebrecht
   
Title: 
Roy J. Liebrecht
 
 
Senior Vice President
     
Senior Vice President
 
 
Business and Legal Affairs
      Business and Legal Affairs
 
 
 

EX-10.3 4 ex10_3.htm EXHIBIT 10.3 ex10_3.htm

Exhibit 10.3


EMPLOYMENT AGREEMENT


EMPLOYMENT AGREEMENT (“Agreement”), originally dated as of June 1, 2009, and amended effective as of the last date signed below, between Scott Flanders (“Executive”) and PLAYBOY ENTERPRISES, INC., a Delaware corporation (“Employer” or the “Company”), with an office at 680 North Lake Shore Drive, Chicago, Illinois 60611.

RECITAL

Employer is primarily engaged in the business of multimedia entertainment.  Employer desires to hire Executive, and Executive desires to be employed by Employer on the terms and subject to the conditions set forth below.

In consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows:

1.
Employment of the Executive.  Employer hereby agrees to employ Executive and Executive hereby agrees to be and remain in the employ of Employer, as the Chief Executive Officer of Employer, upon the terms and conditions hereinafter set forth.

2.
Employment Period.  The term  of Executive’s employment under this Agreement (the “Employment Period”) shall commence July 1, 2009 (the “Commencement Date”) and remain in effect for four years (the “Initial Term”) unless terminated as permitted herein.  Thereafter, this Agreement shall automatically renew for successive one year terms (each a “Renewal Term”) unless either party provides written notice of termination at least one year prior to the end of the Initial Term or Renewal Term, in which case, the Agreement will terminate at the end of such Initial Term or Renewal Term.  The Initial Term and any Renewal Term(s) shall collective be the “Term.”

3.
Duties and Responsibilities.

 
(a)
During the Employment Period, Executive (i) shall have the title of Chief Executive Officer, (ii) shall devote his full business time and attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company, and shall not engage in any other activity that would materially interfere with the performance of his duties under this Agreement (provided that Executive is permitted to serve on the board of directors of eHealth, Inc. and IMAX Corporation – to the extent that doing so does not create any conflict of interest with Executive’s obligations or duties under this Agreement – or other organizations, subject to approval of the Company’s Board of Directors (the “Board”), such approval not to be unreasonably withheld, or engage in endeavors related to the community, his faith, personal finances and effects and other

 
1

 
Exhibit 10.3

charitable functions which do not materially interfere with the performance of his duties hereunder) and (iii) shall perform such duties, and comply with all reasonable directions and instructions of a majority of the Company’s Board.
 
 
(b)
Anything in paragraph 3.(a) above or this Agreement to the contrary notwithstanding, nothing herein will be construed so as to prevent or limit the Company’s good faith determination for bona fide business reasons to cease any or all of its operations or to operate one or more of any such activities through a joint venture, third party license or other arrangement with a third party.

 
(c)
During the Employment Period, (i) Executive will report only to the Company’s Board, (ii) Executive will be the Company’s most senior and highest ranking executive, (iii) all other Company senior executives will report to Executive, and (iv) the Chairman of the Board of the Company will not be an executive of the Company.

4.
Compensation.
 
 
(a)
For all services rendered and required to be rendered by, covenants of and restrictions in respect to, Executive under this Agreement, Employer shall pay to Executive during and with respect to the Employment Period, and Executive agrees to accept, annual base salary (“Base Salary”) computed at the following rates:
 
 
(i)
July 1, 2009 through June 30, 2010:  $875,000;
 
 
(ii)
July 1, 2010 through June 30, 2011:  $900,000;
 
 
(iii)
July 1, 2011 through June 30, 2012:  $925,000;
 
 
(iv)
July 1, 2012 through June 30, 2013:  $950,000;
 
payable on a biweekly basis in accordance with the Employer’s standard payroll practices.  Should the Term be extended beyond June 30, 2013, Company and Executive will negotiate Base Salary for any such extension in good faith.  In addition, for fiscal 2010 and each calendar year of the Term thereafter, Executive will be eligible to participate in a Board approved incentive compensation plan, with Executive being eligible to earn up to a maximum potential of 100% of his Base Salary (with “Target” being 75% of such maximum potential).
 
 
2

 
Exhibit 10.3
 
 
(b)
Executive will be eligible for a one-time bonus based on Executive’s performance from the Commencement Date through December 31, 2009.  Whether such bonus is payable at all, and, if it is, the amount thereof (which will be a maximum of 100% of his Base Salary with Target being 75% of such maximum potential) will be solely at the discretion of the Board and will be payable, if at all, on or before January 31, 2010.
 
 
(c)
Upon commencement of Executive’s employment by the Company, Executive will receive a one-time grant of nonqualified options to purchase 1,200,000 shares of the Class B common stock of the Company.  This option will be subject to the Company’s stock option plan and contain the terms and conditions determined by the Company’s Compensation Committee.  Subject to paragraph 5.5 hereof, the vesting period of such options will be four years in equal installments from the date of grant.  The strike price of such options will be the closing price of the Company’s Class B common stock at the close of business on the date set forth in the grant by the Company’s Compensation Committee (which is expected to be the Commencement Date).
 
 
(d)
Upon commencement of Executive’s employment by the Company, Executive will receive a one-time grant of 150,000 restricted stock units of the Company’s Class B common stock.  This grant will be subject to the Company’s stock option plan and contain the terms and conditions determined by the Company’s Compensation Committee.  Subject to paragraph 5.5 hereof, the vesting period of such grant will be four years in equal installments from the date of the grant (which is expected to be the Commencement Date).
 
 
(e)
Effective on the Commencement Date, Executive will be entitled to participate in the Company’s health benefit plans, together with the Company’s Executive vacation policy (under which he will be entitled to five weeks of paid vacation annually), matching 401-K plan and similar plans in effect from time to time.  Executive’s participation in the foregoing plans, perquisites and travel and entertainment policy will be at the highest level and on terms no less favorable than afforded to other senior executives of the Company commensurate with Executive’s level.  Should any other executive of the Company receive a car allowance or reimbursement for club membership dues, Executive will also be entitled to such perquisites.
 
 
(f)
Subject to paragraph 6. hereof Company will reimburse Executive for all reasonable business expenses and Executive will comply with Company’s travel and entertainment policies in incurring and seeking reimbursement for such expenses.
 
 
3

 
Exhibit 10.3

5.
Termination of Employment Period; Change of Control.

 
5.1
Employer may, at any time during the Employment Period by written notice to Executive (the “Termination Notice”), terminate the Employment Period for uncured “Cause” effective immediately.  The Termination Notice shall specify the reason for termination.  In such an event, Executive’s sole remedy shall be to collect all unpaid Base Salary and all unreimbursed expenses payable for all periods through the effective date of termination and Executive shall not be entitled to any compensation or other amount from the Company after the effective date of termination.  For purposes hereof, “Cause” means a:
 
 
(a)
willful failure or refusal by Executive to substantially implement or follow material lawful policies or directions of the Board after written notice from Company;
 
 
(b)
willful commission by Executive of an act of moral turpitude that results in material harm to the Company; or commission of or conviction for any felony or any material misdemeanor involving theft, fraud or other dishonest action that results in material harm to the Company;
 
 
(c)
material breach of this Employment Agreement that results in material harm to the Company; or
 
 
(d)
material misrepresentation or material and willful non-disclosure by Executive that results in material harm to the Company in connection with performance of Executive’s duties.
 
Provided that in the event any such wrongful conduct is capable of being cured, Executive will have 14 business days from his receipt of the Termination Notice to cure such conduct to the reasonable satisfaction of Company.
 
 
5.2
The Company may terminate this Agreement at any time for any reason, by delivering a written notice to Executive, effective 30 days after Executive receives such notice in accordance with the terms hereof.  In such an event, Executive’s sole remedy shall be:
 
 
(a)
to collect all unpaid Base Salary, accrued incentive compensation, accrued vacation pay and all unreimbursed expenses payable for all periods through the effective date of termination (which shall be paid in the next regularly scheduled payroll date following termination of Executive's employment); plus
 
 
4

 
Exhibit 10.3
 
 
(b)
a severance payment in the amount of 12 months of Executive’s then Base Salary; plus
 
 
(c)
a payout of 100% incentive compensation payable at Target under the incentive compensation plan for Executive in and only in the year of such termination;
 
(the sum of paragraphs 5.2 (b) and (c) being collectively referred to as the “Severance Payment”).  Subject to the provisions of paragraph 7.14, the Severance Payment will be paid in equal installments over the 12 month period immediately following termination of Executive's employment.  For the period commencing on the date of Executive's termination of employment and ending on the first anniversary of such termination, Company shall reimburse Executive for premiums for COBRA coverage for Executive (and to the extent he has family coverage, his family), provided that Executive elects such coverage.

 
5.3
(a)
In the event Executive becomes totally disabled or disabled such that he is rendered unable to perform substantially all of his usual duties for Company, and if such disability shall persist for a continuous period in excess of six months, or an aggregate period in excess of six months in any one fiscal year, Company shall have the right at any time after the end of such period during continuance of Executive’s disability by the delivery of not less than 30 days’ prior written notice to Executive to terminate Executive’s employment under this Agreement whereupon the applicable provisions of paragraph 5.4 below shall apply.

 
(b)
For purposes of this Agreement, if Executive and Company shall disagree as to whether Executive is totally disabled, or disabled such that he is rendered unable to perform substantially all of his usual duties for Company as set forth above, or as to the date at which time such total disability began, the decision of a licensed medical practitioner, mutually agreed upon by the parties, shall be binding as to both questions.  If the parties cannot agree as to the identity of the licensed medical practitioner, Executive shall select a licensed medical practitioner of his choice and the Company shall select a licensed medical practitioner of its choice.  The two licensed medical practitioners so selected shall select a third licensed medical practitioner, which third individual shall resolve either or both of the questions referred to above and which resolution shall be bindin g upon the parties.

 
5.4
If Executive’s employment with the Company is terminated on account of Executive’s disability as provided for in paragraph 5.3 above or on account of Executive’s death, then Executive

 
5

 
Exhibit 10.3

(or Executive’s estate or personal representative, as applicable) shall only be entitled to receive, and Company shall pay to Executive (or Executive’s estate or personal representative, as applicable) the following amounts:
 
 
(a)
all unpaid Base Salary accrued incentive compensation, accrued vacation pay and all unreimbursed expenses payable for all periods through the effective date of termination (which shall be paid in the next regularly scheduled payroll date following termination of Executive's employment); plus

 
(b)
a pro rata payout at Target under the incentive compensation plan for Executive in and only in the year of such termination in an amount equal to the fraction, the numerator of which is the number of calendar days from the beginning of the year of such termination through the effective date of termination and the denominator of which is 365, which amount shall be paid, subject to the provisions of paragraph 7.14, in equal installments over the 12 month period immediately following termination of Executive's employment); plus

 
(c)
the premiums on COBRA coverage (as described in paragraph 5.2) for the 12 month period immediately following termination of Executive's employment.

 
5.5
If there is a “Change of Control” (as hereinafter defined) within the first 12 months of the Term, 50% of all outstanding options granted to Executive under paragraph 4.(c) hereof will become fully vested and exercisable immediately prior to a Change of Control.  Should a Change of Control occur during the Term, but after the first 12 months of the Term, 100% of such options will become fully vested immediately prior to a Change in Control.  Should there be a Change of Control at any time during the Term, 100% of the restricted stock units granted to Executive under paragraph 4.(d) hereof will become fully vested immediately prior to a Change of Control.  “Change of Control” will mean any of the following occurrences during the Term:

 
(i)
Hugh M. Hefner, the Hugh M. Hefner 1991 Trust or any trust established by Hugh M. Hefner for estate planning purposes cease to hold over 50% of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company (“Voting Stock”); or

 
(ii)
except pursuant to a transaction described in the proviso to paragraph 5.5(iii) or (iv), the liquidation or dissolution of the Company; or

 
(iii)
the Company is merged, consolidated or reorganized into or with another corporation or other legal entity or per-

 
6

 
Exhibit 10.3

son; provided, however, that no such merger, consolidation or reorganization will constitute a Change in Control if as a result of such merger, consolidation or reorganization not less than a majority of the combined voting power of the then-outstanding securities of the surviving, resulting or ultimate parent corporation, as the case may be, immediately after such transaction is held in the aggregate by persons or other entities that held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such transaction; or
 
 
(iv)
the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person or entity; provided, however, that no such sale or transfer will constitute a Change in Control if as a result of such sale or transfer not less than a majority of the combined voting power of the then-outstanding securities of such corporation or other legal person, as the case may be, immediately after such sale or transfer is held in the aggregate by persons or other entities that held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such sale or transfer; or

 
(v)
the adoption by the Board of a resolution that, for purposes of this Agreement, a Change in Control has occurred.

 
5.6
If Executive’s employment with Company is terminated for any reason, Company will have no right of offset, nor will Executive be under any duty or obligation to seek alternative or substitute employment at any time after the effective date of such termination or otherwise mitigate any amounts payable by Company to Executive.

 
5.7
Executive shall have the right to terminate his employment under this Agreement and receive the Severance Payment by the delivery of written notice to Company within 30 days after any of the events hereinbelow defined as Good Reason.  For purposes hereof, “Good Reason” means that:

 
(i)
the Company has materially breached this Agreement and the Company has failed to cure such breach after 30 days written notice from Executive; and

 
(ii)
there has occurred any material diminution or reduction in duties, Base Salary, healthcare coverage (unless Company reimburses Executive for or provides Executive with reasonably comparable healthcare coverage), title, authority or responsibilities of Executive, whether in scope or nature.

 
7

 
Exhibit 10.3

6.
Location of Executive’s Activities.  Executive’s place of business in the performance of his duties and obligations under this Agreement shall be split principally between the Employer’s places of business in California and Illinois.  Executive will engage in such travel and spend such time in California, Illinois and such other places as may be reasonably necessary or appropriate in furtherance of his duties hereunder at the Employer’s expense.  Executive will be entitled to fly business class on all domestic flights and first class on international flights.  If the Board determines to close its California office (in favor of maintaining its principal place of business in Chicago, Illinois) Executive will relocate to Chicago, in which case Executive and Company will negotiate relocation benefits in good faith.

7.
Miscellaneous.

 
7.1
Notices.  All notices, requests, demands, consents, and other communications required or permitted to be given or made hereunder shall be in writing and shall be deemed to have been duly given and received, (i) if delivered by hand, the day it is so delivered, (ii) if mailed via the United States mail, certified first class mail, postage prepaid, return receipt requested, five business days after it is mailed, or (iii) if sent by a nationally recognized overnight courier for next business day delivery, the business day after it is sent, to the party to whom the same is so given or made, at the address of such party as set forth at the head of this Agreement, which address may be changed by notice to the other party hereto duly given as set forth herein, with copies delivered as follows:
 
 
(a)
if to Executive:
 
At the last residential address known the Company

with a copy to:

Ziffren Brittenham LLP
1801 Century Park West
Los Angeles CA 90067
Attention:  Bryan Wolf and Jamie Afifi

 
(b)
if to the Company:

General Counsel
Playboy Enterprises, Inc.
680 North Lake Shore Drive
Chicago IL 60611
 
 
7.2
Governing Law; Jurisdiction.  This Agreement shall be governed by, and construed and enforced in accordance with, the substantive and procedural laws of the State of Illinois.  Each party hereto hereby irrevocably submits to the exclusive jurisdiction

 
8

 
Exhibit 10.3

of the state and federal courts located in Cook County, Illinois, and waives any claim based upon forum non-conveniens.
 
 
7.3
Headings.  All descriptive headings in this Agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement.

 
7.4
Counterparts.  This Agreement maybe executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

 
7.5
Severability.  If any provision of this Agreement, or part thereof, is held to be unenforceable, the remainder of such provision and this Agreement, as the case may be, shall nevertheless remain in full force and effect.

 
7.6
Entire Agreement and Representation.  This Agreement contains the entire agreement and understanding between Employee and Executive with respect to the subject matter hereof.  This Agreement supersedes any prior agreement between the parties relating to the subject matter hereof.  Except as otherwise provided herein, this Agreement cannot be changed or terminated except by an instrument in writing signed by the parties hereto.

 
7.7
Binding Effect.  This Agreement shall be binding upon, and inure to the benefit of, each party’s successors, transferees, heirs and assigns.

 
7.8
Confidentiality; Disclosure of Information.

 
(a)
Executive recognizes and acknowledges that he will have access to Confidential Information (as defined below) relating to the business or interests of Company or of persons with whom Company may have business relationships.  Except as permitted herein or as may be approved by Company from time to time, Executive will not during the Employment Period or at any time thereafter, use or disclose to any other person or entity, any Confidential Information of Company (except as required by applicable law or in connection with performance of Executive’s duties and responsibilities hereunder or to Executive’s legal and financial advisors so long as such advisors agree to be bound by the terms and conditions of this paragraph 7.8(a)).  Executive may disclose the existence of the obligations under this paragraph 7.8(a) to future employers.  If Executive is reque sted or becomes legally compelled to disclose any of the Confidential Information, he, if permitted by applicable law, will give prompt notice of such request or legal compulsion to Company.  Company may waive compliance with this paragraph 7.8(a) or will provide Executive with legal counsel at no
 
 
9

 
Exhibit 10.3

cost to Executive to seek an appropriate remedy; provided however Executive may disclose any Confidential Information in the event notwithstanding all such efforts of the Company and such legal counsel if compelled by court order to do so.  The term “Confidential Information” means information relating to Company’s business affairs, proprietary technology, trade secrets, patented processes, research and development data, know-how, market studies and forecasts, competitive analyses, pricing policies, executive lists, employment agreements (other than this Employment Agreement), personnel policies, the substance of agreements with customers, suppliers and others, marketing arrangements, customer lists, commercial arrangements, or any other information relating to Company’s business which is treated as confidential or proprie tary by Company in accordance with its policies.  Notwithstanding the immediately preceding sentence, the provisions of this paragraph 7.8(a) shall not apply to any information that (1) is in the public domain; (2) is or becomes available to the public other than as a result of a disclosure by Executive in violation of this paragraph 7.8(a); (3) was available to Executive on a non-confidential basis prior to the date of this Employment Agreement; (4) was already lawfully in Executive’s possession prior to the date of this Employment Agreement; or (5) becomes available to Executive on a non-confidential basis from a source other than Company (other than through a known breach of a confidentiality obligation).  This obligation shall continue until such Confidential Information becomes publicly available, other than pursuant to a breach of this paragraph 7.8(a) by the Executive, regardless of whether the Executive continues to be employed by the Company.
 
 
(b)
It is further agreed and understood by and between the parties to this Agreement that all “Company Materials,” which include, but are not limited to, computers, computer software, computer disks, tapes, printouts, source, HTML and other codes, flowcharts, schematics, designs, graphics, drawings, photographs, charts, graphs, notebooks, customer lists, sound recordings, other tangible or intangible manifestation of content, and all other documents whether printed, typewritten, handwritten, electronic, or stored on computer disks, tapes, hard drives, or any other tangible medium, as well as samples, prototypes, models, products and the like shall be the exclusive property of Company and, upon termination of Executive’s employment with Company, and/or upon the written request of Company, all Company Materials, including copies thereof, as well as all other Company property then i n Executive’s possession or control, shall be returned to and left with Company.
 
 
10

 
Exhibit 10.3
 
 
7.9
Copyright.

Executive acknowledges that all original works of authorship by Executive, whether created alone or jointly with others, relating to the Executive’s employment with the Company, and which are protectable by copyright, are “works made for hire” within the meaning of the United States Copyright Act, 17 U.S.C. § 101, as amended, and the copyright of which shall be owned solely, completely and exclusively by Company.  If any such work is considered to be a work not included in the categories of work covered by the United States Copyright Act, 17 U.S.C. § 101, as amended, such work is hereby conveyed and transferred completely and exclusively to Company.  Executive hereby irrevocably designates counsel to Company as Executive’s agent and attorney-in-fact to do al l lawful acts necessary to apply for and obtain patents and copyrights and to enforce Company’s rights under this section, provided that such counsel shall take any such actions only after Executive has been requested in writing to do such acts by Company and failed to promptly do so after a reasonable opportunity to review and comment thereon.  Executive will be entitled to receive copies of any documents executed by Company to enforce or evidence its rights under this paragraph 7.9.  This paragraph 7.9 shall survive the termination of this Agreement.  Any conveyance of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as “moral rights.”

 
7.10
Indemnification.

Company recognizes that the activities within the scope of Executive’s employment create the potential in some jurisdictions of civil or even criminal actions being brought against Executive.  To the fullest extent permitted by law, Company shall indemnify, defend, protect and hold Executive harmless from and against all claims, demands, causes of action, actions, suits, costs, damages, penalties, fines, liabilities, losses and expenses, whether civil or criminal, including, without limitation, reasonable attorneys’ and consultant’s fees and expenses arising out of or resulting from the performance of Executive’s duties within the scope of Executive’s employment.  Company will include Executive as a named insured on Company’s directors and officers, errors and omission and general liability policies.

 
7.11
Non-Competition and Non-Solicitation.

Executive acknowledges that Company has invested substantial time, money and resources in the development and retention of its Confidential Information (including trade secrets), customers, accounts and business partners, and further acknowledges that during the course of Executive’s employment with Company, Executive will have access to Company’s Confidential Information (including trade secrets), and will be introduced to
 
 
11

 
Exhibit 10.3
 
existing and prospective customers, vendors, cable operators, accounts and business partners of Company.  Executive acknowledges and agrees that any and all “goodwill” associated with any existing or prospective customer, vendor, cable operator, account or business partner belongs exclusively to Company, including, but not limited to, any goodwill created as a result or direct or indirect contacts or relationships between Executive and any existing or prospective customers, vendors, cable operators, accounts or business partners.  Additionally, the parties acknowledge and agree that Executive possesses skills that are special, unique or extraordinary and that the value of Company depends upon his use of such skills on its behalf.
 
In recognition of this, Executive covenants and agrees that:

 
(a)
During Executive’s employment with Company, Executive may not, without prior written consent of Company (whether as an executive, agent, servant, owner, partner, consultant, independent contractor, representative, stockholder, or in any other capacity whatsoever) perform any work directly competitive in any way to the business of Company or a planned business of which Executive is aware.

 
(b)
During Executive’s employment with Company and for one year thereafter, Executive may not directly or indirectly entice, solicit or encourage any Company employee to leave the employ of the Company or any independent contractor to sever its engagement with Company, absent prior written consent from Company.

 
(c)
During Executive’s employment with Company and for one year thereafter, Executive may not, directly or indirectly, entice, solicit or encourage any customer or prospective customer of Company to cease doing business with Company, reduce its relationship with Company or refrain from establishing or expanding a relationship with Company.

 
7.12
Non-Disparagement; Non-Disclosure.

 
(a)
Executive and Company hereby agree that during the Employment Period and all times thereafter, neither Executive nor Company will make any public statement, or engage in any conduct, that is disparaging to the other party or, in the case of Company, to any of its executives, officers, directors, or shareholders, including, but not limited to, any statement that disparages the products, services, finances, financial condition, capabilities or any other aspect of the business of Company and the capabilities of Executive.  Notwithstanding any term to the contrary herein, neither Executive nor Company shall be in

 
12

 
Exhibit 10.3
 
breach of this paragraph 7.12 for the making of any truthful statements under oath or in a judicial or other proceeding.
 
 
(b)
Executive will not directly or indirectly be the source of disclosing, by publishing or by granting interviews, of any Confidential Information (which is known to Executive to be confidential) concerning the personal, social or business activities of Company, its affiliates or the executives and principals and the officers, directors, agents and Executives of all the foregoing during or at any time after the termination of Executive’s employment, subject to the exceptions specified in section 7.8(a) (1) – (5).  In addition, Executive agrees that without Company’s express written approval in each case, Executive will not:

 
i.
write, be the source of or contribute to any articles, stories, books, screenplays or any other communication or publicity of any kind (written or otherwise) or deliver lectures in any way regarding or concerning the Confidential Information, or

 
ii.
grant any interviews regarding or concerning the Confidential Information during or at any time after the termination of his employment.

 
7.13
Company Authority.  The execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary corporate action of the Company and this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms.

 
7.14
Code Section 409A Compliance.  The intent of the parties to this Agreement is that payments and benefits paid or provided hereunder be exempt from or comply with Section 409A of the Code, as amended and the regulations and guidance promulgated thereunder (together, “Section 409A”) and that this Agreement shall be interpreted and administered in accordance with such intention.  Notwithstanding anything herein to the contrary, if at the time of Executive's termination of employment with Company, Executive is a “specified employee” as defined in Section 409A and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A, then the commencement of such payments or benefits hereunder shall be delayed until the date that is six (6) months and one day following Executive’s termination of employment with  Company; provided that, to the extent necessary to comply with the requirements of IRS Notice 2016-6, in no event shall a payment described in this sentence be paid prior to the date which is eighteen (18) months and one day following [IN-

 
13

 
Exhibit 10.3
 
SERT DATE OF AMENDMENT].  For purposes of any payments and benefits which are (i) subject to Section 409A and (ii) payable due to a termination of Executive's employment, Executive shall not be considered to have terminated employment with Company until Executive incurs a “separation from service” from Company within the meaning of Section 409A.  Each amount to be paid or benefit to be provided under this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code, and any payments described in this Agreement that are due within the “short term deferral period” as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable law requires otherwise.  To the extent required to avoid accelerated taxation and/or tax penalties un der Section 409A of the Code, amounts reimbursable to Executive under this Agreement shall be paid to Executive on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in-kind benefits provided to Executive) during any one year may not effect amounts reimbursable or provided in any subsequent year.

 
 
IN WITNESS WHEREOF, the parties hereto have executed this amended and restated Employment Agreement.


PLAYBOY ENTERPRISES, INC.
         
         
By
/s/ Howard Shapiro
  Howard Shapiro    
  Date:  
9/29
, 2010  
Title
Executive Vice President
         
         
/s/ Scott N. Flanders
SCOTT FLANDERS
Date:  
Sept 29
, 2010
 
 
 
14

EX-10.4 5 ex10_4.htm EXHIBIT 10.4 ex10_4.htm

 
Exhibit 10.4
 
October 27, 2010

Playboy Enterprises, Inc.
2706 Media Center Drive
Los Angeles, CA  90065
Attn:  Gary Rosenson

Dear Gary:

Reference is made to that certain Amended And Restated Affiliation And License Agreement For DTH Satellite Exhibition Of Programming between DIRECTV, Inc. ("Affiliate") and Playboy Entertainment Group and Spice Hot Entertainment, Inc. ("Programmer") made as of August 1, 2007 as extended by the Letter Agreements dated October 12, 2009, November 13, 2009, December 14, 2009, January 14, 2010, February 12, 2010, March 11, 2010, April 8, 2010, June 25, 2010 and September 1, 2010 (the "Agreement").

Except as modified expressly below, all terms of the Agreement are hereby ratified and remain in full force and effect.  All capitalized terms used herein shall have the meanings ascribed to them as set forth in the Agreement.

Affiliate and Programmer hereby agree to extend the Term of the Agreement as set forth in Paragraph 6.(a) through the earlier of the parties entering into a replacement agreement or November 16, 2010.

Very truly yours,

DIRECTV, Inc.

/s/ Toby Berlin

Toby Berlin
Vice President, Programming Acquisition


ACCEPTED AND AGREED:

PLAYBOY ENTERTAINMENT GROUP, INC.
 
SPICE HOT ENTERTAINMENT, INC.
         
         
By:
/s/ Gary Rosenson
 
By:
/s/ Gary Rosenson
Title: 
SVP & GM
 
Title: 
SVP & GM

 

EX-31.1 6 ex31_1.htm EXHIBIT 31.1 ex31_1.htm

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott N. Flanders, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. for the quarter ended September 30, 2010;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:      November 9, 2010
   
/s/ Scott N. Flanders
   
Name:  
Scott N. Flanders
   
Title:
Chief Executive Officer and
     
Director
 
 

EX-31.2 7 ex31_2.htm EXHIBIT 31.2 ex31_2.htm

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christoph Pachler, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. for the quarter ended September 30, 2010;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date:      November 9, 2010
   
/s/ Christoph Pachler
   
Name:  
Christoph Pachler
   
Title:
Executive Vice President and
     
Chief Financial Officer
 
 

EX-32 8 ex32.htm EXHIBIT 32 ex32.htm

Exhibit 32


Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002


In connection with the Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. (the "Company") for the quarterly period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Scott N. Flanders and Christoph Pachler each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1)         The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)         The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Scott N. Flanders
Name: 
Scott N. Flanders
Title: 
Chief Executive Officer
Date: 
November 9, 2010


/s/ Christoph Pachler
Name: 
Christoph Pachler
Title: 
Chief Financial Officer
Date: 
November 9, 2010


This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by § 906 has been provided to Playboy Enterprises, Inc. and will be retained by Playboy Enterprises, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
 
 

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