-----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, L5AihgM7JpHywJ0kPU6dpGW9MmEGSDX4Fe/otFa0ftAqvs20+Zs6Vca5aluJaKf6 SbqqSX3cG8Cqb7H9sWgN3A== 0001169232-04-001668.txt : 20040311 0001169232-04-001668.hdr.sgml : 20040311 20040311115159 ACCESSION NUMBER: 0001169232-04-001668 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040311 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 04662155 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-K 1 d57916_10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- Commission file number 001-14790 Playboy Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4249478 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 680 North Lake Shore Drive, Chicago, IL 60611 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 751-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- -------------------------- Class A Common Stock, par value $0.01 per share New York Stock Exchange Pacific Exchange Class B Common Stock, par value $0.01 per share New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.|X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_| The aggregate market value of Class A Common Stock held by nonaffiliates on June 30, 2003 (based upon the closing sale price on the New York Stock Exchange) was $16,806,720. The aggregate market value of Class B Common Stock held by nonaffiliates on June 30, 2003 (based upon the closing sale price on the New York Stock Exchange) was $199,486,772. At February 29, 2004, there were 4,864,102 shares of Class A Common Stock and 22,613,151 shares of Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required for Part II. Item 5 and Part III. Items 10-14 of this report is incorporated herein by reference to the Notice of Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004. PLAYBOY ENTERPRISES, INC. 2003 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I Item 1. Business 3 Item 2. Properties 15 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36 Item 8. Financial Statements and Supplementary Data 36 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 70 Item 9A. Controls and Procedures 70 PART III Item 10. Directors and Executive Officers of the Registrant 71 Item 11. Executive Compensation 71 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 71 Item 13. Certain Relationships and Related Transactions 71 Item 14. Principal Accounting Fees and Services 71 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 72 2 PART I Item 1. Business Playboy Enterprises, Inc., together with its subsidiaries and predecessors, will be referred to in this Form 10-K Annual Report by terms such as "we," "us," "our," "Playboy" and the "Company," unless the context otherwise requires. We were organized in 1953 to publish Playboy magazine and are now a worldwide leader in the development and distribution of multi-media entertainment for adult audiences. The Playboy brand is one of the most widely recognized and popular brands in the world. The strength of our brand drives our Entertainment, Publishing, Online and Licensing Groups. Our programming is carried in the U.S. by all six of the major multiple system operators, or MSOs, and both of the largest satellite direct-to-home, or DTH, providers. Playboy magazine, celebrating its 50th Anniversary, is the best-selling monthly men's magazine in the world, with a worldwide paid monthly circulation of over four million copies. Our online operations consist of a network of websites that have an established and growing subscriber and revenue base. Our licensing businesses leverage the Playboy name, the Rabbit Head Design and our other trademarks in the worldwide manufacture, sale and distribution of a variety of consumer products. Our businesses are currently classified into the following four reportable segments: Entertainment, Publishing, Online and Licensing. Formerly, we operated a fifth segment, Catalog, which we divested in connection with our sale of the Collectors' Choice Music catalog in 2001. Net revenues, loss before income taxes and cumulative effect of change in accounting principle, depreciation and amortization and identifiable assets of each reportable segment are set forth in Note (T) Segment Information of Notes to Consolidated Financial Statements. Our trademarks and copyrights are critical to the success and potential growth of all of our businesses. Our trademarks, which are renewable periodically and which can be renewed indefinitely, include Playboy, the Rabbit Head Design, Playmate and Spice. We also own numerous domain names related to our online business. ENTERTAINMENT GROUP Our Entertainment Group operations include the production and marketing of adult television programming for our domestic and international TV networks and worldwide DVD/home video products. Programming Our Entertainment Group develops, produces and distributes a wide range of high-quality adult television programming for our domestic and international television networks and worldwide DVD/home video products. Our proprietary productions include feature films, magazine format shows, reality-based and dramatic series, documentaries, live events and celebrity and Playmate features. Our programming features stylized eroticism in a variety of entertaining formats for men and women and is designed to be adapted easily into a number of formats, enabling us to amortize our programming costs over multiple distribution platforms. We have produced a number of shows which air on the domestic and international Playboy TV networks and are also distributed internationally in countries where we do not have networks. Additionally, some of our programming has been released as DVD/home video titles and/or has been licensed to other networks, such as HBO and Showtime. In 2003, we premiered Totally Busted, a "Candid Camera" like show, and in 2002 we premiered The Weekend Flash, a provocative news show. Some of our other series include Women: Stories of Passion, Passion Cove, Sexy Urban Legends, The Extreme Truth and 7 Lives Xposed, Playboy TV's first venture into reality-based television. We invest in high-quality adult-oriented programming to support both our television and Internet businesses. We invested $44.7 million, $41.7 million and $37.3 million in entertainment programming in 2003, 2002 and 2001, respectively. Approximately two-thirds of these expenditures were used to create proprietary programming for Playboy TV, resulting in the domestic production of 268, 243 and 232 hours of original programming, respectively. At December 31, 2003, our domestic library of primarily exclusive, Playboy branded original programming totaled approximately 2,500 hours. The remaining amounts of our programming expenditures were used to acquire high-quality adult movies in various edit standards, as the majority of the programming that airs on our movie networks is licensed, on an exclusive basis, from third parties. In 2004, we expect to invest approximately $46 million in Company-produced and licensed programming, which could vary based on, among other things, the timing of completing productions. 3 Our programming is delivered to DTH and cable operators through communications satellite transponders. We currently have three transponder service agreements related to our domestic networks, the terms of which currently extend through 2006, 2010 and 2015. We also have four international transponder service agreements, the terms of which currently extend through 2004 and 2006. These service agreements contain protections typical in the industry against transponder failure, including access to spare transponders, and conditions under which our access may be denied. Major limitations on our access to DTH or cable systems or satellite transponder capacity could materially adversely affect our operating performance. There have been no instances in which we have been denied access to transponder service. In 2002, we moved to a new state-of-the-art studio facility in Los Angeles where we now have a centralized digital, technical and programming facility for both the Entertainment and Online Groups. The new facility enables us to produce more original programs in a more efficient and cost effective operating environment. In 2003, we upgraded our production capabilities so that the programming we create is now available in high definition format. We are also utilizing our studio to provide playback, production control and origination services for third parties, which helps bring efficiencies and allows us to spread our fixed costs to operate the facility. Domestic TV Networks We currently operate multiple domestic TV networks, which include Playboy TV, Playboy TV en Espanol and seven Spice branded movie networks. Playboy TV, which airs a variety of original and proprietary programming as well as adult movies under exclusive license from leading adult studios, is offered through the DTH market and on cable on a pay-per-view, or PPV, monthly subscription, video on demand, or VOD, and monthly subscription video on demand, or SVOD, basis. Playboy TV en Espanol is offered on cable on a PPV basis and on DTH as part of EchoStar's Dish Latino subscription package. Our Spice branded networks, Spice, Spice 2, Spice Live, Spice Hot, Spice Platinum, Hot Net and Hot Zone, are referred to collectively as our movie networks. Our movie networks feature adult movies under exclusive license from leading adult studios and are offered via cable and satellite on a PPV or VOD basis. We also recognize royalty revenues from the license of our Playboy programming to other pay networks. The following table illustrates certain information regarding approximate household units and current average retail rates for our networks (in millions, except retail rates): Household Units (1) Average Retail Rates -------------------- ----------------------- Dec. 31, Dec. 31, Monthly 2003 2002 PPV Subscription - ------------------------------------------------------------------------------ Playboy TV DTH 21.6 19.2 $ 8.00 $15.15 Digital cable 16.9 14.0 9.90 11.95 Analog addressable cable 4.5 5.7 7.90 10.15 Playboy TV en Espanol DTH 8.1 7.0 -- --(2) Digital cable 3.3 2.7 9.40 -- Movie Networks DTH 42.2 38.4 10.00 -- Digital cable 42.8 36.9 9.50-11.90 -- Analog addressable cable 6.9 10.8 9.20-9.90 -- - ---------------------------------------------------------------------------- (1) Each household unit is defined as one household carrying one given network per carriage platform. A single household can represent multiple household units if two or more of our networks and/or multiple platforms (i.e., digital and analog) are available to that household. (2) An average retail rate is not available as Playboy TV en Espanol is offered with various other Spanish-speaking networks as part of EchoStar's Dish Latino subscription package. 4 Most of our networks are provided through the DTH market in households with small dishes receiving a Ku-band medium or high power digital signal, or DBS, such as those currently offered by DirecTV and EchoStar. Playboy TV is the only adult service to be available on all four DBS services in the United States and Canada. It is currently available on DirecTV and EchoStar in the United States and ExpressVu and Star Choice in Canada. As previously mentioned, Playboy TV en Espanol is offered as part of EchoStar's Dish Latino subscription package. The Hot Network, The Hot Zone and Spice Platinum networks are all available on DirecTV and, in 2001, The Hot Zone network also was launched on EchoStar. Paul Kagan Associates, Inc., or Kagan, an independent media research firm, projects an average annual increase of approximately 7% in DBS households from 2004 through 2006. Our revenues reflect our contractual share of the amounts received by the DTH operators, which are based on both the retail rates set by the DTH operators and the number of buys and/or subscribers. Our networks are also available to consumers through cable providers. Most cable service in the United States is distributed through MSOs and their affiliated cable systems, or cable affiliates. Once arrangements are made with an MSO, we are able to negotiate channel space for our networks with the cable affiliates. Individual cable affiliates determine the retail price of both PPV, which can be dependent on the length of the block of programming, and monthly subscription services, which can be dependent on the number of premium services to which a household subscribes. Our revenues reflect our contractual share of the amounts received by the cable affiliates, which are based on both the retail rates set by the cable affiliates and the number of buys and/or subscribers. PPV programming can be delivered through any number of delivery methods, including (a) DTH, (b) digital and analog cable television, (c) wireless cable systems and (d) technologies such as cable modem and the Internet. Growth in the cable PPV market is expected to result principally from cable system upgrades, utilizing digital compression and other bandwidth expansion methods that provide cable operators additional channel capacity. In recent years, cable operators have been shifting from analog to digital technology in order to upgrade their cable systems and to counteract competition from DBS operators. Digital cable television has several advantages over analog cable television, including more channels, better audio and video quality, advanced set-top boxes that are addressable, a secure, fully scrambled signal, integrated program guides and advanced ordering technology. Kagan projects average annual increases of less than 1% in total cable households and 14% in digital cable households through December 31, 2006. During this same period, Kagan projects an average annual decrease of approximately 28% in analog addressable cable households, as customers upgrade from older analog systems to the digital or DBS platforms. Additionally, recent technology advances have begun to allow digital consumers to not only order programs on a PPV basis, but also to choose VOD. VOD differs from traditional PPV in that it allows viewers to purchase a specific movie or program for a period of time with DVD-like functionality. The basic premise is that consumers have a menu of options and can choose to buy a program "on demand" without having to adhere to the schedule of a programmed network. We are seeking to obtain a leading position in this new phase of technology by leveraging the power of our brand names, our large library of original programming and our agreements with leading major adult movie producers for VOD rights. Currently we are distributing VOD programming through four operators and are in the process of negotiating agreements with other major operators. Growth of this technology will be dependent on a number of factors, including, but not limited to, operator investment, server/bandwidth capacity, availability of a two-way communication path, programmer rights issues and consumer acceptance. Kagan projects an average annual increase of approximately 24% in VOD households from 2004 through 2006. We currently have agreements with each of the nation's six largest MSOs and the principal DTH operators in the United States and Canada. Our agreements with these operators are renewed or renegotiated from time to time in the ordinary course of business. In some cases, following the expiration of an agreement, we and the respective operator continue to perform in accordance with the terms of the expired agreement until a new agreement is negotiated. In any event, our agreements with MSOs and DTH operators generally may be terminated on short notice without penalty. Competition among television programming providers is intense for both channel space and viewer spending. Our competition varies in both the type and quality of programming offered, but consists primarily of other premium pay services, such as general-interest premium channels and other adult movie pay services. We compete with the other pay services as we (a) attempt to obtain or renew carriage with DTH operators and individual cable affiliates, (b) negotiate fee arrangements with these operators and (c) market our programming through these operators to consumers. Over the past several years, we have been adversely impacted by all of the competitive factors described above and, in addition, by consolidation in the cable industry, which has resulted in larger, but fewer operators. The availability and price pressure from more explicit content on the Internet and pay television also presents a significant competitive challenge. 5 While there can be no assurance that we will be able to maintain our current DTH and cable carriage or fee structures or maintain or grow our viewership in the face of this competition, we believe that strong Playboy and Spice brand recognition, the quality of our original programming and our ability to appeal to a broad range of adult audiences are critical factors which differentiate our networks from other providers of adult programming. Also, to optimize revenue potential, we are encouraging DTH and cable operators to market the full range of PPV, VOD, SVOD and monthly subscription options to consumers and to offer our services in high definition format. From time to time, private advocacy groups have sought to exclude our programming from pay television distribution because of the adult-oriented content of the programming. Management does not believe that any such attempts will materially affect our access to DTH and cable systems, but the nature and impact of any such limitations in the future cannot be determined. International TV In December 2002, we completed the restructuring of the ownership of our international TV joint ventures with Claxson Interactive Group Inc. and its affiliates, or Claxson. The current scope of our international television business reflects the significant expansion of our ownership of Playboy TV and movie networks outside of the United States and Canada that occurred with this restructuring. See Note (C) Restructuring of Ownership of International TV Joint Ventures of Notes to Consolidated Financial Statements. We currently own and operate or license 16 Playboy, Spice and locally branded movie networks in Europe and the Pacific Far East. Through joint ventures, we have equity interests in seven additional networks in Japan, Latin America and Iberia. At December 31, 2003, our international TV networks were available in approximately 37.0 million household units outside of the United States and Canada, compared to approximately 30.9 million household units at December 31, 2002. The increase in household units is primarily due to growth in existing markets. These networks carry principally U.S.-originated content, which is subtitled or dubbed and complemented by local content. We also derive revenues by licensing programming rights from our extensive library of content to broadcasters in Europe and Australia. In Europe, we own and operate television networks in the United Kingdom, which are further distributed through DTH and cable television throughout greater Europe. We license networks to local partners in Scandinavia, France, Turkey, Poland, Taiwan, Hong Kong, South Korea, Israel and New Zealand that are programmed for the cultural sensitivities of each country. Through a joint venture with Tohokushinsha Film Corp., we hold a 19.9% ownership interest in Playboy Channel Japan and a local adult service, The Ruby Channel. These international networks are generally available on both a PPV and monthly subscription basis. We own a 19% interest in Playboy TV-Latin America, LLC, or PTVLA, a joint venture with Claxson that operates Playboy TV networks and a local adult service, Venus, in Latin America and Iberia. In these markets, PTVLA operates four networks, distributes Spice Live and exploits the Playboy library by licensing content to broadcasters in the territory. Under the terms of our amended PTVLA operating agreement, Claxson maintains management control of PTVLA, although we have significant management influence. We now provide programming and use of our trademarks directly to PTVLA in return for 17.5% of its net revenues with a guaranteed annual minimum. The term of the program supply and trademark agreement for PTVLA is ten years, unless terminated earlier in accordance with the terms of the agreement. PTVLA provides the feed for Playboy TV en Espanol and we pay PTVLA a 20% distribution fee for that feed based on the network's net revenues in the U.S. Hispanic market. Neither we nor Claxson are obligated to make any additional capital contributions to the PTVLA venture. If the management committee of PTVLA determines that additional capital is necessary for the conduct of PTVLA's business, we would have the option to contribute our pro rata share of additional capital. We have an option to purchase up to 49.9% of PTVLA at fair market value over the next ten years. In addition, we have the option to purchase the remaining 50.1% of PTVLA at fair market value, exercisable at any time during the period beginning December 23, 2007 and ending December 23, 2008, so long as we have previously or concurrently exercised the 49.9% buy-up option. We have the option to pay the purchase price for the 49.9% buy-up option in cash, shares of our Class B common stock, or Class B stock, or a combination of cash and Class B stock. However, if we exercise both options concurrently, then we must pay the entire purchase price for both options in cash. We seek the most appropriate and profitable manner in which to build on the powerful Playboy and Spice brands in each international market. In addition, we seek to generate synergies among our networks by combining operations where practicable, through innovative programming and scheduling, through joint programming acquisitions and by coordinating and sharing marketing activities and materials efficiently throughout the territories in which our programming is aired. We expect the benefits of these synergies to improve operating margins in the future as new territories are added to the growing list of our networks. 6 We believe we can grow our international television business through (a) expanding the distribution reach of existing networks, (b) expanding the number of countries into which we launch and operate new networks, (c) the continued rollout in digital addressable television households in our existing international markets and (d) increasing buy rates driven by new programming and scheduling tactics as well as more targeted marketing activity. While there are several similar domestic and international competitive challenges, a few exist solely within the international marketplace. The availability and price pressure from more explicit content on the Internet and pay television presents a significant competitive challenge. Competition abroad derives from both the availability of less explicit adult content on free television that is much more prevalent, specifically in Europe, than in the U.S., and competitive pay services. In the U.K., our two networks compete with a total of 26 other adult networks and in Japan our two channels compete with 24 adult networks. There are often low barriers to entry, which yield increasing competition, especially from companies in Asia and parts of Europe providing "home grown" content as opposed to dubbed American programs. However, we have used our vast content library and acquisitions to create additional channels (The Adult Channel, Spice, Spice 2, Spice Platinum and Venus), which complement the flagship Playboy TV brand in markets with demand for quality English language adult programming. Worldwide DVD/Home Video We also distribute our original programming domestically in the home video market on both DVD and VHS, which are sold in video and music stores and other retail outlets, through direct mail, including Playboy magazine, and online, including PlayboyStore.com. We offer the following three distinct product lines: Playboy Home Video, which features Playmate, celebrity and specials product; Playboy TV, which features TV shows from our premium pay television network, and Playboy Exposed, which features content drawn from adult reality-based programming. The following table summarizes the number of titles released under each product line: Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------- Playboy Home Video 11 14 11 Playboy TV 7 9 2 Playboy Exposed 9 11 2 - ------------------------------------------------------------------------- Total 27 34 15 ========================================================================= We also distribute various non-Playboy branded movies and we continue to re-release titles on DVD, which were previously only released on VHS. Since October 2001, Image Entertainment, Inc., or Image, has distributed our DVD and VHS products in the United States and Canada. We are responsible for manufacturing the product for sale and for certain marketing and sales functions. We receive advances from Image on all new release titles in the Playboy Home Video and Playboy TV lines, while we receive no advance on Playboy Exposed titles or miscellaneous releases. Image receives a distribution fee on sales of all products, which varies depending on the product line, and remits a net amount to us. Internationally, we release our proprietary Playboy programming on DVD and home video formats. Since 2002, our products have been distributed internationally under a master licensing agreement with Modern Entertainment, Ltd., or Modern. These products are based on the videos produced for the U.S. market, with the licensee dubbing or subtitling into the local language where necessary. Our agreements with Image and Modern are renewed or renegotiated from time to time in the ordinary course of business. We may, following the expiration of an agreement, continue to perform in accordance with the terms of the expired agreement until a new agreement is negotiated. 7 PUBLISHING GROUP Our Publishing Group operations include the publication of Playboy magazine, other domestic publishing businesses and the licensing of international editions of Playboy magazine. Playboy Magazine Founded by Hugh M. Hefner, in 1953, Playboy magazine, now in its 50th Anniversary year, continues to be the best-selling monthly men's magazine in the U.S. and in the world, based on the combined circulation of the U.S. and international editions. Circulation of the U.S. edition is approximately 3.1 million copies monthly. Combined average circulation of the 17 licensed international editions is approximately 1.1 million copies monthly. According to Fall 2003 data published by Mediamark Research, Inc., or MRI, an independent market research firm, the U.S. edition of Playboy magazine is read by approximately one in every seven men in the United States aged 18 to 34. Playboy magazine plays a key role in driving the continued popularity and recognition of the Playboy brand. Playboy magazine is a general-interest magazine targeted to men, with a reputation for excellence founded on providing high-quality photography, entertainment and articles on current issues, interests and trends. Playboy consistently includes in-depth, candid interviews with high profile political, business, entertainment and sports figures; pictorials of famous women; and content by leading authors, including, the following: Interviews Pictorials Leading Authors ---------- ---------- --------------- Ben Affleck Pamela Anderson William F. Buckley Halle Berry Drew Barrymore Ethan Coen George Clooney Cindy Crawford Michael Crichton John Cusack Carmen Electra David Halberstam Bill Gates Daryl Hannah William Kennedy Tommy Hilfiger Rachel Hunter Jay McInerney Michael Jordan Elle Macpherson Joyce Carol Oates Jimmy Kimmel Madonna George Plimpton Jack Nicholson Jenny McCarthy Scott Turow O.J. Simpson Anna Nicole Smith John Updike Jesse Ventura Katarina Witt Kurt Vonnegut Playboy magazine has long been known for its quality of photography, editorial content and illustration in publishing the work of top photographers, writers and artists. Playboy magazine also features lifestyle articles on consumer products, fashion, automobiles and consumer electronics and covers the worlds of sports and entertainment. In 2003, Playboy magazine underwent a redesign, including a series of editorial changes. The goal of these changes is to make the magazine more appealing to young readers by being more contemporary while remaining consistent with its heritage of sophisticated and excellent journalism, literature and photography. The front of book sections have been reconfigured with the addition of many new entry points and regular franchise items. The feature well has more photographs and a greater focus on must-read topical articles, focusing on timely, long-form investigative pieces. Writers, ranging from rising young talents to the nation's most accomplished fiction and nonfiction authors, are being featured. And a new, eight-page fashion well has been introduced, spotlighting the best of modern fashion for young men. The net circulation revenues of the U.S. edition of Playboy magazine for 2003, 2002 and 2001 were $65.9 million, $62.3 million and $63.6 million, respectively. Net circulation revenues are gross revenues less commissions, discounts and provisions for newsstand returns and display costs and unpaid subscriptions. Circulation revenue comparisons may be materially impacted with respect to newsstand sales in any period based on whether or not there are issues featuring major celebrities. According to the Audit Bureau of Circulations, or ABC, an independent audit agency, at December 31, 2003, Playboy magazine was the 13th highest-ranking U.S. consumer publication, with a circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) of 3.15 million. Playboy magazine's circulation rate base at December 31, 2003 was larger than each of Newsweek, Cosmopolitan and Maxim and was larger than the combined rate bases of Stuff, FHM and GQ. 8 Playboy magazine has historically generated approximately two-thirds of its revenues from subscription and newsstand circulation, with the remainder primarily from advertising. Subscription copies represent approximately 85% of total copies sold. We believe that managing Playboy's circulation to be primarily subscription driven, like most major magazines, provides a stable and desirable circulation base, which is attractive to advertisers. In addition, according to the MRI data previously mentioned, the median age of male Playboy readers is 32, with a median annual household income of $53,000, a demographic that we believe is also attractive to advertisers. We also derive revenues from the rental of Playboy magazine's subscriber list, which consists of the subscriber's name, address and other subscription-related information that we maintain. We attract new subscribers to the magazine through our own direct mail advertising campaigns, subscription agent campaigns and the Internet, including the Playboy.com website. We recognize revenues from magazine subscriptions over the terms of the subscriptions. Subscription copies of the magazine are delivered through the U.S. Postal Service as periodical mail. We attempt to contain these costs through presorting and other methods. The Publishing Group was impacted by a general postal rate increase of approximately 10% in July 2002. No postal rate increases are expected in 2004. Playboy magazine is one of the highest priced magazines in the United States. Effective with the April 2001 issue, the basic U.S. newsstand cover price is $4.99 ($6.99 for the December holiday issue and $7.99 for the January 50th Anniversary issue) and the basic Canadian newsstand cover price is C$6.99 (C$7.99 for the December holiday issue and C$8.99 for the January 50th Anniversary issue). In addition, when there is a feature of special appeal, we generally increase the newsstand cover price by $1.00. We price test from time to time, but no general price increases are currently planned for 2004. Playboy magazine targets a wide range of advertisers. Advertising by category, as a percent of total advertising pages, and the total number of ad pages was as follows: Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Category 12/31/03 12/31/02 12/31/01 - ----------------------------------------------------------------------------- Retail/Direct mail 25% 26% 19% Beer/Wine/Liquor 20 25 28 Tobacco 19 19 23 Home electronics 8 8 4 Automotive 4 4 2 Toiletries/Cosmetics 3 4 5 Apparel/Footwear/Accessories 5 4 5 All other 16 10 14 - ----------------------------------------------------------------------------- Total 100% 100% 100% ============================================================================= Total ad pages 555 515 618 ============================================================================= We continue to focus on securing new advertisers, including expanding advertising from underserved categories. The net advertising revenues of the U.S. edition of Playboy magazine for 2003, 2002 and 2001 were $36.1 million, $32.4 million and $37.0 million, respectively. Net advertising revenues are gross revenues less advertising agency commissions, frequency and cash discounts and rebates. We publish the U.S. edition of Playboy magazine in 15 advertising editions: one upper income zip-coded, eight regional, two state and four metro. All contain the same editorial material but provide targeting opportunities for advertisers. We implemented 4% and 8% cost per thousand increases in advertising rates effective with the January 2004 and 2003 issues, respectively. Levels of advertising revenues may be affected by, among other things, increased competition for and decreased spending by advertisers, general economic activity and governmental regulation of advertising content, such as tobacco products. However, as only approximately one-third of Playboy magazine's revenues and less than 15% of the Company's total revenues are from advertising, we are not overly dependent on this source of revenue. 9 Playboy magazine subscriptions are serviced by Communications Data Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement, CDS performs a variety of services, including (a) receiving, verifying, balancing and depositing payments from subscribers, (b) processing Internet transactions, (c) printing forms and promotional materials, (d) maintaining master files on all subscribers, (e) issuing bills and renewal notices to subscribers, (f) issuing labels, (g) resolving customer service complaints as directed by us and (h) furnishing various reports to monitor all aspects of the subscription operations. The term of the previous agreement expired June 30, 2001, but has been extended to June 30, 2006. Either party may terminate the agreement prior to expiration in the event of material nonperformance by, or insolvency of, the other party. We pay CDS specified fees and charges based on the types and amounts of service performed under the agreement. The fees and charges were fixed at their July 1, 2001 levels until June 30, 2003, after which they increase annually based on the consumer price index, to a maximum of six percent in one year. CDS's liability to us for a breach of its duties under the agreement is limited to actual damages of up to $140,000 per event of breach, except in cases of willful breach or gross negligence, in which case the limit is $280,000. The agreement provides for indemnification by CDS of us and our shareholders against claims arising from actions or omissions by CDS in compliance with the terms of the agreement or in compliance with our instructions. Distribution of the magazine and special editions to newsstands and other retail outlets is accomplished through Warner Publisher Services, Inc., or Warner, our national distributor. The issues are shipped in bulk to wholesalers, who are responsible for local retail distribution. We receive a substantial cash advance from Warner 14 days after the date each issue goes on sale. We recognize revenues from newsstand sales based on estimated copy sales at the time each issue goes on sale and adjust for actual sales upon settlement with Warner. These revenue adjustments are not material on an annual basis. Retailers return unsold copies to the wholesalers, who count and then shred the returned copies and report the returns by affidavit. The number of copies sold on newsstands varies from month to month, depending in part on consumer interest in the cover, the pictorials and the editorial features. Playboy magazine and special editions are printed at Quad/Graphics, Inc., or Quad, at a single site located in Wisconsin, which ships the product to subscribers and wholesalers. The print run varies each month based on expected sales and is determined with input from Warner. Paper is the principal raw material used in the production of these publications. We use a variety of types of high-quality coated and uncoated paper that is purchased from a number of suppliers. The market for paper has historically been cyclical resulting in volatility in paper prices, which can materially affect the Publishing Group's financial results. Average paper prices in 2003 were approximately 7% lower than in 2002 due to soft demand. Paper prices are not expected to increase materially in 2004. We rely on CDS, Warner and Quad to produce and distribute our magazine. If they fail to perform their obligations on a timely basis, our operations could be adversely affected. Our agreements with these companies are renewed or renegotiated from time to time in the ordinary course of business. In some cases, following the expiration of an agreement, we and the respective company continue to perform in accordance with the terms of the expired agreement until a new agreement is negotiated. From time to time, Playboy magazine and certain of its distribution outlets and advertisers have been the target of private advocacy groups who seek to limit its availability because of its adult-oriented content. In our 50-year history, we have never sold a product that has been judged to be obscene or illegal in any U.S. jurisdiction. Magazine publishing companies face intense competition for readers, advertising and newsstand shelf space. Magazines and Internet sites primarily aimed at men are Playboy magazine's principal competitors. Other types of media that carry advertising, such as newspapers, radio and television also compete for advertising revenues with Playboy magazine. Other Domestic Publishing Our Publishing Group has also created media extensions, including special editions and calendars, which are primarily sold in newsstand outlets. We published 25 special editions in 2003 and 24 in each of 2002 and 2001. We expect to publish 24 special editions in 2004. Effective with the December 2002 issue, the U.S. special editions newsstand cover price is $7.99 and effective with the August 2002 issue, the Canadian special editions newsstand cover price is C$8.99. No general price increases are currently planned for 2004. Other domestic publishing also includes ancillary publishing products. In 2003, we published two books: Playboy: Fifty Years: The Photographs and The Playboy Guide to Bachelor Parties: Everything You Need to Know About Planning the Groom's Rite of Passage - From Simple to Sinful. We plan to publish three additional books in 2004. Two of the books, Playboy: Fifty Years: The Cartoons and Hef's Little Black Book, are expected to be released in the second quarter. 10 International Publishing We license the right to publish 17 international editions of Playboy magazine to local partners in the following countries: Brazil, Bulgaria, Croatia, the Czech Republic, France, Germany, Greece, Hungary, Japan, Mexico, the Netherlands, Poland, Romania, Russia, Serbia, Slovenia and Spain. Combined average circulation of the international editions is approximately 1.1 million copies monthly. Local publishing licensees tailor their international editions by mixing the work of their national writers and artists with editorial and pictorial material from the U.S. edition. We monitor the content of the international editions so that they retain the distinctive style, look and quality of the U.S. edition, while meeting the needs of their respective markets. The terms of the license agreements vary but, in general, are for terms of three to five years and carry a guaranteed minimum royalty as well as a formula for computing earned royalties in excess of the minimum. Royalty computations are generally based on both circulation and advertising revenues. In 2003, two editions, Germany and Brazil, accounted for approximately half of our total licensing revenues from international editions. ONLINE GROUP Our Online Group, which provides a wide range of web-based entertainment experiences under the Playboy and Spice brand names, capitalizes on the lifestyle and entertainment interests of young men around the world. We believe that we are well positioned to provide compelling online entertainment experiences due to the strength of our brands. Our online destinations combine Playboy's distinct attitude with extensive and original content, a large community of loyal users and a wealth of e-commerce offerings. Our sites provide us with multiple revenue streams, primarily fees for subscription services and e-commerce, but also advertising, the licensing of international sites and, to a smaller extent, online gaming. The various international websites generally mirror the multiple revenue stream model of our domestic online business. Subscriptions We offer multiple subscription-based websites and two VOD theaters, or collections, under the Playboy and Spice names. Subscriptions will remain the largest revenue stream of this segment in 2004. Average revenue per subscriber continues to grow as we offer additional as well as higher priced clubs. The original Playboy Cyber Club, at the website cyber.playboy.com, offers services such as VIP access to over 100,000 photos, including Playboy.com's Cyber Girls, an archive of Playboy magazine interviews, individual home pages for Playboy Playmates, live Playmate chats and exclusive video clips. It is currently offered on a monthly basis for $19.95 and an annual basis for $95.40. The PlayboyNet subscription service, at the website playboy.net, was launched in November 2002 and consists of pictorials and video clips organized by 15 thematic interests. Access to the PlayboyNet is currently offered on a monthly basis for $29.95 and an annual basis for $155.40. In June 2003, we launched PlayboyNet Espanol, at the website playboynetespanol.com, a Spanish-language version of the PlayboyNet service. Access to PlayboyNet Espanol is currently $29.95 per month. Beginning in May 2003, we partnered with RealNetworks, a premier provider of broadband content, to launch the Playboy TV Club, at real.com/partners/PBTV. This club leverages our television and video assets along with Real Networks' marketing reach and is geared toward giving the broadband Internet user a unique and high-quality experience. The Playboy TV Club replaced the Playboy TV Jukebox launched in 2002, which we formerly operated solely. Membership is currently $24.95 per month. In December 2002, we launched a VOD service called the Director's Cut Theater, which offers a variety of viewing packages for our feature-length videos. Packages range from $3.95 to $29.95 depending upon the length of time purchased. We also offer a network of sites featuring premium adult entertainment under the Spice brand. The SpiceNet subscription service, at spicetv.com, consists of six niche clubs offering video clips, pictorial galleries and interactive features that allow users to view highly customized video content, live chat, voyeur cams and original content. SpiceNet is currently being relaunched and is offered on a monthly basis for $29.95 and an annual basis of $189.96. The Spice Platinum Theater VOD offering is linked through the website spicetv.com and offers access to over 10,000 adult movies. Viewing packages range from $3.95 to $29.95, depending upon the length of time purchased. 11 E-Commerce Our second largest revenue stream for the Online Group is e-commerce. Our Playboy branded e-commerce offerings include PlayboyStore.com, which is the primary destination for purchasing Playboy branded fashions, calendars, DVDs, videos, jewelry and collectibles as well as issues of Playboy magazine and foreign and special editions. A Spice branded e-commerce offering, at spicetvstore.com, offers adult oriented products, including DVDs and videos, lingerie and sensual products. E-commerce also includes direct commerce, or printed catalog mailings for both Playboy and Spice products. Fulfillment and customer service is supplied by Infinity Resources Inc., or Infinity. Infinity also purchased our Collectors' Choice Music business in 2001 and has been subleasing our warehouse facility since 2000. Other The free Playboy.com site is designed with a goal of converting visitors to purchasers by directing visitors to our revenue-generating sites while also generating advertising revenues. Playboy.com offers original content and focuses on areas of interest to its target audience, including Arts & Entertainment, Sports, Events, On Campus, World of Playboy and Playmates. We are expanding our international presence by entering into licensing arrangements in foreign countries to provide compelling content specifically tailored to those individual foreign audiences. We currently have international Playboy sites with partners in Germany, Taiwan and the Netherlands. During 2003, we announced agreements to launch sites in Brazil, France and Japan with local partners in those marketplaces. These are currently active and will be fully launched in the first half of 2004. Our international websites have a local editorial staff that develops original adult-oriented content, makes use of content from the local edition of Playboy magazine and translates appropriate U.S.-originated Playboy.com content. In 2003, we also announced a global deal to provide content to wireless customers in European and Asian markets where Hutchison Whampoa Limited provides 3G wireless services, and have entered into license deals to provide video content to broadband-oriented sites in Korea, Hong Kong and Israel. Our online gaming business currently consists of PlayboySportsBook.com and PlayboyCasino.com, which are licensed by Ladbroke eGaming Limited, the world's largest bookmaker. They operate the gaming and bookmaking operations, such that we do not have risk based on the wagering of customers who gamble through our sites. Additionally, we have implemented safeguards designed to prevent illegal wagering through our sites. The Internet industry is highly competitive. We compete for visitors, subscribers, buyers and advertisers. We believe that the primary competitive factors affecting our Internet operations include brand recognition, the quality of our content and products, technology, including the number of broadband homes, pricing, ease of use, sales and marketing efforts and user demographics. We believe that we compete favorably with respect to each of these factors. Additionally, we have the advantage of leveraging the power of the Playboy and Spice brands in multiple media, content libraries, marketing and loyal audiences. 12 LICENSING GROUP Our Licensing Group includes the licensing of consumer products carrying one or more of our trademarks and images, as well as Playboy branded retail stores and marketing activities. We license Playboy, the Rabbit Head Design and other images, trademarks and artwork as well as the Spice name and trademarks for the worldwide manufacture, sale and distribution of a variety of consumer products. We work with licensees to develop, market and distribute high-quality Playboy and Spice branded merchandise. Our licensed product lines include men's and women's apparel, men's underwear and women's lingerie, accessories, collectibles, slot machines, interactive video games, cigars, watches, jewelry, fragrances, small leather goods, stationery, music, eyewear, barware and home fashions. The group also licenses art-related products based on our extensive collection of artwork, most of which were commissioned as illustrations for Playboy magazine. Occasionally we sell small portions of our art and memorabilia collection through auction houses such as Butterfields, Christie's and Sotheby's. Products are marketed primarily through retail outlets, including department and specialty stores. Our first freestanding fashion retail store, located in an upscale Tokyo shopping district and funded by one of our licensees, opened in 2002. It offers a full collection of Playboy branded fashion and accessories for men and women, as well as other Playboy branded products. We plan to open others in major cities on a licensed basis. We are also interested in exploiting Playboy's brand equity in the location-based entertainment market by entering into partnerships with companies in which we would contribute our brand name and marketing expertise in return for licensing fees, and potentially the option to earn or purchase equity in these ventures. While our branded products are unique, we operate in an intensely competitive business that is extremely sensitive to economic conditions, shifts in consumer buying habits or fashion trends, as well as changes in the retail sales environment. Company-wide marketing activities consist of Alta Loma Entertainment, the Playboy Jazz Festival and Playmate Promotions. Since 2001, Alta Loma Entertainment has functioned as a production company that leverages our assets, including editorial material as well as icons like the Playmates, Playboy Mansion and Mr. Hefner, to develop original programming for other television networks. We have produced the Playboy Jazz Festival on an annual basis in Los Angeles at the Hollywood Bowl since June 1979 and have continued our sponsorship of related community events. Playmate Promotions represents the Playmates in ad campaigns, trade shows, endorsements, commercials, motion pictures, television and videos for us and outside clients. SEASONALITY Our businesses are generally not seasonal in nature. Revenues and operating results for the quarters ended December 31, however, are typically impacted by higher newsstand cover prices of holiday issues. These higher prices, coupled with typically higher sales of subscriptions of Playboy magazine during those quarters, also result in an increase in accounts receivable. E-commerce revenues and operating results are typically impacted by the holiday buying season and online subscription revenues and operating results are impacted by decreased Internet traffic during the summer months. PROMOTIONAL AND OTHER ACTIVITIES We believe that our sales of products and services are enhanced by the public recognition of the Playboy name as symbolizing a lifestyle. In order to establish public recognition, we, among other activities, purchased in 1971 the Playboy Mansion in Los Angeles, California, where our founder, Hugh M. Hefner, lives. The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events and sales events. It also enhances our image as host for many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition, which increase public awareness of us and our products and services. As indicated in Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," or MD&A, and Part III. Item 13. "Certain Relationships and Related Transactions," Mr. Hefner pays us rent for that portion of the Playboy Mansion used exclusively for his and his personal guests' residence as well as the per-unit value of non-business meals, beverages and other benefits received by him and his personal guests. The Playboy Mansion is included in our Consolidated Balance Sheet at December 31, 2003 at a net book value of $1.6 million, including all improvements and after accumulated depreciation. We incur all operating expenses of the Playboy Mansion, including depreciation and taxes, which were $2.3 million, $3.6 million and $3.2 million for 2003, 2002 and 2001, respectively, net of rent received from Mr. Hefner. 13 Through the Playboy Foundation, we support not-for-profit organizations and projects concerned with issues historically of importance to Playboy magazine and its readers, including anti-censorship efforts, civil rights, AIDS education, prevention and research, reproductive freedom and women's leadership activities. The Playboy Foundation provides financial support to many organizations and also donates public service advertising space in Playboy magazine and in-kind printing and design services. Our trademarks and copyrights are critical to the success and potential growth of all of our businesses. We actively protect and defend our trademarks and copyrights throughout the world and monitor the marketplace for counterfeit products. Consequently, we initiate legal proceedings from time to time to prevent their unauthorized use. EMPLOYEES At February 29, 2004, we employed 608 full-time employees compared to 580 at February 28, 2003. No employees are represented by collective bargaining agreements. We believe we maintain a satisfactory relationship with our employees. AVAILABLE INFORMATION We make available free of charge on our website, www.playboyenterprises.com, our annual, quarterly and current reports, and, if applicable, amendments to those reports, filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Also posted on our website are the charters of the Audit Committee and Compensation Committee of our Board of Directors, our recently adopted Code of Business Conduct and our Corporate Governance Guidelines. Amendments to or waivers from the Code will be posted on our website. Copies of these documents are available free of charge by sending a request to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. 14 Item 2. Properties Location Primary Use - -------- ----------- Office Space Leased: Chicago, Illinois This space serves as our corporate headquarters and is used by all of our operating groups, primarily Publishing and Online, and for executive and administrative personnel. Los Angeles, California This space serves as our Entertainment Group's headquarters and for executive and administrative personnel. New York, New York This space serves as our Publishing and Online Groups' headquarters and a limited amount of this space is used by the Licensing and Entertainment Groups, as well as executive and administrative personnel. Operations Facilities Leased: Los Angeles, California This space is used by our Entertainment and Online Groups as a centralized digital, technical and programming facility. We also utilize parts of this facility to handle similar functions for other clients. Santa Monica, California This space is used by our Publishing Group as offices and a photography studio. Itasca, Illinois We began subleasing this warehouse facility to Infinity in 2000. This facility, under separate agreements with Infinity, is used to provide e-commerce order fulfillment, customer service and related activities for our Online Group and previously for the Catalog Group, and storage for the entire Company. The facility was formerly used by us in the same capacities. Property Owned: Los Angeles, California The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events and sales events. It also enhances our image as host for many charitable and civic functions. Due to restructuring efforts, we have subleased a portion of our excess office space, and are working to sublease or terminate our remaining excess office space. The term of our New York office lease expires in 2004, and we are currently exploring our alternatives in the New York area. 15 Item 3. 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 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 oral agreement with the Editorial Defendants to solicit advertising for the Mexican Edition to be distributed in the United States. The basis of GSI's cross-claim was that it was the assignee of EC's right to distribute the Mexican Edition in the United States 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 $0.3 million for lost profits, respectively, 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 are vigorously pursuing an appeal with the State Appellate Court sitting in Corpus Christi challenging the verdict. We have posted a bond in the amount of approximately $7.7 million (which represents the amount of the judgment, costs and estimated pre- and post-judgment interest) in connection with the appeal. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be sustained. In accordance with Statement of Financial Accounting Standards, or Statement 5, Accounting for Contingencies, no liability has been accrued. On May 17, 2001, Logix Development Corporation, or Logix, D. Keith Howington and Anne Howington filed suit in state court in Los Angeles County Superior Court in California against Spice Entertainment Companies, Inc., or Spice, Emerald Media, Inc., or EMI, Directrix, Inc., or Directrix, Colorado Satellite Broadcasting, Inc., New Frontier Media, Inc., J. Roger Faherty, Donald McDonald, Jr., and Judy Savar. On February 8, 2002, plaintiffs amended the complaint and added as a defendant Playboy, which acquired Spice in 1999. The complaint alleged 11 contract and tort causes of action arising principally out of a January 18, 1997 agreement between EMI and Logix in which EMI agreed to purchase certain explicit television channels broadcast over C-band satellite. The complaint further sought damages from Spice based on Spice's alleged failure to provide transponder and uplink services to Logix. Playboy and Spice filed a motion to dismiss plaintiffs' complaint. After pre-trial motions, Playboy was dismissed from the case and a number of causes of action were dismissed against Spice. A trial date for the remaining breach of contract claims against Spice was set for December 10, 2003, and then continued, first to February 11, 2004 and then to March 17, 2004. Spice and the plaintiffs filed cross-motions for summary judgment or, in the alternative, for summary adjudication, on September 5, 2003. Those motions were heard on November 19, 2003 and were denied. In February 2004, prior to the trial, Spice and the plaintiffs agreed to a settlement in the amount of $8.5 million, which we recorded as a charge in the fourth quarter of 2003, $6.5 million of which was paid in February 2004. The remaining $2.0 million will be paid in $1.0 million installments in 2005 and 2006. On September 26, 2002, Directrix filed suit in the U.S. Bankruptcy Court in the Southern District of New York against Playboy Entertainment Group, Inc. In the complaint, Directrix alleged that it was injured as a result of the termination of a Master Services Agreement under which Directrix was to perform services relating to the distribution, production and post production of our cable networks and a sublease agreement under which Directrix would have subleased office, technical and studio space at our Los Angeles, California production facility. Directrix also alleged that we breached an agreement under which Directrix had the right to transmit and broadcast certain versions of films through C-band satellite, commonly known as the TVRO market, and Internet distribution. On November 15, 2002, we filed an answer denying Directrix's allegations, along with counterclaims against Directrix relating to the Sublease Agreement and the Master Services Agreement and seeking damages. On May 15, 2003, we filed an amended answer and counterclaims. On July 30, 2003, Directrix moved to dismiss one of the amended counterclaims, and on October 20, 2003, the Court denied Directrix's motion. Both sides have commenced discovery. We intend to vigorously defend ourselves against Directrix's claims. We believe its claims are without merit and that we have good defenses against them. We believe it is not probable that a material judgment against us will result. Item 4. Submission of Matters to a Vote of Security Holders None. 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Stock price information, as reported in the New York Stock Exchange Composite Listing, is set forth in Note (V) Quarterly Results of Operations (Unaudited) of Notes to Consolidated Financial Statements. Our securities are traded on the exchanges listed on the cover page of this Form 10-K Annual Report under the ticker symbols PLA A (Class A voting) and PLA (Class B nonvoting). At February 29, 2004, there were 7,275 and 8,880 holders of record of Class A and Class B common stock, respectively. There were no cash dividends declared during 2003 and 2002. Our revolving credit facility and the indenture related to the senior secured notes we issued in March 2003 have limitations related to the payment of dividends. Other information required under this Item is contained in our Notice of Annual Meeting of Stockholders and Proxy Statement, or collectively, the Proxy Statement, (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference. 17 Item 6. Selected Financial Data (1) (in thousands, except per share amounts, number of employees and ad pages)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99 - --------------------------------------------------------------------------------------------------------------------------- Selected financial data Net revenues $ 315,844 $ 277,622 $ 287,583 $ 303,360 $ 344,044 Interest expense, net (15,946) (15,022) (13,184) (7,629) (6,179) Loss from continuing operations before cumulative effect of change in accounting principle (7,557) (17,135) (29,323) (47,626) (5,568) Net loss (7,557) (17,135) (33,541) (47,626) (5,335) Net loss applicable to common shareholders (8,450) (17,135) (33,541) (47,626) (5,335) Basic and diluted earnings per common share Loss from continuing operations before cumulative effect of change in accounting principle (0.31) (0.67) (1.20) (1.96) (0.24) Net loss (0.31) (0.67) (1.37) (1.96) (0.23) EBITDA (2) Net loss (7,557) (17,135) (33,541) (47,626) (5,335) Adjusted for: Gain on disposal of discontinued operations (net of tax) -- -- -- -- (233) Cumulative effect of change in accounting principle -- -- 4,218 -- -- Income tax expense (benefit) 4,967 8,544 996 16,227 (862) Interest expense 16,309 15,147 13,970 9,148 7,977 Depreciation and amortization 49,558 51,619 51,904 44,911 42,691 Amortization of deferred financing fees 1,407 993 905 840 613 Amortization of restricted stock awards 45 2,748 -- -- -- Equity in operations of investments 80 (279) 746 375 13,871 --------- --------- --------- --------- --------- EBITDA 64,809 61,637 39,198 23,875 58,722 Cash flows from operating activities 4,879 14,328 (7,945) (31,150) 16,100 Cash flows from investing activities (2,047) (3,158) (2,853) (3,889) (68,126) Cash flows from financing activities 24,382 (11,662) 12,874 14,045 75,213 - --------------------------------------------------------------------------------------------------------------------------- At period end Total assets $ 418,060 $ 369,721 $ 426,240 $ 388,488 $ 429,402 Long-term financing obligations $ 115,000 $ 68,865 $ 78,017 $ 94,328 $ 75,000 Shareholders' equity $ 106,636 $ 87,815 $ 81,525 $ 114,185 $ 161,281 Long-term financing obligations as a percentage of total capitalization 52% 44% 49% 45% 32% Number of common shares outstanding Class A voting 4,864 4,864 4,864 4,859 4,859 Class B nonvoting 22,579 21,181 19,666 19,407 19,288 Number of full-time employees 592 581 610 686 780 - --------------------------------------------------------------------------------------------------------------------------- Selected operating data Cash investments in Company-produced and licensed entertainment programming $ 44,727 $ 41,717 $ 37,254 $ 33,061 $ 35,262 Amortization of investments in Company-produced and licensed entertainment programming $ 40,603 $ 40,626 $ 37,395 $ 33,253 $ 34,341 Household units (at period end) (3) Playboy TV networks DTH 21,600 19,200 18,100 15,400 12,400 Digital cable 16,900 14,000 10,300 3,200 1,300 Analog addressable cable 4,500 5,700 7,800 11,000 11,700 Playboy TV en Espanol (4) DTH 8,100 7,000 -- -- -- Digital cable 3,300 2,700 -- -- -- Movie networks (5) DTH 42,200 38,400 35,300 -- -- Digital cable 42,800 36,900 25,300 8,400 3,900 Analog addressable cable 6,900 10,800 17,000 16,200 18,300 International TV household units (at period end) (3) 37,000 30,900 29,500 25,700 13,200 Playboy magazine ad pages 555 515 618 674 640 Online subscribers 163 148 102 67 40 - ---------------------------------------------------------------------------------------------------------------------------
18 For a more detailed description of our financial position, results of operations and accounting policies, please refer to Part II. Item 7. "MD&A" and Part II. Item 8. "Financial Statements and Supplementary Data." (1) Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. (2) EBITDA represents earnings from continuing operations before interest expense, income taxes, cumulative effect of change in accounting principle, depreciation of property and equipment, amortization of intangible assets, amortization of investments in entertainment programming, amortization of deferred financing fees, expenses related to the vesting of restricted stock awards and equity in operations of investments. We evaluate our operating results based on several factors, including EBITDA. We consider EBITDA an important indicator of the operational strength and performance of our ongoing businesses, including our ability to provide cash flows to pay interest, service debt and fund capital expenditures. EBITDA eliminates the uneven effect across business segments of noncash depreciation of property and equipment and amortization of intangible assets. Because depreciation and amortization are noncash charges, they do not affect our ability to service debt or make capital expenditures. EBITDA also eliminates the impact of how we fund our businesses and the effect of changes in interest rates, which we believe relate to general trends in global capital markets but are not necessarily indicative of our operating performance. Finally, EBITDA is used to determine compliance with some of our credit facilities. EBITDA should not be considered an alternative to any measure of performance or liquidity under accounting principles generally accepted in the United States, or GAAP. Similarly, EBITDA should not be inferred as more meaningful than any of those measures. (3) Each household unit is defined as one household carrying one given network per carriage platform. A single household can represent multiple household units if two or more of our networks and/or multiple platforms (i.e. digital and analog) are available to that household. (4) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S. Hispanic market in December 2002 in connection with the restructuring of the ownership of our international TV joint ventures. Prior to the restructuring, this network was included in international TV's household units. (5) We acquired two Spice networks in March 1999 and three networks in July 2001 in connection with the Califa acquisition. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Since our inception in 1953 as the publisher of Playboy magazine, we have become a world leader in the development and distribution of multimedia entertainment for adult audiences. Today, our businesses are classified into four reportable segments: Entertainment, Publishing, Online and Licensing. We formerly operated a Catalog segment, which we exited in 2001. We operate in competitive industries and seek to differentiate ourselves from our competition by leveraging our worldwide brand strength into multiple media and by developing and delivering unique high quality content which becomes part of our extensive libraries of photo images, print and Internet editorial content and original movies and television programs. Another important aspect of our businesses consists of the licensing of our trademarks for the worldwide manufacture, sale and distribution of various consumer products and services. Our trademarks, which are renewable periodically and which can be renewed indefinitely, include Playboy, the Rabbit Head Design, Playmate and Spice. We also own numerous domain names related to our online business. Our Entertainment Group represents the largest portion of our operating income, our Online Group is the fastest growing group, and the brand is driven by our Licensing Group as well as Playboy magazine domestically and worldwide. Our strategic focus has not changed over the last several years. We develop unique Playboy-style content that can be leveraged across our various media platforms and across geographic boundaries. Utilizing multiple technology and distribution channels, we will seek to extend our audience reach and related revenues primarily in our high-margin electronic businesses of television and the Internet. Our 50th Anniversary and the new look of our magazine has developed momentum in our Publishing group via advertising and newsstand sales and we will make efforts to continue that momentum in order to increase profitability and brand equity. We continue to face a number of challenges in our efforts to profitably grow our businesses and to realize our strategies, including the continued industry consolidation of cable and satellite distributors, piracy and theft of service in the television arena, free Internet content, as well as consolidation of newsstand wholesalers, all of which have the potential to exert pressure on our margins. REVENUES We generate most of our Entertainment Group revenues from PPV and subscription fees for our television network offerings, including Playboy TV and Spice branded domestic and international networks. Our network revenues are affected by marketing and retail price, which are controlled by the distributors, our revenue splits with distributors, which are negotiated, and the demand for our programming. A small portion of the Entertainment Group revenue is from the sale of DVDs and home videos, which stem primarily from our network programming. The majority of our Publishing Group revenues are derived from consumers via subscription and newsstand sales of Playboy magazine and special editions. Additionally, the group generates advertising sales, as well as royalties on circulation and advertising, from our 17 licensed international editions. Our subscription revenues are fairly consistent, while newsstand sales fluctuate and are typically higher for issues containing celebrity pictorials or other special content, such as articles or interviews. The group's revenues fluctuate with the general condition of the local and national economy, which impacts newsstand sales as well as advertising buying patterns. Revenue can also fluctuate when we increase the price of issues containing major celebrities, holiday or other special issues such as our 50th Anniversary issue. The principal sources of our Online Group revenues are subscription revenues from our multiple club websites, which offer unique Playboy or Spice branded content, and from e-commerce sales of Playboy branded and other consumer products both online and through direct mail. We also generate revenue through licensing fees from Playboy.com websites outside of the United States as well as from advertising and online gaming. E-commerce revenues are typically higher during the holiday buying season and subscription revenues are lower during the summer months due to decreased Internet traffic. Licensing Group revenues are principally generated from royalties received for the international and domestic licensing of our branded consumer products plus periodic auction sales of small portions of our art and memorabilia collection. 20 COSTS AND OPERATING EXPENSES Entertainment Group expenses include programming amortization, network distribution, sales and marketing and general and administrative expenses. Amortization expenses relate primarily to the expenditures associated with the creation of Playboy programming and licensing of third-party programming for our movie networks. Publishing Group expenses include manufacturing, subscription promotion, editorial, shipping and general and administrative expenses. Manufacturing expenses, which include the production of the magazine, represent the largest operating expense of the group and fluctuate by issue due mainly to the cost of paper and the size of the magazine. Postage is also a major cost. Online Group expenses consist of trademark license and administrative fees to the parent company, content, product fulfillment, sales and marketing, hosting and general and administrative expenses. Licensing Group expenses include promotional expenses and general and administrative expenses. Corporate Administration and Promotion expenses include general corporate costs such as technology, legal, security, human resources, finance, investor relations and Company-wide marketing, communications and promotion, including the expenses related to the Playboy Mansion. 21 RESULTS OF OPERATIONS The following table represents our results of operations (in millions, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------------------------------ Net revenues Entertainment Domestic TV networks $ 95.3 $ 94.4 $ 86.6 International TV 35.5 16.4 17.0 Worldwide DVD/home video 5.5 10.5 9.6 Other 0.6 0.3 0.6 - ------------------------------------------------------------------------------------------------------ Total Entertainment 136.9 121.6 113.8 - ------------------------------------------------------------------------------------------------------ Publishing Playboy magazine 102.0 94.7 100.8 Other domestic publishing 13.0 11.7 13.8 International publishing 5.7 5.4 9.9 - ------------------------------------------------------------------------------------------------------ Total Publishing 120.7 111.8 124.5 - ------------------------------------------------------------------------------------------------------ Online Subscriptions 18.2 11.0 6.6 E-commerce 16.8 14.4 17.6 Other 3.8 5.6 3.3 - ------------------------------------------------------------------------------------------------------ Total Online 38.8 31.0 27.5 - ------------------------------------------------------------------------------------------------------ Licensing 19.4 13.2 10.8 - ------------------------------------------------------------------------------------------------------ Catalog -- -- 11.0 - ------------------------------------------------------------------------------------------------------ Total net revenues $ 315.8 $ 277.6 $ 287.6 ====================================================================================================== Net loss Entertainment Before programming expense $ 68.7 $ 72.9 $ 67.3 Programming expense (40.6) (40.6) (37.4) - ------------------------------------------------------------------------------------------------------ Total Entertainment 28.1 32.3 29.9 - ------------------------------------------------------------------------------------------------------ Publishing 5.2 2.7 1.8 - ------------------------------------------------------------------------------------------------------ Online 2.8 (8.9) (21.7) - ------------------------------------------------------------------------------------------------------ Licensing 10.3 4.6 2.6 - ------------------------------------------------------------------------------------------------------ Catalog -- -- (0.4) - ------------------------------------------------------------------------------------------------------ Corporate Administration and Promotion (16.6) (15.8) (19.7) - ------------------------------------------------------------------------------------------------------ Total segment income (loss) 29.8 14.9 (7.5) Restructuring expenses (0.3) (6.6) (3.8) Gain (loss) on disposals -- 0.4 (0.9) - ------------------------------------------------------------------------------------------------------ Operating income (loss) 29.5 8.7 (12.2) - ------------------------------------------------------------------------------------------------------ Nonoperating income (expense) Investment income 0.4 0.1 0.8 Interest expense (16.3) (15.1) (14.0) Amortization of deferred financing fees (1.4) (1.0) (0.9) Minority interest (1.7) (1.7) (0.7) Equity in operations of investments (0.1) 0.3 (0.7) Litigation settlement (8.5) -- -- Debt extinguishment expenses (3.3) -- -- Vendor settlement -- 0.7 -- Other, net (1.2) (0.6) (0.6) - ------------------------------------------------------------------------------------------------------ Total nonoperating expense (32.1) (17.3) (16.1) - ------------------------------------------------------------------------------------------------------ Loss before income taxes and cumulative effect of change in accounting principle (2.6) (8.6) (28.3) Income tax expense (5.0) (8.5) (1.0) - ------------------------------------------------------------------------------------------------------ Loss before cumulative effect of change in accounting principle (7.6) (17.1) (29.3) Cumulative effect of change in accounting principle (net of tax) -- -- (4.2) - ------------------------------------------------------------------------------------------------------ Net loss $ (7.6) $ (17.1) $ (33.5) ====================================================================================================== Net loss $ (7.6) $ (17.1) $ (33.5) Dividend requirements of preferred stock (0.9) -- -- - ------------------------------------------------------------------------------------------------------ Loss applicable to common shareholders $ (8.5) $ (17.1) $ (33.5) ====================================================================================================== Basic and diluted earnings per common share Loss before cumulative effect of change in accounting principle $ (0.31) $ (0.67) $ (1.20) Cumulative effect of change in accounting principle (net of tax) -- -- (0.17) - ------------------------------------------------------------------------------------------------------ Net loss $ (0.31) $ (0.67) $ (1.37) ======================================================================================================
22 2003 COMPARED TO 2002 Our revenues increased approximately $38.2 million, or 14%, compared to the prior year largely due to the restructuring of our international TV joint ventures and the resulting consolidation of certain of these businesses in our operating results. Higher newsstand and advertising revenues for the 50th Anniversary issue, higher online subscription and e-commerce, and higher licensing revenues also contributed to the overall increase. Operating income improved $20.8 million, more than double the prior year, largely due to the swing to profitability of the Online Group as a result of growth in high-margin subscription revenues. Increased Playboy magazine revenues also contributed to the improvement. The positive performance in the Publishing, Online and Licensing Groups was partially offset by expected lower revenues and operating income from our worldwide DVD/home video business. Also affecting the comparison was a $6.6 million restructuring charge taken in 2002 compared to a $0.3 million restructuring charge in the current year. Net loss for the current year included an $8.5 million charge related to a litigation settlement with Logix as well as $3.3 million of debt extinguishment expenses in connection with financing obligations, which were repaid upon completion of our debt offering in the first quarter of 2003. The prior year included a $5.8 million non-cash income tax charge related to our adoption of Statement 142, Goodwill and Other Intangible Assets. Entertainment Group The following discussion focuses on the profit contribution of each of our Entertainment Group businesses before programming expense. Revenues from our domestic TV networks business increased $0.9 million, or 1%, for the year. The increase was due, in part, to increases in digital home coverage; however, we believe that revenues continue to be negatively impacted by theft of service, which we also believe is an area of focus for the DTH and cable operators. We also believe that revenues have been impacted by customer resistance to increases in total prices for services and the resulting dissatisfaction with the overall value of digital service. In general, our networks are digital services, carried by DTH and cable operators, and we are therefore negatively affected by customer churn in digital cable. The year reflects higher revenues related to Playboy TV en Espanol, which we now own and operate as part of our domestic television operation. Profit contribution for our domestic TV networks increased $1.1 million, or 2%, for the year, which was impacted by lower amortization of intangibles acquired in the 2001 acquisition described below, offset in part by higher distribution costs and overhead related to our first year in our new production facility. In 2004, we anticipate growth opportunities in our domestic TV business, from expected increases in digital home coverage, from technologies like SVOD and VOD combined with marketing, in spite of the difficult negotiating environment with the cable and satellite distributors resulting from industry consolidation. We are also utilizing our studio to provide playback, production control and origination services for third parties, which helps bring efficiencies and allows us to spread our fixed costs to operate the facility. In July 2001, we acquired The Hot Network, the Hot Zone and the related television assets of Califa Entertainment Group, Inc., or Califa, and the Vivid TV network and related television assets of V.O.D., Inc., which we refer to as the Califa acquisition. 23 The following table illustrates certain information regarding approximate household units for our networks (in millions): Household Units (1) ------------------------- Dec. 31, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- Playboy TV DTH 21.6 19.2 Digital cable 16.9 14.0 Analog addressable cable 4.5 5.7 Playboy TV en Espanol DTH 8.1 7.0 Digital cable 3.3 2.7 Movie Networks DTH 42.2 38.4 Digital cable 42.8 36.9 Analog addressable cable 6.9 10.8 - -------------------------------------------------------------------------------- (1) Each household unit is defined as one household carrying one given network per carriage platform. A single household can represent multiple household units if two or more of our networks and/or multiple platforms (i.e. digital and analog) are available to that household. In December 2002, we completed the restructuring of the ownership of our international TV joint ventures with Claxson. The restructuring resulted in our acquiring full ownership of Playboy TV and movie networks outside of the United States and Canada, other than Latin America and Iberia. The operating results of these networks are now consolidated in our operating results. Prior to the restructuring, we recorded only revenues from licensing and other fees in our operating results. Under the terms of the restructuring transaction, we increased our equity interest in networks in Europe and the Pacific Far East. We retained our existing 19% ownership interest in the Playboy TV and Spice branded networks in Latin America and Iberia and acquired the 19.9% equity in two Japanese networks previously owned by PTVI. Profit contribution from our international TV business increased on revenue increases of $19.1 million due to the impact of revenue consolidation from the restructuring. The prior year included $16.3 million in licensing fees from the PTVI joint venture, in which we held a minority interest. We believe growth in our international TV business will come from both existing markets and new territories as the number of available household units and technology available to deliver television programming grows. Profit contribution from our worldwide DVD/home video business decreased, as expected, on a revenue decrease of $5.0 million, or 47%. The year reflected a decrease in domestic sales of $3.4 million due to fewer titles released in the current year, reduced distribution outlets, the absence of a continuity series and a large sale of backlist titles in the prior year. International revenue from DVD/home video sales decreased $1.6 million primarily due to the absence of revenues from a large Korean contract, which were recorded in the prior year. The group's administrative expenses increased mainly due to higher legal expenses related to the litigation with Logix in the current year that were incurred prior to the settlement. Publishing Group Playboy magazine revenues increased $7.3 million, or 8%, for 2003 due to higher newsstand and advertising revenues. Newsstand revenues were $4.1 million higher principally due to a 12% increase in the number of U.S. and Canadian newsstand copies sold in the current year. Advertising revenues increased $3.7 million, or 12%, due to the sale of more ad pages, primarily from our 50th Anniversary issue, combined with higher average net revenue per page. Advertising sales for the 2004 first quarter magazine issues are closed, and we expect to report 3.5% more ad pages and 4.5% higher ad revenues compared to the 2003 first quarter. Subscription revenues were essentially flat in 2003 compared to 2002. Other domestic publishing revenues increased $1.3 million, or 11%, for 2003 compared to the prior year primarily due to higher revenues from sales of special editions resulting from the full-year impact of the 2002 price increases, which more than offset a decline in average copies sold per issue. 24 The group's segment income nearly doubled from $2.7 million in 2002 to $5.2 million in 2003. Partially offsetting the revenue increases stated above were higher magazine editorial costs due to celebrity pictorials and higher advertising and promotion costs related to the 50th Anniversary issue, combined with the costs associated with moving Playboy's editorial functions from Chicago to New York. In 2004, we intend to capitalize on the momentum from the redesign of the magazine and the 50th Anniversary with increased profitability for the group. Our circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) was 3.15 million at December 31, 2003. According to ABC, our actual circulation was 1.6% below our circulation rate base for 2003. We had an increase in newsstand circulation in 2003, at a time when our principal competitors reported decreases in newsstand circulation. Also, our renewals, direct mail, newsstand insert cards and advertising on Playboy.com continue to generate magazine subscriptions. We, like all magazines, continually analyze our circulation business to make certain that the circulation rate base is appropriate for our business strategy, but have no current plans to adjust the rate base at this time. Online Group Online Group revenues for 2003 increased $7.8 million, or 25%, to $38.8 million. Subscription revenues represented the largest growth area, which increased $7.2 million, or 65%, due to growth in members, higher pricing of our various clubs, as well as the launch of new clubs. E-commerce revenues increased $2.4 million, or 17%, partly due to increased catalog circulation and improved marketing strategy for the Spice catalog, combined with increased email campaigns and special offers for PlayboyStore.com. Other revenues were down $1.8 million, or 32%, primarily as a result of lower advertising revenues, partially caused by our decision to internally utilize the premium advertising space to drive traffic to our revenue generating sites. The group's segment performance increased $11.7 million mainly due to the higher revenues. In accordance with an agreement, the group's results included trademark fees paid to the parent company of $6.6 million in 2003 and 2002. The group will pay the same amount in 2004. We expect continued growth in profitability for the group in 2004 principally through anticipated growth of our subscription business with our current Playboy and Spice clubs as well as through affiliate and third-party distribution deals, coupled with the increased use of broadband technology and continued profitable growth in e-commerce. Licensing Group Segment income for 2003 from the Licensing Group increased $5.7 million, or 126%, on a revenue increase of $6.2 million, or 47%. Higher brand licensing royalties from our international and entertainment products businesses contributed to the revenue increase. Revenues from the 50th Anniversary auctions of a portion of our collection of art, manuscripts, cartoons, photographs and memorabilia, and the earlier auction of an original painting by Salvador Dali, resulted in combined higher art revenues of $3.8 million in 2003 compared to $0.9 million in 2002. We intend to grow our royalty revenues in 2004 by expanding our product lines and distribution outlets, including the opening of additional retail stores through licensing arrangements, and continuing to partner with new companies to reach our targeted younger audience. We do not expect significant art revenues in 2004. Corporate Administration and Promotion Corporate Administration and Promotion expenses for 2003 increased $0.8 million, or 5%. We expect Corporate Administration and Promotion expenses to be approximately 20% higher in 2004 than in 2003 reflecting additions in services and business development to support our growth. Restructuring Expenses In 2003, primarily due to excess space in our Chicago office, we recorded unfavorable adjustments of $0.1 million and $0.2 million to the previous estimates related to the 2002 and 2001 restructuring plans, respectively. Of the total costs related to these restructuring plans, approximately $7.1 million was paid by December 31, 2003, with most of the remainder to be paid in 2004 and some payments continuing through 2007. In 2002, we announced a Company-wide restructuring initiative in order to reduce our ongoing operating expenses. The restructuring resulted in a workforce reduction of approximately 11%, or 70 positions. In connection with the restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million related to the termination of 53 employees. The remaining positions were eliminated through attrition. The initiative also involved consolidation of our office space in Los Angeles and Chicago, resulting in a charge of $2.8 million. 25 In 2001, we implemented a restructuring plan in anticipation of a continuing weak economy. The plan included a reduction in workforce coupled with vacating portions of certain office facilities by combining operations for greater efficiency, refocusing sales and marketing, outsourcing some operations and reducing overhead expenses. Total restructuring charges of $4.6 million were recorded, including $0.9 million recorded in 2002 as an unfavorable adjustment to the original estimate. The adjustment was due primarily to a change in sublease assumptions. The restructuring resulted in a workforce reduction of approximately 15%, or 104 positions, through Company-wide layoffs and attrition. Approximately half of these employees were in the Online Group. Of the $4.6 million charge, $2.6 million related to the termination of 88 employees. The remaining positions were eliminated through attrition. The charge also included $2.0 million related to the excess space in our Chicago and New York offices. In 2000, we realigned senior management and made staff reductions, which led to a restructuring charge of $3.7 million. There was $0.5 million in payments made in 2000 and the remaining amount was paid in 2001. The following table displays the activity and balances of the restructuring reserve account for the years ended December 31, 2003, 2002 and 2001 (in thousands):
Consolidation Workforce of Facilities and Reduction Operations Total - ---------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $ 3,243 $ -- $ 3,243 Additional reserve recorded 2,453 1,239 3,692 Adjustment to previous estimate 84 -- 84 Cash payments (4,201) (97) (4,298) - ---------------------------------------------------------------------------------------------------- Balance at December 31, 2001 1,579 1,142 2,721 Additional reserve recorded 2,938 2,799 5,737 Write-off leasehold improvements -- (437) (437) Adjustment to previous estimate 100 806 906 Cash payments (1,845) (505) (2,350) - ---------------------------------------------------------------------------------------------------- Balance at December 31, 2002 2,772 3,805 6,577 Additional reserve recorded -- -- -- Adjustment to previous estimate (168) 518 350 Cash payments (1,974) (1,760) (3,734) - ---------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193 ====================================================================================================
Gain on Disposals In 2002, we sold our remaining 20% interest in VIPress, our Polish publishing joint venture, resulting in a gain of $0.4 million. Nonoperating Income (Expenses) In 2003, we recorded total nonoperating expense of $32.1 million compared to $17.3 million in the prior year. The most significant component was interest expense of $16.3 million, a $1.2 million increase from the prior year due primarily to an overall increase in our debt at a higher interest rate, partially offset by additional cash on our balance sheet as a result of the bond issuance. We also recorded an $8.5 million expense related to the settlement with Logix and $3.3 million of debt extinguishment expenses in connection with outstanding financing obligations, which were paid upon completion of our debt offering in the first quarter of 2003. 2002 COMPARED TO 2001 Our revenues for 2002 decreased $10.0 million, or 3%, compared to the prior year principally as a result of three transaction-related changes: (a) the absence of Catalog Group revenues due to the sale of our Collectors' Choice Music business in November 2001, (b) no library license fees received from PTVI in 2002 due to the restructuring of the ownership of our international TV joint ventures as discussed in more detail below and (c) the sale of a majority of our equity interest in the Polish edition of Playboy magazine in July 2001. See also, Note (C) Restructuring of Ownership of International TV Joint Ventures of Notes to the Consolidated Financial Statements. In addition, Playboy magazine revenues were also lower as the mix of revenues continued to shift away from print to higher margin businesses. Partially offsetting the above were higher domestic TV networks revenues as a result of the Califa acquisition in July 2001, and higher Online and Licensing Group revenues due in part to their global expansion. Operating performance improved $20.9 million compared to the prior year due to better performance from all of our operating groups, primarily Online, combined with lower Corporate Administration and Promotion expenses. In 2002 we recorded a $6.6 million restructuring charge compared to a $3.8 million charge in the prior year. The charge in 26 both periods included workforce reductions and consolidation of office space. The lower net loss for 2002 included a $5.8 million noncash income tax charge related to our adoption of Statement 142, Goodwill and Other Intangible Assets. The prior year included a $4.2 million noncash charge representing a "Cumulative effect of change in accounting principle" related to the adoption of Statement of Position, or SOP, 00-2, Accounting by Producers or Distributors of Films. Entertainment Group In December 2002, we completed the restructuring of the ownership of our international TV joint ventures with Claxson. The restructuring significantly expanded our ownership of Playboy TV and movie networks outside of the United States and Canada. Under the terms of the restructuring transaction, we increased our equity interest in networks in Europe and the Pacific Far East and retained our existing 19.9% ownership interest in the Playboy TV and Spice branded networks in Latin America and Iberia. The following discussion focuses on the profit contribution of each of our Entertainment Group businesses before programming expense. Profit contribution from domestic TV networks for 2002 increased $7.2 million on a revenue increase of $7.8 million, or 9%, primarily due to the addition of the movie networks from the Califa acquisition. Our networks were available as follows: Dec. 31, Dec. 31, Household units (in millions) (1) 2002 2001 - -------------------------------------------------------------------------------- Playboy TV DTH 19.2 18.1 Digital cable 14.0 10.3 Analog addressable cable 5.7 7.8 Playboy TV en Espanol (2) DTH 7.0 -- Digital cable 2.7 -- Movie Networks DTH 38.4 35.3 Digital cable 36.9 25.3 Analog addressable cable 10.8 17.0 - -------------------------------------------------------------------------------- (1) Each household unit is defined as one household carrying one given network per carriage platform. A single household can represent multiple household units if two or more of our networks and/or multiple platforms (i.e. digital and analog) are available to that household. (2) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S. Hispanic market in December 2002 in connection with the restructuring of the ownership of our international TV joint ventures. Prior to the restructuring, this network was included in international TV's household units. Revenues and profit contribution from the international TV business decreased $0.6 million and $1.1 million, respectively, due to our not receiving the September 2002 library license fee payment of $7.5 million from PTVI under the old joint venture agreement. Partially offsetting the above were higher sales of output programming to PTVI. As previously discussed, in December 2002, we restructured the ownership of our international TV joint ventures with Claxson. We accounted for this transaction as an unwinding of the PTVI joint venture and final payment under the original sale of assets and licensing agreement, which resulted in the recognition of $0.5 million in additional revenues. In return for our increased ownership in PTVI and the other terms of the restructuring transaction, among other things, (a) we forgave approximately $12.3 million in current programming and other receivables due from PTVI, (b) we would no longer receive the library or output agreement payments that we were scheduled to receive under the original agreement and (c) Claxson was released from its remaining funding obligations to PTVI. Profit contribution from our worldwide DVD/home video business increased $0.7 million on a revenue increase of $0.9 million, or 10%, mainly due to the absence of a domestic distributor in the prior year third quarter. The contract with our previous distributor expired in June 2001, and the contract with our current distributor became effective in October 2001. Partially offsetting the above were higher revenues in the prior year of $1.6 million related to a change in accounting in accordance with SOP 00-2, Accounting by Producers or Distributors of Films, which primarily impacted the domestic business. 27 Programming amortization expense increased $3.2 million compared to the prior year as a result of a higher number of original programs premiering on domestic Playboy TV and the addition of licensed programming for the movie networks from the Califa acquisition. The group incurred expenses in 2002 of $1.0 million related to relocating its California office space and moving to its new studio production facility during the year. Publishing Group Playboy magazine revenues decreased $6.1 million, or 6%, for 2002 due mostly to lower advertising and newsstand revenues. In spite of this, the Publishing Group reported improved performance for 2002 of $0.9 million. Advertising revenues decreased $4.6 million, or 12%, due to fewer ad pages, partially offset by higher average net revenue per page. Newsstand revenues were $2.8 million lower principally due to 13% fewer U.S. and Canadian newsstand copies sold in 2002. Subscription revenues were 3% higher. Other domestic publishing revenues decreased $2.1 million, or 15%, for 2002 compared to the prior year primarily due to lower newsstand sales of special editions. International publishing revenues decreased $4.5 million, or 45%, due to the sale in July 2001 of the majority of our equity interest in VIPress. As a result, we no longer consolidate its results. We sold our remaining equity interest in the joint venture in October 2002. The group's segment performance for 2002 increased due in part to cost-reduction measures implemented in the fourth quarter of the prior year. Additionally, manufacturing costs decreased $4.5 million, driven by lower paper prices combined with fewer printed pages in Playboy magazine largely as a result of the fewer ad pages. Significantly lower editorial costs of $3.8 million also favorably impacted the comparison. The lower Playboy magazine and special editions newsstand revenues and the lower advertising revenues partially offset the lower costs and expenses. Online Group Online Group revenues for 2002 increased $3.5 million, or 13%, to $31.0 million. Subscription revenues increased $4.4 million, or 66%, due to growth in members, the up pricing of Playboy Cyber Club and the launch of new clubs. Other revenues increased $2.3 million, or 69%, primarily as a result of licensing fees generated by international website deals, including in Germany, Korea, the Netherlands and Taiwan. E-commerce revenues were down $3.2 million, or 18%, mostly due to the sale of our Collectors' Choice Music business in November 2001 combined with the continuation of the strategy to increase profit margins with more targeted circulation. The group's segment loss decreased $12.8 million mainly due to a combination of the higher revenues plus cost-saving initiatives implemented in the fourth quarter of 2001. In accordance with an agreement, the group paid trademark fees to the parent company of $6.6 million in 2002 compared to $4.6 million in 2001. Licensing Group Segment income for 2002 from the Licensing Group increased $2.0 million, or 75%, on a revenue increase of $2.4 million, or 23%. Higher royalties from our international licensed branded products business of $1.3 million, revenues of $0.9 million related to an auction held with Butterfields Auctioneers and eBay in June 2002 of a small portion of our art and memorabilia collection and the favorable impact of cost-reduction measures implemented in the fourth quarter of 2001 were responsible for the improved performance. Catalog Group In November 2001, we sold our Collectors' Choice Music business, ending our presence in the nonbranded print catalog business. Corporate Administration and Promotion Corporate Administration and Promotion expenses for 2002 decreased $3.9 million, or 20%, compared to the prior year. This improvement was primarily a result of no longer amortizing trademarks in 2002 due to the adoption of Statement 142, Goodwill and Other Intangible Assets, lower marketing expenses and a greater reduction of expenses related to the higher trademark fees from the Online Group. Partially offsetting the above were expenses related to the addition of a President and Chief Operating Officer position in 2002. 28 Restructuring Expenses As previously discussed, in 2002, we announced a Company-wide restructuring initiative in order to reduce our ongoing operating expenses, which resulted in a $5.7 million charge in 2002. Also in 2002, a $0.9 million unfavorable adjustment was made to the 2001 restructuring charges discussed below primarily due to a change in sublease assumptions. In 2001, we implemented a restructuring plan in anticipation of a continuing weak economy. The plan included a reduction in workforce coupled with vacating portions of certain office facilities by combining operations for greater efficiency, refocusing sales and marketing, outsourcing some operations and reducing overhead expenses. Restructuring charges of $3.7 million related to this plan were recorded in 2001, of which $2.5 million related to the termination of 88 employees. The charges also included $1.2 million related to the excess space in our Chicago and New York offices. Gain (Loss) on Disposals In 2001, we recorded a loss of $1.3 million related to the sale of our Collectors' Choice Music business. Also in 2001, we sold a majority of our equity interest in VIPress, resulting in a gain of $0.4 million. In 2002, we sold our remaining 20% interest in VIPress resulting in a gain of $0.4 million. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2003, we had $31.3 million in cash and cash equivalents and $115.0 million in total financing obligations compared to $4.1 million in cash and cash equivalents and $92.5 million in total financing obligations at December 31, 2002. The financing obligations at December 31, 2002 included $27.2 million in obligations payable to Mr. Hefner, our Editor-in-Chief, by Playboy.com. As discussed below, in 2003, we and Mr. Hefner agreed to exchange his $27.2 million of promissory notes issued by Playboy.com for cash and our equity securities. Our liquidity requirements are being provided by the cash generated from our offering of $115.0 million in aggregate principal amount of 11% senior secured notes due 2010, or notes, through one of our wholly-owned subsidiaries, PEI Holdings, Inc., or Holdings. In addition, we have a $20.0 million revolving credit facility. At December 31, 2003, there were no borrowings and $9.6 million in letters of credit outstanding under this facility. On February 11, 2004, we filed a registration statement with the Securities and Exchange Commission for approximately 6.9 million shares of our Class B stock. The offering will consist of approximately 3.2 million shares offered by us, 2.6 million shares to be offered by Mr. Hefner and 150,000 shares to be offered by Christie Hefner, our Chairman and Chief Executive Officer. An additional 0.9 million shares are subject to an over-allotment option granted by us to the underwriters. We expect to use the net proceeds from the sale to redeem a portion of the notes issued by Holdings, and the balance for general corporate purposes. DEBT FINANCINGS On March 11, 2003, we completed the offering of $115.0 million in aggregate principal amount of senior secured notes of our subsidiary, Holdings. On September 17, 2003, the senior secured notes were exchanged for new registered senior secured notes. The form and terms of the new senior secured notes are identical in all material respects (including principal amount, interest rate, maturity, ranking and covenant restrictions) to the form and terms of the old notes. The new notes mature on March 15, 2010 and bear interest at the rate of 11.00% per annum, with interest payable on March 15th and September 15th of each year, beginning September 15, 2003. The notes are guaranteed on a senior secured basis by us and by substantially all of our domestic subsidiaries, referred to as the guarantors, excluding Playboy.com and its subsidiaries. The notes and the guarantees rank equally in right of payment with our and the guarantors' other existing and future senior debt. The notes and the guarantees are secured by a first-priority lien on our and each guarantor's trademarks, referred to as the primary collateral, and by a second-priority lien, junior to a lien for the benefit of the lenders under the new credit facility, as described below, on (a) 100% of the stock of substantially all of our domestic subsidiaries, excluding the subsidiaries of Playboy.com, (b) 65% of the capital stock of substantially all of our indirect first-tier foreign subsidiaries, (c) substantially all of our and each guarantor's domestic personal property, excluding the primary collateral and (d) the Playboy Mansion, or collectively, the secondary collateral. Our ability to pay cash dividends on our common stock is limited under the terms of the notes. 29 On March 11, 2003, we used $73.3 million of the notes proceeds to repay $73.0 million in outstanding principal and $0.3 million in accrued interest and fees on our previously existing credit facility. Effective with this repayment, that credit facility was terminated. In connection with the termination of the credit facility, we also terminated our existing interest rate swap agreement for $0.4 million, which was scheduled to mature in May 2003. On March 14, 2003, we paid $17.3 million to the Califa principals in satisfaction of substantially all of our 2003 acquisition payment obligations, which are discussed below. The remaining $24.0 million of notes proceeds provide liquidity for general corporate purposes, including the payment of the 2004 Califa obligation, and fees and expenses associated with the notes offering. On March 11, 2003, Holdings also entered into a new revolving credit facility, under which we are permitted to borrow up to $20.0 million in revolving borrowings, issue letters of credit or a combination of both. For purposes of calculating interest, revolving loans made under the new credit facility will be designated at either the offshore dollar inter bank rate, or IBOR, plus a borrowing margin based on our adjusted EBITDA or, in certain circumstances, at a base rate plus a borrowing margin based on our adjusted EBITDA. Letters of credit issued under the new credit facility bear fees at IBOR plus a borrowing margin based on our adjusted EBITDA. All amounts outstanding under the new credit facility will mature on March 11, 2006. Our obligations under the new credit facility are guaranteed by us and each of the guarantors of the notes. The obligations of us and each of the guarantors under the new credit facility are secured by a first-priority lien on the secondary collateral and a second-priority lien on the primary collateral that supports the obligations under the notes. FINANCING FROM RELATED PARTY At December 31, 2002, Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr. Hefner in the form of three promissory notes. Upon the closing of the senior secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the amount of $10.0 million, was extinguished in exchange for shares of Series A preferred stock of Holdings, which we refer to as the Holdings Series A Preferred Stock, with an aggregate stated value of $10.0 million. The two other promissory notes, in a combined principal amount of $17.2 million, were extinguished in exchange for $0.5 million in cash and shares of Series B preferred stock of Holdings, which we refer to as Holdings Series B Preferred Stock, with an aggregate stated value of $16.7 million. Pursuant to the terms of an exchange agreement between us, Holdings, Playboy.com and Mr. Hefner and certificates of designation governing the Holdings Series A and Series B Preferred Stock, we were required to exchange the Holdings Series A Preferred Stock for shares of Playboy Class B stock and to exchange the Holdings Series B Preferred Stock for shares of preferred stock of Playboy, which we refer to as Playboy Preferred Stock. In order to issue the Playboy Preferred Stock, we were required to amend our certificate of incorporation to authorize the issuance, which we refer to as the certificate amendment. In accordance with applicable law, Mr. Hefner, the holder of more than a majority of our outstanding Class A voting common stock, approved the certificate amendment by written consent. As a result, on May 1, 2003, we filed an amendment to our certificate of incorporation and exchanged the Holdings Series A Preferred Stock plus accumulated dividends for 1,122,209 shares of Playboy Class B stock and exchanged the Holdings Series B Preferred Stock for 1,674 shares of Playboy Preferred Stock. The Playboy Preferred Stock accrues dividends at a rate of 8.00% per annum, which are paid semi-annually. The Playboy Preferred Stock is convertible at the option of Mr. Hefner, the holder, into shares of our Class B stock at a conversion price of $11.2625, which is equal to 125% of the weighted average closing price of our Class B stock over the 90-day period prior to the exchange of Holdings Series B Preferred Stock for Playboy Preferred Stock. Beginning May 1, 2006, if at any time the weighted average closing price of our Class B stock for 15 consecutive trading days equals or exceeds 150% of the conversion price, or $16.89, we will have the option, by delivering a written notice to the holder of shares of Playboy Preferred Stock, to convert any or all shares of Playboy Preferred Stock into the number of shares of Class B stock determined by dividing (a) the sum of the aggregate stated value of such Playboy Preferred Stock and the amount of accrued and unpaid dividends by (b) the conversion price. On September 15, 2010, we will be required to redeem all shares of Playboy Preferred Stock that are then outstanding at a redemption price equal to $10,000 per share plus the amount of accrued and unpaid dividends. The final redemption price may be paid, at our option, in either cash or shares of our Class B stock or any combination of cash and shares of Class B stock. If we elect to pay the final redemption price in shares of our Class B stock, the number of such shares to which a holder of shares of Playboy Preferred Stock will be entitled will be determined by dividing (a) the sum of the aggregate stated value of such Playboy Preferred Stock and the amount of accrued and unpaid dividends by (b) the weighted average closing price of our Class B stock over the 90-day period prior to 30 September 15, 2010. If the announced offering of Class B stock is completed, Mr. Hefner will convert all of his Playboy Preferred Stock into 1,485,948 shares of Class B stock, in accordance with the terms of the Playboy Preferred Stock, and those shares, along with the 1,122,209 Class B shares that he received in exchange for his Holdings Series A Preferred Stock, will be sold in the offering. CALIFA ACQUISITION In connection with the Califa acquisition, we have the option of paying up to $71 million of the purchase price in cash or Class B stock through 2007. We have notified the sellers that the base consideration of $7.0 million and the performance-based payment of $7.0 million that are due in 2004 will be paid in cash. Under the terms of the agreement, the performance-based payment was paid in full on March 1, 2004 and the base consideration will be paid in two equal installments of $3.5 million on May 1, 2004 and November 1, 2004. See the Contractual Obligations table below for the future cash obligations related to our acquisitions. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities was $4.9 million for 2003, a decrease of $9.4 million from 2002. The decrease in the net loss of $9.6 million, which included non-cash charges of $8.5 million for the Logix litigation settlement and $3.3 million for the debt extinguishment was partially offset by a $10.0 million increase in receivables, net of allowances. Net cash provided by operating activities in 2002 was $14.3 million and included $5.2 million of cash received as part of the PTVI restructuring and also included the non-cash forgiveness of approximately $12.3 million in current programming and other receivables due from PTVI. In 2003, we spent $44.7 million in Company-produced and licensed programming as compared to $41.7 million in 2002. We expect to invest approximately $46 million in 2004, which could vary based on, among other things, the timing of completing productions. CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities was $2.0 million for 2003 primarily due to $2.3 million of additions to property and equipment. In 2003, we also entered into leases of furniture and equipment totaling $15.6 million. CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided by financing activities was $24.4 million for 2003 primarily due to proceeds of $115.0 million related to the issuance of senior secured notes, partially offset by payment of $9.2 million of related financing fees, repayment of former financing obligations of $65.8 million and payment of $14.9 million of acquisition liabilities. 31 CONTRACTUAL OBLIGATIONS The following table reflects a summary of our contractual obligations and commercial commitments as further discussed in the notes to consolidated financial statements as of December 31, 2003 (in thousands):
2004 2005 2006 2007 2008 Thereafter Total - --------------------------------------------------------------------------------------------------------------- Long Term Financing Obligations $ 12,650 $ 12,650 $ 12,650 $ 12,650 $ 12,650 $133,975 $197,225 Operating Leases 11,718 9,755 9,032 8,415 7,140 31,033 77,093 Purchase Obligations: Licensed Programming Commitments (1) 9,923 8,323 5,996 3,891 5,224 13,177 46,534 Other (2): Acquisition Liabilities (3) 17,148 8,000 8,000 8,000 1,000 2,750 44,898 Transponder Service Agreements 5,424 5,123 4,634 3,480 3,480 13,195 35,336 Litigation Settlement 6,500 1,000 1,000 -- -- -- 8,500 - ---------------------------------------------------------------------------------------------------------------
(1) Licensed Programming Commitments represents our non-cancelable obligations to license adult programming from other studios. Typically, the licensing of the programming allows us access to specific titles or in some cases the studio's entire library over an extended period of time. We broadcast this programming on our networks throughout the world, as appropriate. (2) We have obligations of $4.2 million recorded in "Other noncurrent liabilities" under two nonqualified deferred compensation plans, which permit certain employees and all nonemployee directors to annually elect to defer a portion of their compensation. These amounts have not been included in the table as the dates of payment are not known at the balance sheet date. (3) We have $5.9 million recorded in the noncurrent portion of "Acquisition liabilities" that have not been included in the table because, per the agreement, the timing of the payments is not known at the balance sheet date. INCOME TAXES In 2003, we increased the valuation allowance by $3.3 million, of which $1.5 million was due to the deferred tax treatment of certain acquired intangibles and the remainder was primarily due to the deferred tax asset related to the 2003 net operating loss. Of the $14.6 million increase in the valuation allowance in 2002, $7.1 million was due to the deferred tax treatment of certain acquired intangibles as a result of the adoption of Statement 142, Goodwill and Other Intangible Assets, and the remainder was primarily due to the deferred tax asset related to the 2002 net operating loss. CRITICAL ACCOUNTING POLICIES Our financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We believe that of our significant accounting policies, the following are the more complex and critical areas. For additional information about our accounting policies, see Note (A) Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements. REVENUE RECOGNITION Playboy Magazine Our Playboy magazine revenues were $102.0 million and $94.7 million for the years ended December 31, 2003 and 2002, respectively, of which 15.5% and 12.3% were derived from newsstand sales in the respective year. Our print run, which is developed with input from Warner, varies each month based on expected sales. Our expected sales are based on historical analyses of demand based on a number of variables, including content, time of year and the cover price. We record our revenue for each month's issue utilizing our expected sales. Our revenues are recorded net of a provision for estimated returns. Substantially all of the magazines to be returned are returned within 90 days of the date that the subsequent issue goes on sale. We adjust our provision for returns based on actual returns of the magazine. Historically, our annual adjustments to Playboy magazine newsstand revenues have not been material and are driven by differences in consumer demand as compared to expected sales. At any point, our exposure to a material adjustment to revenue is mitigated because generally only the most recent two to three months would not have been fully adjusted to actual based on actual returns received. 32 Domestic Television Our domestic television network revenue for the years ended December 31, 2003 and 2002 was $95.3 million and $94.4 million, respectively. In order to record our revenues, we estimate the number of PPV buys and monthly subscriptions. We base our estimate of revenue on a number of factors including, but not exclusively, the average number of buys and subscriptions in the prior three months based on actual payments received and historical data by geographic location. Upon recording the revenue, we also record the related receivable. We have reserves for uncollectible receivables based on our experience and monitor these reserves on an ongoing basis. At December 31, 2003 and 2002, we had receivables of $17.0 million and $13.9 million related to domestic television. We record adjustments to revenue on a monthly basis as we obtain actual payments from the providers. Actual subscriber information and payment is generally received within three months. Historically, our adjustments have not been material. At any point, our exposure to a material adjustment to revenue is mitigated because generally only the most recent two to three months would not have been fully adjusted to actual based on payments received. TRADEMARKS Our trademarks are critical to the success and potential growth of all of our businesses. We actively protect and defend our trademarks throughout the world and monitor the marketplace for counterfeit products. Consequently, we initiate legal proceedings from time to time to prevent their unauthorized use, and we incur costs associated with acquisition, defense, registration and/or renewal of our trademarks. Prior to the implementation of Statement 142, Goodwill and Other Intangible Assets, in 2002, trademark acquisition costs were capitalized and amortized using the straight-line method over 40 years, and trademark defense, registration and/or renewal costs were capitalized and amortized using the straight-line method over 15 years. Beginning in 2002, trademark-related costs are no longer being amortized, since our trademarks have indefinite lives, but are subject to annual impairment tests in accordance with the new accounting standard. For periods after 2001, capitalized amounts related to our trademarks are generally higher than they would have been had the old accounting standards continued to apply. DEFERRED REVENUES As of December 31, 2003, $41.8 million and $5.4 million of deferred revenues related to Playboy magazine subscriptions and online subscriptions, respectively. Sales of Playboy magazine and online subscriptions, less estimated cancellations, are deferred and recognized as revenues proportionately over the subscription period. Our estimates of cancellations are based on historical experience and current marketplace conditions and they are adjusted monthly on the basis of actual results. We have not experienced significant deviations between estimated and actual results. RELATED PARTY TRANSACTIONS HUGH M. HEFNER We own a 29-room mansion located on 5 1/2 acres in Los Angeles, California. The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events and sales events. It also enhances our image as host for many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition which increases public awareness of us and our products and services. Its facilities include a tennis court, swimming pool, gymnasium and other recreational facilities as well as extensive film, video, sound and security systems. The Playboy Mansion also includes accommodations for guests and serves as an office and residence for Hugh M. Hefner, our founder. It has a full-time staff which performs maintenance, serves in various capacities at the functions held at the Playboy Mansion and provides guests of ours and Mr. Hefner's with meals, beverages and other services. Under a 1979 lease we entered into with Mr. Hefner, the annual rent Mr. Hefner pays to us for his use of the Playboy Mansion is determined by independent experts who appraise the value of Mr. Hefner's basic accommodations and access to the Playboy Mansion's facilities, utilities and attendant services based on comparable hotel accommodations. In addition, Mr. Hefner is required to pay the sum of the per-unit value of non-business meals, beverages and other benefits he and his personal guests receive. These standard food and beverage per-unit values are determined by independent expert appraisals based on fair market values. Valuations for both basic accommodations and standard food and beverage units are reappraised every three years, and between appraisals are annually adjusted based on appropriate consumer price indexes. Mr. Hefner is also responsible for the cost of all improvements in any Hefner residence accommodations, including capital expenditures that are in excess of normal maintenance for those areas. 33 Mr. Hefner's usage of Playboy Mansion services and benefits is recorded through a system initially developed by the auditing and consulting firm of PricewaterhouseCoopers LLP and now administered by us, with appropriate modifications approved by the audit and compensation committees of the Board of Directors. The lease dated June 1, 1979, as amended, between Mr. Hefner and us renews automatically at December 31 each year and will continue to renew unless either we or Mr. Hefner terminate it. The rent charged to Mr. Hefner during 2003 included the appraised rent and the appraised per-unit value of other benefits, as described above. Within 120 days after the end of our fiscal year, the actual charge for all benefits for that year is finally determined. Mr. Hefner pays or receives credit for any difference between the amount finally determined and the amount he paid over the course of the year. We estimated the sum of the rent and other benefits payable for 2003 to be $1.5 million, and Mr. Hefner paid that amount during 2003. The actual rent and other benefits payable for 2002 and 2001 were $1.3 million in each year. We purchased the Playboy Mansion in 1971 for $1.1 million and in the intervening years have made substantial capital improvements at a cost of $13.6 million through 2003 (including $2.5 million to bring the Hefner residence accommodations to a standard similar to the Playboy Mansion's common areas). The Playboy Mansion is included in our Consolidated Balance Sheet at December 31, 2003 at a net book value of $1.6 million, including all improvements and after accumulated depreciation. We incur all operating expenses of the Playboy Mansion, including depreciation and taxes, which were $2.3 million, $3.6 million and $3.2 million for 2003, 2002 and 2001, respectively, net of rent received from Mr. Hefner. From time to time, we enter into barter transactions in which we secure air transportation for Mr. Hefner in exchange for advertising pages in Playboy magazine. Mr. Hefner reimburses us for our direct costs of providing these ad pages. We receive significant promotional benefit from these transactions. There were no such transactions in 2003. At December 31, 2002 and at the time of the Hefner debt restructuring, Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr. Hefner in the form of three promissory notes. Upon the closing of the senior secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was restructured as previously discussed in Liquidity and Capital Resources. 34 FORWARD-LOOKING STATEMENTS This Form 10-K Annual Report contains "forward-looking statements," including statements in Business and MD&A, 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. 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 regulation, actions or initiatives, including: (a) attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, video and online materials, (b) limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue for us, or (c) substantive changes in postal regulations or rates which could increase our postage and distribution costs; (2) risks associated with our foreign operations, including market acceptance and demand for our products and the products of our licensees and our ability to manage the risk associated with our exposure to foreign currency exchange rate fluctuations; (3) 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 revenues; (4) our ability to protect our trademarks, copyrights and other intellectual property; (5) 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; (6) dilution from any potential issuance of additional common or convertible preferred stock in connection with financings or acquisitions; (7) competition for advertisers from other publications, media or online providers or any decrease in spending by advertisers, either generally or with respect to the adult male market; (8) competition in the television, men's magazine, Internet and product licensing markets; (9) attempts by consumers or private advocacy groups to exclude our programming or other products from distribution; (10) the television and Internet businesses' reliance on third parties for technology and distribution, and any changes in that technology and/or unforeseen delays in its implementation which might affect our plans and assumptions; (11) risks associated with losing access to transponders and competition for transponders and channel space; (12) the impact of industry consolidation, any decline in our access to, and acceptance by, DTH and/or cable systems and the possible resulting deterioration in the terms, cancellation of fee arrangements or pressure on margin splits with operators of these systems; (13) risks that we may not realize the expected increased sales and profits and other benefits from acquisitions and the restructuring of our international TV joint ventures; (14) risks associated with the financial condition of Claxson, our Playboy TV-Latin America, LLC joint venture partner; (15) increases in paper or printing costs; (16) effects of the national consolidation of the single-copy magazine distribution system; and (17) uncertainty of the viability of our primarily subscription- and e-commerce-based Internet model. 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risk, including changes in foreign currency exchange rates. In order to manage the risk associated with our exposure to such fluctuations, we enter into various hedging transactions that have been authorized pursuant to our policies and procedures. We have derivative instruments that have been designated and qualify as cash flow hedges, which are entered into in order to hedge the variability of cash flows to be received related to forecasted royalty revenues denominated in foreign currencies, primarily Japanese yen and the Euro. We hedge these royalties with forward contracts for periods not exceeding 12 months. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking various hedge transactions. We link all hedges that are designated as cash flow hedges to forecasted transactions. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged items. Hedge ineffectiveness is recorded in earnings. We do not use financial instruments for trading purposes. Effective with the refinancing of our financing obligations, which occurred on March 11, 2003, we no longer have any floating interest rate exposure. All of our current debt is represented by the senior secured notes, which are fixed rate obligations. In 2001, we entered into an interest rate swap agreement that was scheduled to mature in May 2003 that effectively converted $45.0 million of our floating rate debt to fixed rate debt, thus reducing the impact of interest rate changes on future interest expense. In March 2003, in connection with the termination of our former credit facility, we also terminated this swap agreement for $0.4 million. We prepared sensitivity analyses to determine the impact of a hypothetical 10% devaluation of the U.S. dollar relative to the foreign currencies of the countries to which we have exposure, primarily Japan and Germany. Based on our sensitivity analyses at December 31, 2003 and 2002, such a change in foreign currency exchange rates would affect our annual consolidated operating results, financial position and cash flows by approximately $0.3 million for both periods. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements and supplementary data are set forth in this Form 10-K Annual Report as follows: Page ---- Consolidated Statements of Operations - Fiscal Years Ended December 31, 2003, 2002 and 2001 37 Consolidated Balance Sheets - December 31, 2003 and 2002 38 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2003, 2002 and 2001 39 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2003, 2002 and 2001 40 Notes to Consolidated Financial Statements 41 Report of Independent Auditors 68 Report of Management 69 The supplementary data regarding quarterly results of operations are set forth in Note (V) Quarterly Results of Operations (Unaudited) of Notes to Consolidated Financial Statements. 36 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------------------------------------------ Net revenues $ 315,844 $ 277,622 $ 287,583 - ------------------------------------------------------------------------------------------------------------------ Costs and expenses Cost of sales (229,216) (204,616) (237,048) Selling and administrative expenses (56,826) (58,117) (58,050) Restructuring expenses (350) (6,643) (3,776) - ------------------------------------------------------------------------------------------------------------------ Total costs and expenses (286,392) (269,376) (298,874) - ------------------------------------------------------------------------------------------------------------------ Gain (loss) on disposals -- 442 (955) - ------------------------------------------------------------------------------------------------------------------ Operating income (loss) 29,452 8,688 (12,246) - ------------------------------------------------------------------------------------------------------------------ Nonoperating income (expense) Investment income 363 125 786 Interest expense (16,309) (15,147) (13,970) Amortization of deferred financing fees (1,407) (993) (905) Minority interest (1,660) (1,724) (704) Debt extinguishment expenses (3,264) -- -- Equity in operations of investments (80) 279 (746) Litigation settlement (8,500) -- -- Vendor settlement -- 750 -- Other, net (1,185) (569) (542) - ------------------------------------------------------------------------------------------------------------------ Total nonoperating expense (32,042) (17,279) (16,081) - ------------------------------------------------------------------------------------------------------------------ Loss before income taxes and cumulative effect of change in accounting principle (2,590) (8,591) (28,327) Income tax expense (4,967) (8,544) (996) - ------------------------------------------------------------------------------------------------------------------ Loss before cumulative effect of change in accounting principle (7,557) (17,135) (29,323) Cumulative effect of change in accounting principle (net of tax) -- -- (4,218) - ------------------------------------------------------------------------------------------------------------------ Net loss $ (7,557) $ (17,135) $ (33,541) ================================================================================================================== Net loss $ (7,557) $ (17,135) $ (33,541) Dividend requirements of preferred stock (893) -- -- - ------------------------------------------------------------------------------------------------------------------ Net loss applicable to common shareholders $ (8,450) $ (17,135) $ (33,541) ================================================================================================================== Basic and diluted weighted average number of common shares outstanding 27,023 25,595 24,411 ================================================================================================================== Basic and diluted loss per common share Loss before cumulative effect of change in accounting principle applicable to common shareholders $ (0.31) $ (0.67) $ (1.20) Cumulative effect of change in accounting principle (net of tax) -- -- (0.17) - ------------------------------------------------------------------------------------------------------------------ Net loss applicable to common shareholders $ (0.31) $ (0.67) $ (1.37) ==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 37 PLAYBOY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Dec. 31, Dec. 31, 2003 2002 - --------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 31,332 $ 4,118 Marketable securities 3,546 2,677 Receivables, net of allowance for doubtful accounts of $4,364 and $5,124, respectively 52,230 42,211 Receivables from related parties 1,226 1,542 Inventories, net 12,017 10,498 Deferred subscription acquisition costs 11,759 12,038 Other current assets 10,208 11,296 - --------------------------------------------------------------------------------------------------- Total current assets 122,318 84,380 - --------------------------------------------------------------------------------------------------- Property and equipment, net 12,020 11,716 Programming costs, net 57,426 52,347 Goodwill 111,893 111,893 Trademarks 58,159 55,219 Distribution agreements, net of accumulated amortization of $970 and $6,598, respectively 32,170 34,284 Other noncurrent assets 24,074 19,882 - --------------------------------------------------------------------------------------------------- Total assets $ 418,060 $ 369,721 =================================================================================================== Liabilities Financing obligations $ -- $ 6,402 Financing obligations to related parties -- 17,235 Acquisition liabilities 15,392 13,427 Accounts payable 22,899 24,596 Accrued salaries, wages and employee benefits 11,472 10,419 Deferred revenues 53,963 52,633 Accrued litigation settlement 6,500 -- Other liabilities and accrued expenses 19,088 17,648 - --------------------------------------------------------------------------------------------------- Total current liabilities 129,314 142,360 - --------------------------------------------------------------------------------------------------- Financing obligations 115,000 58,865 Financing obligations to related parties -- 10,000 Acquisition liabilities 26,982 39,685 Net deferred tax liabilities 13,877 12,375 Accrued litigation settlement 2,000 -- Other noncurrent liabilities 13,170 8,904 - --------------------------------------------------------------------------------------------------- Total liabilities 300,343 272,189 - --------------------------------------------------------------------------------------------------- Minority interest 11,081 9,717 Shareholders' equity Preferred stock, $10,000 par value - 10,000,000 shares authorized; 1,674 issued 16,959 -- Common stock, $0.01 par value Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49 Class B nonvoting - 30,000,000 shares authorized; 22,579,363 and 21,422,321 issued, respectively 226 214 Capital in excess of par value 152,969 146,091 Accumulated deficit (62,510) (54,060) Unearned compensation - restricted stock -- (2,713) Accumulated other comprehensive loss (1,057) (1,766) - --------------------------------------------------------------------------------------------------- Total shareholders' equity 106,636 87,815 - --------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 418,060 $ 369,721 ===================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 38 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Unearned Accumulated Class A Class B Capital in Comp. - Other Preferred Common Common Excess of Accum. Restricted Comprehensive Stock Stock Stock Par Value Deficit Stock Loss (1) Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $ -- $ 49 $ 196 $ 120,519 $ (3,384) $ (2,713) $ (482) $ 114,185 Net loss -- -- -- -- (33,541) -- -- (33,541) Shares issued or vested under stock plans, net -- -- 3 2,504 -- (306) -- 2,201 Other comprehensive loss -- -- -- -- -- -- (1,631) (1,631) Disposal -- -- -- -- -- -- 244 244 Other -- -- -- 67 -- -- -- 67 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 -- 49 199 123,090 (36,925) (3,019) (1,869) 81,525 Net loss -- -- -- -- (17,135) -- -- (17,135) Shares issued or vested under stock plans, net -- -- -- 6 -- 306 -- 312 Shares issued related to the Califa acquisition -- -- 15 22,826 -- -- -- 22,841 Other comprehensive income -- -- -- -- -- -- 94 94 Other -- -- -- 169 -- -- 9 178 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 -- 49 214 146,091 (54,060) (2,713) (1,766) 87,815 Net loss -- -- -- -- (7,557) -- -- (7,557) Shares issued or vested under stock plans, net -- -- 12 380 -- 2,713 -- 3,105 Conversion of Holdings preferred B to Playboy preferred A 16,959 -- -- 10,100 -- -- -- 27,059 Preferred stock dividends -- -- -- -- (893) -- -- (893) Shares issued related to Califa acquisition -- -- -- (3,602) -- -- -- (3,602) Other comprehensive income -- -- -- -- -- -- 709 709 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 16,959 $ 49 $ 226 $ 152,969 $ (62,510) $ -- $ (1,057) $ 106,636 ==================================================================================================================================
(1) Accumulated other comprehensive loss at December 31, 2003 was as follows: Unrealized loss on marketable securities $ (265) Derivative loss (28) Foreign currency translation loss (764) ------- $(1,057) ======= Comprehensive loss was as follows:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - -------------------------------------------------------------------------------------- Net loss $ (7,557) $ (17,135) $ (33,541) - -------------------------------------------------------------------------------------- Unrealized gain (loss) on marketable securities 817 (555) (350) Derivative gain (loss) 656 500 (1,184) Foreign currency translation adjustments (764) 149 (97) - -------------------------------------------------------------------------------------- Total other comprehensive income (loss) 709 94 (1,631) - -------------------------------------------------------------------------------------- Comprehensive loss $ (6,848) $ (17,041) $ (35,172) ======================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 39 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net loss $ (7,557) $ (17,135) $ (33,541) Adjustments to reconcile net loss to net cash provided by (used for) operating activities Depreciation of property and equipment 3,698 3,781 3,897 Amortization of intangible assets 5,257 7,212 10,612 Amortization of investments in entertainment programming 40,603 40,626 37,395 (Gain) loss on disposals -- (442) 955 Amortization of deferred financing fees 1,407 993 905 Minority interest 1,364 1,724 1,001 Debt extinguishment expenses 3,264 -- -- Equity in operations of investments 80 (279) 746 Deferred income taxes 1,349 7,018 634 Cumulative effect of change in accounting principle -- -- 4,218 Changes in current assets and liabilities Receivables (10,340) 5,537 5,822 Receivables from related parties 316 (30,164) (4,458) Inventories (1,519) 3,464 3,468 Other current assets (2,261) (4,225) 944 Accounts payable (1,921) (139) (6,587) Accrued salaries, wages and employee benefits 3,759 954 (486) Deferred revenues 2,732 3,892 1,122 Deferred revenues from related parties -- 18,618 3,985 Acquisition liability interest (407) 4,836 3,777 Accrued litigation settlement 6,500 -- -- Other liabilities and accrued expenses 2,148 6,419 888 --------- --------- --------- Net change in current assets and liabilities (993) 9,192 8,475 --------- --------- --------- Decrease in receivables from related parties -- 25,000 6,525 Investments in entertainment programming (44,727) (41,717) (37,254) Increase in trademarks (2,940) (3,034) (2,625) (Increase) decrease in other noncurrent assets (1,561) 209 (173) Decrease in deferred revenues from related parties -- (21,325) (6,525) Increase in accrued litigation settlement 2,000 -- -- Increase (decrease) in other noncurrent liabilities 2,224 (3,277) (1,738) International TV joint venture restructuring -- 4,738 -- Other, net 1,411 1,044 (1,452) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 4,879 14,328 (7,945) - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions -- (435) (935) Proceeds from disposals 116 1,517 3,276 Additions to property and equipment (2,342) (4,318) (3,233) Funding of equity interests -- -- (1,875) Other, net 179 78 (86) - ---------------------------------------------------------------------------------------------------------- Net cash used for investing activities (2,047) (3,158) (2,853) - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net proceeds from sale of Playboy.com Series A Preferred Stock -- -- 13,066 Proceeds from financing obligations 115,000 5,000 10,000 Repayment of financing obligations (65,767) (16,311) (11,672) Payment of debt extinguishment expenses (356) -- -- Payment of acquisition liabilities (14,892) -- -- Payment of deferred financing fees (9,205) (585) (454) Payment of preferred stock dividends (669) -- -- Proceeds from stock plans 272 234 2,141 Other, net (1) -- (207) - ---------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 24,382 (11,662) 12,874 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 27,214 (492) 2,076 Cash and cash equivalents at beginning of year 4,118 4,610 2,534 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 31,332 $ 4,118 $ 4,610 ==========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The consolidated financial statements include our accounts and all majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. Reclassifications: Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. Stock-based Compensation: At December 31, 2003 and 2002, we had various stock plans for key employees and non-employee directors, which are more fully described in Note (Q) Stock Plans. We account for stock options as prescribed by Accounting Principles Board Opinion No. 25 and disclose pro forma information as provided by Statement 123, Accounting for Stock Based Compensation. Pro forma net loss and net loss per common share, presented below (in thousands, except per share amounts), were determined as if we had accounted for our employee stock options under the fair value method of Statement 123. The fair value of these options was estimated at the date of grant using an option pricing model. Such models require the input of highly subjective assumptions including the expected volatility of the stock price. For pro forma disclosures, the options' estimated fair value was amortized over their vesting period. No stock-based employee compensation expense is recognized because all options granted under those plans had an exercise price equal to or in excess of the market value of the underlying common stock at the grant date. If we accounted for our employee stock options under Statement 123, compensation expense would have been $2.1 million, $3.1 million and $3.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - --------------------------------------------------------------------------------------------------- Net loss As reported $ (7,557) $ (17,135) $ (33,541) Pro forma (9,699) (20,240) (37,197) Basic and diluted EPS applicable to common shareholders As reported (0.31) (0.67) (1.37) Pro forma $ (0.39) $ (0.79) $ (1.52) - ---------------------------------------------------------------------------------------------------
For the pro forma disclosures above, the estimated fair value of the options is amortized to expense over their respective vesting periods. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - --------------------------------------------------------------------------------------------------- Risk-free interest rate 3.33% 4.64% 4.98% Expected stock price volatility 48.90% 50.20% 49.70% Expected dividend yield -- -- -- - ---------------------------------------------------------------------------------------------------
For 2003, 2002 and 2001, an expected life of six years was used for all of the stock options, and the weighted average fair value of options granted was $5.06, $7.97 and $6.59, respectively. 41 Cumulative effect of change in accounting principle: During 2001, we adopted Statement 139, Rescission of FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89, and 121 and SOP 00-2, Accounting by Producers or Distributors of Films. Statement 139 rescinded FASB Statement 53, Financial Reporting by Producers and Distributors of Motion Picture Films. SOP 00-2 established new film accounting and reporting standards for producers or distributors of films, including changes in revenue recognition and accounting for marketing, development and overhead costs. SOP 00-2 also requires all programming costs to be classified on the balance sheet as noncurrent assets. As a result of the adoption of SOP 00-2, we recorded a noncash charge of $4.2 million, or $0.17 per basic and diluted common share, in 2001, representing a "Cumulative effect of change in accounting principle." The charge primarily related to reversals of previously recognized revenues which under the new rules were considered not yet earned, combined with a write-off of marketing costs that were previously capitalized and are no longer capitalizable under the new rules. Revenue recognition: Domestic TV networks DTH and cable revenues are recognized based on estimates of PPV buys and monthly subscriber counts reported each month by the system operators and adjusted to actual. The net adjustments to actual are not material. International TV revenues are recognized either upon identification of programming scheduled for networks, delivery of programming to customers and/or upon the commencement of the license term. Revenues from the sale of Playboy magazine and online subscriptions are recognized over the terms of the subscriptions. Revenues from newsstand sales of Playboy magazine and special editions (net of estimated returns) and revenues from the sale of Playboy magazine advertisements are recorded when each issue goes on sale. Revenues from e-commerce are recognized when the items are shipped, which is when title passes. Royalties from licensing the Company's trademarks in its international publishing and product licensing businesses are generally recognized on a straight-line basis over the terms of the related agreements. Receivables are recorded when revenue is recognized and adjusted as payments are received. We have established reserves for uncollectible receivables. Prior to the 2002 restructuring of the ownership of our international TV joint ventures, more fully explained in Note (C) Restructuring of Ownership of International TV Joint Ventures, international TV revenues received from PTVI, for the license of the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, were recognized generally as the consideration was paid to us, less our 19.9% ownership interest in such transactions. License fees from PTVI for current output production were recognized as programming was available, less our 19.9% ownership interest in such transactions. Cash equivalents: Cash equivalents are temporary cash investments with an original maturity of three months or less at date of purchase and are stated at cost, which approximates fair value. Marketable securities: Marketable securities are classified as available-for-sale securities and are stated at fair value. Net unrealized holding gains and losses are included in "Accumulated other comprehensive loss." Inventories: Inventories are stated at the lower of cost (specific cost and average cost) or fair value. Property and equipment: Property and equipment are stated at cost. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and immediately expensed for preliminary project activities or post-implementation activities. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. The useful life for building improvements is ten years, furniture and equipment ranges from one to ten years and software ranges from one to five years. Leasehold improvements are depreciated using a straight-line basis over the shorter of their estimated useful lives or the terms of the related leases. Repair and maintenance costs are expensed as incurred and major betterments are capitalized. Sales and retirements of depreciable property and equipment are recorded by removing the related cost and accumulated depreciation from the accounts, and any related gains or losses are recorded. Advertising costs: We expense advertising costs as incurred, except for direct-response advertising. Direct-response advertising consists primarily of costs associated with the promotion of Playboy magazine subscriptions, principally the production of direct-mail solicitation materials and postage, and the distribution of direct and e-commerce mailings for use in the Online Group and previously for the Catalog Group. The capitalized direct-response advertising costs are amortized over the period during which the future benefits are expected to be received, generally six to 12 months. See Note (K) Advertising Costs. 42 Programming costs and amortization: Original programming and film acquisition costs are primarily assigned to the domestic and international networks and are capitalized and amortized utilizing the straight-line method over three years. Prior to the December 2002 PTVI restructuring, the portion of original programming costs assigned to the international TV market was fully amortized upon availability to PTVI. Existing library original programming costs allocated to the international TV market were amortized proportionately with license fees recognized related to the PTVI agreement. Management believes that these methods have provided a reasonable matching of expenses with total estimated revenues over the periods that revenues associated with films and programs are expected to be realized. Film and program amortization are adjusted periodically to reflect changes in the estimates of amounts of related future revenues. Film and program costs are stated at the lower of unamortized cost or estimated net realizable value as determined on a specific identification basis. See Note (C) Restructuring of Ownership of International TV Joint Ventures and Note (M) Programming Costs, Net. Intangible assets: On January 1, 2002, we adopted Statement 142, Goodwill and Other Intangible Assets. Under the new rules, goodwill and intangible assets with indefinite lives are no longer amortized but are subject to annual impairment tests. Our indefinite-lived intangible assets consist of trademarks and certain acquired distribution agreements. Other intangible assets continue to be amortized over their useful lives. Noncompete agreements are being amortized using the straight-line method over the lives of the agreements, either five or ten years. Distribution agreements deemed to have definite lives are being amortized using the straight-line method over the lives of the agreements, ranging from three months to eight years. A program supply agreement will be amortized using the straight-line method over the ten-year life of the agreement. Copyright defense, registration and/or renewal costs are being amortized using the straight-line method over 15 years. The noncompete agreements, program supply agreement and copyright costs are all included in "Other noncurrent assets." During the first quarter of 2002, we completed the required transitional impairment tests for goodwill and indefinite-lived intangible assets, which did not result in an impairment charge. Deferred tax liabilities related to these assets with indefinite lives will now be realized only if there is a disposition or an impairment of the value of these intangible assets. We currently have net operating losses, or NOLs, available to offset deferred tax liabilities realized within the NOL carryforward period. However, we cannot be certain that NOLs will be available when the deferred tax liabilities related to these intangible assets are realized. Therefore, in 2002, we recorded a noncash income tax provision of $7.1 million for these deferred tax liabilities, which included $5.8 million related to the cumulative effect of changing the accounting for amortization from prior years. The following table represents the pro forma effects as if we had adopted Statement 142 as of January 1, 2001 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - --------------------------------------------------------------------------------------------------- Net loss As reported $ (7,557) $ (17,135) $ (33,541) Amortization of goodwill and indefinite-lived intangible assets (net of tax) -- -- 5,762 Income tax benefit (expense) (839) 5,293 (17) - --------------------------------------------------------------------------------------------------- Pro forma $ (8,396) $ (11,842) $ (27,796) =================================================================================================== Basic and diluted EPS applicable to common shareholders As reported $ (0.31) $ (0.67) $ (1.37) Pro forma $ (0.34) $ (0.46) $ (1.14) ===================================================================================================
As a result of the restructuring of the ownership of PTVI in December 2002, we acquired distribution agreements of $3.4 million with a weighted average life of approximately four years and a program supply agreement of $3.2 million with a life of ten years. The weighted average life of the aggregate of the definite-lived intangible assets acquired was approximately seven years. We also acquired indefinite-lived distribution agreements of $9.0 million, which will not be amortized but will be subject to the annual impairment testing. 43 Amortizable intangible assets consisted of the following (in thousands):
December 31, 2003 December 31, 2002 -------------------------------------------- -------------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount - ------------------------------------------------------------------------------------------------------------------- Noncompete agreements $ 14,000 $ 12,037 $ 1,963 $ 14,000 $ 9,368 $ 4,632 Distribution agreements 3,151 970 2,181 10,893 6,598 4,295 Program supply agreement 3,226 323 2,903 3,226 -- 3,226 Copyrights 2,253 743 1,510 2,156 592 1,564 - ------------------------------------------------------------------------------------------------------------------- Total amortizable intangible assets $ 22,630 $ 14,073 $ 8,557 $ 30,275 $ 16,558 $ 13,717 ===================================================================================================================
At December 31, 2003 and 2002, our indefinite-lived intangible assets not subject to amortization included goodwill of $111.9 million for both years, and trademarks of $58.2 million and $55.2 million, respectively. Also, of the $32.2 million and $34.3 million of distribution agreements on our Consolidated Balance Sheets at December 31, 2003 and 2002, $30.0 million are indefinite-lived for both periods. At December 31, 2003 and 2002, goodwill by reportable segment was $111.4 million for both periods for the Entertainment Group and $0.5 million for both periods for the Online Group. At October 1, 2003, we completed our annual impairment testing of goodwill and indefinite-lived intangible assets and determined that no impairment exists. The aggregate amortization expense for intangible assets for 2003, 2002 and 2001 was $5.3 million, $7.2 million and $10.6 million, respectively. Amortization expense related to intangible assets with definite lives is expected to total approximately $2.0 million, $1.4 million, $1.1 million, $0.8 million and $0.7 million for each of the next five years, respectively. Derivative financial instruments: Effective January 1, 2001, we adopted Statement 133, Accounting for Derivative Instruments and Hedging Activities as amended by Statement 138, which require all derivative instruments to be recognized as either assets or liabilities on the balance sheet at fair value regardless of the purpose or intent for holding the derivative instrument. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of relationship. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking various hedge transactions. At December 31, 2003, we had derivative instruments that have been designated and qualify as cash flow hedges, which are entered into in order to hedge the variability of cash flows to be received related to forecasted royalty revenues denominated in foreign currencies, primarily Japanese Yen and the Euro. We hedge these royalties with forward contracts for periods not exceeding 12 months. The fair value and carrying value of our forward contracts were not material. Since these derivative instruments are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instruments is being deferred and reported as a component of "Accumulated other comprehensive loss" and is reclassified into earnings in the same line item where the royalty revenue is recognized into earnings. In 2001, we entered into an interest rate swap agreement that was scheduled to mature in May 2003 that effectively converted $45.0 million of our floating rate debt to fixed rate debt, thus reducing the impact of interest rate changes on future interest expense. The interest rate swap was terminated in March 2003 to coincide with the termination of our former credit facility. At December 31, 2002, the fair value and carrying value of our interest rate swap was a liability of approximately $0.6 million, respectively, recorded in "Other liabilities and accrued expenses." 44 At December 31, 2003 and 2002, we had net unrealized losses totaling $0.03 million and $0.7 million, respectively, in "Accumulated other comprehensive loss," which represents the effective portion of changes in fair value of the cash flow hedges. During 2003 and 2002, we reclassified $0.5 million and $1.5 million, respectively, of net losses from "Accumulated other comprehensive loss" to the Consolidated Statements of Operations, which were offset by net gains on the items being hedged. In 2003 and 2002, there were no amounts included in earnings related to hedging ineffectiveness. We do not expect any significant losses to be reclassified from "Accumulated other comprehensive loss" to earnings within the next 12 months. Earnings per common share: Basic EPS is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the dilutive effects of stock options and other potentially dilutive financial instruments. See Note (G) Earnings per Common Share. Equity investments: Prior to the restructuring of the ownership of PTVI, the equity method was used to account for our 19.9% interest in the common stock of PTVI due to our ability to exercise significant influence over PTVI's operating and financial policies. Equity in operations of PTVI included our 19.9% interest in the results of PTVI, the elimination of unrealized profits on certain transactions between us and PTVI and gains related to the transfer of certain assets to PTVI. Beginning in 2003, the equity method is used to account for our investment in PTVLA since the restructuring gave us the ability to exercise influence over PTVLA. The cost method was used prior to the restructuring. Minority interest: In 2001, one of our subsidiaries, Playboy.com, converted three promissory notes, together with accrued and unpaid interest thereon, into shares of Playboy.com's Series A Preferred Stock. As part of consolidation, included in "Minority interest" and "Other noncurrent liabilities" is the accretion of dividends payable and professional fees related to the preferred stock. Also included in "Other noncurrent liabilities" is minority interest associated with the preferred stock. As part of the restructuring of the ownership of PTVI, Claxson agreed to return its shares of the preferred stock. Additionally, in 2001, we sold a majority of our interest in VIPress. Prior to the sale, the financial statements of VIPress were included in our financial statements, along with the related minority interest. Foreign currency translation: Assets and liabilities in foreign currencies related to our international TV foreign operations and VIPress, prior to its sale in 2001, were translated into U.S. dollars at the exchange rate existing at the balance sheet date. The net exchange differences resulting from these translations were included in "Accumulated other comprehensive loss." Revenues and expenses were translated at average rates for the period. In addition, prior to the restructuring of the ownership of PTVI, we recorded our 19.9% interest in its foreign currency translation amounts. (B) ACQUISITION In July 2001, we acquired The Hot Network and The Hot Zone networks, together with the related television assets of Califa. In addition, we acquired the Vivid TV network, now operated as Spice Platinum, and the related television assets of VODI, a separate entity owned by the sellers. The addition of these networks into our television networks portfolio enables us to offer a wider range of adult programming. We accounted for the acquisition under the purchase method of accounting and, accordingly, the results of these networks since the acquisition date have been included in our Consolidated Statements of Operations. In connection with the acquisition and purchase price allocations, the Entertainment Group recorded goodwill of $27.4 million which is deductible over 15 years for income tax purposes. The purchase price was recorded at its net present value and is reported in the Consolidated Balance Sheets as components of current and noncurrent "Acquisition liabilities." We recorded $30.8 million of intangible assets separate from goodwill. We recorded $28.5 million for distribution agreements and $2.3 million for noncompete agreements. All of the noncompete agreements and $7.5 million of the distribution agreements are being amortized over approximately eight and two years, respectively, the weighted average lives of these agreements. Distribution agreements totaling $21.0 million were deemed to have indefinite lives and are not subject to amortization. The total consideration for the acquisition was $70.0 million and is required to be paid in installments over a ten-year period ending in 2011. The nominal consideration for Califa's assets was $28.3 million. We also assumed the obligations of Califa related to a note payable and noncompete liability. The nominal consideration for VODI's assets was $41.7 million. We were obligated to pay up to an additional $12.0 million in consideration upon the achievement of specified financial performance targets, $5.0 million of which we paid on February 28, 2003 and $7.0 million of which we paid on March 1, 2004. The amounts were recorded at the acquisition date as part of acquisition liabilities. 45 We may accelerate all or any portion of the remaining unpaid purchase price, but only by making the accelerated payments in cash, at a discount rate to be mutually agreed upon by the parties in good-faith negotiations. However, if the parties are unable to agree on the discount rate, we may, at our sole discretion, elect to accelerate the payment at a 10% discount rate if we choose to accelerate beginning on the 19th month following the closing and until the 36th month following the closing, or at a 12% discount after the 36th month following the closing. The Califa acquisition agreement gave us the option of paying up to $71 million of the scheduled payments in cash or Class B stock. The number of shares, if any, we issue in connection with a particular payment or particular payments is based on the trading prices of the Class B stock surrounding the applicable payment dates. Prior to each scheduled payment of consideration, we must provide the sellers with written notice specifying the portion of the purchase price payment that we intend to pay in cash and the portion in Class B stock. If we notify the sellers that we intend to issue Class B stock, the sellers must elect the portion of the shares that the sellers want us to register under the Securities Act, referred to as the eligible shares. We are then obligated to issue eligible shares registered under the Securities Act. The sellers may sell the eligible shares received during the 90-day period following the date the eligible shares are issued. If we do not get the registration statement relating to the resale of our shares issued in connection with a specified payment effective within the periods set forth in the agreement, we are also obligated to pay the sellers interest on the amount of the payment until the registration statement is declared effective. The interest payment can be paid in cash or shares of Class B stock at our option. For purposes of this discussion, references to eligible shares also include any shares of Class B stock issued to pay any required interest payments, if applicable. The interest rate will vary depending on the length of time required after the applicable payment date to get the registration statement declared effective. The number of eligible shares that may be sold on any day during a selling period is limited under the purchase agreement for the networks. A selling period will be extended if the applicable volume limitations did not permit all of the eligible shares to be sold during that selling period, assuming that the maximum number of shares were sold on each day during the period. If the sellers elect to sell eligible shares during the applicable selling period, and the proceeds from the sales of those eligible shares are less than the aggregate value of those eligible shares at the time of their issuance, we have agreed to make the sellers whole for the shortfall by, at our option, (a) paying the shortfall in cash, (b) issuing additional shares of Class B stock in an amount equal to the shortfall, referred to as the make-whole shares, or (c) increasing the next scheduled payment of consideration to the sellers in an amount equal to the shortfall plus interest on the shortfall at a specified interest rate until the next scheduled payment of consideration. The foregoing make-whole mechanism will apply only to the extent the sellers have sold the maximum number of shares they are entitled to sell during the applicable selling period in accordance with the applicable volume limitations. We are obligated to issue make-whole shares that are registered under the Securities Act and the sellers are entitled to sell those shares during a 30-day selling period that follows their issuance. Sales of make-whole shares are also subject to volume limitations and the selling periods applicable to make-whole shares will also be extended if the applicable volume limitations did not permit all of the make-whole shares to be sold during the applicable selling period, assuming that the maximum number of shares were sold on each day during the period. If during the applicable selling period for eligible shares or make-whole shares, the sales proceeds exceed the amount of the purchase price payment or the amount of the make-whole payment, the sellers will immediately cease the offering and sale of the remaining eligible shares or make-whole shares, as applicable, and the remaining eligible shares or make-whole shares, as applicable, will be returned promptly to us along with any excess sales proceeds. On April 17, 2002, a registration statement for the resale of approximately 1,475,000 shares became effective. These shares were issued in payment of the first two installments of consideration, which totaled $22.5 million plus $0.3 million of accrued interest. The sellers elected to sell the shares and realized net proceeds from the sale of $19.2 million. As a result, we were required to provide them with a make-whole payment in either cash or Class B stock of approximately $3.6 million, plus interest until the date payment was made. On March 14, 2003, we paid the sellers $17.3 million in cash, in satisfaction of $8.5 million of base consideration due in 2003, a $5.0 million performance-based payment due in 2003 and the $3.6 million make-whole payment, plus accrued interest of $0.2 million thereon. The amounts were recorded at the acquisition date as part of acquisition liabilities. 46 At December 31, 2003, the remaining installments of consideration were due as follows (in thousands), which includes $7.0 million of performance-based payments in 2004: 2004 $ 15,000 2005 8,000 2006 8,000 2007 8,000 2008 1,000 2009 1,000 2010 1,000 2011 750 - -------------------------------------------------------------------------------- Total future payments 42,750 ================================================================================ (C) RESTRUCTURING OF OWNERSHIP OF INTERNATIONAL TV JOINT VENTURES On December 24, 2002, we completed the restructuring of the ownership of our international TV joint ventures with Claxson. The restructuring resulted in our acquiring full ownership of Playboy TV and movie networks outside of the United States and Canada other than Latin America, Iberia and Japan. The Claxson joint ventures originated when PTVI and PTVLA were formed in 1999 and 1996, respectively, as joint ventures between us and a member of the Cisneros Group, or Cisneros, for the ownership and operation of Playboy TV networks outside of the United States and Canada. In 2001, Claxson succeeded Cisneros as our joint venture partner. Prior to the restructuring transaction, parts of which were effective as of April 1, 2002, PTVI and PTVLA had exclusive rights to create and launch new television networks under the Playboy and Spice brands outside of the United States and Canada, and under specified circumstances, to license programming to third parties. We owned a 19.9% equity interest in PTVI and a 19% equity interest in PTVLA before the restructuring. PTVLA is now our sole remaining joint venture with Claxson. Under the terms of the restructuring transaction, we (a) increased from 19.9% to 100% our ownership in PTVI, (b) acquired the 19.9% equity in two Japanese networks previously owned by PTVI, (c) retained our existing 19% ownership in PTVLA, (d) acquired an option to increase our percentage ownership of PTVLA, (e) obtained 100% distribution rights to Playboy TV en Espanol in the U.S. Hispanic market, (f) restructured our Latin American Internet joint venture with Claxson in favor of revenue share and promotional agreements for our respective Internet businesses in Latin America and (g) received from Claxson its preferred stock ownership in Playboy.com (approximately 3% equity in Playboy.com as if converted). Prior to the restructuring transaction, in return for the exclusive international TV rights for the use of the Playboy tradename, film and video library, and for the acquisition of the international rights to the Spice film library, the U.K. and Japan Playboy TV networks and certain international distribution contracts, PTVI was obligated to make total payments of $100.0 million to us, related to the above, over six years, of which $42.5 million had been received prior to the restructuring transaction. The remaining $57.5 million was to be paid to us from 2002 to 2004. We accounted for these revenues from the original sale of assets and the licensing payments on an "as received" basis. In return for our increased ownership in PTVI and the other terms of the restructuring transaction, among other things, (a) we forgave approximately $12.3 million in current programming and other receivables due from PTVI, (b) we will no longer receive the library or output agreement payments that we were scheduled to receive under the original agreement and (c) Claxson is released from its remaining funding obligations to PTVI. We accounted for this transaction as an unwinding of the PTVI joint venture and final payment under the original sale of assets and licensing agreement. Accordingly, any assets originally sold by us to PTVI have been recorded at their book values prior to the formation of PTVI. The majority of other PTVI net assets, including identifiable intangible assets created subsequent to PTVI's formation, have been recorded at 80.1% of their fair value as a result of the 80.1% additional ownership in PTVI that we have acquired. The Playboy.com preferred stock surrendered by Claxson has been recorded at its carrying value. The net value received, measured as described above, was $12.8 million. Of this amount, $12.3 million was applied to our current programming and other receivables from PTVI. The remaining $0.5 million was recorded as of the transaction date as the final revenue from the original sale of assets and licensing agreement. 47 The following unaudited pro forma information presents a summary of our results of operations assuming the restructuring transaction occurred on January 1, 2001 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Ended Ended 12/31/02 12/31/01 - ------------------------------------------------------------------------------------------------------ Net revenues $ 294,446 $ 301,060 Loss before cumulative effect of change in accounting principle (19,257) (43,804) Net loss (19,257) (48,022) Basic and diluted EPS Loss before cumulative effect of change in accounting principle (0.75) (1.79) Net loss $ (0.75) $ (1.97) - -----------------------------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative purposes only. They do not purport to be indicative of the results of operations which actually would have resulted had the restructuring transaction occurred on January 1, 2001, or of future results of operations. In 2002 and 2001, we recognized revenues from PTVI of $16.3 million and $17.0 million, respectively, and pre-tax income, including our equity in the results of PTVI's operations, of $8.4 million and $8.7 million, respectively. (D) RESTRUCTURING EXPENSES In 2003, primarily due to excess space in our Chicago office, we recorded unfavorable adjustments of $0.1 million and $0.2 million to the previous estimates related to the 2002 and 2001 restructuring plans, respectively. Of the total costs related to these restructuring plans, approximately $7.1 million was paid by December 31, 2003, with most of the remainder to be paid in 2004 and some payments continuing through 2007. In 2002, we announced a Company-wide restructuring initiative in order to reduce our ongoing operating expenses. The restructuring resulted in a workforce reduction of approximately 11%, or 70 positions. In connection with the restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million related to the termination of 53 employees. The remaining positions were eliminated through attrition. The initiative also involved consolidation of our office space in Los Angeles and Chicago, resulting in a charge of $2.8 million. In 2001, we implemented a restructuring plan in anticipation of a continuing weak economy. The plan included a reduction in workforce coupled with vacating portions of certain office facilities by combining operations for greater efficiency, refocusing sales and marketing, outsourcing some operations and reducing overhead expenses. Total restructuring charges of $4.6 million were recorded, including $0.9 million recorded in 2002 as an unfavorable adjustment to the original estimate. The adjustment was due primarily to a change in sublease assumptions. The restructuring resulted in a workforce reduction of approximately 15%, or 104 positions, through Company-wide layoffs and attrition. Approximately half of these employees were in the Online Group. Of the $4.6 million charge, $2.6 million related to the termination of 88 employees. The remaining positions were eliminated through attrition. The charge also included $2.0 million related to the excess space in our Chicago and New York offices. 48 The following table displays the activity and balances of the restructuring reserve account for the year ended December 31, 2003, 2002 and 2001 (in thousands):
Consolidation Workforce of Facilities and Reduction Operations Total - --------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $ 3,243 $ -- $ 3,243 Additional reserve recorded 2,453 1,239 3,692 Adjustment to previous estimate 84 -- 84 Cash payments (4,201) (97) (4,298) - --------------------------------------------------------------------------------------------------- Balance at December 31, 2001 1,579 1,142 2,721 Additional reserve recorded 2,938 2,799 5,737 Write-off leasehold improvements -- (437) (437) Adjustment to previous estimate 100 806 906 Cash payments (1,845) (505) (2,350) - --------------------------------------------------------------------------------------------------- Balance at December 31, 2002 2,772 3,805 6,577 Additional reserve recorded -- -- -- Adjustment to previous estimate (168) 518 350 Cash payments (1,974) (1,760) (3,734) - --------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193 ===================================================================================================
(E) GAIN (LOSS) ON DISPOSALS In 2001, we sold a majority of our equity interest in VIPress, publisher of the Polish edition of Playboy magazine. In connection with the sale, we recorded a gain of $0.4 million. Prior to the sale, the financial statements of VIPress were included in our financial statements, along with the related minority interest. Subsequent to the sale, our remaining 20% interest in VIPress was accounted for under the equity method and, as such, our proportionate share of the results of VIPress was included in nonoperating results. In 2002, we sold our remaining 20% interest in VIPress resulting in a gain of $0.4 million. There was no income tax effect attributable to either transaction due to our NOL carryforward position. In 2001, we sold our Collectors' Choice Music business. In connection with the sale, we recorded a loss of $1.3 million and a related deferred tax benefit of $0.5 million, which was offset by an increase in the valuation allowance. (F) INCOME TAXES The income tax provision consisted of the following (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - -------------------------------------------------------------------------------- Current: Federal $ 67 $ -- $ -- State 152 120 120 Foreign 3,246 1,362 242 - -------------------------------------------------------------------------------- Total current 3,465 1,482 362 - -------------------------------------------------------------------------------- Deferred: Federal 1,365 6,420 576 State 137 642 58 Foreign -- -- -- - -------------------------------------------------------------------------------- Total deferred 1,502 7,062 634 - -------------------------------------------------------------------------------- Total income tax provision $ 4,967 $ 8,544 $ 996 ================================================================================ 49 The U.S. statutory tax rate applicable to us was 35% for each of 2003, 2002 and 2001. The income tax provision differed from a provision computed at the U.S. statutory tax rate as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------------------------------------------- Statutory rate tax benefit $ (907) $ (3,007) $ (9,914) Increase (decrease) in taxes resulting from: Foreign income and withholding tax on licensing income 3,246 1,362 242 State income taxes 289 762 178 Nondeductible expenses 507 345 673 Increase in valuation allowance 3,307 9,479 9,902 Tax benefit of foreign taxes paid or accrued (1,556) (506) (85) Other 81 109 - - ------------------------------------------------------------------------------------------------------------------- Total income tax provision $ 4,967 $ 8,544 $ 996 ===================================================================================================================
Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply in the years in which the temporary differences are expected to reverse. In 2003, we increased the valuation allowance by $3.3 million, of which $1.5 million was due to the deferred tax treatment of certain acquired intangibles and the remainder was primarily due to the deferred tax asset related to the 2003 net operating loss. Of the $14.6 million increase in the valuation allowance in 2002, $7.1 million was due to the deferred tax treatment of certain acquired intangibles as a result of the adoption of Statement 142, Goodwill and Other Intangible Assets, and the remainder was primarily due to the deferred tax asset related to the 2002 net operating loss. The significant components of our deferred tax assets and deferred tax liabilities at December 31, 2002 and 2003 are presented below (in thousands):
Dec. 31, Net Dec. 31, 2002 Change 2003 - --------------------------------------------------------------------------------------------------- Deferred tax assets: NOLs $ 25,879 $ (913) $ 24,966 Capital loss carryforwards 10,577 (1,292) 9,285 Tax credit carryforwards 11,014 665 11,679 Temporary difference related to PTVI 15,014 528 15,542 Other deductible temporary differences 19,853 6,743 26,596 - --------------------------------------------------------------------------------------------------- Total deferred tax assets 82,337 5,731 88,068 Valuation allowance (69,146) (3,307) (72,453) - --------------------------------------------------------------------------------------------------- Deferred tax assets 13,191 2,424 15,615 - --------------------------------------------------------------------------------------------------- Deferred tax liabilities: Deferred subscription acquisition costs (5,700) 217 (5,483) Intangible assets (16,474) (3,054) (19,528) Other taxable temporary differences (3,392) (1,089) (4,481) - --------------------------------------------------------------------------------------------------- Deferred tax liabilities (25,566) (3,926) (29,492) - --------------------------------------------------------------------------------------------------- Net deferred tax liabilities $ (12,375) $ (1,502) $ (13,877) ===================================================================================================
At December 31, 2003, we had NOLs of $71.3 million expiring from 2009 through 2021. We had capital loss carryforwards of $26.5 million expiring from 2004 through 2007. In addition, foreign tax credit carryforwards of $10.5 million and minimum tax credit carryforwards of $1.1 million are available to reduce future U.S. federal income taxes. The foreign tax credit carryforwards expire in 2004 through 2008, and the minimum tax credit carryforwards have no expiration date. 50 (G) EARNINGS PER COMMON SHARE The following table represents the approximate number of shares related to options to purchase our Class A and Class B common stock and Class B restricted stock awards that were outstanding which were not included in the computation of diluted EPS as the inclusion of these shares would have been antidilutive (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - --------------------------------------------------------------------------- Stock options 2,835 2,670 2,245 Convertible preferred stock 1,506 -- -- Restricted stock awards -- 250 245 - --------------------------------------------------------------------------- Total 4,341 2,920 2,490 =========================================================================== As a result, the weighted average number of basic and diluted common shares outstanding for 2003, 2002 and 2001 were equivalent. On February 11, 2004, we filed a registration statement with the Securities and Exchange Commission to offer approximately 3.2 million shares of our Class B stock. (H) FINANCIAL INSTRUMENTS Fair Value: The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. For cash and cash equivalents, receivables, certain other current assets, current maturities of long-term debt and short-term debt, the amounts reported approximated fair value due to their short-term nature. At December 31, 2002, our long-term debt related to our former credit agreement and the amount reported approximated fair value as the interest rate on the debt was generally reset every quarter to reflect current rates. The interest rate swap agreement fair value at December 31, 2002 was $0.6 million, which reflected the amount that we would have to pay if we had terminated the agreement on that date. In connection with the repayment of our former credit agreement, we terminated the swap agreement on March 11, 2003 for a fee of $0.4 million. The related party long-term debt of $10.0 million that existed at December 31, 2002 represented the approximate fair value, since interest rates had not materially changed since the time the note was issued. The related party debt, short-term and long-term, was exchanged for an equivalent amount of preferred stock on March 11, 2003. At December 31, 2003, our long-term debt consisted of $115.0 million of senior secured notes, due 2010, with a coupon of 11.00%. The fair value of these notes was determined to be $131.8 million using market prices. For foreign currency forward contracts, the fair value was estimated using quoted market prices established by financial institutions for comparable instruments, which approximated the contracts' values. Concentrations of Credit Risk: Concentration of credit risk with respect to accounts receivable is limited due to the wide variety of customers and segments from which our products are sold and licensed. (I) MARKETABLE SECURITIES Marketable securities, primarily purchased in connection with our deferred compensation plans, consisted of the following (in thousands): Dec. 31, Dec. 31, 2003 2002 - ------------------------------------------------------------------------------- Cost of marketable securities $ 3,811 $ 3,759 Gross unrealized holding gains 50 -- Gross unrealized holding losses (315) (1,082) - ------------------------------------------------------------------------------- Fair value of marketable securities $ 3,546 $ 2,677 =============================================================================== There were no proceeds from the sale of marketable securities for 2003, 2002 and 2001, and therefore no gains or losses were realized. Included in "Total other comprehensive income (loss)" for 2003 were net unrealized holding gains of $0.8 million, and for 2002 and 2001 net unrealized holding losses of $0.6 million and $0.4 million, respectively. 51 (J) INVENTORIES, NET Inventories, net, consisted of the following (in thousands): Dec. 31, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- Paper $ 2,613 $ 2,470 Editorial and other prepublication costs 6,082 5,992 Merchandise finished goods 3,322 2,036 - -------------------------------------------------------------------------------- Total inventories, net $12,017 $10,498 ================================================================================ (K) ADVERTISING COSTS At December 31, 2003 and 2002, advertising costs of $6.9 million and $6.7 million, respectively, were deferred and included in "Deferred subscription acquisition costs" and "Other current assets." For 2003, 2002 and 2001, our advertising expense was $34.5 million, $31.4 million and $35.5 million, respectively. (L) PROPERTY AND EQUIPMENT, NET Property and equipment, net, consisted of the following (in thousands): Dec. 31, Dec. 31, 2003 2002 - ------------------------------------------------------------------------------- Land $ 292 $ 292 Buildings and improvements 8,644 8,624 Furniture and equipment 17,745 18,353 Leasehold improvements 11,137 8,616 Software 6,855 7,515 - ------------------------------------------------------------------------------- Total property and equipment 44,673 43,400 Accumulated depreciation (32,653) (31,684) - ------------------------------------------------------------------------------- Total property and equipment, net $ 12,020 $ 11,716 =============================================================================== (M) PROGRAMMING COSTS, NET Programming costs, net, consisted of the following (in thousands): Dec. 31, Dec. 31, 2003 2002 - -------------------------------------------------------------------------------- Released, less amortization $44,919 $41,935 Completed, not yet released 5,877 7,714 In-process 6,630 2,698 - -------------------------------------------------------------------------------- Total programming costs, net $57,426 $52,347 ================================================================================ Based on management's estimate of future total gross revenues at December 31, 2003, approximately 53% of the completed original programming costs is expected to be amortized during 2004. We expect to amortize virtually all of the released original programming costs during the next three years. At December 31, 2003, we had $18.3 million of film acquisition costs. Film acquisition costs are typically amortized using the straight-line method over the license term, generally three years or less. 52 (N) FINANCING OBLIGATIONS Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31, 2003 2002 - ------------------------------------------------------------------------------------------ Short-term financing obligations to related parties: Promissory note, interest of 8.00% $ -- $ 17,235 ========================================================================================== Long-term financing obligations: Tranche A term loan, interest of 4.42% at December 31, 2002 $ -- $ 7,232 Tranche B term loan, weighted average interest of 5.67% at December 31, 2002 -- 55,285 Revolving credit facility, weighted average interest of 6.25% at December 31, 2002 -- 2,750 Senior secured notes, interest of 11.00% at December 31, 2003 115,000 -- - ------------------------------------------------------------------------------------------ Total long-term financing obligations 115,000 65,267 Less current maturities -- (6,402) - ------------------------------------------------------------------------------------------ Long-term financing obligations $115,000 $ 58,865 ========================================================================================== Long-term financing obligations to related parties: Promissory note, interest of 9.00% $ -- $ 10,000 ==========================================================================================
We have no minimum payments required for our long-term financing obligations until 2010, at which point, our senior secured notes of $115.0 million are due. Debt Financings On March 11, 2003, we completed the offering of $115.0 million in aggregate principal amount of senior secured notes of our subsidiary, Holdings. On September 17, 2003, the senior secured notes were exchanged for new registered senior secured notes. The form and terms of the new notes are identical in all material respects (including principal amount, interest rate, maturity, ranking and covenant restrictions) to the form and terms of the old notes. The notes mature on March 15, 2010 and bear interest at the rate of 11.00% per annum, with interest payable on March 15th and September 15th of each year, beginning September 15, 2003. The notes are guaranteed on a senior secured basis by us and by substantially all of our domestic subsidiaries, referred to as the guarantors, excluding Playboy.com and its subsidiaries. The notes and the guarantees rank equally in right of payment with our and the guarantors' other existing and future senior debt. The notes and the guarantees are secured by a first-priority lien on our and each guarantor's trademarks, referred to as the primary collateral, and by a second-priority lien, junior to a lien for the benefit of the lenders under the new credit facility, as described below, on (a) 100% of the stock of substantially all of our domestic subsidiaries, excluding the subsidiaries of Playboy.com, (b) 65% of the capital stock of substantially all of our indirect first-tier foreign subsidiaries, (c) substantially all of our and each guarantor's domestic personal property, excluding the primary collateral and (d) the Playboy Mansion, or collectively, the secondary collateral. Our ability to pay cash dividends on our common stock is limited under the terms of the notes. On March 11, 2003, we used $73.3 million of the notes proceeds to repay $73.0 million in outstanding principal and $0.3 million in accrued interest and fees on our previous credit facility. Effective with this repayment, that credit facility was terminated. In connection with the termination of the credit facility, we also terminated our existing interest rate swap agreement for $0.4 million, which was scheduled to mature in May 2003. On March 14, 2003, we paid $17.3 million to the Califa principals in satisfaction of substantially all of our 2003 payment obligations, which are discussed below. On March 11, 2003, Holdings also entered into an agreement for a new revolving credit facility, through which we are permitted to borrow up to $20.0 million in revolving borrowings, issue letters of credit or a combination of both. For purposes of calculating interest, revolving loans made under the new credit facility will be designated at either the offshore dollar inter bank rate, or IBOR, plus a borrowing margin based on our adjusted EBITDA or, in certain circumstances, at a base rate plus a borrowing margin based on our adjusted EBITDA, as defined in the agreement. Letters of credit issued under the new credit facility bear fees at IBOR plus a borrowing margin based on our adjusted EBITDA. All amounts outstanding under the new credit facility will mature on March 11, 2006. Our obligations under the new credit facility are guaranteed by us and each of the guarantors of the notes. The obligations of us and each of the guarantors under the new credit facility are secured by a first-priority lien on the secondary collateral and a second-priority lien on the primary collateral that supports obligations under the notes. At December 31, 2003, there were no borrowings and $9.6 million in letters of credit outstanding under this facility. 53 Financing from Related Party At December 31, 2002 Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr. Hefner in the form of three promissory notes. Upon the closing of the senior secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the amount of $10.0 million, was extinguished in exchange for shares of Holdings Series A Preferred Stock with an aggregate stated value of $10.0 million. The two other promissory notes, in the combined principal amount of $17.2 million, were extinguished in exchange for $0.5 million in cash and shares of Holdings Series B Preferred Stock with an aggregate stated value of $16.7 million. Pursuant to the terms of an exchange agreement between us, Holdings, Playboy.com and Mr. Hefner and certificates of designation governing the Holdings Series A and Series B Preferred Stock, we were required to exchange the Holdings Series A Preferred Stock for shares of Playboy Class B stock and to exchange the Holdings Series B Preferred Stock for shares of Playboy Preferred Stock. In order to issue the Playboy Preferred Stock, we were required to amend our certificate of incorporation to authorize the issuance, which we refer to as the certificate amendment. In accordance with applicable law, Mr. Hefner, the holder of more than a majority of our outstanding Class A voting common stock, approved the certificate amendment by written consent. As a result, on May 1, 2003, we filed an amendment to our certificate of incorporation and exchanged the Holdings Series A Preferred Stock plus accumulated dividends for 1,122,209 shares of Playboy Class B stock and exchanged the Holdings Series B Preferred Stock for 1,674 shares of Playboy Preferred Stock. The Playboy Preferred Stock accrues dividends at a rate of 8.00% per annum, which are paid semi-annually. The Playboy Preferred Stock is convertible at the option of Mr. Hefner, the holder, into shares of our Class B stock at a conversion price of $11.2625, which is equal to 125% of the weighted average closing price of our Class B stock over the 90-day period prior to the exchange of Holdings Series B Preferred Stock for Playboy Preferred Stock. Beginning May 1, 2006, if at any time the weighted average closing price of our Class B stock for 15 consecutive trading days equals or exceeds 150% of the conversion price, or $16.89, we will have the option, by delivering a written notice to the holder of shares of Playboy Preferred Stock, to convert any or all shares of Playboy Preferred Stock into the number of shares of Class B stock determined by dividing (a) the sum of the aggregate stated value of such Playboy Preferred Stock and the amount of accrued and unpaid dividends by (b) the conversion price. On September 15, 2010, we will be required to redeem all shares of Playboy Preferred Stock that are then outstanding at a redemption price equal to $10,000 per share plus the amount of accrued and unpaid dividends. The final redemption price may be paid, at our option, in either cash or shares of our Class B stock or any combination of cash and shares of Class B stock. If we elect to pay the final redemption price in shares of our Class B stock, the number of such shares to which a holder of shares of Playboy Preferred Stock will be entitled will be determined by dividing (a) the sum of the aggregate stated value of such Playboy Preferred Stock and the amount of accrued and unpaid dividends by (b) the weighted average closing price of our Class B stock over the 90-day period prior to September 15, 2010. If the announced offering of Class B stock is completed, Mr. Hefner will convert all of his Playboy Preferred Stock into 1,485,948 shares of Class B stock, in accordance with the terms of the Playboy Preferred Stock, and those shares, along with the 1,122,209 Class B shares that he received in exchange for his Holdings Series A Preferred Stock will be sold in the offering. (O) BENEFIT PLANS Our Employees Investment Savings Plan is a defined contribution plan consisting of two components, a profit sharing plan and a 401(k) plan. The profit sharing plan covers all employees who have completed 12 months of service of at least 1,000 hours. Our discretionary contribution to the profit sharing plan is distributed to each eligible employee's account in an amount equal to the ratio of each eligible employee's compensation, subject to Internal Revenue Service limitations, to the total compensation paid to all such employees. Total contributions for 2003, 2002 and 2001 were $1.0 million, $0.5 million and $0.5 million, respectively. All employees are eligible to participate in the 401(k) plan upon their date of hire. We offer several mutual fund investment options. The purchase of our stock is not an option. We make matching contributions to the 401(k) plan based on each participating employee's contributions and eligible compensation. Our matching contributions for 2003, 2002 and 2001 related to this plan were $1.0 million, $1.1 million and $1.2 million, respectively. 54 We have two nonqualified deferred compensation plans, which permit certain employees and all nonemployee directors to annually elect to defer a portion of their compensation. A match is provided to employees who participate in the deferred compensation plan, at a certain specified minimum level, and whose annual eligible earnings exceed the salary limitation contained in the 401(k) plan. All amounts deferred and earnings credited under these plans are immediately 100% vested and are general unsecured obligations. Such obligations totaled $4.2 million and $3.4 million at December 31, 2003 and 2002, respectively, and are included in "Other noncurrent liabilities." We have an Employee Stock Purchase Plan to provide substantially all regular full- and part-time employees an opportunity to purchase shares of our Class B stock through payroll deductions. The funds are withheld and then used to acquire stock on the last trading day of each quarter, based on the closing price less a 15% discount. At December 31, 2003, a total of approximately 35,000 shares of Class B stock were available for future purchases under this plan. (P) COMMITMENTS AND CONTINGENCIES Our principal lease commitments are for office space, operations facilities and furniture and equipment. Some of these leases contain renewal or end-of-lease purchase options. Our restructuring initiatives in 2002 and 2001 included the consolidation of our office space in our Chicago, New York and Los Angeles locations. In our restructuring efforts, we have subleased a portion of our excess office space, and are working to sublease our remaining excess office space. See Note (D) Restructuring Expenses. Rent expense was as follows (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------- Minimum rent expense $ 13,755 $ 11,343 $ 15,406 Sublease income (842) (1,036) (1,372) - ------------------------------------------------------------------------------- Net rent expense $ 12,913 $ 10,307 $ 14,034 =============================================================================== There was no contingent rent expense in any of these periods. The minimum future commitments at December 31, 2003, under operating leases with initial or remaining noncancelable terms in excess of one year, were as follows (in thousands): 2004 $ 12,899 2005 10,762 2006 10,044 2007 9,258 2008 7,140 Later years 31,033 Less minimum sublease income (4,043) - ------------------------------------------------------------------------------- Net minimum lease commitments $ 77,093 =============================================================================== Our entertainment programming is delivered to DTH and cable operators through communications satellite transponders. We currently have three transponder service agreements related to our domestic networks, the terms of which currently extend through 2006, 2010 and 2015. We also have four international transponder service agreements as a result of the December 2002 restructuring of the ownership of PTVI, one which expires in 2004 and three which expire in 2006. At December 31, 2003, future commitments related to these seven agreements were $5.4 million, $5.1 million, $4.6 million, $3.5 million and $3.5 million for 2004, 2005, 2006, 2007 and 2008, respectively, and $13.2 million thereafter. These service agreements contain protections typical in the industry against transponder failure, including access to spare transponders, and conditions under which our access may be denied. Major limitations on our access to DTH or cable systems or satellite transponder capacity could materially adversely affect our operating performance. There have been no instances in which we have been denied access to transponder service. 55 In 2002, a $4.4 million verdict was entered against us by a state trial court in Texas in a lawsuit with a former publishing licensee. We terminated the license in 1998 due to the licensee's failure to pay royalties and other amounts due to us under the license agreement. We are currently pursuing an appeal. We have posted a bond in the amount of $7.7 million, which represents the amount of the judgment, costs and estimated pre and post-judgment interest. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be sustained and have not recorded a liability for this case in accordance with Statement 5, Accounting for Contingencies. In the fourth quarter of 2003, we recorded $8.5 million related to settlement of the Logix litigation, which related to events prior to our 1999 acquisition of Spice. We made a payment of $6.5 million in February 2004 and will make payments of $1.0 million each in 2005 and 2006. (Q) STOCK PLANS We have various stock plans for key employees and nonemployee directors which provide for the grant of nonqualified and incentive stock options and shares of restricted stock, deferred stock and other performance-based equity awards. The exercise price of options granted equals or exceeds the fair value at the grant date. In general, options become exercisable over a two- to four-year period from the grant date and expire ten years from the grant date. Restricted stock awards provided for the issuance of Class B stock subject to restrictions that lapsed if we met specified operating income objectives pertaining to a fiscal year. Vesting requirements for certain restricted stock awards would have lapsed automatically, regardless of whether or not we had achieved those objectives, generally ten years from the award date. The final two operating income objectives were met in 2003 and 241,374 shares of restricted stock vested. In 2002, it was probable that the performance criteria would be met, so we recorded $2,748,000 of amortization expense in 2002 operating results. In addition, one of the plans pertaining to nonemployee directors also allows for the issuance of Class B stock as awards and payment for annual retainers and committee and meeting fees. At December 31, 2003, a total of 2,195,896 shares of Class B stock were available for future grants under the various stock plans combined. Stock option transactions are summarized as follows:
Weighted Average Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------- Class A Class B Class A Class B - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 2000 5,000 1,841,415 $7.38 $18.72 Granted -- 537,000 -- 12.28 Exercised (5,000) (235,779) 7.38 8.27 Canceled -- (77,500) -- 16.77 - ------------------------------------------------------------------------------------ Outstanding at December 31, 2001 -- 2,065,136 -- 18.31 Granted -- 781,250 -- 14.91 Exercised -- (11,500) -- 10.31 Canceled -- (219,000) -- 16.19 - ------------------------------------------------------------------------------------ Outstanding at December 31, 2002 -- 2,615,886 -- 17.51 Granted -- 701,000 -- 10.03 Exercised -- (17,500) -- 10.95 Canceled -- (455,500) -- 14.33 - ------------------------------------------------------------------------------------ Outstanding at December 31, 2003 -- 2,843,886 $ -- $16.22 ===================================================================================================================
The following table summarizes information regarding stock options at December 31, 2003:
Options Outstanding Options Exercisable -------------------------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ------------------------------------------------------------------------------------------------------------------- Class B $8.25-$15.85 1,851,886 7.14 $ 11.97 865,261 $ 12.65 16.72-21.00 472,500 5.17 20.72 472,500 20.72 $24.13-$31.50 519,500 5.39 27.26 519,500 27.26 - ------------------------------------------------------------------------------------------------------------------- Total Class B 2,843,886 6.49 $ 16.22 1,857,261 $ 18.79 ===================================================================================================================
The weighted average exercise prices for Class B exercisable options at December 31, 2002 and 2001 were $18.65 and $18.27, respectively. 56 The following table summarizes transactions related to restricted stock awards: Restricted Stock Awards Outstanding Class B - ------------------------------------------------------------------------------- Outstanding at December 31, 2000 240,124 Awarded 45,000 Vested -- Canceled (21,250) ------------------------------------------------------------------------------ Outstanding at December 31, 2001 263,874 Awarded 15,000 Vested -- Canceled (37,500) ------------------------------------------------------------------------------ Outstanding at December 31, 2002 241,374 Awarded -- Vested (241,374) Canceled -- - ------------------------------------------------------------------------------- Outstanding at December 31, 2003 -- =============================================================================== There was no restricted stock awarded in 2003. For 2002 and 2001, the weighted average fair value of restricted stock awarded was $11.82 and $14.37, respectively. (R) SALE OF SECURITIES The Califa acquisition agreement gave us the option of paying up to $71 million of the purchase price in cash or Class B stock through 2007. On April 17, 2002, a registration statement for the resale of approximately 1,475,000 shares became effective. These shares were issued in payment of the first two installments of consideration, which totaled $22.5 million plus $0.3 million of accrued interest. The sellers elected to sell the shares and realized net proceeds from the sale of $19.2 million. As a result, we were required to provide them with a make-whole payment in either cash or Class B stock of approximately $3.6 million, plus interest until the date payment was made. On March 14, 2003, we paid the sellers $17.3 million in cash, in satisfaction of $8.5 million of base consideration due in 2003, a $5.0 million performance-based payment due in 2003 and the $3.6 million make-whole payment, plus accrued interest of $0.2 million thereon. The amounts were recorded at the acquisition date as part of acquisition liabilities. (S) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest and income taxes was as follows (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------- Interest $ 13,720 $ 9,260 $ 8,730 Income taxes $ 3,668 $ 1,485 $ 782 - ------------------------------------------------------------------------------- In 2003, we had noncash activities related to the conversion of three related party promissory notes. The notes were first converted to Holdings Series A and Series B Preferred Stock. Subsequently, the Holdings Series A Preferred Stock was converted to Playboy Class B stock and the Series B Preferred Stock was converted to Playboy Preferred Stock. See Note (N) Financing Obligations. In 2002, we had noncash activities related to the conversion of two related party promissory notes and accrued interest into a new promissory note. In 2002 and 2001, we had noncash activities related to the Califa acquisition. See Note (B) Acquisition. (T) SEGMENT INFORMATION Our businesses are currently classified into the following four reportable segments: Entertainment, Publishing, Online and Licensing. Formerly, we operated a fifth segment, Catalog, which we divested in connection with our sale of the Collectors' Choice Music catalog in 2001. Entertainment Group operations include the production and marketing of adult television programming for our domestic and international TV networks and worldwide DVD/home video products. Publishing Group operations include the publication of Playboy magazine; other domestic publishing businesses comprising special editions, calendars and ancillary businesses; and the licensing of international editions of Playboy magazine. Online Group operations include subscription, e-commerce and other Internet businesses including advertising, international ventures and online gaming. Licensing Group operations includes the licensing of consumer products carrying one or more of our trademarks and images, as well as Playboy branded location-based entertainment and marketing activities. 57 These reportable segments are based on the nature of the products offered. Our chief operating decision maker evaluates performance and allocates resources based on several factors, of which the primary financial measure is segment operating results. The accounting policies of the reportable segments are the same as those described in Note (A) Summary of Significant Accounting Policies. The following table represents financial information by reportable segment (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/03 12/31/02 12/31/01 - ------------------------------------------------------------------------------------------------------------- Net revenues (1) Entertainment $ 136,891 $ 121,639 $ 113,833 Publishing 120,678 111,802 124,496 Online 38,844 30,964 27,499 Licensing 19,431 13,217 10,769 Catalog -- -- 10,986 - ------------------------------------------------------------------------------------------------------------- Total $ 315,844 $ 277,622 $ 287,583 ============================================================================================================= Income (loss) before income taxes and cumulative effect of change in accounting principle Entertainment $ 28,061 $ 32,365 $ 29,921 Publishing 5,160 2,669 1,776 Online 2,762 (8,916) (21,673) Licensing 10,358 4,581 2,614 Catalog -- -- (453) Corporate Administration and Promotion (16,539) (15,810) (19,700) Restructuring expenses (350) (6,643) (3,776) Gain (loss) on disposals -- 442 (955) Nonoperating expense (32,042) (17,279) (16,081) - ------------------------------------------------------------------------------------------------------------- Total $ (2,590) $ (8,591) $ (28,327) ============================================================================================================= Depreciation and amortization (2) (3) Entertainment $ 47,096 $ 48,538 $ 45,585 Publishing 397 371 560 Online 796 1,083 1,980 Licensing 33 46 209 Catalog -- -- 26 Corporate Administration and Promotion 1,236 1,581 3,544 - ------------------------------------------------------------------------------------------------------------- Total $ 49,558 $ 51,619 $ 51,904 ============================================================================================================= Identifiable assets (2) (4) Entertainment $ 265,056 $ 263,416 $ 317,848 Publishing 48,462 43,861 49,219 Online 5,493 4,047 4,463 Licensing 8,199 4,726 4,732 Catalog -- 36 1,244 Corporate Administration and Promotion 90,850 53,635 48,734 - ------------------------------------------------------------------------------------------------------------- Total $ 418,060 $ 369,721 $ 426,240 =============================================================================================================
(1) Net revenues include revenues attributable to foreign countries of approximately $64,138, $45,695 and $48,522 in 2003, 2002 and 2001, respectively. Revenues from individual foreign countries were not material. Revenues are generally attributed to countries based on the location of customers, except licensing royalties where revenues are attributed based upon the location of licensees. (2) The majority of our property and equipment and capital expenditures are reflected in Corporate Administration and Promotion; depreciation, however, is allocated to the reportable segments. (3) Amounts include depreciation of property and equipment, amortization of intangible assets and amortization of investments in entertainment programming. (4) Our long-lived assets located in foreign countries were not material. 58 (U) RELATED PARTY TRANSACTIONS In 1971, we purchased the Playboy Mansion in Los Angeles, California, where our founder, Hugh M. Hefner, lives. The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production, magazine photography, online events and sales events. It also enhances our image, as host for many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition which increase public awareness of us and our products and services. Mr. Hefner pays us rent for that portion of the Playboy Mansion used exclusively for his and his personal guests' residence as well as the per-unit value of non-business meals, beverages and other benefits received by him and his personal guests. The Playboy Mansion is included in our Consolidated Balance Sheets at December 31, 2003 and 2002 at a net book value, including all improvements and after accumulated depreciation, of $1.6 million and $1.9 million, respectively. The operating expenses of the Playboy Mansion, including depreciation and taxes, were $2.3 million, $3.6 million and $3.2 million for 2003, 2002 and 2001, respectively, net of rent received from Mr. Hefner. We estimated the sum of the rent and other benefits payable for 2003 to be $1.5 million, and Mr. Hefner paid that amount during 2003. The actual rent and other benefits payable for 2002 and 2001 were $1.3 million in each year. From time to time, we enter into barter transactions in which we secure air transportation for Mr. Hefner in exchange for advertising pages in Playboy magazine. Mr. Hefner reimburses us for our direct costs of providing these ad pages. We receive significant promotional benefit from these transactions. There were no such transactions in 2003. At December 31, 2002 and at the time of the Hefner debt restructuring, Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr. Hefner in the form of three promissory notes. Upon the closing of the senior secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was restructured as previously discussed in Note (N) Financing Obligations. Prior to the December 2002 PTVI ownership restructuring, we also had material related party transactions with PTVI. See Note (C) Restructuring of Ownership of International TV Joint Ventures. 59 (V) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for 2003 and 2002 (in thousands, except per share amounts):
Quarters Ended Fiscal ------------------------------------------------- Year 2003 Mar. 31 June 30 Sept. 30 Dec. 31 Ended - ------------------------------------------------------------------------------------------------------- Net revenues $ 74,281 $ 75,971 $ 74,448 $ 91,144 $315,844 Operating income 9,450 5,518 5,661 8,823 29,452 Net income (loss) 632 (905) (610) (6,674) (7,557) Net income (loss) applicable to common shareholders 632 (1,128) (944) (7,010) (8,450) Basic and diluted EPS applicable to common shareholders 0.02 (0.04) (0.03) (0.26) $ (0.31) Common stock price Class A high 10.23 12.64 13.86 15.68 Class A low 7.48 8.03 11.64 13.48 Class B high 11.95 13.74 15.11 16.91 Class B low $ 7.92 $ 8.47 $ 12.75 $ 14.45 - ------------------------------------------------------------------------------------------------------- Quarters Ended Fiscal ------------------------------------------------- Year 2002 Mar. 31 June 30 Sept. 30 Dec. 31 Ended - ------------------------------------------------------------------------------------------------------- Net revenues $ 66,147 $ 70,566 $ 67,372 $ 73,537 $277,622 Operating income 2,249 2,168 4,188 83 8,688 Net loss (9,387) (3,064) (639) (4,045) (17,135) Basic and diluted EPS (0.38) (0.12) (0.01) (0.16) $ (0.67) Common stock price Class A high 15.06 14.65 11.45 9.55 Class A low 12.37 10.72 7.70 6.50 Class B high 17.50 16.75 13.12 10.85 Class B low $ 14.12 $ 12.18 $ 8.50 $ 7.48 - -------------------------------------------------------------------------------------------------------
Net loss for the quarter ended December 31, 2003 included an $8.5 million charge related to the Logix litigation settlement. Net income for the quarter ended March 31, 2003 included $3.3 million of debt extinguishment expenses in connection with financing obligations which were repaid upon completion of our debt offering in the quarter. Net loss for the quarter ended March 31, 2002 included a $5.8 million noncash income tax charge related to our adoption of Statement 142, Goodwill and Other Intangible Assets. See Note (A) Summary of Significant Accounting Policies. Operating income for the quarter ended December 31, 2002 included restructuring expenses of $6.6 million. See Note (D) Restructuring Expenses. The net loss for the quarter included a nonoperating gain of $0.7 million related to a vendor settlement. 60 (W) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS On March 11, 2003, Holdings completed an offering of $115.0 million of 11.00% senior secured notes due in 2010, which we refer to as the Old Notes. On September 17, 2003, the Old Notes were exchanged for new 11.00% senior secured notes due in 2010, which we refer to as the New Notes. The form and terms of the New Notes are identical in all material respects (including principal amount, interest rate, maturity, ranking and covenant restrictions) to the form and terms of the Old Notes, except that the New Notes (a) have been registered under the Securities Act of 1933, as amended, or the Securities Act, (b) do not bear restrictive legends restricting their transfer under the Securities Act, (c) are not entitled to the registration rights that apply to the Old Notes and (d) do not contain provisions relating to liquidated damages in connection with the Old Notes under circumstances related to the timing of the exchange offer. The payment obligations under the New Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by us and by substantially all of our domestic subsidiaries, referred to as the guarantors, excluding Playboy.com and its subsidiaries. All of our remaining subsidiaries, referred to as the nonguarantors, are wholly-owned by the guarantors except for Playboy.com and its subsidiaries, which are majority-owned subsidiaries. The following supplemental Condensed Consolidating Statements of Operations for the years ended December 31, 2003, 2002 and 2001, the Condensed Consolidating Balance Sheets at December 31, 2003 and December 31, 2002 and the Condensed Consolidating Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001, present financial information for (a) us (carrying our investment in Holdings under the equity method), (b) Holdings, the issuer of the New Notes (carrying its investment in the guarantors under the equity method), (c) on a combined basis the guarantors (carrying any investment in nonguarantors under the equity method) and (d) on a combined basis the nonguarantors. Separate financial statements of the guarantors are not presented because the guarantors are jointly, severally, and unconditionally liable under the guarantees, and we believe that separate financial statements and other disclosures regarding the guarantors are not material to investors. In general, Holdings has entered into third-party borrowings and financed its subsidiaries via intercompany accounts. All intercompany activity has been included as "Net receipts from (payments to) subsidiaries" in the Condensed Consolidating Statements of Cash Flows. In certain cases, taxes have been calculated on the basis of a group position that includes both guarantors and nonguarantors. In such cases, the taxes have been allocated to individual legal entities based upon each legal entity's actual contribution to the tax provision. 61 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands)
Year Ended December 31, 2003 ---------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 256,063 $ 76,580 $ (16,799) $ 315,844 - ---------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (188,850) (57,165) 16,799 (229,216) Selling and administrative expenses -- -- (45,979) (10,847) -- (56,826) Restructuring expenses -- -- 24 (374) -- (350) - ---------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (234,805) (68,386) 16,799 (286,392) - ---------------------------------------------------------------------------------------------------------------------------------- Operating income -- -- 21,258 8,194 -- 29,452 - ---------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 432 44 (113) 363 Interest expense -- (11,288) (4,584) (550) 113 (16,309) Amortization of deferred financing fees -- (1,383) -- (24) -- (1,407) Minority interest (297) -- (1,363) -- -- (1,660) Debt extinguishment expenses -- (3,061) -- (203) -- (3,264) Equity in operations of investments -- -- (80) -- -- (80) Litigation settlement -- -- (8,500) -- -- (8,500) Equity income (loss) from subsidiaries (7,260) 8,847 5,453 -- (7,040) -- Other, net -- (375) (663) (147) -- (1,185) - ---------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (7,557) (7,260) (9,305) (880) (7,040) (32,042) - ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (7,557) (7,260) 11,953 7,314 (7,040) (2,590) Income tax expense -- -- (3,106) (1,861) -- (4,967) - ---------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (7,557) $ (7,260) $ 8,847 $ 5,453 $ (7,040) $ (7,557) ================================================================================================================================== Year Ended December 31, 2002 -------------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 246,020 $ 31,888 $ (286) $ 277,622 - ---------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (175,281) (29,621) 286 (204,616) Selling and administrative expenses -- -- (47,018) (11,099) -- (58,117) Restructuring expenses -- -- (3,865) (2,778) -- (6,643) - ---------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (226,164) (43,498) 286 (269,376) - ---------------------------------------------------------------------------------------------------------------------------------- Gain on disposals -- -- 442 -- -- 442 - ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) -- -- 20,298 (11,610) -- 8,688 - ---------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 91 34 -- 125 Interest expense -- (5,996) (6,847) (2,304) -- (15,147) Amortization of deferred financing fees -- (945) -- (48) -- (993) Minority interest -- -- (1,724) -- -- (1,724) Equity in operations of investments -- -- 279 -- -- 279 Vendor settlement -- -- 750 -- -- 750 Equity loss from subsidiaries (17,135) (10,131) (14,153) -- 41,419 -- Other, net -- (63) (508) 2 -- (569) - ---------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (17,135) (17,135) (22,112) (2,316) 41,419 (17,279) - ---------------------------------------------------------------------------------------------------------------------------------- Loss before income taxes (17,135) (17,135) (1,814) (13,926) 41,419 (8,591) Income tax expense -- -- (8,317) (227) -- (8,544) - ---------------------------------------------------------------------------------------------------------------------------------- Net loss $ (17,135) $ (17,135) $ (10,131) $ (14,153) $ 41,419 $ (17,135) ==================================================================================================================================
62 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (In thousands)
Year Ended December 31, 2001 -------------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Net revenues $ -- $ -- $ 255,476 $ 32,546 $ (439) $ 287,583 - ---------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales -- -- (192,697) (44,790) 439 (237,048) Selling and administrative expenses -- -- (49,008) (9,042) -- (58,050) Restructuring expenses -- -- (1,766) (2,010) -- (3,776) - ---------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses -- -- (243,471) (55,842) 439 (298,874) - ---------------------------------------------------------------------------------------------------------------------------------- Loss on disposals -- -- (955) -- -- (955) - ---------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) -- -- 11,050 (23,296) -- (12,246) - ---------------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income -- -- 613 173 -- 786 Interest expense -- (8,388) (3,984) (1,598) -- (13,970) Amortization of deferred financing fees -- (905) -- -- -- (905) Minority interest -- -- (704) -- -- (704) Equity in operations of investments -- -- (838) 92 -- (746) Equity loss from subsidiaries (33,541) (24,169) (23,926) -- 81,636 -- Other, net -- (79) (307) (156) -- (542) - ---------------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (33,541) (33,541) (29,146) (1,489) 81,636 (16,081) - ---------------------------------------------------------------------------------------------------------------------------------- Loss before income taxes and cumulative effect of change in accounting principle (33,541) (33,541) (18,096) (24,785) 81,636 (28,327) Income tax benefit (expense) -- -- (2,051) 1,055 -- (996) - ---------------------------------------------------------------------------------------------------------------------------------- Loss before cumulative effect of change in accounting principle (33,541) (33,541) (20,147) (23,730) 81,636 (29,323) Cumulative effect of change in accounting principle (net of tax) -- -- (4,022) (196) -- (4,218) - ---------------------------------------------------------------------------------------------------------------------------------- Net loss $ (33,541) $ (33,541) $ (24,169) $ (23,926) $ 81,636 $ (33,541) ==================================================================================================================================
63 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2003 (In thousands)
Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ -- $ -- $ 24,445 $ 6,887 $ -- $ 31,332 Marketable securities -- -- 3,546 -- -- 3,546 Receivables, net of allowance for doubtful accounts -- -- 43,948 8,282 -- 52,230 Receivables from related parties -- -- (7,277) 8,503 -- 1,226 Inventories, net -- -- 9,624 2,393 -- 12,017 Deferred subscription acquisition costs -- -- 11,759 -- -- 11,759 Other current assets -- -- 8,420 1,788 -- 10,208 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets -- -- 94,465 27,853 -- 122,318 - ---------------------------------------------------------------------------------------------------------------------------------- Receivables from affiliates -- 110,843 49,315 -- (160,158) -- Property and equipment, net -- -- 10,621 1,399 -- 12,020 Programming costs, net -- -- 56,442 984 -- 57,426 Goodwill -- -- 111,370 523 -- 111,893 Trademarks -- -- 58,159 -- -- 58,159 Distribution agreements, net of accumulated amortization -- -- 32,170 -- -- 32,170 Investment in subsidiaries 106,636 106,636 (41,990) -- (171,282) -- Other noncurrent assets -- 8,013 16,023 38 -- 24,074 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 106,636 $ 225,492 $ 386,575 $ 30,797 $(331,440) $ 418,060 ================================================================================================================================== Liabilities Acquisition liabilities $ -- $ -- $ 13,244 $ 2,148 $ -- $ 15,392 Accounts payable -- 131 17,205 5,563 -- 22,899 Accrued salaries, wages and employee benefits -- -- 11,200 272 -- 11,472 Deferred revenues -- -- 47,098 6,865 -- 53,963 Accrued litigation settlement -- -- 6,500 -- -- 6,500 Other liabilities and accrued expenses -- 3,725 13,896 1,467 -- 19,088 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities -- 3,856 109,143 16,315 -- 129,314 - ---------------------------------------------------------------------------------------------------------------------------------- Financing obligations -- 115,000 -- -- -- 115,000 Financing obligations to affiliates -- -- 110,843 49,315 (160,158) -- Acquisition liabilities -- -- 21,107 5,875 -- 26,982 Net deferred tax liabilities -- -- 13,877 -- -- 13,877 Accrued litigation settlement -- -- 2,000 -- -- 2,000 Other noncurrent liabilities -- -- 11,888 1,282 -- 13,170 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities -- 118,856 268,858 72,787 (160,158) 300,343 - ---------------------------------------------------------------------------------------------------------------------------------- Minority interest -- -- 11,081 -- -- 11,081 Shareholders' equity 106,636 106,636 106,636 (41,990) (171,282) 106,636 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 106,636 $ 225,492 $ 386,575 $ 30,797 $(331,440) $ 418,060 ==================================================================================================================================
64 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2002 (In thousands)
Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ -- $ -- $ (1,908) $ 6,026 $ -- $ 4,118 Marketable securities -- -- 2,677 -- -- 2,677 Receivables, net of allowance for doubtful accounts -- -- 33,286 8,925 -- 42,211 Receivables from related parties -- -- (6,926) 8,468 -- 1,542 Inventories, net -- -- 9,489 1,009 -- 10,498 Deferred subscription acquisition costs -- -- 12,038 -- -- 12,038 Other current assets -- 905 9,387 1,004 -- 11,296 - ---------------------------------------------------------------------------------------------------------------------------------- Total current assets -- 905 58,043 25,432 -- 84,380 - ---------------------------------------------------------------------------------------------------------------------------------- Receivables from affiliates -- 63,603 27,598 -- (91,201) -- Property and equipment, net -- -- 10,432 1,284 -- 11,716 Programming costs, net -- -- 51,633 714 -- 52,347 Goodwill -- -- 111,370 523 -- 111,893 Trademarks -- -- 55,219 -- -- 55,219 Distribution agreements, net of accumulated amortization -- -- 34,284 -- -- 34,284 Investment in subsidiaries 87,815 87,815 (47,864) -- (127,766) -- Other noncurrent assets -- 1,990 17,723 169 -- 19,882 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 87,815 $ 154,313 $ 318,438 $ 28,122 $(218,967) $ 369,721 ================================================================================================================================== Liabilities Financing obligations $ -- $ 6,402 $ -- $ -- $ -- $ 6,402 Financing obligations to related parties -- -- -- 17,235 -- 17,235 Acquisition liabilities -- -- 12,525 902 -- 13,427 Accounts payable -- -- 18,281 6,315 -- 24,596 Accrued salaries, wages and employee benefits -- -- 10,046 373 -- 10,419 Deferred revenues -- -- 48,377 4,256 -- 52,633 Other liabilities and accrued expenses -- 1,231 15,018 1,399 -- 17,648 - ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities -- 7,633 104,247 30,480 -- 142,360 - ---------------------------------------------------------------------------------------------------------------------------------- Financing obligations -- 58,865 -- -- -- 58,865 Financing obligations to related parties -- -- -- 10,000 -- 10,000 Financing obligations to affiliates -- -- 63,603 27,598 (91,201) -- Acquisition liabilities -- -- 31,777 7,908 -- 39,685 Net deferred tax liabilities -- -- 12,375 -- -- 12,375 Other noncurrent liabilities -- -- 8,904 -- -- 8,904 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities -- 66,498 220,906 75,986 (91,201) 272,189 - ---------------------------------------------------------------------------------------------------------------------------------- Minority interest -- -- 9,717 -- -- 9,717 Shareholders' equity 87,815 87,815 87,815 (47,864) (127,766) 87,815 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 87,815 $ 154,313 $ 318,438 $ 28,122 $(218,967) $ 369,721 ==================================================================================================================================
65 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 2003 --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net cash provided by (used for) operating activities $ (186) $ (8,400) $ 5,939 $ 7,526 $ -- $ 4,879 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Proceeds from disposals -- -- 116 -- -- 116 Additions to property and equipment -- -- (1,796) (546) -- (2,342) Other, net -- -- 175 4 -- 179 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities -- -- (1,505) (542) -- (2,047) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from financing obligations -- 115,000 -- -- -- 115,000 Repayment of financing obligations -- (65,267) -- (500) -- (65,767) Payment of debt extinguishment expenses -- (356) -- -- -- (356) Payment of acquisition liabilities -- -- (13,145) (1,747) -- (14,892) Payment of deferred financing fees -- (9,205) -- -- -- (9,205) Payment of preferred stock dividends (669) -- -- -- -- (669) Proceeds from stock plans 272 -- -- -- -- 272 Other, net (1) -- -- -- -- (1) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (398) 40,172 (13,145) (2,247) -- 24,382 - ---------------------------------------------------------------------------------------------------------------------------------- Net receipts from (payments to) subsidiaries 584 (31,772) 35,064 (3,876) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents -- -- 26,353 861 -- 27,214 Cash and cash equivalents at beginning of period -- -- (1,908) 6,026 -- 4,118 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ 24,445 $ 6,887 $ -- $ 31,332 ================================================================================================================================== Year Ended December 31, 2002 --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net cash provided by (used for) operating activities $ -- $ (6,103) $ 31,634 $ (11,203) $ -- $ 14,328 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions -- -- (435) -- -- (435) Proceeds from disposals -- -- 1,484 33 -- 1,517 Additions to property and equipment -- -- (3,975) (343) -- (4,318) Other, net -- -- 78 -- -- 78 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities -- -- (2,848) (310) -- (3,158) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from financing obligations -- -- -- 5,000 -- 5,000 Repayment of financing obligations -- (16,311) -- -- -- (16,311) Payment of deferred financing fees -- (310) -- (275) -- (585) Proceeds from stock plans 234 -- -- -- -- 234 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 234 (16,621) -- 4,725 -- (11,662) - ---------------------------------------------------------------------------------------------------------------------------------- Net receipts from (payments to) subsidiaries (234) 22,724 (31,150) 8,660 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- -- (2,364) 1,872 -- (492) Cash and cash equivalents at beginning of period -- -- 456 4,154 -- 4,610 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ (1,908) $ 6,026 $ -- $ 4,118 ==================================================================================================================================
66 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 2001 --------------------------------------------------------------------------------------- Playboy Non- Playboy Enterprises, Holdings Guarantor Guarantor Enterprises, Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc. - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net cash provided by (used for) operating activities $ -- $ (9,282) $ 15,000 $ (13,663) $ -- $ (7,945) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions -- -- (935) -- -- (935) Proceeds from disposals -- -- 3,184 92 -- 3,276 Additions to property and equipment -- -- (1,934) (1,299) -- (3,233) Funding of equity interests -- -- (1,875) -- -- (1,875) Other, net -- -- (89) 3 -- (86) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities -- -- (1,649) (1,204) -- (2,853) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Net proceeds from sale of Playboy.com Series A Preferred Stock -- -- -- 13,066 -- 13,066 Proceeds from financing obligations -- -- -- 10,000 -- 10,000 Repayment of financing obligations -- (11,672) -- -- -- (11,672) Payment of deferred financing fees -- (454) -- -- -- (454) Proceeds from stock plans 2,141 -- -- -- -- 2,141 Other, net (207) -- -- -- -- (207) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 1,934 (12,126) -- 23,066 -- 12,874 - ---------------------------------------------------------------------------------------------------------------------------------- Net receipts from (payments to) subsidiaries (1,934) 21,408 (14,832) (4,642) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents -- -- (1,481) 3,557 -- 2,076 Cash and cash equivalents at beginning of period -- -- 1,937 597 -- 2,534 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ 456 $ 4,154 $ -- $ 4,610 ==================================================================================================================================
67 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Playboy Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Playboy Enterprises, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule for the years ended December 31, 2003, 2002 and 2001 listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playboy Enterprises, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in the notes to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill to conform with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Ernst & Young LLP Chicago, Illinois February 10, 2004 68 REPORT OF MANAGEMENT The consolidated financial statements and all related financial information in this Form 10-K Annual Report are our responsibility. The financial statements, which include amounts based on judgments, have been prepared in accordance with accounting principles generally accepted in the United States. Other financial information in this Form 10-K Annual Report is consistent with that in the financial statements. We maintain a system of internal controls that we believe provides reasonable assurance that transactions are executed in accordance with management's authorization and are properly recorded, that assets are safeguarded and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and internal audits. Ernst & Young LLP, independent auditors, have audited and reported on our consolidated financial statements for the fiscal years ended December 31, 2003, 2002 and 2001. Their audits were performed in accordance with auditing standards generally accepted in the United States. The Audit Committee of the Board of Directors, composed of three non-management directors, meets periodically with Ernst & Young LLP, management representatives and our internal auditor to review internal accounting control and auditing and financial reporting matters. Both Ernst & Young LLP and the internal auditor have unrestricted access to the Audit Committee and may meet with it without management representatives being present. Christie Hefner Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial and Accounting Officer) 69 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9a. Controls and Procedures (a) 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 annual 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. (b) Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as such terms is defined in Rules 13(a)-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. 70 PART III Item 10. Directors and Executive Officers of the Registrant The information required by Item 10 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference, pursuant to General Instruction G(3). We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Corporate Controller. That code is part of our Code of Business Conduct, which is available free of charge through our website, www.playboyenterprises.com, and is available in print to any shareholder who sends a request for a paper copy to: Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. We intend to include on our website any amendment to, or waiver from, a provision of the Code of Business Conduct that applies to our Chief Executive Officer, Chief Financial Officer and Corporate Controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K. Item 11. Executive Compensation The information required by Item 11 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference (excluding the Report of the Compensation Committee and the Performance Graph), pursuant to General Instruction G(3). Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information regarding outstanding options and shares reserved for future issuance as of December 31, 2003:
Class B Stock ------------------------------------------------- Weighted Average Number Number of Exercise Price of Shares Options of Options Remaining for Outstanding Outstanding Future Issuance - ---------------------------------------------------------------------------------------------------------- Total equity compensation plans approved by security holders 2,843,886 $ 16.22 2,195,896 ==========================================================================================================
The other information required by Item 12 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference, pursuant to General Instruction G(3). Item 13. Certain Relationships and Related Transactions The information required by Item 13 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference, pursuant to General Instruction G(3). Item 14. Principal Accounting Fees and Services The information required by Item 14 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2004, which will be filed within 120 days after the close of our fiscal year ended December 31, 2003, and is incorporated herein by reference, pursuant to General Instruction G(3). 71 PART IV Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K (a) Certain Documents Filed as Part of the Form 10-K
Our Financial Statements and Supplementary Data following are as set forth under Part II. Item 8. of this Form 10-K Annual Report: Page ---- Consolidated Statements of Operations - Fiscal Years Ended December 31, 2003, 2002 and 2001 37 Consolidated Balance Sheets - December 31, 2003 and 2002 38 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2003, 2002 and 2001 39 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2003, 2002 and 2001 40 Notes to Consolidated Financial Statements 41 Condensed Consolidating Statements of Operations - Fiscal Years Ended December 31, 2003, 2002 and 2001 62 Condensed Consolidating Balance Sheets - December 31, 2003 and 2002 64 Condensed Consolidating Statements of Cash Flows - Fiscal Years Ended December 31, 2003, 2002 and 2001 66 Report of Independent Auditors 68 Report of Management 69 Schedule II - Valuation and Qualifying Accounts 83
72 (b) Reports on Form 8-K On November 5, 2003, we furnished a Current Report on Form 8-K, dated November 5, 2003, under Item 12., attaching our press release announcing our financial results for the third quarter of 2003. On December 9, 2003, we furnished a Current Report on Form 8-K, dated December 9, 2003, under Item 9., attaching our press release disclosing certain projections and remarks made during our presentation at the Credit Suisse First Boston Media Week conference on December 9, 2003. (c) Exhibits See Exhibit Index. 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PLAYBOY ENTERPRISES, INC. March 11, 2004 By /s/Linda Havard --------------------------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Authorized Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Christie Hefner March 11, 2004 - ----------------------------------------- Christie Hefner Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard S. Rosenzweig March 11, 2004 - ----------------------------------------- Richard S. Rosenzweig Executive Vice President and Director /s/ Dennis S. Bookshester March 11, 2004 - ----------------------------------------- Dennis S. Bookshester Director /s/ David I. Chemerow March 11, 2004 - ----------------------------------------- David I. Chemerow Director /s/ Donald G. Drapkin March 11, 2004 - ----------------------------------------- Donald G. Drapkin Director /s/ Jerome H. Kern March 11, 2004 - ----------------------------------------- Jerome H. Kern Director /s/ Russell I. Pillar March 11, 2004 - ----------------------------------------- Russell I. Pillar Director /s/ Sol Rosenthal March 11, 2004 - ----------------------------------------- Sol Rosenthal Director /s/ Linda Havard March 11, 2004 - ----------------------------------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Principal Financial and Accounting Officer) 74 EXHIBIT INDEX All agreements listed below may have additional exhibits which are not attached. All such exhibits are available upon request, provided the requesting party shall pay a fee for copies of such exhibits, which fee shall be limited to our reasonable expenses incurred in furnishing these documents. Exhibit Number Description - ------ ----------- #2.1 Asset Purchase Agreement, dated as of June 29, 2001, by and among Playboy Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D., Inc., Steven Hirsch, Dewi James and William Asher (incorporated by reference to Exhibit 2.1 from the Current Report on Form 8-K dated July 6, 2001) 3.1 Certificate of Incorporation of Playboy Enterprises, Inc. (incorporated by reference to Exhibit 3 from our quarterly report on Form 10-Q dated March 31, 2003) 3.2 Amended and Restated Bylaws of Playboy Enterprises, Inc. (incorporated by reference to Exhibit 3.4 from the Current Report on Form 8-K dated March 15, 1999) 4.1 11% Senior Secured Notes due 2010 a Indenture, dated as of March 11, 2003, or the Indenture, between PEI Holdings, Inc., the Guarantors party thereto and Bank One, N.A., as Trustee b Form of 11% Senior Secured Note due 2010 (included in Exhibit 4.1(a)) c Pledge Agreement, dated as of March 11, 2003, between PEI Holdings, Inc. and Bank One, N.A., as Trustee under the Indenture d Pledge Agreement, dated as of March 11, 2003, among Chelsea Court Holdings LLC, as the limited partner in 1945/1947 Cedar River C.V., Candlelight Management LLC, as the general partner in 1945/1947 Cedar River C.V., and Bank One, N.A., as Trustee under the Indenture e Pledge Agreement, dated as of March 11, 2003, between Claridge Organization LLC and Bank One, N.A., as Trustee under the Indenture f Pledge Agreement, dated as of March 11, 2003, between Playboy Clubs International, Inc. and Bank One, N.A., as Trustee under the Indenture g Pledge Agreement, dated as of March 11, 2003, between CPV Productions, Inc. and Bank One, N.A., as Trustee under the Indenture h Pledge Agreement, dated as of March 11, 2003, between Playboy Entertainment Group, Inc. and Bank One, N.A., as Trustee under the Indenture i Pledge Agreement, dated as of March 11, 2003, between Playboy Gaming International, Ltd. and Bank One, N.A., as Trustee under the Indenture j Pledge Agreement, dated as of March 11, 2003, between Playboy Entertainment Group, Inc. and Bank One, N.A., as Trustee under the Indenture k Pledge Agreement, dated as of March 11, 2003, between Playboy Enterprises, Inc. and Bank One, N.A., as Trustee under the Indenture l Pledge Agreement, dated as of March 11, 2003, between Playboy Enterprises International, Inc. and Bank One, N.A., as Trustee under the Indenture m Pledge Agreement, dated as of March 11, 2003, between Planet Playboy, Inc. and Bank One, N.A., as Trustee under the Indenture n Pledge Agreement, dated as of March 11, 2003, between Spice Entertainment, Inc. and Bank One, N.A., as Trustee under the Indenture o Pledge Agreement, dated as of March 11, 2003, between Playboy TV International, LLC and Bank One, N.A., as Trustee under the Indenture p Pledge Agreement, dated as of March 11, 2003, between Playboy TV International, LLC and Bank One, N.A., as Trustee under the Indenture q Security Agreement, dated as of March 11, 2003, between PEI Holdings, Inc. and Bank One, N.A., in its capacity as Trustee under the Indenture r Security Agreement, dated as of March 11, 2003, among Playboy Enterprises, Inc. and each of the domestic subsidiaries of PEI Holdings, Inc. set forth on the signature pages thereto and Bank One, N.A., in its capacity as Trustee under the Indenture s Trademark Security Agreement, dated as of March 11, 2003, by AdulTVision Communications, Inc., Alta Loma Entertainment, Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Playboy Enterprises International, Inc. and Spice Hot Entertainment, Inc. in favor of Bank One, N.A., in its capacity as Trustee under the Indenture 75 t Copyright Security Agreement, dated as of March 11, 2003, by After Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma Entertainment, Inc., Impulse Productions, Inc., Indigo Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc., Playboy Entertainment Group, Inc., Precious Films, Inc. and Women Productions, Inc. in favor of Bank One, N.A., in its capacity as Trustee under the Indenture u Lease Subordination Agreement, dated as of March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank One, N.A., as Trustee for various noteholders v Second Priority Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated as of March 11, 2003, made and executed by Playboy Enterprises International, Inc. in favor of Fidelity National Title Insurance Company for the benefit of Bank One, N.A., as Trustee pursuant to the Indenture w Intercreditor Agreement, dated as of March 11, 2003, between Bank of America, N.A., as agent, and Bank One, N.A., as trustee x Registration Rights Agreement, dated as of March 11, 2003, by and among PEI Holdings, Inc., Playboy Enterprises, Inc., the subsidiary guarantors listed on the signature pages thereof and Banc of America Securities LLC and Lazard Freres & Co. LLC (items (a) through (x) incorporated by reference to Exhibits 4.1(a) through (x), respectively, from our annual report on Form 10-K for the year ended December 31, 2002, or the 2002 Form 10-K) y First Supplemental Indenture, dated as of July 22, 2003, among PEI Holdings, Inc., Andrita Studios, Inc. and Bank One, N.A., as trustee z First Amendment to Pledge Agreement, dated July 22, 2003, between Playboy Entertainment Group, Inc. and Bank One, N.A., as Trustee under the Indenture aa Joinder to Security Agreement, dated July 22, 2003, between Andrita Studios, Inc. and Bank One, N.A., as Trustee under the Indenture (items (y), (z) and (aa) incorporated by reference to Exhibit 4.1(a)-1, 4.1(h)-1 and 4.1(r)-1 to Playboy Enterprises, Inc.'s Form S-4, filed with the Securities Exchange Commission, or SEC, on May 19, 2003, File No. 333-105386, or the May 19, 2003 Form S-4) 4.2 Certificate of Designations, Powers, Preferences and Rights of Series A Convertible Preferred Stock of Playboy Enterprises, Inc. (included in Exhibit 3.1) 4.3 Exchange Agreement, dated as of March 11, 2003, among Hugh M. Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 4.2 from the 2002 Form 10-K) 4.4 Credit Agreement, dated as of March 11, 2003, among PEI Holdings, Inc., each lender from time to time party thereto and Bank of America, N.A. as Agent (see Exhibit 10.9) (incorporated by reference to Exhibit 4.3 from the 2002 Form 10-K) 10.1 Playboy Magazine Printing and Binding Agreement &a October 22, 1997 Agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.4 from our transition period report on Form 10-K for the six months ended December 31, 1997, or the Transition Period Form 10-K) #b Amendment to October 22, 1997 Agreement dated as of March 3, 2000 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended March 31, 2000) @c Second Amendment to October 22, 1997 Agreement dated as of March 2, 2004 10.2 Playboy Magazine Distribution Agreement dated as of July 2, 1999 between Playboy Enterprises, Inc. and Warner Publisher Services, Inc. (incorporated by reference to Exhibit 10.4 from our quarterly report on Form 10-Q for the quarter ended September 30, 1999) 10.3 Playboy Magazine Subscription Fulfillment Agreement a July 1, 1987 Agreement between Communication Data Services, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.12(a) from our annual report on Form 10-K for the year ended June 30, 1992, or the 1992 Form 10-K) b Amendment dated as of June 1, 1988 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(b) from our annual report on Form 10-K for the year ended June 30, 1993, or the 1993 Form 10-K) c Amendment dated as of July 1, 1990 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(c) from our annual report on Form 10-K for the year ended June 30, 1991, or the 1991 Form 10-K) 76 d Amendment dated as of July 1, 1996 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.5(d) from our annual report on Form 10-K for the year ended June 30, 1996, or the 1996 Form 10-K) #e Amendment dated as of July 7, 1997 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.6(e) from the Transition Period Form 10-K) #f Amendment dated as of July 1, 2001 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended September 30, 2001, or the September 30, 2001 Form 10-Q) 10.4 Transponder Service Agreements a SKYNET Transponder Service Agreement dated March 1, 2001 between Playboy Entertainment Group, Inc. and LORAL SKYNET (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended March 31, 2001) b SKYNET Transponder Service Agreement dated February 8, 1999 by and between Califa Entertainment Group, Inc. and LORAL SKYNET c Transfer of Service Agreement dated February 22, 2002 between Califa Entertainment Group, LORAL SKYNET and Spice Hot Entertainment, Inc. d Amendment One to the Transponder Service Agreement between Spice Hot Entertainment, Inc. and LORAL SKYNET dated February 28, 2002 (items (b), (c) and (d) incorporated by reference to Exhibits 10.4(b), (c) and (d), respectively, from our annual report on Form 10-K for the year ended December 31, 2001, or the 2001 Form 10-K) e Transponder Service Agreement dated August 12, 1999 between British Sky Broadcasting Limited and The Home Video Channel Limited (incorporated by reference to Exhibit 10.4 from the 2002 Form 10-K) &10.5 Playboy TV - Latin America, LLC Agreements a Second Amended and Restated Operating Agreement for Playboy TV - Latin America, LLC, effective as of April 1, 2002, by and between Playboy Entertainment Group, Inc. and Lifford International Co. Ltd. (BVI) b Playboy TV - Latin America Program Supply and Trademark License Agreement, dated as of December 23, 2002 and effective as of April 1, 2002, by and between Playboy Entertainment Group, Inc. and Playboy TV - Latin America, LLC (items (a) and (b) incorporated by reference to Exhibits 10.1 and 10.2, respectively, from the Current Report on Form 8-K dated December 23, 2002 and filed with the SEC on February 12, 2003) 10.6 Transfer Agreement, dated as of December 23, 2002, by and among Playboy Enterprises, Inc., Playboy Entertainment Group, Inc., Playboy Enterprises International, Inc., Claxson Interactive Group Inc., Carlyle Investments LLC (in its own right and as a successor in interest to Victoria Springs Investments Ltd.), Carlton Investments LLC (in its own right and as a successor in interest to Victoria Springs Investments Ltd.), Lifford International Co. Ltd. (BVI) and Playboy TV International, LLC. (incorporated by reference to Exhibit 2.1 from the Current Report on Form 8-K dated December 23, 2002 and filed with the SEC on January 7, 2003) #10.7 Amended and Restated Affiliation and License Agreement dated May 17, 2002 between DirecTV, Inc. and Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc. and Spice Platinum Entertainment, Inc. regarding DBS Satellite Exhibition of Programming (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q dated June 30, 2002, or the June 30, 2002 Form 10-Q) @10.8 Master Lease Agreement dated December 22, 2003 between The Walden Asset Group, LLC and Playboy Entertainment Group, Inc. a Master Lease Agreement b Equipment Schedule No. 1 c Acceptance Certificate for Equipment Schedule No. 1 @10.9 Acknowledgement of Assignment dated December 22, 2003 among Playboy Entertainment Group, Inc., The Walden Asset Group, LLC and General Electric Capital Corporation @10.10 Corporate Guaranty dated December 22, 2003 executed by General Electric Capital Corporation regarding the Master Lease Agreement dated December 22, 2003 77 10.11 Fulfillment and Customer Service Services Agreement dated October 2, 2000 between Infinity Resources, Inc. and Playboy.com, Inc. (incorporated by reference to Exhibit 10.13 from our annual report on Form 10-K for the year ended December 31, 2000, or the 2000 Form 10-K) 10.12 Credit Agreement, dated March 11, 2003, or the Credit Agreement, among PEI Holdings, Inc., each lender from time to time party thereto and Bank of America, N.A., as Agent a Credit Agreement a-1 Master Corporate Guaranty, dated March 11, 2003 b Security Agreement, dated as of March 11, 2003, between PEI Holdings, Inc. and Bank of America, N.A., as Agent under the Credit Agreement c Security Agreement, dated as of March 11, 2003, among Playboy Enterprises, Inc. and each of the domestic subsidiaries of PEI Holdings, Inc. set forth on the signature pages thereto and Bank of America, N.A., as Agent under the Credit Agreement d Pledge Agreement, dated as of March 11, 2003, between PEI Holdings, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement e Pledge Agreement, dated as of March 11, 2003, among Chelsea Court Holdings LLC, as the limited partner in 1945/1947 Cedar River C.V., Candlelight Management LLC, as the general partner in 1945/1947 Cedar River C.V., and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement f Pledge Agreement, dated as of March 11, 2003, between Claridge Organization LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement g Pledge Agreement, dated as of March 11, 2003, between Playboy Clubs International, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement h Pledge Agreement, dated as of March 11, 2003, between CPV Productions, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement i Pledge Agreement, dated as of March 11, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement j Pledge Agreement, dated as of March 11, 2003, between Playboy Gaming International, Ltd. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement k Pledge Agreement, dated as of March 11, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement l Pledge Agreement, dated as of March 11, 2003, between Playboy Enterprises, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement m Pledge Agreement, dated as of March 11, 2003, between Playboy Enterprises International, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement n Pledge Agreement, dated as of March 11, 2003, between Planet Playboy, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement o Pledge Agreement, dated as of March 11, 2003, between Spice Entertainment, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement p Pledge Agreement, dated as of March 11, 2003, between Playboy TV International, LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement q Pledge Agreement, dated as of March 11, 2003, between Playboy TV International, LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement r Trademark Security Agreement, dated as of March 11, 2003, by AdulTVision Communications, Inc., Alta Loma Entertainment, Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Playboy Enterprises International, Inc. and Spice Hot Entertainment, Inc. in favor of Bank of America, N.A., as Agent under the Credit Agreement 78 s Copyright Security Agreement, dated March 11, 2003, by After Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma Entertainment, Inc., Impulse Productions, Inc., Indigo Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc., Playboy Entertainment Group, Inc., Precious Films, Inc. and Women Productions, Inc. in favor of Bank of America, N.A., as Agent under the Credit Agreement t Lease Subordination Agreement, dated as of March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank of America, N.A., as Agent for various lenders u Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated as of March 11, 2003, made and executed by Playboy Enterprises International, Inc. in favor of Fidelity National Title Insurance Company for the benefit of Bank of America, N.A., as agent for Lenders under the Credit Agreement (items (a) through (u) incorporated by reference to Exhibits 10.9(a) through (u), respectively, from the 2002 Form 10-K) v Pledge Amendment, dated July 22, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement (incorporated by reference to Exhibit 10.9(i)-1 to Playboy Enterprises, Inc.'s May 19, 2003 Form S-4). 10.13 Joinder to Master Corporate Guaranty, dated July 22, 2003, executed by Andrita Studios, Inc. (incorporated by reference to Exhibit 10.9(a)-2 to Playboy Enterprises, Inc.'s Form S-4, filed with the SEC on May 19, 2003, File No. 333-105386). 10.14 Joinder to Security Agreement, dated July 22, 2003, executed by Andrita Studios, Inc. (incorporated by reference to Exhibit 10.9(c)-7 to Playboy Enterprises, Inc.'s Form S-4, filed with the SEC on May 19, 2003, File No. 333-105386). 10.15 Exchange Agreement, dated as of March 11, 2003, among Hugh M. Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy Enterprises, Inc. (see Exhibit 4.2) (incorporated by reference to Exhibit 10.11 from the 2002 Form 10-K) 10.16 Playboy Mansion West Lease Agreement, as amended, between Playboy Enterprises, Inc. and Hugh M. Hefner a Letter of Interpretation of Lease b Agreement of Lease (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1991 Form 10-K) c Amendment to Lease Agreement dated as of January 12, 1998 (incorporated by reference to Exhibit 10.2 from our quarterly report on Form 10-Q for the quarter ended March 31, 1998, or the March 31, 1998 Form 10-Q) d Lease Subordination Agreement, dated as of March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank One, N.A., as Trustee for various noteholders (see Exhibit 4.1(u)) e Lease Subordination Agreement, dated as of March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank of America, N.A., as Agent for various lenders (see Exhibit 10.9(t)) (items (d) and (e) incorporated by reference to Exhibits 10.13(d) and (e), respectively, from the 2002 Form 10-K) 10.17 Los Angeles Office Lease Documents a Agreement of Lease dated April 23, 2002 between Los Angeles Media Tech Center, LLC and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the June 30, 2002 Form 10-Q) b First Amendment to April 23, 2002 Lease dated June 28, 2002 (incorporated by reference to Exhibit 10.4 from our quarterly report on Form 10-Q for the quarter ended September 30, 2002 Form 10-Q, or the September 30, 2002 Form 10-Q) 10.18 Chicago Office Lease Documents a Office Lease dated April 7, 1988 by and between Playboy Enterprises, Inc. and LaSalle National Bank as Trustee under Trust No. 112912 (incorporated by reference to Exhibit 10.7(a) from the 1993 Form 10-K) 79 b First Amendment to April 7, 1988 Lease dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from our annual report on Form 10-K for the year ended June 30, 1995, or the 1995 Form 10-K) c Second Amendment to April 7, 1988 Lease dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended December 31, 1992) d Third Amendment to April 7, 1988 Lease dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) e Fourth Amendment to April 7, 1988 Lease dated August 6, 1996 (incorporated by reference to Exhibit 10.20(e) from the 1996 Form 10-K) f Fifth Amendment to April 7, 1988 Lease dated March 19, 1998 (incorporated by reference to Exhibit 10.3 from the March 31, 1998 Form 10-Q) 10.19 New York Office Lease Documents a Agreement of Lease dated August 11, 1992 between Playboy Enterprises, Inc. and Lexington Building Co. (incorporated by reference to Exhibit 10.9(b) from the 1992 Form 10-K) b Agreement of Sublease between Playboy Enterprises International, Inc. and Concentra Managed Care Services, Inc. dated February 13, 2002 (incorporated by reference to Exhibit 10.3 from our quarterly report on Form 10-Q dated March 31, 2002) 10.20 Los Angeles Studio Facility Lease Documents a Agreement of Lease dated September 20, 2001 between Kingston Andrita LLC and Playboy Entertainment Group, Inc. (incorporated by reference to Exhibit 10.3(a) from the September 30, 2001 Form 10-Q) b First Amendment to September 20, 2001 Lease dated May 15, 2002 (incorporated by reference to Exhibit 10.3 from the June 30, 2002 Form 10-Q) c Second Amendment to September 20, 2001 Lease dated July 23, 2002 (incorporated by reference to Exhibit 10.6 from the September 30, 2002 Form 10-Q) d Third Amendment to September 20, 2001 Lease dated October 31, 2002 e Fourth Amendment to September 20, 2001 Lease dated December 2, 2002 f Fifth Amendment to September 20, 2001 Lease dated December 31, 2002 g Sixth Amendment to September 20, 2001 Lease dated January 31, 2003 (items (d) through (g) incorporated by reference to Exhibits 10.17(d) through (g), respectively, from the 2002 Form 10-K) h Guaranty dated September 20, 2001 by Playboy Entertainment Group, Inc. in favor of Kingston Andrita LLC (incorporated by reference to Exhibit 10.3(c) from the September 30, 2001 Form 10-Q) i Seventh Amendment to September 20, 2001 Lease dated July 23, 2003 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q dated September 30, 2003) 10.21 Itasca Warehouse Lease Documents a Agreement dated as of September 6, 1996 between Centerpoint Properties Corporation and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.23 from the 1996 Form 10-K) b Amendment to September 6, 1996 Lease dated June 1, 1997 (incorporated by reference to Exhibit 10.25(b) from our annual report on Form 10-K for the year ended June 30, 1997, or the 1997 Form 10-K) c Real Estate Sublease Agreement dated October 2, 2000 between Playboy Enterprises, Inc. and Infinity Resources, Inc. (incorporated by reference to Exhibit 10.20(c) from the 2000 Form 10-K) *10.22 Selected Company Remunerative Plans a Executive Protection Program dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) b Amended and Restated Deferred Compensation Plan for Employees effective January 1, 1998 c Amended and Restated Deferred Compensation Plan for Board of Directors' effective January 1, 1998 (items (b) and (c) incorporated by reference to Exhibits 10.2(a) and (b), respectively, from our quarterly report on Form 10-Q for the quarter ended June 30, 1998) *10.23 1989 Option Plan a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For Key Employees (incorporated by reference to Exhibit 10.4(mm) from the 1991 Form 10-K) 80 b Playboy Enterprises, Inc. 1989 Stock Option Agreement c Letter dated July 18, 1990 pursuant to the June 7, 1990 recapitalization regarding adjustment of options (items (b) and (c) incorporated by reference to Exhibits 10.19(c) and (d), respectively, from the 1995 Form 10-K) d Consent and Amendment regarding the 1989 Option Plan (incorporated by reference to Exhibit 10.4(aa) from the 1991 Form 10-K) *10.24 1991 Directors' Plan a Playboy Enterprises, Inc. 1991 NonQualified Stock Option Plan for NonEmployee Directors, as amended b Playboy Enterprises, Inc. 1991 NonQualified Stock Option Agreement for NonEmployee Directors (items (a) and (b) incorporated by reference to Exhibits 10.4(rr) and (nn), respectively, from the 1991 Form 10-K) *10.25 1995 Stock Incentive Plan @a Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan b Form of NonQualified Stock Option Agreement for NonQualified Stock Options which may be granted under the Plan c Form of Incentive Stock Option Agreement for Incentive Stock Options which may be granted under the Plan d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (items (b), (c) and (d) incorporated by reference to Exhibits 4.3, 4.4 and 4.5, respectively, from our Registration Statement No. 33-58145 on Form S-8 dated March 20, 1995) e Form of Section 162(m) Restricted Stock Agreement for Section 162(m) Restricted Stock issued under the Plan (incorporated by reference to Exhibit 10.1(e) from the 1997 Form 10-K) *10.26 1997 Directors' Plan @a Amended and Restated 1997 Equity Plan for NonEmployee Directors of Playboy Enterprises, Inc. b Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (incorporated by reference to Exhibit 10.1(b) from our quarterly report on Form 10-Q for the quarter ended September 30, 1997) *10.27 Form of Nonqualified Option Agreement between Playboy Enterprises, Inc. and each of Dennis S. Bookshester and Sol Rosenthal (incorporated by reference to Exhibit 4.4 from our Registration Statement No. 333-30185 on Form S-8 dated November 13, 1996) *10.28 Employee Stock Purchase Plan a Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.2 from our quarterly report on Form 10-Q for the quarter ended March 31, 1997) b Amendment to Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.4 from the quarterly report on Form 10-Q for the quarter ended June 30, 1999) *10.29 Selected Employment, Termination and Other Agreements a Form of Severance Agreement by and between Playboy Enterprises, Inc. and each of James English, James Griffiths, Linda Havard, Christie Hefner, Martha Lindeman, Richard Rosenzweig, Howard Shapiro and Alex Vaickus (incorporated by reference to Exhibit 10.23(a) from the 2001 Form 10-K) b Memorandum dated May 21, 2002 regarding severance agreement for Linda Havard (incorporated by reference to Exhibits 10.5 and 10.6, respectively, from the June 30, 2002 Form 10-Q) @c Letter Agreement dated October 8, 2003 regarding employment of James English @d Amendment to October 8, 2003 Employment Agreement dated February 10, 2004 regarding employment of James L. English @e Employment Agreement dated January 8, 2004 regarding employment of James Griffiths 10.30 11% Senior Secured Notes due 2010 (see Exhibit 4.1) (incorporated by reference to Exhibits 10.27 from the 2002 Form 10-K) 81 @21 Subsidiaries @23 Consent of Ernst & Young LLP @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 - -------------- * Indicates management compensation plan # Certain information omitted pursuant to a request for confidential treatment filed separately with and granted by the SEC & Certain information omitted pursuant to a request for confidential treatment filed separately with the SEC @ Filed herewith 82 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (in thousands)
=========================================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------------------------------------------------------------------------------------------- Additions ----------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- Allowance deducted in the balance sheet from the asset to which it applies: Fiscal Year Ended December 31, 2003: Allowance for doubtful accounts $ 5,124 $ 1,409 $ 1,451(a) $ 3,620(b) $ 4,364 =========== =========== =========== =========== =========== Allowance for returns $ 24,595 $ -- $ 47,536(c) $ 44,994(d) $ 27,137 =========== =========== =========== =========== =========== Deferred tax asset valuation allowance $ 69,146 $ 3,307(e) $ -- $ -- $ 72,453 =========== =========== =========== =========== =========== Fiscal Year Ended December 31, 2002: Allowance for doubtful accounts $ 6,406 $ 213 $ 2,010(a) $ 3,505(b) $ 5,124 =========== =========== =========== =========== =========== Allowance for returns $ 30,514 $ -- $ 48,227(c) $ 54,146(d) $ 24,595 =========== =========== =========== =========== =========== Deferred tax asset valuation allowance $ 54,588 $ 14,558(e) $ -- $ -- $ 69,146 =========== =========== =========== =========== =========== Fiscal Year Ended December 31, 2001: Allowance for doubtful accounts $ 15,994 $ 584 $ 1,690(a) $ 11,862(b) $ 6,406 =========== =========== =========== =========== =========== Allowance for returns $ 28,815 $ -- $ 52,698(c) $ 50,999(d) $ 30,514 =========== =========== =========== =========== =========== Deferred tax asset valuation allowance $ 45,044 $ 9,544(e) $ -- $ -- $ 54,588 =========== =========== =========== =========== ===========
Notes: (a) Primarily represents provisions for unpaid subscriptions charged to net revenues. Also, includes a $660 provision in 2002 related to the December 2002 PTVI restructuring. (b) Includes a reversal in 2001 of a $10,000 provision related to assuming an obligation in the Califa acquisition. Also, primarily represents uncollectible accounts less recoveries. (c) Represents provisions charged to net revenues for estimated returns of Playboy magazine, other domestic publishing products and domestic home videos. (d) Represents settlements on provisions previously recorded. (e) Represents noncash federal income tax expense related to increasing the valuation allowance. 83 EX-10.1C 4 d57916_ex10-1c.txt MATERIAL CONTRACTS Exhibit 10.1c [LOGO]QuadGraphics N63W23075 Main Street Sussex, WI 53089-2827 tel 414.566.6000 SECOND AMENDMENT THIS SECOND AMENDMENT, dated March 2, 2004, by and between Playboy Enterprises, Inc. ("Publisher") and Quad/Graphics, Inc. ("Printer") hereinafter referred to as the "Amendment". RECITALS; A. Publisher and Printer entered into a certain Agreement, dated October 22, 1997, pertaining to the performance of prepress services, platemaking or cylinder engraving, offset and gravure press work, binding, mailing and delivery to common carriers in connection with Publisher's magazine entitled, Playboy, which agreement was modified by the First Amendment, dated March 3, 2000 (as so modified, the "Agreement"). B. Publisher and Printer are desirous of amending the Agreement as hereinafter provided. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged by each party, Printer and Publisher agree as follows: 1. Article 2.01 of the Agreement is amended to extend the term of the Agreement by five (5) years to expire December 31, 2009 (through completion of the January 2010 issue of Playboy) unless terminated prior thereto pursuant to any provisions in the Agreement. 2. Printer will waive its entitlement to and forego the January 1, 2004 price escalation to reflect increases to Printer's labor costs. 3. The Preparatory Prices, dated February 26, 2004 and attached hereto as Exhibit 1, represent the preparatory pricing currently in effect at the time of this Amendment, subject to adjustment as provided in the Agreement, as hereby amended. 4. The Manufacturing Prices, dated February 25, 2004 and attached hereto as Exhibit 2, shall become effective for issue production commencing as of January 1, 2004, subject to adjustment as provided in the Agreement, as hereby amended. The Paper Requirements, dated February 25, 2004 and attached hereto as part of Exhibit 2, represent the paper requirements currently in effect at the time of this Amendment. 5. Article 10.05 of the Agreement is amended to provide that the Preparatory and Manufacturing Prices, attached hereto as Exhibits 1 and 2, shall remain firm through December 31, 2004. If there shall be any change to Printer in the price of materials (excluding ink), or labor increases or decreases (any change in labor conditions), the prices contained in Exhibits 1 and 2 may be adjusted January 1, 2005, and thereafter on January 1, 2007 and January 1, 2009 during the term of the Agreement, as herein amended, to reflect such change. Price increases will be limited to actual cost not to exceed eighty five percent (85%) of the Consumer Price Index. For purposes of Article 10.05, as hereby amended, the "Consumer Price Index" means the selected areas, all items index (1967=100) for the Chicago-Gary-Lake Co. IL-IN-WI Consumer Price Index for Urban Wage Earners and Clerical [LOGO] Playboy Enterprises, Inc. Second Contract Amendment March 2, 2004 Page 2 Workers (CPI-W) published by the Bureau of Labor Statistics, U.S. Department of Labor. The increase in the Consumer Price Index applicable as of any January first shall be the increase in the Consumer Price Index of the previous July over that of the preceding July. (For example, the increase applicable for January 1, 2005 shall be the increase in the Consumer Price Index of July 2004 over that of July 2003). Printer will notify Publisher as soon as practical after knowledge of any increase or decrease. 7. Except as modified herein, the Agreement will continue in full force and effect without change. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers effective on the date herein set forth. Playboy Enterprises, Inc. Quad/Graphics, Inc. By: /s/ Maria Mandis By: /s/ Timothy J. Ohnmacht Name: Maria Mandis Timothy J. Ohnmacht Title. VP Production Director Vice President-Midwest Sales Date: 3/10/04 Date: 3/10/04 EX-10.8(A) 5 d57916_ex10-8a.txt MASTER LEASE AGREEMENT Exhibit 10.8a MASTER LEASE AGREEMENT This Master Lease Agreement ("Lease") is entered into as of December 22, 2003 by and between The Walden Asset Group, LLC, a Delaware limited liability company ("Lessor") having its principal place of business at 1 Hollis St., Wellesley, MA 02482 and Playboy Entertainment Group, Inc, a Delaware corporation ("Lessee") having its principal place of business at 680 North Lake Shore Drive, Chicago, Illinois 60611. As used in this Master Equipment Lease, the terms "Estimated Delivery Date", "Acceptance Date", "Basic Rent Date", "Monthly Lease Factor", "Daily Lease Factor", "Lessor's Cost", "Casualty Value", "Casualty Overdue Rate", "Overdue Rate", "Installation Site", Manufacturer", "Machine Type", "Model Number" and "Serial Number" shall have the meanings with respect to each Item of Equipment set forth on the Equipment Schedule which describes that Item of Equipment. If not set forth in an Equipment Schedule, capitalized terms shall have the meaning set forth in this Lease. 1. LEASE OF EQUIPMENT: Subject to the terms and conditions, contained herein, Lessor hereby leases to Lessee, and Lessee leases from Lessor, the items of personal property (herein referred to collectively as the "Equipment," or individually, as an "Item of Equipment") described more fully in one or more Equipment Schedules executed by Lessor and Lessee, designated Exhibit A and numbered sequentially. Each Equipment Schedule shall be considered a separate and enforceable lease incorporating the terms and conditions of this Lease. An executed counterpart of this Lease (including any supplements, addenda, or riders hereto) or photocopy hereof, together with an executed Equipment Schedule, marked "Original", shall be the original of the lease for the Equipment described on such Schedule and together they constitute and shall be referred to herein as the "Lease" with respect to such Equipment. All other executed counterparts of the Equipment Schedule shall be marked "Duplicate". To the extent that this Lease constitutes chattel paper, as such term is defined in the Uniform Commercial Code of the applicable jurisdiction, no security interest in this Lease may be created through the transfer of possession of any counterpart other than the Original of an Equipment Schedule. Notwithstanding the delivery of the Equipment to, and its possession and use by Lessee, Lessor shall retain the full legal title to the Equipment, it being expressly understood that this Lease is an agreement of lease only. 2. TERM AND RENEWAL. At such time as all Equipment listed on an Equipment Schedule is operational, in good working order and available for use by Lessee, Lessee shall complete and deliver to Lessor an executed equipment acceptance ("Equipment Acceptance"). Lessee shall make available to Lessor such information as Lessor shall reasonably request from time to time in respect of the installation of the Equipment. In the event (a) Lessee shall fail timely to execute and deliver to Lessor such Equipment Acceptance or (b) Lessee shall reject the Equipment, in either case for any reason whatsoever other than the fault of Lessor, all obligations, if any, of Lessor to each vendor with 1 Exhibit 10.8a respect to the Equipment shall be deemed those of Lessee and Lessee shall indemnify and hold Lessor harmless from any and all liability, damages, and reasonable expenses including reasonable attorneys' fees arising therefrom. The lease term ("Term") shall commence as of the date specified on the applicable Equipment Acceptance (as to such Equipment Schedule, the "Commencement Date") and continue through the last day of the final month of the number of months provided in the Equipment Schedule unless theretofore extended pursuant to its terms or terminated pursuant to or upon the occurrence of an Event of Default (the "Expiration Date"). Lessee shall give Lessor notice of Lessee's intention to return the Equipment at least 60 days prior to the Expiration Date of the applicable Equipment Schedule, and the term of such Equipment Schedule shall automatically be extended one month for each thirty-day period or portion thereof Lessee fails to give such notice. Upon 60 days prior written notice to Lessor, Lessee may, at its option ("Renewal Option"), renew the Equipment Schedule in respect of all, but not less than all, of the Equipment covered under the Equipment Schedule upon the same terms and conditions as provided for in the Lease Agreement and the Equipment Schedule (other than Term and Rent), upon the following terms and conditions: (a) The Basic Rent due in respect of the Equipment shall be the fair market monthly rent for continued use by Lessee as determined by agreement between Lessor and Lessee (or, in the absence of such an agreement, by an independent appraisal at Lessee's expense by an appraiser mutually acceptable to Lessee and Lessor) and (b) the Casualty Value during the term of such renewed Equipment Schedule shall be 100% of the fair market value of the Equipment at the Expiration Date of the applicable Equipment Schedule as determined by agreement between Lessor and Lessee (or, in the absence of such an agreement, by an independent appraisal at Lessee's expense by an appraiser mutually acceptable to Lessee and Lessor), and (c) the term shall be agreed by the parties and in no case less than twelve months. The terms of each Equipment Schedule hereto are subject to all conditions and provisions of this Lease as it may at any time be amended in accordance with the terms hereof. 3. NON-CANCELABLE LEASE. This Lease cannot be canceled or terminated during the Term except as expressly provided herein. 4. NET LEASE. This Lease is a net lease and Lessee agrees that its obligations to pay all rent and other sums payable hereunder and the rights of Lessor and Assignee (defined in Section 18) in and to such rent, are absolute and unconditional and are not subject to any abatement, reduction, setoff, defense, counterclaim or recoupment due or alleged to be due to, or by reason of, any past, present or future claims which Lessee may have against Lessor, any Assignee, the manufacturer or seller of the Equipment. Lessee shall maintain in effect all licensing and registration of the Equipment as may, from time to time, be required by federal, state or local law or regulation and shall operate, maintain and use the Equipment in accordance with all applicable federal, state or local laws or regulations, including without limitation all applicable rules and regulations of the Federal Communications Commission. The provisions of this Section shall survive the expiration or earlier 2 Exhibit 10.8a termination of each Equipment Schedule. 5. RENT: The Lessee shall pay to the Lessor or its Assignee the following amounts ("Basic Rent"), for each item of Equipment: (a) On the Commencement Date (but only if the Commencement Date occurs on the first day of a calendar month) and on each successive Basic Rent Date thereafter, an amount equal to the Monthly Lease Factor multiplied by Lessor's Cost of the Item of Equipment. In addition, on the Commencement Date, unless the Commencement Date occurs on the first day of a calendar month, Lessee shall pay to Lessor an amount equal to the product of (a) the Daily Lease Factor multiplied by (b) the number of days from (and including) the Commencement Date to (and excluding) the First Basic Rent Date multiplied by (c) Lessor's Cost of the Item of Equipment; and (b) In the event of a Casualty Occurrence (as defined in Section 13 of this Lease), on the date provided herein, any amount payable hereunder as Casualty Value and any other amounts payable pursuant to the Equipment Schedule; and (c) within 10 days of demand therefor by Lessor, any other amount payable hereunder by Lessee, to the Lessor or others; and (d) on demand, to the extent permitted by applicable law, interest at the Overdue Rate (as provided in the appropriate Equipment Schedule) on any payment of Basic Rent or other monies which have not been received by the Lessor or its assignee in available funds on the applicable due date. Such interest shall accrue on any unpaid amount at the Overdue Rate from the applicable due date until paid, and shall be paid by Lessee within 10 days of receipt of written notice that such payment is past due. 6. LESSOR COMMITMENT. So long as Lessee complies with all of its obligations hereunder and Lessor has not given notice (or been deemed to have given notice) of an Event of Default pursuant to Section 19, Lessor agrees to lease to Lessee the Items of Equipment described on each Equipment Schedule and agrees that neither Lessor or anyone acting at Lessor's direction, nor Assignee or anyone acting at Assignee's direction) shall disturb Lessee's quiet and peaceful possession and use of such Equipment for its intended purpose, provided, however, Lessor shall have no obligation hereunder until the execution and delivery of each such Equipment Schedule and Equipment Acceptance by Lessor and Lessee. 7. NO WARRANTIES BY LESSOR. (a) Lessee acknowledges and agrees that it has made the selection of the Equipment based upon its own judgment, that the Equipment is of a size, design, capacity, condition, quality, durability and manufacture selected by Lessee, and that the Equipment is suitable for Lessee's purposes. Lessee expressly disclaims any reliance upon any statements or representations made by Lessor EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED HEREIN. LESSOR MAKES NO REPRESENTATIONS OR WARRANTIES TO LESSEE OR ANY OTHER PERSON OF ANY KIND, EXPRESS OR IMPLIED, AS TO ANY MATTER 3 Exhibit 10.8a WHATSOEVER, INCLUDING WITHOUT LIMITATION WITH RESPECT TO THE SIZE, DESIGN CAPACITY, CONDITION, QUALITY, DURABILITY, SUITABILITY, MANUFACTURE OR PERFORMANCE OF THE EQUIPMENT, ITS MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WITH RESPECT TO INFRINGEMENT (INCLUDING WITHOUT LIMITATION INFRINGEMENT OF PATENTS OR TRADEMARKS) OR THE LIKE. LESSOR SHALL HAVE NO LIABILITY TO LESSEE OF ANY KIND OR NATURE WHATSOEVER, NOR SHALL THERE BE ANY ABATEMENT OF RENTAL, ARISING OUT OF OR IN CONNECTION WITH (I) ANY DEFICIENCY OR DEFECT IN THE EQUIPMENT, (II) THE USE OR PERFORMANCE OF THE EQUIPMENT OR (III) ANY LOSS OF BUSINESS OR OTHER CONSEQUENTIAL LOSS OR DAMAGE WHETHER OR NOT RESULTING FROM ANY OF THE FOREGOING. SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 15, LESSEE WILL DEFEND, INDEMNIFY AND HOLD LESSOR HARMLESS AGAINST ANY AND ALL DEMANDS, CLAIMS, COSTS, LOSSES, DAMAGES AND LIABILITIES ARISING OUT OF OR IN CONNECTION WITH THE DESIGN, MANUFACTURE, POSSESSION, OPERATION OR USE OF THE EQUIPMENT. Lessee agrees to look solely to the manufacturer or vendor of the Equipment for all warranties made by manufacturer or vendor. Any such warranties are hereby assigned to Lessee for the term of this Lease. Lessor appoints Lessee as its agent and confers on Lessee the authority to settle any and all warranty claims with respect to the Equipment arising during the Term, on Lessor's behalf. Lessee agrees to inform Lessor, or its Assignee, as to the extent and kind of all claims made against vendors or manufacturers under the warranties issued on the Equipment. Lessee further agrees that any Equipment, which is exchanged for Equipment under the Lease, shall become the property of the Lessor, or its Assignee, for the purpose of this Lease. No warranty settlement in excess of $10,000.00 may be made for cash without the approval of the Lessor or its Assignee. (b) Lessee understands and agrees that neither the vendor, the manufacturer nor any representative or other agent of the vendor or manufacturer is an agent of Lessor. Neither the vendor nor the manufacturer, nor any representative or agent of either is authorized to waive or alter any term or condition of this Lease, and no representations as to the Equipment or any other matter by the vendor or the manufacturer shall in any way affect Lessee's duty to pay the Basic Rent and perform its other obligations as set forth in this Lease. (c) Lessee hereby authorizes Lessor to insert in this Lease and each Equipment Schedule hereto the serial numbers, and other identification data, of the Equipment when determined by Lessor. 8. REPRESENTATIONS AND WARRANTIES. (a) Lessee represents and warrants that: (i) it is a corporation, is duly organized, validly existing and in good standing under laws of the state of its incorporation, and is duly aqualified to do business in each state where the Equipment will be located; (ii) it has full power and authority to execute and deliver this Lease and perform its obligations hereunder and this Lease has been duly authorized and constitutes the legal, valid and 4 Exhibit 10.8a binding obligations of Lessee enforceable in accordance with its terms; (iii) this Lease will not contravene any law, regulation or judgment affecting Lessee or result in any breach of any agreement or other instrument binding on Lessee; (iv) no consent of Lessee's shareholders or holder of any indebtedness, or filing with, or approval of, any governmental agency or commission, is a condition to the performance of the provisions hereof; (v) there is no action or proceeding pending or threatened against Lessee before any court or administrative agency which might have a materially adverse effect on the business, financial condition or operations of Lessee; (vi) no deed of trust, mortgage or third party interest (other than Permitted Liens) has attached to the Equipment; and (vii) the Equipment will remain at all times, under applicable law, removable personal property notwithstanding the manner in which the Equipment may be attached to any real property, free and clear of any lien or encumbrance in favor of Lessee or any other person other than (A) any lien or encumbrance, to the extent created by or through Lessor or any Assignee (a "Lessor Lien") and (B) any lien or encumbrance that is (i) created or expressly permitted by the Lease or any another agreement or instrument executed or approved in writing by Lessor and Lessee; (ii) unindemnified Taxes or Taxes (as defined below) either not yet due and payable or being contested in good faith in accordance with Section 16; (iii) construction materialmen's, mechanics', workers', repairmen's, employees' or other like levy, lien or encumbrance arising in the ordinary course of business for amounts either not overdue for a period of more than 60 days or being contested in good faith by appropriate proceedings provided that there is no risk of imminent foreclosure or seizure; or (iv) arising out of judgments or awards against Lessee which at the time are being contested in good faith by appropriate proceedings provided that there is no risk of imminent foreclosure or seizure (collectively, "Permitted Liens"). (b) Lessor represents and warrants that: (i) it is a limited liability company, is duly organized, validly existing and in good standing under laws of the state of its organization, and is duly qualified and in good standing in all jurisdictions where necessary to enter into this Lease; (ii) it has full power and authority to execute and deliver this Lease and perform its obligations hereunder and this Lease has been duly authorized and constitutes the legal, valid and binding obligations of Lessor enforceable in accordance with its terms; (iii) this Lease will not contravene any law, regulation or judgment affecting Lessor or result in any breach of any agreement or other instrument binding on Lessor; 5 Exhibit 10.8a (iv) no consent of Lessor's shareholders or holder of any indebtedness, or filing with, or approval of, any governmental agency or commission, is a condition to the performance of the provisions hereof; and (v) there is no action or proceeding pending or threatened against Lessee before any court or administrative agency which might have a materially adverse effect on the business, financial condition or operations of Lessor. 9. EQUIPMENT ORDERING. Lessee shall be responsible for all packing, rigging, transportation and installation charges for the Equipment. Lessee shall arrange for delivery of Equipment, unless otherwise specified in the Equipment Schedule, so that it can be accepted in accordance with Section 10 hereof. Lessee hereby agrees to indemnify and hold Lessor harmless from any claims, liabilities, costs and expenses, including reasonable attorney fees, incurred by Lessor arising out of any purchase orders or assignments executed by Lessor with respect to any Equipment or services relating thereto. 10. LESSEE ACCEPTANCE. Lessee shall return to Lessor the signed and dated Acceptance Certificate attached hereto as Exhibit "B": (a) acknowledging the Equipment has been received, installed and is ready for use and (b) accepting it as satisfactory in all respects for the purposes of the Lease. 11. OWNERSHIP, LOCATION AND INSPECTION OF EQUIPMENT. (a) Nothing contained in this Lease or in any Equipment Schedule shall give or convey to Lessee any right, title or interest in or to the Equipment, except the right to retain, possess and use the Equipment as a lessee for the Term (and the right to exercise any purchase option contained in any Equipment Schedule). Upon the request of Lessor made at any time during the Term of any Equipment Schedule, Lessee shall affix and maintain on the Equipment leased pursuant to such Equipment Schedule, tags, decals, plates or labels (supplied by Lessor) indicating the interest of Lessor in the Equipment. (b) Lessee shall at all times keep the Equipment free and clear from any liens or encumbrances of Lessee's creditors or other persons (other than Permitted Liens). At Lessor's request, Lessee shall provide Lessor from each owner or mortgagee of any premises in which any Item of Equipment is located a written waiver of any rights of such owner or mortgagee in and to the Equipment or any part or item thereof, in form and substance reasonably acceptable to Lessor. Lessee agrees that the Equipment shall always remain and be deemed personal and moveable property; Lessee shall not enter into any agreement or take any action inconsistent with the foregoing. Under no circumstances shall Lessee remove or permit removal of any Equipment from the Installation Site shown on the Equipment Schedule therefor unless (a) Lessee shall give Lessor at least 20 days prior written notice 6 Exhibit 10.8a thereof, and (b) Lessee, at Lessee's cost, shall have provided Lessor with appropriate Uniform Commercial Code financing statements and other documents requested by Lessor to maintain perfection of its interest in the Equipment and the applicable Equipment Schedule. Under no circumstances shall any Equipment be removed to a location which is not within the continental United States or in which the Uniform Commercial Code is not in effect. (c) Lessor at a time mutually agreed upon by the parties, and at its own risk, shall have the right to inspect the Equipment which is the subject of this Lease for the purpose of ensuring compliance by Lessee with its obligations under this Lease. Such inspection right shall be subject to Lessee's standard security procedures and shall occur during normal business hours. 12. EQUIPMENT MAINTENANCE. Lessee shall enter into, and will maintain in effect, where applicable and if available, manufacturer's standard maintenance contract or any other service agreement reasonably satisfactory to Lessor. Lessee may comply with the requirements of this section through a program of self-maintenance. Any maintenance arrangement entered into by Lessee pursuant to this Section 12 shall provide for the maintenance of the Equipment in good condition and working order and repairs and replacement of parts thereof. 13. LOSS OR DAMAGE. Lessee shall bear the entire risk of loss or damage to the Equipment or caused by the Equipment, from the Commencement Date until the Lessor takes possession of the Equipment after the Expiration Date or earlier termination of this Lease. In the event any Item of Equipment is damaged to a material extent while Lessee bears the risk of loss, Lessee shall promptly notify Lessor and shall determine within 10 days of the date of such notice whether such Item of Equipment can be repaired. If the Item of Equipment can be repaired, Lessee shall at its expense repair such Item to its condition immediately prior to the damage. In the event any Item of Equipment shall be lost, stolen, destroyed, damaged beyond repair, or rendered permanently unfit or unavailable for use for any reason whatsoever (any such occurrence being referred to as a "Casualty Occurrence"), Lessee shall promptly notify Lessor. Lessee shall then terminate this Lease in respect to the Item of Equipment by paying to Lessor on any Basic Rent Date occurring not more than 90 days after such Casualty Occurrence an amount equal to the Casualty Value (as determined in the Equipment Schedule) applicable to such Item of Equipment on the Basic Rent Date immediately preceding the Basic Rent Date upon which such payment is made. After the payment of such Casualty Value and all Rent which becomes due and payable on or before the Basic Rent Date immediately preceding the date on which Casualty Value is paid with respect to such Casualty Occurrence, the Lessee's obligation to pay further Basic Rent for such item of Equipment shall cease, but the Lessee's obligation to pay all other sums, if any, for such Item of Equipment shall remain unchanged. Following payment of the Casualty Value and Basic Rent for an Item of Equipment in accordance with the provisions of the preceding paragraph, Lessee may dispose of such item of Equipment as soon as it is able to do so for the best price obtainable. Any such disposition shall be on an "as is, 7 Exhibit 10.8a where is" basis without representation or warranty, express or implied save those warranties which Lessee wishes to give. For each Item of Equipment so disposed, Lessee may, after paying Lessor the amounts specified in the preceding paragraph and other amounts required to be paid by Lessee pursuant to this Lease with respect to such Item of Equipment, retain all of such sale proceeds. The proceeds of insurance (if any) covering an Item of Equipment to which a Casualty Occurrence has occurred shall be paid to and retained by Lessor to the extent that Lessor has not previously received all Casualty Value and other payments required to be made by Lessee pursuant to this Lease. 14. INSURANCE. (a) Lessee will insure for the following risks with insurers of recognized responsibility: (i) All risk of loss and physical damage (including earthquake insurance) to the Equipment in amounts not less than the greater of the fair market replacement value or the aggregate Casualty Value of all Equipment from time to time and shall be subject to a deductible up to $250,000 per occurrence (up to $2,000,000 deductible for earthquake insurance); (ii) comprehensive public liability and property damage insurance with respect to the condition, possession, maintenance, operation and use of the Equipment, in an amount not less than $2,000,000 for each occurrence and shall be subject to a deductible up to $250,000 per occurrence, provided that Lessee maintains the same insurance deductible levels for all of its other equipment located in the same state the Equipment is located. (b) Lessee shall deliver to Lessor and any Assignee(s) a valid certificate of insurance for each such insurance policy upon the execution thereof and a certificate of insurance for each renewal policy not less than 30 days prior to the expiration of the original policy or any renewal policy. Such insurance shall (i) include as additional parties insured and loss payees Lessor and any Assignee(s) of whom Lessee has notice, (ii) provide that such insurance shall not be materially changed or cancelled without at least 30 days notice to Lessor and such Assignees, and (iii) provide that such policy shall not be invalidated by any negligence of, or breach of warranty by, Lessee. Upon the request of Lessor, Lessee shall provide any additional data related to the insurance as Lessor reasonably requests. Failure to have in force a policy of insurance as required in section 14(a) shall be deemed an immediate Event of Default without notice to Lessee. 15. INDEMNITY. Except as otherwise provided in this Section 15, Lessee will protect, indemnify, save and hold harmless Lessor from and against all liabilities, claims, damages, penalties, causes of action, costs, and expenses, imposed upon or incurred by or asserted against Lessor or any Assignee of Lessor by Lessee or any third party by reason of the occurrence or existence (or alleged occurrence or existence) or any act or event relating to or caused by the Equipment, including but not limited to, consequential or special damages of any kind, or any failure on the part of Lessee to perform or comply with any of the terms of this Lease. In the event that any action, suit or proceeding is brought against Lessor by reason of such occurrence, Lessee, upon request of Lessor, will at Lessee's expense resist and defend such action, suit or proceeding or cause the same to be defended by counsel designated and approved by Lessor, and Lessor shall reasonably cooperate with 8 Exhibit 10.8a Lessee in connection therewith. Except as otherwise provided in this Section 15, Lessee shall indemnify Lessor and any Assignee against, and hold Lessor and Assignee harmless from, any and all claims, actions, damages, including reasonable attorneys' fees, obligations, liabilities and liens (including any of the foregoing arising or imposed without the fault or negligence of Lessee, or in connection with latent or other defects, or any claim for patent, trademark or copyright infringement or under the doctrine of "strict liability", imposed or incurred by or asserted against Lessor or Assignee or their respective successors or assigns, arising out of the manufacture, purchase, lease, possession, operation, condition, use or return of the Equipment, or by operation of law. Lessee shall give Lessor and Assignee prompt written notice of any matter hereby indemnified against and agrees that upon written notice by Lessor or Assignee (as the case may be) of the assertion of such a claim, action, damage, obligation, liability or lien, Lessee shall assume full responsibility for the defense thereof. This Section 15 shall not apply to liabilities, claims, damages, penalties, causes of action, costs, or expenses (a) resulting from Lessor's or any Assignee's bad faith, gross negligence or willful misconduct, (b) in respect of a Tax (without prejudice to Section 16 hereof), (c) resulting from any Lessor Lien or any breach of any Lessor's or any Assignee's representation, warranty or covenant under the Lease, or any sale or other transfer by Lessor or any Assignee of any portion of its interest in any Lease, except pursuant to Section 19 upon an Event of Default, (d) attributable to any period after the Equipment is returned in accordance with the Lease, (e) arising under ERISA as a result of Lessor's or any Assignee's activities, or (f) constituting an ordinary operating expense or overhead charge except for incremental costs associated with this transaction. This Section 15 shall survive termination of this Lease and any Equipment Schedule. 16. TAX INDEMNITY. (a) Lessee agrees to pay or reimburse Lessor for, and to indemnify and hold Lessor harmless from, all fees (including, but not limited to, license, documentation, recording and registration fees), and all sales, use, gross receipts, personal property, occupational, value added or other taxes, levies, imposts, duties, assessments, charges, or withholding of any nature whatsoever, together with any penalties, fines, additions to tax, or interest thereon (all of the foregoing being hereafter referred to as "Taxes") arising at any time during the term of this Lease, or upon expiration or early termination of this Lease and levied or imposed upon Lessor directly or otherwise by any federal, state or local government in the United States upon or with respect to (1) the Equipment, (2) the registration, purchase, ownership, delivery, leasing, possession, use, operation, storage, maintenance, repair, return, sale, transfer of title, or other disposition thereof, (3) the rentals, receipts, or earnings arising from the Equipment, or any disposition of the rights to such rentals, receipts, or earnings, (4) any payment pursuant to this Lease, (5) this Lease or the transaction or any part thereof excluding, however, (i) Taxes based upon or measured by Lessor's gross or net income (other than Taxes in the nature of sales or use taxes) imposed or levied by the United States or any state thereof, (ii) U.S. federal withholding Taxes unless Lessee is a United States Person as defined in section 7701 of the Code; (iii) state or local Taxes on Lessor's receipts, capital or franchise, (other than Taxes in the 9 Exhibit 10.8a nature of sales or use taxes); (iv) income or franchise Taxes imposed by any jurisdiction in which Lessor is organized or doing business; (v) any Taxes imposed as a result of the gross negligence or willful misconduct of Lessor; (vi) any Taxes imposed as a result of a breach by Lessor of its obligations under this Lease; (vii) any Taxes imposed as a result of a transfer of any Item of the Equipment or any interest under the Lease by Lessor other than a sale or other transfer (A) to Lessee, or (B) upon an Event of Default or Casualty Occurrence; (viii) any Taxes imposed as a result of activities of Lessor unrelated to the Lease; (ix) Taxes relating to any period after return of the Equipment as required hereunder unless relating to a lien period during the term of the Lease; (x) any Tax so long as it is being contested in accordance with the terms of the Lease; and (xi) any Taxes that would not have been payable if Lessor had issued an appropriate exemption or resale certificate. (b) Lessee shall pay all personal property taxes indemnified under clause (a) directly to the appropriate taxing authority in a proper timely manner if required by applicable law and provide that its appropriate employees or agents shall have knowledge of such obligation and fulfill such obligation. Lessee shall provide to Lessor a properly completed Certificate Concerning Payment of Personal Property Taxes as set forth in Exhibit C. If Lessee pays such Taxes for Lessor's benefit then Lessee shall provide copies of all returns paid to Lessor upon request. Under no circumstances shall Lessee remove or permit removal of any Equipment from the Installation Site shown on the Equipment Schedule therefor unless Lessee complies with the notice and financing statement requirement set forth in Section 11. (c) If any Items of Equipment are treated as sold by Lessee to Lessor and leased back to Lessee, Lessee and Lessor shall cooperate to minimize any sales, use or similar Taxes and interest and penalties thereon on any transfers of any Items of Equipment. If Lessee acquires any Item of Equipment in a transaction described in Cal Rev. & Tax Code Section 6010.65, Lessee shall provide to Lessor notification that the Item of Equipment was placed into first functional use within ninety (90) days of the Equipment Schedule Commencement Date and a statement indicating that Lessee paid the applicable sales, use or similar Taxes with respect to the Lessee's original purchase of the property in the form set forth in Exhibit D. (d) Lessee represents, warrants and covenants that (i) each Item of Equipment will not be used predominantly outside of the United States within the meaning of Section 168(1)(A) of the Code, (ii) each Item of Equipment will not become "tax-exempt use property" within the meaning of Section 168(g)(1)(B) of the Code, (iii) each Item of Equipment will not become "limited use property" within the meaning of Rev. Proc. 2001-28 and 2001-29, (iv) the Lessee will not make substantial non-severable improvements to any Item of Equipment unless required to by law, (v) each Item of Equipment will be available for use by Lessee at all times during the term of the Lease, and (vi) Lessee will not use any of the Equipment in a manner that alters its MACRS class life. (e) In entering into this Lease and the transactions contemplated hereby, the Owner (hereinafter defined) assumed the following tax benefits in calculating amounts of Basic Rent, Casualty Value and the Owner's after-tax return: (i) with respect to each Item of Equipment, the Owner will be entitled to the benefit of depreciation deductions for United States federal income tax purposes under 10 Exhibit 10.8a the modified accelerated cost recovery system method of depreciation ("MACRS") based on the applicable MACRS class life (and with respect to each Item of Equipment listed on Acceptance Certificate, the additional allowance provided by Section 168(k) of the Code), and that the Owner will claim such deductions utilizing the MACRS life of each Item of Equipment upon one hundred percent (100%) of Lessor's Cost of each Item of Equipment using the half-year convention (and in accordance with Section 168(k) of the Code with respect to each Item of Equipment listed on Acceptance Certificate) ("Depreciation Deductions"); (ii) for each year of the Term, the Owner's federal income Tax rate will be the highest marginal rate for corporations provided for under the Code; and (iii) the Owner will not be required to include in income any amounts with respect to the Lease other than Basic Rent and amounts constituting gain upon payment of Casualty Value and any amounts designated as interest or required to be paid on after-tax basis pursuant to the term of this Lease. If as a result of (1) any breach of any representation, warranty or covenant in the Lease by Lessee, (2) any act or failure to act by Lessee (except as required under the Lease), (3) any loss, damage, casualty, or taking, or (4) the failure of any Item of Equipment listed on Acceptance Certificate to constitute "qualified property" for purposes of Section 168(k) of the Code, the Owner does not have the right to claim, or loses the right to claim, or if there is disallowed or recaptured with respect to the Owner, all or any portion of the Depreciation Deductions or if the Owner is required to include any amount in income other than as set forth in clause (iii) above with respect to an Item of Equipment (such loss of deductions or inclusion in income, a "Tax Loss"), then Lessee must, subject to contest rights, within 30 days of demand, make a lump sum payment to preserve the Owner's after-tax yield. Lessee shall not be liable for a Tax Loss arising as a result of (A) an event obliging Lessee to pay Casualty Value provided Casualty Value is paid, (B) a change in the Code or the regulations thereunder, (C) the Lease not qualifying as a "true lease" unless as a result of an event in clauses (1) through (4) above, or (C) a voluntary transfer by the Owner except upon an Event of Default. For purposes of this Article, the term "Owner" shall mean Lessor and any owner of the Equipment (whether such owner holds title to the Equipment directly or through an agent or trustee) and such term shall be deemed to include any individual who is a partner of or an affiliated corporation of any such Owner and any Assignee of any thereof. (f) Provided that no Event of Default has occurred and is continuing, Lessee shall be provided with a reasonable opportunity to contest any claim or adjustment that may result in a Tax Loss or a claim for indemnified Taxes so long as (i) Lessee shall provide notice of such contest to Lessor (after itself having received notice of such Tax) and pay all costs and expenses associated with such contest, (ii) the continuation of such contest shall not in Lessor's reasonable judgment involve any risk of the sale, forfeiture or loss of the Item of Equipment or interest therein; provided, however, if such risk exists, Lessee shall have posted a bond, or provided other comparable security for the full amount of such Taxes, with the amount and form of such bond or comparable security satisfactory to Lessor, (iii) Lessee shall provide an opinion of counsel satisfactory to Lessor that there is a reasonable basis for the prosecution of such contest, and (iv) there is no risk of imposition of any criminal liability on Lessor. Lessor shall, at Lessee's expense, reasonably cooperate with any such contest. If, in connection with any such contest, a payment of the contested Tax must be made, Lessee shall be responsible for such Tax payment. 11 Exhibit 10.8a 17. RETURN PROVISIONS. Upon the expiration of any Equipment Schedule, Lessee, at Lessee's cost and expense, shall promptly effect an audited deinstallation of the Equipment under the supervision of the manufacturer or the manufacturer's authorized representative, or such other person as is reasonably acceptable to Lessor (in either case the "Supervising Party"). Lessee shall return to Lessor the Equipment leased pursuant to such Equipment Schedule (the "Returned Equipment"), free of all advertising or insignia placed thereon by Lessee (other than advertising or insignia placed upon the Equipment by Lessee at the request of Lessor) and free and clear of all liens or encumbrances of Lessee's creditors or other persons having claims against or otherwise claiming through Lessee (in each case other than Lessor's Liens) and in such condition, repair and working order as when accepted by Lessee, ordinary wear and tear excepted. The Returned Equipment shall, at Lessee's expense, be returned to Lessor, properly packed and crated, at such location within the continental United States as Lessor shall designate to Lessee, accompanied by (a) if applicable to such Returned Equipment a current standard maintenance agreement at Manufacturer's then - current engineering change levels and (b) all inspection, maintenance, modification and all overhaul records and maintenance agreements applicable thereto. In the event as a result of Lessee's failure to comply with the provisions of the above two paragraphs hereof Lessee shall not have effected return of the Equipment in all material respects as provided therein, in addition to all other rights and remedies available to Lessor hereunder, Lessor shall have the right to extend the term of the applicable Equipment Schedule (but respect to the affected Equipment only) through the last day of the month on which, at the sole discretion of Lessee, (i) Lessee has cured such noncompliance with respect to the applicable Equipment, or (ii) Lessee has paid Lessor an amount equal to the loss in fair market value of such Equipment due to such noncompliance; provided, however, the exercise by Lessor of such right shall not be deemed a waiver by Lessor of any other right or remedy available to Lessor hereunder. 18. ASSIGNMENT. Lessor shall have the right upon prior written notice to Lessee, which notice Lessee shall acknowledge at Lessor's request, but subject to Lessee's right of quiet enjoyment and use of the Equipment, (a) to assign Lessor's rights and interests in any Equipment Schedule to one or more persons who may subsequently assign such interests and rights to another person, each of such persons being referred to as an "Assignee", and to grant, or cause, or permit an Assignee to grant, a first security interest in the Equipment covered by such Equipment Schedule, and (b) to sell (subject to this Lease and Lessor's obligations hereunder) one or more items of Equipment to one or more persons who may subsequently sell such Items to another, each of such persons and transferees being included in the term Assignee; provided, however, that Lessor shall not, without the prior written consent of Lessee, assign, convey, or transfer any of Lessor's right or interest in any Equipment Schedule to a person who is, or who Lessee advises Lessor is, a competitor of Lessee, or to a person that is, or who Lessee advises Lessor is, actively opposed to the business or businesses in which Lessee or any affiliate of Lessee is engaged; notwithstanding the foregoing, Lessor or any Assignee may without notice to or approval of Lessee, assign its rights and interests in any Equipment Schedule to any subsidiary or affiliate or in conjunction with any portfolio sale, securitization financing or similar financing structure or conduit. 12 Exhibit 10.8a In the event of any such sale or assignment or grant of a security interest (together, "Transfer"), to the extent agreed upon by Lessor and such Assignee, each Assignee shall succeed to all rights of Lessor under the Equipment so assigned to the extent specified herein, but no Assignee shall be obligated to perform any obligation of Lessor under the Equipment Schedule so sold or Transferred (except to lease to Lessee the Items of Equipment described on each Equipment Schedule and to not disturb Lessee's quiet and peaceful possession and use of such Equipment for its intended purpose except in the event of a default as provided herein, including in Sections 6 and 19 hereof), and Lessee shall recognize each such Transfer and shall not assert against any such Assignee any claim, defense, counterclaim or offset whatsoever, whether by reason of Lessor's breach of such Equipment Schedule or otherwise, which Lessee may or might now or hereafter have against Lessor; provided, however, Lessee reserves the right to have recourse directly against Lessor on account of any such claim, defense, counterclaim or offset, but Lessee shall not be released from its obligations to pay to such Assignee the Basic Rent and any additional sums that may be required by the provisions of this Lease or such Equipment Schedule. As a condition to any Transfer, (a) any person to whom such Transfer is made shall expressly covenant with Lessor that so long as Lessor has not given notice (or been deemed to have given notice) of an Event of Default pursuant to Section 19 in respect of the Equipment Schedule subject to such Transfer, neither such person nor anyone acting at such persons direction, shall disturb Lessee's quiet and peaceful possession and use of such Equipment for its intended purpose, and (b) no such Transfer shall require Lessee to pay Basic Rent or any other amount to more than one person with respect to any Equipment Schedule. Upon reasonable notice, Lessee shall from time to time provide each person designated by Lessor as a prospective Assignee with such information in respect of an Equipment Schedule as such person so designated shall reasonably request, including but not limited to the number (and amount) of Basic Rent payments made and remaining to be made under such Equipment Schedule, the location of the Equipment and whether such Equipment Schedule remains in full force and effect. Lessee acknowledges that Lessor intends to enter into each Equipment Schedule in anticipation of being able to effect a Transfer of its interest thereunder and that the Assignee will be acting in reliance upon and be entitled to the benefits of this Section. Accordingly, Lessee agrees that, after notice of such Transfer, Lessee will not permit such Equipment Schedule or this Lease (to the extent it applies to such Equipment Schedule) to be amended or waived without the prior written consent of the Assignee and promptly shall pay to Assignee, when due, the Basic Rent and any other payments that thereafter will become due to Lessor under such Equipment Schedule. Lessee may not voluntarily or involuntarily transfer (including without limitation a transfer by assignment, sale or sublease) any Item of Equipment or any Equipment Schedule or any interest of Lessee in any such Item of Equipment or Equipment Schedule without the prior written consent of Lessor and Assignee, except that Lessee may, with the prior written consent of Lessor and Assignee, sublease any item of Equipment or assign any Equipment Schedule to a corporation or other entity all of the stock or equity interest of which is owned by Lessee and during the term of such Equipment 13 Exhibit 10.8a Schedule continues to be owned by Lessee. No sublease or assignment shall in any way relieve Lessee of its obligations hereunder. 19. DEFAULT. The occurrence of any of the following shall constitute an "Event of Default": (a) Lessee fails to pay all or any portion of any installment of Basic Rent within 5 days of the date such sum becomes due and payable, or fails to make any other payment when due, taking into account any applicable notice or grace period; or (b) Any representation or warranty made in this Lease, or in any report, certificate, financial statement, or other statement furnished to Lessor or any Assignee pursuant to the provisions of this Lease proves to have been false in any material respect as of the date on which the same was made; or (c) Lessee fails or refuses to duly observe or perform any other covenant, condition, or agreement made by it in this Lease and, except as specifically set forth in Section 14, such failure or refusal continues without remedy for a period of 15 days after written notice thereof to the Lessee (provided, however, that any such non-observance or non-performance which, in the exercise of due diligence, cannot be cured within such 15 day period shall not be deemed an Event of Default so long as Lessee shall within such period commence and thereafter continue diligently to cure such non-observance or non-performance) provided, however, Lessee's due diligence to the contrary, any non-observance or non-performance by Lessee of any covenant, condition or agreement in this Lease which remains uncured for seventy-five (75) days after the initial notice thereof to Lessee shall be deemed to be an Event of Default, or (d) An attachment or other lien against the Equipment resulting from any Lessee action or failure to act (other than a Permitted Lien or Lessor Lien) is issued or entered and remains undischarged or unbonded for 15 days after notice thereof from Lessor to Lessee, unless the Equipment is at risk of imminent foreclosure or seizure which shall instead constitute an immediate Event of Default; or (e) Lessee or any guarantor shall file a voluntary petition in bankruptcy or a voluntary petition or answer seeking liquidation, administration, reorganization, arrangement, readjustment of its debts, or for any other relief under the Bankruptcy Code, or under any other act or law pertaining to insolvency or debtor relief, whether state, federal, or foreign, now or hereafter existing; or Lessee or any guarantor shall enter into any agreement indicating its consent to, approval of, or acquiescence in, any such petition or proceeding; or Lessee or any guarantor shall apply for or permit the appointment by consent or acquiescence of a receiver, custodian administrator, or trustee for all or a substantial part of its property; or Lessee or any guarantor shall make an assignment for the benefit of creditors; or Lessee or any guarantor shall be unable or shall fail to pay its debts generally as such debts become due; or Lessee or any guarantor shall admit, in writing, its inability or failure to pay its debts generally as such debts become due; or (f) There shall have been filed against Lessee or any guarantor an involuntary petition in 14 Exhibit 10.8a bankruptcy or seeking liquidation, administration, reorganization, arrangement, readjustment of its debts or for any other relief under the Bankruptcy Code, or under any other act or law pertaining to insolvency or debtor relief, whether state, federal or foreign, now or hereafter existing, or Lessee or any guarantor shall suffer or permit the appointment of a receiver, custodian, administrator, or trustee for all or a substantial part of its property; or Lessee or any guarantor shall suffer or permit the issuance of a warrant of attachment, diligence, execution or similar process against all or any substantial part of its property; unless, in each case, such petition, appointment or process is fully bonded against, vacated or dismissed within sixty (60) days from its effective date, but not later than ten (10) days prior to any proposed disposition of any assets pursuant to any such proceeding; (g) The occurrence of any default in the payment or performance, and the subsequent acceleration, of any debt or other obligations (including, but not limited to, lease obligations or any corporate guaranty) owed by Lessee or any guarantor to any other persons or entities unaffiliated with Lessor with an outstanding principal balance in excess of $5,000,000 in the aggregate, whether now or hereafter existing; or (h) There shall be a change in the beneficial ownership and control, directly or indirectly, of the majority of the outstanding voting securities or other interests entitled (without regard to the occurrence of any contingency) to elect or appoint members of the board of directors or other managing body of Lessee or any guarantor (a "change of control"), or there is any merger, consolidation, dissolution, liquidation, winding up or sale or other transfer of all or substantially all of the assets of Lessee or any guarantor pursuant to which there is a change of control or cessation of Lessee or any guarantor or their businesses. If an Event of Default occurs and is continuing under this Lease, Lessor may give Lessee written notice of the Event of Default (except after the occurrence of an Event of Default under Section 19(e) or 19(f) hereof, in which event such notice shall be deemed to have been given without any act by Lessor) and, upon giving of such notice or at any time thereafter, at the request of Lessor, Lessee shall comply with the provisions of this section and agrees with the following remedies. Lessee hereby authorizes Lessor to enter, with or without legal process, any premises where any Equipment is located and take possession thereof. Lessee shall, without further demand, forthwith pay to Lessor (i) as liquidated damages for loss of a bargain and not as a penalty, the Casualty Value of the Equipment (calculated in accordance with the Equipment Schedule as of the Rent Payment Date next preceding the declaration of default), and (ii) all Rent and other sums then due (except on such Rent Payment Date) hereunder. Lessor may, but shall not be required to, sell the Equipment at private or public sale, in bulk or in parcels, with or without notice, and without having the Equipment present at the place of sale; or Lessor may, but shall not be required to, lease, otherwise dispose of or keep idle all or part of the Equipment; and Lessor may use Lessee's premises for any or all of the foregoing without liability for Rent, costs, damages or otherwise. The proceeds of sale, lease or other disposition, if any, shall be applied in the following order of priorities: (1) to pay all of Lessor's costs, charges and expenses incurred in taking, removing, holding, repairing and selling, leasing or otherwise disposing of Equipment; then, (2) to the extent not previously paid by Lessee, to pay Lessor all sums due from Lessee hereunder; then, (3) to reimburse to Lessee any sums previously 15 Exhibit 10.8a paid by Lessee as liquidated damages; and (4) any surplus shall be retained by Lessor. Lessee shall pay any deficiency in clauses (1) and (2) forthwith. In addition to the foregoing rights, Lessor may, by written notice to Lessee, cancel the lease as to any or all of the Equipment. The foregoing remedies are cumulative, and any or all thereof may be exercised in lieu of or in addition to each other or any remedies at law, in equity, or under statute. Lessee waives notice of sale or other disposition (and the time and place thereof), and the manner and place of any advertising. If permitted by applicable law, Lessee shall pay reasonable attorney's fees actually incurred by Lessor in enforcing the provisions of this Agreement and any ancillary documents. Waiver of any default shall not be a waiver of any other or subsequent default. 20. LATE PAYMENTS. A late payment charge at the Overdue Rate shall be paid by Lessee to Lessor on all funds owed Lessor by Lessee that are not paid when due, subject to any notice requirements or grace periods hereunder. If such funds have not been received by Lessor at Lessor's place of business or by Lessor's Assignee by the date such funds are due under this Lease, Lessor shall bill Lessee for such charges which will be due in accordance with Section 5(d); failure of Lessor to bill Lessee shall not relieve Lessee of its obligation to pay such amounts. 21. OWNERSHIP, PERSONAL PROPERTY. The Equipment shall be and remain personal property of Lessor, and Lessee shall have no right, title or interest therein or thereto except as expressly set forth in this Lease, notwithstanding the manner in which it may be attached or affixed to real property, and upon termination or expiration of the Lease Term, Lessee shall have the duty and Lessor shall have the right to remove the Equipment from the premises where the same be located whether or not affixed or attached to the real property or any building, at the cost and expense of Lessee. In order to secure the prompt payment and performance as and when due of all of Lessee's obligations (both existing and hereafter arising) under the Equipment Schedule, Lessee shall be deemed to have granted, and it hereby grants, to Lessor a first priority security interest in the Equipment now and hereafter leased pursuant to the Equipment Schedule and all replacements, substitutions, improvements, additions, accessions, and proceeds (cash and non-cash; but without power of sale), including the proceeds of all property insurance policies, thereof; and Lessee agrees that with respect to the Equipment, in addition to all of the other rights and remedies available to Lessor hereunder upon the occurrence of a default, Lessor shall have all of the rights and remedies of a first priority secured party under the Uniform Commercial Code in effect in any applicable jurisdiction. Lessee hereby authorizes Lessor to file Uniform Commercial Code financing statements and amendments thereto describing the Equipment described in the Equipment Schedule and adding any other collateral described therein and containing any other information required by the applicable Uniform Commercial Code. Further, Lessee irrevocably grants to Lessor the power to sign Lessee's name and generally to act on behalf of Lessee to execute and file financing statements and other documents pertaining to any or all of the Equipment. 16 Exhibit 10.8a 22. ALTERATIONS; ATTACHMENTS. Lessee may, at its own expense and upon prior notice to Lessor, make or permit others to make Equipment alterations, modifications, or additions, provided such alterations, modifications, or additions are readily removable without causing material damage to or reducing the value of the Equipment, do not interfere with the maintenance thereof, do not create a safety hazard, and are not subject to any security interest, rent, or other right or claim held or retained by a third party unless such third party acknowledges that Lessor's interest in the Equipment is in all ways superior to that of the third party. Such alterations, modifications, and additions may be removed by Lessee at the expiration or earlier termination of the Term (including any extensions), and shall be removed at such time if so requested by Lessor. The cost of such removal and the restoration of the Equipment to the same condition as when new (ordinary wear and tear excepted) shall be borne by Lessee. Any such alterations, modifications, and additions which are not removed by Lessee shall become the property of Lessor. 23. JURY TRIAL: LESSEE AND LESSOR EACH HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court (including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 24. MISCELLANEOUS: (a) Lessee shall provide Lessor with such corporate resolutions, financial statements, opinions of counsel and other documents as Lessor shall request from time to time. (b) Lessee represents that the Equipment is being leased hereunder for business purposes. (c) Time is of the essence with respect to this Lease. (d) Provided neither Lessee nor any guarantor is required to file regular periodic reports, forms and other filings with the Securities and Exchange Commission, including (without limitation) Forms 8K, 10K and 10Q, Lessee or its guarantor shall promptly within 60 days of the end of each fiscal quarter (other than the fourth fiscal quarter) deliver to Lessor copies of guarantors quarterly unaudited financial statements and within 120 days after the end of each fiscal year deliver to Lessor 17 Exhibit 10.8a copies of guarantors annual audited financial statements, including the opinion of the auditor. Upon reasonable request by Lessor, Lessee shall promptly within 60 days of the end of each fiscal quarter deliver to Lessor copies of its unaudited quarterly financial statements. 25. NOTICES. All notices hereunder shall be in writing, by such overnight courier service as either party may choose, and shall be directed, as the case may be, to Lessor at 1 Hollis St., Wellesley, MA 02482 and to Lessee at 680 North Lake Shore Drive, Chicago, IL 60611, Attn: Howard Shapiro, or to such other address as Lessor or any Assignee may specify by like notice and shall be effective on the earlier of three days after mailing or upon receipt. 26. ENTIRE AGREEMENT. Lessee acknowledges that Lessee has read this Lease, understands it and agrees to be bound by its terms, and further agrees that this Lease and each Equipment Schedule and Equipment Acceptance constitute the entire agreement between Lessor and Lessee with respect to the subject matter hereof and supersede all previous agreements, promises, or Lessor representations. The terms and conditions hereof shall prevail notwithstanding any variance with the terms of any purchase order submitted by Lessee with respect to any Equipment covered hereby. 27. ARTICLE 2A. This Lease constitutes a "finance lease" within the meaning of Article 2A of the Uniform Commercial Code, whether or not each requirement of the definition thereof has been strictly or technically met. 28. AMENDMENT. This Lease may not be changed, altered, or modified except by an instruments in writing signed by an officer of Lessor and a duly authorized representative of Lessee. 29. WAIVER. Any failure of either party to require strict performance by the other or any waiver by either party of any provision herein shall not be construed as a consent or waiver of any other breach of the same or any other provision. 30. SEVERABILITY. If any provision of this Lease is held invalid, such invalidity shall not affect any other provisions hereof. 31. JURISDICTION. The Lease shall be governed by and construed under the laws of the State of Illinois. 32. CONFLICT. Should there be terms or conditions within the Equipment Schedule which conflict with this Master Equipment Lease, the terms of the Equipment Schedule will be binding. 33. SURVIVAL. All representations, warranties, indemnities and covenants of Lessee contained in this Lease or any Equipment Schedule shall continue in full force and effect and shall survive notwithstanding the full payment of all amounts due hereunder or the expiration or earlier termination of this Lease or any Equipment Schedule. 18 Exhibit 10.8a 34. BINDING EFFECT. This Lease shall be binding upon and inure to the benefit of the respective successors and permitted assigns of Lessor and Lessee. WITNESS the execution hereof under seal this 22nd day of December, 2003 The Walden Asset Group, LLC Playboy Entertainment Group, Inc. (LESSOR) (LESSEE) BY: /s/ David L. Burmon BY: /s/ Robert D. Campbell ------------------------------- ---------------------------------- NAME: David L. Burmon NAME: Robert D. Campbell ----------------------------- -------------------------------- TITLE: Chief Operating Officer TITLE: Treasurer and Asst. Secretary ---------------------------- ------------------------------- 19 Exhibit 10.8a EXHIBIT A Equipment Schedule See attached 20 Exhibit 10.8a EXHIBIT B Acceptance Certificate See attached 21 Exhibit 10.8a EXHIBIT C Certificate Concerning Payment of Personal Property Taxes See attached 22 Exhibit 10.8a EXHIBIT D See attached 23 EX-10.8(B) 6 d57916_ex10-8b.txt EQUIPMENT SCHEDULE NO. 1 Exhibit 10.8b Equipment Schedule No. 1 to the Master Lease Agreement (the "Lease") dated December 21, 2003 between The Walden Asset Group, LLC ("Lessor") and Playboy Entertainment Group, Inc. ******************************************************************************** This Equipment Schedule, incorporating by reference the terms and conditions of the Lease, constitutes a separate instrument of lease between Lessor, as lessor, Playboy Enterprises, Inc., as guarantor, and Playboy Entertainment Group, Inc., as lessee, herein "Lessee". Equipment Description & Defined Terms: Various High Definition Television related Equipment and other Equipment as acquired by the Lessor including all packing material, connections, cabling, and instructional manuals with an Estimated Lessor's Cost of $14,800,000. The final costs and the detailed list of Equipment will be set out in the Acceptance Certificate. Installation Locations: 3030 Andrita Street, Los Angeles, California 90065. Lease Term: 60 Months, plus any extension term (collectively, the "Term"). Lease Factor: Factor Type Lease Rate - ------------- ----------- ---------- Monthly 1.7102% Daily 0.00293% (interest rate for interim period only). Commencement Date: The date on which the Equipment which is subject to this Lease is installed and accepted under this Lease. Each separate Equipment Schedule shall have its own Commencement Date. Basic Rent: Lessee shall pay to the Lessor or its Assignee, as "Basic Rent" on the Commencement Date (but only if the Commencement Date occurs on the First Basic Rent Date) and on each successive Basic Rent Date after the Commencement Date, an amount equal to the Monthly Lease Factor multiplied by Lessor's Cost of each item of Equipment. In addition, on the Commencement Date (unless the Commencement Date occurs on the First Basic Rent Date), Lessee shall pay to Lessor an amount equal to the product of (i) the Daily Lease Factor, multiplied by (ii) Lessor's Cost of each applicable item of Equipment, multiplied by (iii) the number of days from, and including, the Commencement Date to, and including, the last day of the month in which the Commencement Date occurs. Basic Rent Dates: The first day of each of 60 successive months commencing with and including the First Basic Rent Date (for a total of 60 Basic Rent Dates, each one month apart) and the first day of each month thereafter during the term of any extension to this Equipment Schedule. First Basic Rent Date: The first day of the calendar month following Lessee's acceptance of all of the Equipment subject to this Lease. Expiration Date: The later of (i) the last day of the month in which the 60th Basic Rent Date occurs or (ii) the last day of any extension of the Lease. Lessor's Cost: The total anticipated Lessor's Cost is $14,800,000.00. Lessee and Lessor may mutually agree to changes in this dollar level and further stipulate that any changes agreed to will be reflected in the Acceptance Certificate. Casualty Value: The Casualty Value from time to time of any item of Equipment subject to this Lease shall be payable to Lessor or its Assignee and shall be an amount equal to the product of (i) the Lessor's Cost of such item of Equipment times (ii) the prorated percentage indicated in the table on the attached Exhibit A. The Casualty Value for any Event of Loss during a Basic Rent Date period shown shall be a pro-rata amount as set forth on the attached Exhibit A. The Casualty Value of the Equipment will be reduced by .75% during each month of any extension to this Lease. Security Deposit: To secure the prompt payment and performance as and when due of all obligations and indebtedness of Lessee (or any guarantor of Lessee) to Lessor under the Lease, Lessee: (1) shall pay to Lessor, concurrently with the execution of this Equipment Schedule, a security deposit in an amount calculated as ten percent (10%) of Lessor's Cost; and (2) hereby grants Lessor a security interest in the cash comprising the security deposit from time to time, and all proceeds (cash and non-cash) thereof, including any account into which such cash may be deposited (collectively, the "Security Deposit"), and Lessee hereby authorizes Lessor to file Uniform Commercial Code financing statements and amendments thereto describing such collateral and containing any other information required by the applicable Uniform Commercial Code. Any interest accrued with respect to the cash comprising the security deposit from time to time shall be for the account of Lessor and shall not be added to the security deposit. Upon indefeasible payment and performance in full of all obligations of Lessee under this Agreement and all Schedules executed pursuant hereto (except with respect to unidentified inchoate indemnity or expense reimbursement obligations), Lessor shall promptly (and in any event within seven (7) Business Days) terminate the security interest granted herein with respect to the security deposit and shall refund the then current balance of such security deposit to Lessee. Lessor is not required to segregate the Security Deposit funds and may commingle the security deposit funds with Lessor's other accounts. Remedies with respect to the security deposit shall be exercised only upon the declaration of an Event of Default and in accordance with Section 19 of the Lease. Overdue Rate: 1.25% per month. Equipment Acquisition: Lessee represents that it has specified and ordered the Equipment described herein from the Manufacturers pursuant to purchase orders between the Lessee and the Manufacturers and Lessee will execute and deliver to the Manufacturers an Assignment of such agreements in a form, which will permit the Lessor, or Lessor's Assignee, to Purchase directly from the Manufacturers the Equipment described hereon. Lessee further warrants that all Equipment is new and subject to accelerated depreciation under the Federal tax laws and will be acquired in a manner consistent with the ability of Lessor or its Assignee to take such accelerated depreciation. 2 Purchase Option: (a) Provided Lessee is not in default or breach of the Lease or any other material present or future obligation to Lessor, its successors or assigns, Lessee shall have the right at the expiration of the Term, upon 60 days prior written irrevocable notice, to purchase all, but not less than all, of Lessor's right, title and interest, in and to the Equipment, for the Equipment's Fair Market Value. (b) If Lessee exercises the option specified in Paragraph (a) hereof, then on the date Lessee exercises the option, Lessee shall pay to Lessor any accrued but unpaid Rent then due and any other sums due and unpaid on the date Lessee exercises the option, together with the Equipment's Fair Market Value, plus all applicable sales taxes, in cash. For purposes of this Equipment Schedule "Fair Market Value" shall mean the price which a willing buyer (who is neither a lessee in possession nor a used equipment dealer) would pay for the Equipment in an arm's-length transaction to a willing seller under no compulsion to sell; provided, however, that in such determination: (i) the Equipment shall be assumed to be in the condition in which it is required to be maintained and returned under the Lease; (ii) in the case of any installed Equipment, that Equipment shall be valued on an installed basis; and (iii) costs of removal from the current location shall not be a deduction from such valuation. Renewal Option: Provided that Lessee has given 60 or more days' prior written notice to the Lessor or Assignee, and no Event of Default has occurred or is continuing hereunder, Lessee may renew all, but not less than all, of the Equipment subject to this Equipment Schedule at a Fair Market Value renewal rate for such term. Failure to give such notice means that the Lessee shall continue to pay the Basic Rent until sixty days after such time as notice is given. Buyout Option: Provided Lessee is not in default or breach of the Lease or any other present or future obligation to Lessor, its successors or assigns, Lessee shall have the right on the 49th Basic Rent Date to purchase all, but not less than all, of the Equipment subject to this Lease for 34.55% of Lessor's Cost plus all applicable taxes (and no Basic Rent shall be due or payable on such Basic Rent Date with respect to the calendar month commencing on such date). This Lease shall immediately terminate upon the exercise of the Buyout Option and the payment of all amounts due in connection therewith. Return Conditions: In addition to the provisions provided for in Section 17 (Return Provisions) of the Lease, and provided that Lessee has elected not to exercise its option to purchase or renew the Equipment. Lessee shall, at its expense: If Lessee elects to return the Equipment, Lessee shall give Lessor written notice of Lessee's intention to return all, but not less than all, the Equipment at least sixty (60) days prior to the Expiration Date of the applicable Equipment Schedule, and the term of such Equipment Schedule shall automatically be extended one month for each thirty-day period or portion thereof Lessee fails to give such notice. Not more than one hundred twenty (120) days prior to and up to the expiration of the Term of this Lease, Lessee shall, upon reasonable notice by Lessor, make the Equipment available for operational inspections by potential purchasers. 3 Not less than sixty (60) days prior to the expiration of the term of this Lease, if Lessee has given Lessor notice of Lessee's intention to return the Equipment, Lessee shall provide to Lessor a detailed inventory of all components of the Equipment (the inventory should include but not be limited to the following: (i) a listing of model and serial numbers for all hardware and peripherals comprising the Equipment; (ii) where applicable, a listing of all software features listed individually; and (iii) a listing of all upgrades on both hardware and software that Lessee is aware of that have been offered since delivery to Lessee by the various manufacturers as they pertain to their Equipment and a listing of all upgrades on both hardware and software that have been installed in the Equipment since delivery to Lessee during the Term. All equipment and related software must be returned with the then current engineering level and/or software version. Lessee shall cause the software to qualify for all applicable licenses necessary for its operation for its intended purpose and ensure the transferability of all licenses to any prospective purchaser of the equipment from Lessor. Within sixty (60) days prior to the expiration of the Term of this Lease, if Lessee has given Lessor notice of Lessee's intention to return the Equipment, Lessee shall, at its expense, provide or cause the manufacturer(s) to provide to Lessor (i) one set of service manuals and parts lists for the Equipment, (ii) one set of cable plans indicating the allocation of cabling and wiring delivered with or becoming part of the Equipment, if any, (iii) one set of operating manuals detailing the Equipment configuration, operating requirements, and other technical data concerning the set-up and operation of the Equipment, if any, (iv) one complete set of "as installed" drawings (including any applicable blueprints) for the Equipment; and (v) one set of warranty manuals and related maintenance records for the Equipment (these documents should include replacements and/or additions thereto such that all documentation is completely up to date). Not more than thirty (30) days prior to the de-installation, crating and return of the Equipment, Lessee, at Lessee's expense, shall cause the manufacturer(s), or other persons expressly authorized by the manufacturer(s) or Lessor (such authorization not to be unreasonably withheld by Lessor), to inspect, examine and test all equipment, material and workmanship of the Equipment. If during any inspection, examination and test, any of the equipment, material or workmanship is found to be defective, then Lessee shall cause the manufacturer(s), or other persons expressly authorized by the manufacturer(s) or Lessor (such authorization not to be unreasonably withheld by Lessor), to replace or properly repair (using generally accepted procedures) such defects. Repairs shall include the replacing of any cracked or broken faceplates, wires, cable, etc. Lessee shall have the manufacturer(s), or their authorized representative, de-install, crate and load all Equipment (including all wire, cable and mounting hardware) onto a carrier approved by the manufacturer(s) in accordance with the manufacturer's specifications should manufacturer provide such service; otherwise such de-installation shall be managed by an expert in such work appointed by Lessor, or it's Assignee and reasonably acceptable to Lessee, and paid for by Lessee. As part of the de-installation process, and to be included with each piece of equipment, Lessee shall have each item of Equipment returned with a field service report stating that the Equipment has been properly inspected, examined and tested and is operating within the manufacturer's specifications and that all up-grades that have been offered by the manufacturer(s) for both the hardware and software that are necessary for operation of the 4 Equipment for its intended purpose have been incorporated into the Equipment and these shall remain and become part of the Equipment. The field service report shall be deemed to satisfy Lessor, or it's Assignee, that, at the time of the Equipment's shipment back to Lessor, or it's Assignee, the Equipment has met the return requirements outlined herein. Lessee shall provide for the proper transportation of the Equipment in a manner consistent with the Manufacturer's recommendations and practices to as many locations as necessary within the continental United States, as Lessor shall reasonably direct. Lessee shall obtain and pay for a policy of transit insurance for the redelivery period in an amount equal to the replacement value of the Equipment and Lessor shall be named as the loss payee on all such policies of insurance. Provided Lessee has complied with the requirements above and 95% (based on Original Equipment Cost) or more of the equipment has been returned to the location(s) directed by Lessor, Lessee's rent payment obligation and all other obligations under this Agreement with respect to the noncompliant Equipment (payment obligation based on Lease Rate Factor applied to Original Equipment Cost of noncompliant equipment and not with respect to any other Equipment under this Equipment Schedule or otherwise) shall continue from month to month notwithstanding any expiration or termination of the Term until, at the sole discretion of Lessee, (i) Lessee has cured such noncompliance with respect to the applicable Equipment, or (ii) Lessee has paid Lessor an amount equal to the stipulated loss value of such Equipment due to such noncompliance. Until such time that Lessee delivers 95% or more of the equipment to the location(s) as directed by Lessor, this Agreement shall continue on a month to month basis at the Monthly Lease Rate factor multiplied by the full Lessor's Cost as provided herein. Subject to Lessee's reasonable security and production procedures, Lessor, at his sole discretion, from time to time, shall be able to inspect (or have the equipment inspected by an authorized manufacturer's representative) the equipment at the Lessor's sole expense. If any discrepancies are found as they pertain to the general and operating condition of the equipment, the Lessor will communicate these discrepancies to the Lessee in writing. The Lessee shall then have thirty (30) days to rectify these discrepancies at his sole expense. The Lessee shall pay all actual out-of-pocket expenses for the re-inspection by the Lessor appointed expert of the Equipment with respect to which such discrepancies were found and documented, if corrective measures are required. Subject to Lessee's reasonable security and production procedures, Lessor shall have the right to attempt the resale of the Equipment from the Lessee's location with the Lessee's full cooperation and assistance for a period of one hundred twenty (120) days prior to Lease maturity; provided that any out-of-pocket expenses in connection therewith shall be for the account of Lessor. Lease Rate Index: The Lease Factor for any Equipment Schedule is subject, on or before the First Basic Rent Date, on and as of the Commencement Date with respect to such Equipment Schedule, to adjustment based upon an increase or decrease in the yield for the three year Treasury Note (November 2006 Three Year Treasury with a coupon rate of 3.5%), as published in the Wall Street Journal from time to time, from a base yield of 2.48%on December 9, 2003. 5 For each basis point increase or decrease in the base yield, the Lease Factor will be increased or decreased by .0004%. The Lease Factors as adjusted shall be shown on the Acceptance Certificate and shall be binding upon Lessor and Lessee with respect to such Equipment Schedule for the Term. By execution hereof the undersigned confirm that this Equipment Schedule, marked "Original", together with a reprographic copy of the Master Lease Agreement incorporated herein by reference, will constitute an original, separable, and enforceable agreement of lease, independent of any other Equipment Schedules. The Walden Asset Group, LLC Playboy Entertainment Group, Inc. (Lessor) (Lessee) By: /s/ David L. Burmon By: /s/ Robert D. Campbell ------------------------------- -------------------------------------- Name: David L. Burmon Name: Robert D. Campbell ----------------------------- ------------------------------------ Title: Chief Operating Officer Title: Treasurer and Asst. Secretary ---------------------------- ----------------------------------- Date: December 22, 2003 Date: 12/22/03 ----------------------------- ------------------------------------ Playboy Enterprises, Inc. (Guarantor) By: /s/ Robert D. Campbell -------------------------------------- Name: Robert D. Campbell ------------------------------------ Title: SVP, Treasurer and Asst. Secretary ----------------------------------- Date: 12/22/03 ------------------------------------ 6 EXHIBIT A Month Casualty Value Month Casualty Value % of Lessor's Cost % of Lessor's Cost 1 108.145 31 66.976 2 106.960 32 65.472 3 105.737 33 63.961 4 104.474 34 62.443 5 103.202 35 60.915 6 101.919 36 59.379 7 100.627 37 57.837 8 99.326 38 56.284 9 98.016 39 54.720 10 96.695 40 53.150 11 95.366 41 51.571 12 94.026 42 49.986 13 92.676 43 48.393 14 91.318 44 46.789 15 89.951 45 45.177 16 88.576 46 43.557 17 87.194 47 41.927 18 85.804 48 40.288 19 84.406 49 38.642 20 82.999 50 36.984 21 81.584 51 35.315 22 80.161 52 33.640 23 78.729 53 31.958 24 77.288 54 30.270 25 75.839 55 28.575 26 74.381 56 26.869 27 72.913 57 25.156 28 71.439 58 23.439 29 69.958 59 21.713 30 68.471 60 20.001 7 EX-10.8(C) 7 d57916_ex10-8c.txt ACCEPTANCE CERTIFICATE Exhibit 10.8c ACCEPTANCE CERTIFICATE For Equipment Schedule No. 1 to the Master Lease Agreement dated as of 12/22/03 between The Walden Asset Group, LLC (Lessor) and Playboy Entertainment Group, Inc. (Lessee) ******************************************************************************** Equipment Acceptance: The Lessee hereby certifies that the following Equipment (as set forth in the Equipment Schedule identified below) has been delivered and installed as of the Commencement Date at the location and on the date identified below. This Equipment has been tested and inspected by the Lessee, found to be in good working order, and is accepted as Equipment under the Lease on the Commencement Date indicated below. Equipment Schedule: No. 1 Installation Locations: 3030 Andrita St., Los Angeles, California 90065 Commencement Date: December 22, 2003 First Basic Rent Date: January 1, 2004 Description of Equipment: Various Equipment as further outlined in Exhibit A attached hereto Lessor's Cost: $14,314,971.45 ($5,516,942.16 of the equipment is eligible for the 30% special depreciation allowance and basis adjustment under Section 168(k)(1) of the code) Lease Factors: Factor Type Factor - -------------- ----------- ------ Monthly 1.7102% Daily 0.00293% Basic Rent: $244,814.64 Monthly in Advance Lease Term: 60 Months commencing on the First Basic Rent Date and preceded by a period from the Commencement Date to the First Basic Rent Date. Lessee hereby confirms the acceptance of the Equipment described above under the Lease, the Lease Factor, the First Basic Rent Date, Lessor's Cost and other information described above, and the Lessee hereby represents and warrants that the Lease is in full force and effect, there have been no defaults thereunder, the Equipment is in good order and repair and there are no agreements between Lessor and Lessee other than the Lease and the Equipment Schedule which cover the leasing of the Equipment. Playboy Enterprises, Inc. Playboy Entertainment Group, Inc. (Guarantor) (Lessee) By: /s/ Robert D. Campbell By: /s/ Robert D. Campbell -------------------------------------- --------------------------------- Title: SVP, Treasurer and Asst. Secretary Title: Treasurer and Asst. Secretary ----------------------------------- ------------------------------ Date: December 22, 2003 Date: December 22, 2003 EX-10.9 8 d57916_ex10-9.txt MATERIAL CONTRACTS Exhibit 10.9 Playboy Entertainment Group, Inc. 680 North Lakeshore Drive Chicago, Illinois 60611 Dear Mr. Campbell: This Acknowledgement of Assignment (the "Notice") is made this 22nd day of December 2003 among Playboy Entertainment Group, Inc. ("Lessee"), The Walden Asset Group, LLC ("Lessor"), and General Electric Capital Corporation ("Assignee"). In order to induce us to accept an assignment of all of Lessor's right, title and interest in the Lease, but none of Lessor's obligations with respect thereto, you confirm to us the following: BACKGROUND A. Lessor and Lessee have executed Equipment Schedule No. 1 (collectively the "Schedule") pursuant to and incorporating therein, the terms and conditions of the Master Lease dated December 22, 2003 (the "Master Lease") between The Walden Asset Group, LLC as Lessor, and Playboy Entertainment Group, Inc. as Lessee, (the Schedule and each Acceptance Certificate thereunder, being hereinafter collectively referred to as the "Lease"); B. Lessor has assigned all of its right, title and interest in, to and under, the Lease; but none of its obligations thereunder, to Assignee. C. The parties desire to clarify certain of their rights and obligations with respect to each other. NOW, THERETOFORE, IT IS AGREED: 1. Lessee hereby acknowledges notice of and consents to Lessor's assignment to Assignee of all of Lessor's right, title and interest in the Lease, but none of Lessor's obligations with respect thereto, all Basic Rent, commencing with the Basic Rent payment due on January 1, 2004, Casualty Value payments, and all other payments from time to time payable by Lessee under the Lease from and after the date hereof (said rents and all other payments being hereafter collectively referred to as the "Moneys"). 2. Lessee represents and warrants, as of the date hereof, as follows: (a) that Lessee has executed an Acceptance Certificate and has therefore accepted the equipment described therein (collectively, the "Equipment") under Lease, and (b) that the Basic Rent Amount is payable (subject to the terms and conditions of the Lease, including Lessee's buyout option and renewal option) in 60 consecutive monthly installments on the first day of each month, as follows: First Basic First Assignee Schedule Rent Date Rent Date Rent Amount -------- --------- --------- ----------- 1 January 1, 2004 January 1, 2004 $244,814.64 and; (c) that Exhibit A hereto is a true and complete copy of the Lease, with all amendments and modifications thereto; (d) that, notwithstanding anything to the contrary in the Lease, there is only one original of each Schedule marked "Original"; any other Schedule containing original signatures is marked "Duplicate", and only the counterpart marked "Original" will be considered chattel paper with respect to which a security interest may be created; and Assignee shall maintain possession of the "Original" Schedule; (e) that Lessor is not in default of any of its obligations as Lessor under the Lease, and Lessee is not in default under the terms of the Lease; (f) there has been no material adverse change in the financial condition of Lessee since its last published annual report; (g) that the Lease and Master Lease are in full force and effect and represent valid and binding obligations of Lessee; (h) that Lessee has received no notice of a prior sale, transfer, assignment, hypothecation, or pledge of the Lease, the Moneys, or the Equipment (except for the grant of security interest in the leasehold under the bank facilities and indenture, which bank facilities security interests have been released/subordinated for the benefit of Lessor pursuant to certain release agreements); (i) that all representations and duties of Lessor intended to induce Lessee to enter into the Lease whether required by the Lease or any other written agreement entered into in connection therewith have been fulfilled; (j) that the Lease, Master Lease, and this Notice are the sole agreements between Lessee and Lessor respecting the Equipment and the Moneys; (k) that Assignee shall be entitled to the benefits of each and every right accorded an Assignee pursuant to the terms of the Lease; and (l) that no assignment or sublease by Lessee of any of its rights under the Lease, Master Lease or in the Equipment shall in any way discharge or diminish any of Lessee's obligations under the Lease, it being the intention that Lessee shall remain primarily liable to pay and perform all of its obligations under the Lease; (m) that, other than as set forth herein and in the Lease, the assignment to Assignee does not materially change Lessee's duties or obligations under the Lease nor materially increase the burdens or risks imposed on Lessee; (n) the Lease is a "finance lease" as defined in and for the purposes of Article 2A of the Uniform Commercial Code. 3. Lessee agrees, in accordance with Section 18 of the Lease, that so long as Assignee does not breach its Covenant of Quiet Enjoyment (as defined in paragraph 6 hereof), Lessee will not assert against Assignee any defense, claim, counterclaim, recoupment, setoff, or right which Lessee may have against Lessor or any other party. Lessee agrees that it will remit all Moneys directly to Assignee as set forth in Section 1 hereof (in sufficient advance time to reach Assignee on their scheduled due dates), via Lessee's check payable to and at the address as follows: General Electric Capital Corporation GE Capital-CEF Lock Box 640387 Pittsburgh, Pennsylvania 15219 without regard to any defense, claim, counterclaim, recoupment, setoff, or right it may have against Lessor arising under the Lease or otherwise and will not seek to recover any part of the same from Assignee. Notwithstanding the foregoing, nothing herein shall be deemed to relieve Lessor from any of its obligations to Lessee under the Lease. 4. Lessee agrees (a) that it shall not enter into any waiver, consent, or other agreement amending, modifying or terminating the Lease (other than its exercise of any right or option reserved for the Lessee under the Lease or any related agreement) to which Assignee is not a party without the written consent of Assignee and any such attempted waiver, consent, or agreement to amend, modify or terminate the Lease without such consent shall be void; (b) that Assignee has not assumed and shall not be obligated to perform any of Lessor's obligations under the Lease, other than those set forth in 2 this Notice, unless agreed upon by the parties to this agreement in writing; (c) that it will deliver to Assignee a copy of all notices and other communications relating to the Lease and the Equipment at the same time any such notice is required to be given to Lessor in accordance with the Lease; (d) that, provided neither Lessee nor any guarantor is required to file regular periodic reports, forms and other filings with the Securities and Exchange Commission, including (without limitation) Forms 8K, 10K and 10Q, Lessee or its guarantor shall promptly within 60 days of the end of each fiscal quarter (other than the fourth fiscal quarter) deliver to Lessor copies of guarantor's quarterly unaudited financial statements and within 120 days after the end of each fiscal year deliver to Lessor copies of guarantor's annual audited financial statements, including the opinion of the auditor and upon reasonable request by Lessor, Lessee shall promptly within 60 days of the end of each fiscal quarter deliver to Lessor copies of its quarterly unaudited financial statements, at Assignee's address for notices set forth below, and (e) Lessee hereby agrees with Assignee that it will promptly designate Assignee as "Additional Insured" as required in the Master Lease. 6. Lessee agrees to do any further act and execute any further documents that Assignee reasonably requests in order to protect and secure its interest in the Equipment and its benefits under the Lease. Assignee shall have all the rights of a secured party under the Uniform Commercial Code, as well as those of Lessor under the Lease, in enforcing its interest. Lessee hereby authorizes Assignee to file all necessary UCC's with respect to the interests granted herein and in the Lease in the appropriate jurisdictions. 7. Assignee hereby covenants to Lessee that, so long as no Event of Default (as defined in Section 19 of the Master Lease) shall have occurred and be continuing and Lessor has not given notice (or been deemed to have given notice) thereof, neither it or any person acting at Assignee's direction will disturb or cause the disturbance of Lessee's (or any of its permitted sublessees' or assignees') quiet and peaceful possession of the Equipment and its unrestricted use of the Equipment for its intended purpose under the terms of the Lease (the foregoing covenant being referred to herein as the "Covenant of Quiet Enjoyment"). 8. The validity of this Notice, the construction and enforcement of the terms hereof, and the interpretation of the rights and duties of the parties hereto shall be governed by the laws of the State of Illinois. 8. Any notices required or permitted to be given or delivered hereunder shall be in writing (unless otherwise specifically provided herein or in the Lease) and shall be sufficiently given if sent by overnight courier to the parties at their addresses as set forth in the signature blocks below; or to such other address or addresses as the parties may specify from time to time. Any such notice shall be deemed to be given on the earlier of three days after mailing or upon receipt. 9. Lessee further agrees that its obligations to make rent payments thereunder, in accordance with the terms thereof, are absolute and unconditional and are independent of Lessee's use and enjoyment of the Equipment or the performance by Lessor of any of its obligations under the Lease or otherwise. All payments will be made to the Assignee regardless of: any bankruptcy, insolvency, reorganization or similar event with respect to the Lessor, the failure of the Equipment to perform to Lessee's expectation or the failure of Lessor or any maintenance or service provider in repairing, maintaining or servicing the Equipment subject to the Lease. 10. This Notice may be executed separately or independently in any number of counterparts. When each party has executed the same or a different counterpart, each and all of which together shall be deemed to have executed by all parties simultaneously and for all purposes to be one Notice. 3 11. Lessee agrees that neither it nor its affiliates will in the future issue any press releases or other public disclosure using the name of Assignee or its affiliates or referring to this Lease or any related document without the prior written consent of Assignee unless (and only to the extent that) Lessee is required to do so under any law, rule or regulation of any governmental authority and then, in any event, Lessee or affiliate will consult with Assignee before issuing such press release or other public disclosure. Lessee consents to the publication by Assignee of a tombstone or similar advertising material relating to the financing transactions contemplated by this Lease. Assignee shall provide a draft of any such tombstone or similar advertising material to Lessee for review and comment prior to the publication thereof. Assignee reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. IN WITNESS WHEREOF, the parties hereto have executed this Notice as of the day, month, and year first above written. THE WALDEN ASSET GROUP, LLC GENERAL ELECTRIC CAPITAL (LESSOR) CORPORATION (ASSIGNEE) By: /s/ David L. Burmon By: /s/ Joseph B. Williams --------------------------------- -------------------------------- Name: David L. Burmon Name: Joseph B. Williams ------------------------------- ------------------------------ Title: Chief Operating Officer Title: Senior Risk Manager ------------------------------ ----------------------------- PLAYBOY ENTERTAINMENT GROUP, INC. (LESSEE) By: /s/ Robert D. Campbell --------------------------------- Name: Robert D. Campbell ------------------------------- Title: Treasurer and Asst. Secretary ------------------------------ 4 EX-10.10 9 d57916_ex10-10.txt MATERIAL CONTRACTS Exhibit 10.10 CORPORATE GUARANTY Date: December 22, 2003 General Electric Capital Corporation 500 West Monroe Street Suite 2900 Chicago, Illinois 60661 To induce you to enter into, purchase or otherwise acquire that certain Master Equipment Lease, dated as of the date hereof, by and between The Walden Asset Group, LLC, a Delaware limited liability company and Playboy Entertainment Group, Inc., a Delaware corporation ("Lessee") (such Master Equipment Lease, as amended, supplemented or otherwise modified from time to time pursuant to the terms thereof, including without limitation by Equipment Schedule No. 1 thereto, and together with any other documents or instruments executed by Playboy Entertainment Group, Inc. in connection therewith or contemplated thereby, the "Lease"), the undersigned, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, does hereby guarantee to you, your successors and assigns, the due regular and punctual payment of all of Lessee's obligations under the Lease, whether such obligations represent principal, interest, rent, late charges, indemnities, an original balance, an accelerated balance, liquidated damages, a balance reduced by partial payment, a deficiency after sale or other disposition of the leased equipment or any other collateral or security, or any other type of sum of any kind whatsoever that the Lessee may now or at any time hereafter owe to you thereunder, and does hereby further guarantee to you, your successors and assigns, the due, regular and punctual performance of any other duty or obligation of any kind or character whatsoever that the Lessee may owe to you now or at any time hereafter pursuant to the Lease, including payment of all losses, costs, attorneys' fees and expenses payable pursuant to the Lease by reason of Lessee's default or default of the undersigned (all such payment and performance obligations being collectively referred to as "Obligations"). This Guaranty is a guaranty of prompt payment and performance (and not merely a guaranty of collection). Nothing herein shall require you to first seek or exhaust any remedy against the Lessee, its successors and assigns, or any other person obligated with respect to the Obligations, or to first foreclose, exhaust or otherwise proceed against the leased equipment or any other collateral or security which may be given in connection with the Obligations. It is agreed that you may, so long as an Event of Default (as defined in the Lease) exists and is continuing thereunder, make demand upon the undersigned and receive payment and performance of the Obligations, with or without notice or demand for payment or performance by the Lessee, its successors or assigns, or any other person. Suit may be brought and maintained against the undersigned at your election, without joinder of the Lessee or any other person as parties thereto. The undersigned agrees that its obligations under this Guaranty shall be primary, absolute, continuing and unconditional, irrespective of and unaffected by any of the following actions or circumstances (regardless of any notice to or consent of the undersigned): (a) the genuineness, validity, regularity and enforceability of the Lease or any other document; (b) any extension, renewal, amendment, change, waiver or other modification of the Lease or any other document; (c) the absence of, or delay in, any action to enforce the Lease, this Guaranty or any other documents; (d) your failure or delay in obtaining any other guaranty of the Obligations (including without limitation, your failure to obtain the signature of any other guarantor hereunder); (e) the release of, extension of time for payment or performance by or any other indulgence granted to the Lessee or any other person with respect to the Obligations by operation of law or otherwise; (f) the existence, value, condition, loss, subordination or release (with or without substitution) of or failure to have title to or perfect and maintain a security interest in, or the time, place and manner of any sale or other disposition of any of the leased equipment or any other collateral or security given in connection with the Obligations, or any other impairment (whether intentional or negligent, by operation of law or otherwise) of the rights of the undersigned; (g) the Lessee's voluntary or involuntary bankruptcy, assignment for the benefit of creditors, reorganization, or similar proceedings affecting the Lessee or any of its assets; or (h) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor. This Guaranty may be terminated upon delivery to you (at your address shown above) of a written termination notice from the undersigned. However, as to all Obligations (whether matured, unmatured, absolute, contingent or otherwise) incurred by the Lessee prior to your receipt of such written termination notice (and regardless of any subsequent amendment, extension or other modification which may be made with respect to such Obligations), this Guaranty shall nevertheless continue and remain undischarged until all such Obligations are indefeasibly paid and performed in full. The undersigned agrees that this Guaranty shall remain in full force and effect or be reinstated (as the case may be) if at any time payment or performance of any of the Obligations (or any part thereof) is rescinded, reduced or must otherwise be restored or returned by you, all as though such payment or performance had not been made. If, by reason of any bankruptcy, insolvency or similar laws affecting the rights of creditors, you shall be prohibited from exercising any of your rights or remedies against the Lessee or any other person or against any property, then, as between you and the undersigned, such prohibition shall be of no force and effect, and you shall have the right to make demand upon, and receive payment from, the undersigned of all amounts and other sums that would be due to you upon an Event of Default with respect to the Obligations. Provided the undersigned is no longer required to file regular periodic reports, forms and other filings with the Securities and Exchange Commission, including (without limitation) Forms 8Q, 10K and 10Q, the undersigned shall promptly within 60 days of the end of each fiscal quarter (other than the fourth fiscal quarter) deliver unaudited quarterly statements and within 120 days after the end of each fiscal year deliver to you copies of its annual audited financial statements, including the opinion of the auditor. The undersigned shall be deemed to be in default hereunder ("Default") if: (a) it shall fail to perform or observe any covenant, condition or agreement to be performed or observed by it hereunder and such failure shall continue unremedied for a period of thirty (30) days after the earlier of the actual knowledge of Guarantor or written notice thereof to the undersigned by you; or (b) there is an anticipatory repudiation of its obligations pursuant to this Guaranty; or (c) any certificate, statement, representation, warranty or audit contained herein or heretofore or hereafter furnished with respect to this Guaranty by or on behalf of the undersigned proving to have been false in any material respect at the time as of which the facts therein set forth were stated or certified, or having omitted any substantial contingent or unliquidated liability or claim against it. Upon a Default hereunder, you may, at your option, declare this Guaranty to be in default by written notice to the undersigned (without election of remedies), and at any time thereafter, may do any one or more of the following, all of which are hereby authorized by the undersigned: A. declare the Lease to be in default and thereafter sue for and recover all liquidated damages, accelerated rentals and/or other sums otherwise recoverable from Lessee thereunder; and/or B. sue for and recover all damages then or thereafter incurred by you as a result of such Default; 2 and/or C. seek specific performance of the obligations of the undersigned hereunder. In addition, the undersigned shall be liable for all reasonable attorneys' fees and other costs and expenses incurred by reason of any Default or the exercise of your remedies hereunder and/or under the Lease. No right or remedy referred to herein is intended to be exclusive, but each shall be cumulative, and shall be in addition to any other remedy referred to above or otherwise available at law or in equity, and may be exercised concurrently or separately from time to time. Notice of acceptance of this Guaranty and of any default by the Lessee or any other person is hereby waived. Presentment, protest, demand, and notice of protest, demand and dishonor of any of the Obligations, and the exercise of possessory, collection or other remedies for the Obligations, are hereby waived. The undersigned warrants that it has adequate means to obtain from the Lessee on a continuing basis financial data and other information regarding the Lessee and is not relying upon you to provide any such data or other information. Without limiting the foregoing, notice of adverse change in the Lessee's financial condition or of any other fact that might materially increase the risk of the undersigned is also waived. All settlements, compromises, accounts stated and agreed balances made in good faith between the Lessee, its successors or assigns, and you shall be binding upon and shall not affect the liability of the undersigned. Payment of all amounts now or hereafter owed to the undersigned by the Lessee or any other obliger for any of the Obligations is hereby subordinated in right of payment to the indefeasible payment in full to you of all Obligations and is hereby assigned to you as security therefore. The undersigned hereby irrevocably and unconditionally waives and relinquishes, for so long as this Guaranty shall be in effect, all statutory, contractual, common law, equitable and all other claims against the Lessee and any other obliger with respect to any of the Obligations, or any collateral therefore, or any other assets of the Lessee or any such other obliger, for subrogation, reimbursement, exoneration, contribution, indemnification, setoff or other recourse in respect of sums paid of payable to you by the undersigned hereunder, and the undersigned hereby further irrevocably and unconditionally waives and relinquishes, for so long as this Guaranty shall be in effect, any and all other benefits which it might otherwise directly or indirectly receive or be entitled to receive by reason of any amounts paid by, or collected or due from, it, the Lessee or any other obliger for any of the Obligations, or realized from any of their respective assets with respect thereto. THE UNDERSIGNED HEREBY UNCONDITIONALLY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN US RELATING TO THE SUBJECT MATTER HEREOF OR THEREOF, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN US WITH RESPECT THERETO. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court (including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY, THE OBLIGATIONS GUARANTEED HEREBY, OR ANY RELATED DOCUMENTS. In the event of litigation this Guaranty may be filed as a written consent to a trial by the court. 3 As used in this Guaranty, the word "person" shall include any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or any government or any political subdivision thereof. This Guaranty is intended by the parties as a final expression of the guaranty of the undersigned and is also intended as a complete and exclusive statement of the terms thereof. No course of dealing, course of performance or trade usage, nor any paid evidence of any kind, shall be used to supplement or modify any of the terms hereof. There are no conditions to the full effectiveness of this Guaranty. This Guaranty and each of its provisions may only be waived, modified, varied, released, terminated or surrendered, in whole or in part, by a duly authorized written instrument signed by us and by you. No failure by you to exercise your rights hereunder shall give rise to any estoppel against you, or excuse the undersigned from performing hereunder. Your waiver of any right to demand performance hereunder shall not be a waiver of any subsequent or other right to demand performance hereunder. This Guaranty shall bind the undersigned's successors and assigns and the benefits thereof shall extend to and include your successors and assigns. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. The parties agree that any action or proceeding arising out of or relating to this Agreement may be commenced in the United States District Court for the Northern District of Illinois. If any provisions of this Guaranty are in conflict with any applicable statute, rule or law, then such provisions shall be deemed null and void to the extent that they may conflict therewith, but without invalidating any other provisions hereof. All notices required to be given hereunder shall be deemed adequately given if sent by overnight courier to the addressee at its address stated herein, or at such other place as such addressee may have designated in writing. Any provision of this Agreement, which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Each signatory on behalf of a corporate guarantor warrants that he had authority to sign on behalf of such corporation and by so signing, to bind said guarantor corporation hereunder. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, this Guaranty is executed the day and year above written. ATTEST: Playboy Enterprises, Inc. By: /s/ Howard Shapiro By: /s/ Robert D. Campbell --------------------------------- -------------------------------------- Name: Howard Shapiro Name: Robert D. Campbell ------------------------------- ------------------------------------ Title: Secretary/Assistant Secretary Title: SVP, Treasurer and Asst. Secretary ----------------------------- ----------------------------------- Address: 680 North Lake Shore Drive Chicago, Illinois 60601 5 CERTIFICATION AND REPRESENTATION BY SIGNING OFFICERS We, the undersigned, Howard Shapiro and Robert D. Campbell being the Executive Vice President and Senior Vice President of Playboy Enterprises, Inc., the corporation which executed the Guaranty attached hereto, hereby jointly and severally certify and represent to General Electric Capital Corporation that each of the undersigned executed the Guaranty for and on behalf of said corporation and that in so executing said instrument the undersigned were duly authorized to do so in their named capacity as officers and by so executing to hereby bind said guarantor corporation to the terms of said instrument as therein set forth. /s/ Howard Shapiro (L.S.) /s/ Robert D. Campbell (L.S.) ------------------ ----------------------- Dated: 12/22 , 2003 Dated: 12/22 , 2003 -------------------- --------------------- 6 EX-10.25(A) 10 d57916_ex10-25a.txt SECOND AMENDED AND RESTATED Exhibit 10.25a SECOND AMENDED AND RESTATED PLAYBOY ENTERPRISES, INC. 1995 STOCK INCENTIVE PLAN Playboy Enterprises, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to certain of its key employees through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of key employees considered essential to the long-range success of the Company by providing and offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I DEFINITIONS Whenever the following terms are used in this Plan they shall have the meaning specified below, unless the context clearly indicates otherwise. Section 1.1 Board. "Board" shall mean the Board of Directors of the Company. Section 1.2 Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) except in a transaction described in clause (iii) below, Hugh M. Hefner, Christie Hefner, the Hugh M. Hefner 1991 Trust (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee), and the Hugh M. Hefner Foundation (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee) cease collectively to own a majority of the total number of votes that may be cast for the election of directors of the Company; or (ii) a sale of Playboy magazine by the Company; or (iii) the liquidation or dissolution of the Company, or any merger, consolidation or other reorganization involving the Company unless (x) the merger, consolidation or other reorganization is initiated by the Company, and (y) is one in which the stockholders of the Company immediately prior to such reorganization become the majority stockholders of a successor or ultimate parent corporation of the Company resulting from such reorganization and (z) in connection with such event, provision is made for an assumption of outstanding Options and rights or a substitution thereof of a new Option or right in such successor or ultimate parent of substantially equivalent value. Section 1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.4 Committee. "Committee" shall mean a committee of the Board of Directors comprised of persons who are both non-employee directors within the meaning of Rule 16b-3 which has been adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such rule or its equivalent is then in effect ("Rule 16b-3") and "outside directors" within the meaning of Section 162(m) of the Code. Section 1.5 Common Stock. "Common Stock" shall mean the Class B Common Stock, par value $.01 per share, of the Company. Section 1.6 Company. "Company" shall mean Playboy Enterprises, Inc., a Delaware corporation. 1 Exhibit 10.25a Section 1.7 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under Article VII of the Plan. Section 1.8 Director. "Director" shall mean a member of the Board. Section 1.9 Employee. "Employee" shall mean any officer or other employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary. Section 1.10 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Section 1.11 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. Section 1.12 Grantee. "Grantee" shall mean an Employee granted a Performance Award, Stock Payment, Section 162(m) Performance Award, Section 162(m) Stock Payment, or an award of Deferred Stock or Section 162(m) Deferred Stock, under this Plan. Section 1.13 Incentive Stock Option. "Incentive Stock Option" shall mean an Option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. Section 1.14 Non-Qualified Option. "Non-Qualified Option" shall mean an Option which is not designated as an Incentive Stock Option by the Committee. Section 1.15 Officer. "Officer" shall mean an officer of the Company. Section 1.16 Option. "Option" shall mean a stock option granted under Article III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option. Section 1.17 Optionee. "Optionee" shall mean an Employee to whom an Option is granted under the Plan. Section 1.18 Performance Award. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. Section 1.18A Performance Criteria. "Performance Criteria" shall mean objective performance criteria established pursuant to this Plan with respect to awards of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments and Section 162(m) Deferred Stock. Performance Criteria shall be measured in terms of one or more of the following objectives, described as such objectives relate to corporation-wide objectives or objectives that are related to the performance of the individual Employee or of the Subsidiary, division, department or function with the Company or Subsidiary in which the participant is employed: (i) market value; (ii) book value; (iii) earnings per share; (iv) market share; (v) operating profit; 2 Exhibit 10.25a (vi) net income; (vii) cash flow; (viii) return on capital; (ix) return on assets; (x) return on equity; (xi) margins; (xii) shareholder return; (xiii) sales or product volume growth; (xiv) productivity improvement; or (xv) costs or expenses. Each grant of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments, and Section 162(m) Deferred Stock shall specify the Performance Criteria to be achieved, a minimum acceptable level of achievement below which no payment or award will be made, and a formula for determining the amount of any payment or award to be made if performance is at or above the minimum acceptable level but fall short of full achievement of the specified Performance Criteria. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Criteria to be unsuitable, the Committee may modify such Performance Criteria or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable; provided, however, that no such modification shall be made if the effect would be to cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. In addition, at the time the award subject to Performance Criteria is made and performance goals established, the Committee is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account certain factors over which the Employees have no or limited control including market related changes in inventory value, changes in industry margins, changes in accounting principles, and extraordinary changes to income. Section 1.19 Plan. "Plan" shall mean the Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. Section 1.20 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded under Article VII of this Plan. Section 1.21 Restricted Stockholder. "Restricted Stockholder" shall mean an Employee granted an award of Restricted Stock under Article VI of this Plan. Section 1.22 Secretary. "Secretary" shall mean the Secretary of the Company. Section 1.22A Section 162(m) Deferred Stock. "Section 162(m) Deferred Stock" shall mean Common Stock awarded under Article VII-A of this Plan. Section 1.22B Section 162(m) Performance Award. "Section 162(m) Performance Award" shall mean a cash bonus, stock bonus, or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII-A of this Plan. 3 Exhibit 10.25a Section 1.22C Section 162(m) Restricted Stock. "Section 162(m) Restricted Stock" shall mean Common Stock awarded under Section VI-A of this Plan. Section 1.22D Section 162(m) Restricted Stockholder. "Section 162(m) Restricted Stockholder" shall mean an Employee granted an award of Section 162(m) Restricted Stock under Article VI-A of this Plan. Section 1.22E Section 162(m) Stock Payment. "Section 162(m) Stock Payment" shall mean (i) a payment in the form of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII-A of this Plan. Section 1.23 Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.24 Stock Payment. "Stock Payment" shall mean (i) a payment in the form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII-A of this Plan. Section 1.25 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.26 Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between the Optionee, Grantee, Restricted Stockholder, or Section 162(m) Restricted Stockholder and the Company or any Subsidiary is terminated, voluntarily or involuntarily, for any reason, with or without Cause (as defined below), including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement, but excluding any termination where there is a simultaneous reemployment by the Company or a Subsidiary. The Committee, subject to the definition of Cause below, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence shall constitute a Termination of Employment if, and to the extent that, such leave of absence interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, "Cause" shall mean an Employee's (a) gross negligence in the performance of the responsibilities of such Employee's office or position; (b) any act of dishonesty or moral turpitude materially adversely affecting the Company or the Company's reputation; (c) commission of any other willful or intentional act that could reasonably be expected to injure materially the reputation, business or business relationships of the Company or any Subsidiary; or (d) conviction of a felony or of any crime involving moral turpitude, fraud or misrepresentation. ARTICLE II SHARES SUBJECT TO PLAN Section 2.1 Shares Subject to Plan. (a) The shares of stock subject to Options, or awards of Restricted Stock, Section 162(m) Restricted Stock, Performance Awards, Section 162(m) Performance Awards, Deferred Stock, Section 162(m) Deferred Stock, Stock Payments, or Section 162(m) Stock Payments shall be Common Stock. The aggregate number of shares which may be issued upon exercise of such Options or rights or upon any such awards under the Plan shall not exceed 5,503,000 shares of Common Stock. 4 Exhibit 10.25a (b) The maximum number of shares of Common Stock which may be subject to Options, rights or other awards granted under the Plan to any Employee in any calendar year shall not exceed 650,000, and the method of counting such shares shall conform to any requirements applicable to performance-based compensation under Section 162(m) of the Code. The shares of Common Stock issuable upon exercise of such Options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (c) With regard to Section 162(m) Performance Awards that are cash bonuses or other performance or incentive awards expressed as cash awards (without regard to whether such bonuses or awards are ultimately paid in the form of cash, stock, or a combination of both as described in Section 7.7A), an Employee may not be granted during any calendar year such Section 162(m) Performance Awards in an amount in excess of $1,000,000. Section 2.2 Unexercised Options and Awards. If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is cancelled without having been fully exercised (including Restricted Stock, Section 162(m) Restricted Stock or any other award that is forfeited before applicable vesting requirements are met or transfer restrictions have lapsed), the number of shares subject to such Option or other right but as to which such Option or other right was not exercised (or vested or delivered without restriction, as the case may be) prior to its expiration or cancellation may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Section 2.3 Adjustments in Outstanding Options or Rights. Subject to Section 4.2(c), in the event that the outstanding shares of the Common Stock subject to Options or other rights are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of a recapitalization, reclassification, stock split, stock dividend or combination of shares or similar transaction, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options or rights, or portions thereof then unexercised, shall be exercisable, so that the Optionee's, Grantee's, Restricted Stockholder's or Section 162(m) Restricted Stockholder's proportionate interest shall be maintained. Such adjustment shall be made without change in the total price applicable to the unexercised portion of the Option or right (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in price per share; provided, however, that, in the case of Incentive Stock Options, each such adjustment shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by the Committee shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company or any Subsidiary, their representatives and all other interested persons. Such adjustments will also be made in determining Section 2.1 limitations on maximum number and kind of shares which may be issued on exercise of Options, Restricted Stock, Section 162(m) Restricted Stock or other awards. The shares of Class B Common Stock reserved under this Plan will be reduced as Options, Restricted Stock, Section 162(m) Restricted Stock or other awards are granted or issued so that the aggregate number of any single Class of Stock will never exceed the total amount of shares authorized under the Plan. ARTICLE III GRANTING OF OPTIONS Section 3.1 Eligibility. Any key Employee of the Company or a Subsidiary except Hugh M. Hefner shall be eligible to be granted Options. Section 3.2 Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. Without limitation of the foregoing, no person shall be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 5 Exhibit 10.25a Section 3.3 Granting of Options. (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are "key Employees" and select from among the key Employees (including those to whom Options and/or rights have been previously granted under the Plan or any other stock option or other plan of the Company) such of them as in its opinion should be granted Options; and (ii) Determine for each Employee the number of shares to be subject to such Options; and (iii) Determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iv) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary or other authorized officer to execute and deliver a Stock Option Agreement, and may impose such conditions on the grant of such Option as it deems appropriate, not inconsistent with this Plan. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock, Section 162(m) Restricted Stock, Deferred Stock or Section 162(m) Deferred Stock, Performance Awards, Section 162(m) Performance Awards, Stock Payments or Section 162(m) Stock Payments or other rights which have been previously granted to him. An Option, the grant of which is conditioned upon such surrender, may have an Option price lower (or higher) than the Option price of the surrendered Option, may cover the same (or a lesser or greater) number of shares as the surrendered Option, may contain such other terms as the Committee deems appropriate and be exercised in accordance with its terms, without regard to the number of shares, price, Option period or any other term or condition of such surrendered Option or award. (c) Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) Options granted hereunder shall be consideration for the future performance of services by the Optionee to the Company or a Subsidiary, as applicable. ARTICLE IV TERMS OF OPTIONS Section 4.1 Option Price. (a) The price of the shares subject to each Non-Qualified Option shall not be less than 100% of the fair market value of such shares at the end of the business day immediately preceding the day such Option is granted. (b) For purposes of the Plan, the fair market value ("Fair Market Value") of a share of the Company's Common Stock as of a given date shall be: (i) the closing price of a share of such class of the Company's Common Stock on the principal exchange on which shares of the Company's Common Stock are then trading, if any, on the day previous to such date, or, if shares were not traded on the day previous to such date, then on the next preceding trading day during which a sale occurred; or (ii) if such Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the Company's Common Stock is then listed as a National Market Issue under the NASD National Market System) or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Company's Common Stock on the 6 Exhibit 10.25a day previous to such date as reported by NASDAQ or such successor quotation system; or (iii) if such Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the Company's Common Stock, on the day previous to such date, as determined in good faith by the Committee; or (iv) if the Company's Common Stock is not publicly traded, the fair market value established by the Committee acting in good faith. (c) The price of the shares subject to Incentive Stock Options shall not be less than the greater of (i) 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted, or (ii) 110% of the fair market value of a share of Common Stock on the date such Incentive Stock Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary. Section 4.2 Commencement of Exercisability; Change of Control. (a) Subject to the provisions of Sections 4.2(b) and 9.3, Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.2 and 9.3, accelerate the time at which such Option or any portion thereof may be exercised; provided further, however, that all outstanding Options shall become fully vested and exercisable as of immediately prior to a Change of Control. (b) No portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Stock Option Agreement or in a resolution adopted following the grant of the Option. Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may extend the term of any outstanding Option in connection with any Termination of Employment of the Optionee, or amend any other term or condition of such Option relating to such a termination. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.2(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. Section 4.3 Expiration of Options. (a) Unless an Option expires earlier or later pursuant to the terms of a Stock Option Agreement, each Option may be exercised any time until the first of the following events, after which such Option will become unexercisable: (i) The expiration of ten (10) years from the date the Option was granted if the Employee is still employed by the Company or any Subsidiary; or (ii) The expiration of three (3) months from the Employee's Termination of Employment if such Termination of Employment results from such Employee's retirement or such Employee's being discharged not for Cause, unless the Employee dies within said three-month period; or (iii) The effective date of (i) a Termination of Employment for Cause, (ii) the Employee's resignation, or (iii) a Change of Control specified in clause (iii) of the definition of such term; or (iv) In the case of an Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of one (1) year from the date of the 7 Exhibit 10.25a Optionee's Termination of Employment; provided, however, that subsection (iv) shall not apply if the Optionee dies within said one-year period; or (v) One (1) year from the date of the Optionee's death. (b) Subject to the provisions of Section 4.3(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any reason. (c) The term of any Incentive Stock Option shall not be more than five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of capital stock of the Company or any Subsidiary. Section 4.4 No Right to Continued Employment. Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company or any Subsidiary or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any of its Subsidiaries, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without Cause. Section 4.5 Reload Options. Options may, in the discretion of the Committee, be granted under the Plan to permit a participant to reaquire any shares such participant delivered to the Company as payment of the exercise price (as described in Section 5.3) in connection with the exercise of an Option hereunder or to reaquire any shares retained by the Company to satisfy the participant's withholding obligation in connection with the exercise of an Option hereunder (a "Reload Option"). The terms of a Reload Option shall be identical in all material respects to the terms of the Option as to which such Reload Option was granted, provided however, that the exercise price for each share granted under the Reload Option shall be the Fair Market Value of a share at the time such Reload Option is granted. ARTICLE V EXERCISE OF OPTIONS Section 5.1 Person Eligible to Exercise. (a) Subject to 5.1(b), during the lifetime of an Optionee, only such Optionee may exercise an Option (or any portion thereof) granted to such Optionee. After the death of the Optionee, any exercisable portion of an Option may, within the time frame allowed, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. To the extent Rule 16b-3 as then in effect permits transfers of Options, the Committee may approve such transfers in its discretion. (b) Should the Optionee be determined under applicable law to have become a disabled person or the equivalent thereof, the then-vested portion of the Option may, prior to the time when such Option becomes unexercisable pursuant to the Plan or the applicable Stock Option Agreement, be exercised by the Optionee's guardian or by any other person empowered to do so under the then applicable laws of guardianship. For purposes of this section 5.1(b), "disabled person" shall mean a person who (i) because of mental deterioration or physical incapacity is not fully able to manage such person's person or estate or (ii) is mentally ill and who because of such person's mental illness is not fully able to manage such person's person or estate. Section 5.2 Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by terms of the Option, a partial exercise be with respect to a number of shares. Section 5.3 Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or the Secretary's office: 8 Exhibit 10.25a (a) A written notice signed by the Optionee (or other person then entitled to exercise such Option or portion), stating that such Option or portion thereof is being exercised and such notice complies with all applicable rules established by the Committee; and (b) Payment in full for the exercised shares: (i) In cash or by certified or cashier's check; or (ii) In shares of the same class of the Company's Common Stock owned by the Optionee; provided, however, that the Optionee may use Common Stock in payment of the exercise price only if the shares so used are considered "mature" for purposes of generally accepted accounting principles, i.e., (x) they have been held by the Optionee free and clear for at least six months prior to the use thereof to pay part of an Option exercise price, (y) they have been purchased by the Optionee in other than a compensatory transaction, or (z) they meet any other requirements for "mature" shares as may exist on the date of the use thereof to pay part of an Option exercise price, as determined by the Committee; further provided, however, that the Optionee may use Common Stock in payment of the exercise price by means of attestation to the Company of his ownership of sufficient shares in a manner reasonably acceptable to the Committee. Shares actually delivered to the Company (i.e., shares for which the attestation mechanism is not used) must be duly endorsed for transfer to the Company. Shares used to pay all or part of the Option exercise price pursuant to this provision will be credited at their Fair Market Value on the date of delivery; or (iii) With the consent of the Committee and at the sole discretion of the Company, by a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code or successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subsections (i), (ii), and (iii); or (v) To the extent permitted by law (including then existing interpretations of Rule 16b-3) a "cashless exercise procedure" satisfactory to the Committee which permits the Optionee to deliver an exercise notice to a broker-dealer, who then sells the Option shares, delivers the exercise price and withholding taxes to the Company and delivers the excess funds less commission and withholding taxes to the Optionee; and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) Appropriate proof of the right of such person or persons to exercise the option or portion thereof in the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee; and (e) Full payment of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option. With the consent of the Committee, shares of the Company's Common Stock owned by the Employee duly endorsed for transfer or shares of the Company's Common Stock issuable to the Employee upon exercise of the Option, valued in accordance with Section 4.1(b) of the Plan at the date of Option exercise, may be used to make all or part of such payment. 9 Exhibit 10.25a Section 5.4 [RESERVED] Section 5.5 Additional Conditions to Issuance of Stock Certificates. The shares of Common Stock able and deliverable upon the exercise of an Option shall be fully paid and non-assessable. In addition to satisfaction of the conditions specified in Section 5.3, the Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (b) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (c) The lapse of such reasonable period of time following the exercise of the Option as the Committee or Board may establish from time to time for reasons of administrative convenience. Section 5.6 Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders or the Company's stock record books reflect the Optionee as a stockholder pursuant to any book entry procedure approved by the Secretary. The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such other restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock, acquired by exercise of an Incentive Stock Option, within (i) two years from the date of granting such Option or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. ARTICLE VI AWARD OF RESTRICTED STOCK Section 6.1 Award of Restricted Stock. (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 10 Exhibit 10.25a Section 6.2 Restricted Stock Agreement. Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3 No Right to Continued Employment. Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4 Rights as Stockholders. Upon delivery of any shares of Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7, and upon issuance thereof, if uncertificated, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extraordinary distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. Section 6.5 Restrictions. All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company or a Subsidiary, Company performance, individual performance, or a change of control; provided, however, that by a resolution adopted after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. Section 6.6 Repurchase of Restricted Stock. If consideration (other than services) was paid for Restricted Stock, the Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock or such other price as may be specified in the Restricted Stock Agreement; provided, however, that provision may be made in the Restricted Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without Cause, or following a Change in Control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7 Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Restricted Stock). Section 6.8 Legend. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. 11 Exhibit 10.25a ARTICLE VI-A AWARD OF SECTION 162(m) RESTRICTED STOCK Section 6.1A Award of Section 162(m) Restricted Stock. (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Section 162(m) Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Section 162(m) Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Section 162(m) Restricted Stock. (c) Upon the selection of a key Employee to be awarded Section 162(m) Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Section 162(m) Restricted Stock and may impose such conditions on the issuance of such Section 162(m) Restricted Stock as it deems appropriate. Section 6.2A Section 162(m) Restricted Agreement. Section 162(m) Restricted Stock shall be issued only pursuant to a written Section 162(m) Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3A No Right to Continued Employment. Nothing in this Plan or in any Section 162(m) Restricted Stock Agreement hereunder shall confer on any Section 162(m) Restricted Stockholder any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Section 162(m) Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4A Rights as Stockholders. Upon delivery of any shares of Section 162(m) Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7A, and upon issuance thereof, if uncertificated, the Section 162(m) Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Section 162(m) Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extraordinary distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5A. Section 6.5A Restrictions. All shares of Section 162(m) Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Section 162(m) Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Section 162(m) Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability. The Section 162(m) Restricted Stock Agreement shall provide that a Section 162(m) Restricted Stockholder's rights in Section 162(m) Restricted Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 162(m) Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Section 162(m) Restricted Stockholder upon issuance, a Section 162(m) Restricted Stockholder's rights in unvested Section 162(m) Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. Section 6.6A Repurchase of Section 162(m) Restricted Stock. If consideration (other than services) was paid for Section 162(m) Restricted Stock, the Committee shall provide in the terms of each individual 12 Exhibit 10.25a Section 162(m) Restricted Stock Agreement that the Company shall have the right to repurchase from the Section 162(m) Restricted Stockholder the Section 162(m) Restricted Stock then subject to restrictions under the Section 162(m) Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Section 162(m) Restricted Stockholder for such Section 162(m) Restricted Stock or such other price as may be specified in the Section 162(m) Restricted Stock Agreement; provided, however, that provision may be made in the Section 162(m) Restricted Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without Cause, or following a Change in Control of the Company or because of the Section 162(m) Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7A Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Section 162(m) Restricted Stock until all of the restrictions imposed under the Section 162(m) Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Section 162(m) Restricted Stock). Section 6.8A Legend. In order to enforce the restrictions imposed upon shares of Section 162(m) Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Section 162(m) Restricted Stock that are still subject to restrictions under Section 162(m) Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. ARTICLE VII PERFORMANCE AWARDS, DEFERRED STOCK, STOCK PAYMENTS Section 7.1 Performance Award. Any key Employee selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee. Section 7.2 Stock Payments. Any key Employee selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. In particular, any person designated by the Committee as a participant in the Company's Key Executive Incentive Bonus Plan (the "Bonus Plan") or under the Company Service Award Program (the "Service Award Program") in accordance with the terms thereof, and whose bonus or service award thereunder is comprised wholly or partially in shares of Common Stock, shall be deemed to have been selected to participate in this Plan, and shall receive such Common Stock denominated bonus as a Stock Payment in accordance with and under the provisions of this Section 7.2. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. Section 7.3 Deferred Stock. Any key Employee selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 13 Exhibit 10.25a Section 7.4 Performance Award Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award, Deferred Stock Award and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5 Term. The term of a Performance Award Agreement, Deferred Stock Award and/or Stock Payment shall be set by the Committee in its discretion. Section 7.6 Exercise Upon Termination of Employment. A Performance Award, Deferred Stock Award and/or Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Performance Award, Deferred Stock Award and/or Stock Payment may be exercised or paid subsequent to Termination of Employment without cause, or following a Change in Control of the Company, or because of the Grantee's death or disability. Section 7.7 Payment. Payment of the amount determined under Section 7.1 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. Section 7.8 No Right to Continued Employment. Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VII-A SECTION 162(m) PERFORMANCE AWARDS, SECTION 162(m) DEFERRED STOCK, SECTION 162(m) STOCK PAYMENTS Section 7.1A Section 162(m) Performance Awards. Any key Employee selected by the Committee may be granted one or more Section 162(m) Performance Awards. The right to a Section 162(m) Performance Award shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 7.2A Section 162(m) Stock Payments. Any key Employee selected by the Committee may be granted one or more Section 162(m) Stock Payments. The right to a Section 162(m) Stock Payment shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 7.3A Section 162(m) Deferred Stock. Any key Employee selected by the Committee may be granted an award of Section 162(m) Deferred Stock. An award of Section 162(m) Deferred Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Common Stock underlying a Section 162(m) Deferred Stock award will not be issued until the Section 162(m) Deferred Stock award has vested. Unless otherwise provided by the Committee, a Grantee of Section 162(m) Deferred Stock shall have no rights as a Company stockholder with respect to such Section 162(m) Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. Section 7.4A Section 162(m) Performance Award Agreement, Section 162(m) Deferred Stock Agreement, Section 162(m) Stock Payment Agreement. Each Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5A Term. The term of a Section 162(m) Performance Award Agreement, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be set by the Committee in its discretion. 14 Exhibit 10.25a Section 7.6A Exercise Upon Termination of Employment. A Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment may be exercised or paid following a Change in Control of the Company, or because of the Grantee's death or disability. Section 7.7A Payment. Payment of the amount determined under Section 7.1A above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII-A is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. Section 7.8A No Right to Continued Employment. Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VIII ADMINISTRATION Section 8.1 Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the agreements pursuant to which Options, awards of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock or Section 162(m) Deferred Stock, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments are granted and awarded and to adopt such rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. Options, awards of Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Awards and Section 162(m) Stock Payments are intended to qualify as performance-based compensation under Section 162(m) of the Code, and the Committee shall grant or award such Options, rights or other awards in a manner consistent with the rules governing performance-based compensation under Section 162(m) of the Code. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "incentive stock options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Section 8.2 Majority Rule. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. Section 8.3 Compensation; Professional Assistance; Good Faith Action. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or the Options or other awards, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. 15 Exhibit 10.25a ARTICLE IX OTHER PROVISIONS Section 9.1 Options and Other Rights Are Not Transferable. No Options, Performance Awards, Stock Payments, Section 162(m) Performance Awards, Section 162(m) Stock Payments, Restricted Stock, Section 162(m) Restricted Stock, Deferred Stock Awards or Section 162(m) Deferred Stock Awards or interest under this Plan or part thereof shall be liable for the debts, contracts or engagements of any Optionee, Grantee, Restricted Stockholder or their respective successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 9.1 shall prevent transfers by will, by the applicable laws of descent and distribution or by the approval of the Committee as described in Section 5.1(a) of the Plan. Section 9.2 Amendment, Suspension or Termination of the Plan; Modification of Options. The Board may at any time terminate the Plan. With the express written consent of an individual participant, the Board or the Committee may cancel or reduce or otherwise alter outstanding Options or other awards. The Board or the Committee may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part; provided that any such amendment shall be contingent on obtaining the approval of the shareholders of the Company if the Committee determines that such approval is necessary to comply with any requirement of law or any rule of any stock exchange on which the Company's equity securities are traded, or in order for Options or other awards to qualify for an exception from Section 162(m) of the Code (to the extent they would so qualify but for the absence of shareholder approval). Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of an Option, Restricted Stock, Section 162(m) Restricted Stock or award, alter or impair any rights or obligations under any such Option, Restricted Stock, Section 162(m) Restricted Stock or award. No Option, Restricted Stock, Section 162(m) Restricted Stock or award may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option be granted under this Plan after the expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 9.3. An Option, Restricted Stock, Section 162(m) Restricted Stock or award shall be subject in all events to the condition that, if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of any of the Company's securities upon any securities exchange or under any law, regulation or other requirement of any governmental authority is necessary or desirable, or that any consent or approval from any governmental authority is necessary or desirable, then the Board may modify the terms of any Option, Restricted Stock, Section 162(m) Restricted Stock or other award granted under the Plan, without the consent of the Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder in any manner which the Board deems necessary or desirable in order to improve the Company's ability to obtain such listing, registration, qualification, consent or approval. Section 9.3 Approval of Plan by Stockholders. The Plan shall become effective as of the date of Board approval (the "Effective Date"), subject to the approval of the Company's stockholders within 12 months after the Effective Date; provided, however, that notwithstanding anything herein or in any award agreement to the contrary, all Section 162(m) Performance Awards, Section 162(m) Stock Payments, Section 162(m) Restricted Stock, and Section 162(m) Deferred Stock awarded prior to such stockholder approval shall be void if such approval has not been obtained at the end of said 12-month period. Section 9.4 Effect of Plan Upon Other Option and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. Section 9.5 No Obligation to Register. The Company shall not be deemed, by reason of the granting of any Option or any other award hereunder, to have any obligation to register the shares of Common Stock 16 Exhibit 10.25a subject to such Option or award under the Securities Act or to maintain in effect any registration of such shares which may be made at any time under the Securities Act. Section 9.6 Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Payment, Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Award, or Section 162(m) Stock Payment. Section 9.7 Loans. The Committee may permit, in its discretion, and subject to the Company's approval, the extension by the Company of one or more loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted under this Plan, or the issuance of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee, subject to the Company's approval. Section 9.8 Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, any Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted, or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded, to a key Employee who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule, and this Plan shall be deemed amended to the extent necessary to conform to such limitations. Furthermore, notwithstanding any other provision of this Plan, any Option, right or award intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. Section 9.9 Compliance with Laws. This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws and federal requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. Section 9.10 Noncompetition Provisions. The Committee, as a condition of issuing any award under the Plan, may include in any agreement evidencing such award such noncompetition and/or nonsolicitation provisions as it may deem appropriate, in its sole discretion, and any award containing such provisions shall not be effective until and unless the grantee thereof acknowledges by written consent his or her obligation to be bound thereby. 17 Exhibit 10.25a Section 9.11 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Section 9.12 Governing Law. The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. 18 EX-10.26(A) 11 d57916_ex10-26a.txt AMENDED AND RESTATED 1997 EQUITY PLAN Exhibit 10.26a AMENDED AND RESTATED 1997 EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS OF PLAYBOY ENTERPRISES, INC. 1. Purpose. The purposes of the Plan are (1) to promote the growth and long-term success of Playboy Enterprises, Inc., a Delaware corporation (the "Company"), by offering Non-Employee Directors the ability to acquire Common Stock of the Company, (2) to enable the Company to attract and retain qualified persons to serve as Non-Employee Directors, which services are considered essential to the long-term success of the Company, by offering them an opportunity to own Common Stock of the Company, and (3) to more closely align the interests of Non-Employee Directors with the interests of the Company's stockholders by paying certain amounts of compensation for services as a Director in the form of shares of Common Stock. 2. Definitions. In addition to the other terms defined elsewhere herein, wherever the following terms are used in this Plan with initial capital letters, they have the meanings specified below, unless the context clearly indicates otherwise. "Accounting Period" means each calendar quarter of the Company, such quarters beginning on January 1, April 1, July 1 and October 1 of each year. "Award" means an award of an Option Right, Restricted Stock or Common Stock Grant under this Plan. "Board" means the Board of Directors of the Company. "Calendar Year" means the period beginning on January 1 of each year and ending on December 31 of each year. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Common Stock" means the Class B Common Stock, par value $0.01 per share, of the Company, and any security into which such Common Stock may be converted or for which such Common Stock may be exchanged by reason of any transaction or event of the type described in Section 9 of this Plan. "Common Stock Grant" means Common Stock, other than Restricted Stock, awarded pursuant to Section 5 of this Plan. "Company" has the meaning set forth in Section 1, and includes its successors. "Date of Award" means the date specified by the Board on which an Award becomes effective, which shall not be earlier than the date on which the Board takes action with respect thereto. "Deferred Compensation Plan" means the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, effective as of October 1, 1992, as it may be amended from time to time. "Employee" means any officer or other employee of the Company or of any corporation which is then a Subsidiary. "Issuance Date" has the meaning set forth in Section 6. "Mandatory Fee and Retainer Shares" means (a) Common Stock awarded pursuant to Section 6(a) with an aggregate Market Value per Share generally equal to a Non-Employee Director's Meeting Fees and (b) 1 Exhibit 10.26a Common Stock awarded pursuant to Section 6(b) with an aggregate Market Value per Share generally equal to a Non-Employee Director's Retainer. "Meeting Fees" means the compensation payable to a Non-Employee Director with regard to the number of Board or Committee meetings attended, or Committee positions held, as determined by the Board from time to time, but for purposes of Section 6 of this Plan shall not include any such compensation subject to deferral under the Deferred Compensation Plan pursuant to an agreement executed by a Non-Employee Director and the Company in accordance with the terms of the Deferred Compensation Plan. "Market Value per Share" means either (a) the closing price of a share of Common Stock as reported on the New York Stock Exchange (the "NYSE") on the date as of which such value is being determined, or, if there are no reported transactions for such date, on the next preceding date for which transactions were reported, as published in the Midwest Edition of The Wall Street Journal, or (b) if there is no reporting of transactions on the NYSE, the fair market value of a share of Common Stock as determined by the Board from time to time. "Non-Employee Director" means a member of the Board who is not an Employee. "Optionee" means a Non-Employee Director to whom an Option Right is awarded under this Plan. "Option Price" means the purchase price payable upon the exercise of an Option Right. "Option Right" means the right to purchase shares of Common Stock from the Company upon the exercise of an option awarded hereunder. "Participant" means a Non-Employee Director (or a person who has agreed to commence serving in such capacity) who is selected by the Board to receive Awards under this Plan, who is entitled to receive Mandatory Fee Shares or Mandatory Retainer Shares or who has elected to receive Voluntary Shares. "Participation Agreement" means the agreement submitted by a Non-Employee Director to the Secretary of the Company pursuant to which a Non-Employee Director may elect to receive all or any portion of his or her Retainer in the form of Voluntary Shares for a specified period in the future. "Performance Objectives" means the performance objectives that may be established by the Board pursuant to this Plan for Participants who have received Awards. "Plan" means the Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc. as set forth herein, as the same may be amended or restated from time to time. "Restricted Stock" means Common Stock awarded pursuant to Section 5 of this Plan as to which neither the substantial risk of forfeiture nor the restrictions on transfer referred to in Section 5 hereof have expired. "Restricted Stockholder" means a Non-Employee Director to whom Restricted Stock has been awarded under this Plan. "Retainer" means the portion of a Non-Employee Director's annual compensation that is payable without regard to the number of board or committee meetings attended or committee positions held, as determined by the Board from time to time, but for purposes of Section 7 of this Plan shall not include (a) any such compensation subject to deferral under the Deferred Compensation Plan pursuant to an agreement executed by a Non-Employee Director and the Company in accordance with the terms of the Deferred Compensation Plan and (b) any such compensation which is issued to a Non-Employee Director as Mandatory Retainer Shares pursuant to Section 6(b) hereof. 2 Exhibit 10.26a "Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of 1934, as amended or any successor rule. "Subsidiary" means any corporation, partnership, joint venture, limited liability company, unincorporated association or other entity (each, an "Entity") in an unbroken chain of Entities beginning with the Company if each of the Entities other than the last Entity in the unbroken chain then owns stock or other interests possessing 50 percent or more of the total combined voting power of all classes of stock or other interests in one of the other Entities in such chain. "Termination of Directorship" means the time when a Participant ceases to be a Director for any reason, including, without limitation, a termination by resignation, removal, failure to be elected or reelected, death or retirement. "Valuation Date" has the meaning set forth in Section 6(a). "Voluntary Shares" has the meaning set forth in Section 7(a). 3. Shares Available under the Plan. Subject to adjustment as provided in Section 9 of this Plan, the number of shares of Common Stock issued or transferred, plus the number of shares of Common Stock covered by outstanding Awards and not forfeited under this Plan, shall not in the aggregate exceed 400,000 shares, which may be shares of original issuance or shares held in treasury or a combination thereof. If an Option Right lapses or terminates before such Option is exercised or shares of Restricted Stock or Common Stock Grants are forfeited, for any reason, the shares covered thereby may again be made subject to Awards or issued as Mandatory Fee Shares, Mandatory Retainer Shares, or Voluntary Shares under this Plan. 4. Option Rights. The Board may from time to time authorize Awards to Participants of Options to purchase shares of Common Stock upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) Each Award shall specify the number of shares of Common Stock to which the Option Rights pertain. (b) Each Award of Option Rights shall specify an Option Price per share of Common Stock, which shall be equal to or greater than the Market Value per Share on the Date of Award. (c) Each Award of Option Rights shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, nonrestricted shares of Common Stock, which are already owned by the Optionee and have a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Board may deem appropriate, including, without limitation, any form of consideration authorized under Section 4(d) below, on such basis as the Board may determine in accordance with this Plan, and (iv) any combination of the foregoing. (d) On or after the Date of Award of any Option Right, the Board may determine that payment of the Option Price may also be made in whole or in part in the form of shares of Restricted Stock or other shares of Common Stock that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Board on or after the Date of Award, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 4(d), the shares of Common Stock received by the Optionee upon the exercise of the Option Right shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of shares of Common Stock received by the Optionee as applied to the forfeitable or restricted shares of Common Stock surrendered by the Optionee. 3 Exhibit 10.26a (e) Any Award of Option Rights may provide for the deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the shares of Common Stock to which the exercise relates. (f) Successive Awards may be made to the same Participant regardless of whether any Option Rights previously awarded to the Participant remain unexercised. (g) Each Award shall specify the period or periods of continuous service as a Non-Employee Director by the Optionee that are necessary or Performance Objectives that must be achieved before the Option Rights or installments thereof shall become exercisable, and any Award may provide for the earlier exercise of the Option Rights in the event of a change in control of the Company or other transaction or event. (h) The term of an Option Right shall be set by the Board; provided, however, that no Option Right awarded pursuant to this Section 4 may have a term of more than 10 years from the Date of Award. (i) Each Award of an Option Right shall be evidenced by a written Stock Option Agreement, which shall be executed on behalf of the Company by any officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Board may determine consistent with this Plan. 5. Common Stock Grants and Restricted Stock. The Board may also authorize Awards to Participants of Common Stock Grants and Restricted Stock upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) A Common Stock Grant consists of the transfer by the Company to a Participant of shares of Common Stock in consideration and as additional compensation for services performed for the Company. Each Award of Common Stock Grants and Restricted Stock shall constitute an immediate transfer of the ownership of shares of Common Stock to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to, in the case of Awards of Restricted Stock, the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each Award of Restricted Stock shall provide that the shares of Restricted Stock covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Board on the Date of Award, and may provide for the termination of such risk of forfeiture upon the achievement of certain Performance Objectives, in the event of a change in control of the Company, or upon any other transaction or event. (c) Each Award of Restricted Stock shall provide during the period for which such substantial risk of forfeiture is to continue, and any Award of Common Stock Grants may provide, that the transferability of the shares of Common Stock subject to such Awards shall be prohibited or restricted in the manner and to the extent prescribed by the Board on the Date of Award. Such restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the shares of Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee. (d) Any Award of a Common Stock Grant or Restricted Stock may be made in consideration of payment by the Participant of an amount that is less than the Market Value per Share on the Date of Award, but in no event shall the value of the consideration provided with respect to any such Award be less than the par value per share of Common Stock. (e) Any Award of Restricted Stock may require that any or all dividends or other distributions paid on the shares of Restricted Stock during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional shares of Common Stock, which 4 Exhibit 10.26a may be subject to the same restrictions as the underlying award or such other restrictions as the Board may determine. (f) Each Award of a Common Stock Grant and Restricted Stock shall be evidenced by a Stock Grant Agreement or Restricted Stock Agreement (as the case may be), which shall be executed on behalf of the Company by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board may determine consistent with this Plan. Unless otherwise directed by the Board, Restricted Stock will be held in book-entry form by the Company as custodian for the Participant. Any certificates representing shares of Restricted Stock, together with a stock power endorsed in blank by the Participant with respect to the shares of Restricted Stock, shall be held in custody by the Company until all restrictions thereon lapse. (g) The Board may provide, at or after the Date of Award of any Common Stock Grant or Restricted Stock, for the payment of a cash award intended to offset the amount of tax that the Participant may incur in connection with such Common Stock Grant or Restricted Stock, including, without limitation, tax on the receipt of such cash award. (h) The Board may provide in any individual Stock Grant Agreement or Restricted Stock Agreement that the Company shall have the right to repurchase the Restricted Stock then subject to restrictions under the Restricted Stock Agreement, or the Common Stock subject to the Common Stock Grant, immediately upon a Termination of Directorship for any reason at a cash price per share equal to the cash price paid by the Participants for such Restricted Stock or Common Stock. In the discretion of the Board, provision may be made that no such right of repurchase shall exist in the event of a Termination of Directorship without cause or because of the Participant's retirement, death or permanent and total disability. 6. Mandatory Fee and Retainer Shares. (a) Commencing with the first meeting of the Board following the effective date of this Plan, all Meeting Fees shall be payable in the form of Mandatory Fee Shares. No later than ten (10) days following the end of an Accounting Period (the "Issuance Date"), the Company shall issue to each Non-Employee Director a number of Mandatory Fee Shares equal to (i) the amount of such Director's Meeting Fees for such Accounting Period, divided by (ii) the Market Value per Share on the last day of each Accounting Period (the "Valuation Date") with respect to which such Meeting Fees are payable. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractional shares shall be disregarded, and the remaining amount of Meeting Fees shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of Mandatory Fee Shares to a Director. (b) Commencing on January 1, 2001, 50% of each Non-Employee Director's Retainer shall be payable in the form of Mandatory Retainer Shares. Upon the Issuance Date, the Company shall issue to each Non-Employee Director a number of mandatory Retainer Shares equal to (i) 50% of the amount of such Director's Retainer for such accounting period, divided by (ii) the Market Value per Share on the applicable Valuation Date. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractions shares shall be disregarded, and the remaining amount of such portion of the Non-Employee Director's Retainer shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of Mandatory Retainer Shares to a Director. 7. Voluntary Shares. Each Non-Employee Director shall be eligible to elect to receive shares of Common Stock in accordance with the following provisions: (a) Prior to the commencement of the Company's Calendar Year (or by such other date as may be specified by the Board), a Participant may elect, by the filing of a Participation Agreement, to have up to 100 percent of his or her Retainer paid by the Company in the form of shares of Common Stock in lieu of a cash payment (the "Voluntary Shares"). Such Participation Agreement must, except as 5 Exhibit 10.26a the Board may otherwise provide, be filed as a one-time election for the applicable Calendar Year. Unless the Director revokes or changes such election by filing a new Participation Agreement by the due date therefor specified in this Section 7(a), such election shall apply to a Participant's Retainer for each subsequent Calendar Year. Once an election has been terminated, another election may not be made effective until the commencement of the next subsequent full Calendar Year unless the Board shall have otherwise provided. (b) No later than the Issuance Date, the Company shall issue to each Participant who has made an election under Section 7(a), a number of Voluntary Shares for the prior Accounting Period equal to (i) the amount of such Director's Retainer for such Accounting Period that such Director has elected to receive as Voluntary Shares, divided by (ii) the Market Value per Share on the Valuation Date. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractional shares shall be disregarded, and the remaining amount of the Retainer shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of the Voluntary Shares to a Director. 8. Transferability. (a) Except as may be otherwise determined by the Board, (i) Awards, Mandatory Fee Shares, Mandatory Retainer Shares and Voluntary Shares issued or granted under this Plan shall be issued only to a Participant, (ii) Option Rights and Restricted Stock may be transferred by a Participant only by will or the laws of descent and distribution, and (iii) Option Rights may not be exercised during a Participant's lifetime except by the Participant or, in the event of the Participant's legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. (b) Any Award made under this Plan may provide that all or any part of the shares of Common Stock that are to be issued or transferred by the Company upon the exercise of Option Rights, or are no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 5 of this Plan, shall be subject to further restrictions upon transfer. (c) To the extent required to satisfy any condition to exemption available pursuant to Rule 16b-3, Mandatory Fee Shares, Mandatory Retainer Shares and Voluntary Shares acquired by a Participant shall be held by the Participant for a period of at least six months following the date of such acquisition. 9. Adjustments. The Board may make or provide for such adjustments in the (a) number of shares of Common Stock covered by outstanding Awards, payable as Mandatory Fee Shares or Mandatory Retainer Shares or subject to elections to receive Voluntary Shares, (b) prices per share applicable to Option Rights, and (c) kind of shares (including, without limitation, shares of another issuer) covered thereby, as the Board in its sole discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Participants that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (y) any merger, consolidation, spin-off, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, or issuance of rights or warrants to purchase securities or (z) any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Board may provide in substitution for any or all outstanding Awards, Mandatory Fee Shares, Mandatory Retainer Shares or Voluntary Shares to be issued under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards, Mandatory Fee Shares, Mandatory Retainer Shares or Voluntary Shares so replaced. The Board may also make or provide for such adjustments in the numbers and kind of shares specified in Section 3 of this Plan as the Board may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 9. 10. Fractional Shares. The Company shall not be required to issue any fractional shares of Common Stock pursuant to this Plan. The Board may provide for the elimination of fractions, for the settlement thereof in cash or for such other adjustments as the Board may deem appropriate under this Plan. 6 Exhibit 10.26a 11. Withholding Taxes. To the extent, if any, that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of any taxes required to be withheld. At the discretion of the Board, any such arrangements may include relinquishment of a portion of any such payment or benefit. The Company and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 12. Certain Terminations of Directorships. (a) Notwithstanding any other provision of this Plan to the contrary, in the event of a Termination of Directorship by reason of death or disability, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right that is not immediately and fully exercisable or any Award as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, the Board may in its sole discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation, waiving or modifying any limitation or requirement with respect to any Award under this Plan. (b) If a Non-Employee Director becomes an Employee while continuing to serve as a Director, that fact alone shall not result in a Termination of Directorship or otherwise impair the rights such Director may have under this Plan, including, without limitation, the rights such Director may have under any Award outstanding under this Plan, but such Director shall no longer be eligible to receive any further Awards, Mandatory Fee Shares, Mandatory Retainer Shares or Voluntary Shares under this Plan. 13. Administration. (a) Administration by the Board; Delegation. This Plan shall be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to a committee or subcommittee of not less than two Directors appointed by the Board who are "non-employee directors" within the meaning of that term as defined in Rule 16b-3. To the extent of any delegation by the Board under this Plan, references in this Plan to the Board shall also refer to the applicable committee or subcommittee. The majority of any such committee or subcommittee shall constitute a quorum, and the action of a majority of its members present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of such committee or subcommittee. (b) Administrative Powers. The Board shall have the power to interpret this Plan, the Option Rights, the Common Stock Grants, the Restricted Stock, the procedures for issuance of Mandatory Fee Shares or Mandatory Retainer Shares and elections to receive Voluntary Shares, and the agreements pursuant to which the Option Rights, the Common Stock Grants, the Restricted Stock, the Mandatory Fee Shares, Mandatory Retainer Shares and the Voluntary Shares are awarded and issued (including Participation Agreements), and to adopt such rules for the administration, interpretation and application of this Plan (including the administration of this Plan in conjunction with the Deferred Compensation Plan), and such agreements as are consistent therewith and to interpret, amend or revoke any such rules. Any Award under this Plan need not be the same with respect to each Optionee or Restricted Stockholder. (c) Professional Assistance; Good Faith Actions. All expenses and liabilities which members of the Board incur in connection with the administration of this Plan shall be borne by the Company. The Board may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Board, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Board in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No members of the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, or any Option, Common Stock Grant, Restricted Stock, Mandatory Fee Shares, Mandatory Retainer Shares or Voluntary Shares, and 7 Exhibit 10.26a all members of the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 14. Amendment, Suspension, Termination and Other Matters. (a) This Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, without further approval of the stockholders of the Company, no action of the Board may, except as provided in Section 9 of this Plan, increase the limits imposed in Section 3 on the maximum number of shares of Common Stock which may be issued under this Plan, and no action of the Board may be taken that would otherwise require stockholder approval as a matter of applicable law or the rules of any U.S. stock exchange, including the NYSE, on which the Common Stock may be listed for trading or authorized for quotation. No amendment, suspension or termination of this Plan shall, without the consent of the holder of an Award, alter or impair any rights or obligations under any Award theretofore granted, unless the Award itself otherwise expressly so provides. (b) The Board may make under this Plan any Award or combination of Awards authorized under this Plan in exchange for the cancellation of an Award that was not made under this Plan. (c) Except as provided in Section 14(b) of this Plan, the making of one or more Awards to a Non-Employee Director under this Plan shall not preclude the making of Awards to such Non-Employee Director under any other stock option or incentive plan previously or subsequently adopted by the Board, nor shall the fact that a Non-Employee Director has received one or more awards under any other stock option or incentive plan of the Company preclude such Non-Employee Director from receiving awards under this Plan. 15. Termination of the Plan. No further awards shall be made under this Plan after the passage of 10 years from the date on which this Plan is first approved by the stockholders of the Company. 16. Effective Date. The effective date of this Plan shall be the date of its adoption by the Board of Directors. This Plan and all Awards granted, Mandatory Fee Shares issued, and any elections to receive Voluntary Shares effected prior to the stockholder approval hereinafter mentioned, shall be void and of no further force and effect unless this Plan shall have been approved at a meeting of stockholders of the Company called for such purpose by the affirmative vote of a majority of the shares of Class A Common Stock of the Company represented in person or by proxy. 8 EX-10.29(C) 12 d57916_ex10-29c.txt MUTUAL AGREEMENT Exhibit 10.29c October 8, 2003 Jim English 777 South Oak Knoll Avenue Pasadena, CA 91106 Dear Jim: This will confirm our mutual agreement to extend your employment arrangement on the following terms and conditions: Your title will remain as President, Entertainment Group and Executive President, Playboy Enterprises, Inc. ("Playboy"). You will report directly to Playboy's CEO or at the CEO's option, Playboy's COO and/or President, should that position be filled. The term of this agreement will be three years, commencing January 1, 2004 and terminating December 31, 2006, unless earlier terminated as set out below. You will be paid a base salary of $650,000 effective January 1, 2004. Effective January 1, 2005 your base salary will be increased to $675,000 and effective January 1, 2006 your base salary will be increased to $700,000. You will be entitled to participate in a Playboy Board approved incentive plan with a maximum annual opportunity of 100% of your base salary. Any approved plan will provide for a 60% payout at plan. You will be entitled to participate in the Playboy benefit plans that are made available to employees at your grade level. While we cannot promise that these plans will not change in the future, we can assure you that you will be treated no less favorably than other executives at your level. If you and Playboy are desirous of renewing this contract, those negotiations will commence no later than six months 1 prior to the expiration date and conclude no later than four months prior to the expiration date. If Playboy does not during these two months of negotiations offer to renew your employment contract with at least comparable compensation, benefits, terms and duties as in that current year, then you will be entitled to receive the "Termination Payment" referenced below at the end of the contract term. Said Termination Payment will not be paid to you if Playboy does offer you comparable compensation (with similar increases), benefits, terms, and duties and you decide not to accept said offer. If you should be terminated at any time not for cause (as described below), you will be entitled to receive a guaranteed severance lump sum payment equal to twelve months base salary at the salary you are receiving at the time of termination ("Termination Payment"). This amount shall be reduced by any amounts payable under your November 15, 2000 Change in Control Agreement with the Company, as amended from time to time. "For cause" is defined as conviction of a crime involving dishonesty, fraud or breach of trust, or engaging in conduct materially injurious to Playboy. You shall have the right by the delivery of written notice to Playboy to terminate your employment under this Agreement and receive the Termination Payment as a result of "Constructive Termination without Cause." Constructive Termination without Cause shall mean termination by the Employee of your employment following the occurrence of any of the following events without your written consent: A. any reduction in your base salary; B. any material diminution in any of your duties, powers authorities, functions, responsibilities or titles; C. your being asked to report to anyone other than the CEO, COO or President of Playboy. Any such Termination Payment will be in addition to any salary or other payments due you through the effective date of such termination. If either A. or B. above is curable by Playboy, Playboy shall have 15 business days after receipt of such notice from you to so cure, in which case such termination shall be deemed withdrawn and without any force or effect. If not 2 cured, said Termination Payment shall be paid promptly after the effective date of termination. Although it is not intended and hopefully will never occur, Playboy recognizes that the activities within the scope of your employment create the potential in some jurisdictions of civil or even criminal actions being brought against you. To the fullest extent permitted by law, Playboy shall indemnify, defend, protect and hold you 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 your duties within the scope of your employment. You will be entitled to whatever insurance benefits are made available to other senior executives at your level including but not limited to D&O insurance, to insure against any civil or criminal claims brought against you in the discharge of your duties within the scope of your employment. All memoranda, notes, records, and other materials made or compiled by you, or made available to you, in connection with and during your employment by Playboy will remain the sole and exclusive property of Playboy. You acknowledge and agree that all nonpublic information acquired about Playboy, and all material reflecting such nonpublic information is highly confidential and that disclosure of such information or material could cause serious and irreparable injury to Playboy, and that you will not hereafter disclose any such information or make any such material available to anyone without the written consent of Playboy, other than as required pursuant to an order of a court, governmental agency or other authorized tribunal. For purposes of this paragraph, the term "Playboy" includes any of Playboy's subsidiaries and affiliated and predecessor companies, and its and their officers, directors, employees and agents. You will not directly or indirectly disclose, discuss, disseminate, be the source of or otherwise publish or communicate in any manner to any person or entity any confidential information concerning the personal, social or business activities of Playboy, its affiliates or the executives and principals and the offi- 3 cers, directors, agents and employees of all the foregoing during or at any time after the termination of you employment, other than as required pursuant to an order of a court, governmental agency or other authorized tribunal. In addition, you agree that without Playboy's express written approval in each case, you 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 confidential information of Playboy, or (ii) grant any interviews regarding or concerning confidential information of Playboy during or at any time after the termination of your employment. For purposes of this the term "Playboy" includes any of Playboy's subsidiaries and affiliated and predecessor companies, and its and their officers, directors, employees and agents. If this is acceptable to you, please sign, date and return the enclosed copy of this letter. Sincerely, /s/ Howard Shapiro Howard Shapiro Executive Vice President ACCEPTED: /s/ James L. English - ----------------------------- James English Date Oct. 10, 2003 4 EX-10.29(D) 13 d57916_ex10-29d.txt EMPLOYMENT AGREEMENT AMENDMENT Exhibit 10.29d AMENDMENT TO OCTOBER 8, 2003 EMPLOYMENT AGREEMENT WHEREAS Playboy Enterprises, Inc. ("Playboy") and James F. Griffiths ("Griffiths") have entered into an employment relationship where Griffiths has been named Senior Executive Vice President of Playboy, WHEREAS Playboy has changed Jim English's reporting requirements as of January 20, 2004 so that English reports to Griffiths, WHEREAS this change in reporting requirements by Playboy constitutes a "Constructive Termination Without Cause," as defined by Playboy's October 8, 2003 employment agreement ("Agreement") with Jim English, WHEREAS English has the immediate right to invoke the "Constructive Termination Without Cause" provisions of that Agreement and receive the benefits and protections thereof, THIS AMENDMENT SHALL PROVIDE as follows: (1) English shall have a period of six months, up to July 20, 2004, to elect to declare the January 20, 2004 reporting change as a Constructive Termination Without Cause; (2) If at any time up to July 20, 2004, English elects to declare the January 20, 2004 Constructive Termination Without Cause, he shall notify Playboy by written notice delivered to Playboy's CEO or its General Counsel; (3) On receipt of notice, English will be immediately entitled to receive and Playboy shall pay a lump sum payment equal to twelve months base salary at the salary he was receiving as of January 20, 2004; (4) If English has not elected to declare a Constructive Termination Without Cause by July 20, 2004, he waives the right as to the reporting relationship to Jim Griffiths. (5) Thereafter, if English is not employed full-time after twelve months of his Notice, he will also be entitled to receive immediately at that twelve month anniversary and Playboy shall pay an additional lump sum payment equal to six months base salary at the salary he was receiving at the time of the Constructive Termination Without Cause; (6) No other rights or provisions are affected or limited by this Amendment. Playboy Enterprises, Inc. By /s/ Howard Shapiro /s/ James L. English --------------------------- ------------------------------ Title: Executive Vice President James L. English Dated: Feb. 6, 2004 Dated: Feb. 10, 2004 EX-10.29(E) 14 d57916_ex10-29e.txt EMPLOYMENT AGREEMENT Exhibit 10.29e EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of January 8, 2004, between JAMES GRIFFITHS, residing at 3300 The Strand, Manhattan Beach, California, 90266 ("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 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 Senior Executive Vice President 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 January 19, 2004 (the "Commencement Date") and, subject to earlier termination as provided herein, shall continue for a period of three years (the "Initial Period") after the Commencement Date. Unless earlier terminated, at the end of the Initial Period, the parties will determine whether or not to renew this Agreement and, if so, on what terms and conditions. 3. Duties and Responsibilities (a) During the Employment Period, Executive (i) shall have the title of Senior Executive Vice President, (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 interfere with the performance of his duties under this Agreement (provided that Executive is permitted to serve on the board of directors of other organizations, subject to approval of the Company's CEO, or engage in endeavors related to the community, his faith and other 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 the Company's CEO. (b) During the Employment Period, Executive's responsibilities will include all pay and free cable and satellite broadcast television, home video and theatrical entertainment development activities of the Company, and the associated production, programming and 1 10.29e distribution activities, the Company's gaming initiatives in Las Vegas, Nevada and business development; provided, however, that the foregoing will not be construed so as to prevent or limit the Company's good faith determination for bona fide business reasons 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, Executive will report only to the Company's CEO and will be the Company's most senior executive in regard to those responsibilities set forth in Paragraph 3.(b) above. 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 a base salary computed at a rate of $650,000 per annum ("Base Salary"), payable on a biweekly basis in accordance with the Employer's standard payroll practices. In addition, on the Commencement Date, Executive will be eligible to participate in a Board of Directors' approved incentive compensation plan, with Executive's being eligible to earn up to a maximum potential of 100% of his Base Salary. On the condition that Executive is not terminated for Cause (as hereinafter defined), Company will guarantee a payout of a minimum of 25% of such maximum potential under the 2004 incentive compensation plan, payable when fiscal 2004 incentive compensation is paid to the Company's other senior executives. The incentive compensation will be based upon the Company's fiscal 2004 operating plan that has been approved by the Company's Board of Directors. Should Executive be employed by Company on December 31, 2006, he will receive whatever payout he is entitled to receive under the Company's incentive compensation plan for fiscal 2006 at the time such payout is made to other executives of Company, even if such payout occurs after the end of the Initial Period. (b) In each calendar year of the Initial Period, Executive will also be granted nonqualified options to purchase 45,000 shares (the "Options") of the Class B common stock of the Company. The Option agreements will be subject to the Company's stock option plan and contain the terms and conditions determined by the Company's Compensation Committee, which will be consistent with the terms and conditions of stock option grants made to other executive officers of the Company. The strike price of the options will be the closing price of the Company's Class B common stock at the close of business on the date prior to the date on which such grants are made to the other executive officers by the Compensation Committee of the Company's Board of Directors (which, for calendar 2004 is scheduled to take place on February 4, 2004). (c) In each calendar year of the Initial Period, Executive will be granted 15,000 deferred stock awards subject to the terms and conditions determined by the Company's Compensation Committee of the Company's Board of Directors consistent with the terms and conditions of deferred stock awards to other executive officers of the Company (which, for calendar 2004 is scheduled to take place on February 4, 2004). (d) Executive will receive a one-time grant of 25,000 shares of the Class B common stock of the Company as restricted shares, subject to the Company's Stock Option Plan, 2 10.29e which restrictions will lapse if, and only if, the Company has met its fiscal 2004 operating income threshold and Executive has not been terminated prior to January 1, 2005. (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, matching 401-K plan, deferred compensation plan, stock prices and similar plans in effect from time to time. Executive's participation in the foregoing plans, perquisites and travel and entertainment policy will be on terms no less favorable than afforded to other executives of the Company commensurate with Executive's level. 5. Termination of Employment Period; Change of Control 5.1 Employer may, at any time during the Employment Period by notice to Executive (the "Termination Notice"), terminate the Employment Period for "Cause" effective immediately. The Termination Notice shall specify the Cause for termination. In such an event, Executive shall not be entitled to any compensation or other amount from the Company from the effective date of termination. For purposes hereof, for "Cause" means: (a) Executive is convicted of a felony involving dishonesty, fraud or breach of trust; or (b) Executive engaged in wrongful conduct materially injurious to the Company; provided that such conduct was not undertaken at the direction of, or with the approval of, the Board or CEO; further provided that in the event that the wrongful conduct is capable of being cured, Executive shall have 15 days from his receipt of the Termination Notice to cease or cure such conduct. 5.2 The company may terminate this Agreement at any time, by delivering a notice to Executive, without Cause, 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 and all unreimbursed expenses payable for all periods through the effective date of termination; plus (b) if such termination occurs in and only in the first year of the Initial Period (i.e., in calendar 2004), the sum of $162,500; plus (c) a severance payment in the sum of 12 months of Executive's then Base Salary; (the sum of paragraphs 5.2 (a), (b) and (c) being collectively referred to as the "Severance Payment"). The Severance Payment will be due and payable on the effective date of the termination of this Agreement. In the event that the Severance Payment, all Base Salary and all other amounts due hereunder to Executive are not paid in full on such date, Executive will continue to earn his Base Salary until all such amounts are paid in full. 3 10.29e 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 three months, or an aggregate period in excess of three 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 binding 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 (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 and all unreimbursed expenses payable for all periods through the effective date of termination; plus (b) the sum of six months of Executive's then Base Salary; plus (c) a pro rata payout under the incentive compensation plan for Executive 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. 5.5 The Company is party to a certain severance agreement with certain executives of the Company ("the Severance Agreement"). The Company will enter into a Severance Agreement on substantially the same terms upon the execution hereof by Executive. 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 by the delivery of written notice to Company within 30 days after either of the events hereinbelow set forth in subparagraphs (a) or (b) to terminate his employment under this Agreement and receive the Severance Payment as a result of "Constructive Termination without Cause." Constructive Termination without Cause shall mean 4 10.29e termination by the Executive of his employment following the occurrence of either of the following events without Executive's written consent: (a) Executive's being asked to report to anyone other than the CEO of the Company; (b) Company hires a Company President or COO; (c) a material diminution in Executive's duties; or (d) if Executive's principal place of business for the performance of his duties is changed to a location more than 50 miles from Glendale, California. Any such Severance Payment will be in addition to any salary or other payments due you through the effective date of such termination. 6. Location of Executive's Activities Executive's principal place of business in the performance of his duties and obligations under this Agreement shall be at Employer's place of business in Glendale, California. Notwithstanding the preceding sentence, Executive will engage in such travel and spend such time in other places as may be necessary or appropriate in furtherance of his duties hereunder at the Employer's expense. 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: 3300 The Strand Manhattan Beach, California 90266 (b) if to the Company: General Counsel Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 5 10.29e 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 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 insure to the benefit of, each parties' successors, transferees, heirs and assigns. 7.8 Confidentiality; Disclosure of Information (a) Executive recognized 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). If Executive is requested or becomes legally compelled to disclose any of the Confidential Information, he 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 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 Executive 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 proprietary by Company in accordance with its policies. Notwithstanding the immediately preceding sentence, 6 10.29e 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. 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 request of Company, all Company Materials, including copies thereof, as well as all other Company property then in Executive's possession or control, shall be returned to and left with Company. 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. ss. 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. ss. 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 all 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 to do such acts by Company and failed to promptly do so. 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 my 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 7 10.29e of Executive's employment. Company will include Executive as a named insured on Company's directors and officers liability policy. 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 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 substantially planned business that Executive is aware of during Executive's employment with Company on behalf of any entity or person other than Company (including Executive). (b) During Executive's employment with Company and for one year thereafter, Executive may not notice, 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. 7.11 Non-Disparagement; Non-Disclosure (a) Executive and Company hereby agree that during the Employment Period and all times thereafter, neither Executive or Company will make any public statement, or engage in any conduct, that is disparaging to the other party or, in the case of Company, any of its Executives, officers, directors, or shareholders known to Executive, including, but not limited to, any statement that disparages the products, services, finances, financial condition, capabilities or 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 breach of this Paragraph 7.11 for the making of any truthful statements under oath. 8 10.29e (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. 7.12 Representations and Warranties. 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 or the Company, enforceable against the Company in accordance with its terms and (3) this Agreement (to the extent that it pertains to Options) does, or prior to Executive's exercise of any Options, will, comply with the Plan; and IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. Playboy Enterprises, Inc. By: /s/ Christie Hefner ------------------------------- Name: Christie Hefner Title: Chief Executive Officer /s/ James Griffiths ---------------------------------- James Griffiths 9 EX-21 15 d57916_ex21.txt SUBSIDIARIES Exhibit 21 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The accounts of all of the subsidiaries are included in our Consolidated Financial Statements. Set forth below are the names of certain of our active corporate subsidiaries as of December 31, 2003. Certain subsidiaries are omitted because, when considered individually or in the aggregate, they would not constitute a significant subsidiary. Indented names are subsidiaries of the company under which they are indented:
Percent Jurisdiction in Ownership which Incorporated By Immediate Name of Company or Organized Parent Playboy Enterprises, Inc. (parent) Delaware PEI Holdings, Inc. Delaware 100% Spice Entertainment, Inc. Delaware 100% CPV Productions, Inc. Delaware 100% Cyberspice, Inc. Delaware 100% MH Pictures, Inc. California 100% Planet Spice, Inc. Delaware 100% SEI 4 ApS Denmark 100% Spice Direct, Inc. Delaware 100% Spice International, Inc. Delaware 100% Spice Networks, Inc. New York 100% Spice Productions, Inc. Nevada 100% Playboy Enterprises International, Inc. Delaware 100% Alta Loma Entertainment, Inc. Delaware 100% Itasca Holdings, Inc. Illinois 100% Lake Shore Press, Inc. Delaware 100% Lifestyle Brands, Ltd. Delaware 100% Planet Playboy, Inc. Delaware 100% Playboy Canada, Inc. Canada 100% Planet Playboy Brazil Licenciamento de Nomes de Dominio Ltda. Brazil 100% Playboy Australia Pty. Ltd. Australia 100% Playboy Clubs International, Inc. Delaware 100% Playboy Preferred, Inc. Illinois 100% Playboy.com, Inc. Delaware 94% Playboy Casino Australia Pty. Ltd. Australia 100% Playboy.com Internet Gaming, Inc. Delaware 100% Playboy.com Racing, Inc. Delaware 100% Playboy.com Internet Gaming (Gibraltar) Limited Gibraltar 100% SpiceTV.com, Inc. Delaware 100% Playboy Entertainment Group, Inc. Delaware 100% AdulTVision Communications, Inc. Delaware 100% After Dark Video, Inc. Delaware 100% Alta Loma Distribution, Inc. Delaware 100% AL Entertainment, Inc. California 100% Andrita Studios, Inc. California 100% Impulse Productions, Inc. Delaware 100% Indigo Entertainment, Inc. Illinois 100% Mystique Films, Inc. California 100% Playboy TV International, LLC Delaware (1) Candlelight Management LLC Delaware 100% 1945/1947 Cedar River C.V. Netherlands 100% PTVI Limited Cayman Islands 100% Chelsea Court Holdings, LLC Delaware 100% Claridge Organization LLC Delaware 100% Stichting 1945/1947 La Laguna Netherlands 100%
Subsidiary Listing Cont. Playboy TV - GmbH Germany Germany 100% Playboy TV International B.V. Netherlands 100% Playboy TV UK Limited United Kingdom 100% Playboy TV/UK Benelux Ltd. United Kingdom 100% STV International B.V. Netherlands 100% Precious Films, Inc. California 100% SEI Inc. ApS Denmark 100% Women Productions, Inc. California 100% Playboy Gaming International, Ltd. Delaware 100% Playboy Cruise Gaming, Inc. Delaware 100% Playboy Gaming UK, Ltd. Delaware 100% Playboy Gaming Nevada, Inc. Nevada 100% Playboy Japan, Inc. Delaware 100% Playboy Models, Inc. Illinois 100% Playboy Products & Services International, B.V. Netherlands 100% Playboy Properties, Inc. Delaware 100% Playboy Shows, Inc. Delaware 100% Special Editions, Ltd. Delaware 100% Spice Hot Entertainment, Inc. Delaware 100% SEI 1 ApS Denmark 100% Spice Platinum Entertainment, Inc. Delaware 100% Telecom International, Inc. Florida 100%
(1) Playboy TV International, LLC is 95% owned by Playboy Entertainment Group, Inc. and 5% owned by AdulTVision Communications, Inc. EX-23 16 d57916_ex23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-30185, Form S-8 POS (as amended) No. 333-74451, Form S-8 No. 333-105454 and Form S-3 No. 333-112682) of Playboy Enterprises, Inc. and in the related prospectuses of our report dated February 10, 2004, with respect to the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2003. Chicago, Illinois March 11, 2004 EX-31.1 17 d57916_ex31-1.txt CEO CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christie Hefner, Chairman of the Board, Chief Executive Officer and Director of Playboy Enterprises, Inc., or the registrant, certify that: 1. I have reviewed this Annual Report on Form 10-K of Playboy Enterprises for the fiscal year ended December 31, 2003. 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)) 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) 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 c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth 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: March 11, 2004 /s/ Christie Hefner ------------------------- Name: Christie Hefner Title: Chairman of the Board, Chief Executive Officer and Director EX-31.2 18 d57916_ex31-2.txt CFO CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Linda G. Havard, Executive Vice President, Finance and Operations, and Chief Financial Officer of Playboy Enterprises, Inc., or the registrant, certify that: 1. I have reviewed this Annual Report on Form 10-K of Playboy Enterprises for the fiscal year ended December 31, 2003. 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) 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 c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth 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: March 11, 2004 /s/ Linda G. Havard ------------------------- Name: Linda G. Havard Title: Executive Vice President, Finance and Operations, and Chief Financial Officer EX-32 19 d57916_ex32.txt SECTION 906 CERTIFICATION OF CEO AND CFO 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 Annual Report on Form 10-K of Playboy Enterprises, Inc. (the "Company") for the year-ended ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Christie Hefner, as Chief Executive Officer of the Company, and Linda G. Havard, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of her 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/ Christie Hefner - ---------------------------- Name: Christie Hefner Title: Chief Executive Officer Date: March 11, 2004 /s/ Linda G. Havard - ---------------------------- Name: Linda G. Havard Title: Chief Financial Officer Date: March 11, 2004 This certification accompanies the Report pursuant to ss. 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 ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by ss. 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. -----END PRIVACY-ENHANCED MESSAGE-----