-----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, IeyneEp307twa14mf5Kww1ph4rR3P64HdF+NL8wVbGXdw6fgeicKP6PiMRylI+ZS BTvsxdNydaapw8MxZEiCAA== 0001169232-05-005239.txt : 20051108 0001169232-05-005239.hdr.sgml : 20051108 20051108142239 ACCESSION NUMBER: 0001169232-05-005239 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051108 DATE AS OF CHANGE: 20051108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0001072341 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 364249478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 051185864 BUSINESS ADDRESS: STREET 1: 680 NORTH LAKE SHORE DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 MAIL ADDRESS: STREET 1: 680 NORTH LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NEW PLAYBOY INC DATE OF NAME CHANGE: 19981020 10-Q 1 d65750_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 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) (312) 751-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| 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 |_| At October 31, 2005, there were 4,864,102 shares of Class A common stock, par value $0.01 per share, and 28,253,294 shares of Class B common stock, par value $0.01 per share, outstanding. PLAYBOY ENTERPRISES, INC. FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income for the Quarters Ended September 30, 2005 and 2004 (Unaudited) 3 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Nine Months Ended September 30, 2005 and 2004 (Unaudited) 4 Condensed Consolidated Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 6. Exhibits 21
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME for the Quarters Ended September 30 (Unaudited) (In thousands, except per share amounts) 2005 2004 - ------------------------------------------------------------------------------- Net revenues $ 80,884 $ 80,258 - ------------------------------------------------------------------------------- Costs and expenses Cost of sales (62,180) (59,314) Selling and administrative expenses (13,355) (14,239) - ------------------------------------------------------------------------------- Total costs and expenses (75,535) (73,553) - ------------------------------------------------------------------------------- Operating income 5,349 6,705 - ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 661 114 Interest expense (1,425) (2,928) Amortization of deferred financing fees (135) (275) Minority interest (384) (364) Other, net (294) (96) - ------------------------------------------------------------------------------- Total nonoperating expense (1,577) (3,549) - ------------------------------------------------------------------------------- Income before income taxes 3,772 3,156 Income tax expense (594) (1,229) - ------------------------------------------------------------------------------- Net income 3,178 1,927 =============================================================================== Other comprehensive income (loss) Unrealized gain on marketable securities 107 -- Unrealized loss on derivatives (55) (3) Foreign currency translation adjustments (91) 99 - ------------------------------------------------------------------------------- Total other comprehensive income (loss) (39) 96 - ------------------------------------------------------------------------------- Comprehensive income $ 3,139 $ 2,023 =============================================================================== Weighted average number of common shares outstanding Basic 33,102 33,371 =============================================================================== Diluted 33,366 33,384 =============================================================================== Basic and diluted earnings per common share $ 0.10 $ 0.06 =============================================================================== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS for the Nine Months Ended September 30 (Unaudited) (In thousands, except per share amounts) 2005 2004 - ------------------------------------------------------------------------------- Net revenues $ 247,206 $ 239,845 - ------------------------------------------------------------------------------- Costs and expenses Cost of sales (183,511) (179,742) Selling and administrative expenses (40,143) (42,785) - ------------------------------------------------------------------------------- Total costs and expenses (223,654) (222,527) - ------------------------------------------------------------------------------- Gains on disposal 14 2 - ------------------------------------------------------------------------------- Operating income 23,566 17,320 - ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 1,443 337 Interest expense (5,485) (10,737) Amortization of deferred financing fees (501) (1,007) Minority interest (1,124) (1,066) Debt extinguishment expenses (19,280) (5,908) Other, net (1,094) (793) - ------------------------------------------------------------------------------- Total nonoperating expense (26,041) (19,174) - ------------------------------------------------------------------------------- Loss before income taxes (2,475) (1,854) Income tax expense (2,826) (2,622) - ------------------------------------------------------------------------------- Net loss (5,301) (4,476) - ------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized gain on marketable securities 36 107 Unrealized gain on derivatives 202 34 Foreign currency translation adjustments 101 (209) - ------------------------------------------------------------------------------- Total other comprehensive income (loss) 339 (68) - ------------------------------------------------------------------------------- Comprehensive loss $ (4,962) $ (4,544) =============================================================================== Net loss $ (5,301) $ (4,476) Dividend requirements of preferred stock -- (428) - ------------------------------------------------------------------------------- Net loss applicable to common shareholders $ (5,301) $ (4,904) =============================================================================== Basic and diluted weighted average number of common shares outstanding 33,178 30,978 =============================================================================== Basic and diluted loss per common share $ (0.16) $ (0.16) =============================================================================== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) (Unaudited) Sept. 30, Dec. 31, 2005 2004 - ------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 27,504 $ 26,668 Marketable securities and short-term investments 36,882 24,052 Receivables, net of allowance for doubtful accounts of $4,029 and $3,897, respectively 39,582 45,084 Receivables from related parties 1,280 1,281 Inventories, net 15,021 12,437 Deferred subscription acquisition costs 11,021 13,104 Other current assets 8,812 8,596 - ------------------------------------------------------------------------------------------------ Total current assets 140,102 131,222 - ------------------------------------------------------------------------------------------------ Property and equipment, net 13,087 11,491 Long-term receivables 2,562 2,755 Programming costs, net 52,482 55,997 Goodwill 121,897 111,893 Trademarks 60,007 57,296 Distribution agreements, net of accumulated amortization of $2,589 and $1,935, respectively 30,552 31,206 Other noncurrent assets 18,271 18,721 - ------------------------------------------------------------------------------------------------ Total assets $ 438,960 $ 420,581 ================================================================================================ Liabilities Acquisition liabilities $ 11,998 $ 10,184 Accounts payable 22,437 21,796 Accrued salaries, wages and employee benefits 8,622 8,286 Deferred revenues 47,088 51,421 Accrued litigation settlement 1,000 1,000 Other liabilities and accrued expenses 14,947 18,040 - ------------------------------------------------------------------------------------------------ Total current liabilities 106,092 110,727 - ------------------------------------------------------------------------------------------------ Financing obligations 115,000 80,000 Acquisition liabilities 14,793 19,085 Net deferred tax liabilities 16,868 15,023 Accrued litigation settlement -- 1,000 Other noncurrent liabilities 12,974 13,779 - ------------------------------------------------------------------------------------------------ Total liabilities 265,727 239,614 - ------------------------------------------------------------------------------------------------ Minority interest 13,641 12,517 Shareholders' equity Common stock, $0.01 par value Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49 Class B nonvoting - 75,000,000 shares authorized; 28,630,435 and 28,521,493 issued, respectively 286 285 Capital in excess of par value 223,388 222,285 Accumulated deficit (58,250) (52,949) Treasury stock, at cost, 381,971 and 0 shares, respectively (5,000) -- Accumulated other comprehensive loss (881) (1,220) - ------------------------------------------------------------------------------------------------ Total shareholders' equity 159,592 168,450 - ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 438,960 $ 420,581 ================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Nine Months Ended September 30 (Unaudited) (In thousands)
2005 2004 - ----------------------------------------------------------------------------------------- Cash flows from operating activities Net loss $ (5,301) $ (4,476) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation of property and equipment 2,340 2,390 Amortization of intangible assets 1,260 1,711 Amortization of investments in entertainment programming 28,131 31,984 Amortization of deferred financing fees 501 1,007 Debt extinguishment expenses 19,280 5,908 Deferred income taxes 1,203 534 Net change in operating assets and liabilities (341) (435) Investments in entertainment programming (24,276) (34,211) Litigation settlement (1,875) (6,500) Other, net 205 710 - ----------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 21,127 (1,378) - ----------------------------------------------------------------------------------------- Cash flows from investing activities Payment for acquisition (8,283) -- Purchases of investments (41,494) (10,000) Proceeds from sale of investments 28,700 -- Additions to property and equipment (4,010) (2,308) Proceeds from disposals -- 150 Other, net -- 201 - ----------------------------------------------------------------------------------------- Net cash used for investing activities (25,087) (11,957) - ----------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from financing obligations 115,000 -- Repayment of financing obligations (80,000) (35,000) Proceeds from public equity offering -- 51,844 Payment of debt extinguishment expenses (15,197) (3,850) Payment of acquisition liabilities (5,871) (8,691) Purchase of treasury stock (5,000) -- Payment of deferred financing fees (5,057) -- Payment of preferred stock dividends -- (651) Proceeds from stock plans 959 407 Other (38) (19) - ----------------------------------------------------------------------------------------- Net cash provided by financing activities 4,796 4,040 - ----------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 836 (9,295) Cash and cash equivalents at beginning of period 26,668 31,332 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 27,504 $ 22,037 =========================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (A) BASIS OF PREPARATION The financial information included in these financial statements is unaudited but, in the opinion of management, reflects all normal recurring and other adjustments necessary for a fair presentation of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes to the financial statements contained in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004. Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. At the end of the third quarter, we acquired an online distribution business to complement our current online business for consideration of $12.0 million, of which $8.0 million was paid at closing, with an additional $2.0 million payable on each of the first and second anniversaries of the closing. Pursuant to the asset purchase agreement, we are obligated to pay future contingent earnout payments, payable over a five-year period, based primarily on the financial performance of the acquired lines of business. (B) RESTRUCTURING EXPENSES During the nine-month period ended September 30, 2005, we made cash payments of $0.8 million related to our various restructuring plans. Approximately $9.8 million of the total restructuring charges was paid by September 30, 2005, with most of the remaining $1.2 million related to the consolidation of our facilities to be paid in the fourth quarter of the current year with some payments continuing through 2007. In 2004, we recorded a restructuring charge of $0.5 million relating to the realignment of our entertainment and online businesses. In addition, primarily due to excess office space, we recorded additional charges of $0.4 million related to the 2002 restructuring plan and reversed $0.2 million related to the 2001 restructuring plan as a result of changes in plan assumptions. Our 2002 restructuring initiative to reduce ongoing operating expenses resulted in a $5.7 million charge, of which $2.9 million related to the termination of employees and $2.8 million related to the consolidation of our office spaces in Los Angeles and Chicago. Our 2001 restructuring plan resulted in a $4.6 million charge, of which $2.6 million related to the termination of employees and $2.0 million related to excess space in our Chicago and New York offices. The following table displays the activity and balances of the restructuring reserve for the year ended December 31, 2004, and the nine months ended September 30, 2005 (in thousands):
Consolidation Workforce of Facilities and Reduction Operations Total - -------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193 Additional reserve recorded 466 -- 466 Adjustment to previous estimate -- 278 278 Cash payments (917) (1,014) (1,931) - -------------------------------------------------------------------------------------- Balance at December 31, 2004 179 1,827 2,006 Cash payments (179) (588) (767) - -------------------------------------------------------------------------------------- Balance at September 30, 2005 $ -- $ 1,239 $ 1,239 ======================================================================================
7 (C) EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share, or EPS (in thousands, except per share amounts): (Unaudited) Quarters Ended September 30, ---------------------- 2005 2004 - -------------------------------------------------------------------------------- Numerator: For basic and diluted EPS - net income $ 3,178 $ 1,927 ================================================================================ Denominator: For basic EPS - weighted-average shares 33,102 33,371 Effect of dilutive potential common shares: Employee stock options and other 264 13 - -------------------------------------------------------------------------------- Dilutive potential common shares 264 13 - -------------------------------------------------------------------------------- For diluted EPS - weighted-average shares 33,366 33,384 ================================================================================ Basic and diluted earnings per common share $ 0.10 $ 0.06 ================================================================================ The reconciliations of basic and diluted EPS for the nine-month periods ending September 30, 2005 and 2004, were excluded as both periods resulted in a net loss position; therefore, potential common shares would have been antidilutive. The following table represents the approximate number of shares related to options to purchase our Class B common stock, or Class B stock, 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): Quarters Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2005 2004 2005 2004 - -------------------------------------------------------------------------------- Stock options 1,866 3,262 2,576 2,636 - -------------------------------------------------------------------------------- Total 1,866 3,262 2,576 2,636 ================================================================================ In addition, in accordance with Emerging Issues Task Force Issue 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share", the shares used in the calculation of diluted EPS also exclude the potential shares of Class B stock contingently issuable under our 3.00% convertible senior secured notes because the shares are antidilutive. See Footnote (I), Debt Refinancing, for additional information. (D) INVENTORIES, NET Inventories, net of reserves, which are stated at the lower of cost (specific cost and average cost) or fair value, consisted of the following (in thousands): (Unaudited) Sept. 30, Dec. 31, 2005 2004 - ------------------------------------------------------------------------------- Paper $ 4,818 $ 2,573 Editorial and other prepublication costs 7,254 7,814 Merchandise finished goods 2,949 2,050 - ------------------------------------------------------------------------------- Total inventories, net $ 15,021 $ 12,437 =============================================================================== (E) INCOME TAXES Our income tax provision consists of foreign income tax related to our international networks and withholding tax on licensing income for which we do not receive a current U.S. income tax benefit because of our net operating loss position. The tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. During the third quarter, we recorded a $0.5 million adjustment to our tax provision due to a refund related to our European television operations. 8 (F) CONTINGENCIES In order to create opportunities to promote our websites to a broader audience and enhance our current product offerings, at the end of the current year quarter we acquired an online distribution business with an extensive affiliate network. Pursuant to the asset purchase agreement, we are obligated to pay future contingent earnout payments, payable over a five-year period, based primarily on the financial performance of the acquired lines of business. As contingencies have not been met as of September 30, 2005, these amounts are not recorded. If future payments are made based on contingencies being met, amounts will be recorded as a combination of additional purchase price and compensation expense. In the fourth quarter of 2003, we recorded $8.5 million related to the settlement of the Logix litigation, which related to events prior to our 1999 acquisition of Spice Entertainment Companies, Inc., or Spice. We made a payment of $6.5 million in February 2004 and a payment of $1.0 million in January 2005 and will make the remaining payment of $1.0 million in 2006. 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 have posted a bond in the amount of $8.5 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. We are currently pursuing an appeal. (G) STOCK-BASED COMPENSATION We account for stock options as prescribed by Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and disclose pro forma information as provided by Statement 123, as amended by Statement 148, Accounting for Stock Based Compensation. In December 2004, the Financial Accounting Standards Board (the "FASB") issued Statement 123 (revised 2004), Share-Based Payment ("Statement 123(R)"), which supersedes APB No. 25 and amends Statement No. 95, Statement of Cash Flows. The implementation of Statement 123(R) has since been delayed and will be effective for the first fiscal year beginning after June 15, 2005. We are required to adopt Statement 123(R) on January 1, 2006, and will utilize the modified prospective method. We are currently conducting an analysis of the impact on our financial statements. Pro forma net income (loss) and net income (loss) per common share, presented below (in thousands, except per share amounts), were determined as if we had accounted for our 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 related to stock options would have been $0.7 million for each of the quarters ended September 30, 2005 and 2004, and $2.2 million and $2.1 million for the nine months ended September 30, 2005 and 2004, respectively. Quarters Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2005 2004 2005 2004 - ------------------------------------------------------------------------- Net income (loss) As reported $ 3,178 $ 1,927 $(5,301) $(4,476) Pro forma 2,441 1,238 (7,460) (6,567) Basic and Diluted EPS As reported $ 0.10 $ 0.06 $ (0.16) $ (0.16) Pro forma 0.07 0.04 (0.22) (0.23) - ------------------------------------------------------------------------- Our restricted stock unit expense was $0.5 million and $0.1 million for the quarters ended September 30, 2005 and 2004, respectively, and $1.2 million and $0.4 million for the nine months ended September 30, 2005 and 2004, respectively, as it is probable that the performance criteria will be met. 9 (H) SEGMENT INFORMATION The following table represents financial information by reportable segment (in thousands):
Quarters Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------- Net revenues Entertainment $ 47,765 $ 46,153 $ 147,123 $ 136,017 Publishing 27,224 29,521 79,758 88,291 Licensing 5,895 4,584 20,325 15,537 - ---------------------------------------------------------------------------------------------------- Total $ 80,884 $ 80,258 $ 247,206 $ 239,845 ==================================================================================================== Income (loss) before income taxes Entertainment $ 7,289 $ 7,802 $ 29,099 $ 18,456 Publishing (704) 1,275 (3,444) 5,239 Licensing 3,165 2,614 10,648 7,564 Corporate Administration and Promotion (4,401) (4,986) (12,751) (13,941) Gain on disposal -- -- 14 2 Investment income 661 114 1,443 337 Interest expense (1,425) (2,928) (5,485) (10,737) Amortization of deferred financing fees (135) (275) (501) (1,007) Minority interest (384) (364) (1,124) (1,066) Debt extinguishment expenses -- -- (19,280) (5,908) Other, net (294) (96) (1,094) (793) - ---------------------------------------------------------------------------------------------------- Total $ 3,772 $ 3,156 $ (2,475) $ (1,854) ====================================================================================================
Prior period segment information has been restated as a result of the realignment of our Entertainment and Online businesses into a combined Entertainment segment, as announced during the fourth quarter of 2004. (Unaudited) Sept. 30, Dec. 31, 2005 2004 - -------------------------------------------------------------------------------- Identifiable assets Entertainment $ 274,535 $ 266,736 Publishing 39,124 45,724 Licensing 6,553 5,344 Corporate Administration and Promotion (1) 118,748 102,777 - -------------------------------------------------------------------------------- Total (1) $ 438,960 $ 420,581 ================================================================================ (1) The increase in identifiable assets since December 31, 2004, was primarily due to our debt refinancing in March 2005. See Footnote (I), Debt Refinancing. (I) DEBT REFINANCING On March 15, 2005, we issued and sold in a private placement $100.0 million aggregate principal amount of our 3.00% convertible senior subordinated notes due 2025, or the convertible notes. On March 28, 2005, we issued and sold in a private placement an additional $15.0 million aggregate principal amount of the convertible notes due to the initial purchasers' exercise of the over-allotment option. The net proceeds of approximately $110.3 million from the issuance and sale of the convertible notes, after deducting the initial purchasers' discount and estimated offering expenses payable by us, were used, together with available cash, (i) to complete a tender offer and consent solicitation for, and to purchase and retire, all $80.0 million outstanding principal amount of the 11.00% senior secured notes of our subsidiary PEI Holdings, Inc., or Holdings, for a total of approximately $95.2 million, including the bond tender premium and consent fee of $14.9 million and other expenses of $0.3 million, (ii) to purchase 381,971 shares of our Class B stock for an aggregate purchase price of $5.0 million concurrently with the sale of the convertible notes and (iii) for working capital and general corporate purposes. The convertible notes bear interest at a rate of 3.00% per annum on the principal amount of the notes, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2005. In addition, under certain circumstances beginning in 2012, if the trading price of the convertible notes exceeds a specified threshold during a prescribed measurement period prior to any semi-annual interest period, contingent interest will become payable on the convertible notes for that semi-annual interest period at an annual rate of 0.25% per annum. 10 The convertible notes are convertible into cash and, if applicable, shares of our Class B stock based on an initial conversion rate, subject to adjustment, of 58.7648 shares per $1,000 principal amount of the convertible notes (which represents an initial conversion price of approximately $17.02 per share) only under the following circumstances: (1) during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the closing sale price of our Class B stock for each of 20 or more consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on that trading day; (2) during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 principal amount of convertible notes over that five consecutive trading day period was equal to or less than 95% of the average conversion value of the convertible notes during that period; (3) upon the occurrence of specified corporate transactions, as set forth in the indenture governing the convertible notes; or (4) if we have called the convertible notes for redemption. Upon conversion of a convertible note, a holder will receive cash in an amount equal to the lesser of the aggregate conversion value of the note being converted and the aggregate principal amount of the note being converted. If the aggregate conversion value of the convertible note being converted is greater than the cash amount received by the holder, the holder will also receive an amount in whole shares of Class B stock equal to the aggregate conversion value less the cash amount received by the holder. A holder will receive cash in lieu of any fractional shares of Class B stock. The convertible notes mature on March 15, 2025. On or after March 15, 2010, if the closing price of our Class B stock exceeds a specified threshold, we may redeem any of the convertible notes at a redemption price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest up to, but excluding, the redemption date. On or after March 15, 2012, we may at any time redeem any of the convertible notes at the same redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the occurrence of a fundamental change, as specified in the indenture governing the convertible notes, holders may require us to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest up to, but excluding, the purchase date. The convertible notes are unsecured senior subordinated obligations of the issuer, Playboy Enterprises, Inc., or Playboy, and rank junior to all of the issuer's senior debt, including its guarantee of Holdings' borrowings under our credit facility; equally with all of the issuer's future senior subordinated debt; and senior to all of the issuer's future subordinated debt. In addition, the assets of the issuer's subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries. (J) SUBSEQUENT EVENT On November 3, 2005, Playboy purchased the outstanding shares of Playboy.com Series A Preferred Stock held by Hugh M. Hefner, our Editor-in-Chief and Chief Creative Officer, for $6.9 million. The repurchase amount was equal to the original issue price plus 8% per annum compounded annually from the issuance date through October 31, 2005. As a result of the repurchase, Playboy now owns approximately 97% of the outstanding equity of Playboy.com and is in discussions with the one remaining preferred shareholder that owns Series A Preferred Stock with an aggregate original purchase price of $5,147,778 about a repurchase of its shares. The shares of Playboy.com Series A Preferred Stock were issued on August 13, 2001 at an issue price of $7.1097 per share. From and after August 10, 2006, the holders of the Series A Preferred Stock could require Playboy.com to redeem any and all of their shares of Playboy.com Series A Preferred Stock at a redemption price equal to the original issue price plus 8% per annum compounded annually through the redemption date. At August 10, 2006,the redemption price for Mr. Hefner's shares would have been $7.4 million. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table represents our results of operations (in millions, except per share amounts):
Quarters Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2005 2004(1) 2005 2004(1) - -------------------------------------------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV networks $ 25.4 $ 24.5 $ 75.5 $ 71.4 International 12.2 11.3 37.5 32.2 Online subscriptions 5.4 5.3 16.9 15.4 E-commerce 3.6 3.4 13.9 12.0 Other 1.1 1.6 3.3 5.0 - -------------------------------------------------------------------------------------------------------------------- Total Entertainment 47.7 46.1 147.1 136.0 - -------------------------------------------------------------------------------------------------------------------- Publishing Playboy magazine 22.5 24.6 67.5 74.8 Other domestic publishing 3.2 3.4 7.4 8.9 International publishing 1.6 1.5 4.9 4.6 - -------------------------------------------------------------------------------------------------------------------- Total Publishing 27.3 29.5 79.8 88.3 - -------------------------------------------------------------------------------------------------------------------- Licensing International licensing 4.2 3.1 13.3 8.9 Domestic licensing 0.8 0.8 2.4 2.3 Entertainment licensing 0.5 0.5 1.5 1.5 Marketing events 0.2 0.2 2.8 2.7 Other 0.2 -- 0.3 0.1 - -------------------------------------------------------------------------------------------------------------------- Total Licensing 5.9 4.6 20.3 15.5 - -------------------------------------------------------------------------------------------------------------------- Total net revenues $ 80.9 $ 80.2 $247.2 $239.8 ==================================================================================================================== Net income (loss) Entertainment Before programming amortization and online content expenses $ 17.0 $ 18.9 $ 58.8 $ 52.2 Programming amortization and online content expenses (9.7) (11.0) (29.7) (33.8) - -------------------------------------------------------------------------------------------------------------------- Total Entertainment 7.3 7.9 29.1 18.4 - -------------------------------------------------------------------------------------------------------------------- Publishing (0.7) 1.2 (3.4) 5.2 - -------------------------------------------------------------------------------------------------------------------- Licensing 3.1 2.6 10.6 7.6 - -------------------------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (4.3) (5.0) (12.7) (13.9) - -------------------------------------------------------------------------------------------------------------------- Operating income 5.4 6.7 23.6 17.3 - -------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.6 0.1 1.4 0.3 Interest expense (1.4) (2.9) (5.5) (10.7) Amortization of deferred financing fees (0.1) (0.3) (0.5) (1.0) Minority interest (0.4) (0.4) (1.1) (1.1) Debt extinguishment expenses -- -- (19.3) (5.9) Other, net (0.4) (0.1) (1.1) (0.8) - -------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (1.7) (3.6) (26.1) (19.2) - -------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 3.7 3.1 (2.5) (1.9) Income tax expense (0.5) (1.2) (2.8) (2.6) - -------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 3.2 $ 1.9 $ (5.3) $ (4.5) ==================================================================================================================== Basic and diluted EPS $ 0.10 $ 0.06 $(0.16) $(0.16) ====================================================================================================================
(1) Prior period information has been restated, as a result of the realignment of our Entertainment and Online businesses, into a combined Entertainment segment, as announced during the fourth quarter of 2004. 12 Our revenues increased $0.7 million, or 1%, and $7.4 million, or 3%, for the quarter and nine-month period, respectively. Both periods were impacted by expected lower revenues from our Publishing Group, more than offset by higher Entertainment and Licensing Group revenues. Our operating income decreased $1.3 million, or 20%, and increased $6.3 million, or 36%, for the quarter and nine-month period, respectively. The quarter decreased due to lower results from our Publishing and Entertainment Groups, partially offset by strong results from our Licensing Group. Operating income increased for the nine-month period due to improved operating results from our Entertainment and Licensing Groups, partially offset by lower results from our Publishing Group. Net income of $3.2 million for the quarter was $1.3 million higher than the prior year quarter, reflecting a decrease in interest expense related to our first quarter debt refinancing. Net loss for the current nine-month period of $5.3 million includes $19.3 million of debt extinguishment expenses compared to $5.9 million in the prior year period. Several of our businesses can experience variations in quarterly performance. As a result, our performance in any quarter is not necessarily reflective of full-year or longer-term trends. Playboy magazine newsstand revenues vary from issue to issue, with revenues generally higher for holiday issues and any issues including editorial or pictorial features that generate additional public interest. Advertising revenues also vary from quarter to quarter depending on economic conditions, holiday issues and changes in advertising buying patterns. Online subscription revenues and operating results are impacted by decreased Internet traffic during the summer months, and e-commerce revenues and operating results are typically strongest in the fourth quarter due to the holiday buying season. ENTERTAINMENT GROUP The following discussion focuses on the revenue and profit contribution of each of our Entertainment Group businesses before programming amortization and online content expenses. Revenues from our domestic TV networks business increased $0.9 million, or 4%, and $4.1 million, or 6%, for the quarter and nine-month period, respectively. Direct-to-home, or DTH, revenues increased $1.1 million, or 20%, and $3.0 million, or 19%, for the quarter and nine-month period, respectively, due to subscriber growth and an increase in average pay-per-view, or PPV, buys. Playboy TV cable revenues were relatively flat for the quarter and decreased $0.5 million for the nine-month period. The quarter results were impacted by a decrease in PPV buys, but mostly offset by an increase in Playboy TV monthly subscription revenues. For the nine-month period, PPV buys decreased as certain cable companies continued to migrate consumers from linear channels to video-on-demand, or VOD. Also as a result of this transition to VOD, revenues from our movie networks decreased $1.1 million and $2.4 million for the quarter and nine-month period, respectively. VOD revenues increased $0.9 million, or 116%, for the quarter and increased $2.6 million, or 102%, for the nine-month period. Our VOD business experienced this growth due to the continued roll out of VOD service in additional cable systems as well as a growing number of consumer buys in existing cable systems. Favorably impacting the nine-month period was the discontinuation of a distributor's high-definition subscription service agreement, which resulted in the accelerated recognition of the remaining $1.4 million of deferred revenue associated with the service agreement. Profit contribution from domestic TV networks decreased $1.4 million, or 8%, for the quarter primarily due to a one-time, $1.3 million adjustment for a contractual obligation related to licensed programming recorded in the current quarter combined with an increase in cable and satellite marketing expenses due to reimbursements received in the prior year quarter. Conversely, decreased marketing and overhead expenses combined with the revenue activity described above resulted in a $3.2 million increase in profit contribution for the nine-month period. International revenues increased $0.9 million, or 9%, and $5.3 million, or 17%, for the quarter and nine-month period, respectively. Revenues for the quarter and nine-month period increased due to the launch of new networks in the U.K., as well as in Australia and Germany, in the prior year quarter and revenues from several third-party licensees. Increased royalties from wireless agreements also contributed favorably in both periods. Profit contribution from our international businesses was flat for the quarter and increased $2.6 million, or 21%, for the nine-month period, respectively, due to the higher revenues mentioned above in both periods, mostly offset by increased marketing and bad debt expenses during the quarter and partially offset by higher costs related to the new U.K. channels in the nine-month period. 13 Online subscription revenues were relatively flat and increased $1.5 million, or 10%, for the quarter and nine-month period, respectively. Profit contribution decreased $0.5 million or 5%, and increased $0.6 million, or 6%, for the quarter and nine-month periods, respectively. Our increased technology investments, new marketing initiatives and the recent acquisition of an online distribution business are expected to return this business to its historical growth rate. E-commerce revenues increased $0.2 million, or 6%, and $1.9 million, or 16%, for the quarter and nine-month period, respectively. A $1.2 million payment due to the termination of a marketing alliance favorably impacted revenues for the nine-month period. Increased business-to-business revenues also contributed favorably in both periods. Profit contribution from e-commerce decreased $0.4 million and $0.6 million for the quarter and nine-month period, respectively, due to increased product fulfillment and system support costs and bad debt expense combined with higher anticipated paper costs in the quarter and nine-month period. Expenses associated with the production of a test catalog also impacted the nine-month period. Profit contribution from other businesses was flat for the quarter and decreased $0.2 million for the nine-month period. The group's administrative expenses decreased for both the quarter and nine-month period due in part to lower legal costs in both periods and a contractually obligated severance charge recorded in the nine-month period of the prior year. Segment income for the group decreased $0.6 million, or 7%, for the quarter and increased $10.7 million, or 58%, for the nine-month period primarily due to the previously mentioned revenue activity and a one-time adjustment. Segment income was favorably impacted by both lower administrative expenses and lower programming amortization and online content expenses, which were $1.3 million, or 12%, lower for the quarter and $4.1 million, or 12%, lower for the nine-month period primarily due to the mix of programming. We continue to expect that our cash programming investments for television will be approximately $38.0 million for the year, down nearly 10% from last year, and online content expense will be approximately $2.0 million. We expect programming amortization expense related to television to decline to about $38.0 million for the year, down from $41.7 million in 2004, and online content amortization expense to be approximately $2.0 million, down from $2.3 million in 2004. PUBLISHING GROUP Playboy magazine revenues decreased $2.1 million, or 8%, and $7.3 million, or 10%, for the quarter and nine-month period, respectively. Newsstand revenues were relatively flat for the quarter and declined $1.7 million for the nine-month period, primarily due to fewer copies sold, partially offset by higher display costs in both periods in the prior year. Additionally, the current year nine-month period included an unfavorable adjustment of $0.1 million related to prior year issues compared to a $0.4 million favorable adjustment in the prior year period. Subscription revenues were relatively flat for the quarter and decreased $1.3 million for the nine-month period, primarily due to lower average net revenue per copy in the current year periods, partially offset by an increase in the number of subscription copies served in the current year periods. Also contributing to the decrease for the nine-month period were higher favorable adjustments recorded in the prior year to recognize revenues for paid subscriptions that will not be served and lower list rental revenues in the current year. Advertising revenues decreased $1.8 million and $4.4 million for the quarter and nine-month period, respectively, due to fewer advertising pages. Additionally, the decrease for the quarter was partially offset by higher net revenue per page while the nine-month period reflected lower net revenue per page. Advertising sales for the 2005 fourth quarter magazine issues are closed, and we expect to report approximately 23% lower advertising revenues and 23% fewer advertising pages compared to the 2004 fourth quarter. Revenues from our other domestic publishing businesses decreased $0.2 million, or 8%, and $1.5 million, or 17%, for the quarter and nine-month period, respectively, primarily due to fewer newsstand copies of special editions sold in the current year periods and higher unfavorable adjustments to prior year issues for the nine-month period. An expected decrease in royalties from books published in prior periods also contributed to the revenue decrease for the nine-month period. International publishing revenues were relatively flat and increased $0.3 million, or 7%, for the quarter and nine-month period, respectively, primarily due to higher royalties from the German edition. 14 The group's segment income decreased $1.9 million and $8.6 million for the quarter and nine-month period, respectively, as a result of the lower revenues discussed above combined with higher subscription acquisition expenses of $0.3 million and $1.3 million and higher paper costs of $0.6 million and $1.4 million for the quarter and nine-month period, respectively, partially offset by a $1.0 million and $1.9 million decrease in editorial expenses for the quarter and nine-month period, respectively. LICENSING GROUP Licensing Group revenues increased $1.3 million, or 29%, and $4.8 million, or 31%, for the quarter and nine-month period, respectively, primarily due to higher royalties from existing and new licensees in Europe and Asia. The group's segment income increased $0.5 million, or 21%, and $3.0 million, or 41%, for the quarter and nine-month period, respectively, due to the revenue increase, partially offset by higher revenue-related expenses and development costs related to our location-based entertainment business. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses decreased $0.7 million, or 12%, for the quarter and $1.2 million, or 9%, for the nine-month period primarily due to a legal settlement and the reclassification of a senior position from Corporate to a division that impacted prior year periods, partially offset by an increase in internal audit expenses in the current year periods. NONOPERATING INCOME (EXPENSES) The nine-month period included debt extinguishment expenses of $19.3 million related to our redemption of all $80.0 million of the 11.00% senior secured notes due 2010, or the senior secured notes, issued by our subsidiary, PEI Holdings, Inc., or Holdings. These expenses were comprised of $14.9 million of bond redemption premium combined with $0.3 million of related expenses and $4.1 million for the non-cash write-off of the related deferred financing costs. The senior secured notes were repurchased using the proceeds of the issuance of $115.0 million of 3.00% convertible senior subordinated notes due 2025, or the convertible notes. The prior year nine-month period included $5.9 million of debt extinguishment expenses related to our redemption of $35.0 million aggregate principal amount of the senior secured notes. Reduced interest expense of $1.5 million and $5.2 million for the quarter and nine-month period, respectively, related to the lower interest rate on the new convertible notes, partially offset the redemption expenses. INCOME TAX EXPENSE Our effective income tax rate differs from U.S. statutory rates. The income tax provision consists of foreign income tax related to our international networks and withholding tax on licensing income for which we do not receive a current U.S. income tax benefit because of our net operating loss position. The tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. During the third quarter, we recorded a $0.5 million adjustment to our tax provision due to a refund related to our European television operations. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2005, we had $27.5 million in cash and cash equivalents compared to $26.7 million in cash and cash equivalents at December 31, 2004. At September 30, 2005, we had $32.1 million of auction rate securities, or ARS, included in short-term investments compared to $20.0 million at December 31, 2004. ARS generally have long-term maturities; however, these investments have characteristics similar to short-term investments because at predetermined intervals, typically every 28 days, there is a new auction process. Total financing obligations were $115.0 million and $80.0 million at September 30, 2005, and December 31, 2004, respectively. At September 30, 2005, our liquidity requirements were being provided by cash generated from our operating activities, existing cash and cash equivalents and short-term investments. At September 30, 2005, we had a $50.0 million credit facility, which can be used for revolving borrowings, issuing letters of credit or a combination of both. At September 30, 2005, there were no borrowings and $10.8 million in letters of credit outstanding under this facility, permitting $39.2 million of available borrowings under this facility. See "Credit Facility" for additional information. 15 DEBT FINANCINGS On March 15, 2005, we issued and sold in a private placement $100.0 million aggregate principal amount of our 3.00% convertible senior subordinated notes due 2025. On March 28, 2005, we issued and sold in a private placement an additional $15.0 million aggregate principal amount of the convertible notes due to the initial purchasers' exercise of the over-allotment option. The net proceeds of approximately $110.3 million from the issuance and sale of the convertible notes, after deducting the initial purchasers' discount and estimated offering expenses payable by us, were used, together with available cash, (i) to complete a tender offer and consent solicitation for, and to purchase and retire, all $80.0 million outstanding principal amount of the 11.00% senior secured notes, for a total of approximately $95.2 million, including the bond tender premium and consent fee of $14.9 million and other expenses of $0.3 million, (ii) to purchase 381,971 shares of our Class B common stock, or Class B stock, for an aggregate purchase price of $5.0 million concurrently with the sale of the convertible notes and (iii) for working capital and general corporate purposes. Also, on March 15, 2005, concurrently with the convertible note offering, Hugh M. Hefner, our Editor-In-Chief and Chief Creative Officer, purchased 381,971 shares of our Class B stock for an aggregate purchase price of $5.0 million. The convertible notes bear interest at a rate of 3.00% per annum on the principal amount of the notes, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2005. In addition, beginning in March 2012, if the trading price of the convertible notes exceeds a specified threshold during a prescribed measurement period prior to any semi-annual interest period, contingent interest will become payable on the convertible notes for that semi-annual interest period at an annual rate of 0.25% per annum. The notes are convertible under specified circumstances into cash and, if applicable, shares of our Class B stock based on an initial conversion rate of 58.7648 shares per $1,000 principal amount of the convertible notes (which represents an initial conversion price of approximately $17.02 per share). In general, upon conversion of a convertible note, the holder of the note will receive cash in an amount equal to the principal amount of the note and Class B stock for the note's conversion value in excess of the principal amount. See Footnote (I), Debt Refinancing, for additional information. The convertible notes mature on March 15, 2025. On or after March 15, 2010, if the closing price of our Class B stock exceeds a specified threshold, we may redeem any of the convertible notes at a redemption price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest to, but excluding, the redemption date. On or after March 15, 2012, we may at any time redeem any of the convertible notes at the same redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the occurrence of a fundamental change, as specified in the indenture governing the convertible notes, holders may require us to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest up to, but excluding, the purchase date. The convertible notes are unsecured senior subordinated obligations of the issuer, Playboy Enterprises, Inc., or Playboy, and rank junior to all of the issuer's senior debt, including its guarantee of Holdings' borrowings under our credit facility; equally with all of the issuer's future senior subordinated debt; and senior to all of the issuer's future subordinated debt. In addition, the assets of the issuer's subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries. CREDIT FACILITY Effective April 1, 2005, Holdings and its lenders amended and restated the credit agreement governing our credit facility, primarily to increase the size of the credit facility from $30.0 million to $50.0 million. Our credit facility provides for revolving borrowings by Holdings of up to $50.0 million and the issuance of up to $30.0 million in letters of credit, subject to a maximum of $50.0 million in combined borrowings and letters of credit outstanding at any time. Borrowings under the credit facility bear interest at a variable rate, equal to a specified Eurodollar, LIBOR or base rate plus a specified borrowing margin based on our Transactions Adjusted EBITDA, as defined in the credit agreement. We pay fees on the outstanding amount of letters of credit under the credit facility based on the margin that applies to borrowings that bear interest at a rate based on LIBOR. All amounts outstanding under the credit facility will mature on April 1, 2008. Holdings' obligations as borrower under the credit facility are guaranteed by us and each of our other U.S. subsidiaries, except for Playboy.com and its subsidiaries. The obligations of the borrower and each of the guarantors under the credit facility are secured by a first-priority lien on substantially all of the borrower's and the guarantors' assets. 16 CALIFA ACQUISITION The Califa acquisition agreement gave us the option of paying $17.5 million of the remaining $23.5 million purchase price consideration obligation, as of September 30, 2005, in cash or in shares of Class B stock. We notified the sellers that the $7.0 million of base consideration due in 2005 would be paid in cash. Under the terms of the agreement, the base consideration was due in two installments of $3.5 million, one of which was paid on May 2, 2005, and the other which was paid on November 1, 2005. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities was $21.1 million for the nine-month period, which represents an increase of $22.5 million from the prior year period. This increase is primarily due to improved overall operating results combined with a decrease in investments in television programming of $9.9 million and a decrease in legal settlement payments of approximately $4.6 million compared to the prior year period. CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities increased $13.1 million primarily due to investments made in auction rate securities during the nine-month period. During the third quarter, $8.3 million was used to acquire an online distribution business to complement our current business. An additional $2.0 million is payable on each of the first and second anniversaries of the closing. Additionally, $4.0 million of cash was used for capital expenditures primarily related to our Andrita and U.K. studios. CASH FLOWS FROM FINANCING ACTIVITIES Net cash provided by financing activities was $4.8 million for the nine-month period primarily due to the proceeds from the sale of $115.0 million aggregate principal amount of convertible notes, partially offset by the payment of $94.9 million in connection with the purchase and retirement of all $80.0 million outstanding principal amount of Holdings' 11.00% senior secured notes and the payment of $0.3 million in associated debt extinguishment expenses and $5.1 million of related financing fees. Proceeds from the convertible note offering were also used to purchase 381,971 shares of our Class B stock for an aggregate purchase price of $5.0 million. See Footnote (I), Debt Refinancing, for additional information. 17 FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements," including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations," as to expectations, beliefs, plans, objectives and future financial performance, and assumptions underlying or concerning the foregoing. 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 regulations, actions or initiatives, including: (a) attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video 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; (3) Our ability to manage the risk associated with our exposure to foreign currency exchange rate fluctuations; (4) 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; (5) Our ability to protect our trademarks, copyrights and other intellectual property; (6) Risks as a distributor of media content, including our becoming subject to claims for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement, and other claims based on the nature and content of the materials we distribute; (7) The risk our outstanding litigation could result in settlements or judgments which are material to us; (8) Dilution from any potential issuance of common or convertible preferred stock or convertible debt in connection with financings or acquisition activities; (9) 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; (10) Competition in the television, men's magazine, Internet and product licensing markets; (11) Attempts by consumers or private advocacy groups to exclude our programming or other products from distribution; (12) Our 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; (13) Risks associated with losing access to transponders and competition for transponders and channel space; (14) 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 splits with operators of these systems; (15) Risks that we may not realize the expected increased sales and profits and other benefits from acquisitions, joint ventures and/or licensing arrangements; (16) Any charges or costs we incur in connection with restructuring measures we may take in the future; (17) Risks associated with the financial condition of Claxson Interactive Group, Inc., our Playboy TV Latin America, LLC joint venture partner; (18) Increases in paper, postage or printing costs; (19) Effects of the national consolidation of the single-copy magazine distribution system; and (20) Risks associated with the viability of our primarily subscription- and e-commerce-based Internet model. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 2005, we did not have any floating interest rate exposure. All of our outstanding debt as of that date consisted of the convertible notes, which are fixed-rate obligations. The fair value of the $115.0 million aggregate principal amount of the convertible notes will be influenced by changes in market interest rates, the share price of our Class B stock and our credit quality. As of September 30, 2005, the convertible senior subordinated notes had an implied fair value of $119.3 million. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state court in Hidalgo County, Texas against Editorial Caballero SA de CV, or EC, Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants, and us. In the complaint, Gongora alleged that he was injured as a result of the termination of a publishing license agreement, or the License Agreement, between us and EC for the publication of a Mexican edition of Playboy magazine, or the Mexican Edition. We terminated the License Agreement on or about January 29, 1998, due to EC's failure to pay royalties and other amounts due 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 approximately $4.4 million. Under the verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in out-of-pocket expenses and approximately $0.3 million for lost profits, 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 $8.5 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. 19 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, or 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 the 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 2004 and $1.0 million in 2005. The remaining $1.0 million will be paid in 2006. On April 12, 2004, Faherty filed suit in the United States District Court for the Southern District of New York against Spice, Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington (together, the "Howington defendants") and Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in the litigation described in the preceding paragraph, or the Logix litigation. The complaint further alleges that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged right to indemnification by excluding him from the settlement of the Logix litigation. On June 18, 2004, a jury entered a special verdict finding Faherty personally liable for $22.5 million in damages to the plaintiffs in the Logix litigation. A judgment was entered on the verdict on or around August 2, 2004. Faherty filed post-trial motions for a judgment notwithstanding the verdict and a new trial, but these motions were both denied on or about September 21, 2004. On October 20, 2004, Faherty filed a notice of appeal from the verdict. In consideration of this appeal Faherty and Playboy have agreed to seek a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York. On January 14, 2005, Logix and the Howington defendants filed a motion to dismiss the Faherty action for, among other things, lack of personal jurisdiction. On February 15, 2005, Faherty filed a cross-motion to stay the action pending the outcome of his appeal. The motion and cross-motions are pending. In the event Faherty's indemnification and conspiracy claims go forward against us, we believe they are without merit and that we have good defenses against them. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with Statement 5, Accounting for Contingencies, no liability has been accrued. 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 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. The parties are engaged in discovery. We believe that we have good defenses against Directrix's claims. We believe it is not probable that a material judgment against us will result. In accordance with Statement 5, Accounting for Contingencies, no liability has been accrued. In the fourth quarter of 2004, we received a $5.6 million insurance recovery partially related to the prior year litigation settlement with Logix. 20 ITEM 6. EXHIBITS Exhibit Number Description - -------------- ----------- 10.1 Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. 10.1.1* Affiliation Agreement, dated November 1, 1992, between Spice, Inc., and Satellite Services, Inc. 10.1.2* Amendment No. 1, dated September 29, 1994, to Affiliation Agreement, dated November 1, 1992, between Spice, Inc., and Satellite Services, Inc. 10.1.3* Letter Agreement, dated July 18, 1997, amending the Affiliation Agreement, dated November 1, 1992, between Spice, Inc., and Satellite Services, Inc. 10.1.4* Letter Agreement, dated December 18, 1997, amending the Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. 10.1.5* Amendment, effective September 26, 2005, to Affiliation Agreement, dated November 1, 1992, between Spice, Inc., and Satellite Services, Inc. 10.2 Affiliation Agreement between Playboy Entertainment Group, Inc., and Satellite Services, Inc. 10.2.1* Affiliation Agreement, dated February 10, 1993, between Playboy Entertainment Group, Inc., and Satellite Services, Inc. 10.2.2* Amendment, effective September 26, 2005, to Affiliation Agreement, dated February 10, 1993, between Playboy Entertainment Group, Inc., and Satellite Services, Inc. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLAYBOY ENTERPRISES, INC. (Registrant) Date: November 8, 2005 By /s/ Linda Havard ---------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer (Authorized Officer and Principal Financial and Accounting Officer) 22 EX-10.1.1 2 d65750_ex10-1.txt AFFILIATION AGREEMENT Exhibit 10.1.1 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. AFFILIATION AGREEMENT THIS AGREEMENT made as of the 1st day of November, 1992 is by and between SPICE, INC., a New York corporation ("Network"), and Satellite Services, Inc., a Delaware corporation ("Affiliate"). 1. RIGHTS: (a) Grant of Rights. Network hereby grants to Affiliate, and Affiliate hereby accepts, the following rights relating to the pay-per-view television programming service known as "Spice," whether in its current analog format or in any other digitized, compressed, modified, replaced or otherwise manipulated format (the "Service"): (i) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of the Service (for the purposes described in Section 4 (e) hereof), by cable or other wire transmission service, whether now existing or developed in the future, ("Cable") in the Distribution Areas (as defined herein) of the System or Systems (as defined herein), if any, set forth by Affiliate on Schedule 1, as such Schedule 1 may be added to or deleted from, from time to time, pursuant to the terms of this Agreement; (ii) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of the Service (for the purposes described in Section 4(e) hereof) by satellite master antenna television systems ("SMATV"), by multipoint distribution services ("MDS"), by multichannel multipoint distribution services ("MMDS"), by Satellite (as defined below), and by any other means of distribution whether now existing or developed in the future (all such technologies including SMATV, MDS, MMDS, Satellite and any other means of distribution whether now existing or developed in the future (other than cable) shall be referred to hereinafter, collectively, as "Alternative Technologies") in (A) Operating Areas (as defined herein), (B) other areas of counties in which Operating Areas are wholly or partially located but which areas are not the subject of a cable television franchise or license or, if a cable television franchise or license exists, the operator of such franchise or license is not distributing the Service, and (C) areas of counties (which are contiguous to such counties where an Operating Area is wholly or partially located) which are not the subject of a cable television franchise or license or, if a cable television franchise or license exists, the operator of such franchise or license is not distributing the Service (the areas described in subsections (A), (B), and (C) of this Section 1(a)(ii) shall be referred to hereinafter, collectively, as a System's "Distribution Area"); and (iii) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of the Service (for the purposes described in Section 4(e) hereof) nationwide (including the fifty United States, the District of Columbia and the territories, possessions and commonwealths of the United States) to any person or entity ("Satellite Subscribers") by means of equipment capable of receiving audio/visual signals and/or programming directly from a satellite, including, but not limited to, C-Band and Ku-Band signals, as digitized, compressed, modified, replaced or - -otherwise manipulated, whether now existing or developed in the future, including tier-bit access rights ("Satellite"). Without the prior written authorization of Network, the Service may not be exhibited or otherwise distributed to Satellite Subscribers in: Tennessee, Mississippi, Alabama, Oklahoma, North Carolina or Utah. The rights set forth in this Section 1(a), and elsewhere under this Agreement, are also granted hereby to any affiliate of Affiliate. As used in this Agreement, an affiliate of Affiliate shall include any entity meeting the requirements of paragraphs I.1, II or III of Exhibit A hereto, regardless of whether such entity is a cable television system. "Operating Area" of a cable television system shall mean that geographic area where the owner of the system is authorized by appropriate governmental authority to operate an audio or video distribution facility through Cable and is operating an audio or video distribution facility through Cable within such area; provided, however, that if a franchise or license is not required for the distribution of television services by Cable in a particular geographic area, then the operating Area of a system shall mean that geographic area where the system is operating regardless of the presence or absence of a franchise or license. (b) Affiliate shall have the right to elect to include, under this Agreement, and to demand authorization from Network, if necessary, any cable television system consisting of Cable which, (i) meets the System Qualifications of Exhibit A hereto, and (ii) either carries the Service or commits to carry the Service, by giving Network written notice within thirty (30) days of the commencement of such carriage (individually, a "System" or, collectively, "Systems"). Upon receipt of such notice or upon the launch of the Service by a System, Schedule 1 hereof shall be deemed to include such System(s) as of the later of: (i) the launch date of the Service on such System(s), or (ii) the date of acquisition of such System(s) by Affiliate. Any then-existing agreement with Network applicable to any such System for carriage of the Service shall terminate and shall cease to be effective with respect to such System as of the effective date of the addition or deemed addition of such System to Schedule 1. Affiliate shall have the right, in Affiliate's sole discretion, to discontinue carriage of the service on any or all Systems, and to delete any or all Systems from Schedule 1, by providing Network with written notice within thirty (30) days of such deletion or discontinuance; provided, however, if such deletion or discontinuance is due to political, legal or community issues, no such notice by Affiliate will be required to delete or discontinue the Service. (c) Notwithstanding any provision of this Agreement to the contrary, Affiliate shall not intentionally authorize any use of the Service: (i) in a room 2 open to the public in a commercial establishment (including, without limitation, public areas of any restaurant, tavern, bar, club, fraternal organization, hospital or correctional facility), or (ii) in any communal room in an otherwise residential building (including without limitation, any lobby or social room in an apartment house, dormitory, drilling rig or similar place). Furthermore, Affiliate shall take all reasonable precautions to prevent such impermissible uses from occurring through the facilities of a System. 2. TERM: (a) Unless terminated sooner pursuant to the terms of this Agreement, the Term of this Agreement shall consist of the Initial Term and any number of Renewal Terms. The Initial Term of this Agreement shall commence upon the date of complete execution of this Agreement and shall terminate on November 30, 2002 unless terminated sooner pursuant to the terms of this Agreement. (b) This Agreement shall automatically renew for successive five (5) year periods (each a "Renewal Term") after the Initial Term, and each Renewal Term, unless either, (i) this Agreement is terminated earlier in accordance with the terms hereof, or (ii) Affiliate provides a minimum of sixty (60) days' prior written notice to Network of its intent to terminate this Agreement, in Affiliate's sole discretion, prior to the end of the Initial Term or any Renewal Term. As used herein, the word "Term" shall mean, collectively, the Initial Term and any number of Renewal Terms. 3. CONTENT OF THE SERVICE: (a) Throughout the Term, the Service shall be commercial-free and shall consist of twenty-four (24) hours per day of high quality, non-rated cable-version adult programming intended for an adult audience, similar to the program schedule attached hereto as Exhibit B, but also including special Events as described in Section 5 below. Notwithstanding the foregoing, the Service shall not contain any programming depicting rape, necrophilia, sadism, sado masochism, bestiality, bondage, incest or programming involving or suggesting sexual activity with, between or among, minors. Network agrees that, during each calendar month of the Term, Network will send one (1) copy of its monthly program schedule to Affiliate, in care of: Vice President, Programming. (b) During the Term, Network shall provide the Service in its entirety to Affiliate. When the phrase "in its entirety" is used in this section, it means that each subscriber of Affiliate receiving the Service shall receive, at all points in time, the same programming received at each such point in time by any other subscriber to the Service, and if any subscriber to the Service is receiving, at such point in time, programming that is different than the programming received by any subscriber of Affiliate receiving the Service at that point in time, Affiliate shall have the unconditional right to elect which programming it desires to receive and utilize at any System and which programming it will authorize for reception. 3 4. DELIVERY AND DISTRIBUTION OF THE SERVICE: (a) During the Term, Network shall, at its own expense, deliver a signal of the Service to the earth station of each System, to each Satellite Subscriber and to any other location in the continental United States designated by Affiliate by transmitting such signal via a domestic satellite commonly used for transmission of domestic cable television programming and shall, at its own expense, fully encode the satellite signal of the Service utilizing scrambling technology commonly used in the domestic cable television industry. Except as otherwise provided in this Section 4(a), Affiliate shall, at its own expense, furnish an earth station and all other facilities necessary for the receipt of such satellite transmission and the delivery of such signal to the Service Cable Subscribers and PPV Cable Subscribers (each as defined below). In the event Network either (i) changes the satellite to which the Service is transmitted, to a satellite not susceptible to viewing by a System's or Systems' then-existing earth station equipment, or (ii) changes the technology used by Network to encrypt the Service, to a technology not compatible with a System's or Systems' then existing descrambling equipment, then Affiliate shall have the right to delete from Schedule 1 of this Agreement, immediately, any such System or Systems, and to discontinue carriage of the Service on any such System or Systems, provided that this termination right shall not apply to any System or Systems if, (1) Network agrees, unconditionally, to reimburse such System or Systems, as the case may be, (A) for the cost of acquiring and installing new equipment necessary to descramble the signal of the Service, and/or (B) for the cost of acquiring and installing equipment reasonably necessary for such System or Systems to receive the Service from such new satellite; (2) physical space exists at the then-existing headend or earth station site to accommodate the necessary equipment; and (3) current zoning and other restrictions permit such additional equipment. (b) Network shall provide to each System distributing the Service and to each Satellite Subscriber a video and audio signal of a technical quality equivalent to the greater of the following: (i) comparable to the technical quality of audio and video signals delivered by other television programming services; or (ii) the technical standards set forth in Exhibit C hereof. If, at any time during the Term, Network converts to a digital format, Network and Affiliate shall negotiate in good faith to agree upon replacement specifications for Exhibit C; provided, however, that the technical quality of the video and audio signal under the replacement specifications shall not be of a lesser technical quality than the video and audio signal quality of the Service as of the month immediately preceding the conversion to digital technology. Each System will deliver a principal video and audio signal of the Service to its Service Cable Subscribers and PPV Cable Subscribers of a technical quality comparable to other cable television programming services, but in no event higher than the technical quality provided by Network. (c) The Systems, if any, may distribute the Service as a fully pre-emptible service. Network agrees that Affiliate will have complete authority to control and to designate the channel(s) over which the Service is to be carried on each System. 4 (d) Each System retains and reserves any and all rights in and to all signal distribution capacity contained within the bandwidth of the Service as received at each System, including, without limitation, the vertical blanking interval and audio subcarriers (and any other portions of the bandwidth that may be created as a result of the conversion of the signal of the Service to a digital format). Network shall not use any portion of the bandwidth other than as provided herein without the prior written consent of Affiliate. Nothing herein shall preclude Affiliate from exercising and exploiting such rights by any means and in any locations freely and without restriction; provided, however, that any such use by Affiliate or the Systems shall not degrade, or otherwise interfere with, the picture quality of the Service or the audio portion of the Service signal which is the principal audio carriage frequency of the Service. (e) Each System or other distribution facility or enterprise may offer the Service, (i) as a Subscription (as defined below) service, and/or (ii) as a PPV (as defined below) service. (f) In each of the Systems, Affiliate shall employ reasonable security measures to prevent pirating, theft or unauthorized exhibition of the Service, or any portion thereof, or of any advertising or promotional materials. Except as provided in Section 4(g) below, neither Affiliate, nor any affiliate of Affiliate, shall authorize others to copy, tape or otherwise reproduce any part of the Service without Network's prior written authorization and shall take reasonable and practical security measures to prevent the unauthorized or otherwise unlawful copying, taping or other reproduction of the Service, by others, through the facilities of any System. Affiliate shall not be responsible for home taping by anyone viewing the Service. Network acknowledges that this Section 4(f) does not restrict Affiliate's practice of (i) connecting its subscribers' videotape recorders, VCRs or other devices susceptible to use for home duplication of video programming to the facilities of a System; or (ii) promoting home taping of the Service by subscribers. (g) Affiliate and any System shall have the right, at their own expense, to make taped copies of any transmissions of the Service programming, which taped programming may be used by such System for one or more of the purposes described in Section 4(e) above, for exhibition and sale at times other than at the times of original satellite transmission by Network. (h) Network hereby grants Affiliate the right to receive the signal of the Service, to digitize, compress, modify, replace or otherwise manipulate the signal, and to transmit the signal as so altered (the "Altered Signal") to a satellite or to a central location for redistribution to terrestrial or other reception sites capable of receiving and utilizing the Altered Signal. Network hereby grants Affiliate the right to deliver the Altered Signal for the uses set forth in Section 1(a) of this Agreement, provided that no such alteration, transmission, redistribution, reception or other use will cause a change in a viewer's perception of the principal video or principal audio presentation of the Service. Furthermore, Network shall not change the signal of the Service in such a way as to technically or technologically defeat, or otherwise interfere with, Affiliate's rights under this Section 4(h). 5 5. FEES: (a) In consideration of the terms and conditions set forth herein, Affiliate shall pay the Fees set forth below. Each of the four categories of Fees defined below (PPV Satellite Fees, Service Satellite Fees, PPV Cable Fees and Service Cable Fees) shall be calculated, stated and reported separately. As used herein, the following terms will have the following meanings: (i) "PPV Satellite Subscriber" means someone who is both a Satellite Subscriber and who utilizes the Service as a PPV service by making a purchase through Affiliate or an affiliate of Affiliate. "PPV Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to PPV Satellite Subscribers. (ii) "Service Satellite Subscriber" means someone who is both a Satellite Subscriber and a Service Subscriber (as defined below) who utilizes the Service as a Subscription service. "Service Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to Service Satellite Subscribers. (iii) "PPV Cable Subscriber" means someone who is provided the Service by Affiliate or an affiliate of Affiliate hereunder, who utilizes the Service as a PPV service and who receives the Service by means other than Satellite. "PPV Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to PPV Cable Subscribers. (iv) "Service Cable Subscriber" means someone who both receives the Service by means other than Satellite and is a Service Subscriber and who utilizes the Service as a Subscription service. "Service Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to Service Cable Subscribers. (v) "Fees" means PPV Satellite Fees, Service Satellite Fees, PPV Cable Fees and Service Cable Fees (collectively) payable by Affiliate to Network during the Initial Term. Fees payable by Affiliate to Network during a Renewal Term are referred to herein as Renewal Fees. (vi) "Pay-per-view" or "PPV" means the authorization of a PPV Satellite Subscriber or PPV Cable Subscriber to receive at least a single motion picture, event or other program included in the Service for a fee separate and distinct from fees paid by such PPV Satellite Subscriber or PPV Cable Subscriber for other television or audio services. Viewing segments may include, but are not limited to, pay-per-view, pay-per-night, pay-per-weekend, or any other continuous segment of seventy-two (72) or fewer consecutive hours of the Service received on a pay-per-view basis. (vii) "Subscription" means the authorization of a Service Cable Subscriber or Service Satellite Subscriber to receive the Service as a monthly 6 subscription service either on an a la carte basis or as part of a package of other services, or both. (viii) "Service Subscriber" means each customer to whom Affiliate or an affiliate of Affiliate knowingly provides the Service directly, through an affiliate, or, as permitted by this Agreement, through a third party, as a Subscription service. (ix) "Special Event" means an occasional, high-profile adult comedy or sports event or program (other than a motion picture or other typical adult dramatic or comedy program) produced originally for the Service, premiering on the Service, and first appearing on the Service no more than one (1) year from its completion date. Network may not include more than one Special Event on the Service in any six (6) month period (except that, with the consent of Affiliate (such consent to be in Affiliate's sole and exclusive discretion), Network may include a Special Event on the Service more frequently than once in a six (6) month period), and no adult comedy, sports event or program event may be treated as a Special Event for more than twelve (12) exhibitions on the Service. Further, no adult comedy, sports event or program may be treated as a Special Event unless Network provides Affiliate with at least seventy-five (75) days prior written notice of the premiere on the Service of such Special Event. (x) "Addressable Subscriber" means a PPV Cable Subscriber whose television set is connected on the PPV Cable Subscriber's premises, or by interdiction, to equipment, issued by Affiliate, that allows the channel on which the Service is received to be turned on or off (i.e., "authorized" or "deauthorized") from a central location, controlled by the operator of the System. (xi) "Gross Receipts" means the amount billed for the Service to a PPV Cable Subscriber, PPV Satellite Subscriber, Service Satellite Subscriber or Service Cable Subscriber (as the case may be) less applicable taxes, franchise fees or other charges, levies or assessments imposed by governmental entities or agencies thereof attributable to the purchase or sale of the Service or any portion thereof. (xii) "Network Share" means that portion of the Gross Receipts which is payable by Affiliate as Fees or Renewal Fees to Network pursuant to this Agreement. (b) Subscription (i) For each calendar month during the Term, Affiliate will pay Network as a Service Cable Fee for each Service Cable Subscriber an amount equal to the greater of (A) ***** or (B) ***** of the Gross Receipts attributable to such Service Cable Subscriber. When the Service is sold to a Service Cable Subscriber in combination with other services for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts attributable to a Service Cable Subscriber for the Service shall be equal to the total charge for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of 7 which is $1.59 and the denominator of which is the numerator plus the aggregate of the net effective rates per subscriber charged to Affiliate by each of the other service providers of the services included in the tier or package of a la carte or other services; provided, however, that the amounts charged to Affiliate for each of the services in the package or tier shall not be disclosed by Affiliate to Network but, at Network's request, in order to assure Network of compliance with this provision, Affiliate shall make such charges and any pertinent calculations available to a representative of KPMG Peat Marwick (which representative is neither Network's nor Affiliate's) on a confidential basis, at Network's cost. This provision shall survive termination or expiration of this Agreement. Affiliate shall pay a Service Satellite Fee to Network of $7.00 per month for each Service Satellite Subscriber regardless of whether such Service Satellite Subscriber purchases the Service alone, as an a la carte service or as part of a tier or package of a la carte or other services and regardless of the Gross Receipts attributable thereto. (ii) The number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) for whom Affiliate shall pay each month shall be the average of (A) the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) on the first day of the month, and (B) the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) on the last day of the month. Service Satellite Subscribers or Service Cable Subscribers (as the case may be) shall include each occupied dwelling (whether in a single family or multi-unit building), hotel or motel guest room, drilling rig, nursing home room, dormitory room or other location in which the Service is received. If Affiliate provides the Service to multiple dwelling complexes, including, but not limited to, apartments, hotels and motels, on a bulk-rate basis, the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate charged a complex for the Service divided by the standard monthly retail rate charged a non-bulk rate Service Satellite Subscriber or Service Cable Subscriber (as the case may be) for the Service in the applicable System or by the pertinent Satellite distributor, as the case may be. The monthly number of Service Satellite Subscribers and the monthly number of Service Cable Subscribers shall each be calculated, stated and reported separately. (iii) The Service Cable Fees and Service Satellite Fees payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the calendar month to which they relate. (c) PPV (i) For each customer of Affiliate who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Cable Subscriber, Affiliate will pay Network a PPV Cable Fee in an amount equal to the greater of, (A) (i) ***** for orders taken from the date of full execution hereof through November 30, 1995, (ii) ***** for orders taken from December 1, 1995 through November 30, 1998 (iii) ***** for orders taken from December 1, 1998 through November 30, 2001 and (iv) ***** for orders from December 1, 2001 through the end of the Initial Term, or (B) the Network Share of the Gross 8 Receipts paid by such PPV Cable Subscriber. With respect to PPV Cable Subscribers, "Network Share" shall equal the following percentage of the Gross Receipts paid by each PPV Cable Subscriber: ***** percent ***** from the date of execution of this Agreement by both parties hereof through November 30, 1995 and ***** percent ***** from December 1, 1995 through the end of the Initial Term. For each customer of Affiliate who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Satellite Subscriber, Affiliate will pay Network a PPV Satellite Fee in an amount equal to the greater of (C) (i) ***** for orders taken from the date of full execution hereof through November 30, 1995, (ii) ***** for orders taken from December 1, 1995 through November 30, 1998, (iii) ***** for orders taken from December 1, 1998 through November 30, 2001, and (iv) ***** for orders taken from December 1, 2001 through the end of the Initial Term, or (D) the Network Share of the Gross Receipts paid by such PPV Satellite Subscriber. With respect to PPV Satellite Subscribers, the Network Share of the Gross Receipts shall be *****. Notwithstanding the foregoing, each System and each Satellite distributor shall have the right to discount the price of a PPV viewing of the service during the first thirty (30) days after the launch of the Service in such System or by such Satellite distributor, respectively, and during no more than two (2) ten (10) day periods each calendar year. For orders taken during such first thirty (30) days and during each such ten (10) day period, Affiliate shall be required to pay to Network minimum PPV Satellite Fees or PPV Cable Fees (as the case may be) of ***** per each complete and technically satisfactory viewing of a viewing segment of the Service as a PPV service, rather than the minimum PPV Satellite Fees or PPV Cable Fees specified in either (A) or (C) of this Section 5(c)(i). Furthermore, there shall be no PPV Satellite Fee or PPV Cable Fee (as the case may be) payable by Affiliate to Network for any PPV viewing of the Service by a subscriber who pays for such viewing by remitting a coupon provided by Affiliate or by an affiliate of Affiliate to subscribers that have not ordered a PPV movie or event in the six (6) months immediately preceding the issuance of such coupon. (ii) In lieu of the PPV Satellite Fees or PPV Cable Fees payable as calculated pursuant to Section 5(c)(i) above, for each PPV Satellite Subscriber or PPV Cable Subscriber (as the case may be) who receives and pays for one (1) complete and technically satisfactory viewing of a Special Event included in the Service, Affiliate will pay Network a PPV Satellite Fee or PPV Cable Fee (as the case may be) equal to the greater of (A) a minimum dollar amount to be set by Network or (B) ***** of the Gross Receipts paid by such PPV Satellite Subscriber or PPV Cable Subscriber (as the case may be). Notwithstanding the above, however, any and all PPV Satellite Fees or PPV Cable Fees paid by Affiliate to Network for any Special Event shall be subject in all respects to Section 13(g) of this Agreement (including the minimum dollar amount payable by Affiliate hereunder). (iii) The PPV Cable Fees and/or PPV Satellite Fees (as the case may be) payable by Affiliate to Network hereunder for exhibition to PPV Cable Subscribers and PPV Satellite Subscribers (as the case may be) during a Reporting Period (as defined below) during the Term shall be due and payable forty-five (45) days after the end of the calendar month which includes the last day of the Reporting Period. (The term "Reporting Period" shall mean the days from the end of each System's or Satellite 9 distributor's last monthly reporting period (which date may vary in each System or for each Satellite distributor from the 20th of the calendar month to the last day of the calendar month) to the end of the System's or Satellite distributor's then current monthly reporting period.) Affiliate shall have the right, however, to make credit adjustments to any month's payment in an amount equal to the portion of a previous month's PPV Cable Fees and/or PPV Satellite Fees which represents an overpayment. (d) Addressable Subscribers Volume Discount (i) On the first day of each calendar quarter of the Term, for orders taken during such calendar quarter of the Term, the Network Share with respect to PPV Cable Subscribers as determined above may be reduced below the Network Share otherwise stated above based upon the number of Addressable Subscribers in all of the Systems on the first day of such calendar quarter, as follows:
If the Number of Addressable Subscribers in Then, the Network Share for each Month of all Systems on the First Day of a Calendar such Calendar Quarter Hereunder Shall be Quarter is: Reduced By the Following Percentage of the Gross Receipts: 2,000,000 - 2,999,999 ***** 3,000,000 - 3,999,999 ***** 4,000,000 - 4,999,999 ***** 5,000,000 - 5,999,999 ***** 6,000,000 - 6,999,999 *****
(e) Each System shall have the right to expend funds for a market or community research survey regarding adult, and other types of, television programming. Any System which launches the Service after undertaking such a survey shall be fully reimbursed for the costs of such survey from the Gross Receipts received by the System from Subscription and Pay-Per-View sales of the Service, or portions thereof, before any such system incurs an obligation to pay Fees hereunder. Affiliate shall submit to Network complete documentation of the costs incurred by each such System for such survey. Network shall have the right (in accordance with Section 6(b)) to inspect and audit the books and records of any System which has claimed reimbursement of such survey costs, but only those books and records relating to such survey. (f) Any amounts payable by Network to Affiliate pursuant to Section 7 hereof shall be due and payable forty-five (45) days after the end of the pertinent calendar month during the Term. (g) Notwithstanding any other provision of this Agreement to the contrary, no Fees shall be payable for PPV Satellite Subscribers, PPV Cable Subscribers, Service Satellite Subscribers or Service Cable Subscribers if they are (i) employees of Affiliate or any affiliated party who are not charged for the Service; or (ii) public officials, administrative personnel or public buildings that are not charged for the Service; or (iii) subscribers who have not paid their cable television bill for a given 10 month and are subsequently disconnected; or (iv) subscribers who, in the good faith exercise of reasonable judgment by an employee either of Affiliate or of an affiliate of Affiliate, are excused from paying for the Service either because such subscriber claims that the Service was not properly ordered or because such subscriber claims that a complete and technically satisfactory viewing of the Service was not received. (h) Network shall have the right to renegotiate the PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees applicable to any Renewal Term upon written notice to Affiliate at least twelve (12) months prior to the end of the Initial Term or Renewal Term immediately preceding such Renewal Term. Any such revised Fees ("Renewal Fees") shall be effective upon the commencement of such Renewal Term. Said Renewal Fees shall be effective for the five (5) year Renewal Term. (i) The PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees and any Renewal Fees payable by Affiliate to Network hereunder, and any amounts payable by Network to Affiliate or any System pursuant to Sections 5 or 7 hereof, that are unpaid after they are due and payable shall accrue interest at one and one-half percent (1-1/2%) per month or the highest lawful rate, whichever is less, from the due date until payment is received by Network, a System or Affiliate, (as the case may be). Each delinquent party shall be liable to the owed party for all reasonable costs and expenses (including, without limitation, reasonable counsel fees, disbursements, and administrative or court costs) in connection with the collection of any overdue amounts. 6. REPORTS: (a) Affiliate shall send to Network, along with the payments described in Section 5 hereof, statements on a form mutually acceptable to Affiliate and Network. Each statement shall set forth information necessary to the calculation of the PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees paid. Each of the four categories of Fees shall be calculated, stated and reported separately. (i) The statement accompanying each month's Service Satellite Fees and Service Cable Fees shall include the number of Service Cable Subscribers and Service Satellite Subscribers as of the first day of the month and the number as of the last day of the month and the average thereof, and such other information as may be necessary for the calculation of the Service Satellite Fees and Service Cable Fees paid. (ii) The statement accompanying each month's PPV Satellite Fees and PPV Cable Fees shall include the number of PPV Satellite Subscribers and PPV Cable Subscribers; the Gross Receipts paid by such PPV Satellite Subscribers and PPV Cable Subscribers; the aggregate number of Addressable Subscribers as of the first day of that calendar quarter in all Systems; and such other information as may be necessary for the calculation of the PPV Satellite Fees and PPV Cable Fees paid. 11 (b) Network shall send to Affiliate, not later than forty-five (45) days after the end of each calendar month for which payment pursuant to Section 7 hereof is due, a statement on a form mutually acceptable to Affiliate and Network which sets forth all pertinent information to compute the amount due to Affiliate for such calendar month. Network shall deliver such statement to Affiliate prior to or along with the amount payable to Affiliate as provided in this Agreement. (c) Affiliate and Network each agree to keep and maintain accurate books and records of all matters directly relating to this Agreement in accordance with generally accepted accounting principles. During the Term and for one (1) year after the termination of this Agreement, such books and records of each party shall be available to the other party for inspection and audit, during normal business hours, at the inspecting party's expense, at the other party's offices upon reasonable notice to the other party. Each party's right to perform such audit shall be limited to once in any twelve (12) month period during the Term and shall be limited to an audit with respect to amounts to be paid in the then-current and prior calendar year only. If either party audits the other party's books hereunder, the inspecting party must make any claim against the other party within the earlier of, three (3) months after the inspecting party or the inspecting party's representative leaves the other party's offices, or twenty-four (24) months after the close of the earliest month which is the subject of such claim. If a claim is not made within such time, then the Fees and reports shall be deemed final and uncontestable, and the inspecting party will be deemed to have waived its right to collect any shortfalls from the other party for the period(s) audited. Each System which takes a credit against Gross Receipts for repayment of survey costs pursuant to Section 5(c) hereof must comply fully with Section 5(c) and this Section 6(c). 7. PROMOTION: (a) Network agrees to spend marketing monies within the Operating Areas of the Systems in an amount relative to all marketing monies spent by Network that is equal to or greater than the ratio of the number of Affiliate's cable television subscribers in the Systems to the total number of Network's cable television subscribers, including Affiliate's cable television subscribers. Specifically, but not in limitation of the foregoing, Network shall do the following: (i) No later than fifty (50) days prior to the first day of each calendar month, Network shall make available to Affiliate its monthly program schedule for such month and such trailers and other publicity materials as Network may have available to be used for advertising and publicity for such month. Affiliate may, at its sole expense, make copies of such materials and make such copies available solely for use by the Systems. (ii) Commencing upon launch of the Service on any System and/or the commencement of the sale of the Service to PPV Subscribers or Service Subscribers (as the case may be), and throughout the Term, Network shall contribute ***** per copy for any catalogue or guide utilized by the Systems or by any Satellite distributor which includes listings for the Service and at least one (1), 1/4 page promotion 12 for the Service, whether or not a subscriber receives such catalogue or guide without charge. Each System or distributor of the Service to Satellite Subscribers shall be entitled to claim the contribution provided for in this Section 7(a)(ii) by providing Network with appropriate documentation verifying the content and quantity of guides or catalogues for which such contribution is sought, no more often than once per month. Network shall remit such contributions to the appropriate Systems or Satellite distributor later than forty-five (45) days after receipt of such appropriate documentation. (b) Network may not, without Affiliate's prior written consent, undertake marketing tests or surveys, rating polls or any other research in the Systems in connection with the Service. With respect to any test, surveys or research which apply to a System or Systems for which Network seeks Affiliate's consent, Network shall notify Affiliate of the nature and scope of each such project and, upon Affiliate's written consent to such project (which consent may be withheld in Affiliate's sole and absolute discretion), Affiliate and/or the pertinent affiliate of Affiliate shall, to the extent permitted by applicable law and company policy, cooperate in such research by rendering such assistance as Network may reasonably request and which Affiliate or such affiliate of Affiliate can reasonably provide, the cost of which assistance shall be borne by Network. Network shall keep the results of all research relating to a System or Systems confidential under the provisions of Section 12 hereof and shall retain the results of such research in an aggregate form only, which does not identify any subscriber, cable television system or cable television system operator. (c) Affiliate acknowledges that the names and marks "SPICE" (and the names of certain programs which appear in the Service) are the exclusive property of Network and its suppliers and that Affiliate has not and will not acquire any proprietary rights therein by reason of this Agreement. Network shall have the right to approve any of Affiliate's mentioning or using of such names or marks and publicity about Network or the products or programming included in the Service. Uses of such names and marks in routine promotional materials or presentations such as program guides, program listings, bill stuffers and video promotions, including, but not limited to, barker channels and cross-channel promotions, shall be deemed approved unless Network specifically notifies Affiliate to the contrary prior to such use by Affiliate. Affiliate shall, however, comply with all of Network's clear, unambiguous and reasonable advance written instructions regarding the content or use of advertising or promotional materials provided to Affiliate by Network prior to Affiliate's use of such materials; provided, however, that, Affiliate reserves the right in its sole and absolute discretion to use or decline to use any advertising or promotional material provided by Network. (d) Network agrees that in the event Network does any direct on-air marketing and sale of products or services, including, but not limited to, sales through "800", "900" or "976" telephone services, Network will: (i) provide Affiliate with lists of the names of respondents from within the zip code areas of the Systems who respond to such direct on-air marketing and sales, for use by Affiliate or the Systems, and 13 (ii) Network shall *****. (e) Network and Affiliate hereby acknowledge that (i) their interests are often in direct conflict, (ii) their relationship is often adversarial, and (iii) Network could cause Affiliate significant harm by the nature of Network's communications to Affiliate's subscribers or to the governmental entities or to franchise or licensing authorities whose opinions and actions could adversely affect cable television systems affiliated with Affiliate. Therefore, Network shall not initiate communications with any subscribers or franchise or licensing authorities or governmental entities in the Operating Area of any cable television system which meets the System Qualifications of Exhibit A without Affiliate's prior written approval, and under no circumstances shall Network engage in any communications with any subscribers or franchise or licensing authority or governmental entity in the Operating Area of any of such systems which would, or could, adversely interfere with the relationship between Affiliate or any affiliate of Affiliate, and subscribers, or the relationship between Affiliate or any affiliate of Affiliate and any governmental entity or community in any such Operating Area. This provision shall not apply, (x) to any national advertising, (y) to any proceeding before any judicial body, or (z) to any communications with Congress or with any other branch or agency of the federal government. This Section 7(e) shall survive the expiration or termination of this Agreement (regardless of the reason for such expiration or termination) for a period of two (2) years. (f) Network may not promote any other cable programming service which is affiliated with Network on the Service without the prior written consent of Affiliate. (g) Network shall not provide to any third party any telephone number of, or any information about (whether personally identifiable or otherwise), any subscriber to any cable television system which meets the System Qualifications of Exhibit A. 8. WARRANTIES AND INDEMNITIES: (a) Network represents and warrants to Affiliate that (i) Network is a corporation duly organized and validly existing under the laws of the State of New York; (ii) Network has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) Network is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Network has the authority to do so; (v) Network is in compliance with all laws, rules, regulations, and court and administrative decrees to which it is subject including, without limitation, all applicable rules and regulations of the Federal Communications Commission (the "FCC"); (vi) Network has, or will have acquired at the pertinent time all or part of the Service is made available to Affiliate, good title to, and/or each and every property right (whether relative to tangible or intangible property), or license, usage or other right necessary or appropriate whatsoever to effectuate the acts or performances 14 contemplated by, or satisfy the obligations imposed on it pursuant to, this Agreement, including all permits, rights, licenses and approvals necessary, required or appropriate for any and all performances through to the premises and to the listeners frequenting the premises of Service Cable Subscribers, Service Satellite Subscribers, PPV Cable Subscribers and PPV Satellite Subscribers; (vii) neither the Service, any program related thereto, or any component thereof is subject to, or the subject of, any lien, encumbrance, charge, lis pendens, administrative proceeding, governmental investigation, or litigation pending or threatened; and (viii) the obligations created by this Agreement, insofar as they purport to be binding on Network, constitute legal, valid and binding obligations of Network enforceable in accordance with their terms. (b) Affiliate represents and warrants to Network that (i) Affiliate is a corporation duly organized and validly existing under the laws of the State of Delaware; (ii) Affiliate has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) Affiliate is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; and (iv) the individual executing this Agreement on behalf of Affiliate has the authority to do so. (c) Network represents and warrants to Affiliate that neither the Service nor any material provided to Affiliate by Network in connection therewith including, without limitation, any advertising or promotional materials, will contain any material which will libel, slander or defame any person, and the Service and such additional materials provided to Affiliate will not, when exhibited, transmitted or otherwise exploited in accordance herewith, violate, infringe upon or give rise to any adverse claim with respect to any contract right, common law right or any other right of any party (including, without limitation, any copyright, trademark, literary or dramatic right, music synchronization right, right of privacy or publicity or music performance right) or violate any law, or (when exhibited by Affiliate as contemplated hereby) cause Affiliate or any affiliate of Affiliate to violate any law. (d) Network represents, covenants, and warrants that the Service complies, and will continue to comply, in all respects with the commercial matter limitations of the Children's Television Act of 1990, Public Law 101-437 (October 18, 1990) and the regulations of the FCC promulgated thereunder as the same may apply to cable television systems and cable operators, including 47 C.F.R. ss. 76.225, 76.305, and as the same may from time-to-time be amended ("Children's Television Regulations"); provided further, that Network represents, covenants and warrants that it will provide to Affiliate all records demonstrating such compliance under the Children's Television Regulations as are necessary for Affiliate to timely demonstrate its compliance as a cable operator with the commercial matter limitations and record keeping requirements of the Children's Television Regulations. Network further represents, covenants and warrants that the Service complies and will continue to comply, with all origination cablecasting regulations of the FCC, including but not limited to 47 C.F.R. ss.ss. 76.205 - 76.221 (political equal time, personal attack, lotteries and sponsorship identification), as the same may from time to time be amended ("Origination Cablecasting Requirements"), and that Network shall provide Affiliate all necessary documentation required thereunder for 15 Affiliate to timely meet its documentation and public file requirements under the Origination Cablecasting Requirements. In the event that any other programming offered by the Service shall be among the kind of programming which is regulated by federal, state or local law, as the same may apply to pay or cable television systems and operators, then Network shall provide to Affiliate all statements, records or other documents reasonably necessary for Affiliate to demonstrate timely compliance as an operator or distributor with such laws and regulations. (e) Affiliate and Network shall each indemnify, defend and forever hold harmless the other, the other's affiliated companies and each of the other's and the other's affiliated companies' respective officers, directors, employees, partners and agents against and from any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) arising out of any breach by it of any term of this Agreement or any warranty, covenant or representation. (f) Without limiting the provisions of Section 8(e) or Section 8(g) hereof, Network will indemnify, defend and forever hold Affiliate and Affiliate's affiliated companies, and each of Affiliate's and Affiliate's affiliated companies' respective officers, directors, employees, partners and agents, harmless from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) arising out of the content of the Service or the use and delivery of the Service under this Agreement (including, but not limited to, sponsorship, promotional and advertising spots, any background music and anything else inserted by any party other than Affiliate), including, without limitation, any losses, liabilities, claims, costs, damages and expenses based upon any lien, encumbrance, charge, lis pendens, administrative proceeding, government investigation or litigation relating to the Service, any program included therein or any component thereof, or based upon alleged or proven libel, slander, defamation, invasion of the right of privacy or the right of publicity, or violation or infringement of copyright (including music performance rights for any and all performances through to subscribers), literary or music synchronization rights, obscenity or any other form or forms of speech (whether or not protected by the Constitution of the United States or any State) or otherwise arising out of the content of the Service. (g) Without limiting the provisions of Section 8(e) or Section 8(f) hereof, Network shall indemnify and hold harmless Affiliate, and Affiliate's affiliated companies, and each of Affiliate' and Affiliate's affiliated companies' respective officers, directors, employees, partners and agents, from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements, court or administrative costs) or any other losses or liabilities of whatever nature, arising from any violation by Network of the Origination Cablecasting Requirements, including required documentation and public file requirements, or of the Children's Television Regulations, either with respect to the Service or to any of the compliance demonstration or record keeping requirements of the Children's Television Regulations. 16 (h) In connection with any indemnification provided for in this Section 8, each party shall so indemnify the other only if such other party claiming indemnity shall give the indemnifying party prompt notice of any claim or litigation to which its indemnity applies; it being agreed that the indemnifying party shall have the right to assume the full defense of any or all negotiations, claims or litigation to which its indemnity applies. The indemnified party will cooperate fully (at the cost of the indemnifying party) with the indemnifying party in such defense and in the settlement of such claim or litigation, and the indemnified party shall make no compromise or settlement of any such claim without the prior written consent of the indemnifying party. The settlement of any claim or action by the indemnified party without the prior written consent of the indemnifying party shall release the indemnifying party from its obligations hereunder with respect to such claim or action so settled. (i) Network represents, warrants and covenants that it has obtained general liability insurance covering the Service and all elements thereof from a nationally recognized insurance carrier and in accordance with industry standards; that such insurance shall remain in full force and effect throughout the Term; that Affiliate shall be named as an additional insured on such policy; and Network that will provide Affiliate with documentation to such effect upon the execution hereof. (j) The representations, warranties and indemnities contained in this Section 8 shall continue throughout the Term and the indemnities shall survive the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 9. EARLY TERMINATION RIGHTS: (a) In addition to Network's other rights at law or in equity or pursuant to other provisions of this Agreement, Network may, by so notifying Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of this Agreement, provided, however, that if such breach is of the type that is curable, then Network shall not exercise its termination or other rights at law or in equity hereunder unless Network has, by so notifying Affiliate, given Affiliate at least thirty (30) days to fully cure such material breach and to demonstrate to Network that such material breach has been cured, and provided further, that if such breach is confined to a System or to a limited number of Systems, Network shall have the right to terminate this Agreement only as to such System or Systems; or (ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has sought relief under any law related to Affiliate's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Affiliate, or any relief under any such law has been sought by any creditor(s) of Affiliate, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought. (b) In addition to Affiliate's other rights at law or in equity or pursuant to other provisions of this Agreement, and in addition to any other right to terminate provided hereunder, Affiliate may, by so notifying Network, terminate this Agreement: (i) if Network is in material breach of this Agreement, provided, however, if 17 such breach is of the type that is curable, then Affiliate shall not exercise its termination or other rights at law or in equity hereunder unless Affiliate has, by so notifying Network, given Network at least thirty (30) days from the time such notice is sent, to fully cure such material breach and to demonstrate to Affiliate that such material breach has been cured; or (ii) if Network has filed a petition in bankruptcy, is insolvent or has sought relief under any law related to Network's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Network, or any relief under any such law has been sought by any creditor(s) of Network, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) on at least fifteen (15) days' notice in the event of any Force Majeure provided for in Section 10 of this Agreement which continues for a continuous period of thirty (30) days. 10. FORCE MAJEURE: Except as herein provided to the contrary, neither Affiliate nor Network shall have any rights against the other party hereto for the non-operation of facilities or the non-furnishing of the Service if such non-operation or non-furnishing is due to an act of God; inevitable accident; fire; lockout; strike, or other labor dispute; riot or civil commotion; flood; hurricane; tornado; earthquake; war; act of government or governmental instrumentality (whether federal, state or local); failure of performance by a common carrier; failure in whole or in part of technical facilities; or other cause (financial inability excepted) beyond such party's reasonable control. With respect to monthly subscriptions to the Service, credit will be given to Affiliate, however, on that portion of the Service which is affected by any interruption during any month equal to the product of (x) the Fees which would be due for such month, assuming no interruption of Service during such month, multiplied by (y) a fraction, the numerator of which is the total number of hours of interruption of the Service during such month and the denominator of which is the total number of hours of the Service which would have been provided during such month absent such interruption (s), provided, however, that such credit shall be given to Affiliate only if Affiliate shall pass on such credit to its Service Subscribers. 11. NOTICES: Any notice or report given under this Agreement shall be in writing, shall be sent postage prepaid by registered or certified mail return receipt requested or by hand or messenger delivery, or by Federal Express or similar overnight delivery service, or by facsimile transmission, to the other party, at the following address (unless either party at any time or times designates another address for itself by notifying the other party thereof by certified mail, in which case all notices to such party thereafter shall be given at its most recently so designated address): To Network: 532 Broadway New York, New York 10012 Attention: President 18 To Affiliate: Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111 Attention: President With copies to: - Vice President, Programming - Vice President, Pay Per View - Corporate Counsel, Business Affairs Notice or report given by personal delivery shall be deemed given on delivery. Notice or report given by mail shall be deemed given on the earlier to occur of actual receipt thereof or on the fifth day following mailing thereof in accordance with the notice requirements of this Section 11. Notice or report given by Federal Express or similar overnight delivery service shall be deemed given on the next business day following delivery of the notice or report to such service with instructions for overnight delivery. Notice or report given by facsimile transmission shall be deemed given on the day of transmission if a business day, or on the next business day after the day of transmission if not transmitted on a business day. 12. CONFIDENTIALITY: PRESS RELEASES: Neither Affiliate nor Network shall disclose (whether orally or in writing, or by press release or otherwise) to any third party (other than each party's respective officers, directors and employees, in their capacity as such, and their respective auditors or attorneys, provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such officers, directors or employees, auditors or attorneys), any information with respect to the terms and provisions of this Agreement and neither party hereto shall disclose any information obtained in any inspection and/or audit of the other party's books and records, except: (i) to the extent necessary (but redacted to the greatest extent possible) to comply with law or the valid order of an administrative agency or a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other as promptly as practicable (and, if possible, prior to making such disclosure) and shall seek confidential treatment of such information; (ii) as part of its normal reporting or review procedure to its parent company, its auditors or its attorneys, provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such parent company, its auditors or attorneys; (iii) in order to enforce its rights or perform its obligations pursuant to this Agreement; and (iv) if mutually agreed by Affiliate and Network, in advance of such disclosure, in writing. In addition, Network shall not use or disclose information (whether personally identifiable information or not) to any third party regarding Affiliate's or any affiliate of Affiliate's cable television subscribers or Satellite subscribers and shall not engage in any direct mailing or telephone solicitation, for any purpose, to cable television subscribers or Satellite subscribers of Affiliate or any affiliate of Affiliate. This Section 12 shall survive the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 19 13. MISCELLANEOUS: (a) Assignment; Binding Effect; Reorganization. This Agreement, including both its obligations and benefits, shall redound to the benefit of, and be binding on the respective transferees and successors of, the parties, except that neither this Agreement nor either party's rights or obligations hereunder shall be assigned or transferred by either party without the prior written consent of the other party; provided, however, no consent shall be necessary in the event of an assignment to a successor entity resulting from a merger, acquisition or consolidation by either party or assignment to an entity under common control, controlled by or in control of either party. Notwithstanding the foregoing, Network shall give Affiliate thirty (30) days' prior written notice of a change in the control or ownership of the Service or Network. In such event, this Agreement may, in the sole discretion of Affiliate, be terminated. For purposes of this paragraph, the term "control" means the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. (b) Service Combinations. In the event that the Service is merged with, or Network acquires control of, or Network is acquired by or merges with, or control of the Network is acquired by, or the Service is acquired by, any other programming service, if Affiliate has (at the time of such merger or acquisition) an affiliation agreement with any such other service or entity, Affiliate shall have the option to choose to continue carriage of the Service and of such other service, as the case may be, under either this Agreement or under such other affiliation agreement. If Affiliate does not have an affiliation agreement with such other service or entity, Affiliate shall have the option to elect to have this Agreement continue to apply to the Service after such merger or acquisition, or to any surviving service after such merger or acquisition. (c) Taxes. Affiliate shall be responsible to pay all income, sales, use and other taxes arising out of Affiliate's exhibition of the Service by the Systems, Affiliate's storage, possession or use of any advertising or promotional materials and/or any personal property or other taxes imposed, assessed or levied against Affiliate by any governmental authority. Network shall be responsible to pay all income, sales, use and other taxes arising out of its provision of the Service to Affiliate and the Systems, Network's storage, possession or use of its advertising or promotional materials and/or any personal property or other taxes imposed, assessed or levied by any governmental authority. (d) Entire Agreement; Amendments; Waivers. This Agreement contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof. This Agreement may not be modified except in writing executed by both parties hereto. Any waiver of any provision of, or right included in, this Agreement must be in writing and signed by the party whose rights are being waived and no waiver by either Affiliate or Network of any breach of any provision hereof shall be or be deemed to be a waiver of any preceding or subsequent breach of the same or any other provision of this Agreement. 20 (e) Governing Law. The obligations of Affiliate and Network under this Agreement are subject to all applicable federal, state and local laws, rules and regulations (including but not limited to the Communications Act of 1934, as amended from time to time, and the rules and regulations of the FCC promulgated thereunder) and this Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York (except with respect to issues regarding perpetuity, which shall be governed by the laws of the State of Colorado), without regard to choice of law rules. (f) Relationship. Neither Affiliate nor Network shall be, or hold itself out as, the agent of the other under this Agreement. No subscriber of Affiliate shall be deemed to have any privity of contract or direct contractual or other relationship with Network by virtue of this Agreement or Network's delivery of the Service to Affiliate hereunder. Likewise, no supplier of advertising or programming or anything else included in the Service by Network shall be deemed to have any privity of contract or direct contractual or other relationship with Affiliate by virtue of this Agreement or Affiliate's carriage of the Service hereunder. Nothing contained herein shall be deemed to create, and the parties do not intend to create, any relationship of partners, joint venturers or agents, as between Affiliate and Network, and neither party is authorized to or shall act toward third parties or the public in any manner which would indicate any such relationship with the other. Network disclaims any present or future right, interest or estate in or to the transmission facilities of Affiliate or the parent, subsidiaries, partnerships or joint venturers controlling the Systems on which the Service is transmitted, such disclaimer being to acknowledge that neither Affiliate nor the transmission facilities of the Systems (nor the owners thereof) are common carriers. (g) *****. Network agrees that ***** of this Agreement, signed by a duly authorized officer of Network, stating that Network has satisfied its obligations under this section. (h) Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein; provided however, that both parties shall negotiate in good faith with respect to an equitable modification of the provision, or application thereof, held to be invalid and all provisions logically related thereto. Notwithstanding the foregoing, in the event volume discounts are declared null and void, or otherwise curtailed or restricted by legislative enactment, administrative ruling or court order or decree, and Affiliate is required by Network to pay a higher net effective rate as a result, or if any other legislation is enacted, or administrative ruling, or court decree or order, issued which materially deprives Affiliate of the overall net economic benefits of this Agreement with respect to the cable exhibition of the Service, and if the parties fail to reach an agreement after good faith negotiation, Affiliate shall have the right to terminate this Agreement upon thirty (30) days' prior written notice to Network. 21 (i) No Inference Against Author. Network and Affiliate each acknowledge that this Agreement was fully negotiated by the parties and, therefore, no provision of this Agreement shall be interpreted against any party because such party or its legal representative drafted such provision. (j) No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. (k) Headings. The titles and headings of the sections in this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. AFFILIATE: NETWORK: SATELLITE SERVICES, INC. SPICE, INC., a Delaware corporation a New York corporation By: /s/ Jedd Palmer By: [SIGNATURE ILLEGIBLE] Jedd Palmer, Name: _______________________ Vice President, Title: _______________________ Programming 22 SCHEDULE 1 To Affiliation Agreement By and Between Spice, Inc. and Satellite Services, Inc. Dated November 1, 1992 SYSTEMS [TO BE PROVIDED] 23 EXHIBIT A To Affiliation Agreement By and Between Spice, Inc. and Satellite Services, Inc. Dated November 1, 1992 System Qualifications I. Affiliate represents and warrants the following regarding each System listed on Schedule I hereof: 1. that (a) either Tele-Communications, Inc. or Liberty Media Corporation (Tele-Communications, Inc. and Liberty Media Corporation shall be hereinafter referred to as "TCI"; any reference to TCI herein shall be deemed to be a reference to either Tele-Communications, Inc. or Liberty Media Corporation, or both, as is necessary to qualify the greatest number of television distribution facilities hereunder) or its agent owns, directly or indirectly, at least a ***** interest in the general manager of the System pursuant to a valid written agreement in full force and effect; or (b) TCI or its agent owns, directly or indirectly, a ***** interest in such System or owns an interest or obligation by which TCI, directly or indirectly, owns a right (whether conditional or not) to convert into or acquire, directly or indirectly, an interest equal to at least the required interest. An "indirect" ownership is an interest resulting from ownership through any series of ownership interests, including corporations, partnerships, joint ventures or other forms of business organizations; an indirect interest shall be quantified in amount by a series of percentage multiplications commencing with TCI's direct interest and multiplying that by the next most proximate percentage interest and, then, multiplying in turn each succeeding ownership interest in the order of their progression away from TCI by the result of the immediately preceding multiplication until the most distant percentage interest is multiplied; 2. that Affiliate or an agent has been authorized, pursuant to a valid written agreement in full force and effect, to make and execute decisions on behalf of each such System with respect to the Service, including but not limited to billing and collection of fees, and Affiliate continues throughout the Term to exercise such authority with respect to matters affecting the distribution of the Service by such System; 3. that either a franchise or license is not required or a valid franchise or license is in effect through the Term of this Agreement or the franchisee or licensee has held a valid cable television franchise or license and continues to operate in the franchise or license area under a claim of right or is otherwise lawfully operating or franchisee or licensee has held a valid cable franchise or license and is continuing to operate while diligently pursuing, in good faith, its available judicial remedies. For the above purposes, in the event a franchise or license expires before the end of the Term, such franchise or license shall be deemed valid for so long as franchisee or 24 licensee is negotiating in good faith with the franchising or licensing authority for a franchise or license renewal; 4. that, except as permitted under this Agreement, Affiliate is not subdistributing and will not in the future subdistribute, nor does it claim to be authorized to subdistribute, the Service through any cable television system which does not satisfy the requirements set forth above. II. In the event TCI's direct or indirect equity interest in a System or in the entity managing such System decreases because of a refinancing of the entity (other than as described in Paragraph III below) which owns or manages such System, and provided TCI's interest does not decrease to zero, such System shall continue to qualify under Paragraph I hereof, provided however, TCI's interest in such System shall increase to the level required under Paragraph I hereof within eighteen (18) months of the decrease. III. In the event Affiliate, or any of the entities which owns or manages Systems which qualify hereunder, effects a corporate separation, reorganization or restructuring (including, but not limited to, by a distribution of stock, or other assets or rights, to its shareholders, partners or joint venturers), the Systems of the entity resulting from such transaction (including all interim and supporting entities) and/or all of such resulting entities, in the aggregate, will continue to qualify under Paragraph I hereof, so as to continue to qualify to distribute the Service under the terms and conditions hereof, as if such separation, reorganization or other restructuring had not occurred. 25 EXHIBIT B To Affiliation Agreement By and Between Spice, Inc. and Satellite Services, Inc. Dated November 1, 1992 PROGRAM SCHEDULE 26 EXHIBIT C To Affiliation Agreement By and Between Spice, Inc. and Satellite Services, Inc. Dated November 1,1992 TECHNICAL SPECIFICATIONS GENERAL 1.1 All specifications are to be adhered to anywhere in the contiguous 48 United States. This specification uses a 5 meter reference antenna which is peaked at the center of the orbital box. It is the responsibility of the Network to provide center of the box times on a monthly basis. 1.2 The specification is divided into space segment and total system. Total system is defined as the additional noise contribution by the originating studio and transport facility to the input to the uplink. 1.3 System availability based on total system 99.998% per year calculated on a monthly basis excluding sun outage. The system shall be declared unavailable under the following: A. Loss of video B. Loss of audio C. Video signal to noise <45db D. Audio signal to noise <.45db 1.4 This specification is for analog service. A specification for digital system will be added at a later date when equipment is developed. VIDEO SPECIFICATIONS Parameter Space Segment Total System 2.1 Frequency response: .25db box .5db box 2.2 Signal to Noise Ratio: 52db 50.3db Definition: lv p/p vid to RMS noise, 4.2 Mhz weighted. 2.3 Chrominance/luminance delay: <20ns <50ns 2.4 2T K Factor: <2% <3% 2.5 Differential Gain: <.2db <.45db 27 VIDEO SPECIFICATIONS Parameter Space Segment Total System 2.6 Differential Phase: +/-1(degree) <+/-2(degree) 2.7 Insertion gain/loss: <2 IRE <4 IRE 2.8 Video formats, waveforms, timing shall adhere to latest FCC requirements. All other parameters not specified shall conform to NTSC Engineering Report #7. AUDIO SPECIFICATIONS Parameter Space Segment Total System 3.1 Frequency response: <.5db box <1db box 3.2 Video/Audio Sync: <10 m/sec <20 m/sec 3.3 Signal to Noise Ratio: >56db >55db Definition: RMS test tone to RMS noise with 15Khz weighting. This parameter to be measured with program video or full field color bar test pattern. 3.4 Distortion: <.5% at TT <.7% at TT At 10db above TT distortion shall not exceed 3%. Distortion shall be measured at 1004Hz. 3.5 Wow and Flutter: <.1%rms 3.6 Crosstalk: >65db >65db 3.7 Insertion gain/loss: <.5db <1db 28 EX-10.1.2 3 d65760_ex1012.txt AMENDMENT NO. 1 TO SPICE AFFILIATION AGREEMENT Exhibit 10.1.2 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. AMENDMENT NO. 1 TO SPICE AFFILIATION AGREEMENT THIS AMENDMENT, made as of Sept. 29, 1994, is by and between Spice, Inc., a New York corporation ("Network"), and Satellite Services, Inc., a Delaware corporation ("Affiliate"), and, with the exception of paragraph 13 hereto, amends that certain Affiliation Agreement dated as of November 1, 1992 (the "Agreement") between Network and Affiliate. All capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto agree as follows: 1. Section 4(a) is hereby amended to read in its entirety as follows: "(a) During the Term, Network shall, at its own expense, deliver a signal of the Service to the earth station of each System, to each Satellite Subscriber and to any other location in the continental United States designated by Affiliate by transmitting such signal via a domestic satellite commonly used for transmission of domestic cable television programming and shall, at its own expense, fully encode the satellite signal of the Service utilizing scrambling technology commonly used in the domestic cable television industry. Except as otherwise provided in this Section 4(a), Affiliate shall, at its own expense, furnish an earth station and all other facilities necessary for the receipt of such satellite transmission and the delivery of such signal to the Service Cable Subscribers and PPV Cable Subscribers (each as defined below). In the event Network either (i) changes the satellite to which the Service is transmitted, to a satellite not susceptible to viewing by a System's or Systems' then-existing earth station equipment, (ii) changes the technology used by Network to encrypt the Service to a technology not compatible with a System's or Systems' then existing descrambling equipment, or (iii) compresses, digitizes, or otherwise modifies the signal of the Service in such manner that it cannot be received or utilized by a System or Systems, then Affiliate shall have the right to delete from Schedule 1 of this Agreement, immediately, any such System or Systems, and to discontinue carriage of the Service on any such System or Systems, provided that this termination right shall not apply to any System or Systems if, (1) Network agrees, unconditionally, to reimburse such System or Systems, as the case may be, (A) for the cost of acquiring and installing new equipment necessary to descramble, receive, and or utilize the signal of the Service, and/or (B) for the cost of acquiring and installing equipment reasonably necessary for such System or Systems to receive the Service from such new satellite; (2) physical space exists at the then-existing headend or earth station site to accommodate the necessary equipment; and (3) current zoning and other restrictions permit such additional equipment." 2. Sections 5(a)(i) through (iv) are amended to read in their entirety as follows: "(i) "PPV Satellite Subscriber" means someone who is both a Satellite Subscriber and who utilizes the Service as a PPV service by making a purchase through Affiliate or an affiliate of Affiliate. Except for purposes of Section 5(c) hereof, PPV Satellite Subscribers shall include Combination PPV Satellite Subscribers. "PPV Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to PPV Satellite Subscribers. (ii) "Service Satellite Subscriber" means someone who is both a Satellite Subscriber and a Service Subscriber (as defined below) who utilizes the Service as a Subscription service. Except for purposes of Section 5(b) hereof, Service Satellite Subscribers shall include Combination Service Satellite Subscribers. "Service Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to Service Satellite Subscribers. (iii) "PPV Cable Subscriber" means someone who is provided the Service by Affiliate or an affiliate of Affiliate hereunder, who utilizes the Service as a PPV service and who receives the Service by means other than Satellite. Except for purposes of Section 5(c) hereof, PPV Cable Subscribers shall include Combination PPV Cable Subscribers. "PV Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to PPV Cable Subscribers. (iv) "Service Cable Subscriber" means someone who both receives the Service by means other than Satellite and is a Service Subscriber and who utilizes the Service as a Subscription service. Except for purposes of Section 5(b) hereof, Service Cable Subscribers shall include Combination Service Cable Subscribers. "Service Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to Service Cable Subscribers." 3. Section 5(a)(x) of the Agreement is hereby amended to read in its entirety as follows: (x) "Addressable Subscriber" means a cable television system subscriber whose television set is connected (or who has been issued equipment by the operator of the cable television system to permit a connection) on the subscriber's premises, or by interdiction, to equipment operated by Affiliate, or an affiliate of Affiliate, that allows the channel on which the Service is received to be turned on or off (i.e., "authorized" or "deauthorized") from a central location, controlled by the operator of the pertinent System or such operator's agent or designee." 4. Attached hereto is Exhibit B to the Agreement, and any and all references in the Agreement to Exhibit B is hereby deemed to be a reference to Exhibit B attached hereto. 5. Sections 5(b)(i) through (iii) of the Agreement are hereby amended to read in their entirety as follows: (b) Subscription 2 (i) For each calendar month during the Term, Affiliate will pay Network as a Service Cable Fee for each Service Cable Subscriber an amount equal to the greater of (A) *****, or (B) ***** of the Gross Receipts attributable to such Service Cable Subscriber. When the Service is sold to a Service Cable Subscriber in combination with other services (excluding a package which contains the cable television service known as "Spice 2" (the "Multiplex Service")) for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts attributable to a Service Cable Subscriber for the Service shall be equal to the total charge for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of which is ***** and the denominator of which is the numerator plus the aggregate of the net effective rates per subscriber charged to Affiliate by each of the other service providers of the services included in the tier or package of a la carte or other services; provided, however, that the amounts charged to Affiliate for each of the services in the package or tier shall not be disclosed by Affiliate to Network but, at Network's request, in order to assure Network of compliance with this provision, Affiliate shall make such charges and any pertinent calculations available to a representative of KPMG Peat Marwick (which representative is neither Network's nor Affiliate's) on a confidential basis, at Network's cost. This provision shall survive termination or expiration of this Agreement. Affiliate shall pay a Service Satellite Fee to Network in the following amounts for each Service Satellite Subscriber (based on the subscription term purchased by such Satellite Subscriber), regardless of whether such Service Satellite Subscriber purchases the Service alone as an a la carte service or as part of a tier or package of a la carte or other services and regardless of the Gross Receipts attributable thereto: Service Satellite Fee Per Service Satellite Service Term Subscriber ------------ --------------------- 1 Month ***** 3 Months ***** 6 Months ***** 1 Year ***** Notwithstanding the foregoing, if the Service is sold to a Service Cable Subscriber in combination with the Multiplex Service (a "Combination Service Cable Subscriber"), Affiliate will pay Network as a Service Cable Fee for each Combination Service Cable Subscriber an amount equal to the greater of (A) *****, or (B) ***** of the Gross Receipts attributable to such Combination Service Cable Subscriber for purchase of both the Service and the Multiplex Service. If the Service and the Multiplex Service are sold in combination with other services for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts attributable to a Combination Service Cable Subscriber for the Service and the Multiplex Service shall be equal to the total charge for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of which is $2.19 and the denominator of which is the numerator plus the aggregate of the net effective rates per subscriber charged to Affiliate by each of the other service providers of the services included in the tier or package of a la carte or other services; provided, however, that the amounts charged to Affiliate for each of the services in the package or tier shall not be disclosed by Affiliate to Network but, 3 at Network's request, in order to assure Network of compliance with this provision, Affiliate shall make such charges and any pertinent calculations available to a representative of KPMG Peat Marwick (which representative is neither Network's nor Affiliate's) on a confidential basis, at Network's cost. This provision shall survive termination or expiration of this Agreement. If the Service is sold to a Service Satellite Subscriber in combination with the Multiplex Service (a "Combination Service Satellite Subscriber"), the Service Satellite Fees for both the Service and the Multiplex Service shall equal the following amounts for each Combination Service Satellite Subscriber, based on the subscription term purchased by such Combination Service Satellite Subscriber: Service Subscription Fee Per Combination Service Service Term Satellite Subscriber ------------ --------------------------- 1 Month ***** 3 Months ***** 6 Months ***** 1 Year ***** (ii) The number of Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) for whom Affiliate shall pay each month shall be the average of (A) the number of Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) on the first day of the month, and (B) the number of Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) on the last day of the month. Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) shall include each occupied dwelling (whether in a single family or multi-unit building), hotel or motel guest room, drilling rig, nursing home room, dormitory room or other location in which the Service (and, if applicable, the Multiplex Service) is received. If Affiliate provides the Service (and, if applicable, the Multiplex Service) to multiple dwelling complexes, including, but not limited to, apartments, hotels and motels, on a bulk-rate basis, the number of Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate charged a complex for the Service (and, if applicable, the Multiplex Service) divided by the standard monthly retail rate charged non-bulk rate Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers (as the case may be) for the Service (and, if applicable, the Multiplex Service) in the applicable System or by the pertinent Satellite distributor, as the case may be. The monthly number of Service Satellite Subscribers, Combination Service Satellite Subscribers, Service Cable Subscribers, or Combination Service Cable Subscribers shall each be calculated, stated and reported separately. (iii) The Service Cable Fees and Service Satellite Fees payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the 4 calendar month to which they relate. In the event that the Service is sold to Service Satellite Subscribers or Combination Service Satellite Subscribers for a term greater than one month, the Service Satellite Fees payable with respect to such Service Satellite Subscriber or Combination Service Satellite Subscriber shall be due and payable forty-five (45) days after the end of the calendar month in which delivery of the Service to such Service Satellite Subscriber commences; provided that if Affiliate does not receive full payment for a term (or gives a credit), Affiliate shall receive a like credit against the Service Satellite Fees. 6. Section 5(c)(i) of the Agreement is hereby amended to read in its entirety as follows: "(c) PPV (i) For each customer of Affiliate who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Cable Subscriber, Affiliate will pay Network a PPV Cable Fee in an amount equal to the greater of, (A) (i) ***** for orders taken from the date of full execution hereof through October 31, 1995, (ii) ***** for orders taken from November 1, 1995 through October 31, 1998 (iii) ***** for orders taken from November 1, 1998 through October 31, 2001 and (iv) ***** for orders from November 1, 2001 through the end of the Initial Term, or (B) the Network Share of the Gross Receipts paid by such PPV Cable Subscriber. With respect to PPV Cable Subscribers, "Network Share" shall equal the following percentage of the Gross Receipts paid by each PPV Cable Subscriber: ***** from the date of execution of this Agreement by both parties hereof through October 31, 1995 and ***** from November 1, 1995 through the end of the Initial Term. For each customer of Affiliate who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Satellite Subscriber (provided that it is technically feasible to sell the Service on a PPV basis to PPV Satellite Subscribers), Affiliate will pay Network a PPV Satellite Fee in an amount equal to the greater of (C) (i) ***** for orders taken from the date of full execution hereof through October 31, 1995, (ii) ***** for orders taken from November 1, 1995 through October 31, 1998, (iii) ***** for orders taken from November 1, 1998 through October 31, 2001, and (iv) ***** for orders taken from November 1, 2001 through the end of the Initial Term, or (D) the Network Share of the Gross Receipts paid by such PPV Satellite Subscriber. With respect to PPV Satellite Subscribers, the Network Share of the Gross Receipts shall be *****. Notwithstanding the foregoing, if the Service is sold to a PPV Cable Subscriber in combination with the Multiplex Service as a PPV service (a "Combination PPV Cable Subscriber"), Affiliate will pay Network a PPV Cable Fee for each Combination PPV Cable Subscriber who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of each of the Service and the Multiplex Service in an amount equal to the greater of, (A) (i) ***** for orders taken from the date of full execution hereof through October 31, 1995, (ii) ***** for orders taken from November 1, 1995 through October 31, 1998, (iii) ***** for orders taken from November 1, 1998 through October 31, 2001 and (iv) ***** for orders from November 1, 2001 through the end of the Initial Term, or (B) the Network Share of the Gross Receipts paid by such PPV Cable Subscriber. With respect to Combination PPV Cable Subscribers, "Network Share" shall equal ***** of the Gross Receipts paid by each Combination PPV Cable Subscriber. If the Service is sold to a PPV Satellite Subscriber in combination with the Multiplex Service as a PPV 5 service (provided that it is technically feasible to sell the Service on a PPV basis to PPV Satellite Subscribers) (a "Combination Satellite PPV Subscriber"), Affiliate will pay Network a PPV Satellite Fee for each PPV Satellite Subscriber who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of each of the Service and the Multiplex Service, Affiliate will pay Network a PPV Satellite Fee in an amount equal to the greater of (C) (i) ***** for orders taken from the date of full execution hereof through October 31, 1995, (ii) ***** for orders taken from November 1, 1995 through October 31, 1998, (iii) ***** for orders taken from November 1, 1998 through October 31, 2001, and (iv) ***** for orders taken from November 1, 2001 through the end of the Initial Term, or (D) the Network Share of the Gross Receipts paid by such Combination PPV Satellite Subscriber. With respect to Combination PPV Satellite Subscribers, the Network Share of the Gross Receipts shall be *****. Notwithstanding the foregoing, each System and each Satellite distributor shall have the right to discount the price of a PPV viewing of the Service during the first thirty (30) days after the launch of the Service in such System or by such Satellite distributor, respectively, and during no more than two (2) ten (10) day periods each calendar year. For orders taken during such first thirty (30) days and during each such ten (10) day period, Affiliate shall be required to pay to Network minimum PPV Satellite Fees or PPV Cable Fees (as the case may be) of ***** per each complete and technically satisfactory viewing of a viewing segment of the Service as a PPV service, rather than the minimum PPV Satellite Fees or PPV Cable Fees specified in this Section 5(c)(i). Furthermore, there shall be no PPV Satellite Fee or PPV Cable Fee (as the case may be) payable by Affiliate to Network for any PPV viewing of the Service by a subscriber who pays for such viewing by remitting a coupon provided by Affiliate or by an affiliate of Affiliate to subscribers that have not ordered a PPV movie or event in the six (6) months immediately preceding the issuance of such coupon. Notwithstanding the foregoing, if in any month the sum of the PPV Cable Fees payable hereunder and the PPV Cable Fees payable under the agreement between Network and Affiliate for the distribution of the Multiplex Service (the "Multiplex Agreement") (excluding PPV Cable Fees attributable to Combination PPV Cable Subscribers under this Agreement and the Multiplex Agreement) do not equal or exceed an amount equal to the product of the Minimum Average Percentage (as defined herein) multiplied by the sum of the Gross Receipts paid by PPV Cable Subscribers (excluding Combination PPV Cable Subscribers) who receive and pay for one (l) complete and technically satisfactory viewing of one viewing segment of either the Service or the Multiplex Service (the "Minimum Average PPV Fee"), Affiliate shall pay' to Network the Minimum Average PPV Fee in lieu of PPV Cable Fees under this Agreement and the Multiplex Agreement. For purposes of this Agreement, the Minimum Average Percentage shall mean the arithmetic mean average of the Network Share payable under this Agreement in the pertinent month with respect to PPV Cable Subscribers to the Service and the Network Share (as defined in the Multiplex Agreement) payable under the Multiplex Agreement in the pertinent month with respect to PPV Cable Subscribers to the Multiplex Service." 7. Section 5(c)(iii) of the Agreement is hereby amended to read in its entirety as follows: "(iii) The PPV Cable Fees and/or PPV Satellite Fees (as the case may be) payable by Affiliate to Network hereunder for exhibition to PPV Cable Subscribers, Combination PPV Cable Subscribers, PPV Satellite Subscribers, and 6 Combination PPV Satellite Subscribers (as the case may be) during a Reporting Period (as defined below) during the Term shall be due and payable forty-five (45) days after the end of the calendar month which includes the last day of the Reporting Period. (The term "Reporting Period" shall mean the days from the end of each System's or Satellite distributor's last monthly reporting period (which date may vary in each System or for each Satellite distributor from the 20th of the calendar month to the last day of the calendar month) to the end of the System's or Satellite distributors then current monthly reporting period.) Affiliate shall have the right, however, to make credit adjustments to any month's payment in an amount equal to the portion of a previous month's PPV Cable Fees and/or PPV Satellite Fees which represents an overpayment." 8. The first sentence of Section 5(e). of the Agreement is hereby amended to read as follows: (e) Each System shall have the right to expend funds for a market or community research survey, which survey shall be primarily for the purpose of determining the market response to adult television programming." 9. Commencing as of the date of execution of this Amendment, notwithstanding anything set forth in Section 7(a)(ii) of the Agreement to the contrary regarding payment by Network of certain contributions to Systems and Satellite distributors for certain catalogues or guides used by such Systems and Satellite distributors, Network shall remit such contributions to the appropriate Systems and Satellite distributors no later than forty-five (45) days after receipt of the documentation required to be provided to Network pursuant to Section 7(a)(ii) of the Agreement. 10. Section 7(b) of the Agreement is hereby amended to read in its entirety as follows: "7(b) Network shall send to Affiliate, not later than forty-five (45) days after the end of each calendar month for which payment pursuant to Section 7 hereof is due, a statement on a form mutually acceptable to Affiliate and Network which sets forth all pertinent information to compute the amount due to Affiliate for such calendar month. Network shall deliver such statement to Affiliate prior to or along with the amount payable to Affiliate as provided in this Agreement. Notwithstanding the foregoing, in the event that Network is paid gross shopping revenue by a fulfillment agency or other agent on a quarterly basis, Network shall send to Affiliate the reports and payments hereunder not later than forty-five (45) days after the end of each such quarter, which report and payment shall relate to such quarter. 11. Section 7(d) of the Agreement is hereby amended to read in its entirety as follows: (d) Network agrees that in the event Network does any direct on-air marketing and sale of products or services, including, but not limited to, sales through "800", "900" or "976" telephone services, Network will: (i) provide Affiliate with lists of the names of respondents from within the zip code areas of the Systems who respond to such direct on-air marketing and sales, for use by Affiliate or the Systems, and 7 (ii) Network shall pay to Affiliate *****. Network agrees that no direct on-air marketing or sale of products or services will advertise, promote, sell, or contain any: (1) illegal products or services; (2) products or items which invade the body; or (3) sexual appliances or items used for simulated sexual intercourse. 12. Section 8(f) is hereby amended to read in its entirety as follows: (f) Without limiting the provisions of Section 8(e) or Section 8(g) hereof, Network will indemnify, defend and forever hold Affiliate and Affiliate's affiliated companies, and each of Affiliate's and Affiliate's affiliated companies' respective officers, directors, employees, partners and agents, harmless from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) arising directly or indirectly out of: (1) sales or marketing of any products or services by, through, or on the Service (including, but not limited to, claims related to product liability, patent, trademark, copyright infringement, right of privacy or publicity, personal injury, express or implied warranties, or obscenity,) or (2) the content of the Service (in its entirety) or the use and delivery of the Service under this Agreement (including, but not limited to, sponsorship, promotional and advertising spots, any background music and anything else inserted by any party other than Affiliate), including, without limitation, any losses, liabilities, claims, costs, damages and expenses based upon any lien, encumbrance, charge, lis pendens, administrative proceeding, government investigation or litigation relating to the Service, any program included therein or any component thereof, or based upon alleged or proven libel, slander, defamation, invasion of the right of privacy or the right of publicity, or violation or infringement of copyright (including music performance rights for any and all performances through to subscribers), literary or music synchronization rights, obscenity or any other form or forms of speech (whether or not protected by the Constitution of the United States or any State) or otherwise arising out of the content of the Service. 13. The parties agree that all the obligations, terms, provisions and conditions set forth in the Agreement, as amended by Sections 1, 3, 8, 10, 11, and 12 hereby, shall apply to the exhibition, distribution, subdistribution, and authorized reception of the television programming service currently known as "Spice 2" (the "Multiplex Service"), as if the Multiplex Service were the "Service" as defined in the Agreement, with the exception of the following amendments to the Agreement applicable only to the Multiplex Service (the agreement for the provision of the Multiplex Service, as described in this paragraph, shall be referred to herein as the Multiplex Agreement): a. Section 4 of the Multiplex Agreement is hereby amended by the addition of the following new Section 4(i): "4(i) Notwithstanding anything contained in this Agreement to the contrary, no System or Satellite Distributor shall exhibit, distribute, subdistribute or authorize the reception of the Service unless such System or Satellite Distributor is also exhibiting, distributing, of authorizing the reception of the pay-per-view television programming service known as "Spice" or "Spice 1" (the "Base Service"); provided, however, that this paragraph shall apply 8 only if such System or Satellite Distributor has rights to exhibit, distribute, subdistribute or authorize the reception of the Base Service." b. Section 4 of the Multiplex Agreement is hereby amended by the addition of the following new Section 4(j): "4(j) Notwithstanding anything contained in this Agreement to the contrary, the Service may not be carried by a System more hours per day (based on weekly averages of hours of carriage) than the Base Service is carried by such System; provided, however, that this paragraph shall apply only if such System has rights to exhibit, distribute, subdistribute or authorize the reception of the Base Service." c. Section 5(b)(i) of the Multiplex Agreement is hereby amended to read in its entirety as follows: "(b) Subscription (i) For each calendar month during the Term, Affiliate will pay Network as a Service Cable Fee for each Service Cable Subscriber an amount equal to the greater of (A) *****, or (B) ***** of the Gross Receipts attributable to such Service Cable Subscriber. When the Service is sold to a Service Cable Subscriber in combination with other services (excluding a package which includes the Base Service) for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts attributable to a Service Cable Subscriber for the Service shall be equal to the total charge for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of which is the a la carte retail price for the Service, and the denominator of which is the numerator plus the aggregate of the a la carte rates charged for each of the other services including in the tier or package; provided, however, that the amounts charged to Affiliate for each of the services in the package or tier shall not be disclosed by Affiliate to Network but, at Network's request, in order to assure Network of compliance with this provision, Affiliate shall make such charges and any pertinent calculations available to a representative of KPMG Peat Marwick (which representative is neither Network's nor Affiliate's) on a confidential basis, at Network's cost. This provision shall survive termination or expiration of this Agreement. Affiliate shall pay a Service Satellite Fee to Network in the following amounts for each Service Satellite Subscriber, based on the subscription term purchased by such Satellite Subscriber, regardless of whether such Service Satellite Subscriber purchases the Service alone, as an a la carte service or as part of a tier or package of a la carte or other services and regardless of the Gross Receipts attributable thereto: Service Satellite Fee Per Service Satellite Service Term Subscriber ------------ ---------------------- 1 Month ***** 3 Months ***** 6 Months ***** 1 Year ***** 9 Notwithstanding the foregoing, if the Service is sold in combination with the Base Service to Service Cable Subscribers or Service Satellite Subscribers, Service Cable Fees and Service Satellite Fees shall be paid in accordance with Section 5 of the Affiliation Agreement dated as of November 1, 1992 between Spice, Inc. and Satellite Services, Inc. (the "Base Agreement"), as amended, and no Service Cable Fees or Service Satellite Fees shall be payable hereunder," d. Section 5(b)(iii) of the Agreement is hereby amended to read in its entirety as follows: "(iii) The Service Cable Fees and Service Satellite Fees payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the calendar month to which they relate. In the event that the Service is sold to Service Satellite Subscribers for a term greater than one month, the Service Satellite fees payable with respect to such Service Satellite Subscriber shall be due and payable forty-five (45) days after the end of the calendar month in which delivery of the Service to such Service Satellite Subscriber commences; provided that if Affiliate does not receive full payment for a term (or gives a credit), Affiliate shall receive a like credit against the Service Satellite Fees." e. Section 5(c)(i) of the Multiplex Agreement is hereby amended to read in its entirety as follows: "(c) PPV (i) For each customer of Affiliate who receives and pays for one (l) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Cable Subscriber, Affiliate will pay Network a PPV Cable Fee in an amount equal to the greater of, (A) (i) ***** for orders taken from the date of full execution hereof through February 28, 1996, (ii) ***** for orders taken from March 1, 1996 through October 31, 1998 (iii) ***** for orders taken from November 1, 1998 through October 31, 2001 and (iv) ***** for orders from November 1, 2001 through the end of the Initial Term, or (B) the Network Share of the Gross Receipts paid by such PPV Cable Subscriber. For purposes of this subparagraph, "Network Share" shall equal the following percentage of the Gross Receipts paid by each PPV Cable Subscriber: ***** from the date of execution of this Agreement by both parties hereof through February 28, 1996; ***** from March 1, 1996 through October 31, 1998; and ***** from November 1, 1998 through the end of the Initial Term. For each customer of Affiliate who receives and pays for one (1) complete and technically satisfactory viewing of one viewing segment of the Service as a PPV service as a PPV Satellite Subscriber, Affiliate will pay Network a PPV Satellite Fee in an amount equal to ***** of the Gross Receipts paid by such PPV Satellite Subscriber. Notwithstanding the foregoing, each System and each Satellite distributor shall have the right to discount the price of a PPV viewing of the Service during the first thirty (30) days after the launch of the Service in such System or by such Satellite distributor, respectively, and during no more than two (2) ten (10) day periods each calendar year. For orders taken during such first thirty (30) days and during each such ten (10) day period, Affiliate shall be required to pay to Network minimum PPV Satellite Fees or PPV Cable Fees (as the case may be) of ***** per each complete and technically satisfactory viewing of a viewing segment of the Service as a PPV 10 service, rather than the minimum PPV Satellite Fees or PPV Cable Fees specified in this Section 5(c)(i). Furthermore, there shall be no PPV Satellite Fee or PPV Cable Fee (as the case may be) payable by Affiliate to Network for any PPV viewing of the Service by a subscriber who pays for such viewing by remitting a coupon provided by Affiliate or by an affiliate of Affiliate to subscribers that have not ordered a PPV movie or event in the six (6) months immediately preceding the issuance of such coupon. Notwithstanding the foregoing, if the Service is sold in combination with the Base Service to PPV Cable Subscribers or PPV Satellite Subscribers, PPV Cable Fees and PPV Satellite Fees shall be paid in accordance with the Base Agreement, as amended, and no PPV Cable Fees or PPV Satellite Fees shall be payable hereunder. In addition, if in any month Minimum Average PPV Fees are due in accordance with Section 5(c)(i) of the Base Agreement, no PPV Cable Fees shall be due and payable hereunder for such month under this Agreement with respect to PPV Cable Subscribers." f. Section 5(d) of the Multiplex Agreement is hereby deleted in its entirety. g. Section 5 of the Multiplex Agreement is hereby amended by the addition of the following new Section 5(j): "(j) Notwithstanding anything contained in this Agreement to the contrary, the retail price of the Service charged to a Service Cable Subscriber, a PPV Cable Subscriber, a Satellite Service Subscriber, or a PPV Satellite Subscriber shall not exceed the standard retail price (exclusive of special promotions) charged by such System or Satellite distributor in the same month to a Service Cable Subscriber, a PPV Cable Subscriber, a Satellite Service Subscriber, or a PPV Satellite Subscriber (as the case may be and as those terms are defined in the Base Agreement) receiving the Base Service; provided, however, that this paragraph shall apply only if such System or Satellite Distributor has rights to exhibit, distribute, subdistribute or authorize the reception of the Base Service." h. Section 7(a)(ii) of the Multiplex Agreement is hereby deleted in its entirety. i. Exhibit B of the Multiplex Agreement is hereby replaced by Exhibit B-1 attached hereto. j. The parties shall execute such further documents (including without limitation an Affiliation Agreement in the same form as the Multiplex Agreement as described herein) to give effect to this paragraph. 14. This Amendment, the Agreement, and the Multiplex Agreement shall be construed and enforced to give effect to each provision hereof and thereof. Any reference in the Agreement to itself, or in this Amendment to the Agreement, shall be deemed a reference to the Agreement as modified and amended hereby, unless otherwise stated. The Agreement, as so modified and amended, shall be and remain in full force and effect. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. SPICE, INC., a New York corporation By: /s/ Steven Saril ---------------------------------- Name: Steven Saril -------------------------------- Title: Executive Vice President ------------------------------- Sales and Marketing AGREED: Satellite Services, Inc., a Delaware corporation By: /s/ Jedd S. Palmer -------------------------------- Name: Jedd S. Palmer Title: Vice President, Programming 12 EX-10.1.3 4 d65750_ex1013.txt LETTER AGREEMENT Exhibit 10.1.3 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. [Satellite Services Inc. Logo] July 18, 1997 MAILING ADDRESS: Post Office Box 5630 Denver, CO 80217-5630 (303) 267-5500 Mr. Steve Saril, President VIA FACSIMILE Spice Networks 536 Broadway, 7th Floor New York, NY 10012 Re: Spice and Adam & Eve Dear Steve: This letter confirms our agreement that effective June 1, 1997, the Fees payable for PPV Cable Subscribers for Spice and Adam & Eve shall be the greater of: (1) ***** of the Gross receipts attributable to such PPV buys; or (2) *****. This letter agreement shall remain in effect for the Term so long as there are no less than ***** million Addressable Subscribers in Systems. Capitalized terms in this letter agreement shall have the same meaning as the definition of such terms in the Affiliation Agreement, as amended, dated as of November 1, 1992 between Spice, Inc., and Satellite Services, Inc. If this letter accurately sets forth our agreement, please sign in the space indicated below and return it to me. Satellite Services, Inc. By: /s/ J. Hinderg Name: J. Hinderg, Jr. Title: President ACCEPTED AND AGREED TO: By: /s/ Steve Saril Name: Steve Saril Title: President cc: James Cofer EX-10.1.4 5 d65750_ex1014.txt LETTER AGREEMENT Exhibit 10.1.4 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. [Satellite Services Inc. Logo] December 18, 1997 MAILING ADDRESS: Post Office Box 5630 Denver, CO, 80217-5630 (303) 267-5500 Mr. Steve Saril President Spice Networks 536 Broadway, 7th Floor New York, NY 10012 Dear Steve: This letter confirms our agreement that effective October 1, 1996, the Fees payable for PPV Digital Cable Subscribers for Spice or both Spice and The Adam & Eve Channel ("AEC") (together, the "Spice Networks") in each System where Spice or the Spice Networks are distributed via the digital platform operated by National Digital Television Center, Inc., d/b/a Headend in the Sky ("HITS") shall in no event collectively exceed, for such Systems, an amount (the following are referred to as the "Rate Caps") equal to: (1) ***** per month per Digital Addressable Subscriber if one or both of the Spice Networks are the only adult Channel(s) carried on such System, or (2) ***** per month per Digital Addressable Subscriber if one or both of the Spice Networks are not the only Adult Channel(s) carried on such System. A "Digital Addressable Subscriber" shall mean an Addressable Subscriber in a System who receives television programming from HITS in a digital format utilizing equipment through which such Addressable Subscriber can also receive a digital PPV viewing segment of one or both of the Spice Networks. A "PVC Digital Cable Subscriber" is a Digital Addressable Subscriber who is a PPV Cable Subscriber, and who purchases a viewing segment of one or both of the Spice Networks from a HITs provided signal. An "Adult Channel" shall mean a cable television programming service or channel where a majority of the programming regularly consists, during the hours of ***** system local time, of sexually explicit adult-oriented programming, similar to Playboy TV, AdultVision, Spice, AEC, Spice Hot or more explicit adult programming. In clarification of the foregoing, Action PPV, Request 5, Hot Choice, or any similarly themed PPV service shall not constitute an Adult Channel, unless such channel changes its format to a format substantially similar to that of an Adult Channel. The availability of the Rate Caps are conditioned upon (i) the aggregate license fees payable to Spice by SSI for both analog and digital distribution of the Spice Networks in any month are no less than ***** of the Baseline; (ii) AEC being included in the HITS programming lineup; and Spice being included in the primary transponder grouping known as *****; and (iii) HITS ***** Mr. Steve Saril December 18, 1997 Page 2 to Spice for the Spice Networks, or Spice having otherwise agreed to terms of carriage with HITS. If after the date hereof, the number of Addressable Subscribers in Systems is increased or decreased from the number of Addressable Subscribers in such Systems as of the date hereof (the "Baseline Subs"), the Baseline shall be adjusted for any month to an amount equal to the Baseline multiplied by a fraction, the numerator of which is the number of Addressable Subscribers in such Systems in such month, and the denominator of which is the Baseline Subs. The "Baseline" shall mean an amount equal to the average monthly amount due to Network under the Affiliation Agreement dated as of November 1, 1992 between Network and SSI ("the Affiliation Agreement") for the months of October, November, and December, 1997. Capitalized terms in this letter agreement shall have the same meaning as the definitions of such terms in the Affiliation Agreement, which, as amended, shall remain in full force and effect. Sincerely, SPICE NETWORKS, INC. By: /s/ Steve Saril Steve Saril President ACCEPTED AND AGREED TO: SATELLITE SERVICES, INC. By: /s/ J. Hinderg Name: Title: EX-10.1.5 6 d65750_ex1015.txt AMENDMENT TO AFFILIATION AGREEMENT Exhibit 10.1.5 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. AMENDMENT to Affiliation Agreement between SPICE, INC. and SATELLITE SERVICES, INC. WHEREAS, Spice, Inc. ("Spice") and Satellite Services, Inc. ("Affiliate") entered into the Affiliation Agreement dated November 1, 1992, as amended by the parties pursuant to Amendment No. 1 dated September 29, 1994 and the letter agreements between the parties dated, respectively, July 18, 1997 and December 18, 1997 (the "Agreement"), under which Spice licensed the use of its Spice programming service (the "Spice Service") to SSI; WHEREAS, Affiliate further entered into certain affiliation agreements with (i) AdultTVision, Inc. ("AdulTVision") dated February 12, 1997 (the "AdulTVision Agreement"), under which AdulTVision licensed the use of its AdulTVision programming service (the "AdulTVision Service") to SSI, and (ii) Adam & Eve Communications, Inc. ("Adam & Eve") dated October 17, 1994 (the "Adam & Eve Agreement"), under which Adam & Eve licensed the use of its Adam & Eve programming service (the "Adam & Eve Service") to SSI, and (iii) Califa Entertainment ("Califa") dated February 9, 2000 (the "Califa Agreement"), under which Califa licensed the use of its "Hot Network" and "Hot Zone" programming services (the "Hot Services") to SSI, which Califa Agreement was acquired by an affiliate of Spice in a July 6, 2001 transaction; WHEREAS, the parties acknowledge and agree that Spice is the successor in interest to AdulTVision, Inc. and Adam & Eve Communications, Inc.; WHEREAS, the parties acknowledge and agree that Affiliate was acquired by Comcast Corporation, and Affiliate's offices now are located at 1500 Market Street, Philadelphia, Pennsylvania 19102; and WHEREAS, Spice and Affiliate now desire to amend the Agreement per this amendment (the "Amendment") to include carriage of the Spice Service, the former AdulTVision Service and former Adam & Eve Service (collectively, the "Spice 2 Service"), the Hot Services, and other X rated and XX rated programming services offered by Spice. NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Spice and Affiliate hereby agree as follows: 1. This Amendment shall become effective upon the date of the last signature written below (the "Amendment Effective Date"). 2. Capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meanings set forth in the Agreement. 3. The Agreement, as amended, contains the entire agreement of the parties with respect to the subject matter thereof and supersedes all prior and contemporaneous agreements, understandings and communications between the parties. Without limiting the foregoing, the parties hereby expressly agree that the AdulTVision Agreement, the Califa Agreement, and the Adam & Eve Agreement referenced in the preamble to this Amendment, including, without limitation, all exhibits and amendments thereto, are hereby cancelled and shall be of no further force and effect (the "Terminated Agreements"). 4. Except as expressly modified herein, all terms of the Agreement shall remain in full force and effect. In the event of a conflict between the terms and conditions of this Amendment and the Agreement, the terms of this Amendment shall govern. 5. The first sentence of Section 1(a) of the Agreement is deleted in its entirety and replaced with the following: (a) Grant of Rights. Network hereby grants to Affiliate, and Affiliate hereby accepts, the following rights relating to any X rated and XX rated programming services offered by Network, including, without limitation, such programming currently offered by Network under the names "Spice", "Spice 2", "Spice Platinum", "Spice Ultimate", "Spice Hot", "Spice Live" and "Spice HD", and any other X rated and XX rated programming services that may be offered by Network (or commonly-controlled entity) from time to time (including the VOD Content and the HVOD Content (as such terms are defined herein), as applicable), whether in their current format or in any other analog, digitized, compressed, modified, replaced or otherwise manipulated format (collectively, the "Service"): 6. Section 1(a)(i) shall be amended by adding the following parenthetical immediately following the phrase "whether now existing or developed in the future": *****. Furthermore, Distribution Technology shall not include distribution to personal mobile and cellular handheld devices (provided that personal mobile and cellular handheld devices will not include Short-Range Wireless Devices, as defined below). *****. "Set-Top Box" means a device that connects to, or is integrated as part of, a television or other video output display device ("Display Device") and also connects to the source of Affiliate's audio/visual signal, the content of which then is displayed on the Display Device. A Set Top Box located at a Subscriber's premises may be connected through short-range wireless technology to one or more Set-Top Boxes and/or Display Devices authorized by Affiliate for use in and around a Subscriber's premises ("Short-Range Wireless Devices"). 2 7. The last sentence of Section 1(a)(iii) of the Agreement is deleted in its entirety. 8. A new Section 1(a)(iv) of the Agreement is hereby added as follows: ***** 9. The second sentence of Section 2(a) of the Agreement is deleted in its entirety and replaced with the following: The Initial Term of this Agreement shall commence upon the date of execution hereof and shall terminate on December 31, 2015, unless terminated sooner pursuant to the terms of this Agreement. 10. The first sentence of Section 4(e) of the Agreement is deleted in its entirety and replaced with the following: Each System or other distribution facility or enterprise may offer the Service, (i) as a Subscription (defined in Section 5(a)(vii) below) service; (ii) as a Pay-per-view (defined in Section 5(a)(vi) below) service marketed and sold in any of the ways described in Section 5(a)(vi); and/or (iii) notwithstanding anything to the contrary in this Agreement, as a VOD (defined in Section 5(a)(xiii) below) service. The Service may be sold in combination with other services (e.g., in a package of services or in a tier); provided that the Service, and/or viewing segments of the Service as described in Section 5(a)(vi) and 5(a)(xiii), must always also be available for sale through each television distribution facility selling the Service under this Agreement on a purely a la carte basis. 11. In the last two sentences of Section 4(f) of the Agreement, the phrase "home taping" shall be replaced by "home taping and / or digital recording." Additionally, the following shall be added to the end of the last sentence: "; or (iii) authorizing Subscribers to use devices and/or functionality (whether provided by Affiliate or otherwise) that enables such Subscribers to engage in lawful duplication, digital recording and/or playback of the Service or any portions thereof for non-public viewing of such content." 12. The following language is hereby added as Section 4(i) of the Agreement: (i) Affiliate shall have the right to make any VOD Content and HVOD Content titles offered by Network available to any subscriber on a VOD basis. Network shall be responsible under this Agreement and that certain Affiliation Agreement between Playboy Entertainment Group, Inc. and Affiliate dated February 10, 1993, as amended (the "Playboy Agreement") collectively for supplying to Affiliate a minimum of ***** of VOD Content (defined in 3 Section 5(a)(xiii) below) and a minimum of ***** of HVOD Content (defined in Section 5(a)(xiii) below) at any given time, which shall be refreshed on a ***** basis such that at least ***** of the VOD Content and HVOD Content is changed each month; provided, however, that Network shall make commercially reasonable efforts to accommodate Affiliate's requests concerning (i) the types of programming to be included in the VOD Content and HVOD Content; (ii) the total amount of VOD Content and HVOD Content that is made available by Network; and (iii) the amount and extent to which the Programs comprising the VOD Content and HVOD Content are refreshed. Unless Affiliate notifies Network in writing that it desires for the VOD Content and/or HVOD Content to include X rated, XX.5 rated, and/or XXX Programs, the VOD Content and HVOD Content will include only XX rated Programs (as such ratings designations are generally understood in the industry). Network shall at all times offer to make available to Affiliate any adult content made available by Network to any other United States distributor for subscribers to view on an VOD basis (including other versions of content provided to Affiliate with a different editing standard). Notwithstanding anything to the contrary in this Agreement, Network hereby agrees that Affiliate shall at all times, and at any time during the Term, have the absolute right to air or offer or to cease airing or offering any VOD Content or HVOD Content to any individual and/or System(s). Affiliate, at its own expense, shall obtain and install equipment necessary to distribute the VOD Content and HVOD Content to such subscribers from the server in each System's headend. Network, at its own expense, shall deliver the VOD Content and HVOD Content in compliance with generally accepted standards of good practice and according to parameters specified in the CableLabs Video On Demand Content Specification Version 1.0 ("CLI 1.0") or future releases thereof, including all applicable digitally encoded non-video data attributes ("Meta Data"). Network shall deliver the VOD Content and HVOD Content via either of the following methods, as selected by Network at its sole option, upon advance written notice: (i) satellite or program master to the Comcast Media Center ("CMC") in Denver, Colorado, or (ii) FTP directly to a point or points designated by Affiliate. The maximum MPEG 2 encoding data rate shall be 3.75 mbps, provided that Network agrees that when it becomes commercially feasible or industry standard to do so, then Network will encode at a maximum rate of 3.375 mbps. Network shall bear all costs in connection with the encoding of, and the transport to applicable Systems of, the VOD Content and HVOD Content regardless of the method of delivery (and to the extent necessary to ensure Network's compliance with the provisions of this sentence (including if Network elects to deliver unencoded VOD Content and HVOD Content to the CMC), Network shall enter into an agreement, and/or maintain any existing agreement, with the CMC concerning the CMC's services related to such encoding and transport). 13. The following language is hereby added as Section 4(j) of the Agreement: 4 (j) Network shall be responsible for any and all royalties and/or other fees payable to any applicable programming licensor(s) for content included in the VOD Content and HVOD Content (including, without limitation, residuals or other payments to guilds or unions, rights for music clearances, including but not limited to Network's through-to-the-viewer performance rights, synchronization rights, and mechanical rights, and all other content-based fees, payments, or obligations arising out of the activities contemplated by this Agreement), and Affiliate shall have no responsibility or liability for any such royalties or fees, including any content-based royalties or fees associated with distribution of the VOD Content or HVOD Content via VOD, except for fees payable to Network in accordance with Section 5 of this Agreement. Network acknowledges that Affiliate may, from time to time, direct Network not to include as part of the VOD Content or HVOD Content any particular Program that Affiliate reasonably determines does not meet the intent of the rating such Program has been given or otherwise may cause Affiliate business, political, or operational difficulty; provided, however, that such Program shall count toward Network's satisfaction of its obligations hereunder to provide at least ***** of VOD Content and at least ***** of HVOD Content for the period of time during which such Program was scheduled to be made available as part of the VOD Content or HVOD Content. The VOD Content and HVOD Content shall not contain any sponsorships or advertising, except sponsorship or advertising for the Service permitted under this Agreement or the Spice Agreement. 14. The second sentence of Section 5(a) of the Agreement is hereby deleted in its entirety and replaced with the following: The Fees shall be calculated, stated, and reported separately for each category of subscriber. 15. The third sentence of each of Sections 5(a)(i), 5(a)(ii), 5(a)(iii) and 5(a)(iv) of the Agreement, which contain the definitions of, respectively, "PPV Satellite Fees", "Service Satellite Fees", "PPV Cable Fees" and "Service Cable Fees", are hereby deleted. 16. Section 5(a)(v) of the Agreement is deleted in its entirety and replaced with the following: (a)(v) "Fees" means the fees payable by Affiliate to Network, as described in Section 5(b) below. Fees payable by Affiliate to Network during a Renewal Term are referred to as Renewal Fees. 17. Section 5(a)(ix) of the Agreement is deleted in its entirety and replaced with the following: Deleted without implication. 18. The following language is hereby added as Section 5(a)(xiii) of the Agreement: 5 (a)(xiii) "VOD" means the authorization of a subscriber to receive the VOD Content or HVOD Content that is chosen by a subscriber for display to that subscriber. For purposes hereof, the "VOD Content" shall mean all content delivered by Network to Affiliate for delivery to subscribers on a per-Program basis in exchange for a per-viewing fee. For purposes hereof, the "HVOD Content" shall mean all high-definition content delivered by Network to Affiliate for delivery to subscribers on a per-Program basis in exchange for a per-viewing fee. A "Program" shall mean an individual feature film, direct-to-video programming (including a movie), extended-length video, live performance or production, or other audio-visual program; provided, however, that each such Program shall be (i) professionally produced, commercial free, high quality heterosexual male- or couple-targeted adult-oriented content intended only for adult consumers because of its sexual content; and (ii) at least twenty (20) minutes in duration. 19. Section 5(b) (including Sections 5(b)(i) through 5(b)(iii)) of the Agreement is deleted in its entirety and replaced with the following: (b) For each Service Cable Subscriber or Service Satellite Subscriber, Affiliate will pay Network the applicable Revenue Share Percentage (as defined in Section 5(d)) of Gross Receipts, less the deductions described in Section 5(g), subject to a monthly minimum of ***** per Service Cable Subscriber or Service Satellite Subscriber, which Fees (as defined below) shall not be subject to rate caps. When the Service is sold to a Service Cable Subscriber or Service Satellite Subscriber in combination with other services for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts deemed to be attributable to a Service Cable Subscriber or Service Satellite Subscriber for the Service shall be equal to the total Gross Receipts for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of which is the a la carte retail charge for the Service otherwise charged for the pertinent System and the denominator of which is the numerator plus the aggregate of the a la carte retail charges otherwise charged by the pertinent System for the other services included in the tier or package of a la carte or other service. In addition, if Affiliate provides the Service to multiple dwelling complexes, including, but not limited to, apartment buildings, on a bulk-rate basis, the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate charged a complex for the Service divided by the standard monthly retail rate charged a non-bulk rate Service Satellite Subscriber or Service Cable Subscriber (as the case may be) for the Service in the applicable System or by the pertinent Satellite distributor, as the case may be. 20. Section 5(c) (including Sections 5(c)(i) through 5(c)(iii)) of the Agreement is deleted in its entirety and replaced with the following: (c) For each PPV Cable Subscriber and each PPV Satellite Subscriber who receives and pays for one (1) technically satisfactory viewing of one (1) viewing segment of 6 the Service, including by means of VOD, Affiliate will pay Network the Network Share of the Gross Receipts paid by such PPV Cable Subscriber and each PPV Satellite Subscriber to Affiliate. "Network Share" shall equal the applicable Revenue Share Percentage (as defined in Section 5(d)) of the Gross Receipts paid by each such subscriber but not less than ***** per PPV Cable Subscriber or PPV Satellite Subscriber, and ***** for each VOD transaction), except that such amount paid by each PPV Cable Subscriber or each PPV Satellite Subscriber (as the case may be) shall be subject to reduction as provided in Section 5(g) below. 21. Section 5(d) of the Agreement is deleted in its entirety and replaced with the following: (d) For purposes hereof, "Revenue Share Percentage" shall mean *****. Notwithstanding the foregoing, Revenue Share Percentage shall mean ***** effective upon the first date upon which Affiliate offers both (A) at least ***** of the TV-SVOD Content (as such term is defined in the Playboy Agreement) for distribution of Playboy TV (the "Playboy Service")) in connection with a subscription to the Playboy Service in systems comprising at least ***** of the basic cable television subscribers within Systems that offer adult content on a VOD basis (i.e., VOD content that is rated X or a more explicit editing standard, other than such VOD content that is included as part of an SVOD offering from a premium service provider not targeted exclusively to adult audiences (e.g., Cinemax, Showtime)) (such systems, the "Adult VOD-Enabled Systems"), and the parties agree that the number of basic television subscribers in the Adult VOD-Enabled Systems shall be deemed to be *****, and (B) at least ***** of the VOD Content offered, at a minimum, via a branded entry point (i.e., the name "Playboy" or "Spice," but not necessarily using a logo) in systems comprising at least ***** of the basic cable television subscribers within the Adult VOD-Enabled Systems ((A) and (B) together, the "Carriage Incentive Benchmarks"); provided, however, that if a System offers at least ***** of the TV-SVOD Content and such System (or another System (i.e., whether this occurs in a single System or as a combination of two separate Systems)) offers at least ***** of the VOD Content before *****, then the Revenue Share Percentage shall mean *****, provided further, however, that if Affiliate fails to achieve the Carriage Incentive Benchmarks on or before *****, then the Revenue Share Percentage shall be deemed to be ***** between ***** and Affiliate shall be required to remit to Network outstanding amounts retroactive to ***** for those Systems that are not offering either at least ***** of the TV-SVOD Content in connection with a subscription to the Service, or at least ***** of the VOD Content ***** as of *****Agreement. 22. Section 5(f) of the Agreement is deleted in its entirety and replaced with the following: 7 (f) The Fees that are attributable to Gross Receipts based on Subscription services payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the calendar month to which they relate. The Fees that are attributable to Gross Receipts based on PPV or VOD services payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the last day of the calendar month which includes the last day of the Reporting Period. The term "Reporting Period" shall mean the days from the end of each System's or Satellite distributor's prior monthly reporting period (which date may vary in each System or for each Satellite distributor from the 20th of the calendar month to the last day of the calendar month) to the end of the System's or Satellite distributor's then current monthly reporting period. Affiliate shall have the right, however, to make adjustments to any month's payment in an amount equal to the portion of a previous month's Fees which represent an overpayment or underpayment. 23. The following shall be added as a new last sentence of Section 5(g) of the Agreement: In addition, the Gross Receipts attributable to purchases of VOD Content or HVOD Content shall be equal to the total amount of per-viewing fees billed by Affiliate to the VOD subscribers for viewing of the VOD Content or HVOD Content, less any technical credits given by Affiliate to such subscribers pursuant to this Section. In the event of a substantiated, technological failure within the transmission system for delivering VOD Content or HVOD Content to subscribers resulting in the substantial interruption or termination of an exhibition of a Program, Affiliate may, in its discretion, offer a technical credit to the subscriber affected thereby not to exceed the amount charged to the affected subscriber and shall maintain documentation in support of the granted technical credit. 24. The phrase "PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees" is deleted in its entirety from Sections 5(h) and 5(i) and replaced in each instance with the term "Fees". 25. Section 6(a) of the Agreement (including Sections 6(a)(i) through 6(a)(iv)) is deleted in its entirety and replaced with the following: (a) For all Reporting Periods, Affiliate shall send to Network along with the payments, if any, due under Section 5 hereof, informational statements. Each statement shall set forth information necessary to the calculation of the Fees and Renewal Fees paid, which shall include but not be limited to: i. the total number of PPV purchases for the applicable month; ii. to the extent necessary to determine the Fees payable by Affiliate, the number of basic cable television subscribers served by Adult VOD- 8 Enabled Systems, and the number of Adult VOD-Enabled Systems offering the VOD Content and/or the SVOD Content in connection with a subscription to the Playboy Service, for the applicable month; iii. the average number of Service Cable Subscribers and Service Satellite Subscribers for the applicable month; and iv. the total number of VOD purchases and the names of the titles (or other appropriate identifier) for each VOD purchase, for the applicable month. 26. Section 7(a)(ii) of the Agreement is deleted in its entirety and replaced with the following: (a)(ii) Deleted without implication. 27. In Section 7(d)(ii) of the Agreement is deleted in its entirety and replaced with the following: (d)(ii) Network shall have the right to run ***** of commercial time per hour. In the event that Network elects to run more than ***** of commercial time per hour, Network shall make available ***** of commercial time per hour to Affiliate for Affiliate's use. With the exception of the ***** per hour granted above, the Service shall not contain any advertising, including but not limited to audio text services, merchandise sales, Internet services and other such products. Notwithstanding the foregoing, during the "breaks" between movies and/or other programs, the Service may contain the following audio text spots: (x) if the break is less than or equal to ***** in length, audio text spots not exceeding ***** in the aggregate during such break; and (y) if the break is greater than ***** in length, audio text spots not exceeding ***** in the aggregate during such break; provided that, in either case, Network shall not interrupt any programming to air the audio text spots, and each audio text spot shall be accompanied by a visual (if not moving video) element. In addition, Network shall be permitted to refer viewers to Network's and its affiliated companies' websites for scheduling information regarding the Service and may refer generally to the websites (e.g., "Visit our website at Playboy.com"); provided that, such referrals shall not contain any advertising, promotions or sales. 28. The following language shall be added to the end of Section 7(f), "provided that Network shall not be restricted from making incidental references to other services affiliated with Network as part of Network's regular programming." 29. The Affiliate contact information at Section 11 of the Agreement is deleted in its entirety and replaced with the following contact information: 9 To Affiliate: Satellite Services, Inc. c/o Comcast Cable 1500 Market Street Philadelphia, PA 19102 Attention: Senior VP, Programming With a copy to: Comcast Cable 1500 Market Street Philadelphia, PA 19102 Attention: General Counsel To Network: Playboy Entertainment Group, Inc. 2706 Media Center Drive Los Angeles, CA 90065 Attention: President With a copy to: Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, IL 60611 Attention: General Counsel 30. Section 13(b) of the Agreement is deleted in its entirety and replaced with the following: (b) In the event that (i) Network acquires or otherwise obtains operating control of, any programming service other than the Service (an "Other Service"), and (ii) such Other Service is merged into, or otherwise combined with, the Service, in each case so that there is only one surviving service, then (a) if the Service is the surviving service, then this Agreement shall remain in full force and effect and any agreement concerning distribution of the Other Service shall be terminated and the parties thereto shall be discharged of any further obligations and/or liabilities thereunder as of the date of such merger or combination; or (b) if the Other Service is the surviving service in such merger or combination, (x) if Affiliate has (at the time of such merger, combination, or acquisition) an affiliation agreement concerning distribution of the Other Service, then such affiliation agreement for the Other Service shall remain in full force and effect, and this Agreement shall be terminated and the parties hereto shall be discharged of any further obligations and/or liabilities hereunder as of the date of such merger, or (y) if Affiliate does not have an affiliation agreement concerning distribution of the Other Service, then Affiliate shall have the option to elect to have this Agreement continue to apply to such Other Service or to negotiate a new agreement to apply to such Other Service. In the event that Network acquires or otherwise exercises 10 operating control over an Other Service, and such Other Service is not merged into, or combined with, the Service, then (A) this Agreement shall not apply to the distribution of such Other Service, and (B) Affiliate shall not be entitled, by virtue of such merger or combination, to distribute the Service under any agreement governing Affiliate's distribution of such Other Service. 31. The first sentence of Section 13(d) of the Agreement shall be modified to read as follows: (d) This Agreement, as amended, contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof, including that certain prior agreement between Comcast Programming and Spice, Inc. made as of October 1, 1999, as amended, which expired September 30, 2004 (the "Prior Comcast Agreement"). 32. The following sentences are hereby added to the end of Section 13(g) of the Agreement: 1) Affiliate acknowledges that it is specifically granted the terms of this Section 13(g) in consideration for the provisions set forth in Section 5(d) of this Agreement. Additionally, Affiliate hereby agrees that, in consideration for the Fees granted pursuant to this Agreement, as amended, Affiliate shall *****. The above notwithstanding ***** shall apply only if *****. Furthermore, Affiliate's *****. 33. The following language is hereby added as Section 13(l) of the Agreement: (l) No Press Releases. Neither party shall issue any press release, announcement or statement to the public or any third party regarding the business relationship of the parties as set forth herein or the transactions described in this Agreement without the advance written consent of the other party, except to the extent such disclosure or statement is required by law. 34. The following language is hereby added as Section 13(m) of the Agreement: (m) Release of Claims. Network, on behalf of itself, its parent, subsidiary and other affiliated companies and each of their respective officers, directors, employees, partners, agents, shareholders, representatives, successors, predecessors and assigns (collectively, the "Network Releasing Parties") hereby voluntarily and forever completely remises, relinquishes, releases and forever discharges Affiliate, its parent, subsidiary and affiliated companies and each of their respective present and former officers, directors, employees, partners, agents, shareholders, representatives, successors, predecessors and 11 assigns (collectively, the "Affiliate Released Parties"), of and from any and all claims (including claims for conversion liability), demands, losses, penalties, costs, expenses (including, without limitation, reasonable attorneys' fees), interest, damages, actions, causes of action and liabilities, whether at law or in equity, whether based on contract, statute, tort, or strict liability, and whether for compensatory, special, punitive, statutory or any other damages or remedies, whether known or unknown, accrued or unaccrued, foreseen or unforeseen, contingent or non-contingent, direct or indirect, whether heretofore asserted or not, or arising by assignment, operation of law or otherwise, that are based on, connected to, arising out of or related to the payment, alleged failure to pay or alleged liability for the payment of any Fees, Renewal Fees, license fees or any other charges or payments whatsoever by Affiliate on account of the Systems to Network for the Service (including any feeds or multiplex signals thereof) for the period prior to, and including, *****. Network shall indemnify, defend, and hold the Affiliate Released Parties harmless from and against any claim brought by a Network Releasing Party, and/or by any person or entity, under any actual or purported assignment, subrogation or other right of substitution by or under a Network Releasing Party, against an Affiliate Released Party relating to the claims released in this Section 13(m), and Network's indemnification shall be subject to the provisions of Sections 8(h) herein. 35. Exhibit A shall be deleted in its entirety and replaced with Exhibit A attached hereto. 36. Exhibit B-1 (Programming Schedule) shall be deleted in its entirety and replaced with Exhibit B-1 (Programming Schedule) attached hereto. 37. The parties acknowledge that those Majority-Owned Systems distributing the Service pursuant to the Terminated Agreements or the Prior Comcast Agreement are hereby added to the Agreement as of the Amendment Effective Date. AGREED TO AND ACCEPTED BY THE PARTIES AS OF THE LAST DATE WRITTEN BELOW. SPICE, INC. SATELLITE SERVICES, INC. By: James F. Griffiths By: Jennifer T. Gaiski Name: James F. Griffiths Name: Jennifer T. Gaiski Title: President Title: Vice President, Programming Date: 9/26/05 Date: 9/26/05 12 EXHIBIT A to Affiliation Agreement by and between Spice, Inc. And Satellite Services, Inc. dated as of November 1992, as amended SYSTEM QUALIFICATIONS Affiliate represents and warrants that, with respect to each System listed on Schedule 1 hereto, Comcast Corporation, or any person or entity controlling, controlled by, or under common control with Affiliate or Comcast Corporation, now or hereafter (Affiliate, Comcast Corporation and each such person or entity a "Comcast Entity"), (i) owns or has the right to acquire ownership of, directly or indirectly, a minimum of ten percent (10%) of such System; and (ii) with respect to Systems that are less than fifty percent (50%) owned, has been authorized to execute decisions on behalf of such System with respect to the Service. In the event Affiliate's direct or indirect equity interest in a System or in the entity managing such System decreases below the level required by the immediately preceding sentence, and provided Affiliate's interest does not decrease to zero, such System shall continue to qualify for inclusion on Schedule 1 as long as Affiliate's interest in such System increases to the level required hereunder within eighteen (18) months of such decrease. In the event Affiliate, or any of the entities that owns or manages systems or enterprises that qualify hereunder, effects a corporate separation, reorganization or restructuring (including, without limitation, by a distribution of stock, or other assets or rights, to its shareholders, partners or joint venturers), the systems or enterprises of the entity resulting from such transaction (including all interim and supporting entities) and/or all of such resulting entities, in the aggregate, will qualify under the system qualifications set forth herein, so as to continue to qualify to distribute the Service under the terms and conditions hereof, as if such separation, reorganization or other restructuring had not occurred. Any system that satisfies the qualifications of this Exhibit A and in which a Comcast Entity owns more than fifty percent (50%) interest shall be referred to as a "Majority-Owned System." 13 EX-10.2.1 7 d65760_ex10-21.txt AFFILIATION AGREEMENT Exhibit 10.2.1 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. AFFILIATION AGREEMENT THIS AGREEMENT made as of the 10th day of February 1993 is by and between PLAYBOY ENTERTAINMENT GROUP, INC., a Delaware corporation ("Network"), and SATELLITE SERVICES, INC., a Delaware corporation ("Affiliate"). 1. RIGHTS: (a) Grant of Rights. Network hereby grants to Affiliate, and Affiliate hereby accepts, the following rights relating to the pay cable television programming service currently known as "PLAYBOY TELEVISION" (and as it may be renamed from time to time by Network), whether in its current analog format or in any other format, whether digitized, compressed, modified, replaced or otherwise manipulated (the "Service"): (i) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of the Service by cable or other wire transmission service, whether now existing or developed in the future, ("Cable") in the Distribution Areas (as defined herein) of the System or Systems.(as defined herein), if any, set forth by Affiliate on Schedule 1, as such Schedule 1, may be added to or deleted from, from time to time, pursuant to the terms of this Agreement; (ii) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of the Service by satellite master antenna television systems ("SMATV"); by multipoint distribution services ("MDS"), and by multichannel multipoint distribution services ("MMDS"), in (A) Operating Areas (as herein defined) of Systems, (B) other areas of counties in which Operating Areas of Systems are wholly or partially located but which areas are not the subject of a cable television franchise or license or, if a cable television franchise or license exists in such area, the operator of such franchise or license is not distributing the Service, and (C) areas of counties (which areas are contiguous to counties where an Operating Area of a System is wholly or partially located) which are not the subject of a cable television franchise or license or, if a cable television franchise or license exists in such area, the operator of such franchise or license is not distributing the Service (the areas described in (A), (B), and (C) of this Section 1(a)(ii) shall be referred to herein as a System's "Distribution Area"); (iii) in the event Network offers or grants to any third party the right to authorize the service for reception, or the right to otherwise exhibit, distribute, or authorize the reception of the Service, in the District of Columbia, the United States, or its territories, possessions or commonwealths, to anyone by means of equipment capable 1 of receiving audio/visual signals and/or programming directly from a satellite (other than a C-Band satellite), including; but not limited" to, K or Ku-Band signals, whether now existing or developed in the future ("DBS"); or by any other means of distribution not otherwise mentioned in this Agreement, whether now existing or developed in the future, *****. (iv) the non-exclusive right, but not the obligation, to exhibit, distribute (pursuant to the terms of this Agreement) and authorize the reception of the Service, nationwide (including, collectively, in the fifty United States; the District of Columbia, and the territories, possessions and commonwealths of the United States) to any person or entity ("Satellite Subscribers"), by means of equipment capable of receiving audio/visual signals and/or programming directly from a C-Band satellite, in an analog format or as digitized, compressed, modified, replaced or otherwise manipulated, including tier-bit access rights and the right to include tier-bit :messages on the Service on any three (3_) consecutive days of each calendar month, provided that, if such three (3) days are not the first consecutive Thursday, Friday and Saturday of a month, Affiliate, (or an affiliate of Affiliate) will give Network written notice of the days Affiliate selects no less than seven (7) days prior to the first day of the month in which the selected days occur. Notwithstanding the foregoing, if: (i) upon the expiration of two years after the date of execution of this Agreement, Affiliate's Retail Satellite Sales (as computed below) does not equal or exceed Network's Retail Satellite Sales (as computed below), then Affiliate's tier-bit messaging rights hereunder may be terminated by Network as of the end of such two-year period; or (ii) upon the expiration of five years after the date of execution of this Agreement, Affiliate's Retail Satellite Sales does not equal or exceed Network's Retail Satellite Sales, then Affiliate's tier-bit messaging rights hereunder may be terminated by Network as of the end of such five-year period. "Affiliate's Retail Satellite Sales" shall equal the total dollar amount of retail sales (net of discounts and credits) accrued by Affiliate or an affiliate of Affiliate for sales of the Service to PPV Satellite Subscribers (as defined herein) and Service Satellite Subscribers (as defined herein) during the days on which Affiliate or an affiliate of Affiliate exercised tier-bit messaging rights in the three months immediately prior to the expiration of the two- or five-year periods (as the case may be) set forth above. "Network's Retail Satellite Sales" shall equal the total dollar amount of retail sales (net of discounts and credits), accrued by Network for sales of the Service to Satellite Subscribers during three-day periods in the three months immediately prior to the expiration of the two- or five-year periods (as the case may be) set forth above, which three-day periods are comparable to the days on which Affiliate exercised tier-bit messaging rights in such three-month period. Affiliate, or an affiliate of Affiliate, shall utilize a port for access to Network's tier-bit for the purpose of tier-bit access which port is assigned to, or is owned or leased by, Affiliate, or an affiliate of Affiliate, unless Network has consented to the utilization by Affiliate or such affiliate of Affiliate of another port, with such consent not to be unreasonably withheld or delayed. The rights set forth in this Section 1(a), and elsewhere under this Agreement, are also granted hereby to any affiliate of Affiliate. Any use of the Service under this Agreement by such an affiliate of Affiliate, or by any permitted subdistributee, shall be subject to the obligations and limitations of this Agreement. As used in this 2 Agreement, an "affiliate of Affiliate" shall include any entity meeting the requirements of paragraphs 1.1, II or III of Exhibit A hereto regardless of whether such entity is a cable television system. "Operating Area" of a cable television system shall mean that geographic area where the owner of the system is authorized by appropriate governmental authority to operate an audio or video distribution facility through Cable and is operating an audio or video distribution facility through cable within such area; provided, however, that if a franchise or license is not required for the distribution of television services by Cable in a particular geographic area, then the Operating Area of a system shall mean that geographic area where the system is operating regardless of the presence or absence of a franchise or license. (b) Affiliate shall have the right, upon written notice to Network within thirty (30) days thereof, to elect to launch the Service in, and to include under this Agreement, any cable television system which meets the System Qualifications of Exhibit A hereto (individually, a "System" or, collectively, "Systems"). Upon receipt of such a notice, Schedule 1 hereof shall be deemed to include such System(s) as of the later of: (i) the launch date of the Service on such System(s), (ii) the date such System(s) first satisfies the requirements of Exhibit A hereto, or (iii) the date set forth in such notice if such notice is properly given pursuant to Section 11 of this Agreement. Any then-existing agreement with Network applicable to any such System or Systems for carriage of the Service shall be extinguished and shall cease to be effective with respect to such System as of the effective date of: the addition or deemed addition of such System to Schedule 1. Affiliate shall have the right, in Affiliate's sole and absolute discretion, to discontinue carriage of the Service on any or all Systems, and to delete any or all Systems from Schedule 1, by providing Network with no less than sixty (60) days prior written notice of such deletion and discontinuance; provided, however, if such deletion and discontinuance is due to political, legal or community pressure, such sixty (60) days' notice shall not be required prior to such deletion or discontinuance but, instead, Affiliate shall give notice to Network and Network shall have ten (10) days to propose and, if agreed to by Affiliate in its sole and absolute discretion, to implement a plan to cure such pressure. If such plan is not successful, as determined by Affiliate in its sole and absolute discretion, within ten (10) days after commencement of implementation of such plan, then Affiliate may immediately discontinue carriage of the Service from such System(s) and delete such System(s) from Schedule 1. After such discontinuance and deletion, the System(s) shall cooperate with Network to the extent reasonably necessary to determine the feasibility of re-launching the Service in such System (s), which re-launch shall be in the sole and absolute discretion of Affiliate. (c) Notwithstanding any provision of this Agreement to the contrary, Affiliate shall not intentionally authorize any use of the Service in a commercial establishment including; without limitation, any restaurant, tavern, bar, club, fraternal organization, hospital, correctional facility or any communal room in an otherwise residential building (including, without limitation, any lobby or social room in an apartment house, dormitory, drilling rig or similar place); provided, however, that affiliate may authorize Pay-per-view (as defined herein) exhibitions of the Service and 3 Subscriptions (as defined herein) to the Service in sorority, fraternity and dormitory rooms; provided further, that Affiliate may authorize Pay-per-view exhibitions of the Service, but not Subscriptions to the Service, in individual rooms of transient occupancy, such as hotel, motel and hospital guest rooms and jail cells, except that sorority houses, fraternity houses and dormitories shall not be considered places of transient occupancy for purposes of this Agreement. Furthermore, Affiliate shall take all reasonable precautions to prevent such impermissible uses from occurring through the facilities of a cable television system which is a System. (d) (d) For the first thirty (30) days following commencement of carriage of the Service by a System, such System may provide the service, to its employees, only, free of charge without any obligation to sell or promote the Service to customers (the "Test Period"). At the end of the Test Period in each System, such System may determine to terminate carriage of the Service or to continue carriage pursuant to the terms of this Agreement. Any determination by a System to terminate carriage of the Service will not result in any charge, fee or penalty to Affiliate or to such System. 2. TERM: (a) Unless terminated sooner pursuant to the terms of this Agreement, the "Term" of this Agreement shall consist, collectively, of the Initial Term and any number of Renewal Terms. The Initial Term of this Agreement shall commence upon the date of execution hereof and shall terminate on December 31, 2001, unless terminated sooner pursuant to the terms of this Agreement. Notwithstanding the foregoing, Network and Affiliate hereby ratify the terms and conditions (including, but not limited to, the payments made by Affiliate and affiliates of Affiliate) of carriage of the Service by cable television systems that met the System Qualifications of Exhibit A hereto, for the period ending on the date of execution hereof. (b) This Agreement shall automatically renew for successive five (5) year periods (each, a "Renewal Term") after the expiration of the initial Term and each Renewal Term, unless either, (i) this Agreement is terminated earlier in accordance with the terms hereof, or (ii) Affiliate, in Affiliate's sole and absolute discretion, elects to terminate this Agreement pursuant to Section 5(h) hereof. 3. CONTENT OF THE SERVICE: (a) Throughout the Term, the programming on the Service shall consist of not less than ten (10) hours per day (initially, from 8:00 p.m. to 6:00 a.m. prevailing Eastern Time) of high-quality adult programming with a sexual theme and format, (including, but not limited to, R-rated (or R equivalent non-rated) and NC-17 rated (or NC-17 equivalent non-rated) cable version motion pictures) substantially similar to the program schedule attached hereto as Exhibit B-1. The Service shall not contain any third party promotional material, including without limitation, commercials, advertising or infomercials, except that the Service may contain program sponsorship billboards, or acknowledgements. Nothing in this paragraph shall be deemed to limit Network's rights set forth in Section 7(e). The content of the Service shall also, be consistent with 4 Network's standards and practices as of this date, attached hereto as Exhibit B-2. Notwithstanding anything in the foregoing which may be inconsistent herewith, the Service shall not contain any programming depicting rape, necrophilia; sadism, sadomasochism, bondage, incest, bestiality or programming involving or suggesting sexual activity with, between, or among minors. Network shall, during each month of the Term, send one copy of its monthly program schedule to Affiliate, in care of: Vice President, Programming. (b) During the Term, Network shall provide the Service in its entirety to Affiliate. When the phrase "in its entirety" is used in this Section 3(b), it means that each subscriber of Affiliate receiving the Service shall be able to receive, at all points in time, all programming received at each such point in time by any other subscriber to the Service, and if any subscriber to the service is receiving, at such point in time, programming that is different than the programming received by any Subscriber (as defined herein) receiving the Service at such point in time, Affiliate shall have the unconditional right to elect which of such programming it desires to receive and utilize at any System, and which of such programming it will authorize for reception by PPV Satellite Subscribers (as defined herein) and Service Satellite Subscribers (as defined herein); provided, however, that the foregoing rights of Affiliate and obligations of Network shall not apply to limited testing by Network in specific selected systems. 4. DELIVERY AND DISTRIBUTION OF THE SERVICE: (a) During the Term, Network shall, at its own expense, deliver a signal of the Service to the earth station(s) of each System, to each PPV Satellite Subscriber and to each Service Satellite Subscriber and to any other location within the continental United States designated by Affiliate (in its sole and absolute discretion), by transmitting such signal via a domestic satellite commonly used for transmission of domestic cable television programming and shall, at its own expense, continue to fully encode the satellite signal of the Service utilizing scrambling technology commonly used in the domestic cable television industry. Except as otherwise provided in this Section 4(a), Affiliate shall, at its own expense, furnish an earth station and all other facilities necessary for the receipt of such satellite transmission and the delivery of such signal to the PPV Cable Subscribers and/or Service Cable subscribers (each as defined herein). In the event Network either (i) changes the technology used by Network to encrypt the Service to a technology not compatible with a System's or Systems' then-existing descrambling equipment, or (ii) changes the satellite to which the Service is transmitted to a satellite not susceptible to viewing by a System's or Systems' then-existing earth station equipment, Affiliate shall then have the right to delete from Schedule 1 of this Agreement, immediately, such System or Systems, and to discontinue carriage of the Service, immediately; from such System or Systems; provided that this right of deletion and discontinuance shall not apply to any System or Systems if, (1) Network agrees, unconditionally, to reimburse such system or Systems, either, as the case may be, (A) for the cost to such System or Systems to acquire and install new equipment necessary for such System or Systems to descramble the signal of the Service, and/or (B) for the cost to purchase and install equipment reasonably necessary for such System or Systems to receive the Service from such new satellite; (2) physical space exists at the then-existing 5 head-end or earth station site to accommodate the necessary equipment; and (3) current zoning and other restrictions permit such additional equipment. (b) Network shall provide to each System distributing the Service and to each PPV Satellite Subscriber and to each Service. Satellite Subscriber a video and audio signal of the Service of a technical quality equivalent to the greater of the following: (i) comparable to the technical quality of audio and video signals delivered by other cable television programming services; or (ii) the technical standards set forth in Exhibit c hereof. If, at any time during the Term, Network converts to a digital or other non-analog format, Network and Affiliate shall negotiate in good faith to agree upon replacement specifications for Exhibit C; provided, however, that the technical quality of the video and audio signal under the replacement specifications shall not be of a lesser technical quality than the video and audio signal quality of the service required hereunder in the month immediately preceding the conversion to a digital or other non-analog format. Each System will deliver to its Service Cable Subscribers and PPV cable Subscribers a principal video and audio signal of the Service of a technical quality at least comparable to other cable television programming services, but in no event higher than the technical quality provided by Network hereunder. (c) The Systems, if any, shall carry the Service no less than ten (10) hours per day, but may carry the Service any number of hours per day in excess of ten (10) if the Service is made available for more than ten (10) hours per day. Other than as specifically permitted in this Agreement, Affiliate will not insert or remove any material into or from the Service. Notwithstanding the foregoing, Network hereby grants each System which does not, at the pertinent time, have another pre-emptible or unused, technically capable channel available, permission to pre-empt such ten (10) hours of the Service for exhibition of up to four (4) Pay-per-view, (as defined below) events (which may not be movies) per month, (including replays of any such events); provided that Affiliate shall not pre-empt such ten (10) hours of the service for exhibition of Pay-per-view events or features, the content of which is substantially similar to the content of the Service Network; agrees that Affiliate will have complete authority to control, to designate and to change the channel(s) over which the Service is to be carried on each system. (d) Each System retains and reserves any and all rights in and to all signal distribution capacity contained within the bandwidth of the Service after receipt at each System, including, without limitation, the vertical blanking interval and audio sub-carriers (and any other portions of the bandwidth that may be created as a result of the conversion of the signal of the Service to a compressed, digital or non-analog format), Network shall not use any of the bandwidth other than as provided herein without the prior written consent of Affiliate. Nothing herein shall preclude Affiliate from exercising and exploiting such rights by any means and in any locations freely and without restriction; provided, however, that any such use by Affiliate or the Systems shall not degrade, or otherwise interfere with, the picture quality of the Service or the audio portion of the Service signal which is the principal audio carriage frequency of the Service. In the event Affiliate offers to a third-party provider of cable television programming services (which is not an affiliate of Affiliate) the right to use portions of 6 the signal distribution capacity contained within the bandwidth of the Service (other than the portion of the bandwidth used by the service and other than portions of the bandwidth made usable by conversion by Affiliate of the signal of the Service to a compressed, digital, or non-analog format), Affiliate shall give Network prior written notice of the financial terms and conditions of such offer. Upon such notice, Network shall have a right of first refusal to accept Affiliate's offer to use portions of the signal distribution capacity contained within the bandwidth of the Service (other than the portion of the bandwidth used by the service and other than portions of the bandwidth made usable by conversion by Affiliate of the signal of the Service to a compressed, digital, or non-analog format) upon the same financial terms and conditions as those offered by Affiliate to such unaffiliated third-party. Network shall have ten (10) days after such notice to exercise in writing its right of first refusal and to accept the grant pursuant to such financial terms and conditions. If Network does not exercise its right of first refusal within such ten (10) day period, then Network shall be deemed to have rejected such grant and waived all rights to such portions of the signal distribution capacity contained within the bandwidth of the Service signal. (e) Each System or other distribution facility or enterprise may offer the Service, (i) as a Subscription (as defined below) service and/or (ii) as a Pay-per-view service marketed and sold in any of the ways described in Section 5(a)(vii); provided, however, that if the Service is sold in combination with other programming services, the Service shall be sold in no less than ten (10) consecutive hour segments. The Service (in no less than ten (10) hour segments) may be sold in combination with other services (e. g., in a package of services or in a tier); provided that the Service, and/or viewing segments of the Service as described in Section 5(a)(vii), must always also be available for sale through each television distribution facility selling the Service under this Agreement on a purely a la carte basis. (f) Neither Affiliate, nor any affiliate of Affiliate, shall authorize others to copy, tape or otherwise reproduce any part of the Service without Network's prior written authorization, and each of the systems shall take reasonable and practical security measures to prevent the unauthorized or otherwise unlawful copying, taping or other reproduction of the Service by others through the facilities of the system. Affiliate shall not be responsible for home taping by anyone viewing the Service. Network acknowledges that this Section 4(f) does not restrict Affiliate's or any affiliate of Affiliate's practice of (i) connecting its subscribers, videotape recorders, video cassette recorders, or other devices susceptible to use for home duplication of video programming to the facilities of a System; or (ii) promoting home taping for personal use by Subscribers (as defined below). (g) Network hereby grants Affiliate the right to receive the signal of the Service, to digitize, replace, compress, modify or otherwise technologically manipulate the signal, and to transmit the signal as so altered (the "Altered Signal") to a satellite, or to a location within the continental United States designated by Affiliate (in its sole and absolute discretion), for redistribution to terrestrial or other reception sites capable of receiving and utilizing the Altered Signal. Network hereby grants Affiliate the right to deliver the Altered Signal (without substitutions, delays or preemptions (except 7 as otherwise permitted under Section 4(c) of this Agreement)) for the uses set forth in Section 1(a) of this Agreement, provided that no such alteration, transmission, redistribution, reception or other use will cause a material change in a viewer's perception of the principal video or principal audio presentation of the Service. Furthermore, Network shall not change the signal of the Service in such a way as to technically or technologically defeat, or otherwise interfere with, Affiliate's rights under this Section 4(g). In the event Network interferes with or otherwise prevents receipt, digitization, compression, modification, manipulation or utilization of the signal of the Service by Affiliate pursuant to this Section 4(g), and fails to remedy such interference within fifteen (15) days after written notice of such interference is given by Affiliate, then Affiliate shall have the right to delete any or all Systems from Schedule 1 of this Agreement, immediately, and to discontinue carriage, immediately, of the Service on any or all such Systems. 5. FEES: (a) In consideration of the terms and conditions set forth herein, Affiliate shall, subject to the provisions of Section 5(f) and Section 7(b), pay the Fees (as def fined herein) set forth below. Each of the four categories of Fees defined below (PPV Satellite Fees, Service Satellite Fees, PPV Cable Fees and Service Cable Fees) shall be calculated, stated and reported separately from the others. As used in this Agreement, the following terms have the following meanings: (i) "PPV Satellite Subscriber" means someone who, (1) is a Satellite Subscriber, (2) receives a complete and technically satisfactory viewing of a viewing segment of the Service as a PPV service, and (3) is authorized to receive the Service by or through Affiliate or an affiliate of Affiliate pursuant to the terms of this Agreement. "PPV Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales! of the Service to PPV Satellite Subscribers. (ii) "Service Satellite Subscriber" means someone who, (1) is a Satellite subscriber, (2) utilizes the Service as a Subscription service, and (3) is authorized to receive the service by or through Affiliate or an affiliate of Affiliate pursuant to the terms of this Agreement. "Service Satellite Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to service Satellite Subscribers. (iii) "PPV Cable Subscriber" means someone who, (.1) is provided the Service by or through Affiliate or an affiliate of Affiliate pursuant to the terms of this Agreement, (2) receives a complete and technically satisfactory viewing of a viewing segment of the Service as a PPV service, and (3) receives the Service by means other than Satellite. "PPV Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the Service to PPV Cable Subscribers. (iv) "Service Cable Subscriber" means someone who (1) receives the Service by means other than Satellite, (2) utilizes the Service as a Subscription service, and (3) receives the Service by or through Affiliate or an affiliate of 8 Affiliate pursuant to the terms of this Agreement. "Service Cable Fees" are those Fees payable by Affiliate to Network in connection with sales of the service to Service Cable Subscribers. (v) "Subscribers" mean, collectively, PPV Satellite Subscribers, Service Satellite Subscribers, PPV Cable Subscribers and Service Cable Subscribers. (vi) "Fees" means, collectively, PPV Satellite Fees, Service Satellite Fees, PPV Cable Fees and Service Cable Fees payable by Affiliate to Network during the Initial Term. Fees payable by Affiliate to Network during a Renewal Term are referred to herein as Renewal Fees. (vii) "Pay-per-view" or "PPV" means the authorization of a subscriber (such as a PPV Satellite Subscriber or PPV Cable Subscriber) to receive at least one viewing segment of the Service for a fee separate and distinct from fees paid by such subscriber for other television or audio services. Viewing segments may include, but are not limited to, any five (5) consecutive hour segment, any reasonable portion of a single night's (or days) performance of the Service, pay-per-night, pay per-weekend, or any other segment of the Service representing a reasonable viewing period. (viii) "Subscription" means the authorization of a subscriber (such as a Service Cable Subscriber or Service Satellite Subscriber) to receive the Service as a subscription service (on a monthly basis, on an annual basis, or on some other basis representing a reasonable subscription period) either on an a la carte basis or as part of a package of other services, or both. (ix) "Addressable Subscriber" means a cable television system subscriber whose television set is connected on the subscriber's premises to equipment operated by Affiliate, or an affiliate of Affiliate, that allows the channel on which the service is received to be turned on or off (i.e., "authorized" or "de-authorized") from a central location, controlled by the operator of the pertinent System or such operator's agent or designee. (x) "Gross Receipts" means the amount billed for the Service to a PPV Cable Subscriber, PPV Satellite Subscriber, Service Satellite Subscriber or Service Cable Subscriber (as the case may be) less all applicable taxes, franchise fees or other charges, levies or assessments imposed by governmental entities or agencies thereof attributable to the purchase or sale of the Service or any portion thereof. (xi) "Network Share" means that portion of Gross Receipts which is payable by Affiliate to Network as Fees or Renewal Fees pursuant to this Agreement. (xii) "Gross Receipts Per Addressable Subscriber" mean Gross Receipts attributable to purchases (including Pay-per-view and subscription purchases) of the Service in a System in a Reporting Period (as defined below) divided by the number of Addressable Subscribers in such System as of the last day of such Reporting Period (as 9 determined by Affiliate on the first day of the calendar quarter which includes said last day of the pertinent Reporting Period, or as adjusted pursuant to Section 5(d) hereof). (b) Subscription (i) For each calendar month during the indicated calendar year during the Initial Term, Affiliate will pay Network a Service Cable Fee per Service Cable Subscriber in such month in an amount equal to the following: Service Cable Fee For the Calendar Year Per Service Cable Subscriber --------------------- ---------------------------- 1992 ***** 1993 ***** 1994 ***** 1995 ***** For each calendar month during the calendar years of the Initial Term after 1995, Affiliate will pay Network a Service Cable Fee per Service Cable Subscriber in such month equal to the greater of (A) *****, or (B) ***** of the Gross Receipts attributable to each such Service Cable Subscriber, except that such ***** shall be subject to reduction as provided in Section 5(d) below. When the Service is sold to a Service Cable Subscriber in combination with other services for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts deemed to be attributable to a Service cable subscriber for the Service shall be equal to the total Gross Receipts for the tier or package of services sold in combination with the service, multiplied by a fraction, the numerator of which is the a la carte retail charge for the service otherwise charged by the pertinent System and the denominator of which is the numerator plus the aggregate of the a la carte retail charges otherwise charged by the pertinent System for the other services included in the tier or package of a la carte or other services. (ii) During the Initial Term, Affiliate shall pay a monthly Service Satellite Fee to Network-per Service Satellite Subscriber in the indicated calendar year of the amount indicated (regardless of whether such Service Satellite Subscribers purchase the Service alone, as an a la carte service or as part of a tier or package of a la carte or other services and regardless of the amount of Gross Receipts attributable to such Service Satellite Subscribers) as follows: For any and For the First For the next all 24,999 Service 15,000 Service additional Satellite Satellite Service Subscribers Subscribers Subscribers ---------------- ---------------- ---------------- 1993 ***** ***** ***** 1994 ***** ***** ***** 10 For any and For the First For the next all 24,999 Service 15,000 Service additional Satellite Satellite Service Subscribers Subscribers Subscribers ---------------- ---------------- ---------------- 1995 ***** ***** ***** 1996 ***** ***** ***** 1997 ***** ***** ***** 1998 ***** ***** ***** 1999 ***** ***** ***** 2000 ***** ***** ***** 2001 ***** ***** ***** (iii) The number of service Satellite Subscribers or Service Cable Subscribers (as the case may be) for whom Affiliate shall pay each month shall be the average of (A) the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) on the first day of the month, and (B) the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) on the last day of the month. Service Satellite Subscribers or Service Cable Subscribers (as the case may be) shall include each occupied dwelling (whether a single family home or a multiunit building), drilling rig, nursing home room, dormitory room, fraternity room, sorority room, or other location in which the Service is received. If Affiliate provides the Service to multiple dwelling complexes, including, but not limited to, apartment buildings, on a bulk-rate basis, the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate charged a complex for the Service divided by the standard monthly retail rate charged a non-bulk rate Service Satellite Subscriber or Service Cable Subscriber (as the case may be) for the service in the applicable System or by the pertinent satellite distributor, as the case may be. The monthly number of Service Satellite Subscribers and the monthly number of Service Cable Subscribers shall each be calculated, stated and reported separately from the other. (iv) The Service Cable Fees and Service Satellite Fees payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the calendar month to which they relate. (c) PPV For each PPV Cable Subscriber and each PPV Satellite Subscriber who receives and pays for one (1) complete and technically satisfactory viewing of one (1) viewing segment of the Service during the Initial Term, Affiliate will pay Network a PPV Cable Fee or PPV Satellite Fee (as the case may be) in an amount equal to the greater of: (A) *****, or (B) the Network Share of the Gross Receipts paid by such PPV Cable Subscriber or PPV Satellite Subscriber to Affiliate. "Network Share" shall equal ***** percent ***** of the Gross Receipts paid by each PPV Satellite Subscriber and shall equal ***** percent ***** of the Gross Receipts paid by each PPV Cable Subscriber, 11 except that such ***** percent ***** paid by each PPV Cable Subscriber shall be subject to reduction as provided in Section 5(d) below. (d) During the Initial Term, the Network Share in any System for Any Reporting Period shall be subject to reduction (from the ***** percent ***** of Gross Receipts otherwise payable by Affiliate to Network hereunder) based upon the aggregate number of cents in Gross Receipts attributable to PPV Cable Subscribers and Service Cable Subscribers in such System in such Reporting Period as measured against the number of Addressable Subscribers in such System during such Reporting Period (provided, however, that the number of Addressable Subscribers in each System shall be determined by Affiliate on the first calendar day of each calendar quarter and each such number of Addressable Subscribers so determined shall be applied for each Reporting Period which concludes during that pertinent calendar quarter; provided, however, that if the number of Addressable Subscribers in a System increases or decreases more than ***** percent ***** in a calendar quarter, then the number of Addressable Subscribers attributable to such System for Reporting Periods which conclude during such calendar quarter shall be equal to the average of the number of Addressable Subscribers in such System on the first calendar day of such calendar quarter and the number of Addressable Subscribers in such System on the first calendar day of the succeeding calendar quarter; provided, further, that Affiliate shall make appropriate adjustments in its payments to Network to properly pay under this provision), as follows: For the calendar years 1993, 1994, and 1995: If the Gross Receipts Per Then, the Network Share For Addressable Subscriber In A Such Calendar Month for System in a Calendar Month purchases by PPV Cable Is: Subscribers in such System shall be: (A) equal to or greater than $.42 but less than $.62 (A-1) ***** (B) equal to or greater than $.62 (B-1) ***** For the calendar years 1996, 1997 and 1998: If the Gross Receipts Per Then the Network Share For Addressable Subscriber In A Such Calendar Month for System in a Calendar Month purchases by PPV Cable Is: Subscribers and Service Cable Subscribers in such System shall be: (C) equal to or greater than $.46 but less than $.68 (C-1) ***** 12 (D) equal to or greater than $.68 (D-1) ***** For the calendar years 1999, 2000 and 2001: If the Gross Receipts Per Then the Network Share For Addressable Subscriber In A Such Calendar Month for System in a Calendar Month purchases by PPV Cable Is: Subscribers and Service Cable Subscribers in such System shall be: (E) equal to or greater than $.50 but less than $.75 (E-1) ***** (F) equal to or greater than $.75 (F-1) ***** (e) The PPV Cable Fees and PPV Satellite Fees payable by Affiliate to Network hereunder for each PPV Cable Subscriber and each PPV Satellite Subscriber who receives and pays for one complete and technically satisfactory Pay-per-view viewing of a segment of the Service pursuant to this Agreement during a Reporting Period during the Term shall be due and payable forty-five (45) days after the last day of the calendar month which includes the last day of the Reporting Period. The term "Reporting Period" shall mean the days from the end of each System's or Satellite distributor's prior monthly reporting period (which date may vary in each System or for each Satellite distributor from the 20th of the calendar month to the last day of the calendar month) to the end of the System's or Satellite distributor's then current monthly reporting period. Affiliate shall have the right, however, to make adjustments to any month's payment in an amount equal to the portion of a previous month's PPV cable Fees and/or PPV Satellite Fees which represents an overpayment or underpayment. (f) Notwithstanding any other provision of this Agreement to the contrary, no Fees shall be payable for PPV Satellite Subscribers, PPV Cable Subscribers, Service Satellite Subscribers or Service Cable Subscribers if such Subscribers are (i) employees of Affiliate or of an affiliate of Affiliate who are not charged for the Service; or (ii) public officials, administrative personnel or public buildings that are not charged for the Service; or (iii) subscribers who have not paid their cable television bill for a given month and are subsequently disconnected; or (iv) subscribers who, in the good faith exercise of reasonable judgment by an employee either of Affiliate or of an affiliate of Affiliate, are excused from paying for the Service either because such subscriber claims that the Service was not properly or intentionally ordered or because such subscriber claims that a complete and technically satisfactory viewing of the Service was not received. In addition, except for the categories of Subscribers described in (i), (ii), (iii) and (iv) of this paragraph, Affiliate shall not provide the Service or any viewing segment thereof to persons who are not charged therefor. 13 (g) Any undisputed PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees payable by Affiliate to Network hereunder, and any undisputed amounts payable by Network to Affiliate or any System pursuant to Section 7 hereof, that are unpaid after they are due and payable, shall accrue interest at one and one-half percent (1-1/2%) per month or the highest lawful rate, whichever is less, from the due date until payment is received by Network, a System or Affiliate, (as the case may be); provided, however, that any dispute which has the effect of suspending the accrual of interest under this sentence must be a good faith dispute. Each delinquent party shall be liable to the other party for all reasonable costs and expenses (including, without limitation, reasonable counsel fees, disbursements, and administrative or court costs) in connection with the collection of any such overdue amounts. In the event of a good faith dispute regarding any Fees or Renewal Fees, no such disputed Fees or Renewal Fees shall be subject to the terms or conditions of this Section 5(g). (h) Network shall have the right to renegotiate the PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees>and Service Cable Fees applicable to any Renewal Term upon written notice to Affiliate at least twelve (12) months ,prior to the end of the Initial Term or the Renewal Term immediately preceding such Renewal Term. Any such Renewal Fees shall be effective upon the commencement of such Renewal Term. Said Renewal Fees shall be effective for such five (5) year Renewal Term. If no agreement regarding Renewal Fees is reached upon the expiration of the Initial Term or any Renewal Term, Affiliate may elect in its sole and absolute discretion either to terminate this Agreement or to provide the Service under this Agreement to Subscribers at a rate equal to the Renewal Fee established by Network in connection with such renewal and such subscribers. 6. REPORTS: (a) For all Reporting Periods after the Test Period, Affiliate shall send to Network along with the payments, if any, due under Section 5 hereof, informational statements on a form mutually acceptable to Affiliate and Network. Each statement shall set forth information necessary to the calculation of the Fees or Renewal. Fees paid. Each of the four categories of Fees` shall be calculated, stated, and reported separately from the others. (i) The statements accompanying each month's Service Cable Fees and Service Satellite Fees, respectively, shall include, on a System-by-System and Satellite distributor-by-Satellite distributor basis, the number of Service Cable Subscribers and Service Satellite Subscribers and, in the case of Systems, the number of basic subscribers, as of the first day of the month and as of the last day of the month, and the average thereof, and commencing in 1996 in the case of Systems, the Cross Receipts attributable to Service Cable Subscribers, the number of Addressable Subscribers as of the first calendar day of the calendar quarter which includes the last day of such Reporting Period, and the Cross Receipts per Addressable Subscriber for each System; and such other information as may be necessary for the calculation of the Service Cable Fees and Service Satellite Fees paid. 14 (ii) The statement accompanying each month's PPV Cable Fees shall include, on a System-by-System basis, the number of PPV Cable Subscribers (in the form of the number of Pay-per-view purchases of the Service); the Cross Receipts paid by such PPV Cable Subscribers at each price level; on a System-by-System basis., the number of basic subscribers, and the number of Addressable Subscribers as of the first calendar day of the calendar quarter which includes the last day of such Reporting Period, and the Gross Receipts per Addressable Subscriber for each System; and such other information as may be necessary for the calculation of the PPV Cable Fees paid. (iii) The statement accompanying each months PPV Satellite Fees shall include the number, of PPV Satellite Subscribers in the form of the number of Pay-per-view purchases of the Service; the Gross Receipts paid by such PPV Satellite Subscribers; and such other information as may be necessary for the calculation of the PPV Satellite Fees paid. (iv) In November 1998, Affiliate shall provide Network with information necessary to allow Network to determine whether its right of termination provided for in Section 9(a)(v)(B) is operable. (b) Network shall send to Affiliate, not later than forty-five (45) days after the end of each calendar month for which payment pursuant to Section 7 hereof is due, a statement on a form mutually acceptable to Affiliate and Network which sets forth all pertinent information to compute the amount due to Affiliate for such calendar month. Network shall deliver such statement to Affiliate prior to or along with the amount payable to Affiliate as provided in this Agreement. (c) Affiliate and Network each agree to keep and maintain accurate books and records of all matters directly relating to this Agreement in accordance with generally accepted accounting principles. During the Term and for two (2) years after the termination or expiration of this Agreement, such books and records of each party shall be available to the other party for inspection and audit, during normal business hours, at the inspecting party's expense and at the other party's offices, upon reasonable notice to the other party. Each party's right to perform such audit shall be limited to once in any nine (9) month period during the Term (and, in the case of Network audits of Affiliate, Network's rights under this sentence shall consist of one (1) audit in any nine (9) month period of any System, whether the audit of such System is conducted at the System or at another office or place of business of Affiliate or an affiliate of Affiliate) and shall be limited to an audit with respect to amounts to be paid in the then-current and prior calendar year only, provided, however, that if Affiliate requires that Network conduct such audits at individual System locations, Network shall be limited to audits of the then-current and two prior calendar years only. If either party audits the other party's books hereunder, the inspecting party must make any claim against the other party within the earlier of, three (3) months after the inspecting party or the inspecting party's representative leaves the other party's offices, or twenty-four (24) months after the close of the earliest month which is the subject of such audit or inspection (which twenty-four (24) months shall be extended to thirty-six (36) months for Systems if Affiliate requires that Network conduct audits at individual system locations). Furthermore, any claim must 15 relate to the then-current calendar year or the immediately preceding calendar year only, provided, however, that if Affiliate requires that Network conduct audits at individual System locations, such claims must relate to the then-current calendar year or the immediately preceding two calendar years only. If a claim is not made within such time, then all amounts paid during such time period shall be deemed final and uncontestable and the inspecting party will be deemed to have waived its right to collect any shortfalls from the other party for the period(s) audited. 7. PROMOTION: (a) Commencing three months after the commencement of the sale of the Service to the customers of any System, and immediately upon the commencement of the sale of the Service to Satellite Subscribers under this Agreement (as the case may be) Network shall contribute $.02 per copy for any pay-per-view catalogue or pay-per view guide utilized by the Systems or by any Satellite distributor of the Service under this Agreement which includes ;listings for the Service and at least one (1), one quarter (1/4) page advertisement for the service, whether or not a subscriber receives such catalogue or guide without charge once each calendar month throughout the Term hereof, each System and each Satellite distributor of the Service under this Agreement shall be entitled to claim the contribution from Network provided for in this Section 7(a) by providing. Network with appropriate documentation verifying the quantity and content of the guides or catalogues for which such contribution is sought. Network shall remit such contributions to the appropriate Systems and Satellite distributors no later than forty-five (45) days after receipt of such documentation. (b) Notwithstanding the provisions of Section 5 of this Agreement to the contrary, any System which launches the Service ***** after the Test Period, if any, that the System carries the Service; provided, however, that the Test Period, if any, in any System shall terminate immediately upon the first sale of the service in the System to a customer; provided, further, that Affiliate shall expend an amount of funds, in any System which launches the Service (which amount is in the aggregate equal to or greater than the amount of Service Cable Fees or PPV Cable Fees ***** during such ***** period in the absence of this paragraph), either to, (Y) reimburse Affiliate or an affiliate of Affiliate for the costs of a market or community research survey regarding programming, including adult programming, undertaken in connection with, or preparatory to, the launch of the Service on the pertinent System, (ii) acquire equipment necessary to descramble the signal of the Service, or (iii) advertise or promote the Service using methods and expenditures mutually agreeable to Affiliate and Network. Furthermore, each System shall provide Network with written documentation (such as receipts or invoices) reflecting such System's expenditures under this paragraph no later than forty-five (45) days after the ninetieth day after the expiration of the Fee Waiver Period. If and to the extent that by ninety (90) days after the expiration of the Fee Waiver Period, any System has expended an amount of funds under the preceding sentence which is less than the amount of the Service Cable Fees and PPV Cable Fees so waived during the Fee Waiver Period, then the difference shall be remitted to Network promptly. Affiliate shall not be eligible to take advantage of this paragraph more than once for any System. 16 (c) Network may not, without Affiliate's prior written consent, undertake marketing tests or surveys, rating polls or any other research in the systems in connection with the Service. With respect to any test, survey, rating poll or research which applies to a System or Systems for which Network seeks Affiliate's consent, Network shall notify Affiliate of the nature and scope of each such project and, upon Affiliate's prior written consent to such project (which consent may be withheld in Affiliate's sole and absolute discretion), Affiliate will, to the extent permitted by applicable lam and company policy, cooperate in such research by rendering such assistance as Network may reasonably request and as Affiliate can reasonably provide, the cost of which assistance shall be borne by Network. Network shall provide Affiliate, without cost to Affiliate, with the results of such research to the extent it applies to z System or Systems. Furthermore, Network shall otherwise keep the results of all research relating to a System or Systems confidential under the provisions of Section 12 hereof and shall retain the results of such research in an aggregate form only, which results do not identify any subscriber, cable television system or cable television operator. (d) Network shall have the right to review and approve, in advance, any of Affiliate's publicity, and the publicity of any affiliate of Affiliate or any subdistributee under this Agreement, about the Service, which approval shall not be unreasonably withheld or delayed. Affiliate has not and will not acquire any proprietary rights in any trade names, trademarks, service marks or logos associated with Network or its parent corporation (the "Marks") by reason of this Agreement or otherwise. Affiliate further acknowledges the great value of the goodwill associated with the Marks and the public renown and recognition of the same, and that the Marks have a distinctiveness and a secondary meaning that is firmly associated in the minds of the trade and general public with Playboy Enterprises, Inc. and/or Network, and that any additional goodwill in the Marks which may be created through the use of the Marks by Affiliate shall redound to the sole benefit of Playboy Enterprises, Inc: and/or Network, as the case may be. Affiliate may use the Marks only for the promotion of the programs and program services of Network which Affiliate or any affiliate of Affiliate or any subdistributee under this Agreement distributes, and such use shall be in accordance with any further clear, unambiguous, reasonable prior written instructions that may be issued by Network from time to time. Affiliate shall submit any initial use of the Marks to Network for Network's prior written approval at least ten (l0) working days prior to their intended distribution which approval shall not be unreasonably withheld or delayed. Any use of any Mark that is not consistent with prior approved uses requires the prior express written approval of Network; which approval shall not be unreasonably withheld or delayed. Any such submission or request for approval shall be made simultaneously to General Manager, Playboy Television, 9242 Beverly Boulevard, Beverly Hills, California 90210 and to General Counsel, Playboy Enterprises, Inc., 680 N. Lake Shore Drive, Chicago, Illinois 60611. Network, through either of such officers, may, pursuant to the terms hereof, disapprove of any use of any Marks by Affiliate, which use does not meet the requirements hereof. Affiliate will not disseminate any material that has not been approved or deemed approved by Network in accordance with the terms hereof. Network shall use its best efforts to either approve or disapprove any such use within one (1) business day of Network's receipt of material for approval. Notwithstanding the foregoing, any such approval must be granted or withheld within five (5) business days of 17 Network's receipt of materials for approval. Failure by Network to respond within five (5) business days of Network's receipt of materials for approval will not be deemed approval. However, if Affiliate or any affiliate of Affiliate or any subdistributee under this Agreement resubmits such materials after the end of said five (5) business day period, then Network shall have two (2) additional business days to respond, after which, in the absence of response from Network, the use of such materials shall be deemed approved. For purposes of this Section 7, Network's disapprovals must be given in writing but approvals may be given telephonically. Unless otherwise specified by Network, all materials, involving the Marks shall include the following notice: "PLAYBOY AND RABBIT HEAD DESIGN ARE MARKS OF AND USED UNDER LICENSE WITH PLAYBOY ENTERPRISES, INC." (e) Network shall not, as a part of the Service, include any direct on-air marketing or sales of products or services, including, but not limited to, sales through "800", "900" or "976" telephone services (or other telephone services which impose a charge in addition to the telephone service provider's charge for placing the call); provided, however, that the Service may contain commercials for the Network or merchandise or services offered by Playboy Enterprises, Inc. or a subsidiary thereof ("Network commercials") if such Network Commercials do not exceed an average (measured monthly) of two (2) minutes per hour of the service. Network agrees that in the event Network includes any Network Commercials on the Service in excess of such average of two (2) minutes per hour, Network shall pay to Affiliate ten percent (l0%) of Net Sales receipts on all revenues, merchandise, or services sold to respondents in the Systems' zip code areas by such Network Commercials in excess of such two (2) minutes per hour on the Service. For purposes of this paragraph, "Net Sales" shall mean gross sales less taxes, fees, returns and allowances, freight out and cash discounts. Furthermore, Network agrees that in the event Network does any direct on-air marketing and sale of goods, merchandise or products offered by Playboy Enterprises, Inc. or a subsidiary thereof, Network shall provide Affiliate with lists of the names of respondents from within the zip code areas of the Systems who respond to such direct on-air marketing and sales, for use by Affiliate or any System or Systems. Any amounts payable by Network to Affiliate hereunder shall be due and payable forty-five (45) days after the end of the calendar month during the Term to which such amounts relate. (f) Network and Affiliate hereby acknowledge that (i) their interests are often in direct conflict, (ii) their relationship is often adversarial, and (iii) Network could cause Affiliate significant harm by the nature of Network's communications to Affiliate's subscribers or to the governmental entities or franchise or licensing authorities whose opinions and actions could adversely affect cable television systems affiliated with Affiliate. Therefore, Network shall not engage in any communications with any cable television subscribers or franchise or licensing authority or governmental entity in the operating Area of any cable television system which satisfies the requirements of Exhibit A hereto which would, or could, adversely interfere with the relationship between Affiliate or any affiliate of Affiliate and subscribers, or the relationship between Affiliate or any affiliate of Affiliate, and any governmental entities or community in any such operating Area. This provision shall not apply to any proceeding before any judicial body, to communications with Congress or any other branch or agency of the Federal 18 government, or to the contents of Playboy Magazine. This Section i(g) shall survive the expiration or termination of this Agreement for a period of two (2) years regardless of the reason for such expiration or termination. (g) Network shall not promote on the Service any other cable programming service which is affiliated with Network without the prior written consent of Affiliate. (h) Network shall make available to Affiliate, each System, and each distributor to Satellite Subscribers, such promotional materials, at no charge to Affiliate or to any System, to be used by Affiliate, such Systems and each distributor to Satellite Subscribers to advertise and promote the Service programming, provided, however., that Network shall have no obligation to provide any such materials to Affiliate if Network is not providing such materials to any other cable television system operator or satellite television programming distributor. Network shall exercise reasonable efforts to provide such materials, if available, to Affiliate no later than fifty (50) days prior to the first day of the calendar month to which they relate. 8. WARRANTIES AND INDEMNITIES: (a) Network represents and warrants to Affiliate that (i) Network is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) Network has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) Network is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Network has the authority to do so; (v) Network is in compliance with all laws, rules, regulations and court and administrative decrees to which it is subject including, without limitation, all applicable rules and regulations of the Federal Communications Commission (the "FCC"), the non-compliance with which might adversely affect Affiliate; (vi) Network has, or will have acquired at the time all or part of the Service is made available to Affiliate, good title to, and/or each and every property right (whether relative to tangible or intangible property), or license, usage or other right necessary or appropriate whatsoever to effectuate the acts or performances contemplated by, or satisfy the obligations imposed on it pursuant to, this Agreement, including all permits, rights, licenses and approvals necessary, required or appropriate for any and all performances through to the premises and to the listeners frequenting the premises of Service Cable subscribers, service Satellite Subscribers, PPV Cable Subscribers and PPV Satellite Subscribers; (vii) neither the Service, any program related thereto, or any component thereof is subject to, or the subject of, any lien, encumbrance, charge, lis pendens, administrative proceeding, governmental investigation, or litigation pending or threatened; (viii) the use and exhibition of the Service by Affiliate, as contemplated by this Agreement, will not cause Affiliate to violate any law, rule, regulation or court or administrative decree which in each case is constitutional; and (ix) the obligations created by this Agreement, insofar as they purport to be binding on Network, constitute legal, valid and binding obligations of Network enforceable in accordance with their terms. 19 (b) Affiliate represents and warrants to Network that (i) Affiliate is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) Affiliate has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) Affiliate is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Affiliate has the authority to do so; and (v) the obligations created by this Agreement, insofar as they purport to be binding on Affiliate, constitute legal, valid and binding obligations of Network enforceable in accordance with their terms. (c) Network represents and warrants to Affiliate that neither the service nor any material provided to Affiliate by Network in connection therewith including., without limitation, any advertising or promotional materials, will contain any material which will libel, slander or defame any person, and the Service and such additional materials provided to Affiliate will not, when exhibited, transmitted or otherwise exploited in accordance herewith, violate, infringe upon or give rise to any finally sustained adverse claim with respect to any contract right, common law right or any other right of any party (including, without limitation, any copyright, trademark, literary or dramatic right, music synchronization right, right of privacy or publicity or violate any law, or (when exhibited by Affiliate as contemplated hereby) cause Affiliate or any affiliate of Affiliate to violate any law. (d) Network represents, covenants, and warrants that the Service complies, and will continue to comply, in all respects with the commercial matter limitations of the Children's Television Act of 1990, Public Law 101-937 (October 18, 1990) and the regulations of the FCC promulgated thereunder as the same may apply to cable television systems and cable operators, including 47 C.F.R. ss. 76.225, 76.305, and as the same may from time-to-time be amended ("Children's Television Regulations"); provided further, that Network represents, covenants and warrants that it will provide to Affiliate all records demonstrating such compliance under the Children's Television Regulations as are necessary for Affiliate to timely demonstrate its compliance as a cable operator with the commercial matter limitations and record keeping requirements of the Children's Television Regulations, it being acknowledged by Affiliate that as of the date of this Agreement, the providing of a letter to Affiliate pursuant hereto substantially in the form attached hereto as Exhibit D shall constitute full compliance with the record-keeping information requirements under the Children's Television Act regulations existing as of the date hereof; provided further that the Service contains neither commercial matter nor children's programming as those terms are defined in such regulations; provided further that Network represents, covenants and warrants that the Service complies, and will continue to comply, with all origination cablecasting regulations of the FCC, including but not limited to 47 C.F.R. ss. ss. 76.205 - 76.221 (political equal time, personal attack, lotteries and sponsorship identification), as the same may from time to time be amended ("Origination Cablecasting Requirements"), and that Network shall provide Affiliate all necessary documentation required thereunder for Affiliate to timely meet its documentation and public file requirements under the Origination Cablecasting Requirements. In the event that any other programming offered by the Service shall be among the kind of programming which is regulated by federal, 20 state or local law, as the same may apply to pay television systems and operators, then Network shall provide to Affiliate all statements, records or other documents reasonably necessary for Affiliate to demonstrate timely compliance as an operator or distributor with such laws and regulations. (e) Affiliate and Network shall each indemnify, defend and forever hold harmless the other, the other's affiliated companies and each of the other's (and the other's affiliated companies) respective officers, directors, employees, partners and agents, against and from any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorney's fees, disbursements and administrative or court costs) arising out of any breach by it of any term of this Agreement or any warranty, covenant or representation contained herein. (f) Without limiting the provisions of Section 8(e) or Section 8 (g) hereof, Network will indemnify, defend and forever hold Affiliate ,and Affiliate's affiliated companies', and each of Affiliate's and Affiliate's affiliated companies' respective officers, directors, employees, partners and agents harmless from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorney's fees, disbursements and administrative or court costs) arising out of the content of the Service or the use and delivery of the Service (including, but not limited to, sponsorship, promotional and advertising spots, any background music and anything else inserted by Network or any party acting under authority of Network), including, without limitation, any losses, liabilities, claims, costs, damages and expenses based upon any lien, encumbrance, charge, lis pendens, administrative proceeding, government investigation or litigation relating to the Service, any program included in the Service or any component thereof, or based upon alleged or proven libel, slander, defamation, invasion of the right of privacy or publicity, or violation or infringement of copyright (including music performance rights for any and all performances through to subscribers), literary or music synchronization rights, obscenity or any other form or forms of speech (whether or not protected by the Constitution of the United States or any State) or otherwise arising out of the content of the Service as furnished by Network hereunder without any interruption, delay, editing or alteration except as required or otherwise caused by Network. In no event shall the foregoing indemnification include any compensation or reimbursement for loss of prospective profits or anticipated sales arising from any breach or alleged breach of Network's representations and warranties. (g) Without limiting the provisions of Section 8(e) or Section 8(f) hereof, Network shall indemnify, defend and forever hold harmless Affiliate and Affiliate's affiliated companies, and each of Affiliate's and Affiliate's affiliated companies respective officers, directors, employees, partners and agents from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements, court or administrative costs) or any other losses or liabilities of whatever nature, arising from any violation by Network of the Origination Cablecasting Requirements, including required documentation and public file requirements, or of the Children's Television. Regulations, either with respect to the 21 service or with respect to any of the compliance demonstration or record keeping requirements of the Children's Television Regulations. (h) In connection with any indemnification provided for in this Section 8, each party shall so indemnify the other only if such other party claiming indemnity shall give the indemnifying party prompt notice of any claim or litigation to which its indemnity applies; it being agreed that the indemnifying party shall have the right to assume the full defense of any or all negotiations, claims or litigation to which its indemnity applies. The indemnified party will cooperate fully (at the cost of the indemnifying party) with the indemnifying party in such defense and in the settlement of such claim or litigation, and the indemnified party shall make no compromise or settlement of any such claim without the prior written consent of the indemnifying party. The settlement of any claim or action by the indemnified party without the prior written consent of the indemnifying party shall release the indemnifying party from its obligations hereunder with respects to such claim or action so settled. In addition, with regard to any indemnification relating to any prosecution or claim arising from an alleged violation of statutory law concerning the content of the service, Network shall so indemnify, defend and hold harmless Affiliate as provided for in Section 8(f) hereof, only if each of the following conditions is met: (i) As soon as practicable after actual receipt by Affiliate's Vice President, Programming, of actual notice of commencement of a prosecution or claim involving the content of the Service, Affiliate or a representative of Affiliate shall notify both the General Counsel's office of Network in Chicago at (312) 751-8000 and Network's President in Beverly Hills at (310) 246-4000, or at other numbers hereafter specified by Network by giving Affiliate prior written notice of such other numbers. Such telephone notification shall be followed, within a reasonable period of time, by a letter to Network containing copies of all papers in the possession of the Vice President, Programming of Affiliate, served in connection with such alleged violation of law and giving whatever information is then in actual possession of Affiliate's Vice President, Programming regarding the incident. After said initial notifications, Network shall be solely responsible for further investigation and information gathering about the incident. (ii) Unless otherwise specified in this Section 8 (h) , Network shall be required to select and pay for counsel to represent Affiliate in any action relating to the content of the Service, and to which Affiliate is a party defendant, cross-claimant, third-party plaintiff, or counterclaimant. If Affiliate elects to engage its own counsel (in addition to any counsel selected and paid for by Network and acting as Affiliate's counsel) in connection with any such prosecution or claim described herein, it shall do so at its own cost and expense. Nothing herein shall abrogate Network's obligation to indemnify, defend and hold harmless Affiliate. 22 (i) Network represents, warrants and covenants that (i) it has obtained errors and omissions liability insurance covering the Service and all elements thereof from a nationally recognized insurance carrier and in accordance with industry standards; (ii) such insurance shall remain in full force and effect throughout the Term; (iii) Affiliate shall be named as an additional insured on such policy; and (iv) Network will provide Affiliate with documentation to such effect upon the execution hereof. (j) The representations, warranties and indemnities contained in this Section 8 shall continue throughout the Term and the indemnities shall survive the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 9. EARLY TERMINATION RIGHTS: (a) In addition to Network's other rights at law or in equity or pursuant to other provisions of this Agreement, Network may, by so notifying Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of this Agreement, provided, however, that if such breach is of the type that is curable, then Network shall not exercise its termination or other rights at law or in equity hereunder unless Network has, by so notifying Affiliate in writing, given Affiliate at least thirty (30) days to fully cure such material breach and to demonstrate to Network that such material breach has been cured, and provided further, that if such breach is confined to a System or to a limited number of Systems, Network shall have the right to terminate this Agreement only as to such System or Systems; or (ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has sought relief under any law related to Affiliate's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Affiliate, or any relief under any such law has been sought by any creditor (s) of Affiliate, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) upon 120 days prior written notice, if Network terminates delivery of the Service to all distribution technologies; provided that if Network commences distribution of a new service that contains any programming which is substantially similar to any programming included in the Service within twelve (12) months of such termination., Affiliate may, in its sole and absolute discretion, elect to carry such new service pursuant to the terms and conditions of this Agreement; or (v) if by December 31, 1998, Affiliate is not then making the Service available in Systems representing the lesser of (A) four million cable television subscribers; or (B) Systems representing forty percent (40%) of the cable television subscribers in systems which are then both managed and directly or indirectly owned at least ten percent (10%) by Tele-Communications, Inc. ("TCI") or a subsidiary of TCI, then, at any time during January, 1999, Network may terminate this Agreement as of the later of 120 days after the giving of such notice or the minimum time necessary for Affiliate to terminate its carriage of the Service in compliance with applicable law. (b) In addition to Affiliate's other rights at law or in equity or pursuant to other provisions of this Agreement, and in addition to any other right to terminate provided hereunder, Affiliate may, by so notifying Network, terminate this Agreement: (i) if Network is in material breach of this Agreement, provided, however, if such breach is 23 of the type that is curable, then Affiliate shall not exercise its termination or other rights at law or in equity hereunder unless Affiliate has, by so notifying Network, given Network at least thirty (30) days from the time such notice is sent, to fully cure such material breach and to demonstrate to Affiliate that such material breach has been cured; or (ii) if Network has filed a petition in bankruptcy, is insolvent or has sought relief under any law related to Network's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Network, or any relief under any such law has been sought by any creditor(s) of Network, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) on at least fifteen (15) days' notice in the event that delivery of the Service is discontinued or interrupted for a continuous period of fifteen (15) days. 10. FORCE MAJEURE: Except as herein provided to the contrary, neither Affiliate nor Network shall have any rights against the other party hereto for the non-operation of facilities or the non-furnishing of the Service if such non-operation or non-furnishing is due to an act of God; inevitable accident; fire; lockout; strike, or other labor dispute; riot or civil commotion; flood; hurricane; tornado; earthquake; war; act of government or governmental instrumentality (whether federal, state or local); failure of performance by a common carrier; failure in whole or in part of technical facilities; or other cause (financial inability excepted) beyond such party's reasonable control. Notwithstanding the foregoing, in the event of non-operation or non-furnishing of the service, Affiliate shall have the right, immediately, to insert programming of its choice on the channel otherwise identified with the Service until such time as the Service is fully operational again. In addition, with respect to Service Cable Subscribers and Service Satellite Subscribers, credit will be given to Affiliate, however, on that portion of the Service which is affected by any interruption during any month equal to the product of (x) the Fees which would be due for such month assuming no interruption of Service during such month, multiplied by (y) a fraction, the numerator of which is the total number of hours of interruption of the Service during such month and the denominator of which is the total number of hours of the Service which would have been provided during such month absent such interruption(s), provided, however, that such credit shall be given to Affiliate only if Affiliate shall pass on proportionate credit to its Service Cable Subscribers and Service Satellite Subscribers, as the case may be. 11. NOTICES: Any notice or report given under this Agreement shall be in writing, shall be sent postage prepaid by registered or certified mail return receipt requested or by hand or messenger delivery, or by Federal Express or similar overnight delivery service, or by facsimile transmission, to the other party, at the following address (unless either party at any time or times designates another address for itself by notifying the other party thereof by certified mail, in which case all notices to such party thereafter shall be given at its most recently so designated address): 24 To Network: 3242 Beverly Boulevard Beverly Hills, California 90210 Facsimile Number: (310) 246-4065 Attention: Programming Distribution cc: Associate General Counsel Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 To Affiliate: Terrace Tower II 5619 DTC Parkway. Englewood, Colorado 80111 Facsimile Number: (303)488-3219 Attention: President cc: Vice President, Programming cc: Corporate Counsel - Business Affairs cc: Vice President, Pay-Per-View Notice or report given by personal delivery shall be deemed given on delivery. Notice or report given by mail shall be deemed given on the earlier to occur of actual receipt thereof or on the fifth day following mailing thereof in accordance with the notice requirements of this Section 11. Notice or report given by Federal Express or similar overnight delivery service shall be deemed given on the next business day following delivery of the notice or report to such service with instructions for overnight delivery. Notice or report given by facsimile transmission, if receipt is electronically confirmed, shall be deemed given on the day of transmission if a business day, or on the next business day after the day of transmission if not transmitted on a business day. 12. CONFIDENTIALITY: PRESS RELEASES: Neither Affiliate nor Network shall disclose (whether orally or in writing, or by press release or otherwise) to, any third party (other than each party's respective officers, directors, and employees, in their capacity as such, and their respective auditors or attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such officers, directors or employees, auditors or attorneys), any information with respect to the terms and provisions of this Agreement, any information contained in any report delivered under the terms of this Agreement, any information regarding Affiliate's (or a System's) subscribers (including but not limited to, the number of such subscribers or the number of Addressable Subscribers) and neither party hereto shall disclose any information obtained in any inspection and/or audit of the other party's books and records, except: (i) to the extent necessary (but redacted to the greatest extent possible) to comply with law or with the 25 valid order of an administrative agency or a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other as promptly as practicable (and, if possible, prior to making such disclosure) and shall seek confidential treatment of such information; (ii) as part of its normal reporting or review procedure to its parent company, its auditors or its attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such parent company, its auditors or attorneys; (iii) in order to enforce its rights or perform its ,obligations pursuant to this Agreement; and (iv) if mutually agreed by Affiliate and Network, in advance of such disclosure, in writing. In addition, Network shall not use or disclose information (whether personally identifiable information or not) to any third party regarding Affiliate's or any affiliate of Affiliate's Subscribers and shall not engage in any direct mailing or telephone solicitation, for any purpose, to Subscribers of Affiliate or any affiliate of Affiliate, unless such Subscriber has previously initiated a communication with Network; provided, however, that the foregoing sentence shall not apply to information obtained by Network or an affiliate of Network in connection with sales of products or services other than the Service. This Section 12 shall survive the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 13. MISCELLANEOUS: (a) Assignment: Binding Effect; Reorganization. This Agreement, including both its obligations and benefits, shall redound to the benefit of the respective transferees and successors of the parties, except that neither this Agreement nor either party's rights or obligations hereunder shall be assigned or transferred by either party without the prior written consent of the other party; provided, however, no consent shall be necessary in the event of an assignment to a successor entity resulting from a merger, acquisition or consolidation by either party or assignment to an entity under common control, controlled by or in control of either party. Notwithstanding the foregoing, Network shall give Affiliate written notice of a change in the control or ownership of the Service or Network not later than the five (5) days after such change in control or ownership occurs provided, however, that Network shall use reasonable efforts to give Affiliate thirty (30) days notice in advance of any such change in control or ownership. In the event of any such change in the ownership or control of Network or the Service, this Agreement may, in the sole and absolute discretion of Affiliate, be terminated. For purposes of this paragraph, the term "control" means the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; provided, however, that no transfer of ownership or management of Network or the Service to any direct descendent of Hugh Hefner, either from Hugh Hefner or from another direct descendent of Hugh Hefner, shall be deemed to be a change o(euro) control hereunder. In addition to the foregoing, upon one hundred twenty (120) days' prior written notice to Affiliate, Network may assign this Agreement or any portion of its rights or obligations hereunder without Affiliate's consent, provided that, as a result of such assignment, the Service shall no longer generally be identified as a "Playboy" Service by or through the use of the Marks therein and the Service shall no longer include any "Playboy-identified" programming. Upon receipt of such notice, Affiliate may elect to terminate this Agreement, at any time thereafter, upon, ninety (90) 26 days' prior written notice to Network (or its assignee), to be effective on the date contained in Affiliate's notice. (b) Service Combinations. In the event that the Service is merged with; or Network acquires control of, or Network is acquired by or merges with, or control of Network is acquired by, or the Service is acquired by, any other programming service or the owner thereof, if Affiliate has (at the time of such merger or acquisition) an affiliation agreement with any such other service or entity, Affiliate shall have the option to choose to continue carriage of the Service and of such other service, as the case may be, under either this Agreement or under such other affiliation agreement. If Affiliate does not have an affiliation agreement with such other service or entity, Affiliate shall have the option to elect to have this Agreement continue to apply to the service after such merger or acquisition, or to any surviving service after such merger or acquisition. (c) Entire Agreement; Amendments: Waivers. This Agreement contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof. This Agreement may not be modified except in writing executed by both parties hereto. Any waiver of any provision of, or right included in, this Agreement must be in writing and signed by the party whose rights are being waived and no waiver by either Affiliate or Network of any breach of any provision hereof shall be or be deemed to be a waiver of any preceding or subsequent breach of the same or any other provision of this Agreement. (d) Governing Law. The obligations of Affiliate and Network under this Agreement are subject to all applicable federal, state and local laws, rules and regulations (including, but not limited to the Communications Act of 1934, as the same may be amended from time to time, and the rules and regulations of the FCC promulgated thereunder) and this Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York (except with respect to issues regarding perpetuity, which shall be governed by the laws of the State of Colorado), without regard to choice of law rules. (e) Relationship. Neither Affiliate nor Network shall be, or hold itself out as, the agent of the other under this Agreement. No subscriber of Affiliate shall be deemed to have any privity of contract or direct contractual or other relationship with Network by virtue of this Agreement or Network's delivery of the service to Affiliate hereunder. Likewise, no supplier of advertising or programming or anything else included in the service by Network shall be deemed to have any privity of contract or direct contractual or other relationship with Affiliate by virtue of this Agreement or Affiliate's carriage of the Service hereunder. Nothing contained herein shall be deemed to create, and the parties do not intend to create, any relationship of partners, joint venturers or agents, as between Affiliate and Network, and neither party is authorized to or shall act toward third parties or the public in any manner which would indicate any such relationship with the other. Network disclaims any present or future right, interest or estate in or to the transmission facilities of Affiliate and any affiliate of the Affiliate and the parents, subsidiaries, partnerships or joint venturers controlling the Systems on which 27 the Service is transmitted, such disclaimer being to acknowledge that neither Affiliate nor the transmission facilities of the Systems (nor the owners thereof) are common carriers. (f) *****. (g) Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein; provided however, that both parties shall negotiate in good faith with respect to an equitable modification of the provision, or application thereof, held to be invalid and provisions logically related thereto. Notwithstanding the foregoing, if any legislation is enacted, or administrative ruling, or court decree or order or stipulated settlement is issued which materially deprives Affiliate of the overall net economic benefits of this Agreement with respect to the cable exhibition of the service, and if the parties fail to reach an agreement after good faith negotiation, Affiliate shall have the right to terminate this Agreement upon thirty (30) days' prior written notice to Network. (h) No Inference Against Author. Network and Affiliate each acknowledge that this Agreement was fully negotiated by the parties and, therefore, no provision of this Agreement shall be interpreted against any party because such party or its legal representative drafted such provision. (i) No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. (j) Headings. The titles and headings of the sections in this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement. (k) Non-recourse. Notwithstanding anything contained in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that each and every representation, warranty, covenant undertaking and agreement made in this Agreement on the part of any of the parties to this Agreement was not made nor intended to be made as a personal representation, warranty, covenant, undertaking, or agreement on the part of any incorporator, stockholder, director, officer, partner, employee or agent, past, present or future, or any of them, and any recourse, whether in common law, in equity, by statute or otherwise, against any of them is hereby forever waived and released. The parties hereto have executed this Agreement as of the date first above written. 28 AFFILIATE: NETWORK: SATELLITE SERVICES, INC. PLAYBOY ENTERTAINMENT GROUP, a Delaware corporation INC., a Delaware corporation By: /s/ Jedd Palmer By: /s/ Michael K. Fleming JEDD PALMER MICHAEL K. FLEMING Title: Vice President, Programming Title: S.R. V.P. - General Mgr. PLAYBOY TELEVISION PLAYBOY ENTERTAINMENT GROUP 29 SCHEDULE 1 To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 SYSTEMS TCI OWNED AND MANAGED HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Maricopa Maricopa (Rio Verde) Maricopa Arizona Scottsdale Scottsdale Maricopa Arizona North Scottsdale Maricopa Arizona Shadow Mountain Maricopa Arizona Maricopa Maricopa Arizona Alameda Alameda Alameda California Alameda Nas Alameda California Brentwood Contra Costa East Contra Costa East California Brentwood Contra Costa East California Chino Pomona Los Angeles California Chino San Bernardino South California Carbon Canyon San Bernardino South California Chino Hills San Bernardino South California Cupertino Cupertino Santa Clara West California Los Altos Santa Clara West California Santa Clara Santa Clara West California Davis Davis Yolo California Yolo Yolo California Foster City Foster City San Mateo California Hillsborough San Mateo California Hacienda Heights La Puente Los Angeles California Pico River Los Angeles California Baldwin Park Los Angeles California Hayward Hayward Alameda California Alameda Alameda California San Leandro Alameda California HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- San Lorenzo Alameda California Lakeview/Nuevo Perris Riverside West California Lakeview/Nuevo Riverside West California Los Angeles Los Angeles Los Angeles California Martinez Contra Costa North Contra Costa East California Contra Costa South Contra Costa East California Lafayette North Contra Costa East California Lafayette South Contra Costa East California Martinez Contra Costa East California North Orinda Contra Costa East California Pleasant Hill Contra Costa East California Walnut Creek Contra Costa East California Moraga Contra Costa East California South Orinda Contra Costa East California Danville Contra Costa East California Clyde Contra Costa East California Concord Naval Contra Costa East California Weapons Station Moreno Valley Moreno Valley Riverside West California Palo Alto Palo Alto Santa Clara West California Atherton San Mateo California East Palo Alto San Mateo California Menlo Park San Mateo California Stanford Santa Clara West California Perris Perris Riverside West California San Jose San Jose Santa Clara West California Campbell Santa Clara West California Santa Clara County Santa Clara West California Cupertino Santa Clara West California Los Gatos Santa Clara West California Scotts Valley Santa Cruz Santa Cruz California Santa Cruz County Santa Cruz California Scotts Valley Santa Cruz California South Whittier South Whittier Los Angeles California Sunnyvale Sunnyvale Santa Clara West California Tracy Tracy San Joaquin California San Joaquin San Joaquin California Vacaville Vacaville Solano West California Solano Solano West California Walnut Creek Walnut Creek Contra Costa East California Contra Costa Contra Costa East California HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Woodcrest Woodcrest Riverside West California Castle Rock Castle Rock Douglas Colorado Acres Green Douglas Colorado The Pinery Douglas Colorado Franktown Douglas Colorado Parker Douglas Colorado Perry Park Douglas Colorado Sedalia Douglas Colorado Louviers Douglas Colorado Roxborough Village Douglas Colorado Denver Metroplex Arvada Jefferson/Adams Colorado Jefferson North Jefferson Colorado Westminster Jefferson/Adams Colorado Aurora Adams Colorado Fitzsimmons Army Med Adams Colorado Aurora Arapahoe Colorado Commerce City Adams Colorado Englewood Arapahoe Colorado Broadway Estates Arapahoe Colorado Arapahoe Arapahoe Colorado Greenwood Village Arapahoe Colorado Sheridan Arapahoe Colorado Cherry Hills Village Arapahoe Colorado Federal Heights Adams Colorado Adams Adams Colorado Buckley AFB Denver Colorado Holly Hills Arapahoe Colorado Lakewood Jefferson Colorado Golden Jefferson Colorado Jefferson South (Lakewood) Jefferson Colorado Douglas Douglas Colorado Adams County SMATVS Adams Colorado Chapparal Subdivision Arapahoe Colorado Hollywood Hollywood Broward Florida Miami Opa Locka Dade Florida Miami Dade Florida Carpentersville Algonquin Kane/McHenry Illinois Crystal Lake McHenry Illinois West Dundee Kane Illinois Lake in the Hills McHenry Illinois East Dundee Kane Illinois Cary McHenry Illinois Fox River Grove McHenry Illinois Carpentersville Kane Illinois Lakewood McHenry Illinois Oakwood Hills McHenry Illinois McHenry McHenry Illinois Sleepy Hollow Kane Illinois HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Huntley McHenry Illinois Kane Kane Illinois Lakemoor McHenry Illinois Wauconda Lake Illinois Galesburg Galesburg Knox Illinois East Galesburg Knox Illinois Knoxville Knox Illinois Knox Knox Illinois Mendota Mendota La Salle Illinois Monmouth Monmouth Warren Illinois Warren Warren Illinois Hammond Hammond Lake Indiana East Chicago Lake Indiana Bossier City Bossier City Bossier Louisiana Bossier Bossier Louisiana Barksdale AFB Bossier Louisiana Haughton Bossier Louisiana Fillmore Bossier Louisiana Princeton Bossier Louisiana Baltimore Baltimore Baltimore Maryland Berlin Berlin Worcester Maryland Worcester Worcester Maryland Ocean City Ocean City Worcester Maryland Sussex Sussex Maryland Fenwick Island Sussex Maryland Grand Rapids Grand Rapids Kent Michigan East Grand Rapids Kent Michigan Grand Rapids Township Kent Michigan Ada Kent Michigan Cascade Kent Michigan Lowell Kent Michigan Grandville Grandville Kent Michigan Georgetown Ottawa Michigan Byron Kent Michigan Dorr Allegan Michigan Jamestown Ottawa Michigan Lake Orion Independence Oakland Michigan Clarkston Oakland Michigan Lake Orion Oakland Michigan Orion Oakland Michigan Rochester Auburn Hills Oakland Michigan Rochester Hills Oakland Michigan HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Oakland Oakland Michigan Rochester Oakland Michigan Troy Oakland Michigan Royal Oak Royal Oak Oakland Michigan Berkley Oakland Michigan Clawson Oakland Michigan Ferndale Oakland Michigan Huntington Woods Oakland Michigan Pleasant Ridge Oakland Michigan Troy Oakland Michigan Walker Walker Kent Michigan Alpine Kent Michigan Plainfield Kent Michigan Cannon Kent Michigan Sparta Kent Michigan Wright Ottawa Michigan Talmadge Ottawa Michigan Grand Rapids Kent Michigan Grand Rapids Township Kent Michigan Wyoming Wyoming Kent Michigan Kentwood Kent Michigan Gaines Kent Michigan Bellevue Bellevue Sarpy Nebraska Offutt AFB Sarpy Nebraska Sarpy Sarpy Nebraska La Vista La Vista Sarpy Nebraska Ralston Douglas Nebraska Papillon Sarpy Nebraska Douglas Douglas Nebraska Omaha Douglas Nebraska Gallup Gallup McKinley New Mexico Gamerco McKinley New Mexico Brookhaven Brookhaven Suffolk New York Patchogue Suffolk New York Bellport Suffolk New York Lake Grove Suffolk New York Poquott Suffolk New York Mamaroneck Mamaroneck (Town) Westchester New York Mamaroneck (Village) Westchester New York Larchmont Westchester New York Bristow Bristow Creek Oklahoma Claremore Claremore Rogers Oklahoma Drumright Drumright Creek Oklahoma HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Tulsa Sand Springs Tulsa Oklahoma Tulsa Tulsa Oklahoma Broken Arrow Tulsa Oklahoma Owasso Tulsa Oklahoma Glenpool Tulsa Oklahoma Sapulpa Creek Oklahoma Jenks Tulsa Oklahoma Creek Creek Oklahoma Kiefer Creek Oklahoma Catoosa Rogers Oklahoma Tulsa Tulsa Oklahoma Rogers Rogers Oklahoma Wagoner Wagoner Oklahoma Osage Osage Oklahoma Rolling Hills Wagoner Oklahoma Abilene Abilene Taylor Texas Tye Taylor Texas Dyess AFB Taylor Texas Taylor Taylor Texas Jacksonville Jacksonville Cherokee Texas Cherokee Cherokee Texas Tyler Tyler Smith Texas Smith Smith Texas Whitehouse Smith Texas CAGUAS CABLE SYSTEMS Caguas Caguas n/a Puerto Rico Cayey Cayey-Cidra n/a Puerto Rico Barranquitas Barranquitas n/a Puerto Rico Humacao Humacao n/a Puerto Rico LENFEST COMMUNICATIONS Sellersville Bedminster Bucks Pennsylvania Blooming Glen Bucks Pennsylvania Chalfont Bucks Pennsylvania Colmar Montgomery Pennsylvania Dublin Bucks Pennsylvania Earlington Montgomery Pennsylvania East Greenville Montgomery Pennsylvania Elroy Montgomery Pennsylvania Fountainville Bucks Pennsylvania Franconia Montgomery Pennsylvania Green Lane Montgomery Pennsylvania Hatfield Montgomery Pennsylvania Harleysville Montgomery Pennsylvania Hilltown Bucks Pennsylvania HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- Lansdale Montgomery Pennsylvania Line Lexington Montgomery Pennsylvania Lederach Montgomery Pennsylvania Mainland Montgomery Pennsylvania Milford Square Bucks Pennsylvania Penasburg Montgomery Pennsylvania Perkasie Bucks Pennsylvania Perkiomenville Montgomery Pennsylvania Pipersville Bucks Pennsylvania Plumsteadville Bucks Pennsylvania Quakertown Bucks Pennsylvania Richlandtown Bucks Pennsylvania Salford Montgomery Pennsylvania Salfordville Montgomery Pennsylvania Sellersville Bucks Pennsylvania Schwensksville Montgomery Pennsylvania Silverdale Bucks Pennsylvania Skippack Montgomery Pennsylvania Souderton Montgomery Pennsylvania Spinnerstown Bucks Pennsylvania Spring Mount Montgomery Pennsylvania Sumneytown Montgomery Pennsylvania Telford Bucks Pennsylvania Telford Montgomery Pennsylvania Trumbauersville Bucks Pennsylvania Tylersport Montgomery Pennsylvania Woxall Montgomery Pennsylvania Zieglersville Montgomery Pennsylvania Perkaskie Borough Bucks Pennsylvania Sellersville Borough Bucks Pennsylvania West Rockhill Township Bucks Pennsylvania East Rockbill Township Bucks Pennsylvania Telford Borough Montgomery Pennsylvania Souderton Borough Montgomery Pennsylvania Hatfield Borough Montgomery Pennsylvania Hatfield Township Montgomery Pennsylvania Franconia Township Montgomery Pennsylvania Quakertown Borough Bucks Pennsylvania Richland Township Bucks Pennsylvania Milford Township Bucks Pennsylvania Richlandtown Borough Bucks Pennsylvania Trumbauersville Borough Bucks Pennsylvania Silverdale Borough Bucks Pennsylvania Lower Salford Township Montgomery Pennsylvania Salford Township Montgomery Pennsylvania Upper Salford Township Montgomery Pennsylvania Lower Frederick Township Montgomery Pennsylvania Green Lane Borough Montgomery Pennsylvania Marlborough Township Montgomery Pennsylvania Bedminster Township Bucks Pennsylvania Dublin Borough Bucks Pennsylvania Upper Frederick Township Montgomery Pennsylvania HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- US CABLE OF NORTHERN INDIANA Griffith Cedar Lake Lake Indiana Crook Co. Uninc. Cook Illinois Crown Point Lake Indiana Dyer Lake Indiana Ford Heights Cook Illinois Glenwood Cook Illinois Griffith Lake Indiana Highland Lake Indiana Hobart Lake Indiana Lake Co. Uninc. Lake Indiana Lake Station Lake Indiana Lowell Lake Indiana Lynwood Cook Illinois Merrillville Lake Indiana Munster Lake Indiana New Chicago Lake Indiana Porter Co. Uninc. Porter Indiana St. John Lake Indiana Schererville Lake Indiana Whiting Lake Indiana Will Co. Uninc. Will Illinois US CABLE OF LAKE COUNTY North Chicago North Chicago Lake Illinois Antioch Lake Illinois Fox Lake Lake Illinois Green Oaks Lake Illinois Gurnee Lake Illinois Knollwood & Shields Lake Illinois Lake Bluff Lake Illinois Lake Forest Lake Illinois Lake Villa Lake Illinois Libertyville Township Lake Illinois Lindenhurst Lake Illinois Park City Lake Illinois Third Lake Lake Illinois Venetian Village Lake Illinois Wadsworth Lake Illinois Waukegan Lake Illinois Winthrop Harbor Lake Illinois Zion Lake Illinois COLUMBIA ASSOCIATES Beaverton Beaverton Washington Oregon Tigard Washington Oregon Lake Osweg Clackamas Oregon Hillsboro Washington Oregon Washington Co. Uninc. Washington Oregon HEADEND NAME FRANCHISE NAME COUNTY STATE - ------------ -------------- ------ ----- King City Washington Oregon Cornelius Washington Oregon Tualatin Washington Oregon Sherwood Washington Oregon Rivergrove Clackamas Oregon North Plains Washington Oregon Banks Washington Oregon Durham Washington Oregon Wilsonville Washington Oregon Aloha Washington Oregon Wash Co-La Washington Oregon Gaston Washington Oregon Clackamas Co. Uninc. Clackamas Oregon EXHIBIT A To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 System Qualifications I. Affiliate represents and warrants the following regarding each System listed on Schedule I hereof: 1. that (a) either Tele-Communications, Inc. or Liberty Media Corporation (Tele-Communications, Inc. and Liberty Media Corporation shall be hereinafter referred to as "TCI"; any reference to TCI herein shall be deemed to be a reference to either Tele-Communications, Inc. or Liberty Media Corporation, or both, as is necessary to qualify the greatest number of television distribution facilities hereunder) or its nominee owns, directly or indirectly, at least a twenty-five percent (25%) interest in the general manager of the System pursuant to a valid written agreement in full force and effect; or (b) TCI or its nominee owns, directly or indirectly, a ten percent (10%) interest in such System or owns an interest or obligation by which TCI, directly or indirectly, owns a right (whether conditional or not) to convert into or acquire, directly or indirectly, an interest equal to at least the required interest. An "indirect" ownership is an interest resulting from ownership through any series of ownership interests, including corporations, partnerships, joint ventures or other forms of business organizations; an indirect interest shall be quantified in amount by a series of percentage multiplications commencing with TCI's direct interest and multiplying that by the next most proximate percentage interest and, then, multiplying in turn each succeeding ownership interest in the order of their progression away from TCI by the result of the immediately preceding multiplication until the most distant percentage interest is multiplied; 2. that Affiliate or an agent has been authorized, pursuant to a valid written agreement in full force and effect, to make and execute decisions on behalf of each such System with respect to the Service, including but not limited to billing and collection of fees, selection of programming and Affiliate continues throughout the Term to exercise such authority with respect to matters affecting the distribution of the Service by such System; 3. That either a franchise or license is not required or a valid franchise or license is in effect through the Term of this Agreement or the franchisee or licensee has held a valid cable television franchise or license and continues to operate in the franchise or license area under a claim of right or is otherwise lawfully operating or franchisee or licensee has held a valid cable franchise or license and is continuing to operate while diligently pursuing, in good faith, its available judicial remedies. For the above purposes, in the event a franchise or license expires before the end of the Term, such franchise or license shall be deemed valid for so long as franchisee or licensee is negotiating in good faith with the franchising or licensing authority for a franchise or license renewal; 4. that, except as permitted under this Agreement, Affiliate is not subdistributing and will not in the future subdistribute, nor does it claim to be authorized to subdistribute, the Service through any cable television system which does not satisfy the requirements set forth above. II. In the event TCI's direct or indirect equity interest in a System or in the entity managing such System decreases, and provided TCI's interest does not decrease to zero, such System shall continue to qualify under Paragraph I hereof, provided however, (i) at the time of diminution of TCI's interest in the System, TCI reasonably expects that its interest will return to the necessary level, and (ii) TCI's interest in such System does in fact increase to the level required under Paragraph I hereof within eighteen (18) months of the decrease. III. In the event Affiliate, or any of the entities which owns or manages Systems which qualify hereunder, effects a corporate separation, reorganization or restructuring (including, but not limited to, by a distribution of stock, or other assets or rights, to its shareholders, partners or joint venturers), the Systems of the entity resulting from such transaction (including all interim and supporting entities) and/or all of such resulting entities, in the aggregate, will continue to qualify under Paragraph I hereof, so as to continue to qualify to distribute the Service under the terms and conditions hereof, as if such separation, reorganization or other restructuring had not occurred. EXHIBIT B-1 To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 PROGRAM SCHEDULE See Attached. EXHIBIT B-1 [FEBRUARY PLAYBOY AT NIGHT PROGRAM SCHEDULE] EXHIBIT B-2 To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 STANDARDS AND PRACTICES Playboy Television is a targeted, differentiated pay-per-view television network featuring stylized eroticism and a variety of entertainment programs for men and women. The service's programming ranges from sensuous imagery to unusual candid interviews; lifestyle information; news, music and dance with a sensual flair; and fast-paced, off-beat comedy. Original programming, both produced and acquired, is the mainstay of Playboy Television. The remainder of the line-up consists of acquired motion pictures. As a rule, Playboy Television does not accept motion pictures shot on videotape. Playboy Television does not produce programming with scenes depicting violent behavior. As a matter of policy, Playboy Television limits the acquisition of programs and films that contain violent scenes our policy is to limit such elements and to avoid completely any scenes which link sexuality and eroticism with violence, directly or indirectly. As a result of these guidelines, Playboy Television is less violent than programming that can be seen on HBO, Cinemax, Showtime, The Movie Channel, Viewer's Choice and Request Television. Nudity is not restricted on Playboy Television and includes both male and female full-frontal nude scenes. The extreme sexual explicitness associated with the majority of adult films is forbidden or strictly edited. Graphic close-ups of genitals are forbidden. There is no rape, sadism, sadomasochism, bondage, incest, bestiality or child pornography. Playboy Television licenses both non-rated and MPAA films. Some explicit (non-rated) adult films are aired with strict editing to the standards stated herein. Because of the nature of our service, strong or explicit language is included in Playboy Television programming. Playboy Television's broadcast standards and practices code is designed to present programming consistent with the level of taste and quality established by Playboy over its more than 35 years as an internationally recognized media and entertainment company. EXHIBIT C To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 TECHNICAL SPECIFICATIONS GENERAL 1.1 All specifications are to be adhered to anywhere in the contiguous 48 United States. This specification uses a 5 meter reference antenna which is peaked at the center of the orbital box. It is the responsibility of the Network to provide center of the box times on a monthly basis. 1.2 The specification is divided into space segment and total system. Total system is defined as the additional noise contribution by the originating studio and transport facility to the input to the uplink. 1.3 System availability based on total system 99.998% per year calculated on a monthly basis excluding sun outage. The system shall be declared unavailable under the following: A. Loss of video B. Loss of audio C. Video signal to noise <45db D. Audio signal to noise <45db 1.4 This specification is for analog service. A specification for digital system will be added at a later date when equipment is developed. VIDEO SPECIFICATIONS Parameter Space Segment Total System 2.1 Frequency response: .25db box .5db box 2.2 Signal to Noise Ratio: Definition: 1v p/p vid to RMS noise, 4.2 Mhz weighted. 52db 50.3db 2.3 Chrominance/luminance delay: <20 ns <50ns Parameter Space Segment Total System 2.4 2T K Factor: <2% <3% 2.5 Differential Gain: <.2db <.45db 2.6 Differential Phase: +/-1(degree) <+/-2(degree) 2.7 Insertion gain/loss: <2 IRE <4 IRE 2.8 Video formats, waveforms, timing shall adhere to latest FCC requirements. All other parameters not specified shall conform to NTSC Engineering Report #7. AUDIO SPECIFICATIONS Parameter Space Segment Total System 3.1 Frequency Response: <.5db box <1db box 3.2 Video/Audio Sync: <10 m/sec <20 m/sec 3.3 Signal to Noise Ratio: Definition: RMS test tone to RMS noise with 15Khz weighting. This parameter to be measured with program video or full field color bar test pattern. >56db >55db 3.4 Distortion: At l0db above TT distortion shall not exceed 3%. Distortion shall be measured at 1004Hz. <.5% at TT <.7% at TT 3.5 Wow and Flutter: <.1%rms 3.6 Crosstalk: >65db >65db 3.7 Insertion gain/loss: <.5db <1d EXHIBIT D To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 [DATE] Satellite Services Inc. 5619 DTC Parkway, Suite 915 Englewood, CO 80111 RE: CHILDREN'S TELEVISION REGULATION CERTIFICATION Dear ______________: Please be advised that Playboy Entertainment Group, Inc. produces neither "commercial matter" nor "children's programming" as those terms are used in 47 U.S.C. Section 303a and C.F.R. Section 76.225; neither does it produce programming designed to service children's educational and informational needs as contemplated by 47 U.S.C. Section 303b and applied regulations. Please let me know if Satellite Services Inc. or its affiliates needs additional information from Playboy Entertainment Group, Inc. to satisfy compliance with the Act. Sincerely, Playboy Entertainment Group, Inc. By: _________________________ Name: _________________________ Title: _________________________ EXHIBIT E To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and Satellite Services, Inc. Dated February 10, 1993 LIST OF AGREEMENTS EXCLUDED FROM THE OPERATION OF SECTION 13 (f) 1. ***** 2. ***** 3. ***** 4. ***** 5. ***** 6. ***** EX-10.2.2 8 d65760_ex10-22.txt AMENDMENT TO AFFILIATION AGREEMENT Exhibit 10.2.2 Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. AMENDMENT to Affiliation Agreement between PLAYBOY ENTERTAINMENT GROUP, INC. and SATELLITE SERVICES, INC. WHEREAS, Playboy Entertainment Group, Inc. ("Playboy") and Satellite Services, Inc. ("Affiliate") entered into the Affiliation Agreement dated February 10, 1993, as amended (the "Agreement"), under which Playboy licensed the use of its Playboy programming service to SSI; WHEREAS, the parties acknowledge and agree that Affiliate was acquired by Comcast Corporation, and Affiliate's offices now are located at 1500 Market Street, Philadelphia, Pennsylvania 19102; and WHEREAS, Playboy and Affiliate now desire to amend the Agreement per this amendment (the "Amendment"). NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Playboy and Affiliate hereby agree as follows: 1. This Amendment shall become effective upon the date of the last signature written below (the "Amendment Effective Date"). 2. Capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meanings set forth in the Agreement. 3. Except as expressly modified herein, all terms of the Agreement shall remain in full force and effect. In the event of a conflict between the terms and conditions of this Amendment and the Agreement, the terms of this Amendment shall govern. 4. The parenthetical phrase "(the "Service")" in Section 1(a) shall be deleted in its entirety and replaced with the parenthetical phrase "(the "Service," which term "Service" also shall refer to Network's linear programming service and the SVOD Content, the VOD Content, and/or the HVOD Content, as applicable)"; 5. Section 1(a)(i) shall be amended by adding the following parenthetical immediately following the phrase "whether now existing or developed in the future": *****. Furthermore, Distribution Technology shall not include distribution to personal mobile and cellular handheld devices (provided that personal mobile and cellular handheld devices will not include Short-Range Wireless Devices, as defined below). *****. A "Set-Top Box" means a device that connects to, or is integrated as part of, a television or other video output display device ("Display Device") and also connects to the source of Affiliate's audio/visual signal, the content of which then is displayed on the Display Device. A Set-Top Box located at a Subscriber's premises may be connected through short-range wireless technology to one or more Set-Top Boxes and/or Display Devices authorized by Affiliate for use in and around a Subscriber's premises ("Short-Range Wireless Devices"). *****. 6. Section 1(a)(iii) shall be deleted in its entirety and replaced with the following: ***** then *****. 7. The second sentence of Section 2(a) of the Agreement is deleted in its entirety and replaced with the following: The Initial Term of this Agreement shall commence upon the date of execution hereof and shall terminate on December 31, 2015, unless terminated sooner pursuant to the terms of this Agreement. 8. In the first sentence of Section 3(a) of the Agreement, the words "ten (10) hours per day (initially, from 8:00 p.m. to 6:00 a.m. prevailing Eastern Time)" shall be replaced with "twenty four (24) hours per day" and the words "(including but not limited to R-rated (or R equivalent non-rated) and NC-17 rated (or NC-17 equivalent non-rated) cable version motion pictures)" shall be deleted. 9. Section 4(c) of the Agreement shall be deleted in its entirety and replaced with the following: (c) The Systems, if any, shall carry the Service no less than twenty-four (24) hours per day; provided, however, that any System that carries the Service on an analog level of service may carry the Service less than twenty-four (24) hours per day but not less than ten (10) hours per day. Other than as specifically permitted in this Agreement, Affiliate will not insert or remove any material into or from the Service. Network agrees that Affiliate will have complete authority to control, to designate and to change the channel(s) over which the Service is to be carried on each System. 10. The first sentence of Section 4(e) of the Agreement is deleted in its entirety and replaced with the following: Each System or other distribution facility or enterprise may offer the Service, (i) as a Subscription (defined in Section 5(a)(viii) below) service; and/or (ii) as a Pay-per-view (defined in Section 5(a)(vii) below) service marketed and sold in any of the ways described in Section 5(a)(vii). The Service may be sold in combination with other services (e.g., in a package of services or in a tier); provided that the Service, and/or viewing segments of the Service as described in Section 5(a)(viii), must always also be available for sale through each 2 television distribution facility selling the Service under this Agreement on a purely a la carte basis. 11. In the last two sentences of Section 4(f) of the Agreement, the phrase "home taping" shall be replaced by "home taping and/or digital recording." Additionally, the following shall be added to the end of the last sentence: "; or (iii) authorizing Subscribers to use devices and/or functionality (whether provided by Affiliate or otherwise) that enables such Subscribers to engage in lawful duplication, digital recording, and/or playback of the Service or any portions thereof for non-public viewing of such content." 12. The following language is hereby added as Section 4(h) of the Agreement: (h) Affiliate shall have the right to make the SVOD Content available, on an SVOD basis, to any Subscription (as defined in Section 5(a)(viii)) subscriber either by means of the Distribution Technology, *****. Network shall be responsible for supplying to Affiliate: (1) a minimum of ***** of SVOD Content (defined in Section 5(a)(xiii) below) at any given time to be made available by means of the Distribution Technology, which shall be refreshed on a weekly basis such that at least ***** of the SVOD Content offered by means of the Distribution Technology is changed each month (the "TV-SVOD Content"); and (2) within *****. The TV-SVOD Content and ***** Content shall be selected by Network in its sole discretion and may be comprised of different titles, provided that Network shall make commercially reasonable efforts to accommodate Affiliate's requests concerning (i) the types of programming to be included in the SVOD Content (such as the inclusion of Network's signature programming); (ii) the total amount of SVOD Content that is made available by Network; and (iii) the amount and extent to which the Programs comprising the SVOD Content are refreshed. Unless otherwise notified in writing by Affiliate that Affiliate desires XX exclusively (meaning Affiliate no longer wants X content), XX.5, and/or XXX as part of the SVOD content, the SVOD Content will include only X and XX rated Programs (as such ratings designations are generally understood in the industry). Network shall at all times offer to make available to Affiliate any adult content (regardless of ratings) made available by Network to any other United States distributor for Service subscribers to view on an SVOD basis. Notwithstanding anything to the contrary in this Agreement, Network hereby agrees that Affiliate shall at all times, and at any time during the Term, have the absolute right to air or offer or to cease airing or offering any SVOD Content to any individual and/or System(s). Affiliate, at its own expense, shall obtain and install equipment necessary to distribute the SVOD Content to such subscribers from the server in each System's headend. Network, at its own expense, shall deliver the SVOD Content in compliance with generally 3 accepted standards of good practice and according to parameters specified in the CableLabs Video On Demand Content Specification Version 1.0 ("CLI 1.0") or future releases thereof, including all applicable digitally encoded non-video data attributes ("Meta Data"). Network shall deliver the SVOD Content via either of the following methods, as selected by Network at its sole option, upon advance written notice: (i) satellite or program master to the Comcast Media Center ("CMC") in Denver, Colorado, or (ii) FTP directly to a point or points designated by Affiliate. The maximum MPEG 2 encoding data rate shall be 3.75 mbps, provided that Network agrees that when it becomes commercially feasible or industry standard to do so, then Network will encode at a maximum rate of 3.375 mbps. Network shall bear all costs in connection with the encoding of, and the transport to applicable Systems of, the SVOD Content regardless of the method of delivery (and to the extent necessary to ensure Network's compliance with the provisions of this sentence (including if Network elects to deliver unencoded SVOD Content to the CMC), Network shall enter into an agreement, and/or maintain any existing agreement, with the CMC concerning the CMC's services related to such encoding and transport). 13. The following language is hereby added as Section 4(i) of the Agreement: (i) Affiliate shall have the right to make any VOD Content and HVOD Content titles offered by Network available to any subscriber on a VOD basis. Network shall be responsible under this Agreement and that certain Affiliation Agreement between Spice, Inc. (as predecessor in interest to Spice) and Affiliate dated November 1, 1992, as amended (the "Spice Agreement") collectively for supplying to Affiliate a minimum of ***** of VOD Content (defined in Section 5(a)(xiv) below) and a minimum of ***** of HVOD Content (defined in Section 5(a)(xiv) below) at any given time, which shall be refreshed on a weekly basis such that at least ***** of the VOD Content and HVOD Content is changed each month; provided, however, that Network shall make commercially reasonable efforts to accommodate Affiliate's requests concerning (i) the types of programming to be included in the VOD Content and HVOD Content; (ii) the total amount of VOD Content and HVOD Content that is made available by Network; and (iii) the amount and extent to which the Programs comprising the VOD Content and HVOD Content are refreshed. Unless Affiliate notifies Network in writing that it desires for the VOD Content and/or HVOD Content to include X rated, XX.5 rated, and/or XXX Programs, the VOD Content and HVOD Content will include only X and XX rated Programs (as such ratings designations are generally understood in the industry). Network shall at all times offer to make available to Affiliate any adult content made available by Network to any other United States distributor for subscribers to view on an VOD basis (including other versions of content provided to Affiliate with a different editing standard). Notwithstanding anything to the contrary in this Agreement, Network hereby agrees that Affiliate shall at all times, and at any time during the Term, have the absolute right to air or offer or to cease airing or offering any VOD Content 4 or HVOD Content to any individual and/or System(s). Affiliate, at its own expense, shall obtain and install equipment necessary to distribute the VOD Content and HVOD Content to such subscribers from the server in each System's headend. Network, at its own expense, shall deliver the VOD Content and HVOD Content in compliance with generally accepted standards of good practice and according to parameters specified in the CableLabs Video On Demand Content Specification Version 1.0 ("CLI 1.0") or future releases thereof, including all applicable digitally encoded non-video data attributes ("Meta Data"). Network shall deliver the VOD Content and HVOD Content via either of the following methods, as selected by Network at its sole option, upon advance written notice: (i) satellite or program master to the Comcast Media Center ("CMC") in Denver, Colorado, or (ii) FTP directly to a point or points designated by Affiliate. The maximum MPEG 2 encoding data rate shall be 3.75 mbps, provided that Network agrees that when it becomes commercially feasible or industry standard to do so, then Network will encode at a maximum rate of 3.375 mbps. Network shall bear all costs in connection with the encoding of the VOD Content and HVOD Content regardless of the method of delivery (and to the extent Network elects to deliver unencoded VOD Content and HVOD Content to the CMC, Network shall enter into an agreement with the CMC concerning the CMC's encoding of such VOD Content and HVOD Content). 14. The following language is hereby added as Section 4(j) of the Agreement: (j) Network shall be responsible for any and all royalties and/or other fees payable to any applicable programming licensor(s) for content included in the VOD Content and HVOD Content (including, without limitation, residuals or other payments to guilds or unions, rights for music clearances, including but not limited to Network's through-to-the-viewer performance rights, synchronization rights, and mechanical rights, and all other content-related fees, payments, or obligations arising out of the activities contemplated by this Agreement), and Affiliate shall have no responsibility or liability for any such content-related royalties or fees, including any royalties or fees associated with distribution of the VOD Content or HVOD Content via VOD, except for fees payable to Network in accordance with Section 5 of this Agreement. Network acknowledges that Affiliate may, from time to time, direct Network not to include as part of the VOD Content or HVOD Content any particular Program that Affiliate reasonably determines does not meet the intent of the rating such Program has been given or otherwise may cause Affiliate business, political, or operational difficulty; provided, however, that such Program shall count toward Network's satisfaction of its obligations hereunder to provide the minimum number of hours of VOD Content and HVOD Content for the period of time during which such Program was scheduled to be made available as part of the VOD Content or HVOD Content. The VOD Content and HVOD Content shall not contain any sponsorships or advertising, except sponsorship or advertising for the Service permitted under this Agreement or 5 the Spice Agreement. 15. The second sentence of Section 5(a) of the Agreement is hereby deleted in its entirety and replaced with the following: The Fees defined below shall be calculated, stated, and reported separately for each category of Subscriber. 16. The second sentence of each of Sections 5(a)(i), 5(a)(ii), 5(a)(iii) and 5(a)(iv) of the Agreement, which contain the definitions of, respectively, "PPV Satellite Fees", "Service Satellite Fees", "PPV Cable Fees" and "Service Cable Fees", are hereby deleted. 17. Section 5(a)(vi) of the Agreement is deleted in its entirety and replaced with the following: (a)(vi) "Fees" means the fees payable by Affiliate to Network, as described in Section 5(b) below. Fees payable by Affiliate to Network during a Renewal Term are referred to as Renewal Fees. 18. The following language is hereby added as Section 5(a)(xiii) of the Agreement: (a)(xiii) "SVOD" means the authorization of a Subscriber to receive the SVOD Content, as defined herein. For purposes hereof, the "SVOD Content" shall mean all content delivered by Network to Affiliate for delivery to Service Cable Subscribers or Service Satellite Subscribers on a per-Program basis without charge in connection with a Subscription service purchased by such subscriber pursuant to this Agreement. A "Program" shall mean an individual feature film, direct-to-video programming (including a movie), extended-length video, live performance or production, or other audio-visual program; provided, however, that each such Program shall be (i) professionally produced, commercial free, high quality heterosexual male- and couple-targeted adult-oriented content intended only for adult consumers because of its sexual content; and (ii) at least twenty (20) minutes in duration. 19. The following language is hereby added as Section 5(a)(xiv) of the Agreement: (a)(xiv) "VOD" means the authorization of a subscriber to receive the VOD Content or HVOD Content that is chosen by a subscriber for display to that subscriber. For purposes hereof, the "VOD Content" shall mean all content delivered by Network to Affiliate for delivery to subscribers on a per-Program basis in exchange for a per-viewing fee. For purposes hereof, the "HVOD Content" shall mean high-definition content delivered by Network to Affiliate for delivery to subscribers on a per-Program basis in exchange for a per-viewing fee. 6 20. Section 5(b) (including Sections 5(b)(i) through 5(b)(iii)) of the Agreement is deleted in its entirety and replaced with the following: (b) Affiliate will pay Network the applicable Revenue Share Percentage (as defined in Section 5(d)) of Gross Receipts, less the deductions described in Section 5(f), subject to a monthly minimum of ***** per Service Cable Subscriber or Service Satellite Subscriber. When the Service is sold to a Service Cable Subscriber or Service Satellite Subscriber in combination with other services for a package charge (as, for example, in a tier or in a package of a la carte or other services), the Gross Receipts deemed to be attributable to a Service Cable Subscriber or Service Satellite Subscriber for the Service shall be equal to the total Gross Receipts for the tier or package of services sold in combination with the Service, multiplied by a fraction, the numerator of which is the a la carte retail charge for the Service otherwise charged for the pertinent System and the denominator of which is the numerator plus the aggregate of the a la carte retail charges otherwise charged by the pertinent System for the other services included in the tier or package of a la carte or other service. In addition, if Affiliate provides the Service to multiple dwelling complexes, including, but not limited to, apartment buildings, on a bulk-rate basis, the number of Service Satellite Subscribers or Service Cable Subscribers (as the case may be) attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate charged a complex for the Service divided by the standard monthly retail rate charged a non-bulk rate Service Satellite Subscriber or Service Cable Subscriber (as the case may be) for the Service in the applicable System or by the pertinent Satellite distributor, as the case may be. 21. Section 5(c) of the Agreement is deleted in its entirety and replaced with the following: (c) For each PPV Cable Subscriber and each PPV Satellite Subscriber who receives and pays for one (1) technically satisfactory viewing of one (1) viewing segment of the Service, including by means of VOD, Affiliate will pay Network the Network Share (as defined below) of the Gross Receipts paid by such PPV Cable Subscriber and each PPV Satellite Subscriber to Affiliate. "Network Share" shall equal the applicable Revenue Share Percentage (as defined in Section 5(d)) of the Gross Receipts paid by each such subscriber (but not less than ***** per PPV Cable Subscriber or PPV Satellite Subscriber, and ***** for each VOD transaction), except that such amount paid by each PPV Cable Subscriber or each PPV Satellite Subscriber (as the case may be) shall be subject to reduction as provided in Section 5(f) below. 22. Section 5(d) of the Agreement is deleted in its entirety and replaced with the following: (d) For purposes hereof, "Revenue Share Percentage" shall mean *****. 7 Notwithstanding the foregoing, Revenue Share Percentage shall mean ***** effective upon the first date upon which Affiliate offers both (A) at least ***** of the TV-SVOD Content in connection with a subscription to the Service in systems comprising at least ***** of the basic cable television subscribers within Systems that offer adult content on a VOD basis (i.e., VOD content that is rated X or a more explicit editing standard, other than such VOD content that is included as part of an SVOD offering from a premium service provider not targeted exclusively to adult audiences (e.g., Cinemax, Showtime)) (such systems, the "Adult VOD-Enabled Systems"), and the parties agree that the number of basic television subscribers in the Adult VOD-Enabled Systems shall be deemed to be *****, and (B) at least ***** of the VOD Content (including such VOD Content delivered by Spice Entertainment, Inc. ("Spice") to Affiliate pursuant to the Spice Agreement) offered, at a minimum, via a branded interface (i.e., the name "Playboy" or "Spice," but not necessarily using a logo) in systems comprising at least ***** of the basic cable television subscribers within the Adult VOD-Enabled Systems ((A) and (B) together, the "Carriage Incentive Benchmarks"); provided, however, that if a System offers at least ***** of the TV-SVOD Content and such System ***** offers at least ***** of the VOD Content before *****, then the Revenue Share Percentage shall mean ***** upon the first date that Affiliate offers both at least ***** of the TV-SVOD Content and offers at least ***** of the VOD Content (whether this occurs in a single System or as a combination of two separate Systems), provided further, however, that if Affiliate fails to achieve the Carriage Incentive Benchmarks on or before *****, then the Revenue Share Percentage shall be deemed to be ***** between *****, and Affiliate shall be required to remit to Network outstanding amounts retroactive to ***** for those Systems that are not offering at least ***** of the TV-SVOD Content in connection with a subscription to the Service, or at least ***** of the VOD Content (including such VOD Content delivered by Spice) as of *****. 23. Section 5(e) of the Agreement is deleted in its entirety and replaced with the following: (e) The Fees that are attributable to Gross Receipts based on Subscription services payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the calendar month to which they relate. The Fees that are attributable to Gross Receipts based on PPV or VOD services payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the last day of the calendar month which includes the last day of the Reporting Period. The term "Reporting Period" shall mean the days from the end of each System's or Satellite distributor's prior monthly reporting period (which date may vary in each System or for each Satellite distributor from the 20th of the calendar month to the last day of the calendar month) to the end of the System's or Satellite distributor's then current 8 monthly reporting period. Affiliate shall have the right, however, to make adjustments to any month's payment in an amount equal to the portion of a previous month's Fees which represent an overpayment or underpayment. 24. The following is added as a new penultimate sentence to Section 5(f) of the Agreement: "Gross Receipts attributable to purchases of VOD Content or HVOD Content shall be equal to the total amount of per-viewing fees billed by Affiliate to the VOD subscribers for viewing of the VOD Content or HVOD Content, less any technical credits given by Affiliate to such subscribers pursuant to this Section. In the event of a substantiated, technological failure within the transmission system for delivering VOD Content or HVOD Content to subscribers resulting in the substantial interruption or termination of an exhibition of a Program, Affiliate may, in its discretion, offer a technical credit to the subscriber affected thereby not to exceed the amount charged to the affected subscriber and shall maintain documentation in support of the granted technical credit." 25. The phrase "PPV Satellite Fees, PPV Cable Fees, Service Satellite Fees and Service Cable Fees" is deleted in its entirety from Sections 5(g) and 5(h) and replaced in each instance with the term "Fees". 26. Section 6(a) of the Agreement (including Sections 6(a)(i) through 6(a)(iv)) is deleted in its entirety and replaced with the following: (a) For all Reporting Periods, Affiliate shall send to Network along with the payments, if any, due under Section 5 hereof, informational statements. Each statement shall set forth information necessary to the calculation of the Fees and Renewal Fees paid, including but not limited to the following: i. the total number of PPV purchases for the applicable month; ii. the average number of Service Cable Subscribers and Service Satellite Subscribers for the applicable month; iii. to the extent necessary to determine the Fees payable by Affiliate, the number of basic cable television subscribers served by Adult VOD-Enabled Systems, and the number of Adult VOD-Enabled Systems offering the VOD Content and/or the SVOD Content in connection with a subscription to the Service for the applicable month; iv. Service Satellite Subscribers' usage of individual Programs comprising the SVOD service for the applicable month, if available; and 9 v. the total number of VOD purchases, and the names of the titles (or other appropriate identifier) for each VOD purchase, for the applicable month. 27. Sections 7(a) and 7(b) are deleted in their entirety and replaced by the following: "Deleted without implication." 28. The contact information in Section 7(d) of the Agreement shall be replaced in its entirety and replaced with "President, Playboy Entertainment Group, Inc., 2706 Media Center Drive, Los Angeles, CA 90065." 29. In Section 7(e) of the Agreement, in the second sentence, the last part of the sentence, which begins "Network shall pay to Affiliate ***** of Net Sales receipts..." shall be deleted, along with the balance of the paragraph and replaced with "Network shall make available ***** of commercial time per hour to Affiliate for Affiliate's use." Additionally, at the end of the revised paragraph, the following language shall be inserted: "With the exception of the ***** per hour granted above, the Service shall not contain any advertising, including but not limited to audio text services, merchandise sales, Internet services and other such products. Notwithstanding the foregoing, during the "breaks" between movies and/or other programs, the Service may contain the following audio text spots: (x) if the break is less than or equal to ***** in length, audio text spots not exceeding ***** in the aggregate during such break; and (y) if the break is greater than ***** in length, audio text spots not exceeding ***** in the aggregate during such break; provided that, in either case, Network shall not interrupt any programming to air the audio text spots, and each audio text spot shall be accompanied by a visual (if not moving video) element. In addition, Network shall be permitted to refer viewers to Network's and its affiliated companies' websites for scheduling information regarding the Service and may refer generally to the websites (e.g., "Visit our website at Playboy.com"); provided that, such referrals shall not contain any advertising, promotions or sales." 30. The following language shall be added to the end of Section 7(g), "provided that Network shall not be restricted from making incidental references to other services affiliated with Network as part of Network's regular programming." 31. The following language is hereby added as Section 7(i) of the Agreement: (i) Marketing. Upon the date, if ever, that Affiliate achieves the Carriage Incentive Benchmarks: A. ***** Affiliate, not later than ninety (90) days following the end of a calendar year, written certification demonstrating Network's compliance with this Section 7(i)(A) with respect to such calendar year. B. In addition, Network will, *****. To the extent Playboy desires to 10 identify a distributor of the Service (including Affiliate or any Comcast entity) in any such *****. C. Network represents and warrants that any advertising and promotional materials that Network provides and Network's publication of such advertising and promotional materials will not (a) create liability for Affiliate; (b) infringe upon or violate a third party's intellectual property rights or rights of publicity or privacy; (c) violate any law, statute, ordinance or regulation; (d) be defamatory, libelous, illegally threatening or harassing; (e) contain obscenity, pornography or otherwise be inflammatory; or (f) in any way violate this Agreement. Affiliate reserves the right to require Network to remove or revise any advertising and promotional materials, as Affiliate deems necessary or appropriate if, in Affiliate's absolute discretion, the materials or publication of the materials is likely to violate any of the representations and warranties in (a) through (f) above. In the event that Affiliate exercises the foregoing rights to require Network to remove any advertising or promotional materials, Network will, at Affiliate's option, promptly remove such materials or promptly remedy the defect that prompted the request for removal. 32. The following language is hereby added as Section 7(j) of the Agreement: (j) In consideration for the provisions set forth in Section 5(d) of this Agreement, upon or after the date, if ever, that Affiliate achieves the Carriage Incentive Benchmarks, then, at Affiliate's request, Network will *****. The date and time of the party are to be mutually agreed upon by the parties. 33. The Affiliate contact information at Section 11 of the Agreement is deleted in its entirety and replaced with the following contact information: To Affiliate: Satellite Services, Inc. c/o Comcast Cable 1500 Market Street Philadelphia, PA 19102 Attention: Senior VP, Programming With a copy to: Comcast Cable 1500 Market Street Philadelphia, PA 19102 Attention: General Counsel To Network: Playboy Entertainment Group, Inc. 2706 Media Center Drive Los Angeles, CA 90065 Attention: President 11 With a copy to: Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, IL 60611 Attention: General Counsel 34. Section 13(b) of the Agreement is deleted in its entirety and replaced with the following: (b) In the event that (i) Network acquires or otherwise obtains operating control of, any programming service other than the Service (an "Other Service"), and (ii) such Other Service is merged into, or otherwise combined with, the Service, in each case so that there is only one surviving service, then (a) if the Service is the surviving service, then this Agreement shall remain in full force and effect and any agreement concerning distribution of the Other Service shall be terminated and the parties thereto shall be discharged of any further obligations and/or liabilities thereunder as of the date of such merger or combination; or (b) if the Other Service is the surviving service in such merger or combination, (x) if Affiliate has (at the time of such merger, combination, or acquisition) an affiliation agreement concerning distribution of the Other Service, then such affiliation agreement for the Other Service shall remain in full force and effect, and this Agreement shall be terminated and the parties hereto shall be discharged of any further obligations and/or liabilities hereunder as of the date of such merger, or (y) if Affiliate does not have an affiliation agreement concerning distribution of the Other Service, then Affiliate shall have the option to elect to have this Agreement continue to apply to such Other Service or to negotiate a new agreement to apply to such Other Service. In the event that Network acquires or otherwise exercises operating control over an Other Service, and such Other Service is not merged into, or combined with, the Service, then (A) this Agreement shall not apply to the distribution of such Other Service, and (B) Affiliate shall not be entitled, by virtue of such merger or combination, to distribute the Service under any agreement governing Affiliate's distribution of such Other Service. 35. The first sentence of Section 13(c) of the Agreement shall be deleted in its entirety and replaced with the following: This Agreement, as amended, contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof, including that certain prior agreement between Comcast Programming and Playboy Entertainment Group, Inc. made as of October 1, 1999, as amended, which expired September 30, 2004 (the "Prior Comcast Agreement"). 12 36. The following phrase in the first sentence of ***** shall be deleted: ***** Additionally, the following sentences are hereby added to the end of Section 13(f) of the Agreement: Affiliate acknowledges that it is specifically granted the terms of this Section 13(f) in consideration for the provisions set forth in Section 5(d) of this Agreement. Additionally, Affiliate hereby agrees that, in consideration for the Fees granted pursuant to this Agreement, as amended, Affiliate shall *****. 37. The following language is hereby added as Section 13(l) of the Agreement: (l) No Press Releases. Neither party shall issue any press release, announcement or statement to the public or any third party regarding the business relationship of the parties as set forth herein or the transactions described in this Agreement without the advance written consent of the other party, except to the extent such disclosure or statement is required by law. 38. The following language is hereby added as Section 13(m) of the Agreement: (m) Release of Claims. Network, on behalf of itself, its parent, subsidiary and other affiliated companies and each of their respective officers, directors, employees, partners, agents, shareholders, representatives, successors, predecessors and assigns (collectively, the "Network Releasing Parties") hereby voluntarily and forever completely remises, relinquishes, releases and forever discharges Affiliate, its parent, subsidiary and affiliated companies and each of their respective present and former officers, directors, employees, partners, agents, shareholders, representatives, successors, predecessors and assigns (collectively, the "Affiliate Released Parties"), of and from any and all claims (including claims for conversion liability), demands, losses, penalties, costs, expenses (including, without limitation, reasonable attorneys' fees), interest, damages, actions, causes of action and liabilities, whether at law or in equity, whether based on contract, statute, tort, or strict liability, and whether for compensatory, special, punitive, statutory or any other damages or remedies, whether known or unknown, accrued or unaccrued, foreseen or unforeseen, contingent or non-contingent, direct or indirect, whether heretofore asserted or not, or arising by assignment, operation of law or otherwise, that are based on, connected to, arising out of or related to the payment, alleged failure to pay or alleged liability for the payment of any Fees, Renewal Fees, license fees or any other charges or payments whatsoever by Affiliate on account of the Systems to Network for the Service (including any feeds or multiplex signals thereof) for the period prior to, and including, *****. Network shall indemnify, defend, and hold the Affiliate Released Parties harmless from and against any claim brought by a Network Releasing 13 Party, and/or by any person or entity, under any actual or purported assignment, subrogation or other right of substitution by or under a Network Releasing Party, against an Affiliate Released Party relating to the claims released in this Section 13(m), and Network's indemnification shall be subject to the provisions of Sections 8(h) herein. 39. Exhibit A shall be deleted in its entirety and replaced with Exhibit A attached hereto. 40. Exhibit B-1 (Programming Schedule) shall be deleted in its entirety and replaced with Exhibit B-1 (Programming Schedule) attached hereto. 41. The parties acknowledge that those systems distributing the Service, as of September 30, 2004, pursuant to that the Prior Comcast Agreement, as amended, were added to the Agreement as of October 1, 2004. AGREED TO AND ACCEPTED BY THE PARTIES AS OF THE LAST DATE WRITTEN BELOW. PLAYBOY ENTERTAINMENT SATELLITE SERVICES, INC. GROUP, INC. By: /s/ James F. Griffiths By: /s/ Jennifer T. Gaiski Name: James F. Griffiths Name: Jennifer T. Gaiski Title: President Title: Vice President, Programming Date: 9/26/05 Date: 9/26/05 14 EXHIBIT A to Affiliation Agreement by and between Playboy Entertainment Group, Inc. and Satellite Services, Inc. dated as of February 10, 1993, as amended SYSTEM QUALIFICATIONS Affiliate represents and warrants that, with respect to each System listed on Schedule 1 hereto, Comcast Corporation, or any person or entity controlling, controlled by, or under common control with Affiliate or Comcast Corporation, now or hereafter (Affiliate, Comcast Corporation and each such person or entity a "Comcast Entity"), (i) owns or has the right to acquire ownership of, directly or indirectly, a minimum of ***** of such System; and (ii) with respect to Systems that are less than ***** owned, has been authorized to execute decisions on behalf of such System with respect to the Service. In the event Affiliate's direct or indirect equity interest in a System or in the entity managing such System decreases below the level required by the immediately preceding sentence, and provided Affiliate's interest does not decrease to zero, such System shall continue to qualify for inclusion on Schedule 1 as long as Affiliate's interest in such System increases to the level required hereunder within eighteen (18) months of such decrease. In the event Affiliate, or any of the entities that owns or manages systems or enterprises that qualify hereunder, effects a corporate separation, reorganization or restructuring (including, without limitation, by a distribution of stock, or other assets or rights, to its shareholders, partners or joint venturers), the systems or enterprises of the entity resulting from such transaction (including all interim and supporting entities) and/or all of such resulting entities, in the aggregate, will qualify under the system qualifications set forth herein, so as to continue to qualify to distribute the Service under the terms and conditions hereof, as if such separation, reorganization or other restructuring had not occurred. 15 EX-31.1 9 d65760_ex31-1.txt 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 Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. for the quarter ended September 30, 2005; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2005 /s/ Christie Hefner ------------------- Name: Christie Hefner Title: Chairman of the Board, Chief Executive Officer and Director EX-31.2 10 d65760_ex31-2.txt 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 Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. for the quarter ended September 30, 2005; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2005 /s/ Linda Havard ---------------- Name: Linda G. Havard Title: Executive Vice President, Finance and Operations, and Chief Financial Officer EX-32 11 d65760_ex32.txt CERTIFICATION Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. (the "Company") for the quarterly period ended September 30, 2005 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: November 8, 2005 /s/ Linda Havard - ---------------- Name: Linda G. Havard Title: Chief Financial Officer Date: November 8, 2005 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-----