-----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, Hzu/c54mxARGUvEfZN/mi8ho+ZGaVwvZ7Jxe4mdHnFfj3UTEL6NOl6cQiY/vxT4k L6d9sohu6YE9zFVrcUe/3w== 0001169232-07-003194.txt : 20070809 0001169232-07-003194.hdr.sgml : 20070809 20070809131122 ACCESSION NUMBER: 0001169232-07-003194 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070809 DATE AS OF CHANGE: 20070809 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: 071039018 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 d72426_form10-q.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 June 30, 2007 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-14790 Playboy Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4249478 (State of incorporation) (I.R.S. Employer Identification Number) 680 North Lake Shore Drive Chicago, IL 60611 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 751-8000 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X] At July 31, 2007, there were 4,864,102 shares of Class A common stock and 28,387,357 shares of Class B common stock outstanding. FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements," including statements in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations," as to expectations, beliefs, plans, objectives and future financial performance, and assumptions underlying or concerning the foregoing. We use words such as "may," "will," "would," "could," "should," "believes," "estimates," "projects," "potential," "expects," "plans," "anticipates," "intends," "continues" and other similar terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause our actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The following are some of the important factors that could cause our actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements: (1) Foreign, national, state and local government regulations, actions or initiatives, including: (a) attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video, Internet and wireless 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 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 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, new electronic media and product licensing markets; (11) Attempts by consumers or private advocacy groups to exclude our programming or other products from distribution; (12) Our television, Internet and wireless 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 or technical failure of transponders or other transmitting or playback equipment that is beyond our control and competition for channel space on linear television platforms or video-on-demand platforms; (14) Failure to maintain our agreements with multiple system operators, or MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as 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; (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, printing or postage costs; (19) Risks associated with certain minimum revenue amounts under certain television distribution agreements; 2 (20) Effects of the national consolidation of the single-copy magazine distribution system; (21) Effects of the national consolidation of television distribution companies (e.g., cable MSOs, satellite platforms and telecommunications companies); and (22) Risks associated with the viability of our subscription-, on demand- and e-commerce-based Internet models. For a detailed discussion of these and other factors that may affect our performance, see Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2006. 3 PLAYBOY ENTERPRISES, INC. FORM 10-Q TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations and Comprehensive Income/Loss for the Quarters Ended June 30, 2007 and 2006 (Unaudited) 5 Condensed Consolidated Statements of Operations and Comprehensive Income/Loss for the Six Months Ended June 30, 2007 and 2006 (Unaudited) 6 Condensed Consolidated Balance Sheets at June 30, 2007 (Unaudited) and December 31, 2006 7 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006 (Unaudited) 8 Notes to Condensed Consolidated Financial Statements (Unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 20 PART II OTHER INFORMATION Item 1. Legal Proceedings 21 Item 1A. Risk Factors 21 Item 4. Submissions of Matters to a Vote of Security Holders 21 Item 6. Exhibits 22 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLAYBOY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) for the Quarters Ended June 30 (Unaudited) (In thousands, except per share amounts)
2007 2006 - --------------------------------------------------------------------------------- Net revenues $ 85,652 $ 80,477 - --------------------------------------------------------------------------------- Costs and expenses Cost of sales (66,532) (65,567) Selling and administrative expenses (15,157) (14,257) Restructuring expenses (110) (1,906) - --------------------------------------------------------------------------------- Total costs and expenses (81,799) (81,730) - --------------------------------------------------------------------------------- Gain on disposal -- 29 - --------------------------------------------------------------------------------- Operating income (loss) 3,853 (1,224) - --------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 623 602 Interest expense (1,204) (1,281) Amortization of deferred financing fees (134) (134) Other, net (168) 50 - --------------------------------------------------------------------------------- Total nonoperating expense (883) (763) - --------------------------------------------------------------------------------- Income (loss) before income taxes 2,970 (1,987) Income tax expense (1,059) (1,320) - --------------------------------------------------------------------------------- Net income (loss) 1,911 (3,307) ================================================================================= Other comprehensive income (loss) Unrealized gain (loss) on marketable securities 96 (111) Unrealized gain (loss) on derivatives 47 (59) Foreign currency translation gain (loss) (108) 502 - --------------------------------------------------------------------------------- Total other comprehensive income 35 332 - --------------------------------------------------------------------------------- Comprehensive income (loss) $ 1,946 $ (2,975) ================================================================================= Weighted average number of common shares outstanding Basic 33,243 33,158 ================================================================================= Diluted 33,272 33,158 ================================================================================= Basic and diluted earnings (loss) per common share $ 0.06 $ (0.10) =================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 PLAYBOY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) for the Six Months Ended June 30 (Unaudited) (In thousands, except per share amounts)
2007 2006 - --------------------------------------------------------------------------------- Net revenues $ 171,067 $ 162,597 - --------------------------------------------------------------------------------- Costs and expenses Cost of sales (133,479) (128,819) Selling and administrative expenses (29,740) (29,594) Restructuring expenses (110) (1,906) - --------------------------------------------------------------------------------- Total costs and expenses (163,329) (160,319) - --------------------------------------------------------------------------------- Gain on disposal -- 29 - --------------------------------------------------------------------------------- Operating income 7,738 2,307 - --------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 1,098 1,209 Interest expense (2,566) (2,709) Amortization of deferred financing fees (268) (268) Other, net (307) (146) - --------------------------------------------------------------------------------- Total nonoperating expense (2,043) (1,914) - --------------------------------------------------------------------------------- Income before income taxes 5,695 393 Income tax expense (2,310) (2,911) - --------------------------------------------------------------------------------- Net income (loss) 3,385 (2,518) ================================================================================= Other comprehensive income (loss) Unrealized gain on marketable securities 153 9 Unrealized gain (loss) on derivatives 36 (61) Foreign currency translation gain (loss) (285) 417 - --------------------------------------------------------------------------------- Total other comprehensive income (loss) (96) 365 - --------------------------------------------------------------------------------- Comprehensive income (loss) $ 3,289 $ (2,153) ================================================================================= Weighted average number of common shares outstanding Basic 33,236 33,149 ================================================================================= Diluted 33,271 33,149 ================================================================================= Basic and diluted earnings (loss) per common share $ 0.10 $ (0.08) =================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 PLAYBOY ENTERPRISES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) June 30, December 31, 2007 2006 - ------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 26,391 $ 26,748 Marketable securities and short-term investments 9,013 9,000 Receivables, net of allowance for doubtful accounts of $4,645 and $3,688, respectively 41,502 47,728 Receivables from related parties 2,066 1,791 Inventories 13,086 12,599 Deferred subscription acquisition costs 9,385 9,931 Other current assets 11,226 9,426 - ------------------------------------------------------------------------------------- Total current assets 112,669 117,223 - ------------------------------------------------------------------------------------- Long-term investments 6,279 -- Property and equipment, net 19,962 17,407 Long-term receivables 4,517 4,665 Programming costs, net 54,621 55,183 Goodwill 133,531 132,974 Trademarks 64,705 63,794 Distribution agreements, net of accumulated amortization of $4,119 and $3,435, respectively 29,021 29,705 Other noncurrent assets 13,850 14,832 - ------------------------------------------------------------------------------------- Total assets $ 439,155 $ 435,783 ===================================================================================== Liabilities Acquisition liabilities $ 7,514 $ 10,773 Accounts payable 32,381 28,846 Accrued salaries, wages and employee benefits 4,738 4,896 Deferred revenues 44,325 45,050 Accrued litigation settlement 1,800 1,800 Other liabilities and accrued expenses 14,075 14,124 - ------------------------------------------------------------------------------------- Total current liabilities 104,833 105,489 - ------------------------------------------------------------------------------------- Financing obligations 115,000 115,000 Acquisition liabilities 8,048 9,692 Net deferred tax liabilities 19,260 18,422 Other noncurrent liabilities 24,616 23,552 - ------------------------------------------------------------------------------------- Total liabilities 271,757 272,155 - ------------------------------------------------------------------------------------- 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; 28,765,219 and 28,743,914 issued, respectively 288 287 Capital in excess of par value 228,255 227,775 Accumulated deficit (54,306) (57,691) Treasury stock, at cost, 381,971 shares (5,000) (5,000) Accumulated other comprehensive loss (1,888) (1,792) - ------------------------------------------------------------------------------------- Total shareholders' equity 167,398 163,628 - ------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 439,155 $ 435,783 =====================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 7 PLAYBOY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six Months Ended June 30 (Unaudited) (In thousands)
2007 2006 - ------------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss) $ 3,385 $ (2,518) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of property and equipment 2,232 1,827 Amortization of intangible assets 1,158 612 Amortization of investments in entertainment programming 17,444 17,561 Amortization of deferred financing fees 268 268 Deferred income taxes 838 2,151 Net change in operating assets and liabilities 8,218 180 Investments in entertainment programming (17,627) (19,545) Stock-based compensation 359 1,794 Other, net 301 932 - ------------------------------------------------------------------------------------- Net cash provided by operating activities 16,576 3,262 - ------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions (105) (7,761) Purchases of investments (6,384) (267) Proceeds from sales of investments -- 11,000 Additions to property and equipment (5,030) (2,826) - ------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (11,519) 146 - ------------------------------------------------------------------------------------- Cash flows from financing activities Payments of acquisition liabilities (5,669) (4,511) Proceeds from stock-based compensation 82 227 - ------------------------------------------------------------------------------------- Net cash used for financing activities (5,587) (4,284) - ------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 173 343 - ------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (357) (533) Cash and cash equivalents at beginning of period 26,748 26,089 - ------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 26,391 $ 25,556 =====================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (A) BASIS OF PREPARATION The financial information included in these financial statements is unaudited but, in the opinion of management, reflects all normal recurring and other adjustments necessary for a fair presentation of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes to the financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation. (B) RECENTLY ISSUED ACCOUNTING STANDARDS In February 2007, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, or Statement 159. Statement 159 allows entities to voluntarily elect to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. We are required to adopt Statement 159 at the beginning of 2008. The impact of the adoption of Statement 159 will be dependent upon the extent to which we elect to measure eligible items at fair value. We are currently evaluating the impact, if any, of adopting Statement 159 on our future results of operations and financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan's funded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. We adopted the recognition and related disclosure provisions of Statement 158 effective December 31, 2006. The measurement date provision of Statement 158 is effective at the end of 2008. We do not expect the measurement date provision of adopting Statement 158 to have a significant impact on our future results of operations or financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We are required to adopt Statement 157 effective at the beginning of 2008. We are currently evaluating the impact, if any, of adopting Statement 157 on our future results of operations and financial condition. (C) RESTRUCTURING EXPENSES In 2006, we implemented a cost reduction plan that has resulted in lower overhead costs and annual programming and editorial expenses. As a result of the 2006 restructuring plan, we reported a charge in 2006 of $2.1 million related to costs associated with a workforce reduction of 15 employees. During the quarter ended June 30, 2007, we recorded an unfavorable adjustment of $47 thousand related to our 2002 and 2001 restructuring plans and an unfavorable adjustment of $63 thousand related to our 2006 restructuring plan as a result of changes in plan assumptions related to excess office space and employee severance. In addition, in 2006, we recorded a favorable adjustment of $0.2 million and an unfavorable adjustment of $0.1 million related to our 2002 and 2001 restructuring plans, respectively, as a result of changes in plan assumptions primarily related to excess office space. During the six-month period ended June 30, 2007, we made cash payments of $0.5 million related to prior years' restructuring plans. Of the total costs related to our restructuring plans, approximately $12.4 million was paid through June 30, 2007, with the remaining $0.3 million to be paid through 2008. 9 The following table sets forth the activity and balances of our restructuring reserves for the year ended December 31, 2006 and for the six-month period ended June 30, 2007 (in thousands):
Consolidation of Facilities Workforce and Reduction Operations Total - ------------------------------------------------------------------------------------- Balance at December 31, 2005 $ -- $ 1,210 $ 1,210 Reserve recorded 2,103 -- 2,103 Adjustments to previous estimates -- (105) (105) Other -- (574) (574) Cash payments (1,673) (263) (1,936) - ------------------------------------------------------------------------------------- Balance at December 31, 2006 430 268 698 Adjustments to previous estimates 63 47 110 Cash payments (455) (37) (492) - ------------------------------------------------------------------------------------- Balance at June 30, 2007 $ 38 $ 278 $ 316 =====================================================================================
(D) EARNINGS PER COMMON SHARE The following table sets forth the computations of basic and diluted earnings per share, or EPS (in thousands, except per share amounts):
Quarters Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2007 2006 2007 2006 - -------------------------------------------------------------------------------------------------------- Numerator: For basic and diluted EPS - net income (loss) $ 1,911 $ (3,307) $ 3,385 $ (2,518) ======================================================================================================== Denominator: For basic EPS - weighted average shares 33,243 33,158 33,236 33,149 Effect of dilutive potential common shares: Employee stock options and other 29 -- 35 -- - -------------------------------------------------------------------------------------------------------- Dilutive potential common shares 29 -- 35 -- - -------------------------------------------------------------------------------------------------------- For diluted EPS - weighted average shares 33,272 33,158 33,271 33,149 ======================================================================================================== Basic and diluted earnings (loss) per common share $ 0.06 $ (0.10) $ 0.10 $ (0.08) ========================================================================================================
The following table sets forth the number of shares related to outstanding options to purchase our Class B common stock, or Class B stock, and the potential shares of Class B stock contingently issuable under our 3.00% convertible senior subordinated notes due 2025, or convertible notes. These shares were not included in the computations of diluted EPS for the quarters and six-month periods ended June 30, 2007 and 2006, as their inclusion would have been antidilutive (in thousands):
Quarters Ended Six Months Ended June 30, June 30, ------------------------- ----------------------- 2007 2006 2007 2006 - --------------------------------------------------------------------------------- Stock options 3,283 3,975 3,220 3,192 Convertible notes 6,758 6,758 6,758 6,758 - --------------------------------------------------------------------------------- Total 10,041 10,733 9,978 9,950 =================================================================================
10 (E) INVENTORIES The following table sets forth inventories, which are stated at the lower of cost (specific cost and average cost) or fair value (in thousands): June 30, December 31, 2007 2006 - -------------------------------------------------------------------------------- Paper $ 3,215 $ 2,917 Editorial and other prepublication costs 7,100 7,425 Merchandise finished goods 2,771 2,257 - -------------------------------------------------------------------------------- Total inventories $ 13,086 $ 12,599 ================================================================================ (F) INCOME TAXES Our income tax provision consists of foreign income tax, which relates to our international networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. We utilize the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. As a result of our recent cumulative losses in the U.S. and certain foreign jurisdictions, we have concluded that a full valuation allowance should be recorded for such jurisdictions. In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on description, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 on January 1, 2007. Pursuant to FIN 48 and as a result of the implementation of FIN 48, we recognized no adjustment in the liability for unrecognized income tax benefits. There have been no material changes to the amount of uncertain tax positions since the adoption of FIN 48. At June 30, 2007, we did not have any material unrecognized income tax benefits. We do not expect to recognize significant increases or decreases in unrecognized income tax benefits over the next 12 months. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2003 through 2006 tax years generally remain subject to examination by federal and most state tax authorities. (G) CONTINGENCIES In 2006, we recorded a charge of $1.8 million, based on an agreement in principle, for the settlement of litigation with Directrix, Inc., or Directrix. The settlement amount, which was subject to Bankruptcy Court approval, was paid in August 2007. The settlement is a compromise of disputed claims and is not an admission of liability. We believe that we had good defenses against Directrix's claims, but made the reasonable business decision to settle the litigation to avoid further management distraction and defense costs, which we had estimated would have approximately equaled the amount of the settlement. In 2006, we acquired Club Jenna, Inc. and related companies, a multimedia adult entertainment business, to complement our existing television, online and DVD businesses. We paid $7.7 million at closing and $1.6 million in 2007 with additional payments of $1.7 million, $2.3 million and $4.3 million required in 2008, 2009 and 2010, 11 respectively. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments based primarily on sales of existing content of the acquired business over a ten-year period and on content produced by the acquired business during the five-year period after the closing of the acquisition. If the required performance benchmarks are achieved, any contingent earnout payments will be recorded as additional purchase price. No earnout payments have been made through June 30, 2007. In 2005, we acquired an affiliate network of websites to complement our existing online business. We paid $8.0 million at closing and $2.0 million in 2006, and an additional payment of $2.0 million is required in 2007. Pursuant to the asset purchase agreement, we are also obligated to make future contingent earnout payments over a five-year period based primarily on the financial performance of the acquired business. If the required performance benchmarks are achieved, any contingent earnout payments will be recorded as additional purchase price and/or compensation expense. During 2007 and 2006, earnout payments of $0.1 million were made each year and recorded as additional purchase price. 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 us under the license agreement. We appealed and the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of plaintiffs' claims and remanded the remaining claims for a new trial. We filed a petition for review with the Texas Supreme Court. We have posted a bond in the amount of approximately $9.4 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 of Financial Accounting Standards No. 5, Accounting for Contingencies. (H) BENEFIT PLANS We currently maintain a practice of paying a separation allowance under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter, which is not funded. We made cash payments under this policy of $0.1 million and $0.2 million during the quarter and six-month period ended June 30, 2007, respectively, and $0.1 million and $0.2 million during the quarter and six-month period ended June 30, 2006, respectively. (I) STOCK-BASED COMPENSATION Upon adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or Statement 123(R), we began estimating the value of options on the date of grant using the Lattice Binomial model, or Lattice model. The Lattice model requires extensive analysis of actual exercise and cancellation data and includes a number of complex assumptions related to expected volatility, risk-free interest rate, expected dividends and option exercises and cancellations. The following table sets forth the assumptions used for the Lattice model:
Quarters Ended Six Months Ended June 30, June 30, --------------------------- ----------------------------- 2007 2006 2007 2006 - -------------------------------------------------------------------------------------------- Expected volatility 25% - 41% 29% - 43% 25% - 41% 29% - 43% Weighted average volatility 34% 38% 34% 38% Risk-free interest rate 4.67% - 5.04% 4.32% - 4.66% 4.67% - 5.04% 4.32% - 4.66% Expected dividends -- -- -- -- - --------------------------------------------------------------------------------------------
The expected life of stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Lattice model. The expected life of stock options is impacted by all of the underlying assumptions and calibration of the Lattice model. The Lattice model assumes that exercise behavior is a function of the option's contractual term, vesting schedule and the extent to which the option's intrinsic value exceeds the exercise price. 12 During the quarter and six-month period ended June 30, 2007, we granted 160,000 stock options, exercisable for shares of our Class B Stock, which will vest over a three-year period from the grant date and expire ten years from the grant date. There were no stock options granted during the second quarter of 2006; during the six-month period ended June 30, 2006, we granted 670,500 stock options. The weighted average expected life for options granted during the current quarter and six-month period was 6.3 years and during the six-month period of 2006 was 5.8 years. The weighted average fair value per share for stock options granted during the current quarter and six-month period was $4.64 and during the six-month period of 2006 was $6.40. During the quarter and six-month period ended June 30, 2007, we granted 250,625 restricted stock units, which provide for the issuance of our Class B stock if our two-year cumulative operating income target thresholds are met as of December 31, 2008, with an additional one-year holding period for restricted stock units that vest based on performance. There were no restricted stock units granted during the second quarter of 2006; during the six-month period ended June 30, 2006, we granted 188,500 restricted stock units. The weighted average grant date fair value for restricted stock units granted during the current quarter and six-month period was $10.61 and during the six-month period of 2006 was $14.51. The following table sets forth stock-based compensation expense related to stock options, restricted stock units, other equity awards and our employee stock purchase plan, or ESPP (in thousands): Quarters Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2007 2006 2007 2006 - ------------------------------------------------------------------------------ Stock options $ 448 $ 796 $ 165 $ 1,505 Restricted stock units 87 160 87 195 Other equity awards 50 37 92 80 ESPP 8 8 15 14 - ------------------------------------------------------------------------------ Total $ 593 $ 1,001 $ 359 $ 1,794 ============================================================================== Statement 123(R) requires that the total amount of compensation expense recognized reflects the number of stock options that actually vest as of the completion of the vesting period. Upon the vesting of certain stock option grants, we adjusted our stock-based compensation expense to reflect actual versus estimated forfeitures. During the quarter ended March 31, 2007, we recorded a favorable adjustment of $1.0 million to reflect that actual forfeitures for vested stock option grants exceeded the estimated amounts. 13 (J) SEGMENT INFORMATION The following table sets forth financial information by reportable segment (in thousands):
Quarters Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2007 2006 2007 2006 - ---------------------------------------------------------------------------------------------- Net revenues Entertainment $ 51,838 $ 47,545 $ 102,696 $ 98,722 Publishing 22,658 23,790 46,003 47,285 Licensing 11,156 9,142 22,368 16,590 - ---------------------------------------------------------------------------------------------- Total $ 85,652 $ 80,477 $ 171,067 $ 162,597 ============================================================================================== Income (loss) before income taxes Entertainment $ 7,301 $ 4,881 $ 11,605 $ 12,754 Publishing (2,273) (1,752) (4,669) (4,049) Licensing 5,523 4,076 13,200 8,422 Corporate Administration and Promotion (6,588) (6,552) (12,288) (12,943) Restructuring expenses (110) (1,906) (110) (1,906) Gain on disposal -- 29 -- 29 Investment income 623 602 1,098 1,209 Interest expense (1,204) (1,281) (2,566) (2,709) Amortization of deferred financing fees (134) (134) (268) (268) Other, net (168) 50 (307) (146) - ---------------------------------------------------------------------------------------------- Total $ 2,970 $ (1,987) $ 5,695 $ 393 ==============================================================================================
June 30, Dec. 31, 2007 2006 - ----------------------------------------------------------------------------------------------- Identifiable assets Entertainment $ 283,998 $ 288,540 Publishing 35,071 38,146 Licensing 11,368 9,386 Corporate Administration and Promotion 108,718 99,711 - ----------------------------------------------------------------------------------------------- Total $ 439,155 $ 435,783 ===============================================================================================
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in Item 1 and with our Annual Report on Form 10-K for the year ended December 31, 2006. All period references are to our fiscal periods unless otherwise indicated. RESULTS OF OPERATIONS (1) The following table sets forth our results of operations (in millions, except per share amounts): Quarters Ended Six Months Ended June 30, June 30, ---------------- ---------------- 2007 2006 2007 2006 - ------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV $ 21.6 $ 20.9 $ 41.3 $ 43.2 International TV 13.7 11.7 27.5 24.1 Online/mobile 14.6 13.5 30.3 28.8 Other 1.9 1.4 3.6 2.6 - ------------------------------------------------------------------------------- Total Entertainment 51.8 47.5 102.7 98.7 - ------------------------------------------------------------------------------- Publishing Domestic magazine 19.0 20.2 38.1 39.4 International magazine 1.8 1.6 3.7 3.3 Special editions and other 1.9 2.0 4.2 4.6 - ------------------------------------------------------------------------------- Total Publishing 22.7 23.8 46.0 47.3 - ------------------------------------------------------------------------------- Licensing Consumer products 7.5 6.9 16.2 13.7 Location-based entertainment 0.9 -- 1.8 -- Marketing events 2.3 2.3 2.6 2.5 Other 0.5 -- 1.8 0.4 - ------------------------------------------------------------------------------- Total Licensing 11.2 9.2 22.4 16.6 - ------------------------------------------------------------------------------- Total net revenues $ 85.7 $ 80.5 $ 171.1 $ 162.6 =============================================================================== Net income (loss) Entertainment Before programming amortization and online content expenses $ 17.4 $ 15.2 $ 31.9 $ 32.5 Programming amortization and online content expenses (10.1) (10.3) (20.3) (19.7) - -------------------------------------------------------------------------------- Total Entertainment 7.3 4.9 11.6 12.8 - ------------------------------------------------------------------------------- Publishing (2.3) (1.8) (4.7) (4.1) - ------------------------------------------------------------------------------- Licensing 5.5 4.1 13.2 8.4 - ------------------------------------------------------------------------------- Corporate Administration and Promotion (6.6) (6.5) (12.3) (12.9) - ------------------------------------------------------------------------------- Segment income 3.9 0.7 7.8 4.2 Restructuring expenses (0.1) (1.9) (0.1) (1.9) - ------------------------------------------------------------------------------- Operating income (loss) 3.8 (1.2) 7.7 2.3 - ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.6 0.6 1.1 1.2 Interest expense (1.1) (1.3) (2.5) (2.7) Amortization of deferred financing fees (0.2) (0.2) (0.3) (0.3) Other, net (0.1) 0.1 (0.3) (0.1) - ------------------------------------------------------------------------------- Total nonoperating expense (0.8) (0.8) (2.0) (1.9) - ------------------------------------------------------------------------------- Income (loss) before income taxes 3.0 (2.0) 5.7 0.4 Income tax expense (1.1) (1.3) (2.3) (2.9) - ------------------------------------------------------------------------------- Net income (loss) $ 1.9 $ (3.3) $ 3.4 $ (2.5) =============================================================================== Basic and diluted earnings (loss) per common share $ 0.06 $ (0.10) $ 0.10 $ (0.08) =============================================================================== (1) Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation. 15 Our revenues increased $5.2 million, or 6.4%, and $8.5 million, or 5.2%, for the quarter and six-month period, respectively, driven by higher revenues from our Entertainment and Licensing Groups. Segment income increased $3.2 million and $3.6 million for the quarter and six-month period, respectively. The quarter comparison reflected increased profits from our Entertainment and Licensing Groups, which were partially offset by lower Publishing Group results. The six-month comparison reflected increased profits from our Licensing Group and lower Corporate Administration and Promotion expenses, partially offset by lower results from our Entertainment and Publishing Groups. Operating income increased $5.0 million and $5.4 million for the quarter and six-month period, respectively, due to the improved segment income coupled with $1.8 million lower restructuring expenses in the current year. Net income of $1.9 million and $3.4 million for the quarter and six-month period, respectively, improved by $5.2 million and $5.9 million compared to the respective prior year periods primarily due to the operating results previously discussed. Several of our businesses may 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 revenues and profit contribution of each of our Entertainment Group businesses before programming amortization and online content expenses. Revenues from our domestic TV networks increased $0.7 million, or 4%, for the quarter and decreased $1.9 million, or 4%, for the six-month period. The increase for the quarter was primarily due to higher video-on-demand, or VOD, revenues net of lower movie network revenues, together with an increase in Playboy TV revenues. The decrease in revenues for the six-month period was principally due to a decrease in movie network revenues, net of higher VOD revenues coupled with lower linear Playboy TV revenues. Favorable variances related to previously estimated revenues also impacted the quarter and six-month period. We believe that second half domestic TV revenues will be approximately equal to the first half, excluding the favorable variances related to previously estimated revenues. Profit contribution from our domestic TV networks increased $0.9 million for the quarter and decreased $1.1 million for the six-month period. In addition to the previously discussed revenue performance, profit contribution was also impacted by lower marketing expenses related to timing of expenditures, partially offset by increased volume-related VOD distribution expenses and expense related to certain carriage distribution agreements that we began amortizing during the fourth quarter of the prior year. International TV revenues increased $2.0 million, or 16%, and $3.4 million, or 14%, and profit contribution increased $1.7 million and $1.5 million for the quarter and six-month period, respectively, reflecting revenue growth in our UK and other European networks. While foreign exchange rate fluctuations resulted in increases in both revenues and expenses, the fluctuations had an immaterial impact on profit contribution. We believe that international TV revenues will continue to improve for the remainder of 2007. Online/mobile revenues increased $1.1 million, or 8%, and $1.5 million, or 5%, and profit contribution increased $0.5 million and $1.1 million for the quarter and six-month period, respectively. Online subscription revenues were higher in both periods primarily due to our acquisition of Club Jenna, Inc. and related companies, or Club Jenna, in June 2006. E-commerce revenues were higher due to improved sales from our Playboy Catalog and revenues from our new BUNNYshop Catalog, more than offsetting the impact of licensing our Spice Catalog in September 2006, leading to lower revenues but higher profit contribution. 16 Revenues from other businesses increased $0.5 million, or 37%, and $1.0 million, or 38%, for the quarter and six-month period, respectively. Profit contribution increased $0.2 million for the quarter and decreased $0.5 million for the six-month period. The improvement was largely due to the Club Jenna acquisition, and the six-month negative comparison was largely due to a legal settlement recorded in the current year. The group's administrative expenses increased $1.0 million, or 23%, and $1.6 million, or 16%, for the quarter and six-month period, respectively, primarily to support the acquired businesses. Programming amortization and online content expense decreased $0.2 million, or 2%, for the quarter and increased $0.6 million, or 3%, for the six-month period. The six-month period reflected larger investments in online content. We anticipate that 2007 programming amortization and online content expense will be less than $40.0 million, compared to $41.8 million for 2006. Segment income for the group increased $2.4 million, or 50%, for the quarter and decreased $1.2 million, or 9%, for the six-month period, respectively, due to the operating results previously discussed. PUBLISHING GROUP Domestic magazine revenues decreased $1.2 million, or 6%, and $1.3 million, or 3%, for the quarter and six-month period, respectively. A continuation of negative industry trends caused circulation revenues to decrease, with subscription revenues decreasing $0.9 million, or 8%, and $1.9 million, or 8%, for the quarter and six-month period, respectively, primarily due to downward pressure on both renewal rates and direct-to-publisher subscription acquisitions. Newsstand revenues decreased $0.2 million, or 8%, and $0.3 million, or 5%, for the quarter and six-month period, respectively, due to 10% and 7% fewer copies sold, respectively. Advertising revenues were $0.2 million lower for the quarter but $0.9 million higher for the six-month period. The quarter results reflect an 8% decrease in average net revenue per page due to a change in the mix of advertisers, partially offset by a 5% increase in advertising pages. The improvement in the six-month period reflects a 10% increase in advertising pages, partially offset by a 2% decrease in average net revenue per page, again due to a change in the mix of advertisers. Advertising sales for the 2007 third quarter magazine issues are closed, and we expect to report approximately 5% higher advertising revenues and a 9% increase in advertising pages compared to the 2006 third quarter. International magazine revenues increased $0.2 million, or 14%, and $0.4 million, or 13%, for the quarter and six-month period, respectively. Special editions and other revenues were flat for the quarter and decreased $0.4 million, or 9%, for the six-month period. Fewer special editions newsstand copies sold in both periods resulted in lower revenues of $0.4 million and $0.6 million for the quarter and six-month period, respectively. The group's segment loss increased $0.5 million, or 30%, and $0.6 million, or 15%, for the quarter and six-month period, respectively, because the periods also included post-employment benefit costs related to senior editorial employees and additional expensing of subscription collection costs. On a comparable basis, segment results would have improved for the quarter and six-month period as cost reductions more than offset the circulation revenue declines previously discussed and higher editorial costs. As a result of the continuing difficult market trends and the post-employment benefit and subscription collection costs, we believe that the group's segment profitability will likely be in line with what we reported in 2005. LICENSING GROUP Licensing Group revenues increased $2.0 million, or 22%, and $5.8 million, or 35%, for the quarter and six-month period, respectively, reflecting royalties from our location-based entertainment venue at the Palms Casino Resort in Las Vegas, which opened in October 2006, and higher consumer products royalties. The quarter and six-month period also reflected $0.4 million and $1.7 million, respectively, in sales of original artwork compared to none and $0.4 million in the prior year periods, respectively. The group's segment income increased $1.4 million, or 36%, and $4.8 million, or 57%, for the quarter and six-month period, respectively, as a result of these revenue 17 increases, partially offset by growth-related costs. We continue to project growth of approximately 20 to 25% in the Licensing Group's segment income, excluding the impact of sales of original art. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses were flat for the quarter and decreased $0.6 million, or 5%, for the six-month period, with both periods reflecting additional expense related to certain trademark costs that were previously capitalized, the previously mentioned allocation of actual post-employment benefit costs to the Publishing Group and lower marketing expenses. RESTRUCTURING EXPENSES During the quarter ended June 30, 2007, we recorded an unfavorable adjustment of $0.1 million related to prior restructuring plans as a result of changes in plan assumptions. For the six-month period, we made cash payments of $0.5 million related to our restructuring plans. Of the total costs related to our restructuring plans, approximately $12.4 million was paid through June 30, 2007, with the remaining $0.3 million to be paid through 2008. INCOME TAX EXPENSE Our effective income tax rate differs from the U.S. statutory rate. Our income tax provision consists of foreign income tax, which relates to our international networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. In June 2006, the Financial Accounting Standards Board, or the FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. We adopted FIN 48 on January 1, 2007. Pursuant to FIN 48 and as a result of the implementation of FIN 48, we recognized no adjustment in the liability for unrecognized income tax benefits. There have been no material changes to the amount of uncertain tax positions since the adoption of FIN 48. At June 30, 2007, we did not have any material unrecognized income tax benefits. We do not expect to recognize significant increases or decreases in unrecognized tax benefits over the next 12 months. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2007, we had $26.4 million in cash and cash equivalents compared to $26.7 million in cash and cash equivalents at December 31, 2006. We also had $9.0 million and $3.0 million of auction rate securities, or ARS, included in marketable securities and short-term investments at June 30, 2007 and December 31, 2006, respectively. 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 at both June 30, 2007 and December 31, 2006. At June 30, 2007, cash generated from our operating activities, existing cash and cash equivalents and marketable securities and short-term investments were fulfilling our liquidity requirements. In addition, our $50.0 million credit facility, which can be used for revolving borrowings, issuing letters of credit or a combination of both, had no borrowings and $10.6 million in letters of credit outstanding, resulting in $39.4 million of available borrowings under this facility at June 30, 2007. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities for the six months ended June 30, 2007 was $16.6 million, an increase of $13.3 million compared to the prior year period primarily due to changes in working capital. 18 CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities for the six months ended June 30, 2007 was $11.5 million, an increase of $11.7 million compared to the prior year period. This increase was primarily due to the purchase of $6.0 million in ARS and capital expenditures of $5.0 million, which were primarily related to leasehold improvements at our New York office and Los Angeles programming facility and technology-related items. The prior year period reflected proceeds of $11.0 million from the sale of investments and payments of $7.8 million primarily related to the acquisition of Club Jenna. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used for financing activities for the six months ended June 30, 2007 was $5.6 million, an increase of $1.3 million compared to the prior year period primarily due to acquisition liability payments related to Califa Entertainment Group, Inc. and Club Jenna. EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS The positive effect of foreign currency exchange rates on cash and cash equivalents during the current year and prior year was due to the weakening of the U.S. dollar against the pound sterling and Euro. RECENTLY ISSUED ACCOUNTING STANDARDS In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, or Statement 159. Statement 159 allows entities to voluntarily elect to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. We are required to adopt Statement 159 at the beginning of 2008. The impact of the adoption of Statement 159 will be dependent upon the extent to which we elect to measure eligible items at fair value. We are currently evaluating the impact, if any, of adopting Statement 159 on our future results of operations and financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R), or Statement 158. Statement 158 requires an entity to (a) recognize in its statement of financial position an asset or an obligation for a defined benefit postretirement plan's funded status, (b) measure a defined benefit postretirement plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in comprehensive income in the year in which the changes occur. We adopted the recognition and related disclosure provisions of Statement 158 effective December 31, 2006. The measurement date provision of Statement 158 is effective at the end of 2008. We do not expect the measurement date provision of adopting Statement 158 to have a significant impact on our future results of operations or financial condition. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We are required to adopt Statement 157 effective at the beginning of 2008. We are currently evaluating the impact, if any, of adopting Statement 157 on our future results of operations and financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At June 30, 2007, we did not have any floating interest rate exposure. All of our outstanding debt as of that date consisted of the 3.00% convertible senior subordinated notes due 2025, or convertible notes, which are fixed-rate obligations. The fair value of the $115.0 million aggregate principal amount of the convertible notes is influenced by changes in market interest rates, the share price of our Class B stock and our credit quality. At June 30, 2007, the convertible notes had an implied fair value of $110.9 million. 19 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. 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes to our Legal Proceedings as contained in our Annual Report on Form 10-K for the year ended December 31, 2006. ITEM 1A. RISK FACTORS There have been no material changes to our Risk Factors as contained in our Annual Report on Form 10-K for the year ended December 31, 2006. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held on May 23, 2007. At the meeting, the following director nominees were elected: Votes Votes Nominee (1) For Withheld - ------------------------------------------------------------------------------ Dennis S. Bookshester 4,457,959 193,985 David I. Chemerow 4,457,984 193,960 Christie Hefner 4,003,614 648,330 Charles Hirschhorn 4,458,108 193,836 Jerome H. Kern 4,457,954 193,990 Russell I. Pillar 4,435,529 216,415 Sol Rosenthal 4,434,671 217,273 Richard S. Rosenzweig 4,003,121 648,823 - ------------------------------------------------------------------------------ (1) On April 30, 2007, Donald G. Drapkin resigned from our Board of Directors, effective immediately, in connection with his appointment as a Vice Chairman of Lazard International and Chairman of the Investment Committee of Lazard Ltd. He was a member of our Board of Directors since 1997 and a member of the compensation committee. As a result, there were eight nominees for director at our 2007 Annual Meeting of Stockholders. Also at the meeting, the shareholders approved, with voting as set forth below, (a) an amendment to our Second Amended and Restated 1995 Stock Incentive Plan, or the 1995 Stock Incentive Plan, (b) an amendment to our Amended and Restated 1997 Equity Plan for Non-Employee Directors, or the 1997 Equity Plan for Non-Employee Directors, (c) an amendment to our Employee Stock Purchase Plan, or ESPP, and (d) ratification of Ernst & Young LLP as our independent registered public accounting firm, or Auditors: Votes Votes Broker Matter For Against Abstain Non-Votes - -------------------------------------------------------------------------------- 1995 Stock Incentive Plan 3,787,067 500,773 788 363,316 1997 Equity Plan for Non-Employee Directors 3,644,118 643,470 1,040 363,316 ESPP 4,270,638 16,974 1,016 363,316 Auditors 4,641,945 4,291 5,712 N/A - -------------------------------------------------------------------------------- 21 ITEM 6. EXHIBITS Exhibit Number Description - -------------- ----------- 10.1* Agreement dated October 4, 2004, between Playboy Enterprises International, Inc. and Fiesta Palms LLC, N-M Ventures II, LLC and Nine Group LLC 10.2 Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan 10.3 Second Amended and Restated 1997 Equity Plan For Non-Employee Directors of Playboy Enterprises, Inc. 10.4 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated 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 SEC pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. 22 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: August 9, 2007 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) 23 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.1* Agreement dated October 4, 2004, between Playboy Enterprises International, Inc. and Fiesta Palms LLC, N-M Ventures II, LLC and Nine Group LLC 10.2 Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan 10.3 Second Amended and Restated 1997 Equity Plan For Non-Employee Directors of Playboy Enterprises, Inc. 10.4 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated 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 SEC pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. 24 EX-10.1 2 d72426_ex10-1.txt AGREEMENT EXHIBIT 10.1 Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. EXECUTED AGREEMENT AGREEMENT This agreement ("Agreement") is made and entered into as of October 4, 2004 (the "Effective Date"), by and between PLAYBOY ENTERPRISES INTERNATIONAL, INC., a Delaware corporation ("Playboy"), FIESTA PALMS LLC, a Nevada limited liability company ("FPLLC") and N-M VENTURES II, LLC, a Nevada limited liability company (the "Tenant"), Nine Group LLC, a Delaware limited liability company ("Nine Group") who with FPLLC are members of Tenant (the Tenant, together with members Nine Group and FPLLC, are referred to collectively as "Palms"). WHEREAS, FPLLC is the owner of the Palms Casino Resort located at 4321 West Flamingo Road in Las Vegas, Nevada (the "Palms Resort"), N-M Ventures LLC, a Nevada limited liability company is the lessee of the four venues known as "N9NE Steakhouse" "ghostbar" "Skin Pool Lounge" "Rain Nightclub" (the "Existing Venues") at the Palms Resort; WHEREAS, FPLLC is the owner of a store within the Palms Resort called the "Palms Store" and N-M Ventures LLC, a Nevada limited liability company is the owner of a store at the Palms Resort called the "Stuff Store." WHEREAS, the Tenant will be leasing from FPLLC up to three additional venues ("New Venues") at the "New Tower" (as defined below) to be built at the Palms Resort; WHEREAS, Playboy is the owner of the "Playboy Marks" (as hereinafter defined) and Palms recognizes and acknowledges that the Playboy Marks are internationally well-known and recognized by the general public and are associated in the public mind with Playboy and are designations in which Playboy has acquired considerable and valuable goodwill; and WHEREAS, Palms desires to obtain a license to use the Playboy Marks at the Palms Resort including without limitation, the development and operation of a Playboy branded lounge with a casino and a night club to be created at the top two floors of the New Tower, a "Hugh Hefner Sky Villa" (as defined below) and a "Playboy Store" (as defined below) on the ground level of the New Tower (the Playboy Store, the Hugh Hefner Sky Villa, and the lounge with the casino and the night club are referred to together as the "Project") in accordance with the terms and conditions set forth in this Agreement and Playboy wishes to grant such license. NOW, THEREFORE, in consideration of the foregoing and the mutual promises herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1 1. DEFINITIONS. In this Agreement and any exhibits, addenda or riders hereto, the following terms shall have the following meanings: "Additional Playboy Venue" means any Playboy themed or branded club, casino, lounge, restaurant, night club, tavern, or hotel that is not within the "Playboy Elements" as defined below. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in Las Vegas, Nevada are authorized by law to close. "Co-Branded Merchandise Sales" shall be defined as set forth in Section 5(d). "Failure to Open Termination Right" shall mean a right of termination when pursuant to Section 2(b) below, the Project Opening Date for the "Nightclub" and "Lounge" (as defined below) does not timely occur. "Fiscal Quarter" shall mean a fiscal quarter which ends on March 31, June 30, September 30 or December 31. The first Fiscal Quarter shall be the period commencing on the date of Project Opening Date for the Nightclub and Lounge and ending on the last day of the Fiscal Quarter in which the Project Opening Date for the Nightclub and Lounge occurs. The last Fiscal Quarter shall be the period commencing on the first day of the Fiscal Quarter in which the expiration or earlier termination of the term hereof shall occur and ending on the date of such expiration or termination. "Force Majeure Event" shall mean an act of God, fire, explosion, transportation contingencies, unusually severe weather, quarantine, restriction, epidemic, natural catastrophe, war, acts of terrorism, civil disturbance, acts of the government of any country or of any governmental agency or official thereof or court order, beyond its reasonable control, that prevents the performance by either party of an obligation hereunder for so long as the excused party makes commercially reasonable efforts to minimize, if and to the extent possible, the impact of such event. ***** "Interest Rate" shall mean ***** per annum above the prime lending rate announced, from time to time, by JPMorgan Chase Bank, N.A. in New York City or, in the event that JPMorgan Chase Bank, N.A. shall no longer announce its prime or base lending rate as aforesaid, ***** per annum above the prime rate from time to time published in the "Money Rates" section of The Wall Street Journal as being the "Prime Rate" (or, if more than one rate is published as the Prime Rate, then the average of such rates). "Nevada Marketing Event for Playboy" shall be as defined in Section 3 below. "Nevada Licensing Authorities" shall mean the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board and any other applicable governmental or administrative state or local agency involved in the regulation of gaming and gaming activities in the State of Nevada with jurisdiction over the Palms Resort. 2 "Playboy Chips" shall mean gaming chips or tokens using any of the Playboy Marks produced by or for Palms pursuant to the terms hereof. There are three types of Playboy Chips. "Rack Playboy Gaming Chips" are those used by FPLLC as rack or inventory chips for gaming at the Palms Resort. "Commemorative Playboy Gaming Chips" are those produced and distributed for events involving the Playboy Indicia and which can be used for gaming at the Palms Resort. "Playboy Nongaming Chips" are those produced and distributed for souvenirs at events involving the Playboy Indicia and which cannot be for gaming at the Palms Resort and cannot be transferred or exchanged for money. "Playboy Co-Branded Merchandise" shall mean merchandise marked with both the Playboy Marks and either be logos or marks of the Nine Group, the Tenant, FPLLC, Palms Resort, the Existing Venues or New Venues. "Playboy Non-Element Revenue Event" shall mean any event at the Palms Resort outside of the Playboy Elements that incorporates the Playboy Indicia at which revenue outside the Playboy Elements are generated. "Playboy Indicia" shall mean the Playboy Marks, Bunnies, Bunny Costumes, and other symbols or indicia of source related to Playboy. "Playboy Marks" shall mean the list of service marks and logos set forth on Exhibit A attached hereto, as the same may be amended from time to time by mutual written agreement of the parties hereto. "Playboy Marketing Use" shall mean using the Playboy Indicia for marketing or promoting the Project at all locations at the Palms Resort including weekends and nights that are not part of a Playboy Non-Element Revenue Event. "Playboy Membership Incremental Revenue" ***** "Playboy-Only Merchandise" shall mean merchandise that carries only the Playboy Marks and no other marks. "Playboy Store Operating Expenses" ***** ***** "Playboy Store Net Profits" shall mean, as to any period, the Playboy Store Revenues minus Playboy Store Operating Expenses. "Project Opening Date for the Nightclub and Lounge" is the earlier of the date either the Nightclub or the Lounge are opened to the public for business. "Project Opening Date for the Playboy Store" is when the Playboy Store opens to the public for business. 3 "Project Standard" shall mean a standard of design, construction, maintenance, operation and management, as applicable, consistent with the first-class standards employed at the Palms Resort as of the date of this Agreement. ***** 2. THE PROJECT. (a) New Tower Description. The Project will be included within a new tower (the "New Tower") to be built by Palms at the Palms Resort. The New Tower will (i) be not less than 25 floors above grade, (ii) include not fewer than 250 guest rooms, (iii) be accessible via enclosed corridors to the existing Palms Resort buildings, and (v) be located at the Palms Resort property in the area designated on Exhibit B attached hereto. Palms will consult with Playboy in developing the Project, provided, however, that Palms shall retain sole discretion with regard to all elements and decisions related to the Project (b) New Tower Construction. Construction of the New Tower will be pursued diligently by FPLLC except for interruptions caused by a Force Majeure Event. Unless interrupted by a Force Majeure Event, if the Project Opening Date for the Nightclub and Lounge does not occur by June 30, 2006, then either FPLLC or Playboy may terminate this Agreement by giving a notice of termination to the other ("Failure to Open Termination Right"). If the Project Opening Date for the Nightclub and Lounge does not occur by June 30, 2006 because of a Force Majeure Event, then the Failure to Open Termination Right shall be deferred for a reasonable period (not to exceed 90 days) to accommodate the delay caused by the Force Majeure Event. Termination of this Agreement by exercise of the Failure to Open Termination Right does not give rise to a claim for loss or damage. Subject to compliance with the Project Standard, FPLLC will be solely responsible (at FPLLC's sole expense) for all aspects of the design, development, construction and finish of the New Tower, including, without limitation, all permits, approvals and licenses. (c) New Tower Signage. Playboy icon signage and Palms Resort signage shall be installed on the east face of the New Tower (collectively, the "New Tower Signage"). The design of the New Tower Signage shall be as shown on Exhibit C attached hereto and by reference incorporated herein. (d) Playboy Elements. The Project will consist of the following Playboy branded components (collectively, the "Playboy Elements") at the Palms Resort. The floorplan of the Playboy Elements shall be as shown on Exhibit D attached hereto and by reference incorporated herein, and any material changes to the floorplan and structural elements that materially changes the look and feel of the Playboy Elements, or requires the closing of the Playboy Elements for three (3) consecutive days after the Effective Date shall require the consent of both parties and be reflected in a revised Exhibit D: 4 (i) An exclusive high-end dance venue at the top floor of the New Tower (the "Nightclub") linked by escalators and elevators to a casino on the floor below the name of which will be "Moon." (ii) A separate lounge with a casino of approximately 12,000 square feet, immediately below the Nightclub, which shall be known by the name or a name similar to "The Playboy Lounge and Casino" (the "Lounge"). (iii) An approximately 750 square foot Playboy branded retail store shall be located on the ground level of the New Tower (the "Playboy Store"). (iv) A two-level approximately 10,000 square foot super villa (the "Hugh Hefner Sky Villa") shall be located at the highest guest floor in the New Tower which FPLLC will use its best efforts (subject to health, safety and engineering constraints) to feature indoor/outdoor pools. (e) New Tower, Playboy Store and Project Management. Subject to the Nevada Licensing Authorities, FPLLC will operate the gaming in the casino immediately below the Nightclub, the Playboy Store, and the Hugh Hefner Sky Villa and either Nine Group Management, Inc. or Nine Group Management II, Inc. will operate the Nightclub and the Lounge on behalf of Tenant. All management will be at a quality of operation equal to or better than the Project Standard. FPLLC and Playboy may mutually agree to form a new special purpose entity to lease the Playboy Store area from FPLLC and to operate the Playboy Store. In such event, reference to Playboy Store Revenues and Playboy Store Operating Expenses will be references to the revenues and operating expenses, respectively of such new special purpose entity. References to Playboy Store Net Profits will be references to the net profits of such new special purpose entity. (f) Operating Covenants. *****. 3. GRANT OF LICENSE AND RELATED RIGHTS. (a) Grant. Subject to the provisions of this Agreement, Playboy hereby grants (and will cause its licensing subsidiaries to grant) to Palms, and Palms hereby accepts, the right and license to use publicly display, copy, reproduce and alter (subject to the provisions of Paragraph 4(c) below) the Playboy Marks in connection with the operation of the Playboy Elements and the Palms Resort and in the marketing and promotion thereof, including without limitation the right to produce or commission the production of the items listed on Exhibit E and any Playboy Co-Branded Merchandise, provided that Palms shall submit the first prototype of any such item to Playboy for approval in accordance with Paragraph 4(c). *****. The License is granted exclusively to Palms and not to any individual or entity that holds an interest in Palms for use in connection with business at the Palms Resort. Anything in this Paragraph 3(a) to the contrary notwithstanding, Playboy will retain the right to use and license third parties the right to use Playboy's 5 trademarks and other intellectual properties on slot machines and other gaming devices. *****. (b) Warranty. Playboy warrants that: (i) it has the right to grant the License hereunder; (ii) it directly or through a subsidiary owns the Playboy Marks; and (iii) Palms may use the Playboy Marks as provided hereunder free from any claim by third parties. (c) Competition. (i) During the term hereof, without prior written approval from Playboy's General Counsel at the contact listed in Section 8 below, Palms shall not: (x) display, sell or permit to be sold at the Playboy Elements any marks or names, or any merchandise bearing or identified with the marks or names, of any of the following persons or entities: ***** (the foregoing persons or entities are collectively referred to as "Competitors"), (y) use any Playboy Indicia at any events to sell any merchandise, sponsored by or associated with any Competitor or (z) rename an Existing Venue with a mark associated with any Competitor at the Palms Resort. (ii) Commencing on the Project Opening Date for the Nightclub and Lounge, Playboy shall, for itself and its affiliates and subsidiaries, book all "Nevada Marketing Events for Playboy" at the Project or Palms Resort. Palms shall offer Playboy its best competitive rate in connection with such bookings. If the Project or Palms, using its best efforts, cannot accommodate any such Nevada Marketing Events for Playboy, such Nevada Marketing Events for Playboy may be conducted at one or more other locations in Clark County, Nevada (the "Alternate Location"), provided that if Playboy desires to book such Nevada Marketing Event for Playboy at an Alternate Location that is another hotel or casino in Las Vegas, then in such case Palms shall have the right of approval over such Alternate Location. A Nevada Marketing Event for Playboy is a marketing or promotional events held by Playboy in the State of Nevada, but it does not include the mere exhibiting at a trade show, (for example at the Las Vegas Convention Center), provided however that a party celebrating the exhibition at a hotel or casino or restaurant or nightclub in Nevada would be considered a Nevada Marketing Event for Playboy. Palms must respond to Playboy's request to book a Nevada Marketing Event for Playboy within ten (10) business days or it shall be deemed that Palms cannot accommodate such request. From the Effective Date until the Project Opening Date for the Nightclub and Lounge, Playboy agrees that it shall not book any Nevada Marketing Events for Playboy at the ***** (d) Co-branding and Sales at the Playboy Store. Subject to following the approval procedures set forth in Paragraph 4(c), the license includes the right to sell Playboy Co-Branded Merchandise at the Stuff Store, the Palms Store, the Playboy 6 Store and through any Palms online internet store (including, without limitation the online internet store operated on the date of this Agreement by the Nine Group), if any. The sale of Playboy-Only Merchandise, shall be sold only at the Playboy Store and shall not be sold at the Stuff Store, the Palms Store or any Palms online internet store or any other retail sales outlet controlled by or affiliated with Palms. For clarification, the Playboy Store shall not be limited to selling Playboy-Only Merchandise or Playboy Co-Branded Merchandise, and other merchandise may also be sold at the Playboy Store. All Playboy-Only Merchandise and Playboy Co-Branded Merchandise shall be sold by Palms at prices that are competitive to the prices charged by other sellers of comparable merchandise using a commercially reasonable standard. All sales of Playboy Co-Branded Merchandise, including through an on line internet store, are subject to the provisions herein, including specifically 3(d), 4(c), 5(c), and 5(d). (e) Playboy Chips. FPLLC shall have the right to produce or cause to be produced Playboy Chips, the design of which shall be approved by Playboy in accordance with Paragraph 4(c). (f) Decor. Playboy may, subject to availability, provide Palms with promotional and decor items to use in connection with the Project, which will be provided at no cost to Palms, except that Palms will pay the actual costs of shipping, insuring and securing such items. All such items will remain the property of Playboy. Playboy will also provide, without charge to Palms (except for actual out-of-pocket reproduction costs), style sheets and camera-ready artwork from which Palms may appropriately reproduce the Playboy Marks pursuant to at its own expense. Palms may reject promotional and decor items and return same to Playboy. (g) Assignment / Change of Control. Without the approval of Playboy's General Counsel at the contact information listed in Section 8 below, the License and all rights and duties hereunder with respect to the License may only be assigned, sold or sublicensed to a person who buys (or acquires through a foreclosure or trustees' sale) the whole or substantially all of the assets of FPLLC or Tenant and who obtains (or has a manager, receiver or supervisor obtain) all required liquor or gaming licenses from the Nevada Licensing Authorities to operate the business formerly operated by FPLLC or Tenant, and agrees to be subject to the ongoing rights and obligations of this Agreement (a "Change of Control"), ***** Without the prior written approval of Playboy's General Counsel at the contact information listed in Section 8 below, the License and all rights and duties hereunder with respect to the License may not be mortgaged or otherwise encumbered by FPLLC, Nine Group or Tenant. Any attempt by any of Nine Group, FPLLC or Tenant to separately assign, mortgage, sublicense or otherwise encumber this Agreement or any of the rights and duties hereunder not in connection with a Change of Control without the prior written consent from Playboy's General Counsel at the contact information in Section 8 below (which may be withheld in Playboy's sole and absolute discretion) shall constitute a material event of default. Playboy hereby approves the grant by Palms of a security interest in its rights under this Agreement to secure Palms' obligations 7 under a credit agreement and amendments, restatements, or modifications thereto with Wells Fargo, N.A. (on its own behalf or administrative agent for other lenders), the outstanding borrowings of which shall be used for purposes which include, without limitation, the financing, construction and operation of the New Tower. Playboy will sign customary and reasonable estoppel certificates or consents in connection with the foregoing, which estoppel certificates or consents will not impair or alter any of Playboy's rights under this Agreement. (h) Pre-Opening Matters. (i) Prior to the Project Opening Date for the Nightclub and Lounge, (x) Palms shall host, at Palms' sole cost and expense, a mutually agreed upon number of promotional events at the Palms Resort to promote the Project and Playboy will cooperate with Palms in connection with the production of such promotional events and (y) Playboy and Palms will jointly host a mutually agreed upon promotional event at Playboy Mansion West to promote the Project and, in connection therewith, Palms shall pay all of the actual out-of-pocket costs and expenses, but not a fee just for the use of Playboy Mansion West. For each of the promotional events promoting the Project, Palms may produce and distribute to patrons and guests Commemorative Playboy Gaming Chips or Playboy Nongaming Chips. Palms will pay to Playboy a "Percentage Fee" (as defined below) of ***** of the face amount of any Commemorative Playboy Gaming Chips, within thirty (3)) days following the date of any such promotional events. Palms is not required to pay Playboy a Percentage Fee for Playboy Nongaming Chips. All uses of the Playboy Marks at each such promotional event will be strictly in accordance with the terms hereof. (ii) Pre-Opening Ads. ***** (iii) Announcement. Playboy and Palms will mutually agree on a public announcement of the Project. Palms acknowledges that the timing of such announcement may be affected by SEC rules and disclosure requirements. (i) Additional Playboy Covenants. During the term hereof, Playboy shall provide Palms with the following: (i) ***** (ii) ***** (iii) ***** (iv) subject to the provisions of Section 4(c), the right to use the Playboy Indicia for a Playboy Marketing Use, provided such uses will not, in any event, include references to Competitors; (v) ***** 8 (vi) from time to time during the Term of this Agreement, but in any event no more frequently than ***** times per year, each party shall send promotional materials, direct promotion pieces and invitations for events that help promote the Playboy Elements to its customer lists, magazine subscribers, on-line subscribers, and celebrity mail list members, as applicable. Written material to be mailed will be provided by the party desiring the mailing and after mailing the other party shall send a verified invoice for any postage, material and labor costs incurred by the mailing party and the other party shall have thirty (30) days within which to pay such invoice. (vii) Playboy and palms agree to work together during the Term of this Agreement to maximize opportunities for the assets of both parties, including Playboy's television networks, magazine, and ancillary products, licensing and online services. Playboy will cause any of its subsidiaries to perform their respective obligations under this Agreement. (j) Playboy to Offer Concierge Services. Playboy shall have the right to offer concierge services through a company such as ***** that will allow the purchasers of such services to receive preferential line treatment for the Nightclub and Lounge (the "Concierge Services). Playboy and Palms agree that the Concierge Services shall only require the accommodation of a reasonable number of persons and shall work like other similarly situated services. 4. APPROVAL AND CONTROL. (a) ***** (b) ***** (c) ***** (d) Use and Goodwill. Palms shall reasonably conduct its business in accordance with all applicable laws and not in a manner that reflects adversely upon the good name of Playboy or the Playboy Marks. Any goodwill arising out of Palms' use of the Playboy Marks will inure solely to the benefit of Playboy. Palms shall use the Playboy Marks to identify the Playboy Elements at the Palms Resort and those personnel within the Palms Resort to be designated as "Bunnies" and that any unauthorized use of the Playboy Marks will constitute an infringement of the rights of Playboy. (e) Playboy Bunnies. The Playboy Bunny is one of the most important symbols of Playboy and maintenance of the quality and goodwill associated with the symbol is central to the License. Consequently, for the mutual benefit of both Palms and Playboy, all Bunnies employed by Palms must conform to the high standards of personal appearance and moral conduct which the Playboy Bunny symbol represents and which may be determined from time to time by Playboy. Upon notice to Palms, Playboy will have the right to interview and observe Palms' 9 Bunnies and ensure that the Bunnies conform to the high standards of personal appearance established by Playboy. Palms obligates itself to employ persons which Palms reasonably believes are of good moral character and conduct as Bunnies who will not bring discredit to the Playboy Bunny symbol or Playboy. It is the purpose of this Paragraph 4(e) to ensure that the value of the Bunny symbol will not be eroded and to maintain uniformity in the appearance of the symbol. Palms will employ a Bunny supervisor ("Bunny Mother") who is subject to the ongoing reasonable approval of Playboy, for purposes of Bunny training and maintaining conformity to reasonable standards set by Playboy. Palms may ask the Bunny Mother to perform other management and supervisory work appropriate to her level of training and experience. Playboy will provide, at no cost to Palms, initial orientation training of Palms' Bunnies and the Bunny Mother. Palms will have complete control over all personnel policies and labor relations at the Project and it is not the intent of this Paragraph 4(e) to affect or influence that control. In accordance with Paragraph 4(c), Playboy will approve all Bunny uniforms. (f) Separate Identity. Palms shall not use any of the Playboy Marks as part of its corporate or other legal name. Palms shall not conduct business with its suppliers, employees, government agencies or others in the name of Playboy, or in any manner which suggests that Palms is an affiliate of Playboy or that Palms is authorized to act for or bind Playboy. (g) No Contest of Playboy's Rights. Palms agrees that it will not, during the term of this Agreement, or at any time thereafter, directly or indirectly, contest or aid others in contesting the validity of any of the Playboy Marks or the exclusive ownership and rights to the use thereof by Playboy. (h) Infringements. Palms will promptly notify Playboy of any infringement of the Playboy Marks that directly interferes with the Project or violates the rights granted to Palms hereunder. In the event of such notice, Playboy shall take such legal action as is reasonable and commercially practical under the circumstances. In the event of any monetary recovery by Playboy in connection with the enforcement of its rights as required herein, Playboy shall be entitled to recoup its costs in obtaining such recovery or judgment and the remainder, if any, shall be split equally between Playboy and Palms. Palms will cooperate fully with Playboy in any such action Playboy may decide to take. In no event shall Playboy be responsible to Palms for any incidental or consequential damages, such as lost profits, that may result from any such infringement. (i) Complaints. Palms shall immediately notify Playboy of any complaint or legal action asserted against it by reason of the use of any of the Playboy Marks and Playboy shall defend or settle any such legal action in any manner and on any terms it shall deem appropriate. Any costs, including, but not limited to, awards of damages, amounts paid in settlement, attorneys' fees, court costs and disbursements incurred in defending or settling any such legal action and that may be assessed against the Palms by reason of the use of the Playboy Marks in 10 accordance with the terms and conditions of this Agreement shall be paid by Playboy. In no event shall Playboy be responsible to Palms for any incidental or consequential damages, such as lost profits, that may result from any such action. (j) Intellectual Property Notices. Palms shall utilize such reasonable trademark and copyright credit notices and such other consumer notices or information as Playboy may request from time to time. (k) Permutations. Playboy acknowledges and agrees that the marks associated with the Existing Venues and the New Venues, along with permutations of such marks, are the property of the Nine Group (the "Nine Marks"). Playboy acknowledges and agrees that the marks and permutations of marks associated with Palms Resort are owned or licensed by FPLLC and are the property of FPLLC (the "Palms Marks"). Any goodwill arising out of the Palms' use of the Palms Marks or the Nine Marks will inure solely to the benefit of Palms and/or Nine Group respectively. Playboy acknowledges and agrees that the extant Nine Marks and Palms Marks are not permutations of the Playboy Marks and upon expiration or termination of this Agreement the owners of the Palms Marks and Nine Marks are permitted to continued use of the Palms Marks and Nine Marks so long as they do not incorporate any Playboy Marks or permutations of the Playboy Marks. Palms shall not during or after the term of this Agreement use or cause or authorize to be used any words, device, design or symbol confusingly similar to the Playboy Marks except as authorized by Playboy. 5. LICENSE FEES AND REPORTING. In consideration of the rights to use the Playboy Marks at the Palms Resort, Palms will pay Playboy the following by electronic transfer, which shall be payable in arrears: (a) Fixed Fee. Commencing on the Project Opening Date for the Nightclub and Lounge and thereafter until termination (subject to Paragraph 6(e)) of this Agreement, ***** (b) Percentage Fees. Commencing on the Project Opening Date for the Nightclub and Lounge and thereafter until termination (subject to Paragraph 6(e)) of this Agreement, a percentage fee (the "Percentage Fee") ***** (i) ***** (ii) ***** (iii) ***** (iv) ***** (v) ***** 11 (c) Monthly Statement. Commencing on the earlier of the Project Opening Date for the Playboy Store or the date Palms commences selling Playboy-Only Merchandise and/or Playboy Co-Branded Merchandise, whether at the Palms Resort or online, and thereafter until termination (subject to Paragraph 6(e)) of this Agreement, Palms shall furnish or cause to be furnished to Playboy a monthly statement of each calendar month's Shared Revenues with a calculation of Percentage Fees within twenty-one (21) days after the end of each calendar month. Such statements shall be in a form mutually acceptable to Palms and Playboy and shall be certified by an officer or responsible employee of either FPLLC or Tenant as an accurate accounting of such amounts. Palms will accompany each such statement with payment by electronic transfer to Playboy in an amount equal to the Percentage Fee and Playboy Store Net Profits calculated in accordance with Paragraph 5(b) hereof. (d) Late Payments. If Palms fails to pay within ten (10) calendar days when the same is due any fee payable hereunder, the unpaid amounts shall bear interest at the Interest Rate, from the date the unpaid amount was initially due, to and excluding the date of payment; provided, however, that the interest provided for in this Paragraph 5(d) shall not in any way limit Playboy's right to declare Palms in default of this Agreement for failure to pay an amount within ten (10) calendar days when the same is due and pursue all rights and remedies in connection therewith, including, without limitation, the right to terminate this Agreement. (e) Records. At the time of a sale or other transaction upon which a Percentage Fee, Playboy Store Net Profits, Playboy-Only Merchandise Net Profits or Co-Branded Merchandise Sales are payable hereunder, Palms shall record the sale or other transaction in auditable point of sale computer systems installed and operated by either FPLLC or Tenant which are used for the recording of transactions to be reported either to the Nevada Licensing Authorities or the department of taxation of the State of Nevada. FPLLC and Tenant shall maintain records on these existing point of sale computer systems for the same period of time and in the same form as are required by the Nevada Licensing Authorities and the department of taxation of the State of Nevada, but in any case no less than three (3) years after such records are created. Promptly, upon request, FPLLC and Tenant will make copies of these records available at the Palms Resort for two inspections in each calendar year by Playboy's representatives who are engaged in inspecting and/or auditing Palms' books and records as provided herein. (f) Audits. Playboy, at any time within three (3) years after receipt of any monthly statement required under this Section and upon not less than fifteen (15) days' prior written notice to Palms, may cause two audits in each calendar year to be made of Shared Revenues and all of Palms' records and books necessary to audit such items. Palms shall make all such books and records available for the audit at the Palms Resort. A copy of the audit report shall be furnished by Playboy to Palms regardless as to whether any additional Shared Revenues are found to be due. If the audit discloses an underpayment of Shared Revenues, Palms shall promptly pay to Playboy the amount of the underpayment, with interest at the 12 Interest Rate, from the date the payment should have been made through and including the date of payment. If the audit discloses an underreporting of Shared Revenues in excess of *****of the reported Shared Revenues, then Palms shall also immediately pay to Playboy all reasonable costs and expenses incurred in performing the audit and in collecting the underpayment. If the audit discloses an overpayment of Percentage Fee or Playboy Store Net Profits, Palms shall be entitled to a prompt refund from Playboy. Playboy shall be permitted to audit Shared Revenues for any single year only once, unless a subsequent audit discloses an irregularity in Palms' reporting, in which event the foregoing limit shall not apply. (g) Confidentiality. Playboy agrees that it shall use its reasonably good faith efforts to not disclose to any third party the Shared Revenues or the amount of Percentage Fees paid or payable by Palms; provided, however, that (a) such information was not previously disclosed by Palms to such third party or to the public generally, and (b) nothing contained herein shall restrict Playboy from disclosing such information (i) as may be required by law (including any securities laws) or (ii) to its accountants, investment bankers, attorneys or bona-fide prospective or current lenders, capital providers or purchasers, provided that each of such recipients shall be bound to the same non-disclosure provisions as are imposed upon Playboy. 6. TERM AND TERMINATION. (a) ***** (b) ***** (c) ***** (d) ***** (e) Effect Of Termination. (i) Upon the expiration or earlier termination of this Agreement, however caused, all rights and privileges of Palms hereunder shall terminate and revert to Playboy, and Palms shall not thereafter make any intentional use whatever of any of the Playboy Marks or sell any Playboy-Only Merchandise or Playboy Co-Branded Merchandise. Termination of the Agreement ends the obligation by Palms to pay Fixed Fee and Percentage Fees, except with regard to any Fixed Fee or Percentage Fees accrued but not yet paid to Playboy as of the termination, and the obligation by Playboy to provide any advertisements, banner, direct mailings or access to Playboy Mansion West. Palms shall, at its own expense, as soon as may reasonably be accomplished remove and efface or destroy all references to Playboy or to any of the Playboy Marks from any services, products, materials, supplies and equipment of Palms and from all business paper, stationery, signs, labels, packaging material, advertising, 13 or the like, used or maintained by Palms, including telephone directory listings, as soon as may reasonably be accomplished, and Palms shall not thereafter hold forth in any manner whatsoever that Palms has or ever had any connection with Playboy. (ii) Palms acknowledges that its failure to promptly make reasonable efforts to cease use of any of the Playboy Marks at the termination of this Agreement will result in immediate and irreparable damage to Playboy and to the rights of any subsequent licensees. Palms acknowledges and admits that there is no adequate remedy at law for such failure to cease such use, and Palms agrees that in the event of such failure, Playboy shall be entitled to equitable relief by way of temporary and permanent injunctions and such other further relief as any court with jurisdiction may deem just and proper. Resort to any remedies referred to herein shall not be construed as a waiver of any other rights and remedies to which Playboy is entitled under this Agreement or otherwise. 7. INDEMNIFICATION AND INSURANCE. (a) Indemnity to Palms. Playboy shall indemnify, defend and hold harmless Palms, its subsidiaries and affiliates, their respective shareholders, partners and members and the agents, managers, officers, directors and employees of each from and against all costs, claims, suits, losses, damages and expenses (including, without limitation, reasonable attorneys' fees and litigation expenses) arising out of the authorized use of the Playboy Marks on or in connection with the Project. Playboy shall have the option to settle or to undertake and conduct the defense of any such claim or suit. Playboy shall not be entitled to settle any such claim or suit on behalf of Palms unless Playboy is responsible for any payment to be made by Palms and obtains a release of all claims against Palms under any such settlement. Palms may, through counsel of Palms' own choice and at its own expense, participate in any such claim or suit, but in such event Playboy shall have sole and exclusive control over such defense, and Playboy's decisions with respect thereto shall govern and control. Palms expressly covenants that no discussion by Palms whatsoever with any claimant or litigant, no compromise or settlement by Palms of any claim or suit and no negotiations by Palms with respect to any compromise or settlement shall be had, made or entered into with out, in each instance, the prior written approval of Playboy. (b) Indemnity to Playboy. Except as provided in Section 7(a) above, palms shall indemnify, defend and hold harmless Playboy, any parent and subsidiaries and affiliates, shareholders, agents, officers, directors and employees of each of the foregoing (hereinafter collectively referred to as "Indemnitees") from and against all costs, claims, suits, losses, damages and expenses (including, without limitation, reasonable attorneys' fees and litigation expenses) arising out of or in connection with: (i) the design, construction, ownership, operation or management of the Palms Resort (including, without limitation, the Project); (ii) Palms' performance hereunder or any alleged action or failure to act whatsoever 14 by Palms; (iii) non-conformity to or non-compliance with any law pertaining to the Palms Resort (including, without limitation, the Project); or (iv) any breach by Palms of any of its representations or warranties hereunder. Palms shall have the option to settle or to undertake and conduct the defense of any such claim or suit. Playboy may, through counsel of Playboy's own choice and at its own expense, participate in any such claim or suit, but in such event Palms shall have sole and exclusive control over such defense, and Palms' decisions with respect thereto shall govern and control. Playboy expressly covenants that no discussion by Playboy whatsoever with any claimant or litigant, no compromise or settlement by Playboy of any claim or suit and no negotiation by Playboy with respect to any compromise or settlement shall be had, made or entered into without, in each instance, the prior written approval of Palms. (c) Limitation on Indemnity. In no event shall such indemnification in (a) or (b) above include incidental or consequential damages, even if the "Indemnifying Party" (as defined below) is aware of such damages, including, but not limited to compensation or reimbursement for loss of prospective profits, anticipated sales or other losses occasioned by termination of the Agreement or any other reason. (d) Indemnification Procedure. All claims for indemnification based on or arising from a third party claim shall be asserted and resolved as set forth in this Section. In the event that any claim or demand by a third party for which one party (the "Indemnifying Party") may be required to indemnify the other (the "Indemnified Party") hereunder (a "Claim") is asserted against the Indemnified Party by a third party, the Indemnified Party shall as promptly as practicable following the Indemnified Party's receipt of notice of such Claim, notify the Indemnifying Party in writing of such Claim, and such notice shall specify (to the extent known) in reasonable detail the amount of such claim and any relevant facts and circumstances relating thereto (the "Demand"); provided, however, that any failure to give such prompt notice or to provide any such facts and circumstances shall not constitute a waiver of any rights of the Indemnified Party, except to the extent that the rights of the Indemnifying Party are actually prejudiced thereby. (e) Contribution. In the event that a loss, liability, claim, damage or expense is caused by more than one Indemnifying Party, each Indemnifying Party whose actions or omissions shall have caused the loss, liability, claim, damage or expense shall contribute to the aggregate amount of any losses, liabilities, claims, damages and expenses owed in such proportion as is appropriate to reflect their relative fault in connection with the actions or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action or omission. The Indemnifying Parties agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. The aggregate amount of losses, liabilities, claims, damages and expenses 15 shall be deemed to include any legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding commenced or threatened. (f) Insurance. FPLLC shall obtain and maintain at substantially similar levels throughout the Term, at its expense, all insurance required by the first lien mortgage lender for the Palms Resort (including, without limitation, the Project) and Tenant shall obtain and maintain at its expense at substantially similar levels throughout the Term all insurance required by the leases for the Existing Venues and the New Venues, which insurance shall name Playboy as an additional insured on the liability coverage and if Playboy has an insurable interest in property at the Palms Resort as an additional named assured on the property damage coverage. Palms shall provide Playboy with a certificate of all relevant insurance policies indicating coverage limits and deductibles on an aggregate and per occurrence basis. 8. MISCELLANEOUS PROVISIONS. (a) No Waiver. The waiver of any breach of any term, covenant or condition of this Agreement by any of the parties hereto shall not constitute a continuing waiver nor a waiver of any subsequent breach, either of the same or any other term, covenant or condition of this Agreement. (b) Partial Invalidity. In the event that any portion of this Agreement shall be unenforceable in whole or in part, said provision shall be limited or curtailed to the extent necessary to bring it within the requirement of present or future law, and this Agreement shall be construed as if said provision had been incorporated herein as so limited, or as if said provision has not been included herein, as the case may be. (c) Integration. This Agreement together with the exhibits annexed hereto constitutes the entire agreement and understanding among the parties upon the subject matter of this Agreement. Any prior understandings and agreements between the parties regarding such subject matter are merged herein and superseded hereby. (d) License Relationship. The rights and powers herein granted to Palms are those of a licensee only and is not intended to create any other relationship. It is expressly understood and agreed that Playboy shall not under any circumstances be liable to Palms for all or any part of any losses Palms may sustain except for losses or damages caused by a breach of this Agreement by Playboy. No party shall have power to obligate or bind any of the others in any manner whatsoever. (e) Licenses. Palms will comply with all federal, state and local laws, rules and regulations and Palms will be solely responsible for obtaining and maintaining, at its own expense, any and all licenses, permits and approvals (including governmental and all other licenses, permits and approvals) necessary for the 16 operation of the Palms Resort, including, without limitation, the Project. Except as provided in Paragraph 7(i) below, in the event Palms is unable, for any reason, to obtain and maintain throughout the term hereof all of such licenses, permits or approvals, such inability will be an incurable default hereunder. (f) ***** (g) Governing Law and Jurisdiction. (i) This Agreement shall be governed and construed in accordance with the laws of the State of Nevada applicable to contracts to be made and performed entirely therein without giving effect to the principles of conflicts of law thereof or of any other jurisdiction. (ii) Each of the parties hereto hereby expressly and irrevocably submits to the nonexclusive personal jurisdiction of the United States District Court for the District of Nevada and to the jurisdiction of any other competent court of the State of Nevada located in the County of Clark (collectively, the "Nevada Courts"), preserving, however, all rights of removal to such federal court under 28 U.S.C. Section 1441, in connection with all disputes arising out of or in connection with this Agreement or the transactions contemplated hereby and agrees not to commence any litigation relating thereto except in such courts. If the aforementioned courts do not have subject matter jurisdiction, then the proceeding shall be brought in any other state or federal court located in the State of Nevada, preserving, however, all rights or removal to such federal court under 28 U.S.C. Section 1441. Each party hereby waives the right to any other jurisdiction or venue for any litigation arising out of or in connection with this Agreement or the transactions contemplated hereby to which any of them may be entitled by reason of its present or future domicile. Notwithstanding the foregoing, each of the parties hereto agrees that each of the other parties shall have the right to bring any action or proceeding for enforcement of a judgment entered by the Nevada Courts in any other court or jurisdiction. (h) Notices. All notice, consents and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand or by Federal Express or similar overnight courier or (b) when successfully transmitted by telecopier (with a confirming copy of such communication to be sent as provided in clauses (a) or (b) above) to the party for whom intended, at the address or telecopier number for such party set forth below (or at such other address or telecopier number for a party as shall be specified by like notice): If to Playboy, to: Jim Griffiths Senior Executive Vice President 17 Playboy Enterprises International, Inc. 2706 Media Center Drive Los Angeles, California 90065 Fax No. 323 276 4505 With a copy to: Howard Shapiro General Counsel Playboy Enterprises International, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 Fax No. 312 266 2042 If to FPLLC: Palms Casino Resort 4321 West Flamingo Road Las Vegas, Nevada 89103 Attention: George J. Maloof, Jr. Fax No. (702) 942-7001 With a copy to: Mr. Thomas K. Land Palms Casino Resort 4321 West Flamingo Road Las Vegas, Nevada 89103 Fax No. (702) 942-7014 Mark H. Goldstein, Esq. Lionel Sawyer & Collins 300 S. 4th Street Las Vegas, NV 89101 Fax No. (702) 383-8845 If to the Tenant or Nine Group: Nine Group, LLC In care of: Palms Casino Resort 4321 West Flamingo Road Las Vegas, Nevada 89103 Attention: Scott DeGraff Fax No. (702) 933-5625 With a copy to: Harold S. Dembo, Esq. 18 Katz Randall Weinberg & Richmond 333 W Wacker Dr Ste 1800 Chicago, IL 60606 Fax No. 312-807-3903 (i) Suitability for the Nevada Licensing Authorities. Playboy acknowledges and agrees that Palms and its affiliates are engaged in businesses that are subject to or exist because of privileged licenses issued by the Nevada Licensing Authorities. Playboy agrees to apply for and obtain any licenses, approvals, findings of suitability or other clearance if so requested or required by any Nevada Licensing Authority. If (i) Playboy fails to satisfy any licensing requirement referred to above, or (ii) if any Nevada Licensing Authority directs Palms to terminate its relationship with Playboy, or (iii) if Palms reasonably determines that Palms' continued relationship with Playboy could or does jeopardize Palms' privileged licenses, approvals or findings of suitability, or (iv) if any such license, approval or finding of suitability is threatened to be, or is, denied, curtailed, suspended or revoked by the Nevada Licensing Authorities as a result of Palms' relationship with Playboy, Palms may, notwithstanding the provisions of Section 6 hereof, terminate this Agreement effective immediately upon written notice to Playboy stating the basis for such termination. (j) No Brokers. Playboy and Palms agree to indemnify and hold one another harmless from and against any claim for any brokerage or other commission or finders fee made by any other person or entity claiming to have acted on the behalf of the indemnifying party by reason of this Agreement. (k) No Agency or Partnership. Palms does not, in any way or for any purpose, become a partner, employer, principal, master, agent or joint venturer of or with Playboy. Playboy does not, in any way or for any purpose, become a partner, employer, principal, master, agent or joint venturer of or with Palms. 19 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date and year first above written. PLAYBOY ENTERPRISES INTERNATIONAL, INC. By: /s/ James F. Griffiths ------------------------------------------------- James F. Griffiths Title: Senior Executive Vice President ------------------------------------------------ FIESTA PALMS LLC By: /s/ George J. Maloof, Jr. ------------------------------------------------- George J. Maloof, Jr. Title: Manager ------------------------------------------------ NINE GROUP LLC By: /s/ Scott DeGraff ------------------------------------------------- Scott DeGraff Title: Manager ------------------------------------------------ N-M VENTURES II, LLC By: /s/ Scott DeGraff ------------------------------------------------- Scott DeGraff as Manager of Nine Group II, LLC Title: Member ------------------------------------------------ 20 EXHIBIT A ATTACHED TO AND MADE A PART OF THE TRADEMARK LICENSE AGREEMENT BETWEEN PLAYBOY ENTERPRISES INTERNATIONAL, INC. AND FIESTA PALMS LLC and N-M VENTURES II, LLC DATED AS OF October 4, 2004 PLAYBOY RABBIT HEAD DESIGN BUNNY BUNNY COSTUME PLAYBOY AFTER HOURS 21 Exhibit B Drawing of New Tower Location 22 Exhibit B - Palms Casino and Resort - Site Plan - Page 1 23 Exhibit B - Casino Expansion Rendering - Palms - Page 2 24 Exhibit C Design of the New Tower Signage 25 Exhibit C - Palms Casino and Resort - Elevation 26 Exhibit D Playboy Elements Floorplan 27 Exhibit D - Furniture Floor Plan - Page 1 28 Exhibit D - Palms Casino and Resort - Gaming and Lounge - Page 2 29 EXHIBIT E ITEMS THAT PALMS MAY PRODUCE, SUBJECT TO PLAYBOY APPROVAL OF PROTOTYPE Screen printed decorated glassware and etched glass shot glasses, double old-fashion glasses, hi-ball glasses, martini glasses, beer mugs, beer steins, pilsner glasses, champagne glasses, wine glasses, pint glasses, margarita glasses, martini shakers, martini pitchers, margarita pitchers, champagne buckets, ice buckets, coasters, stirrers, picks, napkins, matches and serving trays. Bar accessories, specifically corkscrews, bottle openers, bottle stoppers, bottle pourers, strainers, ice tongs, jiggers and wine glass charms. 30 EXHIBIT F ***** 31 EX-10.2 3 d72426_ex10-2.txt THIRD AMENDED, RESTATED STK INCENT. PLAN Exhibit 10.2 THIRD AMENDED AND RESTATED PLAYBOY ENTERPRISES, INC. 1995 STOCK INCENTIVE PLAN (as amended through May 23, 2007) Playboy Enterprises, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to certain of its key employees through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of key employees considered essential to the long-range success of the Company by providing and offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I DEFINITIONS Whenever the following terms are used in this Plan they shall have the meaning specified below, unless the context clearly indicates otherwise. Section 1.1 Board. "Board" shall mean the Board of Directors of the Company. Section 1.2 Change of Control. "Change of Control" shall mean the occurrence of any of the following events: (i) except in a transaction described in clause (iii) below, Hugh M. Hefner, Christie Hefner, the Hugh M. Hefner 1991 Trust (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee), and the Hugh M. Hefner Foundation (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee) cease collectively to own a majority of the total number of votes that may be cast for the election of directors of the Company; or (ii) a sale of Playboy magazine by the Company; or (iii) the liquidation or dissolution of the Company, or any merger, consolidation or other reorganization involving the Company unless (x) the merger, consolidation or other reorganization is initiated by the Company, and (y) is one in which the stockholders of the Company immediately prior to such reorganization become the majority stockholders of a successor or ultimate parent corporation of the Company resulting from such reorganization and (z) in connection with such event, provision is made for an assumption of outstanding Options and rights or a substitution thereof of a new Option or right in such successor or ultimate parent of substantially equivalent value. Section 1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. Section 1.4 Committee. "Committee" shall mean a committee of the Board of Directors comprised of persons who are both non-employee directors within the meaning of Rule 16b-3 which has been adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such rule or its equivalent is then in effect ("Rule 16b-3") and "outside directors" within the meaning of Section 162(m) of the Code. Section 1.5 Common Stock. "Common Stock" shall mean the Class B Common Stock, par value $.01 per share, of the Company. Section 1.6 Company. "Company" shall mean Playboy Enterprises, Inc., a Delaware corporation. Section 1.7 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under Article VII of the Plan. Section 1.8 Director. "Director" shall mean a member of the Board. Section 1.9 Employee. "Employee" shall mean any officer or other employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary. Section 1.10 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Section 1.11 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. Section 1.12 Grantee. "Grantee" shall mean an Employee granted a Performance Award, Stock Payment, Section 162(m) Performance Award, Section162(m) Stock Payment, or an award of Deferred Stock or Section 162(m) Deferred Stock, under this Plan. Section 1.13 Incentive Stock Option. "Incentive Stock Option" shall mean an Option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. Section 1.14 Non-Qualified Option. "Non-Qualified Option" shall mean an Option which is not designated as an Incentive Stock Option by the Committee. Section 1.15 Officer. "Officer" shall mean an officer of the Company. Section 1.16 "Option" shall mean a stock option granted under Article III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option. Section 1.17 Optionee. "Optionee" shall mean an Employee to whom an Option is granted under the Plan. Section 1.18 Performance Award. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. Section 1.18A Performance Criteria. "Performance Criteria" shall mean objective performance criteria established pursuant to this Plan with respect to awards of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments and Section 162(m) Deferred Stock. Performance Criteria shall be measured in terms of one or more of the following objectives, described as such objectives relate to corporation-wide objectives or objectives that are related to the performance of the individual Employee or of the Subsidiary, division, department or function with the Company or Subsidiary in which the participant is employed: (i) market value; (ii) book value; (iii) earnings per share; (iv) market share; (v) operating profit; (vi) net income; (vii) cash flow; 2 (viii) return on capital; (ix) return on assets; (x) return on equity; (xi) margins; (xii) shareholder return; (xiii) sales or product volume growth; (xiv) productivity improvement; or (xv) costs or expenses. Each grant of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments, and Section 162(m) Deferred Stock shall specify the Performance Criteria to be achieved, a minimum acceptable level of achievement below which no payment or award will be made, and a formula for determining the amount of any payment or award to be made if performance is at or above the minimum acceptable level but fall short of full achievement of the specified Performance Criteria. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Criteria to be unsuitable, the Committee may modify such Performance Criteria or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable; provided, however, that no such modification shall be made if the effect would be to cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. In addition, at the time the award subject to Performance Criteria is made and performance goals established, the Committee is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account certain factors over which the Employees have no or limited control including market related changes in inventory value, changes in industry margins, changes in accounting principles, and extraordinary changes to income. Section 1.19 Plan. "Plan" shall mean the Second Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. Section 1.20 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded under Article VII of this Plan. Section 1.21 Restricted Stockholder. "Restricted Stockholder" shall mean an Employee granted an award of Restricted Stock under Article VI of this Plan. Section 1.22 Secretary. "Secretary" shall mean the Secretary of the Company. Section 1.22A Section 162(m) Deferred Stock. "Section 162(m) Deferred Stock" shall mean Common Stock awarded under Article VII-A of this Plan. Section 1.22B Section 162(m) Performance Award. "Section 162(m) Performance Award" shall mean a cash bonus, stock bonus, or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII-A of this Plan. Section 1.22C Section 162(m) Restricted Stock. "Section 162(m) Restricted Stock" shall mean Common Stock awarded under Section VI-A of this Plan. Section 1.22D Section 162(m) Restricted Stockholder. "Section 162(m) Restricted Stockholder" shall mean an Employee granted an award of Section 162(m) Restricted Stock under Article VI-A of this Plan. 3 Section 1.22E Section 162(m) Stock Payment. "Section 162(m) Stock Payment" shall mean (i) a payment in the form of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII-A of this Plan. Section 1.23 Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.24 Stock Payment. "Stock Payment" shall mean (i) a payment in the form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII-A of this Plan. Section 1.25 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.26 Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between the Optionee, Grantee, Restricted Stockholder, or Section 162(m) Restricted Stockholder and the Company or any Subsidiary is terminated, voluntarily or involuntarily, for any reason, with or without Cause (as defined below), including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement, but excluding any termination where there is a simultaneous reemployment by the Company or a Subsidiary. The Committee, subject to the definition of Cause below, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence shall constitute a Termination of Employment if, and to the extent that, such leave of absence interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, "Cause" shall mean an Employee's (a) gross negligence in the performance of the responsibilities of such Employee's office or position; (b) any act of dishonesty or moral turpitude materially adversely affecting the Company or the Company's reputation; (c) commission of any other willful or intentional act that could reasonably be expected to injure materially the reputation, business or business relationships of the Company or any Subsidiary; or (d) conviction of a felony or of any crime involving moral turpitude, fraud or misrepresentation. ARTICLE II SHARES SUBJECT TO PLAN Section 2.1 Shares Subject to Plan. (a) The shares of stock subject to Options, or awards of Restricted Stock, Section 162(m) Restricted Stock, Performance Awards, Section 162(m) Performance Awards, Deferred Stock, Section 162(m) Deferred Stock, Stock Payments, or Section 162(m) Stock Payments shall be Common Stock. The aggregate number of shares which may be issued upon exercise of such Options or rights or upon any such awards under the Plan shall not exceed 7,703,000 shares of Common Stock. (b) The maximum number of shares of Common Stock which may be subject to Options, rights or other awards granted under the Plan to any Employee in any calendar year shall not exceed 650,000, and the method of counting such shares shall conform to any requirements applicable to performance-based compensation under Section 162(m) of the Code. The shares of Common Stock issuable upon exercise of such Options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (c) With regard to Section 162(m) Performance Awards that are cash bonuses or other performance or incentive awards expressed as cash awards (without regard to whether such bonuses or awards are ultimately paid in the form of cash, stock, or a combination of both as described in Section 7.7A), an Employee may not be granted during any calendar year such Section 162(m) Performance Awards in an amount in excess of $1,000,000. Section 2.2 Unexercised Options and Awards. If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is cancelled without having been fully exercised 4 (including Restricted Stock, Section 162(m) Restricted Stock or any other award that is forfeited before applicable vesting requirements are met or transfer restrictions have lapsed), the number of shares subject to such Option or other right but as to which such Option or other right was not exercised (or vested or delivered without restriction, as the case may be) prior to its expiration or cancellation may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Section 2.3 Adjustments in Outstanding Options or Rights. Subject to Section 4.2(c), in the event that the outstanding shares of the Common Stock subject to Options or other rights are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of a recapitalization, reclassification, stock split, stock dividend or combination of shares or similar transaction, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options or rights, or portions thereof then unexercised, shall be exercisable, so that the Optionee's, Grantee's, Restricted Stockholder's or Section 162(m) Restricted Stockholder's proportionate interest shall be maintained. Such adjustment shall be made without change in the total price applicable to the unexercised portion of the Option or right (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in price per share; provided, however, that, in the case of Incentive Stock Options, each such adjustment shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by the Committee shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company or any Subsidiary, their representatives and all other interested persons. Such adjustments will also be made in determining Section 2.1 limitations on maximum number and kind of shares which may be issued on exercise of Options, Restricted Stock, Section 162(m) Restricted Stock or other awards. The shares of Class B Common Stock reserved under this Plan will be reduced as Options, Restricted Stock, Section 162(m) Restricted Stock or other awards are granted or issued so that the aggregate number of any single Class of Stock will never exceed the total amount of shares authorized under the Plan. ARTICLE III GRANTING OF OPTIONS Section 3.1 Eligibility. Any key Employee of the Company or a Subsidiary except Hugh M. Hefner shall be eligible to be granted Options. Section 3.2 Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. Without limitation of the foregoing, no person shall be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. Section 3.3 Granting of Options. (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are "key Employees" and select from among the key Employees (including those to whom Options and/or rights have been previously granted under the Plan or any other stock option or other plan of the Company) such of them as in its opinion should be granted Options; and (ii) Determine for each Employee the number of shares to be subject to such Options; and (iii) Determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iv) Determine the terms and conditions of such Options, consistent with the Plan. 5 (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary or other authorized officer to execute and deliver a Stock Option Agreement, and may impose such conditions on the grant of such Option as it deems appropriate, not inconsistent with this Plan. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock, Section 162(m) Restricted Stock, Deferred Stock or Section 162(m) Deferred Stock, Performance Awards, Section 162(m) Performance Awards, Stock Payments or Section 162(m) Stock Payments or other rights which have been previously granted to him. An Option, the grant of which is conditioned upon such surrender, may have an Option price lower (or higher) than the Option price of the surrendered Option, may cover the same (or a lesser or greater) number of shares as the surrendered Option, may contain such other terms as the Committee deems appropriate and be exercised in accordance with its terms, without regard to the number of shares, price, Option period or any other term or condition of such surrendered Option or award. (c) Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. (d) Options granted hereunder shall be consideration for the future performance of services by the Optionee to the Company or a Subsidiary, as applicable. ARTICLE IV TERMS OF OPTIONS Section 4.1 Option Price. (a) The price of the shares subject to each Non-Qualified Option shall not be less than 100% of the fair market value of such shares at the end of the business day upon which such Option is granted. (b) For purposes of the Plan, the fair market value ("Fair Market Value") of a share of the Company's Common Stock as of a given date shall be: (i) the closing price of a share of such class of the Company's Common Stock on the principal exchange on which shares of the Company's Common Stock are then trading, if any, on such date, or, if shares were not traded on such date, then on the next subsequent trading day during which a sale occurs; or (ii) if such Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the Company's Common Stock is then listed as a National Market Issue under the NASD National Market System) or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Company's Common Stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the Company's Common Stock, on such date, as determined in good faith by the Committee; or (iv) if the Company's Common Stock is not publicly traded, the fair market value established by the Committee acting in good faith. (c) The price of the shares subject to Incentive Stock Options shall not be less than the greater of (i) 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted, or (ii) 110% of the fair market value of a share of Common Stock on the date such Incentive Stock Option is granted in the case of an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary. Section 4.2 Commencement of Exercisability; Change of Control. (a) Subject to the provisions of Sections 4.2(b) and 9.3, Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.2 and 9.3, accelerate the time at which such Option or any portion thereof may be exercised; provided further, however, that all outstanding Options shall become fully vested and exercisable as of immediately prior to a Change of Control. (b) No portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Stock Option 6 Agreement or in a resolution adopted following the grant of the Option. Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may extend the term of any outstanding Option in connection with any Termination of Employment of the Optionee, or amend any other term or condition of such Option relating to such a termination. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.2(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. Section 4.3 Expiration of Options. (a) Unless an Option expires earlier or later pursuant to the terms of a Stock Option Agreement, each Option may be exercised any time until the first of the following events, after which such Option will become unexercisable: (i) The expiration of ten (10) years from the date the Option was granted if the Employee is still employed by the Company or any Subsidiary; or (ii) The expiration of three (3) months from the Employee's Termination of Employment if such Termination of Employment results from such Employee's retirement or such Employee's being discharged not for Cause, unless the Employee dies within said three-month period; or (iii) The effective date of (i) a Termination of Employment for Cause, (ii) the Employee's resignation, or (iii) a Change of Control specified in clause (iii) of the definition of such term; or (iv) In the case of an Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of one (1) year from the date of the Optionee's Termination of Employment; provided, however, that subsection (iv) shall not apply if the Optionee dies within said one-year period; or (v) One (1) year from the date of the Optionee's death. (b) Subject to the provisions of Section 4.3(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any reason. (c) The term of any Incentive Stock Option shall not be more than five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of capital stock of the Company or any Subsidiary. Section 4.4 No Right to Continued Employment. Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company or any Subsidiary or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any of its Subsidiaries, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without Cause. Section 4.5 Reload Options. Options may, in the discretion of the Committee, be granted under the Plan to permit a participant to reaquire any shares such participant delivered to the Company as payment of the exercise price (as described in Section 5.3) in connection with the exercise of an Option hereunder or to reaquire any shares retained by the Company to satisfy the participant's withholding obligation in connection with the exercise of an Option hereunder (a "Reload Option"). The terms of a Reload Option shall be identical in all material respects to the terms of the Option as to which such Reload Option was granted, provided however, that the exercise price for each share granted under the Reload Option shall be the Fair Market Value of a share at the time such Reload Option is granted. 7 ARTICLE V EXERCISE OF OPTIONS Section 5.1 Person Eligible to Exercise. (a) Subject to 5.1(b), during the lifetime of an Optionee, only such Optionee may exercise an Option (or any portion thereof) granted to such Optionee. After the death of the Optionee, any exercisable portion of an Option may, within the time frame allowed, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. To the extent Rule 16b-3 as then in effect permits transfers of Options, the Committee may approve such transfers in its discretion. (b) Should the Optionee be determined under applicable law to have become a disabled person or the equivalent thereof, the then-vested portion of the Option may, prior to the time when such Option becomes unexercisable pursuant to the Plan or the applicable Stock Option Agreement, be exercised by the Optionee's guardian or by any other person empowered to do so under the then applicable laws of guardianship. For purposes of this section 5.1(b), "disabled person" shall mean a person who (i) because of mental deterioration or physical incapacity is not fully able to manage such person's person or estate or (ii) is mentally ill and who because of such person's mental illness is not fully able to manage such person's person or estate. Section 5.2 Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by terms of the Option, a partial exercise be with respect to a number of shares. Section 5.3 Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or the Secretary's office: (a) A written notice signed by the Optionee (or other person then entitled to exercise such Option or portion), stating that such Option or portion thereof is being exercised and such notice complies with all applicable rules established by the Committee; and (b) Payment in full for the exercised shares: (i) In cash or by certified or cashier's check; or (ii) In shares of the same class of the Company's Common Stock owned by the Optionee; provided, however, that the Optionee may use Common Stock in payment of the exercise price only if the shares so used are considered "mature" for purposes of generally accepted accounting principles, i.e., (x) they have been held by the Optionee free and clear for at least six months prior to the use thereof to pay part of an Option exercise price, (y) they have been purchased by the Optionee in other than a compensatory transaction, or (z) they meet any other requirements for "mature" shares as may exist on the date of the use thereof to pay part of an Option exercise price, as determined by the Committee; further provided, however, that the Optionee may use Common Stock in payment of the exercise price by means of attestation to the Company of his ownership of sufficient shares in a manner reasonably acceptable to the Committee. Shares actually delivered to the Company (i.e., shares for which the attestation mechanism is not used) must be duly endorsed for transfer to the Company. Shares used to pay all or part of the Option exercise price pursuant to this provision will be credited at their Fair Market Value on the date of delivery; or (iii) With the consent of the Committee and at the sole discretion of the Company, by a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code or successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or 8 (iv) With the consent of the Committee and at the sole discretion of the Company, by a "net exercise" via the forfeiture to the Company of a portion of the Option pertaining to shares with a value (based on the Fair Market Value of such underlying Option shares on the date of forfeiture) equal to the exercise price of the portion of the Option being exercised plus the applicable tax withholding amount; or (v) Any combination of the consideration provided in the foregoing subsections (i), (ii), (iii) and (iv); or (vi) To the extent permitted by law (including then existing interpretations of Rule 16b-3) a "cashless exercise procedure" satisfactory to the Committee which permits the Optionee to deliver an exercise notice to a broker-dealer, who then sells the Option shares, delivers the exercise price and withholding taxes to the Company and delivers the excess funds less commission and withholding taxes to the Optionee; and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) Appropriate proof of the right of such person or persons to exercise the option or portion thereof in the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee; and (e) Full payment of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option. With the consent of the Committee, shares of the Company's Common Stock owned by the Employee duly endorsed for transfer or shares of the Company's Common Stock issuable to the Employee upon exercise of the Option, valued in accordance with Section 4.1(b) of the Plan at the date of Option exercise, may be used to make all or part of such payment. Section 5.4 [RESERVED] Section 5.5 Additional Conditions to Issuance of Stock Certificates. The shares of Common Stock able and deliverable upon the exercise of an Option shall be fully paid and non-assessable. In addition to satisfaction of the conditions specified in Section 5.3, the Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (b) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (c) The lapse of such reasonable period of time following the exercise of the Option as the Committee or Board may establish from time to time for reasons of administrative convenience. Section 5.6 Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders or the Company's stock record books reflect the Optionee as a stockholder pursuant to any book entry procedure approved by the Secretary. The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such other restriction shall be set forth in 9 the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock, acquired by exercise of an Incentive Stock Option, within (i) two years from the date of granting such Option or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. ARTICLE VI AWARD OF RESTRICTED STOCK Section 6.1 Award of Restricted Stock. (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. Section 6.2 Restricted Stock Agreement. Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3 No Right to Continued Employment. Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4 Rights as Stockholders. Upon delivery of any shares of Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7, and upon issuance thereof, if uncertificated, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extraordinary distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. Section 6.5 Restrictions. All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company or a Subsidiary, Company performance, individual performance, or a change of control; provided, however, that by a resolution adopted after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. 10 Section 6.6 Repurchase of Restricted Stock. If consideration (other than services) was paid for Restricted Stock, the Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock or such other price as may be specified in the Restricted Stock Agreement; provided, however, that provision may be made in the Restricted Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without Cause, or following a Change in Control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7 Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Restricted Stock). Section 6.8 Legend. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. ARTICLE VI-A AWARD OF SECTION 162(m) RESTRICTED STOCK Section 6.1A Award of Section 162(m) Restricted Stock. (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Section 162(m) Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Section 162(m) Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Section 162(m) Restricted Stock. (c) Upon the selection of a key Employee to be awarded Section 162(m) Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Section 162(m) Restricted Stock and may impose such conditions on the issuance of such Section 162(m) Restricted Stock as it deems appropriate. Section 6.2A Section 162(m) Restricted Agreement. Section 162(m) Restricted Stock shall be issued only pursuant to a written Section 162(m) Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3A No Right to Continued Employment. Nothing in this Plan or in any Section 162(m) Restricted Stock Agreement hereunder shall confer on any Section 162(m) Restricted Stockholder any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Section 162(m) Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4A Rights as Stockholders. Upon delivery of any shares of Section 162(m) Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7A, and upon issuance thereof, if uncertificated, the Section 162(m) Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with 11 respect to said shares, subject to the restrictions in the Section 162(m) Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extraordinary distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5A. Section 6.5A Restrictions. All shares of Section 162(m) Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Section 162(m) Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Section 162(m) Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability. The Section 162(m) Restricted Stock Agreement shall provide that a Section 162(m) Restricted Stockholder's rights in Section 162(m) Restricted Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 162(m) Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Section 162(m) Restricted Stockholder upon issuance, a Section 162(m) Restricted Stockholder's rights in unvested Section 162(m) Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. Section 6.6A Repurchase of Section 162(m) Restricted Stock. If consideration (other than services) was paid for Section 162(m) Restricted Stock, the Committee shall provide in the terms of each individual Section 162(m) Restricted Stock Agreement that the Company shall have the right to repurchase from the Section 162(m) Restricted Stockholder the Section 162(m) Restricted Stock then subject to restrictions under the Section 162(m) Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Section 162(m) Restricted Stockholder for such Section 162(m) Restricted Stock or such other price as may be specified in the Section 162(m) Restricted Stock Agreement; provided, however, that provision may be made in the Section 162(m) Restricted Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without Cause, or following a Change in Control of the Company or because of the Section 162(m) Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7A Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Section 162(m) Restricted Stock until all of the restrictions imposed under the Section 162(m) Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Section 162(m) Restricted Stock). Section 6.8A Legend. In order to enforce the restrictions imposed upon shares of Section 162(m) Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Section 162(m) Restricted Stock that are still subject to restrictions under Section 162(m) Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. ARTICLE VII PERFORMANCE AWARDS, DEFERRED STOCK, STOCK PAYMENTS Section 7.1 Performance Award. Any key Employee selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee. Section 7.2 Stock Payments. Any key Employee selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. In particular, any person designated by the Committee as a participant in the Company's Key Executive Incentive Bonus Plan (the "Bonus Plan") or under the Company Service Award Program (the "Service Award Program") in accordance with the terms thereof, and whose bonus or service award thereunder is comprised wholly or partially in shares of Common Stock, shall be deemed to have been 12 selected to participate in this Plan, and shall receive such Common Stock denominated bonus as a Stock Payment in accordance with and under the provisions of this Section 7.2. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. Section 7.3 Deferred Stock. Any key Employee selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. Section 7.4 Performance Award Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award, Deferred Stock Award and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5 Term. The term of a Performance Award Agreement, Deferred Stock Award and/or Stock Payment shall be set by the Committee in its discretion. Section 7.6 Exercise Upon Termination of Employment. A Performance Award, Deferred Stock Award and/or Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Performance Award, Deferred Stock Award and/or Stock Payment may be exercised or paid subsequent to Termination of Employment without cause, or following a Change in Control of the Company, or because of the Grantee's death or disability. Section 7.7 Payment. Payment of the amount determined under Section 7.1 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. Section 7.8 No Right to Continued Employment. Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VII-A SECTION 162(m) PERFORMANCE AWARDS, SECTION 162(m) DEFERRED STOCK, SECTION 162(m) STOCK PAYMENTS Section 7.1A Section 162(m) Performance Awards. Any key Employee selected by the Committee may be granted one or more Section 162(m) Performance Awards. The right to a Section 162(m) Performance Award shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 7.2A Section 162(m) Stock Payments. Any key Employee selected by the Committee may be granted one or more Section 162(m) Stock Payments. The right to a Section 162(m) Stock Payment shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 7.3A Section 162(m) Deferred Stock. Any key Employee selected by the Committee may be granted an award of Section 162(m) Deferred Stock. An award of Section 162(m) Deferred Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Common Stock underlying a Section 162(m) Deferred Stock award will not be issued until the Section 162(m) Deferred Stock award has vested. Unless otherwise provided by the Committee, a Grantee of Section 162(m) Deferred Stock shall have no rights as a 13 Company stockholder with respect to such Section 162(m) Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. Section 7.4A Section 162(m) Performance Award Agreement, Section 162(m) Deferred Stock Agreement, Section 162(m) Stock Payment Agreement. Each Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5A Term. The term of a Section 162(m) Performance Award Agreement, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be set by the Committee in its discretion. Section 7.6A Exercise Upon Termination of Employment. A Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment may be exercised or paid following a Change in Control of the Company, or because of the Grantee's death or disability. Section 7.7A Payment. Payment of the amount determined under Section 7.1A above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII-A is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. Section 7.8A No Right to Continued Employment. Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VIII ADMINISTRATION Section 8.1 Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the agreements pursuant to which Options, awards of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock or Section 162(m) Deferred Stock, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments are granted and awarded and to adopt such rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. Options, awards of Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Awards and Section 162(m) Stock Payments are intended to qualify as performance-based compensation under Section 162(m) of the Code, and the Committee shall grant or award such Options, rights or other awards in a manner consistent with the rules governing performance-based compensation under Section 162(m) of the Code. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "incentive stock options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Section 8.2 Majority Rule. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. Section 8.3 Compensation; Professional Assistance; Good Faith Action. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be 14 final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or the Options or other awards, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE IX OTHER PROVISIONS Section 9.1 Options and Other Rights Are Not Transferable. No Options, Performance Awards, Stock Payments, Section 162(m) Performance Awards, Section 162(m) Stock Payments, Restricted Stock, Section 162(m) Restricted Stock, Deferred Stock Awards or Section 162(m) Deferred Stock Awards or interest under this Plan or part thereof shall be liable for the debts, contracts or engagements of any Optionee, Grantee, Restricted Stockholder or their respective successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 9.1 shall prevent transfers by will, by the applicable laws of descent and distribution or by the approval of the Committee as described in Section 5.1(a) of the Plan. Section 9.2 Amendment, Suspension or Termination of the Plan; Modification of Options. The Board may at any time terminate the Plan. With the express written consent of an individual participant, the Board or the Committee may cancel or reduce or otherwise alter outstanding Options or other awards. The Board or the Committee may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part; provided that any such amendment shall be contingent on obtaining the approval of the shareholders of the Company if the Committee determines that such approval is necessary to comply with any requirement of law or any rule of any stock exchange on which the Company's equity securities are traded, or in order for Options or other awards to qualify for an exception from Section 162(m) of the Code (to the extent they would so qualify but for the absence of shareholder approval). Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of an Option, Restricted Stock, Section 162(m) Restricted Stock or award, alter or impair any rights or obligations under any such Option, Restricted Stock, Section 162(m) Restricted Stock or award. No Option, Restricted Stock, Section 162(m) Restricted Stock or award may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option be granted under this Plan after the expiration of ten years from May 23, 2007, the date the Plan, as amended, is approved by the Company's stockholders under Section 9.3. An Option, Restricted Stock, Section 162(m) Restricted Stock or award shall be subject in all events to the condition that, if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of any of the Company's securities upon any securities exchange or under any law, regulation or other requirement of any governmental authority is necessary or desirable, or that any consent or approval from any governmental authority is necessary or desirable, then the Board may modify the terms of any Option, Restricted Stock, Section 162(m) Restricted Stock or other award granted under the Plan, without the consent of the Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder in any manner which the Board deems necessary or desirable in order to improve the Company's ability to obtain such listing, registration, qualification, consent or approval. Section 9.3 Approval of Plan by Stockholders. The Plan shall become effective as of the date of Board approval (the "Effective Date"), subject to the approval of the Company's stockholders within 12 months after the Effective Date; provided, however, that notwithstanding anything herein or in any award agreement to the contrary, all Section 162(m) Performance Awards, Section 162(m) Stock Payments, Section 162(m) Restricted Stock, and Section 162(m) Deferred Stock awarded prior to such stockholder approval shall be void if such approval has not been obtained at the end of said 12-month period. Section 9.4 Effect of Plan Upon Other Option and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. 15 Section 9.5 No Obligation to Register. The Company shall not be deemed, by reason of the granting of any Option or any other award hereunder, to have any obligation to register the shares of Common Stock subject to such Option or award under the Securities Act or to maintain in effect any registration of such shares which may be made at any time under the Securities Act. Section 9.6 Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Payment, Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Award, or Section 162(m) Stock Payment. Section 9.7 Loans. The Committee may permit, in its discretion, and subject to the Company's approval, the extension by the Company of one or more loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted under this Plan, or the issuance of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee, subject to the Company's approval. Section 9.8 Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, any Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted, or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded, to a key Employee who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule, and this Plan shall be deemed amended to the extent necessary to conform to such limitations. Furthermore, notwithstanding any other provision of this Plan, any Option, right or award intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. Section 9.9 Compliance with Laws. This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws and federal requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. Section 9.10 Noncompetition Provisions. The Committee, as a condition of issuing any award under the Plan, may include in any agreement evidencing such award such noncompetition and/or nonsolicitation provisions as it may deem appropriate, in its sole discretion, and any award containing such provisions shall not be effective until and unless the grantee thereof acknowledges by written consent his or her obligation to be bound thereby. Section 9.11 Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 16 Section 9.12 Governing Law. The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. 17 EX-10.3 4 d72426_ex10-3.txt SEC. AMEND., RESTATED '97 EQUITY PLAN Exhibit 10.3 SECOND AMENDED AND RESTATED 1997 EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS OF PLAYBOY ENTERPRISES, INC. (as amended through May 23, 2007) 1. Purpose. The purposes of the Plan are (1) to promote the growth and long-term success of Playboy Enterprises, Inc., a Delaware corporation (the "Company"), by offering Non-Employee Directors the ability to acquire Common Stock of the Company, (2) to enable the Company to attract and retain qualified persons to serve as Non-Employee Directors, which services are considered essential to the long-term success of the Company, by offering them an opportunity to own Common Stock of the Company, and (3) to more closely align the interests of Non-Employee Directors with the interests of the Company's stockholders by paying certain amounts of compensation for services as a Director in the form of shares of Common Stock. 2. Definitions. In addition to the other terms defined elsewhere herein, wherever the following terms are used in this Plan with initial capital letters, they have the meanings specified below, unless the context clearly indicates otherwise. "Accounting Period" means each calendar quarter of the Company, such quarters beginning on January 1, April 1, July 1 and October 1 of each year. "Award" means an award of an Option Right, Restricted Stock or Common Stock Grant under this Plan. "Board" means the Board of Directors of the Company. "Calendar Year" means the period beginning on January 1 of each year and ending on December 31 of each year. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Committee Fees" means the compensation payable to a Non-Employee Director with regard to Committee positions held, as determined by the Board from time to time, but for purposes of Section 6 of this Plan shall not include any such compensation subject to deferral under the Deferred Compensation Plan pursuant to an agreement executed by a Non-Employee Director and the Company in accordance with the terms of the Deferred Compensation Plan. "Common Stock" means the Class B Common Stock, par value $0.01 per share, of the Company, and any security into which such Common Stock may be converted or for which such Common Stock may be exchanged by reason of any transaction or event of the type described in Section 9 of this Plan. "Common Stock Grant" means Common Stock, other than Restricted Stock, awarded pursuant to Section 5 of this Plan. "Company" has the meaning set forth in Section 1, and includes its successors. "Date of Award" means the date specified by the Board on which an Award becomes effective, which shall not be earlier than the date on which the Board takes action with respect thereto. "Deferred Compensation Plan" means the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, effective as of October 1, 1992, as it may be amended from time to time. 1 "Employee" means any officer or other employee of the Company or of any corporation which is then a Subsidiary. "Issuance Date" has the meaning set forth in Section 6. "Mandatory Committee Fee Shares" means Common Stock awarded pursuant to Section 6(c) with an aggregate Market Value per Share generally equal to 50% of a Non-Employee Director's Committee Fees. "Mandatory Meeting Fee Shares" means Common Stock awarded pursuant to Section 6(a) with an aggregate Market Value per Share generally equal to 100% of a Non-Employee Director's Meeting Fees. "Mandatory Retainer Shares" means Common Stock awarded pursuant to Section 6(b) with an aggregate Market Value per Share generally equal to 50% of a Non-Employee Director's Retainer. "Meeting Fees" means the compensation payable to a Non-Employee Director with regard to the number of Board meetings attended, as determined by the Board from time to time, but for purposes of Section 6 of this Plan shall not include any such compensation subject to deferral under the Deferred Compensation Plan pursuant to an agreement executed by a Non-Employee Director and the Company in accordance with the terms of the Deferred Compensation Plan. "Market Value per Share" means either (a) the closing price of a share of Common Stock as reported on the New York Stock Exchange (the "NYSE") on the date as of which such value is being determined, or, if there are no reported transactions for such date, on the next preceding date for which transactions were reported, as published in the Midwest Edition of The Wall Street Journal, or (b) if there is no reporting of transactions on the NYSE, the fair market value of a share of Common Stock as determined by the Board from time to time. "Non-Employee Director" means a member of the Board who is not an Employee. "Optionee" means a Non-Employee Director to whom an Option Right is awarded under this Plan. "Option Price" means the purchase price payable upon the exercise of an Option Right. "Option Right" means the right to purchase shares of Common Stock from the Company upon the exercise of an option awarded hereunder. "Participant" means a Non-Employee Director (or a person who has agreed to commence serving in such capacity) who is selected by the Board to receive Awards under this Plan, who is entitled to receive Mandatory Meeting Fee Shares, Mandatory Retainer Shares, or Mandatory Committee Fee Shares or who has elected to receive Voluntary Shares. "Participation Agreement" means the agreement submitted by a Non-Employee Director to the Secretary of the Company pursuant to which a Non-Employee Director may elect to receive all or any portion of his or her Retainer in the form of Voluntary Shares for a specified period in the future. "Performance Objectives" means the performance objectives that may be established by the Board pursuant to this Plan for Participants who have received Awards. "Plan" means the Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc. as set forth herein, as the same may be amended or restated from time to time. "Restricted Stock" means Common Stock awarded pursuant to Section 5 of this Plan as to which neither the substantial risk of forfeiture nor the restrictions on transfer referred to in Section 5 hereof have expired. "Restricted Stockholder" means a Non-Employee Director to whom Restricted Stock has been awarded under this Plan. 2 "Retainer" means the portion of a Non-Employee Director's annual compensation that is payable without regard to the number of board meetings attended or committee positions held, as determined by the Board from time to time, but for purposes of Section 7 of this Plan shall not include (a) any such compensation subject to deferral under the Deferred Compensation Plan pursuant to an agreement executed by a Non-Employee Director and the Company in accordance with the terms of the Deferred Compensation Plan and (b) any such compensation which is issued to a Non-Employee Director as Mandatory Retainer Shares pursuant to Section 6(b) hereof. "Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of 1934, as amended or any successor rule. "Subsidiary" means any corporation, partnership, joint venture, limited liability company, unincorporated association or other entity (each, an "Entity") in an unbroken chain of Entities beginning with the Company if each of the Entities other than the last Entity in the unbroken chain then owns stock or other interests possessing 50 percent or more of the total combined voting power of all classes of stock or other interests in one of the other Entities in such chain. "Termination of Directorship" means the time when a Participant ceases to be a Director for any reason, including, without limitation, a termination by resignation, removal, failure to be elected or reelected, death or retirement. "Valuation Date" has the meaning set forth in Section 6(a). "Voluntary Shares" has the meaning set forth in Section 7(a). 3. Shares Available under the Plan. Subject to adjustment as provided in Section 9 of this Plan, the number of shares of Common Stock issued or transferred, plus the number of shares of Common Stock covered by outstanding Awards and not forfeited under this Plan, shall not in the aggregate exceed 600,000 shares, which may be shares of original issuance or shares held in treasury or a combination thereof. If an Option Right lapses or terminates before such Option is exercised or shares of Restricted Stock or Common Stock Grants are forfeited, for any reason, the shares covered thereby may again be made subject to Awards or issued as Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares or Voluntary Shares under this Plan. 4. Option Rights. The Board may from time to time authorize Awards to Participants of Options to purchase shares of Common Stock upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) Each Award shall specify the number of shares of Common Stock to which the Option Rights pertain. (b) Each Award of Option Rights shall specify an Option Price per share of Common Stock, which shall be equal to or greater than the Market Value per Share on the Date of Award. (c) Each Award of Option Rights shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, nonrestricted shares of Common Stock, which are already owned by the Optionee and have a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Board may deem appropriate, including, without limitation, any form of consideration authorized under Section 4(d) below, on such basis as the Board may determine in accordance with this Plan, and (iv) any combination of the foregoing. In addition, the Board may, in its discretion and whether or not specified in an Award of Option Rights, permit payment of the Option Price by a "net exercise" via the forfeiture to the Company of a portion of the Option Rights pertaining to shares of Common Stock with a value (based on the Market Value per Share on the date of such forfeiture) equal to the exercise price of the portion of the Option Rights being exercised plus the applicable tax withholding amount. 3 (d) On or after the Date of Award of any Option Right, the Board may determine that payment of the Option Price may also be made in whole or in part in the form of shares of Restricted Stock or other shares of Common Stock that are subject to risk of forfeiture or restrictions on transfer. Unless otherwise determined by the Board on or after the Date of Award, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 4(d), the shares of Common Stock received by the Optionee upon the exercise of the Option Right shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee; provided, however, that such risks of forfeiture and restrictions on transfer shall apply only to the same number of shares of Common Stock received by the Optionee as applied to the forfeitable or restricted shares of Common Stock surrendered by the Optionee. (e) Any Award of Option Rights may provide for the deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the shares of Common Stock to which the exercise relates. (f) Successive Awards may be made to the same Participant regardless of whether any Option Rights previously awarded to the Participant remain unexercised. (g) Each Award shall specify the period or periods of continuous service as a Non-Employee Director by the Optionee that are necessary or Performance Objectives that must be achieved before the Option Rights or installments thereof shall become exercisable, and any Award may provide for the earlier exercise of the Option Rights in the event of a change in control of the Company or other transaction or event. (h) The term of an Option Right shall be set by the Board; provided, however, that no Option Right awarded pursuant to this Section 4 may have a term of more than 10 years from the Date of Award. (i) Each Award of an Option Right shall be evidenced by a written Stock Option Agreement, which shall be executed on behalf of the Company by any officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Board may determine consistent with this Plan. 5. Common Stock Grants and Restricted Stock. The Board may also authorize Awards to Participants of Common Stock Grants and Restricted Stock upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) A Common Stock Grant consists of the transfer by the Company to a Participant of shares of Common Stock in consideration and as additional compensation for services performed for the Company. Each Award of Common Stock Grants and Restricted Stock shall constitute an immediate transfer of the ownership of shares of Common Stock to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to, in the case of Awards of Restricted Stock, the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each Award of Restricted Stock shall provide that the shares of Restricted Stock covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Board on the Date of Award, and may provide for the termination of such risk of forfeiture upon the achievement of certain Performance Objectives, in the event of a change in control of the Company, or upon any other transaction or event. (c) Each Award of Restricted Stock shall provide during the period for which such substantial risk of forfeiture is to continue, and any Award of Common Stock Grants may provide, that the transferability of the shares of Common Stock subject to such Awards shall be prohibited or restricted in the manner and to the extent prescribed by the Board on the Date of Award. Such restrictions may include, without limitation, rights of repurchase or first refusal in the Company or provisions subjecting the shares of Restricted Stock to a continuing substantial risk of forfeiture in the hands of any transferee. (d) Any Award of a Common Stock Grant or Restricted Stock may be made in consideration of payment by the Participant of an amount that is less than the Market Value per Share on the Date of 4 Award, but in no event shall the value of the consideration provided with respect to any such Award be less than the par value per share of Common Stock. (e) Any Award of Restricted Stock may require that any or all dividends or other distributions paid on the shares of Restricted Stock during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional shares of Common Stock, which may be subject to the same restrictions as the underlying award or such other restrictions as the Board may determine. (f) Each Award of a Common Stock Grant and Restricted Stock shall be evidenced by a Stock Grant Agreement or Restricted Stock Agreement (as the case may be), which shall be executed on behalf of the Company by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board may determine consistent with this Plan. Unless otherwise directed by the Board, Restricted Stock will be held in book-entry form by the Company as custodian for the Participant. Any certificates representing shares of Restricted Stock, together with a stock power endorsed in blank by the Participant with respect to the shares of Restricted Stock, shall be held in custody by the Company until all restrictions thereon lapse. (g) The Board may provide, at or after the Date of Award of any Common Stock Grant or Restricted Stock, for the payment of a cash award intended to offset the amount of tax that the Participant may incur in connection with such Common Stock Grant or Restricted Stock, including, without limitation, tax on the receipt of such cash award. (h) The Board may provide in any individual Stock Grant Agreement or Restricted Stock Agreement that the Company shall have the right to repurchase the Restricted Stock then subject to restrictions under the Restricted Stock Agreement, or the Common Stock subject to the Common Stock Grant, immediately upon a Termination of Directorship for any reason at a cash price per share equal to the cash price paid by the Participants for such Restricted Stock or Common Stock. In the discretion of the Board, provision may be made that no such right of repurchase shall exist in the event of a Termination of Directorship without cause or because of the Participant's retirement, death or permanent and total disability. 6. Mandatory Meeting Fee, Retainer, and Committee Fee Shares. (a) Commencing with the first meeting of the Board following the effective date of this Plan, all Meeting Fees shall be payable in the form of Mandatory Meeting Fee Shares. No later than ten (10) days following the end of an Accounting Period (the "Issuance Date"), the Company shall issue to each Non-Employee Director a number of Mandatory Meeting Fee Shares equal to (i) the amount of such Director's Meeting Fees for such Accounting Period, divided by (ii) the Market Value per Share on the last day of each Accounting Period (the "Valuation Date") with respect to which such Meeting Fees are payable. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractional shares shall be disregarded, and the remaining amount of Meeting Fees shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of Mandatory Meeting Fee Shares to a Director. (b) Commencing on January 1, 2001, 50% of each Non-Employee Director's Retainer shall be payable in the form of Mandatory Retainer Shares. Upon the Issuance Date, the Company shall issue to each Non-Employee Director a number of Mandatory Retainer Shares equal to (i) 50% of the amount of such Director's Retainer for such accounting period, divided by (ii) the Market Value per Share on the applicable Valuation Date. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractions shares shall be disregarded, and the remaining amount of such portion of the Non-Employee Director's Retainer shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of Mandatory Retainer Shares to a Director. (c) Commencing on January 1, 2003, 50% of each Non-Employee Director's Committee Fees shall be payable in the form of Mandatory Committee Fee Shares. Upon the Issuance Date, the Company shall issue to each Non-Employee Director a number of Mandatory Committee Fee Shares equal to (i) 50% of the amount of such Director's Committee Fees for such accounting period, divided by (ii) the Market Value per Share on the applicable Valuation Date. To the extent that the application of the foregoing formula would result 5 in the issuance of fractional shares of Common Stock, any such fractions shares shall be disregarded, and the remaining amount of such portion of the Non-Employee Director's Committee Fees shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of Mandatory Committee Fee Shares to a Director 7. Voluntary Shares. Each Non-Employee Director shall be eligible to elect to receive shares of Common Stock in accordance with the following provisions: (a) Prior to the commencement of the Company's Calendar Year (or by such other date as may be specified by the Board), a Participant may elect, by the filing of a Participation Agreement, to have up to 100 percent of his or her Retainer and/or Committee Fees paid by the Company in the form of shares of Common Stock in lieu of a cash payment (the "Voluntary Shares"). Such Participation Agreement must, except as the Board may otherwise provide, be filed as a one-time election for the applicable Calendar Year. Unless the Director revokes or changes such election by filing a new Participation Agreement by the due date therefor specified in this Section 7(a), such election shall apply to a Participant's Retainer for each subsequent Calendar Year. Once an election has been terminated, another election may not be made effective until the commencement of the next subsequent full Calendar Year unless the Board shall have otherwise provided. (b) No later than the Issuance Date, the Company shall issue to each Participant who has made an election under Section 7(a), a number of Voluntary Shares for the prior Accounting Period equal to (i) the amount of such Director's Retainer and Committee Fees for such Accounting Period that such Director has elected to receive as Voluntary Shares, divided by (ii) the Market Value per Share on the Valuation Date. To the extent that the application of the foregoing formula would result in the issuance of fractional shares of Common Stock, any such fractional shares shall be disregarded, and the remaining amount of the Retainer and Committee Fees shall be paid in cash. The Company shall pay any and all fees and commissions incurred in connection with the payment of the Voluntary Shares to a Director. 8. Transferability. (a) Except as may be otherwise determined by the Board, (i) Awards, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares and Voluntary Shares issued or granted under this Plan shall be issued only to a Participant, (ii) Option Rights and Restricted Stock may be transferred by a Participant only by will or the laws of descent and distribution, and (iii) Option Rights may not be exercised during a Participant's lifetime except by the Participant or, in the event of the Participant's legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision. (b) Any Award made under this Plan may provide that all or any part of the shares of Common Stock that are to be issued or transferred by the Company upon the exercise of Option Rights, or are no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 5 of this Plan, shall be subject to further restrictions upon transfer. (c) To the extent required to satisfy any condition to exemption available pursuant to Rule 16b-3, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares and Voluntary Shares acquired by a Participant shall be held by the Participant for a period of at least six months following the date of such acquisition. 9. Adjustments. The Board may make or provide for such adjustments in the (a) number of shares of Common Stock covered by outstanding Awards, payable as Mandatory Meeting Fee Shares, Mandatory Retainer Shares or Mandatory Committee Fee Shares or subject to elections to receive Voluntary Shares, (b) prices per share applicable to Option Rights, and (c) kind of shares (including, without limitation, shares of another issuer) covered thereby, as the Board in its sole discretion may in good faith determine to be equitably required in order to prevent dilution or enlargement of the rights of Participants that otherwise would result from (x) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (y) any merger, consolidation, spin-off, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, or issuance of rights or warrants to purchase securities or (z) any other corporate transaction or event having 6 an effect similar to any of the foregoing. In the event of any such transaction or event, the Board may provide in substitution for any or all outstanding Awards, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares or Voluntary Shares to be issued under this Plan such alternative consideration as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares or Voluntary Shares so replaced. The Board may also make or provide for such adjustments in the numbers and kind of shares specified in Section 3 of this Plan as the Board may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 9. 10. Fractional Shares. The Company shall not be required to issue any fractional shares of Common Stock pursuant to this Plan. The Board may provide for the elimination of fractions, for the settlement thereof in cash or for such other adjustments as the Board may deem appropriate under this Plan. 11. Withholding Taxes. To the extent, if any, that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Company for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of the balance of any taxes required to be withheld. At the discretion of the Board, any such arrangements may include relinquishment of a portion of any such payment or benefit. The Company and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 12. Certain Terminations of Directorships. (a) Notwithstanding any other provision of this Plan to the contrary, in the event of a Termination of Directorship by reason of death or disability, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right that is not immediately and fully exercisable or any Award as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, the Board may in its sole discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including, without limitation, waiving or modifying any limitation or requirement with respect to any Award under this Plan. (b) If a Non-Employee Director becomes an Employee while continuing to serve as a Director, that fact alone shall not result in a Termination of Directorship or otherwise impair the rights such Director may have under this Plan, including, without limitation, the rights such Director may have under any Award outstanding under this Plan, but such Director shall no longer be eligible to receive any further Awards, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares or Voluntary Shares under this Plan. 13. Administration. (a) Administration by the Board; Delegation. This Plan shall be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to a committee or subcommittee of not less than two Directors appointed by the Board who are "non-employee directors" within the meaning of that term as defined in Rule 16b-3. To the extent of any delegation by the Board under this Plan, references in this Plan to the Board shall also refer to the applicable committee or subcommittee. The majority of any such committee or subcommittee shall constitute a quorum, and the action of a majority of its members present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of such committee or subcommittee. (b) Administrative Powers. The Board shall have the power to interpret this Plan, the Option Rights, the Common Stock Grants, the Restricted Stock, the procedures for issuance of Mandatory Meeting Fee Shares, Mandatory Retainer Shares or Mandatory Committee Fee Shares and elections to receive Voluntary Shares, and the agreements pursuant to which the Option Rights, the Common Stock Grants, the Restricted Stock, the Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares and the Voluntary Shares are awarded and issued (including Participation Agreements), and to adopt such rules for the 7 administration, interpretation and application of this Plan (including the administration of this Plan in conjunction with the Deferred Compensation Plan), and such agreements as are consistent therewith and to interpret, amend or revoke any such rules. Any Award under this Plan need not be the same with respect to each Optionee or Restricted Stockholder. (c) Professional Assistance; Good Faith Actions. All expenses and liabilities which members of the Board incur in connection with the administration of this Plan shall be borne by the Company. The Board may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Board, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Board in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No members of the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, or any Option, Common Stock Grant, Restricted Stock, Mandatory Meeting Fee Shares, Mandatory Retainer Shares, Mandatory Committee Fee Shares or Voluntary Shares, and all members of the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 14. Amendment, Suspension, Termination and Other Matters. (a) This Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. However, without further approval of the stockholders of the Company, no action of the Board may, except as provided in Section 9 of this Plan, increase the limits imposed in Section 3 on the maximum number of shares of Common Stock which may be issued under this Plan, and no action of the Board may be taken that would otherwise require stockholder approval as a matter of applicable law or the rules of any U.S. stock exchange, including the NYSE, on which the Common Stock may be listed for trading or authorized for quotation. No amendment, suspension or termination of this Plan shall, without the consent of the holder of an Award, alter or impair any rights or obligations under any Award theretofore granted, unless the Award itself otherwise expressly so provides. (b) The Board may make under this Plan any Award or combination of Awards authorized under this Plan in exchange for the cancellation of an Award that was not made under this Plan. (c) Except as provided in Section 14(b) of this Plan, the making of one or more Awards to a Non-Employee Director under this Plan shall not preclude the making of Awards to such Non-Employee Director under any other stock option or incentive plan previously or subsequently adopted by the Board, nor shall the fact that a Non-Employee Director has received one or more awards under any other stock option or incentive plan of the Company preclude such Non-Employee Director from receiving awards under this Plan. 15. Termination of the Plan. No further awards shall be made under this Plan after the passage of 10 years from May 23, 2007, the date on which this Plan, as amended, is approved by the stockholders of the Company. 16. Effective Date. The effective date of this Plan shall be the date of its adoption by the Board of Directors. This Plan and all Awards granted, Mandatory Meeting Fee Shares issued, and any elections to receive Voluntary Shares effected prior to the stockholder approval hereinafter mentioned, shall be void and of no further force and effect unless this Plan shall have been approved at a meeting of stockholders of the Company called for such purpose by the affirmative vote of a majority of the shares of Class A Common Stock of the Company represented in person or by proxy. 8 EX-10.4 5 d72426_ex10-4.txt EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.4 PLAYBOY ENTERPRISES, INC. EMPLOYEE STOCK PURCHASE PLAN (as amended through May 23, 2007) SECTION 1. PURPOSE. This Employee Stock Purchase Plan (the "Plan") is intended to advance the interests of Playboy Enterprises, Inc. (the "Company") and its stockholders by allowing employees of the Company and those subsidiaries of the Company that participate in the Plan the opportunity to purchase shares of the Company's Class B Common Stock ("Class B Common Stock"). It is intended that the Plan will constitute an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). SECTION 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors, comprised of persons who are both non-employee directors within the meaning of Rule 16b-3 which has been adopted by the Securities Exchange Commission under the Securities Exchange Act of 1934, as amended, as such rule or its equivalent is then in effect ("Rule 16b-3") and "outside directors" within the meaning of Section 162(m) of the Code. The majority of the Committee shall constitute a quorum, and the action of (a) a majority of the members of the Committee present at any meeting at which a quorum is present or (b) all members acting unanimously by written consent, shall be the acts of the Committee. The interpretation and construction by the Committee of any provision of the Plan or of any subscription to purchase shares under it shall be final. The Committee may establish any policies or procedures which in the discretion of the Committee are relevant to the operation and administration of the Plan and may adopt rules for the administration of the Plan. The Committee will, from time to time, designate the subsidiaries (as defined below) of the Company whose employees will be eligible to participate in the Plan. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any subscription to purchase shares under it. For purposes of this Plan, the term "subsidiary" means any corporation in which the Company directly or indirectly owns or controls more than 50 percent of the total combined voting power of all classes of stock issued by the corporation. SECTION 3. ELIGIBILITY. Each employee of the Company or of a participating subsidiary of the Company whose customary employment is a minimum of 20 hours per week may subscribe to purchase shares of Class B Common Stock under the terms of the Plan, except that no employee may subscribe to purchase shares on the immediately following Purchase Date (as defined below) if, immediately after the immediately preceding Subscription Date (as defined below), such employee would own stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company. For purposes of this paragraph, stock ownership of an individual shall be determined under the rules of Section 424(d) of the Code. For purposes of the Plan: (a) The term "Subscription Date" means the first business day of each fiscal quarter of the Company during which the Plan is effective or, in the case of a participant who is not an employee of the Company or a participating subsidiary of the Company as of a particular Subscription Date, the date thereafter on which such participant became an employee of the Company or a participating subsidiary of the Company. The first Subscription Date under the Plan will be July 1, 1996. 1 (b) The term "Purchase Date" means the last business day of the fiscal quarter in which the related Subscription Date occurs. SECTION 4. PARTICIPATION. (a) An eligible employee shall evidence his or her agreement to subscribe for shares by completing a written agreement (the "Subscription and Authorization Form") provided by the Committee and filing it as directed by the Committee. A Subscription and Authorization Form will take effect within a reasonable time after it has been filed with the Company. Once an employee provides the Committee with the Subscription and Authorization Form, he or she continues as a participant in the Plan on the terms provided in such form until he or she provides a new form or withdraws from the Plan. (b) In the Subscription and Authorization Form, an eligible employee shall designate any whole dollar amount to be withheld from such employee's compensation in each pay period and used to purchase shares of Common Stock on the next Purchase Date, subject to the following limitations: (i) the whole dollar amount (on an annualized basis) shall not exceed 10 percent of his or her compensation (as defined below) on an annualized basis; (ii) the maximum number of shares of Class B Common Stock which can be purchased by any one employee on any Purchase Date shall not exceed 1,000 shares of the Class B Common Stock; and (iii) the Committee may establish from time to time minimum payroll deductions. For purposes of this Plan, the term "compensation" means an eligible employee's bi-weekly base salary. SECTION 5. STOCK. The stock purchased under the Plan shall be shares of authorized but unissued or reacquired Class B Common Stock. Subject to the provisions of Section 6(h), the aggregate number of shares which may be purchased under the Plan shall not exceed 230,000 shares of Class B Common Stock. In the event that the dollar amount of shares subscribed for in any quarter exceeds the number of shares available to be purchased under the Plan, the shares available to be purchased shall be allocated on a pro rata basis among the subscriptions. SECTION 6. TERMS AND CONDITIONS OF SUBSCRIPTIONS. Subscriptions shall be evidenced by a Subscription and Authorization Form in such form as the Committee shall from time to time approve, provided that all employees subscribing to purchase shares shall have the same rights and privileges (except as otherwise provided in Section 4(b) and subparagraph (d) below), and provided further that such subscriptions shall comply with and be subject to the following terms and conditions: (a) Purchase Price. The purchase price shall be an amount equal to 85 percent of the fair market value of such stock on the Purchase Date. During such time as the Class B Common Stock is traded on the New York Stock Exchange, the fair market value per share shall be the closing price of the Class B Common Stock (as reported in the record of Composite Transactions for New York Stock Exchange listed securities and printed in The Wall Street Journal) on such Purchase Date (or on the next regular business date on which shares of the Class B Common Stock of the Company shall be traded in the event that no shares of the Class B Common Stock shall have been traded on the Purchase Date). Subject to the foregoing, the Committee shall have full authority and discretion in fixing the purchase price. (b) Medium and Time of Payment. The purchase price shall be payable in full in United States dollars, pursuant to uniform policies and procedures established by the Committee. The funds required for such payment will be derived by withholding from an employee's compensation. An employee shall have the right at any time to terminate the withholding from his or her compensation of amounts to be paid toward the purchase price. An employee shall have the right, one time in each quarter, to change the amount so withheld, by submitting a written request to the Company at least 15 business days before any Purchase Date. An employee shall have the right to cancel his or her subscription in whole and to obtain a refund of amounts withheld from his or her compensation by submitting a written request to the Company at least 15 business days before any Purchase Date. Any cancellation of a subscription in whole will constitute a withdrawal under Section 4(a) of the Plan. Such amounts shall thereafter be paid to the employee within a reasonable period of time. 2 (c) No Interest on Employee Funds. No interest shall accrue on any amounts withheld from an employee's compensation. (d) Accrual Limitation. No subscription shall permit the rights of an employee to purchase stock under all "employee stock purchase plans" (as defined in the Code) of the Company to accrue, under the rules set forth in Section 423(b)(8) of the Code, at a rate which exceeds $25,000 of fair market value of such stock (determined at the time of subscription) for each calendar year. (e) Termination of Employment. If an employee who has subscribed for shares ceases to be employed by the Company or a participating subsidiary before any applicable Purchase Date: i. Because of retirement or disability, he or she may elect to continue making payments equal to the rate of payroll deductions made before retirement or disability until the first Purchase Date following retirement or disability; or otherwise the accumulated payment in his or her account at the time of retirement or disability will be applied to purchase shares at the applicable purchase price on the first Purchase Date following such retirement or disability, unless the Company is otherwise notified in writing. ii. For any other reason, he or she may elect to have the accumulated payment in his or her account at the time of termination applied to purchase shares at the applicable purchase price on the first Purchase Date following such termination; or otherwise the total unused payments credited to his or her account on the date of termination will be refunded within a reasonable time without interest, unless the Company is otherwise notified in writing. (f) Transferability. Neither payments credited to an employee's account nor any rights to subscribe to purchase shares of Class B Common Stock under the Plan may be transferred by an employee except by the laws of descent and distribution. Any such attempted transfer will be without effect, except that the Company may treat such act as an election by the employee to withdraw in accordance with Section 6(b). Shares of Class B Common Stock may be purchased under the Plan only by subscribing employees who have legal capacity as determined under applicable state law or, in the event of the employee's legal incapacity, by his or her guardian or legal representative acting in a fiduciary capacity on behalf of the employee under state law or court supervision. (g) Death and Designation of Beneficiary. An employee may file with the Company a written designation of beneficiary and may change such designation of beneficiary at any time by written notice to the Company. On the death of an employee, the elections provided on termination of employment for retirement or disability may be exercised by the employee's beneficiary, executor, administrator, or other legal representative. (h) Adjustments. The Committee may make or provide for such adjustments in the purchase price and in the number or kind of shares of the Class B Common Stock or other securities covered by outstanding subscriptions, or specified in the second sentence of Section 5 of the Plan, as the Committee in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of employees that would otherwise result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company; (ii) any merger, consolidation, spin-off, split-off, spin-out, split-up, separation, reorganization, partial or complete liquidation, or other distribution of assets, issuance of rights or warrants to purchase stock; or (iii) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for any or all outstanding subscriptions under this Plan such alternative consideration as it, in good faith, may determine to be equitable in the circumstances. (i) Rights as a Stockholder. An employee shall have no rights as a stockholder with respect to any Class B Common Stock covered by his or her subscription until the Purchase Date following payment in full. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date of such purchase, except as provided in Section 6(h) of the Plan. 3 (j) Fractional Shares. Fractional shares may be purchased under the Plan and credited to an account for the employee. The Company, however, shall have the right to pay cash in lieu of any fractional shares of Class B Common Stock to be distributed from an employee's account under the Plan. (k) Other Provisions. The Subscription and Authorization Form authorized under the Plan shall contain such other provisions as the Committee may deem advisable, provided that no such provisions may in any way be in conflict with the terms of the Plan. SECTION 7. TERM OF PLAN. Eligible employees may subscribe for shares under the Plan until April 25, 2016; provided, however, that the Committee may terminate or suspend the Plan if at any time there are less than 5 percent of the eligible employees participating in the Plan. SECTION 8. AMENDMENT OF THE PLAN. The Plan may be amended from time to time by the Committee, but without further approval of the stockholders, no such amendment shall (a) increase the aggregate number of shares of Class B Common Stock that may be issued and sold under the Plan (except that adjustments authorized by Section 6(h) of the Plan shall not be limited by this provision) or (b) materially modify the requirements as to eligibility for participation in the Plan. SECTION 9. APPROVAL OF STOCKHOLDERS. The Plan shall take effect upon adoption by the Board of Directors; provided, however, that any subscriptions and purchases under the Plan shall be null and void unless the Plan is approved by a vote of the holders of a majority of the total number of outstanding shares of voting stock of the Company present in person or by proxy at a meeting at which a quorum is present in person or by proxy, which approval must occur within the period of 12 months after the date the Plan is adopted by the Board of Directors. 4 EX-31.1 6 d72426_ex31-1.txt SECTION 302 CERTIFICATION OF CEO 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 June 30, 2007; 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: August 9, 2007 /s/ Christie Hefner -------------- ------------------- Name: Christie Hefner Title: Chairman of the Board, Chief Executive Officer and Director EX-31.2 7 d72426_ex31-2.txt SECTION 302 CERTIFICATION OF CFO 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 June 30, 2007; 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: August 9, 2007 /s/ Linda Havard -------------- ---------------- Name: Linda G. Havard Title: Executive Vice President, Finance and Operations, and Chief Financial Officer EX-32 8 d72426_ex32.txt SECTION 906 CERTIFICATION OF CEO AND CFO Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. (the "Company") for the quarterly period ended June 30, 2007, 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: August 9, 2007 /s/ Linda Havard - ---------------- Name: Linda G. Havard Title: Chief Financial Officer Date: August 9, 2007 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-----