-----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, WUvNJDj6O5JLLoJByEJsH2XioFuS7XBaOIoA3v2jpo1dsQGs9SSkba8f1v9Q3OxD sy3Fd+sKGR3+rJy5HSZjsg== 0001169232-08-002944.txt : 20080808 0001169232-08-002944.hdr.sgml : 20080808 20080808125239 ACCESSION NUMBER: 0001169232-08-002944 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080808 DATE AS OF CHANGE: 20080808 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: 081001476 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 d74702_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 001-14790 Playboy Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4249478 (State 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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company)
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, 2008, there were 4,864,102 shares of Class A common stock and 28,452,590 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 sales and operations, including market acceptance and demand for our products and the products of our licensees and partners; (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, wireless, new electronic media and product licensing markets; (11) Attempts by consumers, distributors, merchants or private advocacy groups to exclude our programming or other products from distribution; (12) Our television, Internet and wireless businesses' reliance on third parties for technology and distribution, and any changes in that technology and/or unforeseen delays in 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, pressure on splits or adverse changes in certain minimum revenue amounts 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 undertake 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) Effects of the national consolidation of the single-copy magazine distribution system and risks associated 2 with the financial stability of major magazine wholesalers; (20) Effects of the national consolidation of television distribution companies (e.g., cable MSOs, satellite platforms and telecommunications companies); and (21) Risks associated with the viability of our subscription, on-demand, e-commerce and ad-supported 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 fiscal year ended December 31, 2007. 3 PLAYBOY ENTERPRISES, INC. FORM 10-Q TABLE OF CONTENTS Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations and Comprehensive Income (Loss) for the Quarters Ended June 30, 2008 and 2007 (Unaudited) 5 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2008 and 2007 (Unaudited) 6 Consolidated Balance Sheets at June 30, 2008 (Unaudited) and December 31, 2007 7 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (Unaudited) 8 Notes to Condensed Consolidated Financial Statements (Unaudited) 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II OTHER INFORMATION Item 1. Legal Proceedings 24 Item 1A. Risk Factors 25 Item 4. Submissions of Matters to a Vote of Security Holders 25 Item 6. Exhibits 26 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) for the Quarters Ended June 30 (Unaudited) (In thousands, except per share amounts) 2008 2007 - ------------------------------------------------------------------------------- Net revenues $ 73,378 $ 85,652 - ------------------------------------------------------------------------------- Costs and expenses Cost of sales (60,125) (67,560) Selling and administrative expenses (13,522) (14,129) Restructuring expense 36 (110) Impairment charge on assets held for sale (103) - - ------------------------------------------------------------------------------- Total costs and expenses (73,714) (81,799) - ------------------------------------------------------------------------------- Operating income (loss) (336) 3,853 - ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 296 623 Interest expense (1,123) (1,204) Amortization of deferred financing fees (89) (134) Other, net 175 (168) - ------------------------------------------------------------------------------- Total nonoperating expense (741) (883) - ------------------------------------------------------------------------------- Income (loss) before income taxes (1,077) 2,970 Income tax expense (1,031) (1,059) - ------------------------------------------------------------------------------- Net income (loss) $ (2,108) $ 1,911 =============================================================================== Other comprehensive income (loss) Unrealized gain (loss) on marketable securities (72) 96 Unrealized gain on derivatives - 47 Foreign currency translation loss (201) (108) - ------------------------------------------------------------------------------- Total other comprehensive income (loss) (273) 35 - ------------------------------------------------------------------------------- Comprehensive income (loss) $ (2,381) $ 1,946 =============================================================================== Weighted average number of common shares outstanding Basic 33,300 33,243 =============================================================================== Diluted 33,300 33,272 =============================================================================== Basic and diluted earnings (loss) per common share $ (0.06) $ 0.06 =============================================================================== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) for the Six Months Ended June 30 (Unaudited) (In thousands, except per share amounts) 2008 2007 - ------------------------------------------------------------------------------- Net revenues $ 151,914 $ 171,067 - ------------------------------------------------------------------------------- Costs and expenses Cost of sales (123,881) (135,460) Selling and administrative expenses (28,227) (27,759) Restructuring expense (558) (110) Impairment charge on assets held for sale (103) - - ------------------------------------------------------------------------------- Total costs and expenses (152,769) (163,329) - ------------------------------------------------------------------------------- Operating income (loss) (855) 7,738 - ------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 656 1,098 Interest expense (2,256) (2,566) Amortization of deferred financing fees (178) (268) Other, net (342) (307) - ------------------------------------------------------------------------------- Total nonoperating expense (2,120) (2,043) - ------------------------------------------------------------------------------- Income (loss) before income taxes (2,975) 5,695 Income tax expense (2,268) (2,310) - ------------------------------------------------------------------------------- Net income (loss) $ (5,243) $ 3,385 =============================================================================== Other comprehensive income (loss) Unrealized gain (loss) on marketable securities (542) 153 Unrealized gain on derivatives 78 36 Foreign currency translation gain (loss) 182 (285) - ------------------------------------------------------------------------------- Total other comprehensive loss (282) (96) - ------------------------------------------------------------------------------- Comprehensive income (loss) $ (5,525) $ 3,289 =============================================================================== Weighted average number of common shares outstanding Basic 33,287 33,236 =============================================================================== Diluted 33,287 33,271 =============================================================================== Basic and diluted earnings (loss) per common share $ (0.16) $ 0.10 =============================================================================== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 PLAYBOY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) June 30, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 25,615 $ 20,603 Marketable securities and short-term investments 3,553 12,952 Receivables, net of allowance for doubtful accounts of $3,669 and $3,627, respectively 44,735 51,139 Receivables from related parties 2,957 1,704 Inventories 9,366 11,363 Deferred subscription acquisition costs 8,194 8,686 Deferred tax asset 1,320 1,320 Assets held for sale - 4,706 Prepaid expenses and other current assets 9,482 13,402 - ------------------------------------------------------------------------------- Total current assets 105,222 125,875 - ------------------------------------------------------------------------------- Long-term investments 6,431 6,556 Property and equipment, net 18,190 14,665 Long-term receivables 2,795 2,795 Programming costs, net 54,243 54,926 Goodwill 133,585 133,570 Trademarks 66,107 65,437 Distribution agreements, net of accumulated amortization of $5,465 and $4,803, respectively 27,675 28,337 Deferred tax asset 1,206 1,206 Other noncurrent assets 11,294 11,789 - ------------------------------------------------------------------------------- Total assets $ 426,748 $ 445,156 =============================================================================== Liabilities Acquisition liabilities $ 2,670 $ 2,134 Accounts payable 31,725 37,842 Accrued salaries, wages and employee benefits 4,157 8,304 Deferred revenues 42,093 43,955 Deferred tax liability 1,490 1,490 Other liabilities and accrued expenses 13,603 14,269 - ------------------------------------------------------------------------------- Total current liabilities 95,738 107,994 - ------------------------------------------------------------------------------- Financing obligations 115,000 115,000 Acquisition liabilities 5,656 7,936 Deferred tax liability 19,467 18,604 Other noncurrent liabilities 24,439 24,305 - ------------------------------------------------------------------------------- Total liabilities 260,300 273,839 - ------------------------------------------------------------------------------- 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; 28,825,478 and 28,784,079 issued, respectively 288 288 Capital in excess of par value 230,489 229,833 Accumulated deficit (58,009) (52,766) Treasury stock, at cost - 381,971 shares (5,000) (5,000) Accumulated other comprehensive loss (1,369) (1,087) - ------------------------------------------------------------------------------- Total shareholders' equity 166,448 171,317 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 426,748 $ 445,156 =============================================================================== 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) 2008 2007 - ------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss) $ (5,243) $ 3,385 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation of property and equipment 2,192 2,232 Amortization of intangible assets 1,130 1,158 Amortization of investments in entertainment programming 16,333 17,444 Amortization of deferred financing fees 178 268 Stock-based compensation 450 359 Impairment charge on assets held for sale 103 - Deferred income taxes 863 838 Net change in operating assets and liabilities (1,502) 8,218 Investments in entertainment programming (15,964) (17,627) Other, net 125 301 - ------------------------------------------------------------------------------- Net cash provided by (used for) operating activities (1,335) 16,576 - ------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions (60) (105) Purchases of investments (588) (6,384) Proceeds from sales of investments 9,511 - Additions to assets held for sale (6,920) - Proceeds from assets held for sale 12,000 - Additions to property and equipment (5,741) (5,030) - ------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 8,202 (11,519) - ------------------------------------------------------------------------------- Cash flows from financing activities Payments of acquisition liabilities (2,200) (5,669) Proceeds from stock-based compensation 67 82 - ------------------------------------------------------------------------------- Net cash used for financing activities (2,133) (5,587) - ------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 278 173 - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 5,012 (357) Cash and cash equivalents at beginning of period 20,603 26,748 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 25,615 $ 26,391 =============================================================================== 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, 2007. Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation. (B) RECENTLY ISSUED ACCOUNTING STANDARDS In May 2008, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles, or Statement 162. Statement 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. Statement 162 becomes effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of Statement 162 to impact our future results of operations or financial condition. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1. FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adopt FSP APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all periods presented. We are currently evaluating the impact of adopting FSP APB 14-1 on our results of operations and financial condition. In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. We are required to adopt FSP FAS 142-3 prospectively for intangible assets acquired on or after January 1, 2009. Intangible assets acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS 142-3. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We are required to adopt Statement 160 at the beginning of 2009. We are currently evaluating the impact, if any, of adopting Statement 160 on our future results of operations and financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), 9 Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). 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 years 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. Since we use a December 31 measurement date, this provision of Statement 158 will not have an 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 adopted Statement 157 on January 1, 2008, as required for our financial assets and liabilities. However, FASB Staff Position FAS 157-2 delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of Statement 157 for our nonfinancial assets and liabilities to have a significant impact on our future results of operations or financial condition. (C) SALE OF ASSETS In April 2008, we completed the sale of assets related to our Los Angeles production facility to Broadcast Facilities, Inc., or BFI, for $12.0 million. Our use of the facility for productions had significantly decreased since its inception, and we believe that our need for linear network transmission capacity will decrease over the next several years. We recorded a $0.1 million unfavorable adjustment in the current year quarter related to the $1.5 million charge on assets held for sale recorded in the prior year. In connection with the sale of these assets, we entered into an agreement to sublet the entirety of the leased production facility to BFI for a period equal to the remaining term of our lease. BFI assumed all of our liabilities and obligations under the existing facility lease as a part of the sublease and provided a letter of credit in the amount of $5.0 million to secure the performance of its obligations under the sublease. Also in connection with the sale of these assets, we assigned our rights and obligations under our four domestic transponder agreements to BFI and entered into a services agreement under which BFI is providing us with certain satellite transmission and other related services (including compression, uplink and playback) for our standard definition cable channels. If we launch high definition cable channels during the term of the services agreement, BFI will also provide such services for these channels. BFI is also providing us with a dedicated radio studio and office space. The agreement includes other terms and conditions which are standard for an agreement of this nature and continues for an initial term of five years, after which we may renew the agreement for an additional three-year term on substantially the same terms and conditions. (D) RESTRUCTURING EXPENSE In 2007, we implemented a plan to outsource our e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained in the acquisition of Club Jenna, Inc. and related companies, or Club Jenna. As a result of this restructuring plan, we recorded a reserve of $0.4 million for 10 costs associated with a workforce reduction of 28 employees. During the six-month period ended June 30, 2008, as part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses related to the 2007 workforce reduction. During the six-month period ended June 30, 2008, we made cash payments of $0.9 million related to prior years' restructuring plans. Approximately $13.4 million of the total costs of our prior years' restructuring plans was paid through June 30, 2008, with the remaining $0.2 million to be paid during 2008. The following table sets forth the activity and balances of our restructuring reserves, which are included in "Accrued salaries, wages and employee benefits" and "Other liabilities and accrued expenses" on our Consolidated Balance Sheets (in thousands): Consolidation of Facilities Workforce and Reduction Operations Total - ------------------------------------------------------------------------------- Balance at December 31, 2006 $ 430 $ 268 $ 698 Reserve recorded 429 - 429 Adjustments to previous estimates 43 (27) 16 Cash payments (473) (127) (600) - ------------------------------------------------------------------------------- Balance at December 31, 2007 429 114 543 Additional reserve recorded 149 445 594 Adjustments to previous estimates (36) - (36) Cash payments (473) (460) (933) - ------------------------------------------------------------------------------- Balance at June 30, 2008 $ 69 $ 99 $ 168 =============================================================================== (E) EARNINGS (LOSS) PER COMMON SHARE The following table sets forth the computations of basic and diluted earnings (loss) per share, or EPS (in thousands, except per share amounts):
Quarters Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2008 2007 2008 2007 - ------------------------------------------------------------------------------------------------- Numerator: For basic and diluted EPS - net income (loss) $ (2,108) $ 1,911 $ (5,243) $ 3,385 ================================================================================================= Denominator: For basic EPS - weighted average shares 33,300 33,243 33,287 33,236 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 33,300 33,272 33,287 33,271 ================================================================================================= Basic and diluted earnings (loss) per common share $ (0.06) $ 0.06 $ (0.16) $ 0.10 =================================================================================================
11 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 number of shares of Class B stock contingently issuable under our 3.00% convertible senior subordinated notes due 2025, or convertible notes. These shares were not included in the computations of diluted EPS for the quarters and six-month periods ended June 30, 2008 and 2007, as their inclusion would have been antidilutive (in thousands): Quarters Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2008 2007 2008 2007 - -------------------------------------------------------------------------------- Stock options 3,702 3,283 3,624 3,220 Convertible notes 6,758 6,758 6,758 6,758 - -------------------------------------------------------------------------------- Total 10,460 10,041 10,382 9,978 ================================================================================ (F) INVENTORIES In January 2008, we signed an agreement to outsource our Playboy and BUNNYshop e-commerce and catalog businesses to eFashion Solutions, LLC, or eFashion. As part of this agreement, we sold all remaining inventory related to these businesses to eFashion. 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, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Paper $ 3,076 $ 2,948 Editorial and other prepublication costs 5,783 5,518 Merchandise finished goods 507 2,897 - ------------------------------------------------------------------------------- Total $ 9,366 $ 11,363 =============================================================================== (G) INCOME TAXES Our income tax provision consists primarily of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss, or NOL, position. 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 FASB 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 cumulative losses in the U.S. and certain foreign jurisdictions, we have concluded that a full valuation allowance should be recorded for such jurisdictions. At June 30, 2008 and December 31, 2007, we had unrecognized tax benefits of $8.0 million and do not expect this amount to change significantly over the next 12 months. Due to the impact of deferred income tax accounting, the disallowance of these benefits would not affect our effective income tax rate nor would it accelerate the payment of cash to the taxing authority to an earlier period. Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2004 through 2007 tax years generally remain subject to examination by federal and most state tax authorities. In addition, for all tax years prior to 2004 generating an NOL, tax authorities can adjust the NOL amount. In our 12 international tax jurisdictions, numerous tax years remain subject to examination by tax authorities, including tax returns for 2002 and subsequent years. (H) FAIR VALUE MEASUREMENT As discussed in Note (B), Recently Issued Accounting Standards, we adopted Statement 157 on January 1, 2008 for our financial assets and liabilities. Statement 157 requires enhanced disclosures about assets and liabilities measured at fair value. Our financial assets primarily relate to marketable securities and investments, while financial liabilities primarily relate to derivative instruments to hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro. We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Statement 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels: Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities; Level 2 - Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data; and Level 3 - Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at June 30, 2008 (in thousands):
Quoted Prices in Significant Active Markets for Significant Other Unobservable Total Fair Value Identical Assets Observable Inputs Inputs Measurement (Level 1) (Level 2) (Level 3) - ------------------------------------------------------------------------------------------------------------------------ Marketable securities and investments $ 9,984 $ 6,431 $ 3,553(1) $ - Derivative liabilities $ (152) $ - $ (152) $ - - ------------------------------------------------------------------------------------------------------------------------
(1) At December 31, 2007, we had $6.9 million in an enhanced cash portfolio included in "Marketable securities and short-term investments" on our Consolidated Balance Sheet. Due to adverse market conditions, we determined that the market value of this investment was other-than-temporarily impaired, and during the fiscal year ended December 31, 2007, we recorded a charge of $0.1 million in "Other, net" on our Consolidated Statements of Operations. Through June 30, 2008, we have received six distributions from the investment, which is being liquidated, at an average net asset value of 98.26%, resulting in a cumulative realized loss of $0.1 million. At June 30, 2008, our remaining balance in this investment was $3.6 million. (I) CONTINGENCIES We acquired the Club Jenna business in 2006, for which we paid $7.7 million at closing, $1.6 million in 2007 and $1.7 million in 2008 with additional purchase price payments of $2.3 million and $4.3 million due in 2009 and 2010, 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, 2008. 13 In 2005, we made an acquisition of an affiliate network of websites. We paid $8.0 million at closing and $2.0 million in each of 2006 and 2007. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments over the five-year period commencing January 1, 2005, 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 each six-month period ended June 30, 2008 and 2007, earnout payments of $0.1 million were made 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 Texas 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. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims will be retried. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be obtained and have not recorded a liability for this case in accordance with FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. (J) BENEFIT PLANS We maintain a practice of paying a separation allowance, which is not funded, under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter. We made cash payments under this policy of $0.1 million and $0.3 million during the quarter and six-month period ended June 30, 2008, respectively, and $0.1 million and $0.2 million during the quarter and six-month period ended June 30, 2007, respectively. (K) STOCK-BASED COMPENSATION Upon adoption of FASB 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 the 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, ----------------------------- ------------------------------ 2008 2007 2008 2007 - --------------------------------------------------------------------------------------------------------- Expected volatility 31% - 41% 25% - 41% 31% - 41% 25% - 41% Weighted average volatility 35% 34% 35% 34% Risk-free interest rate 1.95% - 5.10% 4.67% - 5.04% 1.95% - 5.10% 4.67% - 5.04% 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. During the quarter and six-month period ended June 30, 2008, we granted 171,000 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. During the quarter and six-month period ended June 30, 2007, we granted 160,000 stock 14 options. During the current year quarter and six-month period, the weighted average expected life for options granted was 6.7 years and during the prior year quarter and six-month period, it was 6.3 years. During the current year quarter and six-month period, the weighted average fair value per share for options granted was $2.45 and during the prior year quarter and six-month period, it was $4.64. During the quarter and six-month period ended June 30, 2008, we awarded 270,625 restricted stock units, which provide for the issuance of our Class B stock if certain performance goals are met. Pursuant to the requirements of Statement 123(R), we will establish a measurement date and disclose the grant date fair value and expense for these restricted stock units in the applicable reporting period after the performance goals are approved. During the quarter and six-month period ended June 30, 2007, we granted 250,625 restricted stock units that provide for the issuance of our Class B stock if two-year cumulative operating income target thresholds are met. During the prior year quarter and six-month period, the weighted average grant date fair value for restricted stock units was $10.61. In the quarter ended June 30, 2008, we determined that it was unlikely that the minimum threshold associated with the 2007 grants would be met. Therefore, in the quarter ended June 30, 2008, we reversed $0.6 million of stock-based compensation expense, which included $0.5 million that was recorded in 2007 related to this restricted stock unit grant. 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, --------------------- -------------------- 2008 2007 2008 2007 - ------------------------------------------------------------------------------- Stock options $ 380 $ 448 $ 844 $ 165 Restricted stock units (563) 87 (502) 87 Other equity awards 43 50 96 92 ESPP 6 8 12 15 - ------------------------------------------------------------------------------- Total $ (134) $ 593 $ 450 $ 359 =============================================================================== Statement 123(R) requires that the total amount of compensation expense recognized reflect the number of stock-based awards that actually vest as of the completion of their respective vesting periods. Upon the vesting of certain stock-based awards, we adjusted our stock-based compensation expense to reflect actual versus estimated forfeitures. During the six-month periods ended June 30, 2008 and 2007, we recorded an unfavorable adjustment of $0.1 million and a favorable adjustment of $1.0 million, respectively, to reflect actual forfeitures for vested stock option grants. The following table sets forth stock option activity for the six-month period ended June 30, 2008: Weighted Average Number of Exercise Shares Price - ------------------------------------------------------------------------------- Outstanding at December 31, 2007 3,546,250 $ 15.60 Granted 171,000 5.72 Canceled (21,500) 12.71 - ----------------------------------------------------------------- Outstanding at June 30, 2008 3,695,750 $ 15.16 =============================================================================== 15 (L) SEGMENT INFORMATION The following table sets forth financial information by reportable segment (in thousands):
Quarters Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2008 2007 2008 2007 - ---------------------------------------------------------------------------------------------------------- Net revenues Entertainment $ 41,142 $ 51,838 $ 89,056 $ 102,696 Publishing 20,589 22,658 40,720 46,003 Licensing 11,647 11,156 22,138 22,368 - ---------------------------------------------------------------------------------------------------------- Total $ 73,378 $ 85,652 $ 151,914 $ 171,067 ========================================================================================================== Income (loss) before income taxes Entertainment $ 1,810 $ 7,301 $ 4,509 $ 11,605 Publishing (1,954) (2,273) (5,122) (4,669) Licensing 6,081 5,523 12,724 13,200 Corporate Administration and Promotion (6,206) (6,588) (12,305) (12,288) Restructuring expense 36 (110) (558) (110) Impairment charge on assets held for sale (103) - (103) - Investment income 296 623 656 1,098 Interest expense (1,123) (1,204) (2,256) (2,566) Amortization of deferred financing fees (89) (134) (178) (268) Other, net 175 (168) (342) (307) - ---------------------------------------------------------------------------------------------------------- Total $ (1,077) $ 2,970 $ (2,975) $ 5,695 ========================================================================================================== June 30, Dec. 31, 2008 2007 - ---------------------------------------------------------------------------------------------------------- Identifiable assets Entertainment $ 283,879 $ 287,940 Publishing 30,992 35,320 Licensing 12,488 11,560 Corporate Administration and Promotion 99,389 110,336 - ---------------------------------------------------------------------------------------------------------- Total $ 426,748 $ 445,156 ==========================================================================================================
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes in Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. 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, ----------------------- ----------------------- 2008 2007 2008 2007 - ------------------------------------------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV $ 14.8 $ 21.6 $ 31.3 $ 41.3 International TV 13.4 13.7 28.1 27.5 Online/mobile 11.6 14.8 26.8 30.5 Other 1.4 1.7 2.9 3.4 - ------------------------------------------------------------------------------------------------------------------- Total Entertainment 41.2 51.8 89.1 102.7 - ------------------------------------------------------------------------------------------------------------------- Publishing Domestic magazine 16.8 19.0 32.9 38.1 International magazine 1.9 1.8 4.0 3.7 Special editions and other 1.9 1.9 3.8 4.2 - ------------------------------------------------------------------------------------------------------------------- Total Publishing 20.6 22.7 40.7 46.0 - ------------------------------------------------------------------------------------------------------------------- Licensing Consumer products 8.0 7.5 17.2 16.2 Location-based entertainment 1.3 0.9 2.2 1.8 Marketing events 2.3 2.3 2.5 2.6 Other - 0.5 0.2 1.8 - ------------------------------------------------------------------------------------------------------------------- Total Licensing 11.6 11.2 22.1 22.4 - ------------------------------------------------------------------------------------------------------------------- Total net revenues $ 73.4 $ 85.7 $ 151.9 $ 171.1 =================================================================================================================== Net income (loss) Entertainment Before programming amortization and online content expenses $ 11.7 $ 17.4 $ 24.2 $ 31.9 Programming amortization and online content expenses (9.9) (10.1) (19.7) (20.3) - ------------------------------------------------------------------------------------------------------------------- Total Entertainment 1.8 7.3 4.5 11.6 - ------------------------------------------------------------------------------------------------------------------- Publishing (1.9) (2.3) (5.1) (4.7) - ------------------------------------------------------------------------------------------------------------------- Licensing 6.0 5.5 12.7 13.2 - ------------------------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (6.2) (6.6) (12.3) (12.3) - ------------------------------------------------------------------------------------------------------------------- Segment income (loss) (0.3) 3.9 (0.2) 7.8 Restructuring expense - (0.1) (0.6) (0.1) Impairment charge on assets held for sale (0.1) - (0.1) - - ------------------------------------------------------------------------------------------------------------------- Operating income (loss) (0.4) 3.8 (0.9) 7.7 - ------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.4 0.6 0.7 1.1 Interest expense (1.2) (1.1) (2.3) (2.5) Amortization of deferred financing fees (0.1) (0.2) (0.2) (0.3) Other, net 0.2 (0.1) (0.3) (0.3) - ------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (0.7) (0.8) (2.1) (2.0) - ------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1.1) 3.0 (3.0) 5.7 Income tax expense (1.0) (1.1) (2.2) (2.3) - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (2.1) $ 1.9 $ (5.2) $ 3.4 - ------------------------------------------------------------------------------------------------------------------- Basic and diluted earnings (loss) per common share $ (0.06) $ 0.06 $ (0.16) $ 0.10 ===================================================================================================================
(1) Certain amounts reported for the prior periods have been reclassified to conform to the current year's presentation. 17 Revenues decreased $12.3 million, or 14%, for the quarter and $19.2 million, or 11%, for the six-month period largely due to lower domestic TV, online/mobile and domestic magazine revenues. Segment results decreased $4.2 million for the quarter and $8.0 million for the six-month period primarily due to lower results from our Entertainment Group largely due to lower revenues. In addition, the quarter and six-month period include the reversals of $1.1 million and $0.5 million, respectively, of variable compensation expense, which were previously accrued in each of the segments. Operating results decreased $4.2 million for the quarter and $8.6 million for the six-month period primarily due to the lower segment results previously discussed. Additionally, the current year six-month period reflected $0.6 million of restructuring expense. Net losses were $2.1 million and $5.2 million for the current year quarter and six-month period, respectively. These compared to net income of $1.9 million and $3.4 million in the respective prior year periods. The changes in results were primarily due to the lower operating results previously discussed. ENTERTAINMENT GROUP The following discussion focuses on the revenues and profit contribution before programming amortization and online content expenses of each of our Entertainment Group businesses. Revenues from our domestic TV networks decreased $6.8 million, or 31%, for the quarter and $10.0 million, or 24%, for the six-month period, and profit contribution decreased $5.2 million for the quarter and $7.6 million for the six-month period. Increases in Playboy TV monthly subscription revenues for the quarter and six-month period were more than offset by lower pay-per-view revenues reflecting the continued migration from linear networks to the more competitive video-on-demand platform. The decreases also reflected the impact of unfavorable variances in the current year quarter and six-month period compared to favorable variances in the prior year periods related to previously estimated revenues. The sale of our Los Angeles production facility assets in April 2008 resulted, as expected, in lower revenues but increased profit contribution for the quarter and six-month period. International TV revenues were basically flat as they decreased $0.3 million, or 2%, for the quarter and increased $0.6 million, or 2%, for the six-month period. Profit contribution decreased $0.5 million for the quarter but increased $1.1 million for the six-month period. The quarter and six-month period reflected lower revenues from our U.K. networks offset by growth in our other European networks. Lower costs and foreign currency exchange rate fluctuations had a favorable impact on results for the six-month period. Online/mobile revenues decreased $3.2 million, or 22%, for the quarter and $3.7 million, or 12%, for the six-month period, and profit contribution decreased $0.2 million for the quarter and $2.0 million for the six-month period. Our online websites are in the midst of a major infrastructure overhaul and redesign effort, which we anticipate to be substantially complete by the end of 2008. We believe that this will generate more traffic, resulting in higher revenue and profit contribution from the online business in 2009. During this transition, we expect lower revenues and profit contribution. Additionally, our Playboy and BUNNYshop e-commerce and catalog businesses were outsourced to eFashion Solutions, LLC, with planned lower revenues but higher profit contribution for the quarter and six-month period. Revenues from other businesses decreased $0.3 million, or 25%, for the quarter and $0.5 million, or 16%, for the six-month period, and profit contribution increased $0.2 million for the quarter and $1.2 million for the six-month period primarily as a result of a decrease in DVD sales which was more than offset by lower costs. The group's administrative expenses were flat for the quarter and increased $0.4 million, or 4%, for the six-month period. Programming amortization and online content expenses decreased $0.2 million, or 2%, for the quarter and $0.6 million, or 3%, for the six-month period. Segment income for the group decreased $5.5 million, or 75%, for the quarter and $7.1 million, or 61%, for the six-month period due to the results previously discussed. 18 PUBLISHING GROUP Domestic magazine revenues decreased across all revenue streams, reflecting industry dynamics. This resulted in lower revenues of $2.2 million, or 11%, for the quarter and $5.2 million, or 14%, for the six-month period. Subscription revenues decreased $0.6 million, or 6%, for the quarter and $1.4 million, or 7%, for the six-month period primarily due to 5% fewer copies served in the current year quarter and six-month period. Newsstand revenues decreased $0.9 million, or 41%, for the quarter and $1.3 million, or 28%, for the six-month period primarily due to 28% and 27% fewer copies sold, respectively. Advertising revenues decreased $0.6 million, or 10%, for the quarter and $2.5 million, or 21%, for the six-month period primarily due to 7% and 14% decreases in average net revenue per page, respectively, largely due to our lower rate base effective with the January 2008 issue, combined with 3% and 8% fewer advertising pages compared to the respective prior year periods due in part to the loss of a major advertiser. Advertising sales for the 2008 third quarter magazine issues are closed, and we expect to report approximately 15% lower advertising revenues and 10% fewer advertising pages compared to the 2007 third quarter. On a combined basis, Playboy print and online advertising revenues decreased $0.6 million, or 8%, for the quarter and $2.5 million, or 19%, for the six-month period. International magazine revenues were flat for the quarter and increased $0.3 million, or 7%, for the six-month period. Special editions and other revenues were flat for the quarter and decreased $0.4 million, or 8%, for the six-month period. The decrease for the six-month period was due mainly to 12% fewer newsstand copies of special editions sold, partially offset by the impact of a $1.00 cover price increase effective with the July 2007 issues. Segment loss for the group improved $0.4 million, or 14%, for the quarter as the previously discussed revenue declines together with severance expense and higher paper and postage prices in the current year quarter were more than offset by lower editorial, post-employment benefit and manufacturing costs. Segment loss for the six-month period increased $0.4 million, or 10%, as the previously discussed revenue declines together with severance expense and higher paper and postage prices in the current year period were partially offset by lower editorial, post-employment benefit, manufacturing and subscription collection costs. LICENSING GROUP Licensing Group revenues increased $0.4 million, or 4%, for the quarter and decreased $0.3 million, or 1%, for the six-month period. The current year quarter and six-month period reflected higher consumer products royalties, principally from Southeast Asia, and higher location-based entertainment royalties. The prior year quarter and six-month period were favorably impacted by $0.4 million and $1.7 million, respectively, of sales of original art. Excluding the original art sales, revenues for the group would have increased 8% for the quarter and 7% for the six-month period. The group's segment income increased $0.5 million, or 10%, and decreased $0.5 million, or 4%, for the quarter and six-month period, respectively, primarily due to the changes in revenues discussed above. CORPORATE ADMINISTRATION AND PROMOTION Corporate Administration and Promotion expenses decreased $0.4 million, or 6%, for the quarter and were flat for the six-month period. RESTRUCTURING EXPENSE In 2007, we implemented a plan to outsource our e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained in the acquisition of Club Jenna, Inc. and related companies. As a result of this restructuring plan, we recorded a reserve of $0.4 million for costs associated with a workforce reduction of 28 employees. During the six-month period ended June 30, 2008, as part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses related to the 2007 workforce reduction. 19 During the six-month period ended June 30, 2008, we made cash payments of $0.9 million related to prior years' restructuring plans. Approximately $13.4 million of the total costs of our prior years' restructuring plans was paid through June 30, 2008, with the remaining $0.2 million to be paid during 2008. INCOME TAX EXPENSE Income tax expense of $1.0 million for the quarter and $2.2 million for the six-month period was flat compared to the respective prior year periods. Our effective income tax rate differs from the U.S. statutory rate. Our income tax provision consists of foreign income tax, which relates to our international television networks and withholding tax on licensing income, for which we do not receive a current U.S. income tax benefit due to our net operating loss position. Our income tax provision also includes deferred federal and state income taxes related to the amortization of goodwill and other indefinite-lived intangibles, which cannot be offset against deferred tax assets due to the indefinite reversal period of the deferred tax liabilities. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2008, we had $25.6 million in cash and cash equivalents compared to $20.6 million in cash and cash equivalents at December 31, 2007. During the six-month period ended June 30, 2008, we sold at par all of our $6.0 million of auction rate securities, or ARS, which had been included in marketable securities and short-term investments at December 31, 2007. Total financing obligations were $115.0 million at both June 30, 2008 and December 31, 2007. At June 30, 2008, cash generated from our operating activities, existing cash and cash equivalents and marketable securities and short-term investments were fulfilling our liquidity requirements. We also have a $50.0 million credit facility, which can be used for revolving borrowings, issuing letters of credit or a combination of both. At June 30, 2008, there were no borrowings under this facility and $1.2 million in letters of credit outstanding, resulting in $48.8 million of available borrowings. DERIVATIVE INSTRUMENTS We hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro with derivative instruments. These royalties are hedged with forward contracts for periods not exceeding 12 months. The fair value and carrying value of our forward contracts are not material. For the six-month period ended June 30, 2008, hedges deemed to be ineffective due to us not being able to exactly match the settlement date of the hedges to the receipt of these royalty payments resulted in losses of $0.2 million, which were recorded as "Other, net" on the Consolidated Statements of Operations and Comprehensive Income (Loss). CASH FLOWS FROM OPERATING ACTIVITIES Net cash used for operating activities for the six-month period ended June 30, 2008 was $1.3 million, compared to net cash provided by operating activities of $16.6 million in the prior year period. This decrease was primarily due to the operating results discussed earlier combined with decreases in accounts payable and accrued salaries, wages and employee benefits, partially offset by decreases in prepaid expenses and other current assets and inventories. CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided by investing activities for the six-month period ended June 30, 2008 was $8.2 million, compared to net cash used for investing activities of $11.5 million in the prior year period. This change reflected net proceeds of $5.1 million related to the April 2008 sale of assets related to our Los Angeles production facility and net proceeds from sales of investments of $8.9 million, primarily reflecting the sale of our ARS and proceeds from the liquidation of a portion of our investment in an enhanced cash portfolio during the current year period, compared to net purchases of investments of $6.4 million in the prior year period. 20 CASH FLOWS FROM FINANCING ACTIVITIES Net cash used for financing activities for the six-month period ended June 30, 2008 was $2.1 million, a decrease of $3.5 million compared to the prior year period. The decrease reflected payments of acquisition liabilities of $2.2 million during the current year period compared to payments of acquisition liabilities of $5.7 million in the prior year period. EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS The positive effects of foreign currency exchange rates on cash and cash equivalents during the six-month periods ended June 30, 2008 and 2007 of $0.3 million and $0.2 million, respectively, were due to the weakening of the U.S. dollar against certain foreign currencies. RECENTLY ISSUED ACCOUNTING STANDARDS In May 2008, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles, or Statement 162. Statement 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. Statement 162 becomes effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of Statement 162 to impact our future results of operations or financial condition. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1. FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adopt FSP APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all periods presented. We are currently evaluating the impact of adopting FSP APB 14-1 on our results of operations and financial condition. In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. We are required to adopt FSP FAS 142-3 prospectively for intangible assets acquired on or after January 1, 2009. Intangible assets acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS 142-3. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We are required to adopt Statement 160 at the beginning of 2009. We are currently evaluating the impact, if any, of adopting Statement 160 on our future results of operations and financial condition. 21 In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). 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 years 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. Since we use a December 31 measurement date, this provision of Statement 158 will not have an 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 adopted Statement 157 on January 1, 2008, as required for our financial assets and liabilities. However, FASB Staff Position FAS 157-2 delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of Statement 157 for our nonfinancial assets and liabilities to have a significant impact on our future results of operations or financial condition. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks, including changes in foreign currency exchange rates. There was no material change in our exposure to such fluctuations during the six-month period ended June 30, 2008. Information regarding market risks as of December 31, 2007 is contained in Item 7A. "Quantitative And Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. At June 30, 2008, we did not have any floating interest rate exposure. As of that date, all of our outstanding debt consisted of 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 common stock and our credit quality. At June 30, 2008, the convertible notes had an implied fair value of $90.4 million. ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act. 22 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. 23 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state court in Hidalgo County, Texas, against Editorial Caballero SA de CV, or EC, Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants, and us. In the complaint, Gongora alleged that he was injured as a result of the termination of a publishing license agreement, or the License Agreement, between us and EC for the publication of a Mexican edition of Playboy magazine, or the Mexican Edition. We terminated the License Agreement on or about January 29, 1998, due to EC's failure to pay royalties and other amounts due us under the License Agreement. On February 18, 1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged that in December 1996 he entered into an oral agreement with the Editorial Defendants to solicit advertising for the Mexican Edition to be distributed in the United States. The basis of GSI's cross-claim was that it was the assignee of EC's right to distribute the Mexican Edition in the United States and other Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in out-of-pocket expenses and approximately $0.3 million for lost profits, even though the jury found that EC had failed to comply with the terms of the License Agreement. On October 24, 2002, the trial court signed a judgment against us for $4.4 million plus pre- and post-judgment interest and costs. On November 22, 2002, we filed post-judgment motions challenging the judgment in the trial court. The trial court overruled those motions and we vigorously pursued an appeal with the State Appellate Court sitting in Corpus Christi challenging the verdict. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest, in connection with the appeal. On May 25, 2006, the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of the plaintiffs' claims and remanded the remaining claims for a new trial. On July 14, 2006, the plaintiffs filed a motion for rehearing and en banc reconsideration, which we opposed. On October 12, 2006, the State Appellate Court denied plaintiffs' motion. On December 27, 2006, we filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims will be retried. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be obtained. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, or Statement 5, no liability has been accrued. On April 12, 2004, J. Roger Faherty, or Faherty, filed suit in the United States District Court for the Southern District of New York against Spice Entertainment Companies, or Spice, Playboy Enterprises, Inc., or Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and Logix Development Corporation, or Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in the litigation described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, or the Logix litigation. The complaint further alleges that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged right to indemnification by excluding him from the settlement of the Logix litigation. On June 18, 2004, a jury entered a special verdict finding Faherty personally liable for $22.5 million in damages to the plaintiffs in the Logix litigation. A judgment was entered on the verdict on or around August 2, 2004. Faherty filed post-trial motions for a judgment notwithstanding the verdict and a new trial, but these motions were both denied on or about September 21, 2004. On October 20, 2004, Faherty filed a notice of appeal from the verdict. As a result of rulings by the California Court of Appeal and the California Supreme Court as recently as February 13, 2008, Logix' recovery against Faherty has been reduced significantly, although certain portions of the case have been set for a retrial. In light of these rulings, however, when coupled with any offset as a result of the settlement of the Logix litigation, any ultimate net recovery by Logix against Faherty will be severely reduced and might be entirely eliminated. In consideration of this appeal, Faherty and Playboy have agreed to continue a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York through the end of December 2008. In late June 2008, plaintiffs in the Logix litigation filed a motion in the trial court seeking to amend a $40 million judgment previously entered on consent against defendant Emerald Media Inc., or EMI, seeking to add Faherty as a judgment debtor. In the event Faherty's indemnification and conspiracy claims go forward against us, we believe they are without merit and that we have good defenses against 24 them. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with Statement 5, no liability has been accrued. 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 fiscal year ended December 31, 2007. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual meeting of shareholders was held on May 21, 2008. At the meeting, the following director nominees were elected: Votes Votes Nominee For Withheld - -------------------------------------------------------------------------------- Dennis S. Bookshester 4,694,941 2,955 David I. Chemerow 4,695,517 2,379 Christie Hefner 4,643,025 54,871 Charles Hirschhorn 4,695,515 2,381 Jerome H. Kern 4,694,944 2,952 Russell I. Pillar 4,695,519 2,377 Sol Rosenthal 4,694,936 2,960 Richard S. Rosenzweig 4,642,520 55,376 - -------------------------------------------------------------------------------- Also at the meeting, the shareholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm, or Auditors, as set forth below: Votes Votes Matter For Against Abstain - -------------------------------------------------------------------------------- Auditors 4,696,224 1,472 199 - -------------------------------------------------------------------------------- 25 ITEM 6. EXHIBITS Exhibit Number Description - -------------- ----------- 10.1* Sublease Agreement dated April 1, 2008 between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. 10.2* Services Agreement dated April 1, 2008 between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934. 26 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 8, 2008 By /s/ Linda Havard --------------------------- Linda G. Havard Executive Vice President and Chief Financial Officer (Authorized Officer and Principal Financial and Accounting Officer) 27 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.1* Sublease Agreement dated April 1, 2008 between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. 10.2* Services Agreement dated April 1, 2008 between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934. 28 EX-10.1 2 d74702_ex10-1.txt SUBLEASE 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. SUBLEASE AGREEMENT BETWEEN PLAYBOY ENTERTAINMENT GROUP, INC., a Delaware corporation, AS LANDLORD, AND BROADCAST FACILITIES, INC., a Delaware corporation AS TENANT, FOR PREMISES LOCATED AT 3030 Andrita Street, Los Angeles, California DATED: April 1, 2008 SUBLEASE AGREEMENT This Sublease Agreement (this "Lease") is dated as of April 1, 2008 (the "Effective Date"), and is by and between PLAYBOY ENTERTAINMENT GROUP, INC., a Delaware corporation ("Landlord"), and BROADCAST FACILITIES, INC., a Delaware corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Kingston Andrita LLC, a Delaware limited liability company, as landlord ("KA LLC") and Landlord, as tenant, entered into that certain Agreement of Lease, dated as of September 20, 2001 (as amended, modified and supplemented as further described on Exhibit A attached hereto, the "Master Lease") with respect to certain Premises (as defined in the Master Lease) located at 3030 Andrita Street, Los Angeles, California; WHEREAS, KA LLC assigned its interest in the Master Lease to OLP Los Angeles, Inc., a California corporation, and Andrita GERP LLC, a California limited liability company, as tenants-in-common (collectively, "Master Landlord"); WHEREAS, Landlord sublet a portion of the Premises to SITV, INC., a Delaware corporation ("SITV"), pursuant to that certain Sublease, dated July 15, 2005 (as amended, modified and supplemented as further described on Exhibit A attached hereto, the "SITV Sublease"); WHEREAS, Tenant is purchasing from Landlord and its affiliates certain assets and assuming certain liabilities constituting the Andrita Studios business (the "Business") pursuant to the terms of that certain Asset Purchase Agreement, dated as of the Effective Date, by and among Tenant, as buyer, Landlord and Andrita Studios, Inc., a Delaware corporation, collectively, as Seller, and Playboy Enterprises, Inc. (the "Purchase Agreement"); WHEREAS, pursuant to the Purchase Agreement, Landlord and Tenant are entering into that certain Services and Facilities Agreement, effective as of the Effective Date, pursuant to which Tenant is providing certain services to Landlord (the "Service Contract"); and WHEREAS, in connection with the sale of the Business, Landlord desires to sublease to Tenant and Tenant desires to sublease the Premises from Landlord for the term, at the rent, and upon and subject to the covenants, agreements, terms, conditions, limitations, expectations and reservations herein contained and further subject to the rights of SITV pursuant to the SITV Sublease. NOW, THEREFORE, in consideration of mutual rights, responsibilities and covenants hereinafter set forth and upon the terms, covenants and conditions hereinafter set forth: 1. DEFINED TERMS. Capitalized words not otherwise expressly defined herein (including in the recitals hereto) shall have the meaning set forth in the Master Lease. 2. PREMISES 2.1 Identification of Premises. Landlord for and in consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of Tenant to be paid, kept and performed, has 1 demised and subleased, and by these presents, does demise and sublease, unto Tenant and Tenant does hereby take and lease, upon and subject to the covenants and conditions hereinafter expressed which Tenant agrees to keep and perform, the Premises, subject further to those matters of record affecting title set forth on Exhibit B attached hereto. 2.2 Parking Facilities. Tenant shall be entitled to use all parking spaces provided to Landlord pursuant to the terms of the Master Lease, provided that (i) Tenant, its employees, agents and invitees shall be subject to all terms and conditions set forth in the Master Lease and (ii) such parking shall be subject to rules and regulations imposed by Master Landlord from time to time as provided in the Master Lease. 3. TERM 3.1 Initial Term. The initial term of this Lease shall commence on the Effective Date and continue through the date which is one (1) day prior to the expiration or earlier termination of the Master Lease (or until such term shall sooner cease and expire as hereinafter provided), unless this Lease shall be extended as hereinafter provided (the "Term"). 3.2 Conditions to Effectiveness. This Lease shall have no effect unless and until (i) Master Landlord shall have given its written consent hereto in accordance with the provisions of the Master Lease and (ii) the Business is acquired by Tenant in accordance with the terms of the Purchase Agreement. If Master Landlord refuses to give its consent to this Lease, this Lease shall be null and void, and the parties shall have no further obligations hereunder. 4. RENT 4.1 During Term. Tenant shall pay directly to Master Landlord, without demand and without any deduction or right of setoff except as expressly provided herein, all Base Rent, Impositions, Additional Rent and any other sums due and owing from Landlord to Master Landlord pursuant to the Master Lease during the Term of this Lease including, without limitation, any cost of insurance and any other charges that Landlord is required to reimburse to Master Landlord pursuant to the terms of the Master Lease (collectively, the "Lease Payments"). On the date each Lease Payment is made by Tenant, Tenant shall deliver written notice to Landlord that such Lease Payment (and the amount thereof) has been paid, together with the federal reference number for the wire transfer. All Rent (as defined below) due and payable under this Lease shall be paid directly to Master Landlord by wire transfer pursuant to instructions provided by Master Landlord from time to time (or at such other place as Master Landlord may direct by written notice to Landlord and Tenant) at least two (2) days prior to the date that such Rent is due from Landlord to Master Landlord pursuant to the terms of the Master Lease. Notwithstanding anything to the contrary contained in this Lease, the Master Landlord's receipt from Tenant of any Lease Payments in accordance with the terms of this Lease shall fully satisfy any and all obligations Tenant may have with respect to such Lease Payments under this Lease or the Master Lease. Notwithstanding Tenant's agreement to make Lease Payments directly to Master Landlord, Landlord shall remain liable for the payment of Lease Payments pursuant to the terms and conditions of the Master Lease. Tenant acknowledges that unless a Direct Lease Event (as defined in Section 5.1(c)) has occurred, Master Landlord's acceptance of any payment from Tenant as aforesaid shall not be deemed to create any privity of contract or estate between Master Landlord and Tenant under this Lease. 4.2 Partial Months. If the Term of this Lease shall commence other than on the first day of a month, Rent for such month shall be prorated for such month as applicable. 2 4.3 Rent Defined. "Rent", as used herein, shall mean Base Rent, Additional Rent, Impositions and any other sums due and owing from Tenant to Landlord pursuant to the terms of this Lease. 4.4 No Set-Off. Tenant covenants to pay without notice or demand and without deduction or set-off except as expressly provided herein, all Rent, at the times and in the manner in this Lease provided. 4.5 Net Lease. It is the intention of Landlord and Tenant that the Rent herein specified shall be net to Landlord during the Term of this Lease. Accordingly except as otherwise expressly provided herein, all costs, expenses, and obligations of every kind relating to the Premises during the Term of this Lease, which may arise or become due from Landlord pursuant to the terms of the Master Lease, shall be paid by Tenant, and Landlord shall be indemnified by Tenant against such costs, expenses and obligations except as otherwise expressly provided in this Lease. 4.6 Acts of Invitees. Any liability or costs incurred by Landlord under the Master Lease as a result of the negligence or willful acts of Tenant, its employees, customers, guests, invitees and/or anyone else on the Premises at the invitation of Tenant shall be Rent hereunder and shall be immediately due and payable to Landlord following demand therefor. 4.7 Tenant's Taxes. Tenant shall be responsible for and shall pay, before delinquency, all municipal, county or state taxes assessed during the Term of this Lease against any leasehold interest in this Lease or personal property of any kind, owned by or placed in, upon or about the Premises by Tenant. 4.8 Late Payment Charge and Interest. If Tenant fails to make any payment of Rent within five (5) days of the due date thereof and if Landlord makes such payment of Rent to the Master Landlord, then (i) Tenant shall, in addition to making such delinquent payment, pay to Landlord a late charge equal to five (5%) percent of the late Rent payment which shall accrue and become immediately due and payable to Landlord as Rent hereunder and (ii) such unpaid amounts shall bear interest from the original due date thereof to the date of payment at the rate per annum provided in Article 5 of the Master Lease. If Tenant has timely made payment to Master Landlord of any then due Lease Payments, in no event shall Tenant be subject to any late payment fees or charges, penalties, or any additional premiums of charges whatsoever. Notwithstanding anything to the contrary contained herein, any late fees and/or interest required to be paid by Tenant hereunder with respect to any delinquent payment ("Tenant Late Fees") shall be paid directly to Landlord for the sole benefit of Landlord, except to the extent that Master Landlord is entitled to collect late fees and/or interest pursuant to the terms and conditions of the Master Lease with respect to such delinquent payment, in which case Landlord shall pay to Master Landlord the late fees and/or interest due and payable to Master Landlord, but subject to the terms and conditions of Section 4.1 hereof. 4.9 Tenant's Representation. Tenant represents and warrants to Landlord that Tenant has the financial resources to perform its obligations under this Lease including, without limitation, the payment of Rent as contemplated herein. 5. MASTER LEASE 5.1 Subject to Master Lease. (a) Notwithstanding anything to the contrary contained herein, it is expressly understood and agreed by and between Landlord and Tenant that this Lease is a sublease and 3 is subject to the Master Lease, as supplemented by that certain Consent to Sublease Agreement dated of even date herewith (the "Master Landlord Consent") and, subject to the non-disturbance provisions set forth in the Master Landlord Consent, this Lease is subject to and subordinate to the Master Lease and all terms and conditions thereof as otherwise provided in the Master Lease and, subject to Section 25, to all things to which the Master Lease is subject and subordinate. (b) If the Master Lease expires or terminates for any reason in accordance with the terms and conditions of the Master Lease, this Lease shall automatically terminate as between Landlord and Tenant on the date of the expiration or termination of the Master Lease. Upon any such expiration or termination of this Lease, the parties hereto shall thereupon be relieved of all liability and obligation hereunder, excepting liabilities and obligations (i) which accrued or arose prior to the date of such termination or expiration or (ii) relating to or arising from any breach hereof or any Event of Default which occurred prior to said date of expiration or termination. (c) If (i) Master Landlord has elected, at its sole option, to terminate the Master Lease following an Event of Default (as defined in the Master Lease) by Landlord (as tenant) thereunder or (ii) the interest of Landlord under this Lease is transferred (or surrendered or terminated) to Master Landlord by reason of Landlord's Event of Default (as defined in the Master Lease) under the Master Lease or by reason of assignment of the Master Lease (or any similar device) in lieu of transfer (or surrender or termination) following Landlord's Event of Default (as defined in the Master Lease) under the Master Lease, then, so long as no Event of Default by Tenant is continuing under this Lease, this Lease shall subject to the terms of the Master Landlord Consent continue in full force and effect as a direct sublease between Master Landlord and Tenant in accordance with the Master Landlord Consent (the items set forth in (i) and (ii) above being referred to as a "Direct Lease Event"). Upon the occurrence of a Direct Lease Event, Landlord's rights, title and interest under this Lease shall be terminated. 5.2 Compliance with Master Lease. Tenant acknowledges that Tenant has been provided a copy of the Master Lease and that Tenant has reviewed the Master Lease and, subject to the terms of the Master Landlord Consent, accepts all of the terms, covenants, provisions, conditions and agreements contained in the Master Lease, all of which are made a part of this Lease as though fully set forth herein. Tenant covenants and agrees that Tenant, its agents, contractors, sublessees, licensees, concessionaires or invitees will not violate or breach the terms, covenants or conditions of the Master Lease, and Tenant, its agents, contractors, sublessees, licensees, concessionaires or invitees will not breach such terms, covenants, or conditions or cause a default thereunder or cause the Master Lease to be terminated or forfeited. 5.3 Tenant's Obligations under Master Lease. Except as expressly provided otherwise in this Lease and the Master Landlord Consent, (i) Tenant specifically agrees to comply with and fully perform all of the requirements and obligations of Landlord (as tenant) under the Master Lease and (ii) Tenant assumes and agrees to keep, observe and perform all of the agreements, conditions, covenants and terms of the Master Lease on the part of Landlord (as tenant) to be kept, observed and performed and shall be and become liable for the non-performance thereof occurring on and after the Effective Date with respect to any portion of the Premises or to Tenant's tenancy under this Lease. 4 5.4 Rights of Landlord Under Master Lease. Landlord hereby grants to Tenant the right to enforce the Landlord's rights under the Master Lease and the Master Landlord's obligations under the Master Lease, except for (i) Landlord's right to exercise any termination option under the Master Lease or (ii) Landlord's rights under Article 15 or Article 36 of the Master Lease, and provided that Tenant shall have no right to extend or renew the term of the Master Lease without the prior written consent of Landlord, which may be granted or withheld in the sole discretion of Landlord. 5.5 Modification of Master Lease. This Lease shall also be subject to, and Tenant accepts this Lease subject to, any amendments and supplements to the Master Lease made subsequent to this Lease; provided, however, that Landlord shall obtain the prior written consent of Tenant (not to be unreasonably withheld, conditioned or delayed) in the case of any amendment or supplement to the Master Lease. 5.6 Notices Under Master Lease. Landlord agrees to promptly give Tenant copies of (i) all default notices received from Master Landlord and (ii) any other notices received from Master Landlord which relate to matters which have an affect on Tenant's rights or obligations under this Lease. 5.7 Performance of Obligations by Master Landlord. With respect to all obligations, agreements and services to be performed or furnished by Master Landlord, Tenant shall look solely to the Master Landlord for the performance thereof, and no failure on the part of the Master Landlord to perform such obligations, agreements or services shall constitute a breach of the obligations of Landlord under this Lease. Subject to the terms and conditions of Section 5.4, Landlord expressly grants to Tenant all of Landlord's rights and remedies under the Master Lease to enforce, at Tenant's sole cost and expense, against Master Landlord the full compliance by Master Landlord of its obligations thereunder except as otherwise expressly provided herein. 5.8 Subordination, Non-Disturbance and Attornment Agreement. At the request of Master Landlord, Tenant shall execute a subordination, non-disturbance and attornment agreement ("SNDA") in favor of Master Landlord or its lenders or ground lessor, as applicable, subject to and in accordance with the terms of the Master Lease and Article 25 below. 5.9 Right to Direct Lease. In the event Master Landlord agrees to terminate the Guaranty securing Landlord's obligations under the Master Lease provided by Playboy Enterprises, Inc. (the "Master Lease Guaranty"), Landlord agrees to (i) use commercially reasonable efforts to cooperate with Tenant in obtaining Master Landlord's consent to an assignment of the Master Lease to, and assumption of the Master Lease by, Tenant and (ii) assign to Tenant all of its right, title and interest under the Master Lease promptly upon obtaining such Master Landlord consent; provided, however, that in the event Landlord retains the right to occupy a portion of the Premises pursuant to the Service Contract and Section 11(a) below, Landlord and Tenant shall enter into such further sublease arrangements in form and substance reasonably satisfactory to Master Landlord, Landlord and Tenant as may be necessary to preserve such right of occupancy on the same terms as set forth in Section 11(a) hereof and the Service Contract. Upon any assignment and assumption as set forth above, provided that no Event of Default by Tenant has occurred and is continuing hereunder, this Lease shall terminate. 6. COMPLIANCE WITH LAWS Tenant agrees, at its own cost and expense, to keep the Premises in such order and condition as shall conform to all the orders, rules and regulations of all municipal, state and federal departments, boards, commissions and governmental agencies now existing or hereafter created in all material respects and, at its own cost and expense, promptly execute and comply in all material respects with all laws, 5 rules, ordinances and regulations, now in force or hereafter enacted which affect the Premises in accordance with the terms of Section 13.1 of the Master Lease. Tenant further agrees to comply, at Tenant's cost and expense, with the reasonable recommendations and reasonable requirements of any insurance company which insures or participates in insuring the Premises against loss by fire or other casualty; provided, however, that the foregoing requirement shall only apply with respect to insurance companies providing coverage required to be maintained by Tenant pursuant to Article 8 hereof and shall be subject to the general rights of contest set forth in Section 13.2 of the Master Lease. 7. CONDITION OF PREMISES 7.1 Acceptance by Tenant. Tenant's taking possession of the Premises or any portion thereof shall be conclusive evidence against Tenant that the Premises or such portion thereof, as the case may be, were in good order and satisfactory condition when Tenant took possession. Tenant accepts the Premises subject to the existing SITV Sublease which will be assigned by Landlord to Tenant as of the Effective Date pursuant to an Assignment and Assumption Agreement in the form attached hereto as Exhibit C. 7.2 "As Is" Condition. No promise of Landlord to alter, remove, improve, redecorate or clean the Premises or any part thereof, and no representation respecting the condition of the Premises or any part thereof, have been made by Landlord to Tenant, unless the same is expressly stated herein or made a part hereof, and Tenant agrees that acceptance of possession of the Premises shall be in an "as is, where is" condition for all purposes of this Lease. Landlord has neither made nor does hereby make any representations or warranties, express or implied, with respect to the fitness of the Premises for any particular use or with respect to zoning or any licenses, permits, certificates or similar governmental approvals required for Tenant's use of the Premises as provided herein. 8. INSURANCE 8.1 Master Lease Requirements. During the entire Term of this Lease, Tenant shall, at Tenant's sole cost and expense, maintain in full force and effect any and all insurance policies that Landlord is required at any time or from time to time to obtain as tenant under the Master Lease pursuant to the terms and conditions of the Master Lease including, without limitation, Section 6.1 (b) through (g) thereof. To the extent that Landlord is required to reimburse Master Landlord for any insurance obtained by Master Landlord pursuant to the terms of the Master Lease, such charges shall be deemed Rent owing from Tenant to Landlord (and paid to Master Landlord) hereunder. 8.2 Additional Insurance Coverages. During the entire Term of this Lease, Tenant shall, at Tenant's sole cost and expense, maintain in full force and effect each of the following types of insurance policies: (a) in the event Tenant vacates and leaves the Premises unoccupied by its employees or those of an approved subtenant, Tenant shall also pay for, any incremental costs for premiums for such insurance during any period that the Building remains unoccupied (it being understood and agreed by Tenant that if the Premises remain vacant or abandoned by Tenant for an extended period of time that Landlord or Master Landlord may require or be obligated to obtain special coverages insuring a vacant building); and (b) any other commercially reasonable types of insurance coverage in such commercially reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably required by Landlord or Master Landlord from time to time. 6 8.3 Companies; Forms. All policies of insurance shall be kept in full force and effect continuously throughout the Term of this Lease, shall be written and issued by companies authorized to do business in the State of California, and shall be in form and substance reasonably acceptable to Landlord and, to the extent applicable, Master Landlord and otherwise be in compliance with all of the requirements set forth in Article 6 of the Master Lease. 8.4 Persons and Interests Insured. Tenant shall cause Landlord and its respective agents or such other persons as Landlord shall from time to time require (including Landlord's lenders, Master Landlord, and Master Landlord's lenders), to be additional insureds, as their interests may appear, under the policy or policies carried by Tenant under this Section 8 (except for any workers' compensation insurance required under Section 6.1(d) and 6.1(e)(ii) of the Master Lease) with a special endorsement, if necessary, to insure Master Landlord and Landlord that any acts of Tenant (or anyone for whose acts Tenant is responsible or liable, including its employees, agents, officers or invitees) shall not invalidate or preclude coverage for Master Landlord and Landlord. 8.5 Cancellation Notices. All policies of insurance carried by Tenant shall contain provisions that the same shall not be canceled, terminated, or changed without at least thirty (30) days prior written notice to Tenant, Landlord, Master Landlord and their respective agents. 8.6 Evidence of Insurance. Standard certificates of all insurance policies required to be carried by Tenant shall be deposited with Landlord and Master Landlord upon the execution of this Lease. Standard certificates of renewal of all policies of insurance or any additional insurance required by Master Landlord or Landlord pursuant to the terms of this Lease shall be deposited with Landlord as soon as practicable but in no event less than two (2) business days prior to the date on which such certificates must be delivered to Master Landlord pursuant to the terms of the Master Lease. 9. WAIVER OF SUBROGATION RIGHTS Whenever (a) any loss, cost, damage or expense resulting from fire, or other cause is incurred by either of the parties to this Lease or anyone claiming by, through or under it in connection with the Premises, and (b) such party is then either covered in whole or in part by insurance with respect to such loss, cost, damage or expense, or required under this Lease to be so insured, then the party so insured (or so required) hereby releases the other party from any liability said other party may have on account of such loss, cost, damage or expense to the extent of any amount recovered by reason of such insurance (or which could have been recovered, had insurance been carried as so required under this Lease) and waives any right of subrogation which might otherwise exist in or accrue to any person on account thereof, provided that such release of liability and waiver of the right of subrogation shall not be operative in any case where the effect thereof is to invalidate such insurance coverage or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within thirty (30) days following written notice, to pay such increased cost thereupon keeping such release and waiver in full force and effect). 10. UTILITIES Tenant agrees to pay or cause to be paid all charges for gas, water (including user charges imposed by any law, ordinance or regulation for the treatment and disposal of sewage, industrial wastes and other wastes in connection with Tenant's use of the Premises) electricity, light, heat or power, telephone or other communication service (including security or fire alarm services) and other utilities used, rendered or supplied upon or in connection with the Premises throughout the Term of this Lease, 7 including, without limitation, any charges due under the Master Lease from Landlord as the tenant thereunder, if any. 11. RIGHTS RESERVED TO LANDLORD Landlord shall have the following rights, exercisable without notice to and without effecting an eviction or disturbance of Tenant's use or possession or giving rise to any claim for set-offs, or abatement of Rent: (a) during the term of the Service Contract, (i) unrestricted access to the Andrita Radio Studio (as defined in the Service Contract), the Dedicated Office Facilities (as defined in the Service Contract), the edit bays to be used in connection with the services to be provided by Tenant under the Service Contract (except as otherwise provided in (ii) below) and the common areas of the Premises at all times in connection with Landlord's business at the Premises, and (ii) escorted access, upon reasonable prior notice to Tenant, to the shared space technology areas, including without limitation, Room 192 and related information technology infrastructure components and any location that hosts equipment supporting technology and operations of Landlord's information technology for the purposes of repairing, upgrading, maintaining and performing similar actions with respect to Landlord's information technology infrastructure at the Premises; (b) escorted access to the Premises at all times during normal business hours upon reasonable prior notice for purposes of inspecting the Premises to ensure Tenant's compliance with its obligations under this Lease; and (c) subject to the terms of Section 20.7 below, at any time or times, escorted access to the Premises to make repairs to or maintain the Premises to the extent that Tenant fails to timely perform its obligations under this Lease, and to perform any acts related to the safety, protection or preservation thereof, provided that Landlord provides reasonable notice to Tenant of the same and the Landlord shall cause as little inconvenience or annoyance to Tenant as is reasonably necessary in the circumstances. Upon any such entry, Landlord shall not unreasonably interfere with the business operations of Tenant on the Premises. If Tenant shall not be personally present to open and permit any entry into said Premises, at any time when an entry therein for emergency purposes is necessary, Landlord or Landlord's agent(s) may enter same by a master key or keycard, or may forcibly enter same, without rendering Landlord or such agents liable therefor, and without, in any manner, affecting the obligations, responsibility or liability whatsoever, for the care, maintenance or repair of the Premises, except as otherwise herein specifically provided and except as to any damage, injury or loss resulting from the gross negligence or willful misconduct of Landlord upon such entry. 12. REPAIRS AND MAINTENANCE Tenant shall, at Tenant's sole cost and expense, promptly make all repairs and replacements and perform all maintenance required to be made or performed under the Master Lease by Landlord as the tenant thereunder pursuant to Sections 11.1(b) and 11.2 of the Master Lease. Landlord shall not be obligated to make repairs, replacements, or improvements of any kind upon the Premises whether such repairs, replacements, or improvements to the Premises are interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen. In addition to the foregoing, Tenant shall keep the Premises equipped with all safety appliances required because of Tenant's specific use of the Premises. All such repairs or maintenance made or caused to be made by Tenant shall be of equal or higher quality and class as the original work and shall be made in compliance with the Requirements. Tenant hereby 8 waives all rights it would otherwise have under California Civil Code Sections 1932(1) and 1942(a), or any successor statutes, to deduct repair costs from Rent or terminate this Lease as a result of any failure by Landlord to perform its maintenance or repair obligations, if any. 13. ALTERATIONS BY TENANT 13.1 Consent Required. Tenant's right to make changes, alterations, improvements or additions or attach any signs to the Premises (collectively, "Tenant Additions") shall be subject to and in accordance with the terms set forth for "Alterations" in Article 12 of the Master Lease. With respect to any Tenant Additions which would require the consent of Master Landlord under the Master Lease, Tenant shall not make any such Tenant Additions without: (i) the prior written consent of Master Landlord and (ii) the prior written consent of Landlord, not to be unreasonably withheld or delayed. If Landlord consents to any Tenant Additions requiring such consent, before commencement of such work or delivery of any materials onto any part of the Premises, Tenant shall furnish Landlord with plans and specifications and permits necessary for such Tenant Additions, all in form and substance reasonably satisfactory to Landlord. 13.2 Tenant's Indemnification; Contractor's Insurance. Tenant agrees to defend, hold harmless and indemnify Landlord from and against any and all liabilities, costs and expenses of every kind and description (including, but not limited to, reasonable attorneys' fees and costs) which may arise out of or be connected in any way with any Tenant Additions performed by or on behalf of Tenant. Tenant shall furnish Landlord with standard certificates of insurance from all contractors performing labor or furnishing materials in connection with any Tenant Additions, insuring Landlord and Master Landlord, against any and all liabilities which may arise out of or be connected in any way with such Tenant Additions. 13.3 Approved Contractors; Payments; Lien Waivers. The work necessary to make such Tenant Additions shall be done at Tenant's expense by contractors as reasonably approved by Landlord. Tenant shall promptly pay to Tenant's contractors when due, the cost of all such work. Upon the Landlord's request following the completion of any Tenant Additions, Tenant shall furnish Landlord with copies of contractors' and subcontractors' affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used therein or therefor, all in form and substance reasonably satisfactory to Landlord. 13.4 Compliance With Legal and Insurance Requirements. All Tenant Additions shall comply with all insurance requirements applicable to the Premises, and with all Requirements of all governmental bodies, departments or agencies having jurisdiction over the Premises and/or the underlying real property. Tenant shall permit Landlord to review and observe construction operations in connection with any Tenant Additions, if Landlord requests to do so, provided that Landlord shall have no duty to so review or observe. 13.5 Subject to Master Lease. Tenant's right to construct or install any Tenant Additions as set forth in this Section shall be subject to Tenant complying with all terms, conditions and requirements set forth in Article 12 of the Master Lease as to any proposed Alteration. 14. RETURN OF PREMISES 14.1 Tenant's Obligations. At the termination of this Lease by lapse of time or otherwise: 9 (a) Tenant shall return the Premises in as good condition as when Tenant took possession except for ordinary wear, any damage caused by Landlord, its agents, employees or invitees and as otherwise provided in this Lease; (b) Subject to the terms of the Master Lease, Tenant shall remove any and all fixtures, equipment and personal property belonging to Tenant and signs installed on the Premises by Tenant during the Term of this Lease (to the extent required under the Master Lease); (c) Upon surrender or termination of this Lease, Tenant shall restore to Landlord any and all keys and keycards to the Premises either furnished to, or otherwise procured by Tenant. In the event of the loss of any keys so furnished by Landlord, Tenant shall pay to Landlord the cost thereof, as well as any other costs associated with the loss of said keys or keycards; and (d) Subject to the terms of the Master Lease, all Tenant Additions in or upon the Premises, except movable furniture, fixtures and equipment belonging to Tenant, whether placed there by Tenant or Landlord, shall be Landlord's property and shall remain upon the Premises, all without compensation, allowance or credit to Tenant; provided, however, that if prior to such termination or within ten (10) business days thereafter Landlord so directs by written notice, Tenant shall promptly, at Tenant's cost, remove the Tenant Additions placed in or upon the Premises by Tenant and designated in the notice and shall repair any damage caused by such removal, failing which Landlord may remove the same and Tenant shall, upon demand, pay to Landlord the cost of such removal and of any necessary restoration of the Premises. 14.2 Waiver. Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4) (and all similar or successor statutes) which relate to the termination of leases when the thing leased is destroyed, and agrees that such event shall be governed by the terms of this Lease. 14.3 Failure to Remove Trade Fixtures and Personal Property. All trade fixtures, equipment and personal property belonging to Tenant and not removed from the Premises prior to the termination of this Lease and not required by Landlord or Master Landlord to have been removed as provided herein or in the Master Lease, respectively, shall be conclusively presumed to have been abandoned by Tenant and title thereto shall pass to Landlord under this Lease. 15. TENANT'S USE OF PREMISES 15.1 Uses Permitted. Tenant shall use and occupy Premises only for the uses permitted pursuant to the Master Lease. 15.2 Rules and Regulations. Tenant agrees to comply with all rules and regulations that Master Landlord may hereafter from time to time make for the Premises pursuant to Master Landlord's rights under the terms of the Master Lease. 16. ENVIRONMENTAL COMPLIANCE AND INDEMNITY 16.1 Compliance With Legal Requirements. During the entire Term of this Lease, Tenant shall comply with all Laws now or at any time hereafter in effect which regulate, relate to or impose liability or standards of conduct concerning any Hazardous Materials (as defined in Section 20.4(d) of the Master Lease) which affect Tenant's use of the Premises, and Tenant shall not permit the Premises to contain, be used to store or otherwise used to handle any Hazardous Materials except in accordance with the terms and conditions of Section 20.4(a) of the Master Lease. As of the Effective Date, Landlord 10 represents that, there is not and, to its Knowledge (as defined in the Purchase Agreement), has not been any Hazardous Materials (including toxic mold) used, generated, treated, stored, transported, disposed of, handled or otherwise existing on, under, about or emanating from the Premises, except for quantities of any Hazardous Materials stored or otherwise held in, on, under or about the Premises in compliance with all Laws (as defined in Section 20.4(e) of the Master Lease) in all material respects. 16.2 Disposals or Releases of Hazardous Materials. If any environmental test, inspection or evaluation completed by or in connection with Tenant's business or Tenant's occupancy or use of the Premises discloses a disposal, release, threatened release or the presence of Hazardous Materials on, over, under, from or affecting the Premises in violation of any Laws which has been caused or permitted by, attributed or related to or otherwise arising out of the use or occupancy of the Premises by Tenant or by anyone acting by, through or under Tenant, including, without limitation, any of Tenant's agents, employees, invitees, licensees, subtenants or assignees that requires cleanup or any other remedial action, Tenant shall, at Tenant's sole cost and expense, immediately cause such cleanup or any such remedial action to be completed to the extent necessary to return the Premises to its prior state and in accordance with and to the extent required by all applicable Laws and any orders and directives of any applicable government authorities. Notwithstanding the foregoing, Tenant shall not be responsible for the presence of Hazardous Materials in or about the Premises which result from the underground migration of Hazardous Materials to the Premises from other sites which is not caused, contributed to or exacerbated by Tenant or by anyone acting by, through or under Tenant. 16.3 Remedial Work. Should a release of any Hazardous Materials onto or from the Premises occur as a result of any intentional or unintentional act or omission on the part of Tenant or any other person, Tenant shall immediately notify Landlord thereof and, if such release is due to any act or omission of Tenant or of anyone acting by, through or under Tenant, as soon as possible thereafter Tenant shall conduct and complete or cause to be conducted or completed any and all action and remedial work reasonably required to clean up and remove all such Hazardous Materials in accordance with and to the extent required by and in accordance with all applicable Laws and Section 20.4(a) of the Master Lease. 16.4 Indemnification by Tenant. Tenant agrees to defend, hold harmless and indemnify Landlord, Master Landlord, each of their respective officers, directors, agents and employees, and with respect to each of the foregoing, their respective agents, from and against all Claims (as defined below) including, without limitation, reasonable attorneys' fees and other consultants' and experts' fees, investigation or laboratory fees, court costs and litigation expenses and any cleanup, remedial, removal or restoration work), arising out of, or as a result of (a) the presence, use, disposal, release or threatened release of any Hazardous Materials on, over, under, from or affecting the Premises, or the land caused or permitted by, attributed or related to or otherwise arising out of the use and occupancy of the Premises by Tenant or by anyone acting by, through or under Tenant, including without limitation any of Tenant's employees, agents, invitees, licensees, subtenants or assignees; (b) the underground migration of Hazardous Materials to the Premises after the Effective Date from other sites, which is caused by or attributed or related to Tenant or by anyone acting by, through or under Tenant; (c) any violation of or failure to comply with any Laws or any orders, requirements or demands of any applicable governmental authorities which are related to any such presence, use, disposal, release or threatened release of any Hazardous Materials caused or permitted by, or related to or otherwise arising out of the use and occupancy of the Premises by Tenant or by anyone acting by, through or under Tenant; or (d) Tenant's failure to comply with any of the requirements of this Section 16.4. 16.5 Indemnification by Landlord. Landlord agrees to defend, hold harmless and indemnify Tenant, its officers, directors, agents, employees, and their respective agents, from and against all Claims 11 including, without limitation, reasonable attorneys' fees and other consultants' and experts' fees, investigation or laboratory fees, court costs and litigation expenses and any cleanup, remedial, removal or restoration work), arising out of, or as a result of (a) the presence, use, disposal, release or threatened release of any Hazardous Materials on, over, under, from or affecting the Premises, or the land caused or permitted by, attributed or related to or otherwise arising out of the use and occupancy of the Premises by Landlord or anyone acting by, through or under Landlord (other than Tenant or anyone acting by, through or under Tenant), including without limitation any of Landlord's employees, agents, invitees, licensees, or assignees; (b) the underground migration of Hazardous Materials to the Premises from other sites, which is caused by or attributed or related to Landlord or by anyone acting by, through or under Landlord (other than Tenant or anyone acting by, through or under Tenant); or (c) any violation of or failure to comply with any Laws or any orders, requirements or demands of any applicable governmental authorities which are related to any such presence, use, disposal, release or threatened release of any Hazardous Materials caused or permitted by, or related to or otherwise arising out of the use and occupancy of the Premises by Landlord or by anyone acting by, through or under Landlord (other than Tenant or anyone acting by, through or under Tenant), whether prior to the Effective Date or during the term hereof. Additionally, provided that Tenant does not disturb any asbestos at the Premises, if any asbestos which is present at the Premises as of the date hereof must be abated at any time during the term hereof in order to comply with Laws, Landlord shall, at its costs and expense (or, pursuant to Section 20.4(b) of the Master Lease, cause Master Landlord to, at Master Landlord's cost and expense) encapsulate or otherwise abate the same to the extent necessary to comply with such Laws. 16.6 Non-Exclusive. No part of the above and foregoing agreements to be kept and performed by Tenant, are intended to be a substitute for, or a limitation upon, each and every other agreement contained in this Lease to be kept and performed by Tenant. 17. WAIVER OF CLAIMS AND INDEMNITY 17.1 Tenant's Waiver. To the extent permitted by law, and except for those items subject to the Landlord's indemnification pursuant to Section 17.4 below, Tenant waives and releases Landlord and Landlord's officers, directors, contractors, agents and employees from all claims for damage to person or property sustained by Tenant relating to: (a) the Premises or any part thereof, becoming out of repair or maintenance by Tenant or Master Landlord; or (b) subject to the terms of Section 9 above, any accident in or about the Premises unless due to the negligence or willful misconduct of the Landlord or the Landlord's officers, directors, contractors, agents and employees. All property situated on the Premises and belonging to Tenant, its contractors, agents or employees or visitors or any occupant of the Premises shall be situated there at the risk of Tenant or such other person only. Unless such property is the property of the Landlord (as occupant of a portion of the Premises pursuant to the Service Contract), Landlord shall not be liable for damage thereto or theft, misappropriation or loss thereof. Nothing contained in this Section 17 shall be deemed or construed as an indemnification of Landlord by Tenant of the negligence, tortuous conduct, or willful misconduct of Landlord or any of Landlord's agents, employees or invitees in contravention of the provisions of any applicable California landlord and tenant laws. 17.2 Limitation of Landlord's Liability. Landlord is not liable for any injury or damage to any party happening on, in or about the Premises and its appurtenances during the Term of this Lease, nor 12 for any injury or damage to the Premises or to any property belonging to Tenant or to any other party that may be caused by fire, breakage, or by the use, misuse or abuse of any portion of the Premises (including, without limitation, any of the common areas within the Premises, elevators, hatches, openings, installations, stairways or hallways), nor the streets or sidewalk areas within the Premises, or which may arise from any other cause whatsoever during the Term of this Lease, unless caused by the Landlord's breach of the provisions of this Lease or the Master Lease (excluding any breach of the Master Lease caused by a breach of Tenant of its obligations hereunder), the negligence, tortuous conduct, or willful misconduct of Landlord, its agents or employees. In no event shall Landlord be liable to Tenant for consequential damages. 17.3 Indemnification by Tenant. Subject to Section 9 hereof, Tenant agrees to defend, hold harmless, and indemnify Landlord and Master Landlord (which for the purposes of this Section 17.3 shall include their officers, directors, managers, employees, shareholders, and agents) from and against all claims, liabilities, suits, obligations, fines, damages, penalties, costs, charges and expenses including, but not limited to, reasonable attorneys' fees and costs (collectively, "Claims") for injuries to persons and damage to, or the theft, misappropriation or loss of, property arising from occurrences in or about the Premises by reason of any of the following occurring during the Term hereof: (a) each item set forth Section 17.1 (a) through (c), (f) and (h) of the Master Lease, to the extent arising from any act or failure to act by Tenant or its officers, agents, contractors, servants, employees, licensees or invitees; (b) any accident, injury (including death) or damage to any Person or property occurring in, on or about the Premises or any part thereof or in, on or about any street, alley sidewalk, curb, passageway, gutter, or space comprising a part thereof or adjacent thereto; (c) the negligence or willful misconduct of Tenant, its employees, agents, and invitees; (d) any failure on the part of Tenant to keep, observe, comply with an perform any of the terms, covenants, agreements, provisions, conditions or limitations contained in this Lease, the Master Lease as required herein, or any other contracts and agreements affecting the Premises or any part thereof, on Tenant's part to be kept, observed or performed; provided, however that such indemnification shall not extend to Claims caused by Landlord's breach of the provisions of this Lease or the Master Lease or the negligence, tortious conduct, or willful misconduct of Landlord or Master Landlord, or their agents, employees, or invitees; and further provided that in no event shall Tenant be liable for any consequential damages. 17.4 Indemnification by Landlord. Subject to Section 9 hereof, Landlord agrees to defend, hold harmless and indemnify Tenant (which for the purposes of this Section 17.4 shall include its officers, directors, managers, employees, shareholders, and agents) from and against all Claims for personal injury or property damage arising from injuries to persons or damage to property in or about the Premises caused by a breach by Landlord, its employees, agents or invitees of any covenant or condition of this Lease or by the negligence, tortious conduct, or willful misconduct of Landlord, its employees, agents or invitees; provided, however, that in no event, shall Landlord be liable for any consequential damages. 17.5 Defense of Claims, Etc. If any Claim is made or brought against Landlord or Master Landlord by reason of any event described in Section 17.3 above, or against Tenant, by reason of any event described in Section 17.4 above, then, upon demand by the indemnified party, the indemnifying 13 party shall resist, defend or satisfy such claim, action or proceeding in the indemnified party's name, if necessary, by the attorneys for the indemnifying party's insurance carrier (if such claim, action or proceeding is covered by insurance), or by such other attorneys as the indemnified party shall approve, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the indemnified party may engage its own attorneys to defend it or to assist in its defense and the indemnifying party shall pay the reasonable fees and disbursement of such attorneys of the indemnified party. 17.6 Survival. The provisions of this Article 17 shall survive the expiration or earlier termination of this Lease. 18. DAMAGE BY FIRE OR OTHER CAUSE The provisions of Article 7 of the Master Lease shall be incorporated herein. In the event of a casualty, Landlord shall have the same rights to terminate this Lease as are available to Tenant with respect to the Master Lease pursuant to Article 7 thereof and Tenant shall have the same rights to terminate this Lease as are available to Landlord, as tenant, with respect to the Master Lease pursuant to Article 7 thereof. Except as provided in this Section 18, no damage or destruction of the Premises, shall entitle Tenant to surrender possession of the Premises and terminate this Lease, nor shall there be any suspension or abatement of Rent provided for pursuant to the terms of this Lease as a result of such damage or destruction regardless of whether such damage or destruction shall have been caused by reason of the fault or neglect of Tenant, except and only to the extent that Rent (as defined in the Master Lease) is abated under the terms of the Master Lease. 19. CONDEMNATION 19.1 Taking. If the whole of the Premises or Real Estate are taken or condemned by any competent authority for any public or quasi-public use or purpose, or if any part of the Premises is taken or condemned by any competent authority for any public or quasi-public use or purpose and such taking would prevent or materially interfere with Tenant's use of the Premises for the purposes for which the Premises are then being used, the Term of this Lease shall end upon, and not before, the date of termination of the Master Lease, if applicable. In such event, the Base Rent and Additional Rent shall be apportioned as of the date of such termination. 19.2 Partial Taking. If part of the Premises or Real Estate shall be taken by any competent authority for any public or quasi-public use or purpose and this Lease is not terminated as provided in 19.1 above, the Term of this Lease shall not terminate, but the Rent payable during the then unexpired portion of the Term of this Lease shall be reduced in the same proportion to the reduction of Rent (as defined in the Master Lease) under the Master Lease. 19.3 Allocation of Award. Tenant shall have no right to any apportionment of or share in any condemnation award or judgment for damages caused by or resulting from any taking or condemnation of the Premises (including any Tenant Additions) or underlying real property, whether partial or complete, and Landlord shall be entitled to the whole of such award or judgment subject to the terms of the Master Lease. Notwithstanding the foregoing, Tenant shall be permitted to file its own separate claim for the value of its trade fixtures, equipment and personal property and the cost of moving the same from the Premises; provided, however, that Tenant's claim for any one or more of the foregoing items or damages must be separately identified and not a part of and included in the condemnation award or judgment to Landlord and shall not be permitted to reduce Landlord's or Master Landlord's award. 14 20. LANDLORD'S RIGHTS AND REMEDIES 20.1 Defaults by Tenant. If (i) Tenant defaults in the payment of Rent or fails to maintain, renew or replace any Letter of Credit or Security Deposit as required in accordance with Section 30 hereof and such default continues for three (3) or more days after written notice from Landlord that the same is past due, provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161; (ii) Tenant defaults in the prompt and full performance of any other provision of this Lease and Tenant does not cure the default within twenty-eight (28) days after written demand by Landlord or Master Landlord that the default be cured (unless default is not reasonably capable of being cured within such twenty-eight (28) day period, in which case Tenant shall have such period of time as may be reasonably required to cure such default, provided that Tenant commences the cure of such default within such twenty-eight (28) day period, and thereafter diligently prosecutes such cure to completion, and further provided that in no case shall the cure period hereunder be any longer than the cure period with respect to such default as provided under the Master Lease), provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161; (iii) Tenant enters into a Sublease Transfer without complying with the provisions of this Lease and the Master Lease and does not cure the default within twenty-eight (28) days after written demand by Landlord or Master Landlord that the default be cured; (iv) any voluntary or involuntary petition or similar pleading under any section or sections of any bankruptcy or insolvency act shall be filed by or against Tenant; (v) any voluntary or involuntary proceeding in any court or tribunal shall be instituted to declare Tenant insolvent or unable to pay Tenant's debts or, to the extent permitted by law, if Tenant is generally not paying its debts as they become due, or admits, in writing, that it is unable to pay its debts as they become due; (vi) Tenant makes an assignment for the benefit of its creditors; (vii) a trustee or receiver is appointed for Tenant or for the major part of Tenant's property; (viii) the leasehold interest of Tenant is levied upon under execution or is attached by process of law; (ix) Tenant abandons the Premises; (x) Tenant fails to observe or perform one or more of the terms, conditions, covenants or agreements of any mortgage of Tenant's interest in this Lease beyond any applicable notice or cure period and the same causes Landlord to be in default under the Master Lease; or (xi) a default (beyond applicable cure periods) has occurred under the Master Lease due to any negligence, act, or failure to act by Tenant or by the Tenant's failure to perform its obligations as set forth herein including, without limitation, any default under Section 21.1 (l) through (o) of the Master Lease ((i) through (xi) above, each an "Event of Default"), then Landlord may, if Landlord so elects but not otherwise, with or without notice of such election and with or without any demand whatsoever, either terminate this Lease and Tenant's right to possession of the Premises or, without terminating this Lease, terminate Tenant's right to possession of the Premises. An election by Landlord to terminate Tenant's right to possession of the Premises without terminating this Lease shall not preclude a subsequent election by Landlord to terminate this Lease. 20.2 Surrender of Possession. Upon termination of this Lease following an Event of Default, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of this Lease, Tenant shall surrender possession and vacate the Premises immediately, and deliver possession thereof to Landlord. Tenant hereby grants to Landlord full and free license to enter into and upon the Premises in such event, with or without process of law, and to repossess Landlord of the Premises as of Landlord's former estate and to expel or remove Tenant and any others who may be occupying or within the Premises and to remove any and all property therefrom, using such force as may be necessary, without being deemed in any manner guilty of trespass, eviction or forcible entry or detainer or conversion of property and without relinquishing Landlord's rights to the Base Rent, Additional Rent or any other charges due Landlord, or any other right given to Landlord hereunder or by operation of law. Except for those notices and cure or grace periods expressly afforded Tenant under Section 20.1, Tenant 15 waives the service of any demand for the payment of any Base Rent, Additional Rent or any other charges hereunder or for possession and the service of any notice of Landlord's election to terminate this Lease or to re-enter the Premises following an election by Landlord under Sections 20.1 to terminate this Lease or Tenant's right to possession, other than such demand and notice as is prescribed by any statute in California and agrees that the breach of any covenant or provision of this Lease by Tenant (after such election by Landlord) shall, of itself, without the service of any notice or demand whatsoever, constitute a forcible detainer by Tenant of the Premises within the meaning of the statutes of the State of California. 20.3 Landlord's Rights After Event of Default. (a) In addition to the rights set forth herein, following an Event of Default hereunder, Landlord shall have all of the rights and remedies available to Master Landlord pursuant to the terms of the Master Lease. (b) If Landlord elects to terminate this Lease following an Event of Default, then Tenant shall pay to Landlord, not as a penalty but as consideration for the loss of Landlord's bargain, a sum equal to Landlord's Damages (hereinafter defined) in payment of the damages Landlord incurred by reason of Tenant's default. Landlord may draw on any Letter of Credit (as defined in the Purchase Agreement) or use, apply or retain any Security Deposit held by Landlord in accordance with Section 30.3 hereof to collect any such Landlord's Damages. If Landlord elects to terminate Tenant's right to possession only, without terminating this Lease pursuant to a right granted to Landlord hereunder, then Landlord may, at Landlord's option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof as provided in Section 20.2 without such entry and possession terminating this Lease or releasing Tenant, in whole or in part, from Tenant's obligation to pay Rent for the full Term of this Lease. (c) After entry into possession without termination of this Lease, Landlord, if and to the extent required by law, may relet the Premises or any part thereof for the account of Tenant to any person, firm or corporation other than Tenant for such rent, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine. Landlord shall not be required to accept any tenant offered by Tenant or to observe any instructions given by Tenant about such reletting. In any such case, Landlord may make repairs, alterations and additions in or to the Premises and redecorate the same to the extent deemed necessary or desirable by Landlord in order to restore the Premises to the same condition as Tenant is required to maintain the Premises under this Lease. Tenant shall, upon demand, pay the cost thereof, together with Landlord's expenses of the reletting. If the consideration collected by Landlord upon any reletting of the Premises for Tenant's account is not sufficient to pay monthly the full amount of Rent reserved in this Lease, together with the cost of repairs, alterations, additions, redecorating and Landlord's other costs and expense of regaining possession and reletting the Premises, Tenant shall pay to Landlord the amount of each monthly deficiency upon demand. 20.4 Removal of Tenant's Property. Any and all property which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed or stored in a commercial warehouse or otherwise by Landlord at Tenant's risk, cost and expense, and Landlord shall not be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not removed from the Premises or retaken from storage by Tenant within thirty (30) days after the end of the Term shall be conclusively presumed to have been abandoned by Tenant. 16 20.5 Equitable Relief. If Tenant violates any of the terms and provision of this Lease or defaults in any of its obligations hereunder, other than the payment of Rent, such violation may be restrained or such obligation enforced by injunction or other equitable action. 20.6 No Waivers. No delay or omission of the right to exercise any power by Landlord shall impair any such right or power, nor shall any such delay or omission be construed as a waiver of any default or as acquiescence therein. No waiver by Landlord of any default of Tenant shall be implied to affect, and no express waiver shall affect, any default other than the default specified in such waiver and that only for the time and to the extent therein stated. No receipt of money by Landlord from Tenant after the termination of this Lease, the service of any notice, the commencement of any suit or final judgment for possession shall reinstate, continue or extend the Term of this Lease or affect any such notice, demand, suit or judgment. The various rights and remedies of Landlord contained in this Lease are reserved to Landlord and shall not be considered as exclusive of any other right or remedy, but shall be construed as cumulative and shall be in addition to every other remedy available to Landlord whether now or at any time hereafter existing at law, in equity, or by statute. To the fullest extent permitted by law, Tenant hereby waives all rights of redemption or relief from forfeiture under California Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant. 20.7 Landlord's Right to Perform Tenant's Obligations. If at any time during the Term of this Lease: (a) Any damage to the Premises results from any act, omission or neglect of Tenant or of Tenant's contractors, agents or employees (and Tenant fails to repair the same as required in this Lease prior to the expiration of the applicable cure period), Landlord may, at Landlord's option, repair such damage and Tenant shall reimburse Landlord as Additional Rent, upon demand by Landlord, for the total cost of such repairs in excess of the amount, if any, paid to Landlord under insurance, if any, covering such damage; or (b) Tenant at any time fails to make any payment or perform any other act on its part to be made or performed under this Lease or under the Master Lease as provided herein that will result in a default under the Master Lease, Landlord may, at Landlord's sole option, upon not less than five (5) days prior notice to Tenant (except in the event of an emergency, in which case telephonic notice only shall be required), make such payment or perform such obligation (including, without limitation, making any necessary repairs or performing any necessary work on the Premises in the event of an emergency), without waiving or releasing Tenant from any obligation under this Lease. 20.8 Landlord's Expenses. All reasonable sums paid by Landlord and all costs, charges and expenses incurred by Landlord in connection with (a) the exercise of any of the Landlord's rights under this Lease and (b) the enforcement of Tenant's obligations hereunder, or any litigation, negotiation or transaction in which Tenant causes Landlord, without Landlord's fault, to be involved or concerned (including, but not limited to, reasonable attorneys' fees and costs and interest and penalties for unpaid amounts due to Master Landlord under the Master Lease or other charges required to be paid or reimbursed by Tenant) shall be payable upon demand, together with interest thereon at the same rate applicable to the late payment or nonpayment of Rent as provided in this Lease. 20.9 Landlord's Damages. As used herein, the term "Landlord's Damages" shall mean the sum of (i) the Rent specified in this Lease for the remainder of the stated Term following termination of this Lease or of Tenant's right to possession, (ii) any other sums or damages then due to Landlord 17 hereunder, and (iii) any other expenses, costs or damages (including, without limitation, reasonable attorneys' fees and court costs and any damages or deficiency in the reletting of the Premises) incurred by Landlord in connection with any default hereunder or any corresponding default under the Master Lease. 20.10 Waiver of Jury Trial. Tenant and Landlord hereby each waive its right of trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other, or with respect to any issue or defense raised therein, including the right to an advisory jury (except for personal injury or property damage), on any matters whatsoever arising out of, or in any way connected with, this Lease, the relationship of Landlord and Tenant, Tenant's use and occupancy of said premises, including summary proceedings and possession actions, and any emergency statutory other statutory remedy. 20.11 Venue. In the event of any dispute under the terms of this Lease, the parties agree that the venue for settling the dispute will be placed in Los Angeles County, State of California and none other. 20.12 Waiver of Right of Redemption. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. No receipt of monies by Landlord from Tenant after the termination or cancellation of this Lease, in any lawful manner, shall reinstate, continue or extend the term of this Lease, or affect any notice theretofore given to Tenant, or operate as a waiver of the right of Landlord to enforce the payment of fixed or additional rent or rents then due, or thereafter falling due or operate as a waiver of the rights of Landlord to recover possession of the Premises by proper suit, action, proceeding or remedy. It is agreed that, after the service of notice to terminate or cancel this Lease, or the commencement of suit, action or summary proceeding, or any other remedy, or after a final order or judgment for the possession of the Premises, Landlord may demand, receive and collect any monies due, or thereafter falling due, without, in any manner, affecting such notice, proceeding, suit, action, order or judgment. Any and all such monies collected shall be deemed to be payments towards satisfying Tenant's obligations to Landlord. 21. HOLDING OVER If Tenant retains possession of the Premises or any part thereof after the termination of this Lease by lapse of time or otherwise, Tenant shall pay Landlord, in order to compensate Landlord for Tenant's wrongful withholding of possession, and during such time as Tenant remains in possession, an amount calculated at a rate equal to 200% of the Base Rent in effect immediately prior to such termination, plus any other Rent determined to be due pursuant hereto, plus all direct and consequential damages sustained by Landlord by reason of Tenant's wrongful retention of possession. The provisions of this Section shall not constitute a waiver of Landlord's right of re-entry or of any other right or remedy provided herein or at law. 22. LANDLORD'S TITLE Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord or the Master Landlord. 23. QUIET ENJOYMENT So long as Tenant observes and performs its covenants and agreements hereunder and no Event of Default has occurred and is continuing hereunder, Tenant shall, at all times during the Term, peacefully 18 and quietly have and enjoy possession of the Premises without any encumbrance or hindrance by, from or through Landlord, its successors or assigns or any person claiming by, through or under the Landlord, subject to the SITV Sublease. 24. ASSIGNMENT AND SUBLETTING 24.1 Restrictions on Transfer. Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed, (i) assign, transfer or convey this Lease or any interest hereunder; (ii) suffer to occur or permit to exist any assignment of this Lease, voluntarily, involuntarily or by operation of law; (iii) sublet the Premises or any part thereof; or (iv) otherwise transfer its interest in this Lease where such transfer would require the consent of Master Landlord pursuant to the terms of the Master Lease (each, a "Sublease Transfer"); provided however, that (1) the foregoing shall not apply to Tenant's rights pursuant to Section 10.1 of the Master Lease (and Landlord's consent shall not be required in connection therewith), and (2) any Sublease Transfer to a person or entity that is engaged primarily in the ownership and operation of adult television entertainment shall be subject to Landlord's consent, which may be granted or withheld in Landlord's sole and absolute discretion. Landlord's consent to any Sublease Transfer, when required, shall not constitute a waiver of Landlord's right to withhold its consent to any future assignment, subletting or transfer. The consent by Landlord to any Sublease Transfer shall not in any way be construed to relieve Tenant from obtaining the express consent of Landlord to any further Sublease Transfer. 24.2 Advance Notice. When Landlord's consent to a Sublease Transfer is required hereunder, Tenant shall give Landlord written notice of any proposed Sublease Transfer which notice shall contain the name of the proposed sublessee or assignee and the proposed principal terms thereof. Upon receipt of such notice with respect to any such Sublease Transfer, Landlord shall have a period of thirty (30) days to give notice to Tenant as to whether Landlord is prepared to consent to such Sublease Transfer. If Landlord fails to give notice of its consent within such thirty (30) day period, Landlord shall be deemed to consent to such Sublease Transfer. 24.3 Consent of Master Landlord. To the extent consent thereto is required by the terms of the Master Lease, no Sublease Transfer shall be effective unless Tenant has obtained the written consent of Master Landlord pursuant to the terms of the Master Lease. 24.4 Tenant Not Released. Notwithstanding anything to the contrary contained herein, if Master Landlord and Landlord consent to any proposed Sublease Transfer by Tenant, the original Tenant shall not be released from any covenant or obligation under this Lease as a result of such Sublease Transfer. 25. MORTGAGES AND SECURITY INTERESTS This Lease is subject and subordinate to (i) all ground or underlying leases and the lien of any present and future mortgages and security interests of any lender of Master Landlord, now and hereafter in force against the Premises and to all renewals, modifications, consolidations, replacements and extensions of such mortgages or security interests and to all advances made or hereafter to be made upon the security of such mortgages and security interests and (ii) all things to which the Master Lease is subject, subject in each case to the terms and conditions of the Master Lease. Landlord hereby agrees that in no event shall Landlord be permitted to grant a mortgage lien on or otherwise encumber with a security interest its interest in the Master Lease. 19 26. ESTOPPEL CERTIFICATE Landlord and Tenant agree that, from time to time upon not less than ten (10) business days prior notice by the requesting party, Landlord or Tenant, as applicable, will deliver to the requesting party or to such other person or persons as such requesting party shall designate in such notice, a statement in writing certifying (a) that this Lease is unmodified and in full force and effect, and contains the full agreement between Landlord and Tenant (or, if there have been modifications or additional agreements, that this Lease is in full force and effect as modified and identifying the modifications thereof or additional agreements), (b) the dates to which the Base Rent, Additional Rent, Impositions and other charges due under this Lease have been paid, and (c) that, insofar as each party knows, the other party is not in default under any provision of this Lease and has performed all of the obligations to be performed by such party to date (or, if either party has knowledge of any default by other or of any unperformed obligation by the other, a statement of the nature thereof). 27. BROKERAGE Landlord and Tenant represent and warrant to each other that they have had no dealings with any broker or agent in connection with this Lease and both Landlord and Tenant hereby agree to hold harmless and indemnify each other from and against all claims for costs (including reasonable attorneys' fees), expense or liability for any compensation, commissions and charges claimed by any other broker or agent who claims to have dealt with the other of them with respect to this Lease or the negotiation thereof. 28. NOTICES 28.1 Timing of Notices. Whenever Tenant is required to give a notice or make demand pursuant to the terms of the Master Lease as a result of Tenant's assumption of Landlord's obligations under the Master Lease, the notice period under this Lease shall be (i) two (2) days shorter than the applicable notice period in the Master Lease to the extent that such notice period in the Master Lease is at least six (6) days and (ii) half of the number of days of such notice period in the Master Lease (as rounded down to the nearest whole integer) to the extent that the notice period in the Master Lease is less than six (6) days. 28.2 Manner of Giving Notices. Any notice or demand from Landlord to Tenant or from Tenant to Landlord shall be in writing and shall be deemed to have been duly given if delivered personally or mailed (by registered or certified mail) or sent by nationally recognized overnight courier delivery service, in any case, addressed, as follows: For notices and communications to Tenant: Broadcast Facilities, Inc. 3030 Andrita Street Los Angeles, California 90065 Attn: William Tillson and Simon Bax Fax: 323-344-4800 For notices and communications to Landlord: Playboy Entertainment Group, Inc. 9242 Beverly Boulevard Beverly Hills, CA 90210 20 Attn: Roy Liebrecht Fax: 323-276-4502 With copies to: Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, IL 60611 Attn: Sue Shoemaker Fax: 312-751-2818 Notices shall be deemed to have been given, in the case of personal delivery, on the date of delivery; in the case of mailing, on the date which is three (3) days after the date mailing thereof; and in the case of courier delivery service, on the day after the date of deposit for delivery with said courier delivery service. 28.3 Changes of Address or Addressee. By notice complying with the requirements of Section 28.2, each party shall have the right to change the address or addressee, or both, or add additional addresses for all future notices and communications and payments to such party or for copies of notices provided for above that are not required to be sent via certified or registered mail or by overnight courier or other delivery service, but no such notice of a change or additional addressee, by notice given hereunder shall be effective until actually received by the other party. 29. SUCCESSORS AND ASSIGNS 29.1 Binding Nature. The covenants, agreements and obligations herein contained, except as herein otherwise provided, shall bind, extend to and inure to the benefit of Landlord and Tenant and their respective successors and assigns, but nothing contained in this Section 29.1 shall be deemed or construed to release Tenant from its obligation under Section 24 to first obtain the written consent of Landlord or Master Landlord with respect to any Transfer. 29.2 Transfer by Landlord. In the event of any transfer of the interest of Landlord in the Premises, the Landlord making such transfer (whether named herein or its successor or assign) shall be relieved and fully released of and from all covenants, agreements and obligations of Landlord contained in this Lease for all periods of time subsequent to the effective date of such transfer provided that the transferee assumes the obligations of Landlord hereunder in writing from and after the effective date of such transfer. Notwithstanding any provision to the contrary set forth herein or in the Master Lease, any transfer of the interest of Landlord in the Premises to a direct competitor of Tenant shall require Tenant's prior written consent, which consent may granted or withheld in Tenant's sole and absolute discretion. 30. LETTER OF CREDIT 30.1 Delivery; Reductions. Pursuant to the terms of the Purchase Agreement, Tenant shall deliver or cause to be delivered, within five (5) business days of the Effective Date, a Letter of Credit (as defined in the Purchase Agreement) to Landlord in an amount of Five Million Dollars ($5,000,000) (the "Original LOC Amount") as security for Tenant's performance of its obligations under this Lease, which Letter of Credit shall be substantially in the form attached hereto as Exhibit D. Any failure or refusal of the issuer to honor the letter of credit shall be at Tenant's sole risk and shall not relieve Tenant of its 21 obligations hereunder. Provided that no Event of Default has occurred and is continuing hereunder at the time of any proposed reduction in the amount then available to be drawn under the Letter of Credit (the "LOC Amount"), the LOC Amount may be reduced commencing on the first day of the first month after which Tenant's remaining cumulative monetary obligations under this Lease including, without limitation all Rent due hereunder for the remaining Term of the Lease, are determined to be less than the Original LOC Amount as determined in Landlord's reasonable judgment; provided that the LOC Amount may be reduced on a monthly basis only to the extent that such reduced LOC Amount is not less than an amount equal to such remaining cumulative monetary obligations hereunder as determined in Landlord's reasonable discretion. Further, at such time as (i) this Lease terminates in accordance with its terms and no Event of Default shall have occurred and be continuing under this Lease, (ii) Landlord has assigned to Tenant all of its right, title and interest in and to the Master Lease in accordance with the terms of the Master Lease, (iii) a replacement Letter of Credit has been issued in accordance with the provisions of this Section 30, or (iv) Landlord and Tenant agree in writing, Tenant shall have the right to terminate the Letter of Credit. Any and all fees and charges in connection with the establishment, renewal, maintenance, replacement, amendment or drawing with respect to the Letter of Credit shall be the sole responsibility of Tenant. For the purposes of the penultimate sentence of this Section 30.1, "Landlord" shall refer to Landlord or its transferee (as such term is used in the Letter of Credit). 30.2 Renewals; Failure to Renew. If in any event (i) the Letter of Credit shall terminate or expire or shall become unenforceable or illegal prior to the date which is 180 days after the expiration of the Term (unless sooner terminated in accordance with Section 30.1 above) or (ii) Tenant shall fail to renew or replace the Letter of Credit (including, without limitation, the failure to renew or replace an existing Letter of Credit (a) at least thirty (30) days prior to the termination or scheduled expiration thereof or (b) as required pursuant to Section 30.4 hereof) and provide evidence of such renewal or replacement to Landlord at least thirty (30) days prior to the termination or scheduled expiration thereof or, in the event that Landlord has required a replacement Letter of Credit in accordance with Section 30.4 below, within thirty (30) days following written notice as required in Section 30.4 below, then Landlord shall have the right to draw the full LOC Amount and hold the proceeds thereof as a security deposit for Tenant's obligations under this Lease (the "Security Deposit"). Landlord shall not be required to hold any such Security Deposit in a separate account or in an interest bearing account unless otherwise required by any applicable laws. If Landlord elects not to draw on the Letter of Credit, then Tenant shall be obligated to promptly cause a replacement Letter of Credit to be issued in accordance with the terms hereof. If Landlord elects to draw on the Letter of Credit and Tenant thereafter causes a replacement Letter of Credit to be issued, Landlord shall refund the Security Deposit to Tenant within ten (10) days following the issuance of such replacement Letter of Credit. 30.3 Draws; Application of Security Deposit. If an Event of Default (other than an Event of Default arising from the failure of Tenant to maintain, replace or renew the Letter of Credit as required pursuant to Section 30.2 above) has occurred and is continuing hereunder, including, but not limited to, the failure to pay Rent (for the avoidance of doubt, in determining whether an Event of Default has occurred with respect to the payment of Rent hereunder, Landlord shall be entitled to rely upon a notice from Master Landlord that rent has not been timely paid under the Master Lease, absent evidence reasonably acceptable to Landlord to the contrary), then Landlord may draw on the Letter of Credit (or, if applicable, use, apply or retain the whole or any part of any Security Deposit and the interest accrued thereon, if any) to the extent required to cure any monetary Event of Default or for the recovery of any Landlord's Damages incurred as a result of an Event of Default to the extent that Landlord would be entitled to such recovery pursuant to the terms of Section 20.3 above (the "Draw Amount"). If Landlord shall so draw upon the Letter of Credit (or, if applicable, use, or retain the whole or any part of any Security Deposit or the interest accrued thereon, if any), Tenant shall upon demand immediately either (i) 22 cause the existing Letter of Credit to be increased by the Draw Amount or (cause an additional Letter of Credit to be issued in the amount of the Draw Amount such that, in either event, the total LOC Amount (by one or more Letters of Credit) is equal to the amount of required security per Section 30.1 above or (ii) deposit with Landlord a sum equal to the Draw Amount to cause the Security Deposit to be equal to the amount of required security per Section 30.1 above. Upon Tenant's satisfaction of either clause (i) or (ii) above, the Event of Default in respect of which the Draw Amount was applied shall be deemed cured to such extent. 30.4 Rating of Issuer. In the event that the credit rating of any issuer of a Letter of Credit falls below Investment Grade (as defined below), then at Landlord's written request, Tenant shall be obligated to deliver or cause to be delivered a replacement Letter of Credit from a third party financial institution with an Investment Grade rating as reasonably approved by Landlord in the amount then required pursuant to Section 30.1 above no later than thirty (30) days following written notice from Landlord. "Investment Grade" shall mean a credit rating of Baa or better from Moody's Investors Service or BBB or better from Standard and Poor's. Upon receipt by Landlord of the replacement Letter of Credit, Landlord shall return the original Letter of Credit for cancellation to the issuer bank and submit such certificate(s) as required by the terms of the Letter of Credit to cause cancellation of the original Letter of Credit as promptly as possible. Upon replacement as provided herein, the replacement Letter of Credit shall be deemed the Letter of Credit for all purposes under this Lease and the Purchase Agreement. 30.5 Transfers. The Letter of Credit and/or Security Deposit may be transferred and assigned by the beneficiary thereof to any transferee that has succeeded to Landlord's obligations under this Lease in accordance with Section 29.2 above. Any and all fees for a transfer and/or assignment charged by the issuer of the Letter of Credit shall be payable by Tenant. 30.6 Substitute Letter of Credit. Upon 15 days written notice to Landlord, Tenant may deliver a substitute a letter of credit (the "Substitute Letter of Credit") in place of the Letter of Credit. Such Substitute Letter of Credit shall be issued by a third party financial institution with an Investment Grade rating as defined above as reasonably approved by Landlord in the amount then required pursuant to Section 30.1 and shall have substantially the same terms and conditions as the Letter of Credit. The Applicant under the Substitute Letter of Credit may be Tenant, ***** or any affiliate of Tenant or ***** or any other party designated in writing by Tenant or *****. Upon receipt by Landlord of the Substitute Letter of Credit, Landlord shall return for cancellation the Letter of Credit to the issuer bank and submit such certificate(s) as required by the terms of the Letter of Credit to cause cancellation of the Letter of Credit as promptly as possible. Upon substitution as provided herein, the Substitute Letter of Credit shall be deemed the Letter of Credit for all purposes under this Lease and the Purchase Agreement. 31. GENERAL PROVISIONS 31.1 Reserved. 31.2 Consents. Except as otherwise provided herein, whenever Master Landlord's consent for any action is required under the Master Lease, Tenant shall be obligated to obtain the consent of Master Landlord and Landlord, such consent of Landlord not to be unreasonably withheld or delayed in the event that Master Landlord grants its consent to such action. 31.3 No Partnership. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party, to create the relationship of principal and agent, partnership, joint venture or any association between Landlord and Tenant, it being expressly understood and agreed that no 23 provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of Landlord and Tenant. 31.4 Entire Agreement. This Lease embodies and reflects the entire agreement between Landlord and Tenant with respect to the subject matter herein. This Lease supersedes all prior agreements and understandings between Landlord and Tenant with respect to the subject matter herein. This Lease may be modified or altered only by an agreement in writing between Landlord and Tenant. 31.5 Severability. If any term, section or provision of this Lease shall be found to be invalid or unenforceable for any reason whatsoever, such invalidity or unenforceability shall not affect the validity or enforceability of any other term, section or provision of this Lease. 31.6 Governing Law. This Lease shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of California. 31.7 Headings. The headings contained herein are for convenience only, and shall not be used to define, explain, modify or aid in the interpretation or construction of the contents. 31.8 Plurals; Grammatical Changes. The words "Landlord" and "Tenant" wherever used in this Lease shall be construed to mean "Landlords" or "Tenants" in all cases where there is more than one landlord or tenant, and the necessary grammatical changes required to make the provisions hereof apply either to corporations, partnerships or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. 31.9 Covenants and Conditions. All of the covenants of Tenant hereunder shall be deemed and construed to be "conditions" if Landlord so elects as well as "covenants" as though the words specifically expressing or importing covenants and conditions were used in each separate instance. 31.10 Recording. Tenant covenants not to place this Lease or any memorandum of this Lease on record without prior written consent of Landlord and Master Landlord. 31.11 Counterparts. This Lease may be executed in one or more counterparts, each of which shall constitute an original but all of which together shall constitute one and the same instrument. Each counterpart may be executed and delivered by facsimile or electronic transmission. [Signature Pages Follow] 24 IN WITNESS WHEREOF, Landlord and Tenant have, respectively, caused this Lease to be signed as of the day, month and year first above written. LANDLORD: PLAYBOY ENTERTAINMENT GROUP, INC., a Delaware corporation By: /s/ Howard Shapiro ----------------------------------------- Name: Howard Shapiro Its: Vice President and Secretary TENANT: BROADCAST FACILITIES, INC., a Delaware corporation By: /s/ Simon Bax ----------------------------------------- Name: Simon Bax Its: Chief Executive Officer and Secretary Acknowledged by the undersigned Guarantor of Master Lease: PLAYBOY ENTERPRISES, INC., a Delaware corporation By: /s/ Howard Shapiro ------------------------------- Name: Howard Shapiro Its: Executive Vice President, General Counsel and Secretary Index of Exhibits Exhibit A Master Lease Exhibit B Title Matters Exhibit C Form of Assignment of SITV Sublease Exhibit D Form of Letter of Credit EX-10.2 3 d74702_ex10-2.txt SERVICES AGREEMENT Exhibit 10.2 Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. BROADCAST FACILITIES, Inc. SERVICES AND FACILITIES AGREEMENT This Agreement is made as of April 1, 2008 and is by and between Broadcast Facilities Inc., ("BFI"), a Delaware Corporation, located at 3030 Andrita Street, Los Angeles, California 90065 and Playboy Entertainment Group, Inc. ("PEGI"), a Delaware Corporation with offices located at 2706 Media Center Dr., Los Angeles, California 90065, and whose telephone and facsimile numbers are (323) 276-4000 and (323) 276-4505, respectively ("Customer"). RECITALS A. Whereas, BFI currently leases fully protected capacity on satellite transponders from Intelsat USA Sales Corp. ("Intelsat") and has sufficient capacity thereon to resell to Customer transponder capacity sufficient for the transmission of Customer's current thirteen (13) standard definition ("SD") television channels (the "SD Channels") and currently sufficient for Customer's high definition ("HD") channel(s) ***** (the "HD Channels" and together with the SD Channels, the "Channels") should they be launched by Customer in the future to cable MSOs, DTH operators and SMATV systems in North America (collectively, the "Digital Channel Services"), all in accordance with the technical specifications set forth in Exhibit A; B. Whereas, BFI operates the Andrita Studios, an integrated production, post-production, network origination and satellite transmission facility at 3030 Andrita Street in Los Angeles, California ("Andrita") and BFI desires to provide to Customer the Digital Channel Services along with certain additional services including: (i) compression, encryption, downlinking of Customer's Playboy en Espanol Channel and uplinking of the SD Channels (collectively with the Digital Channel Services and as further specified in Section 1(a), the "Transmission Services"), all in accordance with the details and technical specifications set forth in Exhibits A & B; (ii) network playback of all of the SD Channels (excluding Playboy en Espanol), including Decocast services for four (4) of the SD Channels (as further specified in Section 1(b), the "Network Playback Services" and, together with the Transmission Services, the "Origination Services"), all in accordance with the technical specifications set forth in Exhibit B; (iii) a dedicated radio studio (the "Andrita Radio Studio"), in accordance with the technical specifications set forth in Exhibit B and as further specified in Section 1(c); (iv) post production services that include: one (1) dedicated Final Cut Pro editing bay and ***** dedicated Final Cut Pro edit stations (as further specified in Section 1(d), the "Dedicated Post Production Services") in accordance with the technical specifications set forth in Exhibit B; (v) VOD encoding, VOD concatenation and VOD propagation to cable headends, Telco systems and DTH operators via CMC, inDemand, or direct delivery via hard drive or direct digital file delivery via fiber circuits or the internet (the "VOD Services") in accordance with the technical specifications set forth in Exhibit B, and as further specified in Section 1(e); (vi) five (5) closed offices and twenty-one (21) office cubes including associated services such as parking, janitorial services, security, access to common conference room facilities (all such services to be provided at least at the same level and quality as they were provided as of the date hereof) (the "Dedicated Office Facilities") in accordance with the specifications set forth in Exhibit B and as further specified in Section 1(f); and (vii) tape vault space for Customer's tapes that are required for the Network Playback Services, the Dedicated Post Production Services, the VOD Services or the Additional Services, said tape vault to be exclusive to Customer, managed by Customer's employees and to only contain active tapes (the "Tape Vault Services"). The Transmission Services, the Network Playback Services, the Andrita Radio Studio, the Dedicated Post Production Services, the VOD Services, the Dedicated Office Facilities and the Tape Vault Services shall collectively be referred to as the "Dedicated BFI Services." In addition, BFI will have a right of first refusal to provide Customer with physical tape duplication services and conversion between the standards set forth on the Playboy Rate Card, provided Customer intends to use a non-affiliated third party for these services and provided BFI meets generally accepted industry pricing, quality and delivery standards (the "Duplication/Conversion Services"), as described in Section 1(h). In addition, Customer will have the option to secure certain optional services, including but not limited to encoding services other than the VOD Services, production services, supplemental post-production services including additional Final Cut Pro editing bays, audio suites, voice over booth(s), graphics bay(s), digital archive services, IPTV services, Decocast services in addition to the four (4) dedicated Decocast services provided in the Network Playback Services, off-air compliance recording and fiber connectivity, all as set forth in Exhibit C (collectively, the "Optional Services") and Exhibit D (the "Playboy Rate Card") and as further specified in Section 1(i). In addition, in the event Customer launches HD Channel(s) during the Term, BFI will provide the HD compression, HD uplink and HD space capacity (collectively, the "HD Transmission Services"), and the HD network playback (the "HD Network Playback Services") required to originate these HD Channel(s), provided BFI has the capacity and facilities available for the HD Channel(s) *****, all as further specified in Sections 1(j) and 1(k). In addition to the Dedicated Office Facilities, BFI will also provide five (5) closed offices and five (5) office cubes including associated services such as parking, janitorial services, security, access to common conference room facilities (all such services to be provided at least at the same level and quality as they were provided as of the date hereof) (the "Additional Office Facilities") in accordance with the specifications set forth in Exhibit B and as further specified in Section 1(l). The Dedicated BFI Services, the Duplication/Conversion Services, the Optional Services, the HD Transmission Services, the HD Network Playback Service and the Additional Office Facilities shall collectively be referred to as the "Andrita Services;" and C. Whereas, Customer currently operates 13 SD Channels and manipulates and distributes the SD Channels and additional media to multiple broadcast television platforms including but not limited to Cable MSOs, DTH Operators, SMATV Systems, and VOD Platforms and whereas Customer and BFI have simultaneous with the execution of this Agreement entered into an agreement through which BFI has purchased certain assets from 2 Customer or its affiliates necessary to provide the Andrita Services and under which Customer has committed to enter into a service agreement to purchase the Andrita Services from BFI under the terms and conditions contained herein during the Term of this Agreement as defined below; Now, therefore, in consideration of the mutual covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Services and Facilities: BFI will provide Customer the following services and facilities from and in BFI's facilities at Andrita on the terms and conditions set forth herein: (a) The Transmission Services, in accordance with the details and technical specifications set forth in Exhibits A & B, using the Galaxy 23 ("G 23") Transponder 5, 15 and/or 23 or such other satellite transponder(s) and/or satellite(s) that may replace G 23 Transponder 5, 15 or 23, or their replacements due to the failure of G 23 Transponders 5, 15 or 23 to meet technical specifications materially equivalent to those set forth in Exhibit A (the "BFI SD Transponders"). The Transmission Services will be provided for the entire Term. The Transmission Services will initially be provided for 13 SD Channels (including Playboy TV en Espanol). ***** The parties acknowledge that the Channel known as Club Jenna XX.5 will terminate at midnight EST on March 27, 2008. If during the Term Customer commences the origination of any additional SD Channel(s), Customer must utilize BFI for the Transmission Services required to originate said additional Channel(s) (the "Additional SD Channel(s)") and BFI will provide Customer with the Transmission Services for the Additional SD Channel(s) pursuant to this Agreement, provided BFI has the capacity and facilities available for the Additional SD Channel(s). Upon Customer's reasonable request at any time, BFI shall, within five (5) days, notify Customer of the number of Additional SD Channel(s) for which BFI has the capacity and facilities to provide Transmission Services at such time. BFI shall be responsible for responding to any failure of a BFI SD Transponder and/or G23, including providing all appropriate notices to Customer. Customer and BFI shall reasonably cooperate with each other in connection with the response to any such failure, including technical communications to third parties. Customer shall be solely responsible for providing notice of any such failure to third parties, including but not limited to Customer's affiliates. For all purposes of this agreement, an "affiliate" shall mean with respect to any "person" (which shall mean an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity or a governmental entity (or any department, agency, or political subdivision thereof)), any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person; and for purposes of this definition, "control," as used with respect to any person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such 3 person, whether through the ownership of voting securities, by agreement or otherwise. For purposes of this definition, the terms "controlling," controlled by" and "under common control with" shall have correlative meanings. (b) The Network Playback Services, in accordance with the details set forth in Exhibit B, all specifically for creation, playback and transmission of the SD Channels and data appurtenant thereto. The Network Playback Services will be provided for the entire Term. The Network Playback Services will initially be provided for 12 SD Channels (not including Playboy TV en Espanol). ***** The parties acknowledge that the Channel known as Club Jenna XX.5 will terminate at midnight EST on March 27, 2008. If during the Term Customer commences the origination of any Additional SD Channel(s) pursuant to this Agreement, Customer must utilize BFI for the Network Playback Services required to originate said Additional SD Channels and BFI will provide the Network Playback Services for the Additional SD Channel(s), provided BFI has the capacity and facilities available for the Additional SD Channel(s). Upon Customer's reasonable request at any time, BFI shall, within five (5) days, notify Customer of the number of Additional SD Channel(s) for which BFI has the capacity and facilities to provide Network Playback Services at such time. (c) The Andrita Radio Studio (as it is currently configured or with improvements thereto made at BFI's sole discretion, unless Customer requests in writing that BFI provide additional equipment, software and/or functionality for the Andrita Radio Studio (and upon such a request, the parties shall negotiate in good faith regarding additional fees and charges), in accordance with the details set forth in Exhibit B. The Andrita Radio Studio will be provided for the first thirty-six (36) months of the Term (the "Andrita Radio Studio Term"). At Customer's option, one hundred and twenty (120) days prior to the end of the Andrita Radio Studio Term, BFI and Customer will commence good faith negotiations on the terms and conditions for an extension of the Andrita Radio Studio Term. In the event BFI and Customer fail to reach agreement on the terms and conditions for an extension of the Andrita Radio Studio Term prior to the end of the Andrita Radio Studio Term, BFI shall be free from any obligation to provide Customer with the Andrita Radio Studio facilities after the Andrita Radio Studio Term. (d) The Dedicated Post Production Services, in accordance with the details set forth in Exhibit B. The Dedicated Post Production Services will be provided for the first thirty-six (36) months of the Term (the "Dedicated Post Production Services Term"). Customer shall have the option to extend the Dedicated Post Production Services Term on the then-existing terms and conditions for the remainder of the Term, provided Customer provides BFI with written notice thereof no later than ninety (90) days prior to the end of the Dedicated Post Production Services Term. 4 (e) The VOD Services including VOD encoding, VOD concatenation and VOD propagation to cable headends, Telco systems and DTH operators ***** all in accordance with the details set forth in Exhibit B. The VOD Services will be provided for the Term. (f) The Dedicated Office Facilities, in accordance with the details set forth in Exhibit B. The Dedicated Office Facilities will be provided for the first thirty-six (36) months of the Term (the "Dedicated Office Facilities Term"). Customer shall have the option to extend the Dedicated Office Facilities Term on the then-existing terms and conditions for the remainder of the Term, provided Customer provides BFI with written notice thereof no later than ninety (90) days prior to the end of the Dedicated Office Facilities Term. (g) The Tape Vault Services, in accordance with the details set forth in Exhibit B. The Tape Vault Services shall be provided for the Term. (h) The Duplication/Conversion Services in accordance with the details set forth in Exhibit B and at the rates set forth on the Playboy Rate Card shall be provided for the Term; ***** (i) The Optional Services, at Customer's option and in accordance with and subject to the details set forth in Exhibit C and the Playboy Rate Card. Customer may elect to receive any of the Optional Services at any time during the Term, subject to BFI having sufficient capacity (as solely determined by BFI) available at the time of Customer's request to provide the requested services. Exhibit D may be modified at any time during the Term, upon mutual agreement of BFI and Customer. (j) The HD Transmission Services, and in accordance with the details and technical specifications set forth in Exhibits A and Exhibit B, using the Galaxy 13 ("G 13") Transponder 11 or 13, or such other satellite transponder(s) and/or satellite(s) that may replace G 13 Transponder 11 or 13 or their replacements due to the failure of G 13 Transponder 11 or 13 to meet technical specifications materially equivalent to those set forth in Exhibit A (the "BFI HD Transponder" and together with the BFI SD Transponders, the "BFI Transponders"); provided that BFI has the capacity and facilities available to provide the HD Transmission Services as determined on a HD Channel by HD Channel basis. The HD Transmission Services will be provided from the date they commence for the remainder of the Term. Customer must utilize the HD Transmission Services for all HD Channels it launches during the Term, ***** Upon Customer's request at any time, BFI shall, within five (5) days, notify Customer of the number of HD Channels for which BFI has the capacity and facilities to provide HD Transmission Services at such time. BFI shall be responsible for responding to any failure of a BFI HD 5 Transponder and/or G13, including providing all appropriate notices to Customer. Customer and BFI shall reasonably cooperate with each other in connection with the response to any such failure, including technical communications to third parties. Customer shall be solely responsible for providing notice of any such failure to Customer's third parties, including but not limited to Customer's affiliates. (k) The HD Network Playback Services, in accordance with the details in Exhibit B, all specifically for the creation, playback and transmission of HD Channel(s) and data appurtenant thereto; provided that BFI has the capacity and facilities available to provide the HD Network Playback Services as determined on a HD Channel by HD Channel basis. The HD Network Playback Services will be provided from the date they commence for the remainder of the Term. Customer must utilize the HD Network Playback Services for all HD Channels it launches during the Term, ***** Upon Customer's reasonable request at any time, BFI shall, within five (5) days, notify Customer of the number of HD Channels for which BFI has the capacity and facilities to provide HD Network Playback Services at such time. (l) The Additional Office Facilities, in accordance with the details set forth in Exhibit B. The Additional Office Facilities will be provided for the first forty-five (45) days of the Term (the "Additional Office Facilities Term"). Customer shall have the option to extend the Additional Office Facilities Term on the then-existing terms and conditions for the next forty-five (45) days of the Term by providing BFI with written notice thereof. (m) Notwithstanding anything to the contrary in this Agreement, this Agreement shall only apply to content transmitted via broadcast, cable television, DTH, SMATV or any Telco system (e.g. Verizon, AT&T, etc.), and shall not apply to any content that is transmitted over the Internet or any equivalent or successor technology (including transmission via any IP or TCP/IP protocol, or any equivalent or successor protocols), unless said Internet transmission is incorporated in the transmissions and/or protocol utilized by Customer's broadcast, cable television, DTH, SMATV, or Telco systems. 2. Customer's Channels. (a) Customer shall be solely responsible for the content of the Channels and the creation and delivery of said content to BFI, and Customer shall have the sole and exclusive right to license the reception of the Channels. BFI shall have no rights whatsoever to the content of the Channels except those required to perform the Andrita Services reflected herein as directed to do so by the Customer. BFI shall have no right to alter in any manner the content of the Channels except as 6 required to perform the Andrita Services reflected herein, as directed by Customer. Customer will be solely responsible for all billing and collection from all persons and entities that have been authorized to receive the Channels. BFI shall not be entitled to any of such sums collected. (b) ***** (c) BFI shall only authorize or de-authorize headends (or any similar delivery mechanism) as instructed in writing by Customer, and shall promptly do so upon its receipt of any such instruction. BFI shall provide Customer with a list of all Customer IRDs currently authorized by BFI's encryption system upon Customer's request. (d) From time to time during the Term, at Customer's request, BFI shall reasonably cooperate with Customer in connection with additional projects involving the Andrita Services, so long as such cooperation does not require BFI to incur any additional, non de minimis costs. To the extent that such cooperation would require BFI to incur any new additional, non de minimis costs, BFI shall notify Customer and the parties shall meet to discuss whether to alter or continue the proposed project, and any addition fees or charges to be paid by Customer, in good faith. 3. Term. BFI shall commence providing the Andrita Services on the date hereof (the "Commencement Date"), and this Agreement shall continue for a period of sixty (60) months from the Commencement Date (the "Initial Term"). During the Term, BFI shall provide each Andrita Service to Customer for the period set forth in the applicable provision of Section 1. Customer shall have the option to extend the Initial Term for an additional thirty-six (36) months on terms and conditions that are substantially the same as the then-existing terms and conditions (the "Option Term"). Customer shall provide written notice to BFI of its intention to exercise the Option Term no later than one hundred and twenty (120) days prior to the expiration of the Initial Term. The "Term" shall consist of the Initial Term together with the Option Term and the Transition Period, if applicable, but in any case shall end at the termination of this Agreement if terminated earlier pursuant to the terms hereof. 4. Fees. As full consideration for the Dedicated BFI Services, HD Transmission Services and HD Network Playback Services, Customer shall pay to BFI per month (prorated for partial months) the following amounts, as set forth below (the "Monthly Charges"), as well as any fees set forth below for Duplication/Standards Conversion Services and/or Optional Services, as applicable ("Additional Charges"). (a) Subject to Section 4(b), Customer shall remit to BFI the following amounts: 7 (i) The Transmission Services: ***** per month per SD Channel (ii) The Network Playback Services: ***** per month per SD Channel with an annual ***** increase on each anniversary of the Commencement Date. (iii) The Andrita Radio Studio: ***** per month with an annual ***** increase on each anniversary of the Commencement Date. (iv) The Dedicated Post Production Services: ***** per month for one Final Cut Pro edit bay with an annual ***** increase on each anniversary of the Commencement Date. ***** per month for ***** Final Cut Pro work stations with an annual ***** increase on each anniversary of the Commencement Date. (v) The VOD Services: The rates reflected in Exhibit D with an annual ***** increase on each anniversary of the Commencement Date. (vi) The Dedicated Office Facilities: ***** per square foot per month with an annual ***** increase on each anniversary of the Commencement Date. (vii) Tape Vault Services: 8 ***** per month with an annual ***** increase on each anniversary of the Commencement Date. (viii) Duplication/Conversion Services The rates reflected in Exhibit D with an annual ***** increase on each anniversary of the Commencement Date. (ix) The Optional Services: The rates reflected in Exhibit D with an annual ***** increase on each anniversary of the Commencement Date. (x) The HD Transmission Services: The prevailing rate that BFI generally charges to third parties for substantially equivalent HD Transmission Services at the time the Customer HD Channel is launched. ***** (xi) The HD Network Playback Services: The prevailing rate that Customer is paying for Network Playback Services for SD Channels at the time the Customer HD Channel is launched. (xii) The Additional Office Facilities: ***** per square foot per month with an annual ***** increase on each anniversary of the Commencement Date, if applicable. (b) The Monthly Charges (for the Dedicated BFI Services (other than the VOD Services), HD Transmission Services and HD Network Playback Services, as applicable) will be paid in advance and shall be due no later than the first day of the month in which the applicable Dedicated BFI Services are to be rendered (the "Due Date"). As a courtesy, BFI shall send an invoice for the Monthly Charges thirty (30) days prior to the Due Date, provided that Customer's failure to receive an invoice shall not relieve Customer of its obligation to pay the Monthly Charges by the Due Date. ***** 9 (c) The Additional Charges for the VOD Services, the Additional Office Facilities, the Duplication/Conversion Services and the Optional Services, as detailed in Exhibit C and Exhibit D, shall be invoiced after the applicable services are rendered to Customer and payment shall be due within thirty (30) days after Customer's receipt of the invoice, unless otherwise specified. (d) All payments shall be made via electronic transfer to: BFI's account as follows: Incoming Standard Domestic Wiring Instructions: Pay to Bank: ***** Address: ***** ABA: ***** Beneficiary: Broadcast Facilities Inc 3030 Andrita Street Los Angeles, CA 90065 Account to Credit ***** ACH Instructions Same as standard domestic wiring instructions, plus specify account type: checking SWIFT Method Instructions: Bank Name: ***** Swift Code: ***** Account Number: ***** Account Name: ***** Beneficiary Customer: ***** (e) The Monthly Charges and Additional Charges (as applicable) shall apply to each month, or fraction thereof (paid on a pro-rata basis), that the applicable Andrita Services are provided to Customer and accrue through and include the date that any Andrita Services are discontinued in whole or in part, as provided for herein. Each month will be considered to have thirty (30) days for billing purposes. Customer may dispute any or all charges after receipt of the applicable invoice. ***** Any late payments of undisputed amounts due and payable hereunder to BFI shall be with interest at the annual rate equal to ***** computed from the Due Date (with respect to Monthly Charges) or from the date that is thirty (30) days following Customer's receipt of the applicable invoice for Additional Charges, continuing until the date on which payment is made. If Customer fails to make payment of an undisputed amount when due, then BFI shall have the right to discontinue any of the Andrita Services and/or terminate this Agreement 10 ten (10) days following BFI's written notice to Customer of such breach that is not cured by Customer within such ten (10) day period. ***** In the event the Agreement is terminated by BFI due to any uncured breach by Customer (including Customer's failure to pay any amounts due pursuant to this Agreement and failure to cure such default within ten (10) days after notice thereof), BFI shall be entitled to retain any deposit hereunder in addition to any other rights or claims BFI may have pursuant to this Agreement and/or by law. (f) Records; Inspection and Audit Rights. (i) During the Term *****, BFI shall maintain accurate records arising from or related to the Andrita Services provided hereunder, including accounting records and documentation produced in connection with the provision of the Andrita Services; provided, that BFI shall maintain such records for any longer duration required by any laws, statutes, ordinances, regulations, rules, notice requirements, court decisions, agency decisions, directives and orders of any government and any governmental department or agency that is applicable to Customer and of which BFI has reasonable prior notice, and Customer shall pay any incremental, out-of-pocket, non-de minimis costs incurred by BFI in connection with any such longer retention. (ii) ***** 5. Performance Standard. BFI shall endeavor to meet the industry standard of 99.95% availability for the Network Playback Services, the Transmission Services (excluding the Digital Channel Services) and the HD Network Playback Services and the HD Transmission Services (excluding the Digital Channel Services), should they be applicable, of the Customer-provided media in accordance with the Customer-provided playlist (the "Performance Standard Services") calculated on a Channel by Channel basis on an annual basis during the Term of this Agreement. ***** 6. Service Interruptions. Notwithstanding any contrary provision herein and except only to the extent resulting from BFI's willful misconduct or intentional breach of this Agreement, BFI shall not be responsible for and shall not be in default of this Agreement as a result of, nor shall it be held liable for any damages, claims, losses, or costs and expenses on account of, any interruption of the Andrita Services, including the Origination Services, to the extent that such interruption or failure occurs due to any of the following: (i) damage to any equipment or interruptions in the Andrita Services caused by electrical storms, fire, weather, flood, natural disaster, national emergency or war, sabotage, riots, governmental authority (only where such act of government or governmental authority is not caused by BFI's intentional breach of its obligations under this Agreement, acts of God, willful or criminal misconduct of third parties beyond BFI's 11 reasonable control, or other forces outside the control of BFI; (ii) interference from other communications systems, whether licensed or not, that use the same frequency bands as the Transmission Services herein, provided, that BFI shall use commercially reasonable efforts in its reasonable discretion to mitigate or eliminate any such interference; (iii) any interruption or out of specification performance of the BFI Transponder, any associated satellite transponders; (iv) conditions, which are beyond the control of BFI, that threaten the safety of operations and maintenance personnel; (v) occasional interruptions due to passing of the sun within the beamwidth of any associated BFI Transponder during the spring and fall equinox periods beyond BFI's reasonable control and customary care in the industry; (vi) degradation or interruptions of the Channel due to protection switching; (vii) outage or interruption or degradation due to atmospheric attenuation of the Channel; (viii) such planned interruptions for testing or maintenance as may be agreed to in advance between Customer and BFI; (ix) any failure of Customer to fulfill an obligation hereunder where the failure of Customer to perform such obligation causes a service interruption; and/or (x) compliance by BFI with action by any court, agency, legislature or other governmental authority that makes it unlawful for BFI to provide the Andrita Services or any part thereof in accordance with this Agreement, in each case only where such action is not caused by BFI's intentional breach of its obligations under this Agreement ***** For the sake of clarity, BFI shall not be responsible for any service interruptions for: (x) services or facilities arranged by the Customer and not provided by BFI, (y) any feeds into BFI provided by third parties or Customer whether arranged by BFI or not and any interruption caused by or related to any media or playlist provided by or on behalf of Customer. ***** 7. Representations, Warranties and Covenants. (a) By BFI. BFI warrants, represents and covenants to Customer that: (i) it is in compliance with and will throughout the Term continue to comply in all material respects with all laws with respect to its rights and obligations under this Agreement; (ii) it has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) it shall provide the Andrita Services in accordance with and subject to the terms and conditions set forth in this Agreement, and in a generally professional and workerlike manner; (iv) it has a valid and enforceable written agreement with Intelsat for satellite transponder capacity which extends beyond the Term of this Agreement, such agreement as of the date hereof provides BFI with the necessary 12 satellite transponder capacity for and allows BFI to provide the relevant Andrita Services specified in this Agreement, and BFI shall maintain such agreement in full force during the Term; (v) subject only to paragraph 5, it makes no representation or warranty, expressed or implied, regarding the performance of the BFI Transponders and/or the equipment utilized in providing the Andrita Services, including without limitation the compression system, the encoder and third party services, including those services and/or equipment provided by Intelsat, utilized in the performance of the Andrita Services, provided that BFI will take all necessary steps to enforce its rights against Intelsat for the benefit of Customer; (vi) it shall not use the name of or logo of the Channels or the names, titles or logos of any of its programs, or the names, voices, photographs, likenesses or biographies of any individual participant or performer in, or contributor to, any program or any variations thereof, for any purposes other than in the provision of the Andrita Services as expressly authorized herein, without the express authorization to do so (except in each case for non-commercial use permitted under applicable law); (vii) it has obtained, and shall maintain in full force during the Term hereof, such federal, state and local authorizations as are material and are necessary to operate the business it is conducting in connection with its rights and obligations under this Agreement; (viii) it has no knowledge of any misrepresentation, breach of warranty or covenant made by BFI hereunder; (ix) execution and performance of its obligations hereunder does not constitute a breach of any other agreement to which BFI or its controlled affiliates are a party; (x) it will, or will cause its affiliates to, comply in all material respects with its agreement with Intelsat; and (xi) ***** (b) By Customer. Customer warrants, represents and covenants to BFI that: 13 (i) it is in compliance with and will throughout the Term continue to comply in all material respects with all laws applicable to, or with respect to, the Channels and the provision of the Channels to BFI, Radio Content produced by or for Customer, and Customer's rights and obligations under this Agreement, including without limitation, Federal Communications Commission rules and regulations governing the Channels and Radio Content, if any, all relevant provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Communications Act of 1934, as amended and any regulations promulgated under any applicable law or any of the foregoing; (ii) it has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) it shall provide the Channels to BFI at its sole cost and expense (together with any necessary equipment as the parties agree to be added, if any, including without limitation, backup or reserve equipment as Customer shall require to decode Customer-provided inbound feeds), in accordance with and subject to the terms and conditions set forth in this Agreement; (iv) it has obtained, and shall maintain in full force during the Term, such federal, state and local authorizations as are material and necessary to operate the business it is conducting in connection with its rights and obligations under this Agreement. (v) It has obtained or will obtain at its sole expense all rights necessary for the delivery of the Channels to BFI and for BFI to provide the applicable Andrita Services with respect to such Channel (but expressly excluding the intellectual property rights specifically associated with the Andrita Services), including, without limitation, obtaining all necessary Intellectual Property, including without limitation, all trademarks, copyrights, licenses and any and all other proprietary, Intellectual Property and other use rights necessary in connection therewith, and at all times during the Term obtaining all necessary rights, title and interest in and to the names, titles or logos of the Channels (or any successors thereto) and Radio Content, or any of their programs, or the names, voices, photographs, music, likenesses or biographies of any individual participant or performer in, or contributor to, any program or Radio Content or any variations thereof and to perform its obligations hereunder; (vi) it shall not, without BFI's prior written approval, use any name or logo of BFI (including any name or logo associated with Andrita Studios) for any purpose (except for non-commercial use permitted under applicable law); (vii) to Customer's actual knowledge, there is no actual or pending investigation involving the Channels (or any content included in the Channels) or Radio Content or any pending proceeding against Customer (or any of its principals or affiliated companies) for the violation of any federal, state or local law or regulation, as applicable; 14 (viii) there are no outstanding (or, to the best of Customer's knowledge, threatened) judgments or pending claims, liens, charges, restrictions, or encumbrances on or related to the Channels or any programming provided as part thereof or any Radio Content that may materially interfere with BFI's rights or obligations under this Agreement; (ix) it has no knowledge of any misrepresentation, breach of warranty or covenant made by Customer hereunder; and (x) execution and performance of its obligations hereunder does not constitute a breach of any other agreement to which Customer or its controlled affiliates are a party, and does not violate the rights (including intellectual property rights) of any person or entity. (xi) Insurance. a) Customer will provide and maintain during the Term, the following insurance coverages: 1. Statutory Workers' Compensation and Employers' Liability insurance with a limit of liability on the latter of not less than ***** Customer shall use commercially reasonable efforts to cause its Workers' Compensation carrier(s) to waive insurer's Right of Subrogation with respect to BFI and affiliated companies. 2. A Comprehensive General Liability Insurance and/or Excess Umbrella Liability policy which shall contain coverage parts for blanket contractual (excluding breach of contract coverage), broad form property damage, third party property damage, severability of interest, and primary, not contributing coverage. Customer shall provide coverage with primary limits of liability and/or excess umbrella liability coverage with not less than ***** combined single limit each occurrence. 3. Customer shall waive all rights of subrogation on behalf of any insurance company insuring their interests. b) Prior to use of any Andrita facilities, Customer shall cause its insurance carrier(s) to add BFI and its respective successors, assigns, licensees, officers, agents, directors, owners, shareholders, and employees as additional insureds as their respective interests may appear hereunder. c) Customer will deliver to BFI original certificates of insurance and policy endorsements evidencing the insurance coverage herein specified. Thirty (30) days notice of cancellation shall be given to BFI prior to cancellation or non-renewal. If Customer fails to deliver said insurance certificate(s), BFI's failure to request delivery shall in no way be construed as a waiver of its obligation to provide the insurance coverage specified in these paragraphs. 15 d) Failure by Customer to comply with the provision of this Insurance section could result in suspension of the use of the Andrita facilities as determined by BFI, effective upon thirty (30) days' prior written notice to Customer, unless the failure is cured during such period. 8. ***** 9. ***** 10. ***** 11. Force Majeure. Except as herein specifically provided to the contrary, neither BFI nor Customer shall have any rights against the other party hereto for the non-operation, malfunction, or failure of facilities or equipment or the non-furnishing of the Andrita Services by BFI or the Channels by Customer if such non-operation, malfunction, failure or non-furnishing is due to any cause beyond the other party's reasonable control, which may include: an act of God, fire, lockout, flood, tornado, hurricane, strike or other labor dispute, riot or civil commotion, earthquake, war, act of government or governmental instrumentality (whether federal, state or local and in each case, only where such act of government or governmental instrumentality is not caused by the other party's intentional breach of its obligations under this Agreement, or other cause beyond such party's reasonable control (all together, "Force Majeure"). For the avoidance of doubt, a "cause beyond a party's reasonable control" will not include occurrences arising from the willful misconduct or negligence of the party asserting protection hereunder. BFI shall take all reasonable actions available to it to restore the Andrita Services following a Force Majeure event as soon as practical. ***** 12. ***** 13. Termination. This Agreement may be terminated prior to the end of the Initial Term or Option Term, if applicable, as follows: (a) in the event of a breach of any material term and/or condition, representation and/or warranty contained herein (except as otherwise provided in Section 4 (e) or Section 5), the non-breaching party may terminate upon ***** prior written notice providing, with reasonable specificity, the cause of such termination, unless such breach is cured during such period or if incapable of cure during such period then good faith efforts to cure have commenced, providing in such case cure will be effected in no more than ***** 16 (b) by BFI, as provided in Section 4, in the event of a failure by Customer to make payment of the Monthly Charges and cure such failure within ***** after notice thereof; (c) if a Force Majeure event continues for more than ***** and precludes a party from performing its obligations hereunder, the other party may terminate this Agreement upon written notice of such termination; and (d) by Customer in part on a Channel-by-Channel basis in the event that BFI fails to meet or exceed the Performance Standard, as provided in Section 5 of this Agreement. 14. ***** 15. ***** 16. ***** 17. Governing Law and Jurisdiction. This Agreement shall be governed by and interpreted under the laws of the State of California, without regard to conflict of law rules. The parties agree that all litigation related to this Agreement shall be brought in any state or federal court in Los Angeles County and each party hereby submits itself to the exclusive in personam jurisdiction of such court for purposes of any such litigation. Neither party shall object to venue in any such court on the grounds of an inconvenient forum or otherwise. 18. Assignment. Neither party may assign this Agreement without the express written consent of the other party, not to be unreasonably withheld, provided that: (a) Customer may assign its rights and obligations under this Agreement in connection with a merger or sale of all or substantially all of Customer's assets, or to any purchaser or transferee of some or all of the Channels, including, but not limited to, any joint venture in which Customer is a participant; provided that the assignee is at least as capable as Customer in fulfilling Customer's obligations under this Agreement (including payment obligations) and such assignee agrees to be bound by all of the terms and obligations of Customer pursuant to this Agreement as reasonably determined by BFI; and (b) BFI may assign its rights and obligations under this Agreement in connection with a merger or sale of all or substantially all of BFI's assets; provided that the assignee is at least as capable as BFI of providing the services following the transaction and such assignee agrees to be bound by all of the terms and obligations of BFI pursuant to this Agreement as reasonably determined by Customer; provided, further, that, notwithstanding the foregoing, BFI may not assign any of its rights or obligations hereunder to any third party that is a competitor of Customer or its affiliates, where such company's business is primarily the adult 17 entertainment media industry. Subject to the foregoing, it is acknowledged that this Agreement, and the terms and conditions contained herein, shall be binding on all successors and assigns of the parties. 19. Notices. All notices, requests, demands, consents, directions and other communications provided for hereunder shall be in writing and be either delivered by facsimile transmission ("fax"), with confirmed electronic receipt, or by means of U.S. certified mail, return receipt requested; if to BFI to 3030 Andrita Street, Los Angeles, California 90065, ***** and if to Customer at Customer's address set forth on the first page of this Agreement; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All notices shall, when delivered via fax shall be deemed effective on the date receipt of such facsimile is so confirmed, and when delivered via FedEx Express, UPS or other overnight carrier on the earlier of the actual delivery date or next business day. 20. Confidentiality. BFI and Customer shall hold in confidence the information contained in, or exchanged in connection with, this Agreement, however, either BFI or Customer may disclose the existence of this Agreement, but shall not disclose any specific terms and/or conditions including, but not limited to, the Monthly Charges and Additional Charges. Nothing contained herein shall prevent Customer from disclosing such technical information as is required for reception of the Channel to the distribution systems. Notwithstanding the foregoing, disclosure by either party is permitted: (a) to its principals, auditors, attorneys, investors, lenders, insurance agents, and proposed and actual successors in interest (in each case, who are bound by confidentiality obligations with respect to such disclosure), and (b) only to the extent necessary to comply with law, enforce its rights and perform its obligations under this Agreement. 21. Entire Agreement. This Agreement constitutes the entire Agreement between the parties with respect to the transactions contemplated herein and may not be modified or changed except in writing executed by all parties hereto. This Agreement supercedes and merges all prior written or oral agreements, communications, commitments, or understandings with respect to the matters provided for herein. Each party acknowledges that it is entering into this Agreement in reliance only upon the provisions expressly herein set forth, and not upon any covenants, representations, warranties or other considerations not set forth herein, and that there are no warranties, representations or covenants which extend beyond the description of the express provisions of this Agreement. 22. Waivers. Any waiver of any provision of this Agreement must be in writing and signed by the party whose rights are being waived. No waiver of any right, obligation or breach of any provision hereof shall be or be deemed to be a waiver of any other or similar right or obligation, or preceding or subsequent breach of the same or any other provision of this Agreement. The failure of Customer or BFI to enforce or seek enforcement of the terms of this Agreement following any breach shall not be construed as a waiver of such 18 breach. All remedies, whether at law, in equity or pursuant to this Agreement shall be cumulative. 23. Relationship. Nothing in this Agreement shall be deemed to create a relationship of joint venture, principal-agent or partnership between the parties, and neither shall hold itself out in its advertising or in any manner that would indicate any such relationship between the parties. 24. Taxes. Customer shall pay, or if required BFI will collect from Customer and forward, to the relevant taxing authority, and Customer will hold BFI harmless from any of the following imposed on Customer or BFI by such taxing authority: all sales, use, universal service fee, excise and similar taxes (including, without limitation, any fees payable to local or state franchising authorities) and any other charges now or hereafter imposed upon Customer or the Channels or any part thereof (including, without limitation, any tax or charge based upon goods or services furnished to Customer by BFI, which goods or services are then passed on by Customer). 25. Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein; provided, however, that both parties shall negotiate in good faith with respect to an equitable modification of the provision held to be invalid or unenforceable and provisions logically related to it. 26. No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. 27. Attorney's Fees and Costs. If any legal action or other proceeding is brought for the enforcement of this Agreement or in connection with any other matter related to this Agreement, the successful or prevailing party shall be entitled to recover its reasonable attorneys' fees and other costs incurred in connection with such action or proceeding in addition to any other relief to which such party may be entitled. 28. Non-Recourse. Notwithstanding anything contained in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that each and every representation, warranty, covenant, undertaking, or agreement made in this Agreement was not made nor intended to be made as a personal representation, warranty, covenant, undertaking, or agreement on the part of any individual of either party, and any recourse, whether in common law, in equity, by statue or otherwise, against any individual is hereby forever waived and released. 19 29. Headings. The headings, captions and arrangements used in this Agreement are, unless specified otherwise, for convenience of reference only and shall not be deemed to limit, amplify or modify the terms of this Agreement nor affect the meaning thereof. 30. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all such counterparts together shall constitute but one and the same instrument. The parties also agree that this Agreement shall be binding upon the electronic transmission by each party of a signed signature page thereof to the other party. If such an electronic transmission occurs, the parties agree that they will each also immediately post, by FedEx, a fully-executed original counterpart of the Agreement to the other party, provided that failure to do so or to have evidence of such original signatures shall not affect the binding nature of this Agreement on the parties hereto. 20 In Witness Whereof, the parties hereto have entered into this Agreement as of the date first above written. PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Howard Shapiro ---------------------------------------------- Name: Howard Shapiro Title: Vice President and Secretary BROADCAST FACILITIES, INC. By: /s/ Simon Bax ---------------------------------------------- Name: Simon Bax Title: Chief Executive Officer and Secretary Signature Page to Services and Facilities Agreement EX-31.1 4 d74702_ex31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Christie Hefner, Chairman of the Board, Chief Executive Officer and Director of Playboy Enterprises, Inc., or the registrant, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. for the quarter ended June 30, 2008; 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 8, 2008 /s/ Christie Hefner -------------- ------------------------------------ Name: Christie Hefner Title: Chairman of the Board, Chief Executive Officer and Director EX-31.2 5 d74702_ex31-2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Linda G. Havard, Executive Vice President 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, 2008; 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 8, 2008 /s/ Linda Havard -------------- --------------------------- Name: Linda G. Havard Title: Executive Vice President and Chief Financial Officer EX-32 6 d74702_ex32.txt SECTION 1350 CERTIFICATION Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Playboy Enterprises, Inc. (the "Company") for the quarterly period ended June 30, 2008, 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. Section 1350, as adopted pursuant to Section 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 8, 2008 /s/ Linda Havard - -------------------------------- Name: Linda G. Havard Title: Chief Financial Officer Date: August 8, 2008 This certification accompanies the Report pursuant to Section 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 Section 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 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-----