-----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, TWoJoRsN3YgnY9+7KGCaGmyov4CUPesiNX81a+l02KvRHCQ32jxXE/qbrJ3+K4yy xDcA2n5i662GJvo07GSjSA== 0000950131-97-003301.txt : 19970513 0000950131-97-003301.hdr.sgml : 19970513 ACCESSION NUMBER: 0000950131-97-003301 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970512 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0000079114 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 362258830 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06813 FILM NUMBER: 97601057 BUSINESS ADDRESS: STREET 1: 680 N LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 10-Q 1 FORM 10-Q 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 March 31, 1997 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 1-6813 PLAYBOY ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2258830 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 680 NORTH LAKE SHORE DRIVE, CHICAGO, IL 60611 (Address of principal executive offices) (Zip Code) (312) 751-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- As of April 30, 1997, there were 4,748,954 shares of Class A Common Stock, par value $0.01 per share, and 15,594,029 shares of Class B Common Stock, par value $0.01 per share, outstanding. PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q ____________ Page Number ----------- Part I. Financial Information Condensed Consolidated Statements of Operations for the Quarters Ended March 31, 1997 and 1996 (Unaudited) 3 Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 1997 and 1996 (Unaudited) 4 Condensed Consolidated Balance Sheets at March 31, 1997 (Unaudited) and June 30, 1996 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements 7-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Part II. Other Information 17-18 2 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Quarters Ended March 31 (Unaudited) (In thousands, except per share amounts)
1997 1996 --------- ---------- Net revenues $ 73,247 $ 66,257 -------- -------- Costs and expenses: Cost of sales (58,853) (56,702) Selling and administrative expenses (9,727) (7,720) -------- -------- Total costs and expenses (68,580) (64,422) -------- -------- Operating income 4,667 1,835 -------- -------- Nonoperating income (expense): Investment income 17 12 Interest expense (87) (202) Other, net (193) (103) -------- -------- Total nonoperating expense (263) (293) -------- -------- Income before income taxes 4,404 1,542 Income tax expense (1,894) (866) -------- -------- Net income $ 2,510 $ 676 ======== ======== Weighted average number of common shares outstanding 20,330 20,007 ======== ======== Net income per common share $ 0.12 $ 0.03 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Nine Months Ended March 31 (Unaudited) (In thousands, except per share amounts)
1997 1996 --------- --------- Net revenues $ 219,250 $ 200,138 --------- --------- Costs and expenses: Cost of sales (180,915) (170,884) Selling and administrative expenses (25,974) (23,125) --------- --------- Total costs and expenses (206,889) (194,009) --------- --------- Operating income 12,361 6,129 --------- --------- Nonoperating income (expense): Investment income 52 41 Interest expense (386) (508) Other, net (291) (137) --------- --------- Total nonoperating expense (625) (604) --------- --------- Income before income taxes 11,736 5,525 Income tax expense (5,364) (2,699) --------- --------- Net income $ 6,372 $ 2,826 ========= ========= Weighted average number of common shares outstanding 20,304 19,996 ========= ========= Net income per common share $ 0.31 $ 0.14 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 4 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) March 31, June 30, 1997 1996 ----------- -------- Assets - ------ Cash and cash equivalents $ 2,001 $ 2,438 Receivables, net of allowance for doubtful accounts of $3,757 and $3,009, respectively 31,441 29,110 Inventories 21,942 23,499 Programming costs 32,745 33,873 Deferred subscription acquisition costs 11,937 9,569 Other current assets 12,063 10,420 -------- -------- Total current assets 112,129 108,909 -------- -------- Property and equipment, at cost 37,951 37,404 Accumulated depreciation (27,208) (25,510) -------- -------- Property and equipment, net 10,743 11,894 -------- -------- Programming costs - noncurrent 12,916 3,362 Trademarks 13,084 11,887 Net deferred tax assets 649 4,191 Other noncurrent assets 11,338 10,626 -------- -------- Total assets $160,859 $150,869 ======== ======== Liabilities - ----------- Short-term borrowings $ 5,000 $ 5,000 Current financing obligations 345 340 Accounts payable 23,589 22,745 Accrued salaries, wages and employee benefits 6,479 6,941 Reserves for losses on disposals of discontinued operations 670 707 Income taxes payable 1,120 970 Deferred revenues 48,291 44,378 Other liabilities and accrued expenses 7,024 8,940 -------- -------- Total current liabilities 92,518 90,021 Long-term financing obligations - 347 Other noncurrent liabilities 8,395 8,218 -------- -------- Total liabilities 100,913 98,586 -------- -------- Shareholders' Equity - -------------------- Common stock, $0.01 par value Class A - 7,500,000 shares authorized; 5,042,381 issued 50 50 Class B - 30,000,000 shares authorized; 16,989,018 and 16,477,143 issued, respectively 166 165 Capital in excess of par value 37,519 36,323 Retained earnings 29,170 22,798 Foreign currency translation adjustment (55) (17) Less cost of treasury stock (6,904) (7,036) -------- -------- Total shareholders' equity 59,946 52,283 -------- -------- Total liabilities and shareholders' equity $160,859 $150,869 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Nine Months Ended March 31 (Unaudited) (In thousands)
1997 1996 --------- --------- Cash Flows From Operating Activities ------------------------------------ Net income $ 6,372 $ 2,826 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation of property and equipment 1,711 1,794 Amortization of intangible assets 1,386 1,323 Amortization of investments in entertainment programming 14,538 13,857 Investments in entertainment programming (22,964) (19,002) Net change in operating assets and liabilities 301 (3,846) Net cash used for discontinued operations (37) (41) Other, net (11) 22 -------- -------- Net cash provided by (used for) operating activities 1,296 (3,067) -------- -------- Cash Flows From Investing Activities ------------------------------------ Additions to property and equipment (570) (471) Acquisitions and funding of equity interests in international ventures (1,150) (3,180) Other, net 125 150 -------- -------- Net cash used for investing activities (1,595) (3,501) -------- -------- Cash Flows From Financing Activities ------------------------------------ Increase in short-term borrowings - 5,500 Repayment of debt (350) (350) Proceeds from exercise of stock options 77 161 Proceeds from sales under employee stock purchase plan 135 - -------- -------- Net cash provided by (used for) financing activities (138) 5,311 -------- -------- Net decrease in cash and cash equivalents (437) (1,257) Cash and cash equivalents at beginning of period 2,438 1,471 -------- -------- Cash and cash equivalents at end of period $ 2,001 $ 214 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 6 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (A) BASIS OF PREPARATION -------------------- The financial information included herein is unaudited, but in the opinion of management, reflects all adjustments (which include only normal recurring 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 such results and cash flows for the entire year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Annual Report on Form 10-K for the fiscal year ended June 30, 1996 (the "1996 Form 10-K") of Playboy Enterprises, Inc. and Subsidiaries (the "Company"). (B) INCOME TAXES ------------ The Company's net deferred tax asset declined to $0.9 million at March 31, 1997 based on taxable income for the current quarter and management's projection of fiscal 1997 taxable income. As reported in the Company's 1996 Form 10-K, the significant components of the gross deferred tax asset include net operating loss, capital loss and tax credit carryforwards. Of the $0.9 million and $4.5 million net deferred tax assets included in the Condensed Consolidated Balance Sheets at March 31, 1997 and June 30, 1996, respectively, $0.3 million is included in "Other current assets" with the remainder segregated as "Net deferred tax assets". Realization of the net deferred tax asset is dependent upon the Company's ability to generate taxable income in future years. The recognition of benefits in the financial statements is based upon projections by management of future operating income and the anticipated reversal of temporary differences that will result in taxable income. Projections of future earnings were based on adjusted historical earnings. In order to fully realize the net deferred tax asset of $4.5 million recorded at June 30, 1996, the Company will need to generate future taxable income of approximately $13.2 million prior to the expiration, beginning in 2001, of the Company's net operating loss carryforwards. Management believes that it is more likely than not that the required amount of such taxable income will be realized. Management will periodically reconsider the assumptions utilized in the projection of future earnings and, if warranted, increase or decrease the amount of deferred tax benefits recognized through an adjustment to the valuation allowance. (C) INVENTORIES ----------- Inventories, which are stated at the lower of cost (average cost, specific cost and first-in, first-out) or market, consisted of the following (in thousands):
March 31, June 30, 1997 1996 --------- -------- Paper $ 6,951 $10,771 Editorial and other prepublication costs 5,651 6,566 Merchandise finished goods 9,340 6,162 ------- ------- Total inventories $21,942 $23,499 ======= =======
(D) TREASURY STOCK -------------- Treasury stock consisted of 293,427 Class A common shares and 1,014,848 Class B common shares at March 31, 1997. At June 30, 1996, treasury stock consisted of 293,427 Class A common shares and 1,040,045 Class B common shares. 7 (E) ACCOUNTING STANDARDS -------------------- The Company will implement the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123") in fiscal 1997. It is the Company's intention to adopt only the disclosure requirements of Statement 123. The Company will implement the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128") for financial statements issued for periods ending after December 15, 1997. Statement 128 simplifies the previous standards for computing earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which applies to the Company. Management believes that adoption of Statement 128 will not have a material impact on the Company's EPS amounts. (F) CONTINGENCIES ------------- In February 1996, the Company filed suit challenging Section 505 of the Telecommunications Act of 1996 which, among other things, regulates the cable transmission of adult programming, such as the Company's domestic pay television programs. Management believes that the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected as a result of enforcement of Section 505, which will commence on May 18, 1997, due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers, in particular basic cable networks that frequently pay cash guarantees for carriage. At this point, the feedback the Company has received from the cable operators indicates that the Entertainment Group's annual revenue shortfall will be in the $4 million-to-$5 million range, consistent with the testimony that Tony Lynn, president of Playboy Entertainment Group, Inc., gave during the Company's initial court challenge in Delaware in spring of 1996. See Part II. Item 1. "Legal Proceedings." In January 1993, the Company received a General Notice from the United States Environmental Protection Agency (the "EPA") as a "potentially responsible party" ("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other entities were also identified as PRPs in the notice. The notice relates to actions that may be ordered taken by the EPA to sample for and remove contamination in soils and sediments, purportedly caused by skeet shooting activities at the Resort property. During fiscal 1994, the EPA advised the Company of its position that the area of land requiring remediation is approximately twice the size of the initial site. The Company believes that it has established adequate reserves, which totaled $0.7 million at March 31, 1997, to cover the eventual cost of its anticipated share (based on an agreement with one of the other PRPs) of any remediation that may be agreed upon. The Company is also reviewing available defenses, insurance coverage and claims it may have against third parties. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS - --------------------- The Company's revenues increased 11% to $73.2 for the quarter ended March 31, 1997 compared to $66.3 for the prior year quarter. Revenues were $219.3 for the nine months ended March 31, 1997, a 10% increase over revenues of $200.1 for the nine months ended March 31, 1996. These increases were primarily due to higher revenues from the Entertainment Group, largely driven by increases from Playboy TV. Also contributing to the increases were higher revenues from the Catalog Group and the international publishing and newsstand specials and other businesses. Partially offsetting the above for the nine-month period was a decline in Playboy magazine revenues. The Company reported operating income of $4.7 for the quarter ended March 31, 1997 compared to $1.8 in the prior year quarter. For the nine months ended March 31, 1997, the Company had operating income of $12.4 compared to $6.1 in the prior year. These increases were principally due to increases in operating income for the Entertainment Group, primarily due to significantly higher operating income for Playboy TV, partially offset by higher Corporate Administration and Promotion expenses, largely due to investment spending on corporate marketing. Also unfavorably impacting the nine-month comparison was a decline in operating income for the Publishing Group. Net income for the quarter ended March 31, 1997 was $2.5, or $0.12 per share, compared to $0.7, or $0.03 per share, for the prior year quarter. For the nine months ended March 31, 1997, net income was $6.4, or $0.31 per share, compared to $2.8, or $0.14 per share, for the nine months ended March 31, 1996. Net income for the quarter ended March 31, 1997, adjusted to eliminate federal income tax expense that will not be paid due to the Company's net operating loss carryforwards ("tax-adjusted net income"), was $3.8, or $0.19 per share, compared to $1.2, or $0.06 per share, for the prior year quarter. For the nine months ended March 31, 1997, tax-adjusted net income was $9.9, or $0.49 per share, compared to $4.4, or $0.22 per share, for the nine months ended March 31, 1996. Several of the Company's businesses can experience variations in quarterly performance. As a result, the Company's performance in any quarterly period is not necessarily reflective of full-year or longer-term trends. For example, Playboy magazine newsstand revenues vary from issue to issue, with revenues generally higher for holiday issues and any issues including editorial or pictorial features that generate unusual public interest. Advertising revenues also vary from quarter to quarter, depending on product introductions by advertising customers, changes in advertising buying patterns and economic conditions. In addition, Entertainment Group revenues vary with the timing of sales to international customers, particularly on a tier basis. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996. This modification results in the revenues from these networks now being recorded on a quarterly basis, which has the effect of smoothing out the fluctuations caused by recording a year's worth of programming sales in one quarter. Previously, the Company scheduled programming for a full year in the quarter during which the network was launched or an agreement was renewed, and recognized the full year of revenues in that quarter. 9 PUBLISHING GROUP The revenues and operating income of the Publishing Group were as follows for the periods indicated below:
QUARTERS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, ------------ ------------- 1997 1996 1997 1996 ----- ----- ------ ----- REVENUES Playboy Magazine.............. $24.3 $24.5 $ 76.1 $78.6 Newsstand Specials and Other.. 5.5 4.2 17.0 15.1 International Publishing...... 2.4 1.7 7.6 4.3 ----- ----- ------ ----- Total Revenues.............. $32.2 $30.4 $100.7 $98.0 ===== ===== ====== ===== OPERATING INCOME................. $ 1.5 $ 1.5 $ 5.2 $ 7.7 ===== ===== ====== =====
Publishing Group revenues increased 6%, or $1.8, and 3%, or $2.7, respectively, for the quarter and nine months ended March 31, 1997 compared to the prior year. This was due to continued strong revenue growth in the international publishing and newsstand specials and other businesses, including Playboy on-line, partially offset by lower Playboy magazine revenues. Playboy magazine circulation revenues for the quarter and nine months ended March 31, 1997 decreased 7%, or $1.4, and 3%, or $1.8, respectively, compared to the prior year. These decreases were primarily due to 19% and 13% lower newsstand revenues, primarily due to favorable newsstand sales adjustments related to prior issues in the prior year quarter, and 17% more U.S. and Canadian newsstand copies sold in the prior year nine-month period, respectively, when two exceptionally strong-selling issues were published. Subscription revenues were essentially stable for the quarter, and increased 4% for the nine-month period. Both the quarter and nine-month periods were impacted by lower revenues from the rental of Playboy magazine's subscriber list. Playboy magazine advertising revenues for the quarter ended March 31, 1997 increased 23% compared to the prior year quarter primarily due to an increase in average net revenue per page principally due to the mix of pages sold, combined with 7% more ad pages in the current year quarter. For the nine-month period, advertising revenues decreased 3% compared to the prior year primarily due to 9% fewer ad pages, partially offset by higher average net revenue per page, principally due to the mix of pages sold. Advertising sales for the fiscal 1997 fourth quarter issues of the magazine are closed, and the Company expects to report 19% more ad pages for the quarter compared to the prior year quarter, resulting in an expected 2% decrease in ad pages for fiscal 1997 compared to the prior fiscal year. Revenues from newsstand specials and other increased 32%, or $1.3, and 12%, or $1.9, respectively, for the quarter and nine months ended March 31, 1997 primarily due to the publication of an additional newsstand special in the current year periods, combined with higher advertising revenues generated from Playboy on-line. Additionally, for the nine-month period, a higher average newsstand special price was mostly offset by 4% lower average U.S. and Canadian newsstand copies sold in the current year. International publishing revenues were higher for the quarter and nine months ended March 31, 1997 principally due to revenues in the current year related to the purchase of additional equity in March 1996 of VIPress Poland Sp. z o.o. ("VIPress"), which publishes the Polish edition of Playboy magazine, which resulted in its consolidation. Additionally, licensing royalties were lower and higher for the quarter and nine-month periods, respectively, compared to the prior year. For the quarter ended March 31, 1997, Publishing Group operating income remained stable compared to the prior year. The net increase in revenues discussed above combined with lower manufacturing costs, primarily due to lower average paper prices, were offset by higher related direct costs, and higher operating and administrative expenses. 10 For the nine months ended March 31, 1997, Publishing Group operating income decreased $2.5, or 33%, compared to the prior year despite lower manufacturing costs, principally due to lower average paper prices, primarily due to the previously discussed lower newsstand revenues. The National Defense Authorization Act of 1997 was signed into law in September 1996. One section of that legislation that began as the Military Honor and Decency Act (the "Military Act") bans the sale or rental of sexually oriented written or videotaped material on property under the jurisdiction of the Department of Defense. A Federal Court has permanently enjoined enforcement of the Military Act and has prohibited the Department of Defense from changing its acquisition and stocking practices based on the Military Act. The government has filed an appeal and a decision by the Appellate Court is pending. The Military Act, if applicable to the Company's products and enforceable, would prohibit the sale of Playboy magazine, newsstand specials and videos at commissaries, PX's and ship stores, and would adversely affect a portion of the Company's sales attributable to such products. Based on preliminary estimates and current sales levels at such locations, the Company believes that any such impact would be immaterial. ENTERTAINMENT GROUP The revenues and operating income of the Entertainment Group were as follows for the periods indicated below:
QUARTERS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, ------------- --------------- 1997 1996 1997 1996 ----- ----- ------ ------ REVENUES Playboy TV: Cable.................................... $ 5.7 $ 5.5 $ 16.1 $ 16.4 Satellite Direct-to-Home................. 6.1 4.5 16.0 11.8 Other.................................... 0.2 0.2 2.2 0.4 ----- ----- ------ ------ Total Playboy TV.......................... 12.0 10.2 34.3 28.6 Domestic Home Video....................... 3.2 2.9 7.1 7.3 International TV and Home Video........... 2.3 1.0 6.6 4.2 ----- ----- ------ ------ Total Playboy Businesses................ 17.5 14.1 48.0 40.1 AdulTVision............................... 1.1 0.5 3.4 1.3 Movies and Other.......................... 0.6 0.5 1.7 1.2 ----- ----- ------ ------ Total Revenues.......................... $19.2 $15.1 $ 53.1 $ 42.6 ===== ===== ====== ====== OPERATING INCOME Profit Contribution Before Playboy Businesses Programming Expense.. $10.7 $ 6.5 $ 27.4 $ 17.1 Playboy Businesses Programming Expense.... (4.5) (4.7) (13.5) (13.4) ----- ----- ------ ------ Total Operating Income................. $ 6.2 $ 1.8 $ 13.9 $ 3.7 ===== ===== ====== ======
The following discussion focuses on the profit contribution of each Playboy business before Playboy businesses programming expense ("profit contribution"). Playboy TV For the quarter ended March 31, 1997, cable pay-per-view revenues of the Company's branded domestic pay television service, Playboy TV, were 13% higher primarily due to higher average buy rates combined with larger favorable adjustments, as reported by cable systems, in the current year quarter. Cable pay-per-view revenues were 5% higher for the nine months ended March 31, 1997 primarily due to higher average buy rates in the current year. At March 31, 1997, Playboy TV was available to 11.0 million cable addressable households, of which 4.9 million could receive Playboy TV on a 24-hour basis. The number of households with 24-hour availability increased 1.3 million, or 36%, from March 31, 1996. However, new launches in cable systems were not sufficient to offset some system drops leading to a 3% lower total number of cable addressable households to which Playboy TV was available at March 31, 1997 compared to the prior year. Historically, buy rates in households receiving Playboy 11 TV on a 24-hour basis are higher than those receiving Playboy TV on only a ten- hour basis. The number of total cable addressable households to which Playboy TV was available at March 31, 1997 decreased 2% from December 31, 1996, while households with 24-hour availability increased 0.4 million, or 9%, over the same period. The average annual increase in the number of total cable addressable households to which Playboy TV was available over the last five complete fiscal years was 20%. For both the quarter and nine months ended March 31, 1997, cable monthly subscription revenues decreased 16% compared to the prior year primarily due to the same system drops as discussed above which resulted in a decline in the average number of subscribing households. Management believes that the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected as a result of enforcement of Section 505 of the Telecommunications Act of 1996, which will commence on May 18, 1997, due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers, in particular basic cable networks that frequently pay cash guarantees for carriage. At this point, the feedback the Company has received from the cable operators indicates that the Entertainment Group's annual revenue shortfall will be in the $4 million-to-$5 million range, consistent with the testimony that Tony Lynn, president of Playboy Entertainment Group, Inc., gave during the Company's initial court challenge in Delaware in spring of 1996. Although the Company's request for a preliminary injunction has been denied, the Company intends to seek a ruling from the District Court that Section 505 is unconstitutional. There can be no assurance that the Company will prevail. See Part II. Item 1. "Legal Proceedings." Additionally, management believes that the growth in cable access for the Company's domestic pay television businesses has also slowed in recent years due to the effects of cable reregulation by the Federal Communications Commission ("FCC"), including the "going-forward rules" announced in fiscal 1995 which provide cable operators with incentives to add basic services. As cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions, competition for channel space has increased. Additionally, the delay of new technology, primarily digital set-top converters which would dramatically increase channel capacity, has contributed to the slowdown. Management believes that growth will continue to be affected in the near term as the cable television industry responds to the FCC's rules and subsequent modifications, and develops new technology. However, as addressable and digital technology (which is unaffected by Section 505) becomes more available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable households on a 24-hour basis. Playboy TV satellite direct-to-home revenues were 34% and 36% higher for the quarter and nine months ended March 31, 1997, respectively, compared to the prior year. These increases were primarily due to higher DirecTV and PrimeStar revenues, as a result of significant increases in their addressable universes, partially offset by lower revenues, as expected, from TVRO, or the big-dish market. Playboy TV was available to approximately 17.0 million cable addressable and satellite direct-to-home households, including approximately 375,000 monthly subscribers, at March 31, 1997, an increase of 7% compared to March 31, 1996. Other revenues remained stable and increased $1.8 for the quarter and nine months ended March 31, 1997, respectively, compared to the prior year. The nine- month comparison includes revenues in the current year from licensing episodes of one of the Company's series to Showtime Networks Inc. Profit contribution for Playboy TV increased $3.6 and $8.7, respectively, for the quarter and nine months ended March 31, 1997 primarily due to the net increases in revenues combined with favorable music licensing settlements, lower marketing costs and no royalty expense related to the Company's former distributor in the current year. Royalty payments were discontinued April 30, 1996, when the agreement ended. Domestic Home Video Domestic home video revenues increased $0.3 and decreased $0.2, respectively, for the quarter and nine months ended March 31, 1997, compared to the prior year. The current year quarter and nine-month periods reflected higher revenues from a three-year distribution agreement with Universal Music & Video Distribution (formerly Uni Distribution Corp.) related to backlist titles, which are subject to certain earn-out provisions in fiscal 1997, the final year of the agreement. For the quarter and nine-month periods, these increases were partially and more than, respectively, offset by lower net sales of new releases and anticipated lower revenues related to the Company's direct-response continuity series, the second of which was recently launched. 12 Profit contribution increased $0.5 and decreased $0.3, respectively, on the net increase and decrease, respectively, in revenues for the quarter and nine months ended March 31, 1997. Also unfavorably impacting the nine-month comparison was the timing of promotion costs. International TV and Home Video For the quarter and nine months ended March 31, 1997, profit contribution from the international TV and home video business increased $0.9 and $1.7, respectively, on $1.3 and $2.4 increases, respectively, in revenues. These increases were primarily due to higher international TV revenues in the current year, largely from Playboy TV networks. However, due to the unusually high home video sales recorded in the prior year fourth quarter, annual net revenues and profit contribution for the international business for fiscal 1997 are expected to be lower compared to the prior year. Variations in quarterly performance are caused by revenues and profit contribution from tier sales being recognized depending upon the timing of program delivery, license periods and other factors. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996. See "Results of Operations." Playboy Businesses Programming Expense Programming amortization expense associated with the Entertainment Group's Playboy businesses discussed above decreased $0.2 and increased $0.1, respectively, for the quarter and nine months ended March 31, 1997 compared to the prior year. AdulTVision AdulTVision revenues increased $0.6 and $2.1, respectively, for the quarter and nine months ended March 31, 1997, compared to the prior year primarily due to revenues in the current year related to the September 1996 launch of a new network in Latin America. Also contributing to the increases were higher revenues from the domestic network, which launched in July 1995, as a result of an increase in the addressable universe and higher buys. For the quarter and nine months ended March 31, 1997, operating performance increased $0.4 and $1.2, respectively, primarily due to the increases in revenues, partially offset by higher distribution costs due to the launch in Latin America and an increase in domestic fees in the current year related to transferring to a new transponder. Movies and Other For the quarter and nine months ended March 31, 1997, revenues from movies and other businesses increased $0.1 and $0.5, respectively, while operating income decreased $0.1 and remained stable, respectively. The Entertainment Group's administrative expenses for the quarter and nine months ended March 31, 1997 increased $0.9 and $1.1, respectively, compared to the prior year largely due to higher variable compensation expense related to performance. PRODUCT MARKETING GROUP The revenues and operating income of the Product Marketing Group were as follows for the periods indicated below:
QUARTERS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, ------------ ------------ 1997 1996 1997 1996 ----- ----- ----- ----- REVENUES.......... $ 2.0 $ 2.2 $ 6.3 $ 6.0 ===== ===== ===== ===== OPERATING INCOME.. $ 0.9 $ 1.4 $ 3.2 $ 3.3 ===== ===== ===== =====
13 Revenues for the quarter ended March 31, 1997 decreased $0.2 compared to the prior year quarter primarily due to lower international product licensing royalties. The timing of reporting of royalties from Asia contributed to the decreased revenues. Operating income for the quarter declined $0.5 compared to the prior year quarter due to the decrease in revenues combined with higher expenses, principally reflecting increased investments in brand marketing and product design. For the nine months ended March 31, 1997, revenues increased $0.3 compared to the prior year primarily due to royalties in the current year related to the Company's new line of cigars currently being distributed domestically. Operating income for the nine-month period decreased $0.1 due to higher expenses, principally reflecting the increased investments in brand marketing and product design and higher administrative expenses. CATALOG GROUP The revenues and operating income of the Catalog Group were as follows for the periods indicated below:
QUARTERS NINE MONTHS ENDED ENDED MARCH 31, MARCH 31, ------------ ------------ 1997 1996 1997 1996 ----- ----- ----- ----- REVENUES.......... $19.8 $18.6 $59.2 $53.5 ===== ===== ===== ===== OPERATING INCOME.. $ 1.2 $ 1.6 $ 4.1 $ 4.2 ===== ===== ===== =====
For the quarter and nine months ended March 31, 1997, revenues of the Catalog Group increased 7% and 11%, respectively, compared to the prior year due to higher sales volume from all of the Company's catalogs, due in part to increased circulation. Increased revenues related to promotions also contributed to the higher revenues from the Collectors' Choice Music catalog for the nine- month period. Revenues from the Playboy catalog were also favorably impacted by current year sales from the Playboy Store, a version of the catalog on Playboy on-line. For the quarter and nine months ended March 31, 1997, operating income decreased 24% and 2%, respectively, compared to the prior year primarily as a result of lower-than-anticipated response rates from prospective customers. The increases in revenues generally were not sufficient to offset higher related costs, due in part to prospecting, even with the impact of lower paper prices in the current year periods. Administrative expenses were higher for the group largely due to higher salary and related expenses. In the summer of 1997, the catalog operations will move from its current facility to a larger facility, under terms of a build-to-suit lease, to meet additional space requirements resulting from growth in the business. The new facility will be located in the same Chicago suburb. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expenses of $5.2 and $14.1 for the quarter and nine months ended March 31, 1997, increased $0.7 and $1.2, respectively, compared to the prior year periods. These increases were largely due to investment spending on corporate marketing. Also unfavorably impacting the nine-month period was the timing of variable compensation expense related to performance. CASINO GAMING In fiscal 1996 the Company announced plans to re-enter the casino gaming business. The Company, with a consortium of Greek investors, bid for and won an exclusive casino gaming license on the island of Rhodes, Greece. The Company's consortium executed the contract with the government in October 1996 and is presently renovating the historic Hotel des Roses that will be the Playboy casino hotel, which is expected to open at the end of calendar 1997. The Company is continuing to explore other casino gaming opportunities with a strategy to form joint ventures with strong local partners, in which the Company would receive license fees for the use of the Playboy name and trademarks and would consider taking equity positions. 14 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At March 31, 1997, the Company had $2.0 in cash and cash equivalents and $5.0 in short-term borrowings, compared to $2.4 in cash and cash equivalents and $5.0 in short-term borrowings at June 30, 1996. The Company expects to meet its short-term and long-term cash requirements through its revolving credit agreement and cash generated from operations. Cash Flows From Operating Activities Net cash provided by operating activities was $1.3 for the nine months ended March 31, 1997 compared to net cash used of $3.1 for the prior year period principally due to the Company's improved operating performance in the current year. Cash provided by operating assets and liabilities was $0.3 in the current year period compared to cash used of $3.8 in the prior year. This difference was primarily due to cash provided by inventories in the current year compared to a use of cash in the prior year primarily due to additional purchases of paper related to Playboy magazine in the prior year period in part to take advantage of favorable pricing. Partially offsetting the above was cash used for other accrued liabilities in the current year compared to cash provided in the prior year principally due to lower accruals in the current year related to music licensing and advertising, combined with the timing of tax payments. The Company invested $23.0 in Company-produced and licensed entertainment programming during the first nine months of fiscal 1997 compared to $19.0 in the prior year period, and expects to invest approximately $9.7 in such programming during the remainder of fiscal 1997. The increase in investments in programming expected for fiscal 1997 compared to the prior year primarily reflects spending for businesses other than the Playboy TV network, largely the pre-sold made for television and home video programming, co-production agreements and a celebrity event. Cash Flows From Investing Activities Net cash used for investing activities was $1.6 for the nine months ended March 31, 1997 compared to $3.5 for the prior year period. The prior year included investments in equity interests of $3.2 in the first overseas Playboy TV networks in the United Kingdom and Japan, the casino gaming venture that was awarded an exclusive license on the island of Rhodes, Greece, and an additional equity interest in VIPress. This compares to $1.2 of investments in the current year period principally related to additional funding of the network in the United Kingdom and an equity interest as well as additional funding in the new Playboy TV and AdulTVision networks in Latin America. Cash Flows From Financing Activities Net cash used for financing activities was $0.1 for the nine months ended March 31, 1997 compared to net cash provided of $5.3 for the prior year period. This difference was principally due to a $5.5 increase in the level of short- term borrowings under the Company's revolving line of credit in the prior year. Income Taxes Based on current tax law, the Company must generate approximately $13.2 of future taxable income prior to the expiration of the Company's net operating loss carryforwards ("NOLs") for full realization of the $4.5 net deferred tax asset recorded at June 30, 1996. At June 30, 1996, the Company had NOLs of $37.7 for tax purposes, with $1.0 expiring in 2001, $8.9 expiring in 2003, $8.2 expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008 and $16.4 expiring in 2009. Management continues to believe that it is more likely than not that a sufficient level of taxable income will be generated prior to the expiration of the Company's NOLs to realize the $4.5 net deferred tax asset recorded at June 30, 1996. The Company's net deferred tax asset declined to $0.9 at March 31, 1997 based on taxable income for the current quarter and management's projection of fiscal 1997 taxable income. Following is a summary of the bases for management's belief that a valuation allowance of $28.0 at June 30, 1996 is adequate, and that it is more likely than not that the net deferred tax asset of $4.5 at June 30, 1996 will be realized: . In initially establishing the net deferred tax asset, management reviewed the components of the Company's NOLs and determined that they primarily resulted from several nonrecurring events, which were not indicative of the Company's ability to generate future earnings. 15 . The Publishing, Product Marketing and Catalog Groups continue to generate meaningful earnings, while the Company's substantial investments in the Entertainment Group resulted in significant earnings growth in fiscal 1996 and are anticipated to lead to increased earnings potential in fiscal 1997 and future years. . The Company has several opportunities to accelerate taxable income into the NOL carryforward period. Tax planning strategies would include the capitalization and amortization versus immediate deduction of circulation expenditures, the immediate inclusion versus deferred recognition of prepaid subscription income, the revision of depreciation and amortization methods for tax purposes and the sale-leaseback of certain property that would generate taxable income in future years. Other In January 1993, the Company received a General Notice from the United States Environmental Protection Agency (the "EPA") as a "potentially responsible party" ("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other entities were also identified as PRPs in the notice. The notice relates to actions that may be ordered taken by the EPA to sample for and remove contamination in soils and sediments, purportedly caused by skeet shooting activities at the Resort property. During fiscal 1994, the EPA advised the Company of its position that the area of land requiring remediation is approximately twice the size of the initial site. The Company believes that it has established adequate reserves, which totaled $0.7 at March 31, 1997, to cover the eventual cost of its anticipated share (based on an agreement with one of the other PRPs) of any remediation that may be agreed upon. The Company is also reviewing available defenses, insurance coverage and claims it may have against third parties. The Company will implement the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("Statement 123") in fiscal 1997. It is the Company's intention to adopt only the disclosure requirements of Statement 123. The Company will implement the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128") for financial statements issued for periods ending after December 15, 1997. Statement 128 simplifies the previous standards for computing earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which applies to the Company. Management believes that adoption of Statement 128 will not have a material impact on the Company's EPS amounts. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------------------------- In February 1996, Congress passed, and President Clinton signed into law, the Telecommunications Act of 1996 (the "Telecommunications Act"). Certain provisions of the Telecommunications Act are directed exclusively at cable programming in general and adult cable programming in particular. In some cable systems, audio or momentary bits of video of premium or pay-per-view channels may accidentally become available to non-subscribing cable customers. This is called "bleeding." The practical effect of Section 505 of the Telecommunications Act ("Section 505") is to require many existing cable systems to employ additional blocking technology in every household in every cable system that offers adult programming, whether or not customers request it or need it, to prevent any possibility of bleeding, or to restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Telecommunications Act are significant and include fines and imprisonment. Surveying of cable operators indicates that most will choose to comply by restricting the hours of transmission. On February 26, 1996, one of the Company's subsidiaries filed a civil suit challenging Section 505 on constitutional grounds. On March 7, 1996, the Company was granted a Temporary Restraining Order ("TRO") staying the implementation and enforcement of Section 505. In granting the TRO, the court found that the Company had demonstrated it was likely to succeed on the merits of its claim that Section 505 is unconstitutional. On November 8, 1996, eight months after the TRO was granted, a three-judge panel in United States District Court in Wilmington, Delaware (the "Court") denied the Company's request for preliminary injunction against enforcement of Section 505 of the Act and, in so denying, found that the Company was not likely to succeed on the merits of its claim. The Company appealed the Court's decision to the United States Supreme Court and enforcement of Section 505 was stayed pending that appeal. On March 24, 1997, without opinion, the Supreme Court summarily affirmed the Court's denial of the Company's request for a preliminary injunction. As a result of the Supreme Court's action, enforcement of Section 505 will commence on May 18, 1997. Management believes that the Company's revenues attributable to its domestic pay television cable services could be materially adversely affected as a result of enforcement of Section 505 due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers, in particular basic cable networks that frequently pay cash guarantees for carriage. At this point, the feedback the Company has received from the cable operators indicates that the Entertainment Group's annual revenue shortfall will be in the $4 million-to-$5 million range, consistent with the testimony that Tony Lynn, president of Playboy Entertainment Group, Inc., gave during the Company's initial court challenge in Delaware in spring of 1996. The Company intends to pursue in the Court its case challenging on constitutional grounds the validity of Section 505 and to seek a permanent injunction against the enforcement of Section 505. There can be no assurance that the Court will grant such an injunction. The Company's full case on the merits has not yet been heard or decided by the Court. On December 18, 1995, BrandsElite International Corporation, an Ontario, Canada corporation ("BrandsElite"), filed a complaint against the Company in the Circuit Court of Cook County, Illinois. In the complaint, BrandsElite, an international distributor of premium merchandise, including liquor, perfume, cosmetics and luxury gifts, principally to duty-free retailers, alleges that the Company breached a product license agreement, shortly after its execution by the Company in October 1995. The agreement provided for the appointment of BrandsElite as the exclusive, worldwide licensee of the Playboy trademark and tradename with respect to the sale of cognac and possibly some deluxe whiskeys. The Company has admitted that it advised BrandsElite that it had determined not to proceed with the transaction but disputes strongly BrandsElite's allegation that as a result of the Company's breach, BrandsElite has suffered millions of dollars of damages in future lost profits. BrandsElite also seeks to recoup alleged out-of-pocket expenses, fees and costs incurred in bringing the action, and specific performance of the agreement. The license agreement provides for recovery by a party in any judgment entered in its favor of attorneys' fees and litigation expenses, together with such court costs and damages as are provided by law. The action is currently in discovery. 17 Item 6. Exhibits and Reports on Form 8-K - ---------------------------------------- (a) Exhibits Exhibit Number Description - ------ ----------- 10.1 Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan 10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated 10.3 Selected Employment, Termination and Other Agreements a Agreement dated October 16, 1996 amending the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn b Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn c Memorandum dated October 11, 1996 regarding special compensation plan for Herb Laney d Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M. Laney e Employment Agreement dated April 7, 1997 between Playboy Enterprises, Inc. and Marianne Howatson f Letter Agreement dated April 18, 1997 regarding employment of Linda Havard *10.4 Agreements between Playboy Entertainment Group, Inc. and Bloomfield Mercantile Inc. related to establishing international networks in Latin America, Spain and Portugal a Agreement outline as of March 29, 1996 b Letter agreement dated January 13, 1997 *10.5 Memorandum of Understanding as of February 26, 1997 between Playboy Entertainment Group, Inc. and Daewoo Corporation related to establishing international networks in South Korea 10.6 Amendment to March 24, 1995 Distribution Agreement between Playboy Entertainment Group, Inc. and Universal Music & Video Distribution (formerly Uni Distribution Corp.) regarding licensing and sale of domestic home video product dated February 28, 1997 10.7 Amendment to June 27, 1996 Distribution Agreement between Playboy Entertainment Group, Inc. and Orion Home Video regarding the distribution of certain home video programs and product dated July 29, 1996 11 Computation of Earnings Per Common Share 27 Financial Data Schedule _________ * Certain information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1997. 18 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 May 12, 1997 By s/Rebecca S. Maskey ---------------- ------------------------ Rebecca S. Maskey Senior Vice President, Finance 19 EX-10.1 2 STOCK INCENTIVE PLAN EXHIBIT 10.1 AMENDED AND RESTATED PLAYBOY ENTERPRISES, INC. 1995 STOCK INCENTIVE PLAN Playboy Enterprises, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to certain of its key employees through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of key employees considered essential to the long-range success of the Company by providing and offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I DEFINITIONS ----------- Whenever the following terms are used in this Plan they shall have the meaning specified below, unless the context clearly indicates otherwise. Section 1.1 - Board. "Board" shall mean the Board of Directors of the Company. - ----------- ----- Section 1.2 - Change of Control. "Change of Control" shall mean the occurrence - ----------- ----------------- of any of the following events: (i) except in a transaction described in clause (iii) below, Hugh M. Hefner, Christie Hefner, the Hugh M. Hefner 1991 Trust (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee), and the Hugh M. Hefner Foundation (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee) cease collectively to own a majority of the total number of votes that may be cast for the election of directors of the Company; or (ii) a sale of Playboy ------- magazine by the Company; or (iii) the liquidation or dissolution of the Company, or any merger, consolidation or other reorganization involving the Company unless (x) the merger, consolidation or other reorganization is initiated by the Company, and (y) is one in which the stockholders of the Company immediately prior to such reorganization become the majority stockholders of a successor or ultimate parent corporation of the Company resulting from such reorganization and (z) in connection with such event, provision is made for an assumption of outstanding Options and rights or a substitution thereof of a new Option or right in such successor or ultimate parent of substantially equivalent value. Section 1.3 - Code. "Code" shall mean the Internal Revenue Code of 1986, as - ----------- ---- amended. Section 1.4 - Committee. "Committee" shall mean a committee of the Board of - ----------- --------- Directors comprised of persons who are both non-employee directors within the meaning of Rule 16b-3 which has been adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, as such rule or its equivalent is then in effect ("Rule 16b-3") and "outside directors" within the meaning of Section 162(m) of the Code. Section 1.5 - Common Stock. "Common Stock" shall mean the Class B Common Stock, - ----------- ------------ par value $.01 per share, of the Company. Section 1.6 - Company. "Company" shall mean Playboy Enterprises, Inc., a - ----------- ------- Delaware Corporation. Section 1.7 - Deferred Stock. "Deferred Stock" shall mean Common Stock awarded - ----------- -------------- under Article VII of the Plan. Section 1.8 - Director. "Director" shall mean a member of the Board. - ----------- -------- Section 1.9 - Employee. "Employee" shall mean any officer or other employee (as - ----------- -------- defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary. Section 1.10 - ERISA. "ERISA" shall mean the Employment Retirement Income - ------------ ----- Security Act of 1974, as amended. Section 1.11 - Exchange Act. "Exchange Act" shall mean the Securities Exchange - ------------ ------------ Act of 1934, as amended. Section 1.12 - Grantee. "Grantee" shall mean an Employee granted a Performance - ------------ ------- Award, Stock Payment, Section 162(m) Performance Award, Section 162(m) Stock Payment, or an award of Deferred Stock or Section 162(m) Deferred Stock, under this Plan. Section 1.13 - Incentive Stock Option. "Incentive Stock Option" shall mean an - ------------ ---------------------- Option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. Section 1.14 - Non-Qualified Option. "Non-Qualified Option" shall mean an - ------------ -------------------- Option which is not designated as an Incentive Stock Option by the Committee. Section 1.15 - Officer. "Officer" shall mean an officer of the Company. - ------------ ------- 2 Section 1.16 - Option. "Option" shall mean a stock option granted under Article - ------------ ------ III of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option. Section 1.17 - Optionee. "Optionee" shall mean an Employee to whom an Option is - ------------ -------- granted under the Plan. Section 1.18 - Performance Award. "Performance Award" shall mean a cash bonus, - ------------ ----------------- stock bonus or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII of this Plan. Section 1.18A - Performance Criteria. "Performance Criteria" shall mean - ------------- -------------------- objective, performance criteria established pursuant to this Plan with respect to awards of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments and Section 162(m) Deferred Stock. Performance Criteria shall be measured in terms of one or more of the following objectives, described as such objectives relate to corporation-wide objectives or objectives that are related to the performance of the individual Employee or of the Subsidiary, division, department or function with the Company or Subsidiary in which the participant is employed: (i) market value; (ii) book value; (iii) earnings per share; (iv) market share; (v) operating profit; (vi) net income; (vii) cash flow; (viii) return on capital; (ix) return on assets; (x) return on equity; (xi) margins; (xii) shareholder return; (xiii) sales or product volume growth; 3 (xiv) productivity improvement; or (xv) costs or expenses. Each grant of Section 162(m) Restricted Stock, Section 162(m) Performance Awards, Section 162(m) Stock Payments, and Section 162(m) Deferred Stock shall specify the Performance Criteria to be achieved, a minimum acceptable level of achievement below which no payment or award will be made, and a formula for determining the amount of any payment or award to be made if performance is at or above the minimum acceptable level but fall short of full achievement of the specified Performance Criteria. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Criteria to be unsuitable, the Committee may modify such Performance Criteria or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable; provided, however, that no such modification shall be made if the effect would be to cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. In addition, at the time the award subject to Performance Criteria is made and performance goals established, the Committee is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account certain factors over which the Employees have no or limited control including market related changes in inventory value, changes in industry margins, changes in accounting principles, and extraordinary charges to income. Section 1.19 - Plan. "Plan" shall mean the Amended and Restated Playboy - ------------ ---- Enterprises, Inc. 1995 Stock Incentive Plan. Section 1.20 - Restricted Stock. "Restricted Stock" shall mean Common Stock - ------------ ---------------- awarded under Article VII of this Plan. Section 1.21 - Restricted Stockholder. "Restricted Stockholder" shall mean an - ------------ ---------------------- Employee granted an award of Restricted Stock under Article VI of this Plan. Section 1.22 - Secretary. "Secretary" shall mean the Secretary of the Company. - ------------ --------- Section 1.22A - Section 162(m) Deferred Stock. "Section 162(m) Deferred Stock" - ------------- ----------------------------- shall mean Common Stock awarded under Article VII-A of this Plan. Section 1.22B - Section 162(m) Performance Award. "Section 162(m) Performance - ------------- -------------------------------- Award" shall mean a cash bonus, stock bonus, or other performance or incentive award that is paid in cash, Common Stock or a combination of both, awarded under Article VII-A of this Plan. 4 Section 1.22C - Section 162(m) Restricted Stock. "Section 162(m) Restricted - ------------- ------------------------------- Stock" shall mean Common Stock awarded under Section VI-A of this Plan. Section 1.22D - Section 162(m) Restricted Stockholder. "Section 162(m) - ------------- ------------------------------------- Restricted Stockholder" shall mean an Employee granted an award of Section 162(m) Restricted Stock under Article VI-A of this Plan. Section 1.22E - Section 162(m) Stock Payment. "Section 162(m) Stock Payment" - ------------- ---------------------------- shall mean (i) a payment in the form of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII-A of this Plan. Section 1.23 - Securities Act. "Securities Act" shall mean the Securities Act - ------------ -------------- of 1933, as amended. Section 1.24 - Stock Payment. "Stock Payment" shall mean (i) a payment in the - ------------ ------------- form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VII of this Plan. Section 1.25 - Subsidiary. "Subsidiary" shall mean any corporation in an - ------------ ---------- unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Section 1.26 - Termination of Employment. "Termination of Employment" shall - ------------ ------------------------- mean the time when the employee-employer relationship between the Optionee, Grantee, Restricted Stockholder, or Section 162(m) Restricted Stockholder and the Company or any Subsidiary is terminated, voluntarily or involuntarily, for any reason, with or without Cause (as defined below), including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement, but excluding any termination where there is a simultaneous reemployment by the Company or a Subsidiary. The Committee, subject to the definition of Cause below, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether particular leaves of absence constitute Terminations of Employment; provided, however, that, with respect to Incentive Stock Options, a leave of absence shall constitute a Termination of Employment if, and to the extent that, such leave of absence interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, "Cause" shall mean an Employee's (a) gross negligence in the performance of the responsibilities of such Employee's office or 5 position; (b) any act of dishonesty or moral turpitude materially adversely affecting the Company or the Company's reputation; (c) commission of any other willful or intentional act that could reasonably be expected to injure materially the reputation, business or business relationships of the Company or any Subsidiary; or (d) conviction of a felony or of any crime involving moral turpitude, fraud or misrepresentation. ARTICLE II SHARES SUBJECT TO PLAN ---------------------- Section 2.1 - Shares Subject to Plan - ----------- ---------------------- (a) The shares of stock subject to Options, or awards of Restricted Stock, Section 162(m) Restricted Stock, Performance Awards, Section 162(m) Performance Awards, Deferred Stock, Section 162(m) Deferred Stock, Stock Payments, or Section 162(m) Stock Payments shall be Common Stock. The aggregate number of shares which may be issued upon exercise of such Options or rights or upon any such awards under the Plan shall not exceed 1,803,000 shares of Common Stock. (b) The maximum number of shares of Common Stock which may be subject to Options, rights or other awards granted under the Plan to any Employee in any calendar year shall not exceed 250,000, and the method of counting such shares shall conform to any requirements applicable to performance-based compensation under Section 162(m) of the Code. The shares of Common Stock issuable upon exercise of such Options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (c) With regard to Section 162(m) Performance Awards that are cash bonuses or other performance or incentive awards expressed as cash awards (without regard to whether such bonuses or awards are ultimately paid in the form of cash, stock, or a combination of both as described in Section 7.7A), an Employee may not be granted during any calendar year such Section 162(m) Performance Awards in an amount in excess of $1,000,000. Section 2.2 - Unexercised Options and Awards - ----------- ------------------------------ If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is cancelled without having been fully exercised (including Restricted Stock, Section 162(m) Restricted Stock or any other award that is forfeited before applicable vesting requirements are met or transfer restrictions have lapsed), the number of shares subject to such Option or other right but as to which such Option or other right was not exercised (or vested or delivered without restriction, as the case may be) prior to its expiration or cancellation may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. 6 Section 2.3 - Adjustments in Outstanding Options or Rights - ----------- -------------------------------------------- Subject to Section 4.2(c), in the event that the outstanding shares of the Common Stock subject to Options or other rights are changed into or exchanged for a different number or kind of shares of the Company or other securities of the Company by reason of a recapitalization, reclassification, stock split, stock dividend or combination of shares or similar transaction, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options or rights, or portions thereof then unexercised, shall be exercisable, so that the Optionee's, Grantee's, Restricted Stockholder's or Section 162(m) Restricted Stockholder's proportionate interest shall be maintained. Such adjustment shall be made without change in the total price applicable to the unexercised portion of the Option or right (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in price per share; provided, however, that, in the case of Incentive Stock Options, each such adjustment shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by the Committee shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company or any Subsidiary, their representatives and all other interested persons. Such adjustments will also be made in determining Section 2.1 limitations on maximum number and kind of shares which may be issued on exercise of Options, Restricted Stock, Section 162(m) Restricted Stock or other awards. The shares of Class B Common Stock reserved under this Plan will be reduced as Options, Restricted Stock, Section 162(m) Restricted Stock or other awards are granted or issued so that the aggregate number of any single Class of Stock will never exceed the total amount of shares authorized under the Plan. ARTICLE III GRANTING OF OPTIONS ------------------- Section 3.1 - Eligibility - ----------- ----------- Any key Employee of the Company or a Subsidiary except Hugh M. Hefner shall be eligible to be granted Options. Section 3.2 - Qualification of Incentive Stock Options. - ----------- ---------------------------------------- No Incentive Stock Option shall be granted unless such Option, when granted, qualifies as an "incentive stock option" under Section 422 of the Code. Without limitation of the foregoing, no person shall be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 7 Section 3.3 - Granting of Options - ----------- ------------------- (a) The Committee shall from time to time, in its absolute discretion: (i) Determine which Employees are "key Employees" and select from among the key Employees (including those to whom Options and/or rights have been previously granted under the Plan or any other stock option or other plan of the Company) such of them as in its opinion should be granted Options; and (ii) Determine for each Employee the number of shares to be subject to such Options; and (iii) Determine whether such Options are to be Incentive Stock Options or Non-Qualified Options; and (iv) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary or other authorized officer to execute and deliver a Stock Option Agreement, and may impose such conditions on the grant of such Option as it deems appropriate, not inconsistent with this Plan. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee that the Employee surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock, Section 162(m) Restricted Stock, Deferred Stock or Section 162(m) Deferred Stock, Performance Awards, Section 162(m) Performance Awards, Stock Payments or Section 162(m) Stock Payments or other rights which have been previously granted to him. An Option, the grant of which is conditioned upon such surrender may have an Option price lower (or higher) than the Option price of the surrendered Option, may cover the same (or a lesser or greater) number of shares as the surrendered Option, may contain such other terms as the Committee deems appropriate and shall be exercisable in accordance with its terms, without regard to the number of shares, price, Option period or any other term or condition of such surrendered Option or award. (c) Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. 8 ARTICLE IV TERMS OF OPTIONS ---------------- Section 4.1 - Option Price - ----------- ------------ (a) The price of the shares subject to each Non-Qualified Option shall not be less than 100% of the fair market value of such shares at the end of the business day immediately preceding the day such Option is granted. (b) For purposes of the Plan, the fair market value ("Fair Market Value") of a share of the Company's Common Stock as of a given date shall be: (i) the closing price of a share of such class of the Company's Common Stock on the principal exchange on which shares of the Company's Common Stock are then trading, if any, on the day previous to such date, or, if shares were not traded on the day previous to such date, then on the next preceding trading day during which a sale occurred; or (ii) if such Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, (1) the last sales price (if the Company's Common Stock is then listed as a National Market Issue under the NASD National Market System) or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Company's Common Stock on the day previous to such date as reported by NASDAQ or such successor quotation system; or (iii) if such Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing bid and asked prices for the Company's Common Stock, on the day previous to such date, as determined in good faith by the Committee; or (iv) if the Company's Common Stock is not publicly traded, the fair market value established by the Committee acting in good faith. (c) The price of the shares subject to Incentive Stock Options shall not be less than the greater of (i) 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted, or (ii) 110% of the fair market value of a share of Common Stock on the date such Incentive Stock Option is granted in the case of an individual then owning (within the meaning of section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary. Section 4.2 - Commencement of Exercisability; Change of Control - ----------- -------------------------------------------------- (a) Subject to the provisions of Sections 4.2(b) and 9.3, Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.2(b) and 9.3 and except in connection with a Change of Control, accelerate the time at which such Option or any portion thereof may be exercised; provided further, that, to the extent necessary for this Plan to meet the requirements of Rule 16b-3, no Option granted 9 hereunder shall be exercisable for at least six months (or such other period as may be specified in said Rule) after such Option is granted. (b) No portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Stock Option Agreement or in a resolution adopted following the grant of the Option. Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may extend the term of any outstanding Option in connection with any Termination of Employment of the Optionee, or amend any other term or condition of such Option relating to such a termination. (c) If an Optionee is terminated without Cause less than one (1) year after a Change of Control specified in clause (i) or (ii) of the definition thereof, unless the terms of any Option specifically exclude such right, the Optionee shall have the right to exercise such Optionee's Option until expiration thereof pursuant to Section 4.3(a)(ii) with respect to all vested installments of such Option, and with respect to the next installment (if any) of such Option that was unvested on the date of such Termination of Employment. Not less than ninety (90) days prior to the effective date of any Change of Control specified in clause (iii) of the definition of such term, the Committee shall give the Employee notice of such event if the Option has then neither been fully exercised nor become unexercisable under Section 4.3, and shall specify in such notice a date prior to the effective date of such event when this Option shall be exercisable with respect to all vested installments thereof, and with respect to the next installment (if any) of such Option that is unvested on the date of such Change of Control. (d) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during any calendar year (under the Plan and all other incentive stock option plans of the Company and any subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.2(d), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. Section 4.3 - Expiration of Options - ----------- --------------------- (a) Unless an Option expires earlier pursuant to the terms of a Stock Option Agreement, each Option may be exercised any time until the first of the following events, after which such Option will become unexercisable: 10 (i) The expiration of ten (10) years from the date the Option was granted if the Employee is still employed by the Company or any Subsidiary; or (ii) The expiration of three (3) months from the Employee's Termination of Employment if such Termination of Employment results from such Employee's retirement, or such Employee's being discharged not for Cause, unless the Employee dies within said three-month period; or (iii) The effective date of (i) a Termination of Employment for Cause, (ii) the Employee's resignation, or (iii) a Change of Control specified in clause (iii) of the definition of such term; or (iv) In the case of an Optionee who is disabled (within the meaning of Section 22(e)(3) of the Code), the expiration of one (1) year from the date of the Optionee's Termination of Employment; provided, however, that this subsection (iv) shall not apply if the Optionee dies within said one-year period; or (v) One (1) year from the date of the Optionee's death. (b) Subject to the provisions of Section 4.3(a), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any reason. (c) The term of any Incentive Stock Option shall not be more than five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of capital stock of the Company or any Subsidiary. Section 4.4 - No Right to Continued Employment - ----------- -------------------------------- Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of the Company or any Subsidiary or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any of its Subsidiaries, which are hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without Cause. 11 ARTICLE V EXERCISE OF OPTIONS ------------------- Section 5.1 - Person Eligible to Exercise - ----------- --------------------------- (a) Subject to 5.1(b), during the lifetime of the Optionee, only such Optionee (or the spouse or former spouse of such Optionee following transfer of the Option pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder) may exercise an Option (or any portion thereof) granted to such Optionee. After the death of the Optionee, any exercisable portion of an Option may, within the time frame allowed, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's will or under the then applicable laws of descent and distribution. To the extent Rule 16b-3 as then in effect permits transfers of Options other than as provided in this Section 5.1(a), the Committee may by resolution amend this Section 5.1(a) or the terms of outstanding options to reflect such other transfer limitation requirements, in the Committee's discretion. (b) Should the Optionee be determined under applicable law to have become a disabled person or the equivalent thereof, the Option may, prior to the time when the Option becomes unexercisable under the Plan or the applicable Stock Option Agreement, be exercised by the Optionee's guardian or by any other person empowered to do so under applicable laws of guardianship. For purposes of this section 5.1(b), "disabled person" shall mean a person who (i) because of mental deterioration or physical incapacity is not fully able to manage such person's person or estate or (ii) is mentally ill and who because of such person's mental illness is not fully able to manage such person's person or estate. Section 5.2 - Partial Exercise - ----------- ---------------- An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee may require that, by terms of the Option, a partial exercise be with respect to a minimum number of shares. Section 5.3 - Manner of Exercise - ----------- ------------------ All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or the Secretary's office: (a) A written notice signed by the Optionee (or other person then entitled to exercise such Option or portion), stating that such Option or portion thereof is being exercised and such notice complies with all applicable rules established by the Committee; and 12 (b) Payment in full for the exercised shares: (i) In cash or by certified or cashier's check; or (ii) In shares of the same class of the Company's Common Stock owned by the Optionee. These shares must be duly endorsed for transfer to the Company and will be credited at the Fair Market Value on the date of delivery; or (iii) With the consent of the Committee and at the sole discretion of the Company, by a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code or successor provision) and payable upon such terms as may be prescribed by the Committee. The Committee may also prescribe the form of such note and the security to be given for such note. No Option may, however, be exercised by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law; or (iv) Any combination of the consideration provided in the foregoing subsections (i), (ii), and (iii); or (v) To the extent permitted by law (including then existing interpretations of Rule 16b-3) a "cashless exercise procedure" satisfactory to the Committee which permits the Optionee to deliver an exercise notice to a broker-dealer, who then sells the Option shares, delivers the exercise price and withholding taxes to the Company and delivers the excess funds less commission and withholding taxes to the Optionee; and (c) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars; and (d) Appropriate proof of the right of such person or persons to exercise the option or portion thereof in the event that the Option or portion thereof shall be exercised pursuant to Section 5.1 by any person or persons other than the Optionee; and (e) Full payment of all amounts which, under federal, state or local law, it is required to withhold upon exercise of the Option. With the consent of the Committee, (i) shares of the Company's Common Stock owned by the Employee duly endorsed for transfer or (ii) subject to the timing requirements of Section 5.4, shares of the Company's Common Stock issuable to the Employee upon exercise of the Option, valued in 13 accordance with Section 4.1(b) of the Plan at the date of Option exercise, may be used to make all or part of such payment. Section 5.4 - Certain Timing Requirements - ----------- --------------------------- At the discretion of the Committee shares of Common Stock issuable to the Optionee upon exercise of the Option may be used to satisfy the Option exercise price or the tax withholding consequences of such exercise, in the case of persons subject to Section 16 of the Exchange Act and to the extent such limitation is required by Rule 16b-3, as then in effect, only (i) during the period beginning on the third business day following the date of release of the quarterly or annual summary statement of sales and earnings of the Company and ending on the twelfth business day following such date or (ii) pursuant to an irrevocable written election by the Optionee to use shares of Common Stock issuable to the Optionee upon exercise of the Option to pay all or part of the Option price or the withholding taxes made at least six months prior to the payment of such Option price or withholding taxes. Section 5.5 - Additional Conditions to Issuance of Stock Certificates - ----------- ------------------------------------------------------- The shares of Common Stock issuable and deliverable upon the exercise of an Option shall be fully paid and non-assessable. In addition to satisfaction of the conditions specified in Sections 5.3 and 5.4, the Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (b) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (c) The lapse of such reasonable period of time following the exercise of the Option as the Committee or Board may establish from time to time for reasons of administrative convenience. Section 5.6 - Rights as Stockholders - ----------- ---------------------- The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders or the Company's stock record books reflect the Optionee as a stockholder pursuant to any book entry procedure approved by the Secretary. 14 The Committee, in its absolute discretion, may impose such other restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such other restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock, acquired by exercise of an Incentive Stock Option, within (i) two years from the date of granting such Option or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. ARTICLE VI AWARD OF RESTRICTED STOCK ------------------------- Section 6.1 - Award of Restricted Stock - ----------- ------------------------- (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. Section 6.2 - Restricted Stock Agreement - ----------- -------------------------- Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3 - No Right to Continued Employment - ----------- -------------------------------- Nothing in this Plan or in any Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of the 15 Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4 - Rights as Stockholders - ----------- ---------------------- Upon delivery of any shares of Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7, and upon issuance thereof, if uncertificated, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the -------- ------- discretion of the Committee, any extraordinary distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. Section 6.5 - Restrictions - ----------- ------------ All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company or a Subsidiary, Company performance, individual performance, or a change of control; provided, however, that by a resolution adopted after the -------- ------- Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. Section 6.6 - Repurchase of Restricted Stock - ----------- ------------------------------ If consideration (other than services) was paid for Restricted Stock, the Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock or such other price as may be specified in the Restricted Stock Agreement; provided, however, that provision may be made in the Restricted -------- ------- Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without 16 Cause, or following a Change in Control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7 - Escrow - ----------- ------ The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Restricted Stock). Section 6.8 - Legend - ----------- ------ In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. ARTICLE VI-A AWARD OF SECTION 162(m) RESTRICTED STOCK ---------------------------------------- Section 6.1A - Award of Section 162(m) Restricted Stock - ------------ ---------------------------------------- (a) The Committee shall from time to time, in its absolute discretion: (i) Select from among the key Employees (including Employees who have previously received other awards under this Plan or any other stock option plan of the Company) such of them as in its opinion should be awarded Section 162(m) Restricted Stock; and (ii) Determine the purchase price, if any, and other terms and conditions applicable to such Section 162(m) Restricted Stock, consistent with this Plan. (b) In all cases, legal consideration meeting the requirements of Delaware law shall be required for each issuance of Section 162(m) Restricted Stock. (c) Upon the selection of a key Employee to be awarded Section 162(m) Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Section 162(m) Restricted Stock and may impose such conditions on the issuance of such Section 162(m) Restricted Stock as it deems appropriate. 17 Section 6.2A - Section 162(m) Restricted Stock Agreement - ------------ ----------------------------------------- Section 162(m) Restricted Stock shall be issued only pursuant to a written Section 162(m) Restricted Stock Agreement, which shall be executed by the selected key Employee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 6.3A - No Right to Continued Employment - ------------ -------------------------------- Nothing in this Plan or in any Section 162(m) Restricted Stock Agreement hereunder shall confer on any Section 162(m) Restricted Stockholder any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Section 162(m) Restricted Stockholder at any time for any reason whatsoever, with or without good cause. Section 6.4A - Rights as Stockholders - ------------ ---------------------- Upon delivery of any shares of Section 162(m) Restricted Stock that are certificated to the escrow holder pursuant to Section 6.7A, and upon issuance thereof, if uncertificated, the Section 162(m) Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in the Section 162(m) Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; provided, however, that in the discretion of the Committee, any extra ordinary - -------- ------- distribution with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5A. Section 6.5A - Restrictions - ------------ ------------ All shares of Section 162(m) Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Section 162(m) Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Section 162(m) Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability. The Section 162(m) Restricted Stock Agreement shall provide that a Section 162(m) Restricted Stockholder's rights in Section 162(m) Restricted Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 162(m) Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration (other than services) was paid by the Section 162(m) Restricted Stockholder upon issuance, a Section 162(m) Restricted Stockholder's rights in unvested Section 162(m) Restricted Stock shall lapse upon Termination of Employment for any reason at any time or prior to any date the Committee may establish. 18 Section 6.6A - Repurchase of Section 162(m) Restricted Stock - ------------ --------------------------------------------- If consideration (other than services) was paid for Section 162(m) Restricted Stock, the Committee shall provide in the terms of each individual Section 162(m) Restricted Stock Agreement that the Company shall have the right to repurchase from the Section 162(m) Restricted Stockholder the Section 162(m) Restricted Stock then subject to restrictions under the Section 162(m) Restricted Stock Agreement immediately upon a Termination of Employment at a cash price per share equal to the price paid by the Section 162(m) Restricted Stockholder for such Section 162(m) Restricted Stock or such other price as may be specified in the Section 162(m) Restricted Stock Agreement; provided, however, that provision may be made in the Section 162(m) Restricted - -------- ------- Stock Agreement in the Committee's discretion that no such right of repurchase shall exist in the event of a Termination of Employment without Cause, or following a Change in Control of the Company or because of the Section 162(m) Restricted Stockholder's retirement, death or disability, or otherwise. Section 6.7A - Escrow - ------------ ------ The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Section 162(m) Restricted Stock until all of the restrictions imposed under the Section 162(m) Restricted Stock Agreement with respect to the shares evidenced by such certificate expire or shall have been removed (or the Secretary shall establish book entry procedures sufficient to prevent unauthorized transfers of the Section 162(m) Restricted Stock). Section 6.8A - Legend - ------------ ------ In order to enforce the restrictions imposed upon shares of Section 162(m) Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all certificated shares of Section 162(m) Restricted Stock that are still subject to restrictions under Section 162(m) Restricted Stock Agreements, or stop transfer instructions with respect to book entry procedures, which legend, legends or instructions shall make appropriate reference to the conditions imposed hereby. ARTICLE VII PERFORMANCE AWARDS, DEFERRED STOCK, STOCK PAYMENTS -------------------------------------------------- Section 7.1 - Performance Awards - ----------- ------------------ Any key Employee selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in 19 each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee. Section 7.2 - Stock Payments - ----------- -------------- Any key Employee selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. Section 7.3 - Deferred Stock - ----------- -------------- Any key Employee selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria, in each case on a specified date or dates or over any period or periods determined by the Committee. Common Stock underlying a Deferred Stock award will not be issued until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. Section 7.4 - Performance Award Agreement, Deferred Stock Agreement, Stock - ----------- ------------------------------------------------------------ Payment Agreement - ----------------- Each Performance Award, Deferred Stock Award and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5 - Term - ----------- ---- The term of a Performance Award Agreement, Deferred Stock Award and/or Stock Payment shall be set by the Committee in its discretion. 20 Section 7.6 - Exercise Upon Termination of Employment - ----------- --------------------------------------- A Performance Award, Deferred Stock Award and/or Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Performance Award, Deferred Stock Award and/or Stock Payment may be exercised or paid subsequent to Termination of Employment without Cause, or following a Change in Control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. Section 7.7 - Payment - ----------- ------- Payment of the amount determined under Section 7.1 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. Section 7.8 - No Right to Continued Employment - ----------- -------------------------------- Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VII-A SECTION 162(m) PERFORMANCE AWARDS, SECTION 162(m) DEFERRED STOCK, SECTION 162(m) STOCK PAYMENTS ---------------------------------------------------- Section 7.1A - Section 162(m) Performance Awards - ------------ --------------------------------- Any key Employee selected by the Committee may be granted one or more Section 162(m) Performance Awards. The right to a Section 162(m) Performance Award shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Section 7.2A - Section 162(m) Stock Payments - ------------ ----------------------------- Any key Employee selected by the Committee may be granted one or more Section 162(m) Stock Payments. The right to a Section 162(m) Stock Payment shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. 21 Section 7.3A - Section 162(m) Deferred Stock - ------------ ----------------------------- Any key Employee selected by the Committee may be granted an award of Section 162(m) Deferred Stock. An award of Section 162(m) Deferred Stock shall not vest unless one or more specified Performance Criteria established by the Committee shall have been achieved. Common Stock underlying a Section 162(m) Deferred Stock award will not be issued until the Section 162(m) Deferred Stock award has vested. Unless otherwise provided by the Committee, a Grantee of Section 162(m) Deferred Stock shall have no rights as a Company stockholder with respect to such Section 162(m) Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. Section 7.4A - Section 162(m) Performance Award Agreement, Section 162(m) - ------------ ---------------------------------------------------------- Deferred Stock Agreement, Section 162(m) Stock Payment Agreement - ---------------------------------------------------------------- Each Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. Section 7.5A - Term - ------------ ---- The term of a Section 162(m) Performance Award Agreement, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment shall be set by the Committee in its discretion. Section 7.6A - Exercise Upon Termination of Employment - ------------ --------------------------------------- A Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment is exercisable or payable only while the Grantee is an Employee; provided that the Committee may determine that the Section 162(m) Performance Award, Section 162(m) Deferred Stock Award and/or Section 162(m) Stock Payment may be exercised or paid following a Change in Control of the Company, or because of the Grantee's death or disability. Section 7.7A - Payment - ------------ ------- Payment of the amount determined under Section 7.1A above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VII-A is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Sections 5.3 and 5.5. 22 Section 7.8A - No Right to Continued Employment - ------------ -------------------------------- Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE VIII ADMINISTRATION -------------- Section 8.1 - Duties and Powers of Committee - ----------- ------------------------------ It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the agreements pursuant to which Options, awards of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock or Section 162(m) Deferred Stock, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments are granted and awarded and to adopt such rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. Options, awards of Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Awards and Section 162(m) Stock Payments are intended to qualify as performance-based compensation under Section 162(m) of the Code, and the Committee shall grant or award such Options, rights or other awards in a manner consistent with the rules governing performance-based compensation under Section 162(m) of the Code. Any such interpretations and rules in regard to Incentive Stock Options shall be consistent with the basic purpose of the Plan to grant "incentive stock options" within the meaning of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Section 8.2 - Majority Rule - ----------- ------------- The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. Section 8.3 - Compensation; Professional Assistance; Good Faith Actions - ----------- --------------------------------------------------------- Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities 23 incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, Section 162(m) Restricted Stockholders, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or the Options or other awards, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. ARTICLE IX OTHER PROVISIONS ---------------- Section 9.1 - Options and Other Rights Are Not Transferable - ----------- --------------------------------------------- Except as the Committee may otherwise provide, no Options, Restricted Stock Awards, Deferred Stock Awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock Awards, Section 162(m) Deferred Stock Awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments or interest under this Plan or part thereof shall be liable for the debts, contracts or engagements of any Optionee, Grantee, Restricted Stockholder, Section 162(m) Restricted Stockholder or their respective successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 9.1 shall prevent transfers by will or by the applicable laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder. Section 9.2 - Amendment, Suspension or Termination of the Plan; Modification of - ----------- ----------------------------------------------------------------- Options - ------- The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board; provided, however, that no such amendment or modification may (i) increase the maximum number of shares specified in Section 2.1(a) (except that adjustments authorized by Section 2.3 of the Plan shall not be limited by this provision) or (ii) change the Employees eligible to participate in the Plan. Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of an Option, Restricted Stock, Section 162(m) Restricted Stock or award, alter or impair any rights or obligations under any such Option, Restricted Stock, Section 162(m) Restricted Stock or award. No 24 Option, Restricted Stock, Section 162(m) Restricted Stock or award may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option be granted under this Plan after the expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 9.3. An Option, Restricted Stock, Section 162(m) Restricted Stock or award shall be subject in all events to the condition that, if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of any of the Company's securities upon any securities exchange or under any law, regulation or other requirement of any governmental authority is necessary or desirable, or that any consent or approval from any governmental authority is necessary or desirable, then the Board may modify the terms of any Option, Restricted Stock, Section 162(m) Restricted Stock or other award granted under the Plan, without the consent of the Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder in any manner which the Board deems necessary or desirable in order to improve the Company's ability to obtain such listing, registration, qualification, consent or approval. Section 9.3 - Approval of Plan by Stockholders - ----------- -------------------------------- The Plan shall become effective as of the date of Board approval (the "Effective Date"), subject to the approval of the Company's stockholders within 12 months after the Effective Date; provided, however, that -------- ------- notwithstanding anything herein or in any award agreement to the contrary, all Section 162(m) Performance Awards, Section 162(m) Stock Payments, Section 162(m) Restricted Stock, and Section 162(m) Deferred Stock awarded prior to such stockholder approval shall be void if such approval has not been obtained at the end of said 12-month period. Section 9.4 - Effect of Plan Upon Other Option and Compensation Plans - ----------- ------------------------------------------------------- The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. Section 9.5 - No Obligation to Register - ----------- ------------------------- The Company shall not be deemed, by reason of the granting of any Option or any other award hereunder, to have any obligation to register the shares of Common Stock subject to such Option or award under the Securities Act or to maintain in effect any registration of such shares which may be made at any time under the Securities Act. 25 Section 9.6 - Tax Withholding - ----------- --------------- The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee, Restricted Stockholder or Section 162(m) Restricted Stockholder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Payment, Section 162(m) Restricted Stock, Section 162(m) Deferred Stock, Section 162(m) Performance Award, or Section 162(m) Stock Payment. Section 9.7 - Loans - ----------- ----- The Committee may permit, in its discretion, and subject to the Company's approval, the extension by the Company of one or more loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted under this Plan, or the issuance of Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee, subject to the Company's approval. Section 9.8 - Limitations Applicable to Section 16 Persons and Performance-Based - ----------- ------------------------------------------------------------------ Compensation - ------------ Notwithstanding any other provision of this Plan, any Option, Performance Award, Stock Payment, Section 162(m) Performance Award, or Section 162(m) Stock Payment granted, or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded, to a key Employee who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule, and this Plan shall be deemed amended to the extent necessary to conform to such limitations. Furthermore, notwithstanding any other provision of this Plan, any Option, right or award intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. Section 9.9 - Compliance with Laws - ----------- -------------------- This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance 26 Awards, or Section 162(m) Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Payments, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or Restricted Stock, Deferred Stock, Section 162(m) Restricted Stock, or Section 162(m) Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Payments, Section 162(m) Restricted Stock awards, Section 162(m) Deferred Stock awards, Section 162(m) Performance Awards, or Section 162(m) Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. Section 9.10 - Transfer Restrictions - ------------ --------------------- To the extent required for compliance of the Plan with any applicable provisions of Rule 16b-3, shares acquired upon exercise of any Option, award or right under this Plan may not be sold or otherwise transferred for at least six months (or such other period as provided in such Rule) after such acquisition. Section 9.11 - Titles - ------------ ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. Section 9.12 - Governing Law - ------------ ------------- The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. 27 I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Playboy Enterprises, Inc. on __________, 199_. Executed on this ____ day of ____________, 199_. ----------------------------- Assistant Secretary * * * * I hereby certify that the foregoing Plan was duly approved by the shareholders of Playboy Enterprises, Inc. on __________, 199_. Executed on this ____ day of ____________, 199_. ----------------------------- Secretary 28 EX-10.2 3 STOCK PURCHASE PLAN EXHIBIT 10.2 PLAYBOY ENTERPRISES, INC. EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE. This Employee Stock Purchase Plan (the "Plan") is intended to advance the interests of Playboy Enterprises, Inc. (the "Company") and its stockholders by allowing employees of the Company and those subsidiaries of the Company that participate in the Plan the opportunity to purchase shares of the Company's Class B Common Stock ("Class B Common Stock"). It is intended that the Plan will constitute an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). SECTION 2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors. The majority of the Committee shall constitute a quorum, and the action of (a) a majority of the members of the Committee present at any meeting at which a quorum is present or (b) all members acting unanimously by written consent, shall be the acts of the Committee. The interpretation and construction by the Committee of any provision of the Plan or of any subscription to purchase shares under it shall be final. The Committee may establish any policies or procedures which in the discretion of the Committee are relevant to the operation and administration of the Plan and may adopt rules for the administration of the Plan. The Committee will, from time to time, designate the subsidiaries (as defined below) of the Company whose employees will be eligible to participate in the Plan. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any subscription to purchase shares under it. For purposes of this Plan, the term "subsidiary" means any corporation in which the Company directly or indirectly owns or controls more than 50 percent of the total combined voting power of all classes of stock issued by the corporation. SECTION 3. ELIGIBILITY. Each employee of the Company or of a participating subsidiary of the Company whose customary employment is a minimum of 20 hours per week may subscribe to purchase shares of Class B Common Stock under the terms of the Plan, except that no employee may subscribe to purchase shares on the immediately following Purchase Date (as defined below) if, immediately after the immediately preceding Subscription Date (as defined below), such employee would own stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company. For purposes of this paragraph, stock ownership of an individual shall be determined under the rules of Section 424(d) of the Code. For purposes of the Plan: (a) The term "Subscription Date" means the first business day of each fiscal quarter of the Company during which the Plan is effective or, in the case of a participant who is not an employee of the Company or a participating subsidiary of the Company as of a particular Subscription Date, the date thereafter on which such participant became an employee of the Company or a participating subsidiary of the Company. The first Subscription Date under the Plan will be July 1, 1996. (b) The term "Purchase Date" means the last business day of the fiscal quarter in which the related Subscription Date occurs. SECTION 4. PARTICIPATION. (a) An eligible employee shall evidence his or her agreement to subscribe for shares by completing a written agreement (the "Subscription and Authorization Form") provided by the Committee and filing it as directed by the Committee. A Subscription and Authorization Form will take effect within a reasonable time after it has been filed with the Company. Once an employee provides the Committee with the Subscription and Authorization Form, he or she continues as a participant in the Plan on the terms provided in such form until he or she provides a new form or withdraws from the Plan. (b) In the Subscription and Authorization Form, an eligible employee shall designate any whole dollar amount to be withheld from such employee's compensation in each pay period and used to purchase shares of Common Stock on the next Purchase Date, subject to the following limitations: (i) the whole dollar amount (on an annualized basis) shall not exceed 10 percent of his or her compensation (as defined below) on an annualized basis; (ii) the maximum number of shares of Class B Common Stock which can be purchased by any one employee on any Purchase Date shall not exceed 1,000 shares of the Class B Common Stock; and (iii) the Committee may establish from time to time minimum payroll deductions. For purposes of this Plan, the term "compensation" means gross regular earnings. SECTION 5. STOCK. The stock purchased under the Plan shall be shares of authorized but unissued or reacquired Class B Common Stock. Subject to the provisions of Section 6(h), the aggregate number 2 of shares which may be purchased under the Plan shall not exceed 50,000 shares of Class B Common Stock. In the event that the dollar amount of shares subscribed for in any quarter exceeds the number of shares available to be purchased under the Plan, the shares available to be purchased shall be allocated on a pro rata basis among the subscriptions. SECTION 6. TERMS AND CONDITIONS OF SUBSCRIPTIONS. Subscriptions shall be evidenced by a Subscription and Authorization Form in such form as the Committee shall from time to time approve, provided that all employees subscribing to purchase shares shall have the same rights and privileges (except as otherwise provided in Section 4(b) and subparagraph (d) below), and provided further that such subscriptions shall comply with and be subject to the following terms and conditions: (a) Purchase Price. The purchase price shall be an amount equal to 85 percent of the fair market value of such stock on the Purchase Date. During such time as the Class B Common Stock is traded on the New York Stock Exchange, the fair market value per share shall be the closing price of the Class B Common Stock (as reported in the record of Composite Transactions for New York Stock Exchange listed securities and printed in The Wall Street Journal) on such ----------------------- Purchase Date (or on the next regular business date on which shares of the Class B Common Stock of the Company shall be traded in the event that no shares of the Class B Common Stock shall have been traded on the Purchase Date). Subject to the foregoing, the Committee shall have full authority and discretion in fixing the purchase price. (b) Medium and Time of Payment. The purchase price shall be payable in full in United States dollars, pursuant to uniform policies and procedures established by the Committee. The funds required for such payment will be derived by withholding from an employee's compensation. An employee shall have the right at any time to terminate the withholding from his or her compensation of amounts to be paid toward the purchase price. An employee shall have the right, one time in each quarter, to change the amount so withheld, by submitting a written request to the Company at least 10 business days before any Purchase Date. An employee shall have the right to cancel his or her subscription in whole or in part and to obtain a refund of amounts withheld from his or her compensation by submitting a written request to the Company at least 10 business days before any Purchase Date. Any cancellation of a subscription in whole will constitute a withdrawal under Section 4(a) of the Plan. Such amounts shall thereafter be paid to the employee within a reasonable period of time. (c) No Interest on Employee Funds. No interest shall accrue on any amounts withheld from an employee's compensation. 3 (d) Accrual Limitation. No subscription shall permit the rights of an employee to purchase stock under all "employee stock purchase plans" (as defined in the Code) of the Company to accrue, under the rules set forth in Section 423(b)(8) of the Code, at a rate which exceeds $25,000 of fair market value of such stock (determined at the time of subscription) for each calendar year. (e) Termination of Employment. If an employee who has subscribed for shares ceases to be employed by the Company or a participating subsidiary before any applicable Purchase Date: i. Because of retirement or disability, he or she may elect to continue making payments equal to the rate of payroll deductions made before retirement or disability until the first Purchase Date following retirement or disability; or otherwise the accumulated payment in his or her account at the time of retirement or disability will be applied to purchase shares at the applicable purchase price on the first Purchase Date following such retirement or disability, unless the Company is otherwise notified in writing. ii. For any other reason, he or she may elect to have the accumulated payment in his or her account at the time of termination applied to purchase shares at the applicable purchase price on the first Purchase Date following such termination; or otherwise the total unused payments credited to his or her account on the date of termination will be refunded within a reasonable time without interest, unless the Company is otherwise notified in writing. (f) Transferability. Neither payments credited to an employee's account nor any rights to subscribe to purchase shares of Class B Common Stock under the Plan may be transferred by an employee except by the laws of descent and distribution. Any such attempted transfer will be without effect, except that the Company may treat such act as an election by the employee to withdraw in accordance with Section 6(b). Shares of Class B Common Stock may be purchased under the Plan only by subscribing employees who have legal capacity as determined under applicable state law or, in the event of the employee's legal incapacity, by his or her guardian or legal representative acting in a fiduciary capacity on behalf of the employee under state law or court supervision. (g) Death and Designation of Beneficiary. An employee may file with the Company a written designation of beneficiary and may change such designation of beneficiary at any time by written notice to the Company. On the death of an employee, the elections provided on termination of employment for retirement or disability may be exercised by the employee's beneficiary, executor, administrator, or other legal representative. 4 (h) Adjustments. The Committee may make or provide for such adjustments in the purchase price and in the number or kind of shares of the Class B Common Stock or other securities covered by outstanding subscriptions, or specified in the second sentence of Section 5 of the Plan, as the Committee in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of employees that would otherwise result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company; (ii) any merger, consolidation, spin-off, split-off, spin-out, split-up, separation, reorganization, partial or complete liquidation, or other distribution of assets, issuance of rights or warrants to purchase stock; or (iii) any other corporate transaction or event having an effect similar to any of the foregoing. Moreover, in the event of any such transaction or event, the Committee, in its discretion, may provide in substitution for any or all outstanding subscriptions under this Plan such alternative consideration as it, in good faith, may determine to be equitable in the circumstances. (i) Rights as a Stockholder. An employee shall have no rights as a stockholder with respect to any Class B Common Stock covered by his or her subscription until the Purchase Date following payment in full. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date of such purchase, except as provided in Section 6(h) of the Plan. (j) Fractional Shares. Fractional shares may be purchased under the Plan and credited to an account for the employee. The Company, however, shall have the right to pay cash in lieu of any fractional shares of Class B Common Stock to be distributed from an employee's account under the Plan. (k) Other Provisions. The Subscription and Authorization Form authorized under the Plan shall contain such other provisions as the Committee may deem advisable, provided that no such provisions may in any way be in conflict with the terms of the Plan. SECTION 7. TERM OF PLAN. Eligible employees may subscribe for shares under the Plan within a period of ten years from the date the Plan is adopted by the Board of Directors; provided, however, that the Committee may terminate or suspend the Plan if at any time there are less than 5 percent of the eligible employees participating in the Plan. 5 SECTION 8. AMENDMENT OF THE PLAN. The Plan may be amended from time to time by the Committee, but without further approval of the stockholders, no such amendment shall (a) increase the aggregate number of shares of Class B Common Stock that may be issued and sold under the Plan (except that adjustments authorized by Section 6(h) of the Plan shall not be limited by this provision) or (b) materially modify the requirements as to eligibility for participation in the Plan. SECTION 9. APPROVAL OF STOCKHOLDERS. The Plan shall take effect upon adoption by the Board of Directors; provided, however, that any subscriptions and purchases under the Plan shall be null and void unless the Plan is approved by a vote of the holders of a majority of the total number of outstanding shares of voting stock of the Company present in person or by proxy at a meeting at which a quorum is present in person or by proxy, which approval must occur within the period of 12 months after the date the Plan is adopted by the Board of Directors. 6 EX-10.3A 4 EMPLOYMENT AGREEMENT EXHIBIT 10.3(a) AGREEMENT This Agreement (this "Agreement") is made as of the 16th day of October, 1996, by and between Playboy Enterprises, Inc. (the "Company") and Anthony J. Lynn ("Employee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and Employee are parties to that certain agreement dated May 21, 1992, as amended (the "Employment Agreement"); and WHEREAS, the Company and Employee desire to amend the Employment Agreement to incorporate and reflect all amendments to the date of this Agreement and to amend such other provisions of the Employment Agreement as are hereinafter set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants, and subject to the terms and conditions herein set forth, the parties hereto agree as follows: 1. Defined Terms. All capitalized terms used and not otherwise defined ------------- herein shall have the meanings assigned to such terms in the Employment Agreement. 2. Amendments to Employment Agreement. The Employment Agreement is hereby ---------------------------------- amended as follows: 2.01 Paragraphs 3.B., 3.D., 12.C. and 12.E. of the Employment Agreement are hereby terminated and severed from the Employment Agreement, and shall have no further force or effect from and after the date hereof. From and after the date of this Agreement, Employee's rights to any compensation in the nature of Contingent Compensation or Equity Bonuses shall be governed exclusively by the 1996 Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn (the "Plan), a copy of which has been provided to Employee. Employee understands and agrees that his entitlement to Contingent Compensation and Equity Bonuses for periods after June 30, 1996 is subject to, and contingent upon, approval by the Company's stockholders of the Plan at the Company's annual meeting of stockholders scheduled to be held November 13, 1996, and any and all rights thereunder shall be void and of no force and effect should the Company's stockholders not approve the Plan. 2.02 From and after the date of this Agreement, all references in this Agreement and the Employment Agreement to (a) "Contingent Compensation" shall mean "Post-1997 Contingent Compensation" and "1997 Contingent Compensation" (as defined in the Plan), (b) "Equity Bonus" shall mean and include the terms "Post-1997 Equity Bonus" and "1997 Equity Bonus" (as defined in the Plan), (c) "Equity Disposition Transactions" shall mean and include "Equity Disposition Transaction" and "1997 Equity Disposition Transaction" (as defined in the Plan), (d) "Pre-tax Profits" shall mean and include "Pre-tax Profits" and "1997 Pre-tax Profits" (as defined in the Plan), and (e) "Profits Base" shall mean "Profits Base" (as defined in the Plan). 2.03 Paragraph 2 of the Employment Agreement is hereby amended by amending and restating such Paragraph in its entirety as follows: "2. TERM: ---- The term of this Agreement shall commence on July 1, 1996 and shall continue until June 30, 2000 or the date upon which this Agreement is terminated pursuant to the provisions of paragraphs 8 - 11 below, whichever occurs first (the "Employment Term")." 2.04 Paragraph 3.A. of the Employment Agreement is hereby amended by amending and restating such Paragraph in its entirety as follows: "A. Basic Compensation: Employee shall receive annual basic ------------------ compensation as follows ("Basic Compensation") and payable bi-weekly pursuant to the Company's normal payroll practices: (i) July 1, 1996 through June 1, 1997 - Five Hundred Twenty- Five Thousand Dollars ($525,000); and (ii) July 1, 1997 through June 30, 2000 - Five Hundred Fifty Thousand Dollars ($550,000)." 2.05 Paragraph 12.D. of the Employment Agreement is hereby amended by amending and restating such Paragraph in its entirety as follows: "D. If Employee's employment with the Company is terminated by the Company without cause as provided in Paragraph 10 above, then Employee shall only be entitled to receive, and the Company shall unconditionally pay to Employee without offset of any kind or nature, except as described below, a one-time severance payment equal to your Basic Compensation in the fiscal year in which such termination occurs. Any amounts payable to Employee pursuant to this paragraph 12.D. will be reduced by any amounts paid to Employee pursuant to Employee's Change in Control Severance Agreement dated as of June 1, 1992." 2 3. Miscellaneous. ------------- 3.01 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. 3.02 Ratification. The Employment Agreement as hereby amended is in ------------ all respects ratified and confirmed, and, as amended, all of the rights and powers created thereby or thereunder shall be and remain in full force and effect. IN WITNESS WHEREOF, the parties have executed or caused their duly authorized representatives to execute, this Agreement as of the date first above written. PLAYBOY ENTERPRISES, INC. By:/s/Howard Shapiro ------------------------------- /s/Anthony J. Lynn ------------------------------ Anthony J. Lynn 3 EX-10.3B 5 INCENTIVE COMPENSATION PLAN EXHIBIT 10.3(b) PLAYBOY ENTERPRISES, INC. INCENTIVE COMPENSATION PLAN FOR ANTHONY J. LYNN Playboy Enterprises, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn (the "Plan"). The Compensation Committee of the Board of Directors of the Company (the "Committee") and the Board of Directors of the Company have approved the terms and conditions reflected in the Plan. The purposes of the Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to Anthony J. Lynn ("Employee") through incentive compensation. (2) To enable the Company to obtain and retain the services of Employee who is considered essential to the long-range success of the Company by providing and offering him an opportunity to participate in incentive compensation arrangements which will reflect the growth, development and financial success of the Company. Section 1 - 1997 Contingent Compensation and Post-1997 Contingent --------- ----------------------------------------------------- Compensation. - ------------ (a) Employee shall receive contingent compensation for the 1997 fiscal year ("1997 Contingent Compensation"), computed as follows: (i) Employee shall receive a sum equal to 5% of the amount by which the 1997 Pre-tax Profits of the Playboy Entertainment Group for the 1997 fiscal year (July 1 through June 30) exceeds the Profits Base; provided, however, if the sum of $525,000 plus 1997 Contingent Compensation equals $2,000,000, any additional 1997 Contingent Compensation payable to Employee will be equal to 2.5% of the amount by which the 1997 Pre-tax Profits of the Playboy Entertainment Group exceeds the Profits Base. (ii) The Profits Base is defined as $2,350,000. (iii) (A) "1997 Pre-tax Profits" of the Playboy Entertainment Group for the 1997 fiscal year shall be the amount, if any, by which the total net revenues of the Playboy Entertainment Group, including its subsidiaries and the Group's pro-rata share of revenues derived from all controlled affiliates exceeds all reasonable and applicable operating expenses attributable to same, in accordance with "Generally Accepted Accounting Principles" computed consistent with methods utilized by the Company in the 1992 fiscal year and used by the Company's outside auditors in the preparation of the Company's audited financial statements. (B) In computing the 1997 Pre-tax Profits of the Playboy Entertainment Group for the 1997 fiscal year, there shall be allowed all fair and reasonable allocation of items of revenue and expenses between divisions, subsidiaries and affiliates of the Company, including, but not limited to, inter company sales, expenses such as rents, occupancy, general administrative and personnel salaries, MIS, insurance, employee benefits costs, security, payroll processing, legal and tax advisory fees, depreciation, profit sharing and auditing expenses. (C) Further, the effect of any One Time Gains or Losses accounted for as part of the Playboy Entertainment Group shall be amortized evenly over four (4) years, beginning in the month of occurrence, for purposes of calculating 1997 Pre-tax Profits, regardless of how the transaction is accounted for under Generally Accepted Accounting Principles. A "One Time Gain or Loss" is a gain or loss resulting from a transaction not in the ordinary course of business and which does not result in a 1997 Equity Bonus or a Post- 1997 Equity Bonus under Section 2 of this Plan. (D) In no event shall profits or losses, except as described in Section 1(a)(iii)(C), from any fiscal year be carried over or back to any other fiscal year or otherwise taken into consideration in computing the 1997 Pre-tax Profits. (iv) The 1997 Contingent Compensation to which Employee is entitled shall be paid on or before the date which is five business days after the earlier of: (A) The date on which the Company's outside auditors complete their field work for the Company with regard to the 1997 fiscal year; or (B) The date on which such outside auditors approve the release of the annual earnings of the Company for the 1997 fiscal year; or (C) 90 days after the end of the 1997 fiscal year. Notwithstanding anything in this Section 1(a)(iv) to the contrary, Employee shall not be paid 1997 Contingent Compensation until after the Committee certifies in writing that the performance goals and any other material terms specified herein and necessary for Employee to receive such 1997 Contingent Compensation have been satisfied. (v) The Company shall, concurrently with payment to Employee of the 1997 Contingent Compensation to which he is entitled hereunder, deliver and render to Employee a detailed accounting (certified by the Chief Financial Officer of the -2- Company) setting forth therein the Company's determination of the 1997 Pre-tax Profits of the Playboy Entertainment Group. (vi) 1997 Contingent Compensation, if any, due to Employee following the termination of Employee's employment with the Company shall be governed solely by the provisions of Section 1(c). (b) Employee shall receive annual contingent compensation ("Post-1997 Contingent Compensation") for each of the fiscal years during the Section 1(b) Term, computed as follows: (i) Employee shall receive a sum equal to 5% of the amount by which the Pre-tax Profits of the Playboy Entertainment Group for each fiscal year (July 1 through June 30) during the Section 1(b) Term exceeds the Profits Base; provided, however, once the sum of $550,000 plus Post-1997 Contingent Compensation equals $2,000,000 in any fiscal year, any additional Post-1997 Contingent Compensation payable to Employee in such fiscal year will be equal to 2.5% of the amount by which the Pre-tax Profits of the Playboy Entertainment Group in such fiscal year exceeds the Profits Base. Each fiscal year shall be deemed a separate accounting period for purposes of computing Post-1997 Contingent Compensation for such fiscal year. (ii) The Profits Base is defined as $2,350,000. (iii) (A) "Pre-tax Profits" of the Playboy Entertainment Group for any fiscal year shall be the amount, if any, by which the total net revenues of the Playboy Entertainment Group, including its subsidiaries and the Group's pro- rata share of revenues derived from all controlled affiliates exceeds all reasonable and applicable operating expenses attributable to same, in accordance with "Generally Accepted Accounting Principles" computed consistent with methods utilized by the Company and used by the Company's outside auditors in the preparation of the Company's audited financial statements. (B) In computing the Pre-tax Profits of the Playboy Entertainment Group for any fiscal year, there shall be allowed all fair and reasonable allocation of items of revenue and expenses between divisions, subsidiaries and affiliates of the Company, including, but not limited to, inter company sales, expenses such as rents, occupancy, general administrative and personnel salaries, MIS, insurance, employee benefits costs, security, payroll processing, legal and tax advisory fees, depreciation, profit sharing and auditing expenses. (C) Further, the effect of any One Time Gains or Losses accounted for as part of the Playboy Entertainment Group shall be amortized evenly over four (4) years, beginning in the month of occurrence, for purposes of calculating Pre-tax Profits, regardless of how the transaction is accounted for under -3- Generally Accepted Accounting Principles. A "One Time Gain or Loss" is a gain or loss resulting from a transaction not in the ordinary course of business and which does not result in a 1997 Equity Bonus or a Post-1997 Equity Bonus under Section 2 of this Plan. (D) In no event shall profits or losses, except as described in Section 1(b)(iii)(C), from any fiscal year be carried over or back to any other fiscal year or otherwise taken into consideration in computing the Pre-tax Profits for any other fiscal year. (iv) The Post-1997 Contingent Compensation for each fiscal year to which Employee is entitled shall be paid on or before the date which is (5) business days after the earlier of: (A) The date on which the Company's outside auditors complete their field work for the Company with regard to such fiscal year; or (B) The date on which such outside auditors approve the release of the annual earnings of the Company for such fiscal year; or (C) 90 days after the end of such fiscal year. Notwithstanding anything in this Section 1(b)(iv) to the contrary, Employee shall not be paid Post-1997 Contingent Compensation for a fiscal year until after the Committee certifies in writing that the performance goals and any other material terms specified herein and necessary for Employee to receive such Post-1997 Contingent Compensation have been satisfied. (v) The Company shall, concurrently with payment to Employee of the Post-1997 Contingent Compensation for each fiscal year to which he is entitled hereunder, deliver and render to Employee a detailed accounting (certified by the Chief Financial Officer of the Company) setting forth therein the Company's determination of the Pre-tax Profits of the Playboy Entertainment Group for each such fiscal year. (vi) This Section 1(b) shall be in effect for the 1998, 1999 and 2000 fiscal years, and for each fiscal year thereafter unless and until notice is given by the Committee to Employee that this Section 1(b) shall not apply to the specified fiscal year following the 2000 fiscal year ("Section 1(b) Term"). Such notice shall be in writing and delivered no later than 30 calendar days prior to the commencement of the relevant fiscal year. -4- (vii) Post-1997 Contingent Compensation, if any, due to Employee following the termination of Employee's employment with the Company shall be governed solely by the provisions of Section 1(c). (c) (i) If Employee's employment with the Company is effectively terminated for "cause" as provided for under any then existing employment agreement between Employee and the Company, then Employee shall only be entitled to receive, and the Company shall unconditionally pay to Employee, all 1997 Contingent Compensation or Post-1997 Contingent Compensation, as the case may be, payable with respect to all periods prior to the fiscal year ("Section 1(c) Termination Year") during which the Company notifies Employee that his employment with the Company is so terminated. (ii) If Employee's employment with the Company is effectively terminated on account of Employee's disability as provided under any then existing employment agreement between Employee and the Company, or otherwise as provided in the Company's long-term disability policy, or on account of Employee's death, then Employee (or Employee's estate or personal representative, as applicable) shall only be entitled to receive, and the Company shall unconditionally pay to Employee (or Employee's estate or personal representative, as applicable), the following amounts: (A) All unpaid Post-1997 Contingent Compensation and 1997 Contingent Compensation, as the case may be, payable with respect to all periods prior to the Section 1(c) Termination Year during which the Company notifies Employee that his employment with the Company is so terminated, or Employee's death, as the case may be, plus (B) That percentage of the 1997 Contingent Compensation or Post-1997 Contingent Compensation, as the case may be, otherwise payable to Employee for the Section 1(c) Termination Year equal to the fraction, the numerator of which is the number of calendar days from the beginning of the Section 1(c) Termination Year through the effective date of termination and the denominator of which is 365. (iii) If Employee's employment with the Company is terminated by the Company without cause as defined under any then existing employment agreement between Employee and the Company, then Employee shall only be entitled to receive, and the Company shall pay to Employee, 100% of the 1997 Contingent Compensation or Post-1997 Contingent Compensation, as the case may be, to which Employee would have been entitled for and only for the Section 1(c) Termination Year (based upon the actual 1997 Pre-tax Profits or Pre-tax Profits, as the case may be, of the Playboy Entertainment Group for such fiscal year). Any amounts payable to Employee pursuant to this Section 1(c)(iii) will be -5- reduced by any amounts paid to Employee pursuant to Employee's Change in Control Severance Agreement dated as of June 1, 1992. Section 2 - 1997 Equity Bonus and Post-1997 Equity Bonus. --------- -------------------------------------------- (a) Employee shall be entitled to a bonus for the 1997 fiscal year ("1997 Equity Bonus") in accordance with the following provisions: (i) In the event that the Company directly or indirectly sells, transfers or otherwise disposes of an equity interest in Playboy Entertainment Group, Inc. ("PEGI") (or all or a portion of the assets comprising the Playboy Entertainment Group operations) (except sales of assets or operations that contributed less than 25% of the Group's total Pre-tax Profits in the fiscal year immediately preceding the fiscal year in which such sale, transfer or disposition occurs ("Measuring Year") or less than a 25% equity interest) to a third party (including a sale to the public) ("1997 Disposition") during the 1997 fiscal year and such 1997 Disposition occurs either (A) while Employee is employed by the Company or (B) within three (3) months after he is no longer employed by the Company (a "1997 Equity Disposition Transaction"), then Employee shall be entitled to a one-time 1997 Equity Bonus, as defined in Section 2(a)(ii) of this Plan. The 1997 Equity Bonus will be paid to Employee in cash promptly following the closing date of the 1997 Equity Disposition Transaction. However, Employee shall not be paid the 1997 Equity Bonus until after the Committee certifies in writing that the performance goals and any other material terms specified herein and necessary for Employee to receive such 1997 Equity Bonus have been satisfied. (ii) The 1997 Equity Bonus shall be computed by multiplying 1997 EB Pre-Tax Profits times the Remaining Term. "1997 EB Pre-Tax Profits" means (A) in the case of the sale, transfer or other disposition of an equity interest in PEGI entitling Employee to a 1997 Equity Bonus hereunder, the total Pre-tax Profits of PEGI for the Measuring Year times the fully-diluted percentage equity interest in PEGI acquired by the third party, and (B) in the case of a sale, transfer or other disposition of all or a portion of the assets comprising the Playboy Entertainment Group entitling Employee to a 1997 Equity Bonus hereunder, that portion of the Pre-tax Profits of Playboy Entertainment Group generated or attributable to such assets for the Measuring Year. "Remaining Term" means the lesser of (A) three (3) or (B) the number arrived at by dividing the number of full months remaining in Employee's employment term, as established by the Committee, by 12. (iii) It is the express intent of the Plan that the 1997 Equity Bonus shall only be payable in connection with a -6- 1997 Equity Disposition Transaction which constitutes a bona fide transfer of an equity interest in PEGI or a bona fide sale of assets, and shall not be payable in connection with any other transaction (whether in the form of joint ventures, co-productions or otherwise) which represents a financing transaction. In no event shall the Company structure a transaction which would otherwise constitute a sale or disposition of an equity interest in PEGI or a sale of assets as a financing transaction for the purposes of frustrating the provisions of this Section 2(a)(iii). (iv) The payment of the 1997 Equity Bonus, if any, will be in addition to any 1997 Contingent Compensation or Post-1997 Contingent Compensation payable to Employee under Section 1 of this Plan. (b) Employee shall be entitled to a bonus ("Post-1997 Equity Bonus") for all fiscal years beginning with or after the 1998 fiscal year in accordance with the following provisions: (i) In the event that the Company directly or indirectly sells, transfers or otherwise disposes of an equity interest in PEGI (or all or a portion of the assets comprising the Playboy Entertainment Group operations) (except sales of assets or operations that contribute less than 25% of the Group's total Pre-tax Profits in the Measuring Year or less than a 25% equity interest) to a third party (including a sale to the public) ("Post-1997 Disposition") after June 30, 1997 and such Post-1997 Disposition occurs either (A) while Employee is employed by the Company or (B) within three (3) months after he is no longer employed by the Company (an "Equity Disposition Transaction"), then Employee shall be entitled to a one-time Post-1997 Equity Bonus, as defined in Section 2(b)(ii) of this Plan. The Post-1997 Equity Bonus will be paid to Employee in cash promptly following the closing date of the Equity Disposition Transaction. However, Employee shall not be paid the Post- 1997 Equity Bonus until after the Committee certifies in writing that the performance goals and any other material terms specified herein and necessary for Employee to receive such Post-1997 Equity Bonus have been satisfied. (ii) The Post-1997 Equity Bonus shall be computed by multiplying Post-1997 EB Pre-Tax Profits times the Remaining Term. "Post-1997 EB Pre-Tax Profits" means (A) in the case of the sale, transfer or other disposition of an equity interest in PEGI entitling Employee to a Post-1997 Equity Bonus hereunder, the total Pre-tax Profits of PEGI for the Measuring Year times the fully-diluted percentage equity interest in PEGI acquired by the third party, and (B) in the case of a sale, transfer or other disposition of all or a portion of the assets comprising the Playboy Entertainment Group entitling Employee to a Post-1997 Equity Bonus hereunder, that portion of the Pre-tax Profits of Playboy Entertainment Group generated or attributable to such assets for the Measuring Year. -7- (iii) It is the express intent of the Plan that the Post-1997 Equity Bonus shall only be payable in connection with an Equity Disposition Transaction which constitutes a bona fide transfer of an equity interest in PEGI or a bona fide sale of assets, and shall not be payable in connection with any other transaction (whether in the form of joint ventures, co-productions or otherwise) which represents a financing transaction. In no event shall the Company structure a transaction which would otherwise constitute a sale or disposition of an equity interest in PEGI or a sale of assets as a financing transaction for the purposes of frustrating the provisions of this Section 2(b)(iii). (iv) The payment of the Post-1997 Equity Bonus, if any, will be in addition to any 1997 Contingent Compensation or Post-1997 Contingent Compensation payable to Employee under Section 1 of this Plan. Section 3 - Approval of Plan by Stockholders. The Plan will be submitted --------- -------------------------------- for the approval by the Company's stockholder prior to the end of the Company's 1997 fiscal year. The Plan shall not take effect unless and until the Plan receives such stockholder approval. Section 4 - Administration. --------- -------------- (a) It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and to adopt rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. (b) The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. (c) Members of the Committee shall receive such compensation for their services as members as may be determined by the Board of Directors of the Company. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorney, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon Employee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or awards thereunder, and all -8- members of the Committee shall be fully protected by the Company in respect to such action, determination or interpretation. Section 5 - Tax Withholding. The Company shall be entitled to require --------- --------------- payment in cash or deduction from other compensation payable to Employee of any sums required by federal, state or local tax law to be withheld with respect to the payment or vesting of any award hereunder. Section 6 - Titles. Titles are provided herein for convenience only and --------- ------ are not to serve as a basis for interpretation or construction of the Plan. Section 7 - Governing Law. The laws of the State of Delaware shall govern --------- ------------- the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. * * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Playboy Enterprises, Inc. on October 9, 1996. Executed on this 22 day of November, 1996. /s/Robert O. Campbell --------------------- Assistant Secretary * * * * I hereby certify that the foregoing Plan was duly approved by the shareholders of Playboy Enterprises, Inc. on November 13, 1996. Executed on this 14th day of November, 1996. /s/Howard Shapiro ----------------- Secretary -9- EX-10.3C 6 MEMO DATED OCT. 11, 1996 EXHIBIT 10.3(c) [LETTERHEAD OF PLAYBOY ENTERPISES, INC. APPEARS HERE] DATE October 11, 1996 -------------------------------------------------------------------------- TO Herb Laney ---------------------------------------------------------------------------- FROM Christie Hefner -------------------------------------------------------------------------- SUBJECT: Employment Terms ---------------------------------------------------------------------- - -------------------------------------------------------------------------------- This memo restates and supersedes our prior letter to you of February 26, 1993 and my memo to you of this year dated May 1, 1996, both of which are terminated as of the date hereof. Effective with the fiscal year commencing July 1, 1996, you will carry the title of Senior Vice President and President, Catalog Group. Your salary will continue to be $275,000 per year. The terms of, and your entitlement to compensation under, your special incentive compensation plan for the fiscal years ending June 1, 1997, 1998 and 1999 will be governed exclusively by the 1996 Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M. Laney (the "Plan"), a copy of which has been provided to you. You understand and agree that your entitlement to such compensation with respect to such periods is subject to, and contingent upon, approval by the Company's stockholders of the Plan at the Company's annual meeting of stockholders scheduled to be held November 13, 1996, and any and all rights thereunder shall be void and of no force and effect should the Company's stockholders not approve the Plan. If your employment is terminated for any reason other than cause, you will receive a full year's severance. Herb, I am very pleased to memorialize the terms of your arrangement with the Company. You continue to exhibit exceptional performance, innovation and enthusiasm for the catalog business. We have great expectations for growth in this group for the next several years. ACCEPTED AND AGREED TO: /s/ Herb Laney ----------------------- Herb Laney Date October 14, 1996 ------------------- EX-10.3D 7 INCENTIVE COMPENSATION PLAN FOR HERB LANEY EXHIBIT 10.3(d) PLAYBOY ENTERPRISES, INC. INCENTIVE COMPENSATION PLAN FOR HERBERT M. LANEY Playboy Enterprises, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), hereby adopts this Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M. Laney (the "Plan"). The Compensation Committee of the Board of Directors of the Company (the "Committee") and the Board of Directors of the Company have approved the terms and conditions reflected in the Plan by action taken on April 25, 1996. The purposes of the Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to Herbert M. Laney ("Employee") through incentive compensation. (2) To enable the Company to obtain and retain the services of Employee, who is considered essential to the long-range success of the Company, by providing and offering him an opportunity to participate in incentive compensation arrangements which will reflect the growth, development and financial success of the Company. Section 1 - Contingent Compensation. Employee shall receive a sum equal to --------- ----------------------- 5% on all pre-tax operating profits earned by the Catalog Group in excess of the fiscal 1996 operating profits of the Group based on cumulative profits achieved over a three year period from Fiscal Year 1997 through Fiscal Year 1999 (the "Contingent Compensation"). (By way or example, if Fiscal Year 1996 operating profits for the Group are $5,521,000, Employee would be entitled to 5% of the cumulative profits in excess of $16,563,000.) Employee shall not be entitled to the Contingent Compensation unless he is employed by the Company through Fiscal Year 1999. Furthermore, Employee shall not be paid the Contingent Compensation until after the Committee certifies in writing that the performance goals and any other material terms necessary for Employee to receive such Contingent Compensation have been satisfied. Section 2 - Approval of Plan by Stockholders. The Plan will be submitted --------- -------------------------------- for the approval of the Company's stockholders prior to the end of the Company's 1997 fiscal year. The Plan shall not 1 take effect unless and until the Plan receives such stockholder approval. Section 3 - Administration. --------- -------------- (i) It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and to adopt rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. (ii) The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. (iii) Members of the Committee shall receive such compensation for their services as members as may be determined by the Board of Directors of the Company. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon Employee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or awards thereunder, and all members of the Committee shall be fully protected by the Company in respect to such action, determination or interpretation. Section 4 - Tax Withholding. The Company shall be entitled to require --------- --------------- payment in cash or deduction from other compensation payable to Employee of any sums required by federal, state or local tax law to be withheld with respect to the payment or vesting of any award thereunder. 2 Section 5 - Titles. Titles are provided herein for convenience only and --------- ------ are not to serve as a basis for interpretation or construction of the Plan. Section 6 - Governing Law. The laws of the State of Delaware shall govern --------- ------------- the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. **** I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Playboy Enterprises, Inc. on Oct. 9 1996. Executed on this 2nd day of December, 1996. /s/ [SIGNATURE APPEARS HERE] ----------------------------------- Ass't. Secretary **** I hereby certify that the foregoing Plan was duly approved by the Shareholders of Playboy Enterprises, Inc. on Nov. 13, 1996. Executed on this 22nd day of November, 1996. /s/ [SIGNATURE APPEARS HERE] ----------------------------------- Secretary 3 EX-10.3E 8 EMPLOYMENT AGREEMENT EXHIBIT 10.3(e) EMPLOYMENT AGREEMENT -------------------- AGREEMENT, made and entered into as of the 7th day of April 1997 by and between Playboy Enterprises, Inc., a Delaware company (together with its successors and assigns permitted under this Agreement, the "Company"), and Ms. Marianne Howatson (the "Executive"). W I T N E S S E T H : ------------------- WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment (this "Agreement") and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. ----------- (a) "Base Salary" shall mean the salary provided for in Section 4 below or any increased salary granted to the Executive pursuant to Section 4. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" shall mean that, prior to any termination pursuant to Section 11(c) hereof, the Executive shall have: (i) been convicted of a criminal violation involving dishonesty, fraud or breach of trust; or (ii) willfully engaged in misconduct in the performance of Executive's duties that materially injures the 2 Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"). (d) "Constructive Termination without Cause" shall mean termination by the Executive of her employment following occurrence of any of the following events without her written consent: (i) a reduction in the Executive's compensation (Base Salary, bonus opportunity or equity opportunity) or material reduction of any employee benefit or perquisite that is not equally applicable to other members of senior management of the Company; (ii) the failure to continue the Executive in a position which she then holds or removal of her from any such position; (iii) a material diminution in the Executive's duties, the assignment to the Executive of duties which are materially inconsistent with her current duties or, so long as the Executive is serving as President of the Publishing Group of the Company, a change in the reporting relationship of the Executive so that she no longer reports directly to the Chief Executive Officer; (iv) the relocation of the Executive's office to a location more than 50 miles from New York, NY; and (v) the failure of the Company to obtain the assumption of the Agreement by any successor. 2. Term of Employment. The Company hereby employs the Executive, and the Executive hereby accepts such employment, for the period commencing April 21, 1997 and ending June 30, 2001, subject to earlier termination as provided in Section 11, below. 3. Position, Duties and Responsibilities. (a) During the Term of Employment, the Executive shall be employed as an Executive Vice President of the Company and President of the Publishing Group. The Executive, in carrying out her duties under this Agreement, shall report to the Chairman of the Board and Chief Executive Officer. 3 (b) Anything herein to the contrary notwithstanding, nothing shall preclude the Executive from (i) serving, subject to approval of the Chairman of the Board, on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable activities and community affairs, and (iii) managing her personal investments and affairs, provided that such activities do not interfere with the proper performance of her duties and responsibilities as the President of the Publishing Group. 4. Base Salary. The Executive shall be paid an annualized Base Salary, payable in accordance with the regular payroll practices of the Company, of no less than $400,000. The Base Salary shall be increased annually at a rate of no less than 5% commencing July 1, 1998. 5. Annual Incentive Compensation. Commencing in FY 1998, the Executive shall participate in the Executive Incentive Compensation Plan with an annual target award opportunity of 60% of Base Salary (80% of which will be tied to Publishing Group performance to budget and 20% of which will be tied to corporate performance to budget), 50% of which amount ($120,000) shall be guaranteed in respect of FY 1998 and paid when incentive compensation is customarily paid to the Company's senior executives. The Executive shall receive guaranteed incentive compensation for FY 1997 of an amount equal to the product of $120,000 times a fraction, the numerator of which is the number of days Executive is in the employ of the company in FY 1997 and the denominator of which is 365, payable when FY 1997 incentive compensation is paid to the Company's senior executives. 6. Profit Participation. The Executive shall receive additional annual compensation based on the profits of Playboy Publishing Group for each fiscal year during the Term of Employment computed as follows: (a) The Executive shall receive a sum equal to 5% of the amount by which the Pre-tax Profits of the Playboy Publishing 4 Group for each fiscal year (July 1 through June 30) exceeds the Profits Base (as defined below) for the previous fiscal year. Each fiscal year shall be deemed a separate accounting period for purposes of computing Profit Participation. (b) The Profits Base is defined as the amount of Pre-tax Profits of the Playboy Publishing Group computed in accordance with Generally Accepted Accounting Principles ("GAAP") by the Company's outside auditors in the preparation of the Company's audited financial statements for the applicable fiscal year. (c) Pre-tax Profits of the Playboy Publishing Group for any fiscal year shall be the amount, if any, by which the total net revenues of the Playboy Publishing Group, including its subsidiaries and the Group's pro-rata share of revenues derived from all controlled affiliates, exceeds all reasonable and applicable operating expenses attributable to same, in accordance with GAAP used by the Company's outside auditors in the preparation of the Company's audited financial statements. In computing the Pre-tax Profits of the Playboy Publishing Group for any fiscal year, there shall be allowed all fair and reasonable allocations of items of revenue and expense between divisions, subsidiaries and affiliates of the Company, including, but not limited to, inter company sales, expenses such as rent, occupancy, general administrative and personnel salaries, MIS, insurance, employee benefit costs, security, payroll processing, legal and tax advisory fees, depreciation, profit sharing and auditing expenses; provided, however, the Executive and the Chief Executive Officer of the Company may agree to exclude from the computation of Pre-tax Profits expenses associated with acquisitions or investments. Further, the effect of any one time gains or losses accounted for as part of the Playboy Publishing Group shall be amortized evenly over four (4) years, beginning in the month of occurrence, for purposes of calculating Pre-tax Profit, regardless of how the transaction is accounted for under GAAP. A "One Time Gain or Loss" is a gain or loss resulting from a transaction not in the ordinary course of business. In no event shall profits or losses, except as described in the preceding paragraph, from any fiscal year be carried over or back to any fiscal year during the base period or otherwise taken into consideration in computing the Pre-tax Profits for any other fiscal year during the base period. 5 (d) Profit Participation, if any, for any fiscal year, including any Pro Rata Profit Participation as defined below, shall be paid to the Executive no later than ninety (90) days following the end of such fiscal year. (e) In the event that the Executive is to receive a Pro Rata Profit Participation upon termination as provided in Section 11 below, the Pro Rata Profit Participation shall be that percentage of the Profit Participation otherwise payable for the fiscal year in which termination occurs equal to a fraction, the numerator of which is the number of calendar days in the period commencing July 1 of such fiscal year and ending on the effective date of the Executive's termination, and the denominator of which is 365. 7. Long-term Incentives. (a) The Executive shall participate on an ongoing basis in any long-term incentive programs made available to senior-level executives of the Company. (b) As soon as practicable after commencement of the Executive's employment, the Company shall grant the Executive a 10-year option, substantially in the form attached to this Agreement as Exhibit A, to purchase 75,000 shares of stock. (c) As soon as practicable after commencement of the Executive's employment the Company shall grant the Executive 15,000 shares of restricted stock substantially in the form attached to this Agreement as Exhibit B. 8. Employee Benefit Programs. The Executive shall be eligible to participate in the employee benefit programs of the Company applicable to senior level executives, including, without limitation, qualified and supplemental retirement and savings plans, medical/dental and hospitalization plans, life insurance, short- and long-term disability programs, accidental death and dismemberment protection and travel accident insurance. In addition, the Executive shall be entitled to five weeks per annum vacation. 6 9. Perquisites. The Executive shall be entitled to perquisites on the same basis as made available to other senior executives of the Company, including without limitation, the following: (a) residential security and (b) expensing the cost of upgrade certificates or coupons. 10. Reimbursement of Business and Other Expenses. The Executive is authorized to incur reasonable expenses in carrying out her duties and responsibilities under this Agreement and the Company shall promptly reimburse her for all business expenses incurred in connection with carrying out the business of the Company, including up to $15,000 for legal expenses incurred in connection with her employment arrangements with the Company, upon submission of documentation reasonably satisfactory to the Company of such expenses. 11. Termination of Employment. (a) Termination Due to Death. In the event the Executive's employment is terminated due to her death, her estate or her beneficiaries, as the case may be, shall be entitled to: (i) Base Salary for a period of 90 days following the date of death; (ii) a pro rata Annual Incentive Compensation award (based on the amount of Incentive Compensation payable for the fiscal year in which the death occurs; (iii) if death occurs after the 6th month of the fiscal year, a pro rata Profit participation award for the year of death, calculated as provided in Section 6 above; (iv) the right to exercise any stock option which was exercisable at the date of the Executive's death for a period of 1 year following the Executive's death; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) other benefits in accordance with applicable plans and programs of the Company. 7 (b) Termination Due to Disability. In the event the Executive becomes totally disabled or disabled such that she is rendered unable to perform substantially all of her usual duties for the Company, and if such disability shall persist for a continuous period in excess of four (4) months, or an aggregate period in excess of four (4) months in any one fiscal year, the Company shall have the right at any time after the end of such period to terminate the Executive's employment under this Agreement by delivering a thirty (30) day prior written notice to her. For purposes of this agreement, if the Executive and the Company shall disagree as to whether she is totally disabled, or disabled such that she is rendered unable to perform substantially all of her usual duties for the Company, the decision of a doctor, mutually agreed upon by the parties, shall be binding as to both questions. If the parties cannot agree upon a doctor, the Executive and the Company shall each select a doctor. The two (2) doctors so selected shall select a third doctor who shall resolve either or both of the questions referred to above. In the event the Executive's employment is terminated due to disability, she shall be entitled to: (i) Base Salary for six months following the effective date of her termination due to disability; (ii) a pro rata Annual Incentive Compensation award (based on the higher of (A) the actual bonus earned in the prior year or (B) the target bonus for the year of termination); (iii) if termination due to disability occurs after the sixth month of the fiscal year, a pro rata Profit Participation award for the year of termination, calculated as provided in Section 6 above; (iv) the right to exercise any option which is exercisable on the date of termination for a period of one (1) year; (v) any amounts earned, accrued or owing to the Executive but not yet paid; and (vi) disability and other benefits in accordance with the applicable plans and programs of the Company. 8 (c) Termination by the Company for Cause. In the event the Company terminates the Executive's employment for Cause, she shall be entitled to: (i) Base Salary through the date of the termination of her employment for Cause; (ii) any amounts earned, accrued or owing to the Executive but not yet paid; and (iii) other benefits, if any, in accordance with applicable plans and programs of the Company. A Termination for Cause shall not take effect unless the Executive is given written notice of the Company's intention to terminate her for Cause and unless she is given an opportunity to be heard by the Board. (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Executive's employment is terminated without Cause or in the event there is a Constructive Termination Without Cause, the Executive shall be entitled to: (i) Base Salary through the date of termination of the Executive's employment; (ii) Base Salary, at the annualized rate in effect on the date of termination of the Executive's employment, (x) for a period of 12 months (the "Salary Continuation Period") and (y) if termination occurs prior to the end of the Executive's first year of employment, Base Salary for the remainder of the first year, all payable in a single installment immediately after her termination; (iii) Incentive Compensation payments for the year in which termination occurs and if termination occurs after the 6th month of such fiscal year, Incentive Compensation in the next succeeding fiscal year as if Executive's employment had not been terminated, payable when Incentive Compensation is paid to the Company's senior executives for such fiscal year. (iv) if termination occurs after the 6th month of the fiscal year, a pro rata Profit Participation award for the year of termination, calculated as provided in Section 6 above; 9 (v) the right to exercise any stock option which was exercisable at the date of Executive's termination for a period of 3 months following the date of termination; (vi) continued participation in all medical, dental, hospitalization and life insurance coverage and in other employee benefit plans or programs in which she was participating on the date of the termination of her employment and in which she is entitled to continue until the earlier of the end of the Salary Continuation Period or the date, or dates, she receives equivalent coverage and benefits under the plans and programs of a subsequent employer; in the event that any of the benefit plans do not permit the Executive's participation, the Company shall provide the Executive with the economic equivalent on an after-tax basis during and only during the Salary Continuation Period; (vii) Company-provided executive outplacement; (viii) any amounts earned, accrued or owing to the Executive but not yet paid; and (ix) other benefits in accordance with applicable plans and programs of the Parent and the Company. (e) Voluntary Termination. Same consequences as Termination for Cause. (f) Termination Following a Change in Control. The Company and the Executive are entering into a Severance Agreement which is attached to this Agreement as Exhibit C. In the event the Executive's employment is terminated following a Change in Control, (as defined in the Severance Agreement), the Executive's rights and entitlements shall be determined in accordance with the Severance Agreement. Any amounts payable to the Executive under Section 11(d) will be reduced by any amounts paid to her pursuant to the Severance Agreement. (g) No Mitigation; No Offset. In the event of any termination of employment, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due her under the Agreement on account of any remuneration attributable to any subsequent employment that she may obtain or any claims the Company may have against her. 10 12. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall, at the election of the Executive or the Company, be resolved by binding arbitration, to be held in New York, NY in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Costs of the arbitration or litigation, including, without limitation, reasonable attorneys' fees of both Parties, shall be borne by the Company. Pending the resolution of any arbitration or court proceeding, the Company shall continue payment of all amounts due the Executive under this Agreement and all benefits to which the Executive is entitled at the time the dispute arises. 13. Indemnification. (a) The Executive shall be entitled to indemnification by the Company in accordance with the provisions of Section 6 of the Company's bylaws and the implementing Board resolutions as in effect on the date of this agreement or, if more favorable to Executive, the provisions of such bylaws as in effect at the time indemnification is requested. (b) The Executive shall be entitled to coverage under any policy of directors' and officers' liability insurance maintained by the Company, if any. 14. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict the Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 15. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. Without the prior written consent of the Company, no rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than her rights to compensation and benefits, which may be 11 transferred only by will or operation of law, except as provided in Section 20 below. 16. Conflicts of Interest. (a) It is hereby acknowledged that Executive is aware of Company's conflict of interest policies (a copy of which is attached hereto as Exhibit "D" and by this reference made a part hereof), and understands that compliance therewith is of the essence of and is material to this Agreement. Company agrees that Executive shall have a period of sixty (60) days from commencement of services hereunder during which to divest herself of ownership of any firms, corporation, stock or similar items which are in violation of said conflict of interest policy. Nothing herein shall be construed to prevent Executive from owning an interest of less than one percent (1%) of the outstanding stock of any publicly traded company, whether or not such publicly traded company is in a business competitive to Company. (b) Executive recognizes and acknowledges that a breach of the provisions of this paragraph would result in immeasurable and irreparable harm to Company. Executive accordingly agrees that in addition to, and not in lieu of, all other remedies available to Company against Executive by reason of such breach, Company shall be entitled to temporary and permanent injunctive relief to prevent the occurrence or continuation thereof. 17. Non-Competition. Executive acknowledges that (i) by virtue of her employment with the Company, Executive will obtain knowledge, know-how, confidential and proprietary information, training and experience, (ii) the Company has a protectible interest in such knowledge, know-how, training, information and experience and there is a substantial probability that such knowledge, know-how, training, information and experience could be used to the substantial advantage of a competitor of the Company and to the Company's substantial detriment, and (iii) the agreements and covenants contained in this Agreement are essential to protect the value of the Company's business and assets, including such protectible interest. Therefore, Executive agrees that, for the period commencing on April 21, 1997 and ending at the later of Executive's termination or the Salary Continuation Period, Executive will not engage in any Competitive Activity. Competitive Activity means a business that engages in men's sophisticate publishing, including both print and electronic media. 12 18. Nondisclosure of Confidential Information. During and after the term of this Agreement, Executive will not disclose any information about the Company that is not in the public domain that was acquired by Executive in the course of her employment by the Company except (i) as such disclosure is required or appropriate in connection with her work as an employee of the Company and (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body with apparent jurisdiction to order her to disclose such information. 19. Entire Agreement. This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto. 20. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 21. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 22. Survivorship. The respective rights and obligations of the Parties 13 hereunder shall survive any termination of the Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 23. Beneficiaries/References. ------------------------ The Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of her incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to her beneficiary, estate or other legal representative. 24. Governing Law. ------------- This Agreement shall be governed by and construed and interpreted in accordance with the laws of New York without reference to principles of conflict of laws. 25. Notices. ------- Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, IL 60611 Attention: Howard Shapiro General Counsel If to the Executive: Ms. Marianne Howatson c/o Playboy Enterprises, Inc. 730 Fifth Avenue New York, New York 10019 14 26. Headings. -------- The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 27. Counterparts. ------------ This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. Playboy Enterprises, Inc. By: /s/ Christie Hefner --------------------- Christie Hefner Chairman, and Chief Executive Officer /s/ Marianne Howatson --------------------- Marianne Howatson EX-10.3F 9 LETTER AGREEMENT DATED 4/18/97 EXHIBIT 10.3f PLAYBOY ENTERPRISES, INC. CHRISTIE HEFNER CHAIRMAN AND CHIEF EXECUTIVE OFFICER April 18, 1997 Linda Havard 1413 Rutherford Drive Pasadena, CA 91103 Dear Linda: It is with great pleasure that I offer you the position of Executive Vice President, Chief Financial Officer of Playboy Enterprises, Inc. Your start date will be Friday, May 16, 1997. You will be reporting to me. You will be domiciled at the Playboy offices in Chicago, although you will be expected to do such traveling as may be necessary and appropriate for the performance of your duties. You will be paid a base salary of $300,000 per year, to be paid on a biweekly basis on our normal payroll dates. In addition, you are entitled to participate in a Board approved incentive plan with a Fiscal 1998 maximum potential of 60% of your base salary based upon the Company's performance. You will be entitled to participate in all fringe benefits made available to Playboy executives. You will also be a member of the Executive Committee of the Company. You will be entitled to four weeks' paid vacation. You will be entitled to participate in the "parachute plan" that is described on page 14 of Playboy's 1996 proxy statement, copy enclosed. I will recommend to the Company's Compensation Committee that you be granted an option to purchase 75,000 shares of Playboy's Class B stock and the right to receive up to 20,000 shares of Class B stock under the Company's restricted stock plan, vesting 7,500 shares upon the Company's achieving operating income of $15 million and 12,500 shares on the Company's achieving operating income of $20 million according to the terms and conditions of the 1995 Playboy Enterprises, Inc. Stock Incentive Plan. 680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611/312-751-8000 April 18, 1997 Linda Havard Page Two To assist in the sale of your California home, the Company will reimburse you for brokerage commissions and customary closing costs/attorney fees and title costs. Also, if you sell your home within the next 18 months for less than $837,500, Playboy will reimburse you for the difference between the actual purchase price and $837,500 -- up to a maximum reimbursement of $70,000. Should you voluntarily terminate your employment within two years from the sale of your home, you must return any such amount paid to you by Playboy. If you choose to purchase a new residence in Chicago, you will be reimbursed for customary and reasonable closing costs, to include title costs and reasonable attorney and escrow office fees. You will also be reimbursed for the relocation of your household goods. Also, to assist in your transition, the Company will also provide you with temporary furnished housing in Chicago for up to three months. The Company will also reimburse you for travel back/forth from Chicago/California for you and/or your family. The initial term of your employment will commence on May 16, 1997 and end on June 30, 2001. Within this period, if you are terminated at any time not for cause (as defined below), you will be entitled to receive 12 months severance pay based on your salary at that time. "For cause" is defined as conviction of a crime involving dishonesty, fraud or breach of trust, or engaging in conduct materially injurious to Playboy. In the event of such termination you will have no duty to mitigate damages, and you will be free to accept other employment at your discretion. If the above is acceptable, please sign, date and return the enclosed copy of this letter. April 18, 1997 Linda Havard Page Three Once again, welcome to the Playboy family. I look forward to working with you. Sincerely, /s/ Christie Hefner Christie Hefner ACCEPTED: /s/ Linda Havard - -------------------- Linda Havard Date 4/23/97 ---------------- EX-10.4A 10 AGREEMENT OUTLINE EXHIBIT 10.4(a) PLAYBOY TV/LATIN AMERICA ADULT VISION/LATIN AMERICA AGREEMENT OUTLINE ----------------- (As of March 29, 1996) 1. Overview and Definitions ------------------------ 1.1 This Agreement Outline ("Agreement") sets forth the terms for the formation of a limited liability company (the "Venture") by the Playboy Entertainment Group, Inc. ("PEGI") and Bloomfield Mercantile Inc., a Panama corporation and a member of the Cisneros Group of Companies ("Bloomfield"), that will operate two adult oriented pay television services (the "Services") throughout the Territory (as defined below): (a) Playboy TV/Latin America ("PTVLA"), a Service based on Playboy TV as currently programmed in the United State; and (b) AdulTVision/Latin America ("ATV"), a Service based on AdulTVision as currently programmed in the United States. Bloomfield, together with the other companies under common control in the Cisneros Group of Companies participating in the transactions contemplated herein are referred to as the "Cisneros Affiliates". As set forth in Section 8, Programming supplied to PTVLA and ATV will be exclusive to the Services in the Territory. The parties agree to use their respective best efforts to negotiate and execute more formal agreement, including the Superseding Agreements described below, as soon as reasonably practicable and the parties intend that such agreements will be executed within 60 days of the date hereof. Such agreements will incorporate the terms of this Agreement and such other terms as the parties may mutually agree. In furtherance of such best efforts obligations, the parties will cause their respective executives authorized to make final decisions regarding these transactions and their counsel and other advisors to be available on a first priority basis. Until such agreements are executed and if such agreements are never executed, this Agreement, when executed by both Bloomfield and PEGI, will constitute a binding agreement between the parties with regard to all matters covered herein. Specifically, any terms described herein to be included in a Superseding Agreement will, until such Superseding Agreement is executed and if such Superseding Agreement is never executed, be fully operative as terms of this Agreement. Upon execution of the Superseding Agreements, this Agreement will terminate and be of no further force and effect. 1.2 Terms used in this Agreement are defined in Exhibit "A" attached hereto, which includes a list of the terms defined in the text of this Agreement. 1 2. Superseding Agreements ---------------------- It is contemplated that the Venture, the parties and their respective affiliates (as the case may be) will execute the following agreements in connection with the formation of the Venture, all of which will be subject to the mutual approval of the parties (the "Superseding Agreements"): 2.1 Operating Agreement and Articles of Association. PEGI and ----------------------------------------------- Bloomfield (together, the "Ventures") will enter into an Operating Agreement and Articles of Association (collectively, the "Operating Agreement"), which will establish the limited liability company and outline the structure of the Venture, including board/governance issues, ownership provisions, option mechanisms and price, termination provisions, minority owner protections, etc. The Operating Agreement will contain the terms set forth in Section 14 (Venture Ownership, Capitalization and Governance) and such further terms as the Venturers may mutually agree. The parties acknowledge and agree that it is not their intention by executing this Agreement to form a partnership or other entity prior to the formation of the limited liability company and the execution of the Operating Agreement and agree that neither party will take any action that may subject the other to any liability, including but not limited to making any agreements or incurring any obligations on behalf of the Venture prior to such formation and execution. 2.2 Program Supply Agreement for PTVLA. PEGI and the Venture will ---------------------------------- enter into a Program Supply Agreement under which PEGI will license programming to the Venture for PTVLA on an exclusive basis and receive compensation for such programming (as described in Sections 8, 9 and 10 below). This agreement will include PEGI's Standard Terms and Conditions, substantially as attached hereto as Exhibit "B". If any term in the text of this Agreement is inconsistent with the provisions of such Standard Terms and Conditions, the term as contained in the text of this Agreement will prevail. 2.3 Trademark License Agreement. Playboy Enterprises, Inc. ("PEI") and --------------------------- the Venture will enter into a Trademark License Agreement (the "Trademark License Agreement") under which PEI, for a ***% royalty (as described in Section 11 below), will grant to the Venture those rights to the "Playboy" name, marks, etc. as are necessary for the effective marketing of the PTVLA Service. The Trademark License will contain PEI's customary approval rights and procedures for trademark usage and advertising, substantially as detailed in the Trademark Usage Summary attached hereto as Exhibit "C", the terms described in Section 11 below, and such further terms as the parties may mutually agree. The Trademark License Agreement will also contain similar terms regarding the use of AdulTVision trademarks on ATV. No royalty will be payable with respect to the AdulTVision trademarks. If any term in the text of this Agreement is inconsistent with the provisions of such Trademark Usage Summary, the term as contained in the text of this Agreement will prevail. *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 2 2.4 Program Supply Agreement for ATV. PEGI and the Venture will enter into -------------------------------- a Program Supply Agreement under which PEGI will license programming to the Venture for ATV on an exclusive basis and receive compensation for such programming (as described in Section 8, 9 and 10 below). This agreement will include PEGI's Standard Terms and Conditions, substantially as attached hereto as Exhibit "B". If any term in the text of this Agreement is inconsistent with the provisions of such Standard Terms and Conditions, the term as contained in the text of this Agreement will prevail. 2.5 Management Services Contract. The Venture and a Cisneros Affiliate ---------------------------- generally engaged in delivering the following services will enter into a Management Services Agreement under which such Cisneros Affiliate ("Management Co.") will, for a ***% fee (as described in Section 13.2 below), provide back office services, including bookkeeping and accounting, affiliate and subscriber relations, collections and payables, etc. These documents together with the Business Plan (Section 3), and any other documents deemed necessary by the parties, will constitute the formal agreements which establish and govern the Venture. 3. Business Plan/Annual Fiscal Year Budgets ---------------------------------------- 3.1 The Ventures have preliminarily agreed to a 10-year business plan (dated March 27, 1996, version 9) which is attached hereto as Exhibit "D", subject to such changes as they shall mutually agree prior to the commencement of the Venture (as so modified, the "Business Plan"). The Business Plan is the financial model for the operation of PTVLA and ATV and will be incorporated into the Operating Agreement. Prior to the end of the fifth year of the Venture and prior to the end of every succeeding five year period thereafter, the Venturers will prepare 5 additional years of the Business Plan such that the Business Plan continues to have between five and ten years of coverage throughout the term of the Venture. Such additions to the Business Plan will require the approval of both Venturers. 3.2 The Business Plan will be updated annually by a budget (each, an "Annual Budget") for the coming fiscal year. The Venture's General Manager (See Section 14) will prepare the Annual Budget and present it to PEGI and Bloomfield for approval at least 90 days prior to commencement of the applicable fiscal year. The approved Annual Budget for a given fiscal year will supersede the data contained in the original Business Plan for that fiscal year. The Annual Budget for any fiscal year will require the approval of both Venturers. The Annual Budget for fiscal 1996 is included in the Business Plan. 4. Territory --------- 4.1 The "Territory" will include only the following: (a) each country comprising Central and South America from the U.S.-Mexican border south to Tierra del Fuego where the national language is Spanish, (b) Brazil and its territories/possessions, and (c) each *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 3 country and territory located in the Carribbean where the official language is Spanish (including Cuba, but excluding Puerto Rico and U.S. Virgin Islands). 4.2 The Venture grant to PEGI an exclusive license to distribute the PTVLA and ATV Spanish-language Services in the United States (including its possessions and territories) in all forms of Non-Standard Television (as defined in Section 7.1) in perpetuity (the "U.S. Rights"). The costs incurred by or on behalf of the Venture in connection with the U.S. distribution (including but not limited to uplink and other delivery costs), will be borne by the Venture. Such cost will exclude the costs of PEGI with respect to the U.S. feed of AdulTVision. 4.2.1 PEGI will receive a distribution fee equal to ***% of the revenue received from systems operators on account of the U.S. Rights. 4.2.2 The remaining revenue ("revenue", for purposes of this Agreement, means cash actually received by the relevant person) from the U.S. Rights (i.e, ---- the revenue from systems operators minus PEGI's ***% fee and minus any costs in connection with the U.S. distribution (as set forth in Section 4.2) will, after the Venturer's have received distributions for return of capital equal to their respective capital contributions, be allocated ***% to Bloomfield and ***% to PEGI. The costs of dubbing/subtitling or other costs to "localize" the Services, including but not limited to the costs to create a second language track on the existing ATV feed, will be borne by the Venture as a regular operating expense and not allocated to U.S. distribution of the Services. 4.2.3. Not later than 2 years after the date of launch of a Service, PEGI shall make a good faith effort to distribute the U.S. Rights for that Service via pay cable in the U.S. 4.2.3.1 With respect to PTVLA, this "good faith" test will be conclusively deemed to be satisfied if such Service is available in at least 10% of the Spanish-speaking addressable cable homes in the U.S. ("Spanish Cable Homes") within such 2-year period. 4.2.3.2 With respect to ATV, this "good faith" test will be conclusively deemed to be satisfied if such Service is available, within such 2-year period, in at least that percentage of the Spanish Cable Homes equal to 10% multiplied by a fraction, the numerator of which is the number of addressable cable homes in the U.S. in which AdulTVision is then available ("AdulTVision Homes") and the denominator of which is the number of addressable cable homes in the U.S. in which Playboy TV is then available ("Playboy Homes"). For example, if two years after the launch of ATV, the number of AdulTVision Homes equals 500,00 and the number of Playboy Homes equal 1,000,000, then the "good faith" test for ATV will be deemed satisfied if ATV is available in at least 5% of the Spanish Cable Homes (10% x 500,000/1,000,000). The parties will use their best *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 4 efforts to agree to a source or methodology for determining the number of Spanish Cable Homes. 4.2.4. PEGI will not be required to take any commercially unreasonable actions to satisfy the "good faith" test, which may be satisfied notwithstanding any failure to meet the conclusive thresholds described above. In the event PEGI fails to satisfy the "good faith" test for either Service, the U.S. Rights for that Service will revert to the Venture subject to any third party agreements entered into prior to such time by PEGI, provided, however, that any deals made by the Venture for distribution in the U.S. will be subject to PEGI's approval, not to be unreasonably withheld. 5. Term ---- 5.1 Term. The term of the Venture shall be 25 years, automatically ---- renewable for additional 10-year periods so long as the Venture is meeting projections (within the variance permitted in Section 5.2.2). 5.2 Early Termination. ----------------- 5.2.1 Either Venturer may terminate the Venture if controlling ownership of the other Venturer changes (other than a change to an affiliate of such Venturer); provided, however, that the parties acknowledge that PEI, the parent company of PEGI, is publicly held and that no change in its ownership will constitute a change of control of PEGI as long as PEGI remains a controlled subsidiary of PEI. Any such termination will be effective as of the last day of the fiscal year in which such termination event occurs. 5.2.2 With respect to a particular Service (i.e., PTVLA or ATV) and ---- starting at the end of fiscal year 7, either party may terminate that Service if its net revenue per household (as defined in Exhibit "E" attached hereto) for the previous 3 fiscal year period is below projections in the Business Plan (as modified by the annual Budgets) for such period by more than 15%. Termination of one Service does not terminate the other Service if the other Service is meeting projections. 5.2.2.1 Either Venturer may cure the other Venturer's right to terminate per Section 5.2.2 by making a payment to the Venture in the amount by which revenues fall short of projections minus the allowed variance. If such Venturer elects to invoke its cure right, it will guarantee any shortfall below 100% of budget in the following fiscal year. 5.2.3 If, within 6 months of the date when PEGI notifies the Venture that sufficient programming to launch a Service is available and that PEGI has taken all actions required on its part to be taken in connection with such launch, the Venture is unable to negotiate a carriage agreement with the DTH service known as Galaxy Latin America 5 ("GLA") that provides for such Service to be available in territories at least inclusive of Mexico, Brazil, Argentina and Venezuela, PEGI shall have the right to cause the Venture to seek alternative DTH distribution for any such territories as are not covered by a GLA carriage agreement. The exercise of such right shall not constitute an exercise of the Veto Option or result in any decrease in the Program License Fees payable to PEGI. 5.2.3.1 In negotiating the initial carriage agreement and each subsequent agreement with GLA, the Venture will use its best efforts to secure the most favorable terms available from GLA regarding collections and allowances for bad debt. 5.2.3.2 In the event that GLA breaches its obligation to distribute the Services in all major countries served by GLA pursuant to the carriage agreement with the Venture (excluding those countries in which the distribution of the type of programming contained in the Services is prohibited by statute regulation, court order or other governmental act or decree), the Venture will take all appropriate actions (including but not limited to pursuing litigation) to cause GLA to so distribute the Services (the "Remedial Actions"). In the event Bloomfield prevents the Venture from taking such Remedial Actions, PEGI shall have the right to take such actions on the Venture's behalf and at the Venture's cost. If PEGI is prevented from taking such actions in violation of this Section, PEGI shall, in addition to any other rights or remedies it may have, have the right to terminate the Venture for material breach on the part of Bloomfield. 5.2.4 Either party may without prejudice to any other remedies it may have terminate this Agreement immediately by notice in writing to the other on or after the occurrence of any of the following: 5.2.4.1 the commission of one or more material breaches of this Agreement by the other party which are not capable of remedy; or 5.2.4.2 the commission of material breach of this Agreement by the other party which is capable of remedy (a "remediable breach") which shall not have been remedied within a period of 30 days after the party in breach has been given notice in writing specifying that remediable breach and requiring it to be remedied; provided, however, that such 30 day period shall be extended for -------- ------- such additional period as shall be reasonably necessary if that remediable breach is incapable of remedy within that one month period and during that 30 day period the party in breach shall diligently endeavor to remedy that remediable breach, but only if such extension would not reasonably be expected to have a material adverse effect on the party giving notice of such breach; or 5.2.4.3 the bankruptcy, insolvency, general assignment for the benefit of creditors or similar event of or the appointment of a trustee, receiver or similar person for the other party or of the Venture. 6 5.3 Effect of Termination. Upon termination of the Venture, the --------------------- Trademark License Agreement, Program License Agreement, Management Agreement and related agreements will automatically terminate and all rights and obligations of the respective parties thereto will terminate, except for any claims, etc, that have arisen prior to such termination. Upon termination of the Venture, each Venture shall have the right to compel the Venture to be promptly wound-up and liquidated. 6. Languages --------- 6.1 PEGI will license the Venture to transmit in Spanish, Portuguese, and English (excluding the U.S., which will be Spanish-only). PEGI may permit the Venture to transmit in other languages at PEGI's option. 6.2 A Cisneros Affiliate generally engaged in the following services will provide dubbing/subtitle services to Venture at the prevailing fair market price. PEGI may purchase dubbed/subtitled programs for use in other territories, or in other media within the Territory, at ***% of cost. If a Cisneros Affiliate performs dubbing and/or subtitling services for the Venture, such Cisneros Affiliate will provide such materials in sufficient time to provide for efficient implementation by PEGI and/or Venture. 7. Media ----- 7.1 The Venture will be granted the exclusive license to transmit in all forms of "Non-Standard Television", which means DSS, DTH, pay cable, STV, MMDS, and SMATV, Non-Standard Television specifically excludes basic cable and terrestrial broadcast television. 7.2 In no event may PEGI launch a Playboy-branded service or sell a branded block of programming in basic cable or terrestrial broadcast television in the Territory (although it may license programs into basic cable or terrestrial broadcast television in accordance with Section 8). 7.3 The Venture will use its best efforts to launch ATV as a retransmission of the U.S. feed via GLA on or about June 15, 1996. If such distribution is not available by such date, the Venture will launch ATV via tape delivery by such date. PEGI will provide the necessary taped material for such launch with all costs associated therewith to be borne by the Venture. 7.4 Within 6 months after the launch of a Service, the Venture (via Management Co.) will make a good faith effort to distribute such Service via pay cable in Mexico and Argentina. This "good faith" test will be conclusively deemed to be satisfied if the Venture has initiated contact and, if feasible, negotiations, with the key cable operators in such countries within such 6 months period. Not later than 2 years after the launch of a Service, *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 7 the Venture (via Management Co.) shall make a good faith effort to distribute such Service via pay cable throughout the Territory. This "good faith" test will be conclusively deemed to be satisfied if the PTVLA Service or ATV Service, as the case may be, is available in 10% of the addressable cable homes in the Territory within such 2-year period. 7.5 With respect to forms of Non-Standard Television other than pay cable, PEGI may make a format request that the Venture distribute the PTVLA Service in a particular media, and the Venture (via Management Co.) shall commence such distribution within one year of PEGI's request and shall make a good faith effort to distribute the Service in such media. This good faith test will be conclusively deemed to be satisfied if the PTVLA Service is available to 10% of the applicable homes within 2 years of PEGI's request. 7.6 Management Co. shall receive a fee equal to ***% of the revenue received by the Venture from systems operators from the distribution described in Sections 7.4 and 7.5 and the costs of such distribution will be borne by the Venture . 7.7 The Venture will not be required to take any commercially unreasonable actions to satisfy the "good faith" test, which may be satisfied notwithstanding any failure to meet the conclusive thresholds described above. In the event the Venture (via Management Co.) fails to satisfy the "good faith" requirement for distribution of either Service in a particular form of Non-Standard Television As set forth in Sections 7.4 and 7.5, PEGI will have the right to distribute such Service in that media; provided, however, that any deals made by PEGI to distribute either Service will be subject to the Venture's approval, not to be unreasonably withheld. For the distribution of such Service, the Venture will pay to PEGI a fee equal to ***% of the revenue received from systems operators for such Service in such media, with the Venture to receive the remainder of such revenue. The costs of such distribution will be borne by the Venture. 7.8 Each entity engaged in distributing the Services (including PEGI pursuant to Section 4.2 and the Management Co. as set forth above) will in all material respects incur costs for the account of the Venture in accordance with the cost structure set forth in the Business Plan as modified by the Annual Budget for the applicable period. If such compliance with the applicable Annual Budget is not feasible, such distributor will obtain the Venture's approval for variances, which approval will not be unreasonably withheld. 8. License Term and Media Holdbacks -------------------------------- 8.1 The Venture's License Term with respect to each program (the "License Term") will commence on the later of the first day of the relevant fiscal year and the date such program is first available in any media (as described and subject to the limitations in Section 3.3 below) and will end at the termination of the Window (as defined below). Subject to the terms of this Section 8.1 and of Section 8.3, the programs will be exclusive to the Venture during the respective License Terms. The Venture will have a window of 18 months for the *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 8 transmission of each program (the "Window"), commencing on the date that such program is first transmitted via the Venture. Following the Window, there will be a 12-month dark period, after which PEGI may license such program into basic cable and/or terrestrial television as it sees fit; provided, however, that such programs cannot be run as part of a "Playboy" service and must be licensed on an "unbranded" basis (i.e., such licenses shall not allow the use of the "Playboy" name or trademarks in connection with the programs or the advertising thereof other than in customary production, presentation and logo credits in the title or end sequences of such programs, for use solely in the credit block in advertising for such programs, and the title and content of the programs, where applicable). Notwithstanding the foregoing, at any time, whether during or after the Window, PEGI can distribute on a "branded" basis any program in the home video or other private exhibition market (including, without limitation, discs, cassettes or other forms of video grams now existing or invented in the future, collectively, "Home Video"). 8.2 The Venture will be entitled to transmit each program on 20 Broadcasting Days. Each Broadcast Day will include three airings of each program within a consecutive 24 hour period. Attached hereto as Exhibit "F" is a sample program schedule. 8.3 The starting date of the Venture's License Term for a given program (other than feature films with a budget of more than $1 million) will be the date set forth in Section 8.1, unless such program is subject to an agreement which-pre-dates this Agreement. Notwithstanding the foregoing, PEGI will have the right to grant earlier release dates for Home Video for not more than 15 core titles and not more than 20 additional films (with production costs under $1 million), in each case per each 12 month period commencing with the launch date of PTVLA. Attached hereto as Exhibit "G" are example titles of core programs and films which may have earlier release dates in Home Video. In addition, the parties acknowledge that PEGI may not control the Home Video or other non-television distribution rights of certain programs it acquires from third parties and, consequently, the starting date of the Venture's License Term for any such program will be the date the television rights are available to PEGI in the Territory, which may be after the date such program is released in Home Video or other media by the parties holding such rights. 9. Program Supply -------------- 9.1 Subject to Section 9.4, PEGI will make available to PTVLA all Playboy Programming (as defined below) and all related interstitial, promo, on-air identifications, logos or similar material. 9.2 PEGI will provide, and the Venture will license under the Program License Agreement, 180 hours of New Programming to PTVLA for each 12 month period commencing with the launch of PTVLA. For the purposes hereof, "New Programming" means programs never-before broadcast by either of the Services. Without limiting the 9 foregoing, the parties acknowledge that PEGI has previously transmitted programming in the Territory via HBO Ole, and that such programming will be considered "New Programming" in the Venture. Home shopping programming will be included with the 180 hours. 9.3 So long as ATV is a retransmission of the AdulTVision U.S. feed, PEGI will provide, and the Venture will license under the Program License Agreement, 204 new movies to ATV for each 12 month period commencing with the launch of ATV until that Service reaches cash break-even. In addition, in the first 12 month period, PEGI will provide up to 110 additional "encore" movies in place of repeats, with the actual number of such movies to be set forth in the program schedule to be attached to the Program License Agreement. In the event that PEGI wishes to supply more than 204 new movies in such a 12 month period prior to cash break-even, the Venture will not pay for such additional movies (except for up to 110 additional "encore" movies in the first 12 month period as provided above and in Section 10.1.2 below). After ATV reaches cash break-even, PEGI may, in its sole discretion, increase the number of movies supplied to that Service, provided, however, that the number of movies per such a 12 month period that the Venture must pay PEGI for will be capped at 300. For purposes of the foregoing, a "movie" is a 90 minute block of programming (e.g., if a particular film is less than 90 minutes, PEGI will provide additional programming as is necessary to provide a 90 minute block without additional cost to the Venture). At any time commencing at the end of the 18th month following the launch of ATV, the Venture may give PEGI written notice of its intention to offer ATV as an independent feed, which notice will be given not less than 6 months prior to the launch of such independent feed. Upon launch of such independent feed, the Venture will determine the number of movies to be licensed for ATV for each 12 month period, not to be less than 120 movies per 12 month period. 9.4 The Venture acknowledges that PEGI produces and distributes certain feature films with negative costs of at least $1,000,000. Although these films are to be excluded from the Program Supply Agreement, the Venture will have a right of first negotiation to acquire the Non-Standard Television rights to these films for the Service upon release (or upon the expiration of pre-existing commitments). The right of first negotiation will exclude films that are offered by PEGI on a multiple territory basis which includes the Territory. The right of first negotiation must be with respect to all rights offered (e.g., the Venture does not have a right of first negotiation for pay cable only if the film is being offered on an "all rights" basis). If the film is "bundled", the right of first negotiation is with respect to all programs included in the bundle. Exhibit "H" hereto provides examples of these films as well as the rights that have already been sold to third parties in the Territory. 9.5 The Venture acknowledges that Playboy Productions, a division of PEI, produces certain programming for network television and for other distributors not controlled by PEI, which is not principally sexually oriented. Such programming is to be excluded from the Program Supply Agreement. Each such program, including "The Playboy Interview" series but excluding the Hugh Hefner mini-series produced in association with David Wolper 10 Productions and Warner Bros., to the extent PEI owns the distribution rights to such Program in the Territory, is referred to as an "Option Program". A Cisneros Affiliate designated by Bloomfield (the "Optionee") will have "first look" and "last refusal" rights with respect to each Option Program as set forth below. 9.5.1 Prior to any sale of distribution rights for an Option Program in the Territory, PEGI will notify the Optionee of the availability of the Option Program and negotiate in good faith with the Optionee to reach mutually satisfactory terms for the distribution by the Optionee of such Option Program. If within 30 days of such notice, PEGI and the Optionee are unable to reach agreement, PEGI will have the right but not the obligation for a period of 60 days to seek other distribution opportunities. If such 60 day period expires without PEGI entering into negotiations with an alternative distributor, PEGI will thereafter be free to exploit such distribution rights in the Territory without further obligation to the Optionee. 9.5.2 If PEGI enters into negotiations with an alternative distributor within such 60 day period and wishes to consummate an agreement with such distributor during such period or within 60 days thereafter, PEGI will first notify Optionee of the proposed terms of such agreement and Optionee will have the right to preempt such offer and acquire the distribution rights subject to such offer by making a binding counter-offer that is more favorable to PEGI by $1 or more. If Optionee does not exercise such right, PEGI will thereafter have the right to license such Option Program to any person on terms no less favorable to PEGI than the proposed terms disclosed to Optionee. If, during such aggregate 120 day period, PEGI wishes to consummate an agreement to license such Option Program on terms less favorable to PEGI, Optionee will again have a right to last refusal with respect to such Option Program as provided in this Section. 9.5.3 If PEGI licenses any distribution rights to Option Programs in the Territory other than to Optionee, such program will be licensed on an "unbranded" basis. 9.6 Notwithstanding the Standard Terms and Conditions attached hereto, (i) the schedule of programs referenced in Section 1 thereof will be attached to the Program License Agreement, (ii) PEGI will be responsible for clearing any music or other copyright material incorporated in the programs (with the royalties therefore being paid by Venture), (iii) the indemnification provisions in Section 6 thereof will include lost profits and consequential damages awarded to third parties, and (iv) the liquidated damages provision in Section 9 thereof will be limited to the lesser of the licenses fees owing for the balance of the term or 12 months of license fees and will exclude defaults by the Venture due to PEGI's failure to make capital contributions to the Venture as required pursuant to this Agreement. 10. Program License Fees The Venture shall pay PEGI program license fees as set -------------------- forth below (the "Program License Fees"): 11 10.1 Program License Fees During the Exclusive Period. During the ------------------------------------------------ Exclusive Period (defined in Section 17.2), the Venture will pay to PEGI Program License Fees as follows: 10.1.1 For PTVLA, the greater of (a) the PTVLA Guaranteed Minimum Program License Fee (as defined below) for each 12 month period of (b) the sum of $*** per subscriber per program hour plus ***% of net pay per view revenue; ---- once (b) is greater than (a), this fee is subject to a cap of ***% of the aggregate net revenue from subscribers and from pay-per-view. For purposes hereof, "PTVLA Guaranteed Minimum Program License Fee" means (i) *** and (ii) for each subsequent 12 month period, such increased amounts as are set forth in the Business Plan as modified by the Annual Budget for such period. The PTVLA Program License Fee shall be paid ***% in cash and ***% deferred until the Venture reaches cash break-even. After cash break-even, free cash will go ***% to PEGI for the payment of deferred Program License Fees, until paid in full, and ***% to the venture to be used for the return of capital. 10.1.2 For ATV, the ATV Guaranteed Program License Fee for a 12 month period. For purposes hereof, "ATV Guaranteed Program License Fee" means (i) *** and (ii) for each subsequent 12 month period, such increased amount as is set forth in the Business Plan as modified by the Annual Budget for such period; provided, however, that if the Venture elects to offer ATV as an independent feed and in connection therewith elects to decrease the number of movies licensed from PEGI as provided in Section 9.3 above, the "ATV Guaranteed Program License Fee" per movie will be $*** subject to the same percentage increases as apply to the initial license fees (i.e., as set forth in the Business Plan as modified by the Annual Budget for the respective period). 10.2 Program License Fees after the Exclusive Period. Prior to the ----------------------------------------------- expiration of the Exclusive Period as relevant to each Service, the Venture will negotiate a new carriage agreement with GLA which may or may not provide GLA with DHT exclusivity for PTVLA and/or ATV. Subsequent to the expiration (if any) of the Exclusive Period as relevant to a given Service, the Program License Fees payable to PEGI will be determined as follows: 10.2.1 For PTVLA: 10.2.1.1 The Program License Fee will continue as set forth in Section 10.1.1 (i.e., continuing to increase for each 12 month period as set forth in the Business *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities Exchange Commission. 12 Plan) if (a) the Venture decides to contract with GLA as a non-exclusive DTH distributor of PTVLA, or (b) the Venture decides to continue its DTH-exclusive relationship with GLA for PTVLA and PEGI does not exercise its Veto Option (as defined below). 10.2.1.2 PEGI shall have the right to veto the Venture's decision to grant DTH, exclusivity for PTVLA to GLA after expiration of the Exclusive Period (the "Veto Option"), thereby causing the Venture to thereafter grant GLA a non-exclusive right to distribute PTVLA via DTH. In the event PEGI exercises the Veto Option, the license fee payable to PEGI for PTVLA will be as follows: (i) If the Venture is not harmed by the exercise of the Veto Option, then the license fee will be as set forth in Section 10.1.1. (ii) If the Venture is harmed by the exercise of the Veto Option, then the license fee will be reduced for the portion of the fiscal year following such exercise and for each subsequent fiscal year by the amount of the harm suffered in the respective period, subject to a maximum reduction of such license fee to 2/3 of the amount pursuant Section 10.1.1 for such fiscal year (i.e., subject to continuing escalation for subsequent fiscal years as provided in the Business Plan). The amount owed pursuant to this Section shall be payable in cash and deferrals in the same ratio as would have been the case if no such reduction had been made. For the purposes of this Section 10.2.1.2, the "harm" attributable to PEGI's exercise of the Veto Option shall be based on the decrease in profits of the Venture directly attributable to the non-exclusivity of the GLA distribution rights and shall be determined at the end of each fiscal year following the exercise of the Veto Option manually by PEGI and Bloomfield by comparing the profit (or loss) actually realized by the PTVLA Service in the applicable fiscal year to the profit (or loss) that Service would have realized had PEGI not exercised the Veto Option. For example, if in a given fiscal year following the exercise of the Veto Option the PTVLA Service had an actual profit of $100, and it would have otherwise had a profit of $80, then there was no harm and the license fee is as provided in Section 10.1.1. As a further example, if in a given fiscal year following the exercise of the Veto Option the PTVLA Service had an actual accrual profit of $80, but would have had a profit of $100 had PEGI not exercised the Veto Option, the Venture was harmed and the license fee owing for such fiscal year would be $20 less than the amount provided for in Section 10.1.1 (subject to a maximum reduction to 2/3 of the amount so provided), and such fee would be payable ***% in cash and ***% deferred until cash break-even. *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 13 10.2.1.3 If the Venture asserts that the provisions for reducing the Program License Fees described in Section 10.2.1.2 above should be effected, the Venture will pay to PEGI the full amount of the Program License Fee as if such reduction had not been in effect, according to the payment terms described in Section 10.3 below. At the end of a fiscal year, the Venturers will calculate the degree of harm, if any, resulting from PEGI's exercise of the Veto Option for such fiscal year pursuant to Section 10.2.1.2 and the amount owing from PEGI to the Venture with respect to such reduction in Program License Fees will be allocated first to offset accrued deferrals owing to PEGI and then to future payments due from the Venture to PEGI. 10.2.2 For ATV: The Program License Fees payable with respect to ATV will continue as set forth in Section 10.1.2. 10.3 Payment of Program License Fees. The Program License Fees shall be due ------------------------------- and payable to PEGI as follows: (a) the PTVLA Guaranteed Minimum Program License Fee and the ATV Guaranteed Minimum Program License Fee shall be calculated on a monthly basis and paid quarterly in arrears within 30 days after the close of the quarter, and (b) any overages above the PTVLA Guaranteed Minimum Program License Fee shall be calculated on a monthly basis and paid quarterly after the close of the appropriate quarter. 11. Trademark License Agreement: Royalties -------------------------------------- 11.1 The Venture will pay to PEGI a trademark license royalty (the "Trademark Royalty") of ***% of adjusted gross revenue from the PTVLA Service. "Adjusted Gross Revenue" is defined as the gross revenue actually received by the Venture from subscribers to the PTVLA Service (including pay per view revenue) and all other revenues from operation of the PTVLA Service by the Venture, minus consumption and other taxes (other than income taxes). Without limiting the foregoing, in the event that the revenue of the PTVLA Service includes streams from advertising and/or home shopping, such revenue will be included in Adjusted Gross Revenue as defined herein. The Trademark Royalty shall be calculated on a monthly basis and paid quarterly within 30 days after the close of the appropriate quarter. 11.2 PEGI will cause PEI to grant to the Venture a license to use in connection with PTVLA the trademarks "Playboy" and the "Rabbit Head Design" and such other Playboy trademarks as will be described in the Trademark License Agreement in and in connection with PTVLA and the marketing and promotion of PTVLA. PEGI will cause PEI to grant to the Venture a license to use in connection with ATV the "AdulTVision" trademarks and such other AdulTvision trademarks owned by Playboy as will be described in the Trademark Agreement in and in connection with ATV and the marketing and promotion of ATV. The grant of licenses will be made to the Venture on an exclusive basis for the respective service but only with respect to Non-Standard Television and only in the Territory. The only *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 14 exception to the foregoing exclusivity will be (a) customary presentation and logo credits in the title and end credits sequences of programs licensed to others as permitted hereunder and credit blocks in advertising therefor, and (b) use of the trademarks in any television service which is not intended for general reception in the Territory but which is received in the Territory. The Venture will not sub-license any trademarks licensed under the Trademark License Agreement except with the consent of PEI. PEI shall have the right to approve any and all permutations of the trademarks and any secondary, combination or derivative marks based on the trademarks, all of which, when approved, shall be the property of PEI and be licensed to the Venture under the terms of the Trademark License Agreement. PEI will have the right to control and conduct all proceedings relating any infringement of the trademarks in the Territory and any claim that the Venture's use of the trademarks in the Territory infringes the rights of any third party. The Venture will indemnify and hold harmless PEI from and against all losses arising from the use by the Venture of the trademarks. 11.3 Although the programs transmitted by the Services will depict nudity and allow strong or explicit language, PEGI will not deliver and the Venture will not transmit scenes or other material depicting any of the following: (i) the glorification of violence of gratuitous violence, (ii) rape, non-consensual intercourse or other non-consensual sexual activity, (iii) bondage, incest, sadism or masochism, bestiality, extreme sexual explicitness or the graphic close-up of genitals; or (iv) child pornography, including, without limitation, instances where an actor is the legal age for consent but is portrayed as under the legal age for consent. In that regard, no actor will appear in any program transmitted by the Services who is not at least 18 years of age. Notwithstanding the foregoing, the standards applied by PEGI from time to time for Playboy TV and AdulTVision, respectively, in the United States shall be the controlling standards and any materials transmitted on either such Playboy service and shall be deemed acceptable for transmission on the respective Service. 11.4 The parties acknowledge that any material breach of the Trademark License Agreement or of this Agreement with respect to the use of trademarks will result in irreparable harm to the other party for which there is no adequate remedy at law. Accordingly, each party shall be entitled to preliminary or temporary equitable relief pending a final determination in accordance with the dispute resolution provisions provided below, without the necessity of posting bond, by way of any or all of the temporary and permanent injunctions and such other relief as a court of competent jurisdiction may deem just and proper. 11.5 Notwithstanding the Trademark Usage Summary attached hereto, (i) PEI will permit advertising in English without prior approval, and (ii) advertising and other uses of the trademarks and logos will be submitted for approval at least 10 days in advance to PEI. 15 12. PEGI Programming and Operational Responsibilities. Consistent with this ------------------------------------------------- Agreement and the attachments hereto; PEGI will control and manage all facets of the programming for PTVLA and ATV. This will include: 12.1 Exclusive Program Supplier. PEGI will be the exclusive supplier of all -------------------------- programming shown on PTVLA and on ATV, regardless of whether such programming is produced and owned by PEGI, or whether PEGI acquires such programming for the Venture. The costs of producing or acquiring such programming for the Venture will be borne by PEGI. Notwithstanding the foregoing, the Venture will have the right at its own cost to product its own programming targeted to the Latin American market pursuant to Section 12.2 ("Venture-produced Programming" or a "Venture-produced Program"). 12.2 Venture-Produced Programming. Venture-produced Programming will be ---------------------------- developed by mutual agreement between Bloomfield and PEGI. Such programming will be produced locally by a Cisneros Affiliate or under Bloomfield's direction, consistent with PEGI's standards and subject to PEGI's approval, not to be unreasonably withheld. A budget for Venture-produced programming will be identified in the Business Plan and annual Budgets. 12.2.1 PEGI may recommend a supervising producer for a Venture-produced program. If such person is approved by Bloomfield (which approval will not be unreasonably withheld), he/she will be paid in accordance with the Venture's production budget; if not approved, the Venture will allow such person to supervise production, but at PEGI's expense. Such supervising producer shall have control over the content and look of the program, consistent with the standards for the Playboy Programming. 12.2.2 With respect to each Venture-produced Program, PEGI will have 10 business days following the receipt of a program to approve such program or request changes in writing; if no such approval or request for changes is delivered to the Venture within this 10 business day period, PEGI will be deemed to have approved such program. The costs of making changes requested by PEGI will be borne by the Venture. 12.2.3 After the Venture makes any changes requested by PEGI pursuant to Section 12.2.2, PEGI will have 5 business days from receipt of the changed program to approve such program or request additional changes in writing; if no such approval or request for changes is delivered within this 5 business day period, PEGI will be deemed to have approved such program. If the changes initially requested by PEGI have not been made to PEGI's reasonable satisfaction, the costs of making further changes to conform to such initial comments will be borne by the Venture. The costs of making any new changes pursuant to this Section 12.2.3 will be borne by the Venture, up to a cap of 2.5% or the program's original production cost, with any overage to be paid by PEGI. 16 12.2.4 After the Venture makes any changes requested by PEGI pursuant to Section 12.2.3, PEGI will have 5 business days from receipt of the changed program to approve such program or request additional changes in writing; if no such approval or request for changes is delivered in this 5 business day period, PEGI will be deemed to have approved such program. The costs of making any further changes not initially requested by PEGI will be borne by PEGI. 12.2.5 The inclusion of Venture-produced Programming in the Venture's program block will be in addition to the minimum number of hours to be supplied by PEGI. 12.2.6 The Venture will grant PEGI a license to distribute the Venture-produced Programming outside the Territory in all media and within the Territory in all media other than the media for which the Venture has rights pursuant to Section 7 above. For this distribution, PEGI will receive a distribution fee equal to ***. Remittance of distribution fees will be on a quarterly basis, payable within 30 days after the close of the relevant quarter with the excess, to the extent received by PEGI, to be paid over to the Venture. Although PEGI makes no guaranties to the Venture regarding such distribution, PEGI will use its commercially reasonable efforts to maximize the license fees it obtains from third parties for such Venture-produced Programming. PEGI will license such programming on terms substantially equivalent to terms applicable to the licensing of PEGI's own similar programming; provided, that the Venture will have the right to approve any such transaction within the Territory and will have the annual right to review the records of PEGI with respect to all such licensing activities, upon reasonable notice, to ensure compliance with the terms hereof. If PEGI acquires Venture-produced Programming (or specific programs or series of programs therefrom) for use in a PEGI-owned or -operated service or media, PEGI will acquire such programs on arms' length terms to achieve fair market prices for the Venture with respect to such programs. If the Venture-produced Programming is "bundled" with other programming by PEGI in the course of its distribution efforts, PEGI will make a fair and good faith allocation to such Venture-produced Programming of the fees received. 12.3 Program Mix. ----------- 12.3.1 PTVLA: PEGI will program the PTVLA Service with three ----- types of programming, as follows: (a) "Playboy Programming", which is programming produced, co-produced or owned by PEGI or one of its affiliates, or which is programming acquired by PEGI or one of its affiliates for multiple territories around the world; (b) "Venture Acquired Programming", which is programming acquired by PEGI or one of its affiliates specifically for PTVLA,; and (c) Venture-produced Programming, which is programming produced by the Venture according to Section 12.2 PEGI will determine the mix of Playboy programming and Venture Acquired Programming. PEGI and Bloomfield will mutually determine the manner in which the *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 17 Venture-produced Programming is scheduled. The 180 hours of New Programming (as defined in Section 9.2 above) supplied by PEGI each fiscal year will include a mix of Playboy Programming and Venture Acquired Programming. As per the Business Plan, the following are the targets for the programming mix of such 180 hours: Year 1 90% Playboy Programming 10% Venture Acquired Programming Year 2 85% Playboy Programming 15% Venture Acquired Programming Year 3 80% Playboy Programming 20% Venture Acquired Programming Year 4 and 75% Playboy Programming Thereafter 25% Venture Acquired Programming The parties acknowledge that these are target ranges and that PEGI will use its reasonable efforts to meet these targets. Any variance of more than 5% from these targets will be subject to the Venture's approval. As noted in Section 12.2.5, Venture-produced Programming will be in addition to the 180 hours of New Programming supplied by PEGI each fiscal year. 12.3.2 ATV: Initially, the ATV Service will be a retransmission of the --- U.S. AdulTVision feed in the English language. If the Venture determines that a separate ATV feed is commercially viable and desires to proceed with such separate feed, the Venture will pay all costs associated with the development and implementation of such separate feed (including satellite and transponder), and the number of movies supplied by PEGI will be as set forth in Section 9.3 (subject to the rights of the Venture to decrease the number of movies as described in such Section). 12.4 Interstitials/Promos/On-Air Look. In consultation with the Venture, -------------------------------- PEGI will determine and direct the production and compilation of all interstitial and promotional materials, as well as developing the on-air look of PTVLA and ATV. The costs of such production and compilation will be borne by the Venture. Bloomfield intends to produce or cause another Cisneros Affiliate to produce local host wraps and other interstitial material, under PEGI supervision and subject to PEGI's approval. The price paid by the Venture for such material will be prevailing fair market price. 12.5 Delivery Material. ----------------- 12.5.1 For PTVLA: PEGI will supply one copy of each program, --------- intersitial, promo or other relevant item to the Venture, with the costs of duplication and shipping from 18 Los Angeles to be borne by the Venture. Assembly of the finished program block will be implemented by the Venture at PEGI's direction and to PEGI's specification. PEGI will provide a nightly program log to enable the Venture's technical personnel to properly compile a given night's programming. The Venture will bear the costs of dubbing/subtitling and any necessary format conversions. PEGI will provide such materials to the Venture in sufficient time to provide for efficient implementation by the Venture. 12.5.2 For ATV: Initially, the ATV Service will be a retransmission of ------- the US AdulTVision feed in the English language. Should the Venture determine that the Service be transmitted off this same US AdulTVision feed in Spanish and/or Portuguese (via a Second Audio Program or similar means), the costs of implementing such transmission in these languages will be paid by the Venture. The transmission to the Venture's ATV customers will be via the Galaxy III-R satellite or any successor. 12.5.3 Certificate of Erasure. At the end of the Window for each item ---------------------- delivered to the Venture (excluding items that have been dubbed or subtitled and which PEGI desires to acquire pursuant to the terms hereof), the Venture will erase the tapes of such items and deliver to PEGI a certificate of erasure with respect thereto. 12.6 Alternative Means of Performance. In the event the Venture can more -------------------------------- cost effectively perform some or all of the functions described in Section 12.4, the Venture may assume such functions, although PEGI will retain control over control and quality of such transferred functions. 13. Operating Responsibilities -------------------------- 13.1 The Venture will employ a staff of sufficient size to efficiently handle sales and distribution, affiliate relations, technical matters and other appropriate matters. 13.2 Pursuant to the Management Services Contract, Management Co. will handle many of the day-to-day operational and financial responsibilities of the Venture under the supervision of the General Manager, including but not limited to financial management, payroll services and accounting; collections and accounts payable; and facilities acquisition and management. Management Co. will receive a fee of ***% of the Adjusted Gross Revenue of PTVLA. In the event that ATV launches prior to PTVLA, the 1996 Annual Budget will be modified to provide for ATV to manage itself until the launch of PTVLA. 13.3 The Venture will be responsible for making arrangements for satellite transponders as necessary to insure coverage of the entire Territory. All costs of assembly, dubbing, subtitling, shipping, duplication, production of original "wrap around" material, and similar functions will be paid by the Venture. In the event PEGI expands its own funds for such services, such costs will be "rebilled" to the Venture, with the Venture to reimburse PEGI within 30 days. All costs shall be rebilled "at costs" with no markup by PEGI. A *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 19 Cisneros Affiliate will provide dubbing/subtitle services on the terms set forth in Section 6.2, payable within 30 days. The Business Plan will attempt to identify the type and magnitude of these costs, with operating changes to be made as needed via subsequent Annual Budgets. 13.4 The Venture will obtain office facilities/computer and telecommunications infrastructure/other support services as needed. Such facilities and/or services will be provided by a Cisneros Affiliate, and the Venture will pay the actual or a reasonable allocation of costs of such facilities and/or services, including a reasonable allocation of the overhead associated therewith. 14. Venture Ownership, Capitalization and Governance ------------------------------------------------ 14.1 Formation of Venture. The Venture will be organized as a limited -------------------- liability company under the laws of the State of California. The parties intend that the terms of the limited liability company be sufficient to qualify to be taxed as if the Venture were a partnership. Consequently, the Venture will have limited transferability of interests (as described below) and a limited life (terminating on the 50th anniversary of its organization). 14.2 Ownership Provisions. -------------------- 14.2.1 The Venture will initially be owned 81% by Bloomfield and 19% by PEGI. 14.2.2 PEGI has the right to increase its percentage interest, but Bloomfield can never be diluted below 50.1%. PEGI can buy its additional percentage interests from Bloomfield once per fiscal year, in minimum increments of 5%. Until the sooner of cash break even or the end of 5 fiscal years, PEGI can buy additional percentage interests from Bloomfield at the founders' price; after fiscal year 5 or break even, PEGI's buy-in price will be a pro rata portion of the going concern value of the Venture, to be mutually-agreed by the parties or determined by a mutually agreed third-party expert. PEGI's buy-in cannot be "paid" with deferred license fees. 14.2.3 Restrictions on Transfers of Interests. No member of the -------------------------------------- Venture may transfer ownership interests to affiliates or any third party without the consent of all the other members, provided, however, that Confidential Shelf 16 Limited, a corporation organized under the laws of England ("Flextech"), may obtain an equity interest in the Venture and be admitted as a member on the terms set forth below. 14.2.4 Flextech Buy-In. On or before the 105th day following the date --------------- this Agreement is executed by the parties hereto, Flextech may purchase a 10% equity interest in the Venture from Bloomfield at the founders' price. If Flextech exercises such option, PEGI's maximum interest in the Venture will be decreased from 49.9% to 39.9% 20 14.2.5 Subject to the limitations set forth in this paragraph, and provided that Flextech has purchased the 10% equity interest in the Venture described in Section 14.2.4, at any time after July 1, 1996 either Bloomfield or PEGI may sell to Flextech additional percentage interests in the Venture at a price to be mutually-agreed between the selling party and Flextech. At any time while PEGI's buy-in price pursuant to Section 4.2.2 above is the founders' price, PEGI will have the right to preempt any proposed sale by Bloomfield to Flextech by purchasing such interest from Bloomfield at the lower of the price offered by Flextech and the founders' price. PEGI will have 60 days from written notice from Bloomfield confirming the amount of the interest to be sold, the terms of such sale, and Flextech's binding commitment to purchase such interest in the event PEGI does not exercise its preemptive option. Subject to the rights of PEGI set forth in the preceding two sentences, if any member of the Venture (the "Selling Party") wishes to sell interests (the "Offered Interest") to any other member, the third member (the "Non-Selling Party") may "tag-along" in such sale on the same terms as negotiated by the Selling Party, with each having the right to sell its pro rata share of the Offered Interest. Notwithstanding anything to the contrary set forth herein, (i) without PEGI's approval, Bloomfield cannot sell Flextech any interest that would have the effect of transferring control of the Venture to Flextech and (ii) without Bloomfield's and PEGI's approval, PEGI's interest in the Venture cannot fall below 19%. 14.2.5.1 For example, if PEGI wishes to sell a 10% interest in the Venture to Flextech for $30 at a time when Bloomfield owns 60% of the Venture, PEGI owns 30% and Flextech owns 10%, then if Bloomfield exercises its tag-along right, PEGI may sell 3.33% (10% x 30/90) for $10 and Bloomfield may sell 6.66% (10% x 60/90) for $20. 14.2.6 In connection with Flextech's possible buy-in and participation in the Venture, PEGI and Bloomfield agree that (i) no information or material available to the Venture which constitutes confidential or proprietary information of GLA or DirecTV will be provided or disseminated to Flextech, and (ii) each will use its best efforts to protect the confidentiality of such information or material. The foregoing restrictions will be disclosed to Flextech prior to any acquisition by Flextech of an interest in the Venture. 14.3 Capitalization. -------------- 14.3.1 The initial capital contribution of Bloomfield will be $1,128,000 and the initial capital contribution of PEGI will be $265,000 (the anticipated capital requirements of the Venture for the first two fiscal quarters). Bloomfield shall fund its initial capital contribution in cash. PEGI's initial capital contribution can be in the form of cash or paid from the cash portion of the license fees payable pursuant to Section 10; this decision must be made at the formation of the LLC. 14.3.2 If necessary to cover the deficits of the Venture, each member shall contribute additional capital pro rata in accordance with their respective percentage interests, 21 with such capital calls subject to the aggregate maximum of the highest deficit shown in the Business Plan. The Operating Agreement will include an estimated schedule of such additional capital calls, which are expected to occur quarterly at the beginning of the respective quarter, commencing with the third fiscal quarter. PEGI will have the right to fund its portion of such additional capital requirements through non-payment of the Program License Fees and Trademark Royalties, to the extent sufficient to cover such requirements. If any member fails to make such additional capital contributions, the other members may loan the Venture the amount of the shortfall, which loan will bear interest and will be paid out of any distribution or payment otherwise owing from the Venture to the defaulting member. The parties will negotiate other appropriate terms regarding required capital contributions to be included in the Operating Agreement, including but not limited to additional remedies regarding defaulting members (e.g., the purchase of interest of any member that fails on multiple occasions to make required captial contributions). 14.4 Governance Provisions --------------------- 14.4.1 The general management of the Venture will be delegated to a General Manager to be mutually approved by the Venturers. The General Manager will report to and be subject to the direction of a Management committee comprised of three representatives of each of Bloomfield and PEGI. If Flextech purchases an interest in the Venture pursuant to Section 14.2, the Management Committee will be increased to include on representative of Flextech. Notwithstanding the number of representatives a member has on the Management Committee, such representatives will collectively vote the percentage interest the member holds in the Venture and will collectively exercise each member's approval rights. 14.4.2 The Operating Agreement will include appropriate minority protections, including, but not limited, to provisions requiring the appoval of PEGI prior to the Venture taking any of the following actions: (i) any amendment to the Superseding Agreements, (ii) any merger or other reorganization of the Venture, (iii) the issuance of additional interests in the Venture, (iv) any distribution by the Venture with respect to the interests therin other than distributions of excess cash (including, but not limited to, any distribution of non-cash assets), (v) the Venture taking actions that are inconsistent with an approved Business Plan or Annual Budget, or which are otherwise outside the ordinary course of business, including but not limited to the incurrence of indebtness in excess of the levels comtemplated by the applicable Business Plan or Annual Budget, (vi) the Venture entering into any business activities except as contemplated herein, (vii) loans by the Venture to any member, (viii) any transaction with an affiliate of any member (other than the Superseding Agreements), or (ix) except as expressly provided herein, the termination, dissolution or liquidation or the Venture. 14.4.3 It is the parties intent that the structure of the Venture as a limited liability company will limit the liability of the members for liabilities of the Venture to their respective interests in the Venture. However, if either Bloomfield or PEGI becomes 22 directly liable for any liability of the Venture resulting from an action of the other Venturer taken without the approval (on the terms provided herein) of such Venturer, then the Venturer taking such action will indemnify and hold the Venturer suffering such liability harmless from and against any liability arising from such action (subject to the exclusion for PEGI's responsibility for local laws regarding censorship as set forth in Section 19). 14.4.4 Each member of the Venture will have the right to examine the books and records of the Venture, and will have the annual right to audit or cause an audit of the books and records of the Venture upon not less than 10 business days prior notice. The Management Co. under the supervision of the General Manager will prepare regular periodic financial statements and annual financial statements to be prepared in accordance with GAAP. At the request of any member, the annual financial statements will be audited by a nationally recognized accounting firm. 15. Distribution of Profits The Venture will make distributions of operating ----------------------- profits on a quarterly basis to each partner, in proportion to its percentage interests at the end of that quarter. The Venture will not withhold distributions except as necessary to provide for the reasonable conduct of the Venture's Business as detailed in the Business Plan (as modified by the Approved Budget for a given fiscal year). 16. Advertising It is the intention of the parties that the Venture secure ----------- cross-channel promotional advertising with the other channels carried by GLA. If GLA is unable or unwilling to facilitate such promotional advertising, the Venture will seek promotional advertising directly from the owners of such channels. Except as set forth above, the Venture shall determine whether and when to sell advertising time to third-parties. If the Venture decides to carry advertising, the Services will at all times abide by the following advertising standards: 16.1 Categories that are not acceptable for advertising are firearms (or advertisements from any gun lobby organization) and other weapons; explosives or fireworks; massage parlors; telephone sex lines; sex clubs; sexually explicit audio visual products (e.g., X-rated or similar "hardcore" videos); sex toys; materials depicting graphic sexual conduct, violence, sadism, sadomasochism, bondage, incest, bestiality or child pornography; classified advertising; advertising for psychics or similar services; religious organizations and/or cults. 16.2 The Venture will not accept advertisements for magazines which compete with any edition of the "Playboy" magazine or for any other publication or audio-visual products published, produced or distributed by any person who is engaged in the publication and distribution of any magazine which competes with any edition of the "Playboy" magazine. 16.3 Once advertising commences on a Service (other than cross-channel promotional advertising), if the Venture decides to offer free or discounted advertising time 23 to either Venturer (whether for products bearing trademarks owned or licensed by such Venturer or by affiliates of such Venturer), the Venture will offer such advertising time to each Venturer equally and such advertising time will not, in the aggregate, exceed 5% of the total advertising time on such Service. 17. Non-Competition and Exclusivity ------------------------------- 17.1 Neither of the parties nor their affiliates will hold an ownership position of any kind in any competing primarily adult-oriented television service (excluding a Cisneros Affiliates' interest in GLA) or (except as permitted herein) distribute adult oriented programming to Non-Standard Television in the Territory without the express written permission of the other. Further, neither of the parties nor their affiliates will distribute adult-oriented programming in any media that is "branded" programming of the publisher of a magazine or other publication that competes with any edition of the "Playboy" Magazine. The ownership or distribution of R-rated feature film product for major studios does not represent ownership or distribution of "adult-oriented" programming for the purposes of this provision. Notwithstanding the foregoing, a Cisneros Affiliate's distribution in Venezuela pay cable to the extent currently conducted (i.e., restricted to the current territory, number of hours type of programming, etc. ) will not constitute a breach of this Section 17.1. 17.2 Subject to Section 5.2.3, the parties agree that GLA will be exclusive DTH platform for the PTVLA Service through and including June 15, 1999 (the "Exclusive Period"). GLA will be the exclusive DTH platform for the ATV for a period of 5 years commencing on the date that ATV is first distributed via GLA to subscribers. 17.3 In negotiating a carriage agreement with GLA, the Venture will endeavor to obtain GLA's agreement that PTVLA and ATV will be the only primarily adult-oriented services carried by GLA during the Exclusive Period. The parties acknowledge, however, that Bloomfield cannot guarantee that the Venture will be the exclusive provider of adult-oriented programming to GLA. 18. Mutivision The parties agree that the Venture will negotiate with the ---------- Multivision, a cable and DTH operator in Mexico, regarding the granting of suitable performance-based incentives for the distribution of the Services in Mexico via systems owned or controlled by Multivision. Any such agreement will require the approval of both PEGI and Bloomfield. 19. Censorship ---------- The Venture is willing to accept and pay for programs supplied by PEGI for the Services regardless of consorship regulations or the potential for same throughout the Territory or in any individual country or politial subdivision within the Territory. The Venture will be obliged either to edit the programming as supplied by PEGI (subject to PEGI's approval) or blackout the territory(ies) where the censorship problem occurs, with all 24 costs of editing and/or blackout to be borne by the Venture; provided that the Venture will make good faith efforts to obtain waivers of such restrictions or will permit PEGI to make such efforts on behalf of the Venture. 20. Guaranty: Non-Disclosure ------------------------ 20.1 A Cisneros Affiliate reasonably acceptable to PEGI will provide a guaranty in favor of PEGI and PEI guarantying the Cisneros Affiliates' obligations hereunder and under the Superseding Agreements (including but not limited to any claims for which PEGI is entitled to satisfaction pursuant to the dispute resolution provision set forth in Section 21 below). Such guaranty will be irrevocable and will include financial assurances with respect to the Cisneros Affiliates (including, if necessary, the infusion of additional capital). The parties specifically agree that the bankruptcy, insolvency or other similar financial condition of the Cisneros Affiliates will not in any event form a defense to any claim by PEGI or PEI under the Guaranty. 20.2 The parties acknowledge that it is Cisneros Groups's intention to hold its ownership interest in the Venture through an entity which will not be publicly known to be a Cisneros Affiliate. PEGI will not publicize to third-parties the participation of the Cisneros family in the Venture, without Bloomfield's express approval, unless and only to the extent that such disclosure is required by applicable law or to enforce the provisions of this Agreement. If such disclosure is so required, PEGI will, to the extent reasonably feasible, notify Bloomfield in advance of such disclosure and cooperate with Bloomfield in seeking a protective order or other appropriate protections. Prior to any investment in the Venture, Flextech will be required to acknowledge and agree to be similarly bound by the foregoing. 21. Dispute Resolution ------------------ 21.1 Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section 21, which shall be the sole and exclusive procedures for the resolution of any such disputes. The parties intend to include substantially similar provisions in the Superseding Documents so that the following provisions will continue to govern dispute resolution with respect to the Venture and the Venturers. The parties intend that these provisions shall be valid, binding, enforceable and irrevocable and shall survive any termination of this Agreement or the Superseding Agreements. 21.2 The parties shall promptly notify each other in writing of any dispute arising out of or relating to this Agreement. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives who have authority to settle the controversy. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this 25 clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. 21.3 If any such dispute remains unresolved within 30 days of original notice thereof, the parties shall endeavor to resolve any dispute arising out of or relating to this agreement by mediation under the CPR Mediation Procedure for Business Disputes. Unless the parties agree otherwise, the mediator will be selected from the CPR Panel of Neutrals with notification to CPR. 21.4 Any controversy or claim arising out of or relating to this contract or the breach, termination or validity thereof, which remains unresolved 45 days after appointment of a mediator, shall be settled by arbitration by a sole arbitrator in accordance with the CPR Non-Administered Arbitration Rules; provided, however, that if either party will not participate in a non-binding procedure described above, the other may initiate binding arbitration before expiration of the above period. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.(S)1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of arbitration shall be Los Angeles, California. 21.5 Except as expressly provided below, the arbitrator is not empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any right to recover such damages with respect to any dispute resolved by arbitration. The arbitrator shall have the authority to include, as an item of damages, the costs of arbitration, including legal fees and expenses, incurred by the prevailing party and to apportion such costs among the parties on a claim by claim basis as such party prevails thereon. For purposes of the foregoing, the "prevailing party" shall mean the party whose final settlement offer (or other position or monetary claim) prior to the start of arbitration is closest to the judgement awarded by the arbitrator, regardless of whether such judgement is entered into in favor of or against such party. 21.6 The statute of limitations of the State of California applicable to the commencement of a lawsuit shall apply to the commencement of an arbitration hereunder, except that no defenses shall be available based upon the passage of time during any negotiation or mediation called for by the preceding paragraphs of this Section 21. 21.7 All negotiations pursuant to Sections 21.2 and 22.3 are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. 21.8 Each party agrees that service by registered or certified mail, return receipt requested, delivered to such party at the address provided in Section 22.8 (Notices) below, will be deemed in every respect effective service of process upon such person for all purposes of these provisions relating to mediation and arbitration. Each party irrevocably 26 submits to the jurisdiction of the courts of the State of California and to any federal court located within such state for the purpose of any action or judgement with respect to this Agreement, regardless of where any alleged breach or other action, omission, fact or occurrence giving rise thereto occurred. Each party hereby irrevocably waives any claim that any action or proceeding brought in California has been brought in any inconvenient forum. 21.9 The parties will negotiate in good faith and agree on such further or modified arbitration provisions as are reasonably necessary for awards and other judgements resulting from the provisions set forth above to be recognized and enforceable in the respective jurisdictions of organization of PEGI and the Cisneros Affiliates and, to the extent necessary, in other jurisdictions in the Territory. 22. Miscellaneous ------------- 22.1 Currency; Payments ------------------ Except where otherwise expressly provided to the contrary in the Superseding Agreements: 22.1.1 All amounts due from either party to the other or from the Venture to a Venturer pursuant to this Agreement shall be paid in U.S. Dollars. If any portion of such payment is calculated on the basis of revenues received in other currencies, such revenues shall be calculated using the exchange rate published in the Wall Street Journal or, with respect to Mexico, Brazil, Argentina and Venezuela, as quoted by the Central Bank of such country, as of the business day immediately preceding the date on which the payment initially is due. Such exchange rate shall also apply to any portion of a payment which is permitted to be deferred, regardless of whether such deferred payment is represented by a promissory note or other instrument. 22.1.2 All payments owing pursuant to this Agreement will be made by wire transfer of immediately available funds, net of any withholding required by applicable law. Each party will from time to time designate one or more accounts into which such payments will be made and may designate one or more affiliates to receive such payments. 22.1.3 Any payment hereunder not made when due will bear interest from the date due to and including the date of payment in full at a rate equal to the reference rate of the Bank of America for domestic customers as in effect on the date payment was due. 22.1.4 The parties agree that if any payment owing by it or any of its affiliates is precluded or limited by a restriction imposed by jurisdiction of organization or operation of the payor or the jurisdiction where the payor's funds are deposited, then an affiliate of such payor not subject to such restriction shall make the required payment. 27 22.2 Governing Law. This Agreement has been negotiated and entered into in ------------- the State of California and all questions with respect to the Agreement and the relationships of the parties hereunder will be governed by the internal laws of the State of California, regardless of the choice of law principles of California or any other jurisdiction. 22.3 Authority. Each party represents that (i) it has full power and --------- authority to enter into and perform this Agreement, (ii) this Agreement is the valid and binding obligation of such party, enforceable against it in accordance with its terms, and (iii) the performance by such party of its obligations under this Agreement does not violate any law, rule or regulation binding on such party or such party's charter documents. 22.4 Assignment: No Third Party Beneficiary. No party shall assign its -------------------------------------- rights or delegate its obligations hereunder without written consent of the other party except to an affiliate of such party; provided that no such assignment shall relieve the assignor of its obligations. The provisions of this Agreement are for the benefit only of the parties, and no third party may seek to enforce or benefit from these provisions. 22.5 Agreement Negotiated. The parties hereto are sophisticated and have -------------------- been represented by lawyers throughout the negotiation and execution of this Agreement who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe the presumption of California Civil Code Section 1654 and similar laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive its effects. 22.6 Waivers, Remedies, Cumulative, Amendments, etc. ----------------------------------------------- 22.6.1 No failure or delay by any of the parties hereto in exercising any right, power or privilege under this Agreement shall operated as a waiver thereof nor shall any single or partial exercise by any of the parties hereto of any right, power or privilege precluding any further exercise thereof or the exercise of any other right, power or privilege. 22.6.2 The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. 22.6.3 No provision of this Agreement may be amended, modified, waived, discharged or terminated, other than by the express written agreement of the parties hereto nor may any breach of any provision of this Agreement be waived or discharged except with the express written consent of the party not in breach. 22.7 Notices. All notices, requests, demands and other communications ------- required to be given under this Agreement shall be in writing and shall conclusively deemed to have been duly given (a) when hand delivered to the other party, (b) the next business day if sent 28 by a generally recognized overnight courier services that provides written acknowledgement by the addressee of receipt, or (c) when received, if sent by facsimile or other generally accepted means of electronic transmission. if to PEGI to: ------------- Playboy Entertainment Group, Inc. Attention: President 9242 Beverly Boulevard Beverly Hills, CA 90210 United States of America Fax number: (310) 246-4065 with a copy to: Playboy Enterprises, Inc. Attention: General Counsel 680 North Lake Shore Drive Chicago, IL 60611 United States of America Fax number: (312) 266-2042 if to Bloomfield to: ------------------- Bloomfield Mercantile Inc. c/o Glenn Dryfoos, Esq. Greenberg Glusker Fields Claman & Machtinger LLP 1900 Avenue of the Stars Suite 2200 Los Angeles, CA 90067 United States of America Fax Number: (310) 553-0687 or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. 22.8 Confidentiality. --------------- 22.8.1 Each Venturer and its respective affiliates shall maintain the confidentiality of all information of a confidential or proprietary nature which it may have or 29 acquire regarding the customers, business, finances, assets or affairs of the Venture or the other Venturer and its affiliates except for (a) any information which is generally available to the public or becomes generally available to the public other than through disclosure in violation of this provision or (b) which is required to be disclosed by applicable law or to enforce the provisions of this Agreement. 22.8.2 In recognition of each party's understanding that the other may in the future invite third parties to participate as equity or non-equity investors or other providers of finance in or to such party or its respective affiliates, the parties agree that each may provide to such entities copies of the Operating Agreement, Program License Agreement, Trademark License Agreement and other agreements governing the Venture, the Business Plan, financial statements and other financial information provided by the Venture to its members, and such other information as would be reasonable in the circumstances for a potential investor to require. Notwithstanding the foregoing, no such information will be provided until a confidentiality agreement for the benefit of the Venture, the Venturers and their respective affiliates has been signed by such potential investor. 22.8.3 In recognition of the fact that PEGI is a subsidiary of a publicly held company, the parties agree that PEGI may provide to institutional investors and analysts such information concerning the Venturer as in conventional to assist such investors in deciding whether to invest or such analysts to prepare their reports; provided, that no information may be disclosed without the prior consent of the Venture that would reasonably be expected to cause harm to the Venture, including with respect to its competitive position. 22.8.4 Notwithstanding Section 22.8.2 and 22.8.3 to the contrary, neither the Venture nor the parties may disclose any proprietary information of GLA that would violate the terms of the GLA carriage agreement (which is expected to include customary confidentiality provisions) without obtaining GLA's approval thereof. Bloomfield and Management Co. agree to use their best efforts to obtain such approval upon request by PEGI. 22.9 Public Announcements. Unless otherwise agreed by the parties or as -------------------- required by law or by the stock exchange on which PEI's stock is traded, no public announcement 30 will be made by either party or any of their respective affiliates with respect to the subject matter of this Agreement. AGREED AND ACCEPTED: - ------------------- PLAYBOY ENTERTAINMENT BLOOMFIELD MERCANTILE INC. GROUP, INC. By:/s/ Anthony J. Lynn By: /s/ Maria Batista de Upegui ---------------------- ---------------------------- Name: Anthony J. Lynn Name: Maria Batista de Upegui Title: President Title: President 31 EXHIBIT "A" DEFINED TERMS The following terms are defined in the indicated Sections of the text of the within Agreement:
TERM SECTION ---- ------- Adjusted Gross Revenue 11.1 AdulTVision Homes 4.2.3.2 Agreement 1.1 Annual Budget 3.2 ATV 1.1 ATV Guaranteed Program License Fee 10.1.2 Bloomfield 1.1 Business Plan 3.1 Cisneros Affiliates 1.1 Exclusive Period 17.2 Flextech 14.2.3 GLA 5.2.3 Home Video 8.1 License Term 8.1 Management Co. 2.5 movie 9.3 New Programming 9.2 Non-Selling Party 14.4.2 Non-Standard Television 7.1 Offered Interest 14.4.2 Operating Agreement 2.1 Optionee 9.5 Option Program 9.4 PEGI 1.1 PEI 2.3 Playboy Homes 4.2.3.2 Playboy Programming 12.3.1 Program License Fees 10.1 PTVLA 1.1 PTVLA Guaranteed Minimum Program License Fee 10.1.1 Remedial Actions 5.2.3.1 revenue 4.2.2 Selling Party 14.4.2 Services 1.1 Spanish Cable Homes 4.3.2.1
EXHIBIT A-1 DEFINED TERMS
TERM SECTION ---- ------- Superseding Agreements 2 Territory 4.1 Trademark License Agreement 2.3 Trademark Royalty 11.1 U.S. Rights 4.2 Venture 1.1 Venture Acquired Programming 12.3.1 Venture-produced Programming or Venture-produced Program 12.1 Ventures 2.1 Veto Option 10.2.1.2 Window 8.1
The following additional terms shall have the meanings set forth below: "affiliate" means any person controlled, controlling or under common control with the specified person. "control" (and controlled and controlling, respectively) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevent person (whether by the holding of shares, the possession of voting rights or otherwise). "person" means any individual, corporation, partnership, limited liability company, trust, association or other legal entity. EXHIBIT A-2 EXHIBIT "B" STANDARD TERMS AND CONDITIONS OF PAY TELEVISION LICENSE AGREEMENT 1. LICENSE: Subject to the payment of the License Fee and the due ------- performance by Licensee of the obligations hereunder, Licensor grants and Licensee accepts a limited license of rights under copyright of each of the Programs during the periods set forth in Schedule "A" attached hereto by means of direct broadcast satellite pay television, satellite television and pay cable television. This license does not grant any right to Licensee to transmit or authorize others to transmit exhibitions of the Programs over so-called subscription and/or theatre television rights, i.e., the right to exhibit the Programs for reception by those paying a fee therefor or in places where an admission fee is charged. The license does not grant any right to the Licensee to transmit or to authorize others to transmit exhibitions of the Programs by means of free broadcast television. 2. DELIVERY AND RETURN: Licensor shall deliver to Licensee one tape of ------------------- each Program on the dates specified in Schedule "A". Delivery to Licensee at the address set forth in Schedule "A" shall be deemed delivery hereunder. All costs of delivery and return of tapes and all risks of loss in transit or while in Licensee's possession or control shall be borne by Licensee. At all times after receipt of tapes, Licensee shall keep the tapes in Licensee's exclusive possession and control until retuned or erased as hereafter provided. Licensee will not make or authorize others to make copies of the Programs other than the minimum number of copies necessary to exhibit the Programs. Licensee shall furnish an affidavit with respect to any lost, stolen or destroyed tapes. All tapes and parts or replacements thereof shall remain the property of Licensor at all times. Licensee shall promptly examine each tape and shall give Licensor immediate written notice if said tape is not physically suitable for telecast other than the need to dub the tapes into the Spanish and/or Portuguese language(s). The tape or tapes shall be deemed acceptable unless Licensor is notified a minimum of ten (10) days prior to any scheduled broadcast that a tape is defective. At its option, Licensor may furnish another tape of said Program, or a suitable tape or another program in the series, or grant Licensee a proportionate credit in the license fees but Licensor shall have no other obligation or liability whatsoever. Original undubbed Licensor-supplied tapes and reels of each Program shall be either the subject of a certificate of erasure delivered to Licensor within sixty (60) days of receipt by Licenses or returned to Licensor at Licensee's expense (including customs fees) in the same condition as received, normal wear and tear excepted, either directly to Licensor or to such address as Licensor may designate. Licensee shall within sixty (60) days after the date of the last scheduled telecast of each Program, deliver to Licensor a certificate of erasure concerning all retained copies of Program tapes of all dubbed sound tracks, subtitled or subtitling material, and all optical and/or magnetic sound tracks and/or tapes of Programs containing optical and/or magnetic sound tracks, which were manufactured by or at the instance of Licensee, whether or not any of said sound tracks, materials or tapes were actually utilized by Licensee in connection with the exercise of rights granted to Licensee hereunder. It is expressly agreed that title in and to any such material provided to Licensee hereunder shall remain in Licensor, and that title in and to any such material created by, for or at the instance of Licensee and all rights including copyrights therein shall vest in Licensor upon the creation thereof, subject only to possession and control thereof by Licensee during the terms of this license solely for the purpose of exercise of the rights granted herein. Licensee will execute, acknowledge and deliver to Licensor any instruments of transfer, conveyance or assignment in or to any such material necessary or desirable to evidence or effectuate Licensor's ownership thereof and in the event that Licensee fails or refuses to execute, acknowledge or deliver any such instrument or documents then Licensor shall be deemed to be and Licensee hereby nominates, constitutes and appoints Licensor its true and lawful attorney-in-fact irrevocably to execute and deliver all such instruments in Licensee's name or otherwise, it being acknowledged that such power is a power coupled with an interest. Anything herein to the contrary notwithstanding, Licensee shall not have the right to use any dubbed sound tracks, sub-titled materials, optical sound tracks, or tapes made therefor except in the exercise of the rights granted to Licensee hereunder and in accordance with all limitations on said rights as are contained in this Agreement. It is distinctly understood and agreed that all payments, fees, royalties, residual payments and the like shall be the sole obligation of Licensee with respect to the production of and use of any and all dubbed magnetic sound tracks, sub-titled materials, and all optical sound tracks and tapes of Programs containing optical sound tracks made by, for or at the instance of the Licensee and Licensee hereby indemnifies Licensor with respect thereto. 3. CREDITS AND ALTERATION OF TAPES: Licensee may make only such cuts or -------------------------------- deletions as are necessary to make the Programs conform to the orders of any duly authorized public censorship authority, its time segment requirements and its continuity acceptance standards and may add commercial matter provided it is made clear to the television viewers that such commercial matter is not part of the continuity of the Programs. Additionally, once the editing is completed, such edited version shall be supplied to Licensor for its prior-to-broadcast approval (such approval not to be unreasonably delayed or withheld). Licensee will not delete the copyright notice and/or credits incorporated in the Programs as delivered by Licensor. Licensee shall replace such cuts and alterations and delete such commercial matter so that the tapes are returned in the same condition as received, normal wear and tear excepted. Licensee will not and will not authorize others to copy, duplicate or sub-license any tape nor part with possession thereof. 4. PAYMENT: Licensee shall pay Licensor the license fees stipulated in -------- Schedule "A" at the times and in the manner therein specified. Said license fees shall be due and payable whether or not any one or more of the Programs is actually telecast. Any payment not made within thirty (30) days of its due date shall bear legal interest not to exceed 12% per annum but in no event more than the maximum legal rate from the due date until paid. Acceptance of any payment after its due date shall constitute a waiver by Licensor of any of its rights except as to such payment. All payments shall be made only in United States dollars by wire transfer of immediately available federal funds to LaSalle National Bank, 120 South LaSalle Street, Chicago, IL 60603, ABA #071000505 (Playboy Entertainment Group, Inc.), A/C No. 22-9214-8. 5. SUBSTITUTION OF PROGRAMS: CERTIFICATE OF PERFORMANCE: ----------------------------------------------------- a. Licensor may, in its absolute discretion, withdraw any licensed Program if Licensor determines that the telecasting thereof would or might (i) infringe upon the rights of others; (ii) violate the law, court order, government regulation or other ruling of any governmental agency; (iii) interfere with the actual or contemplated use of the licensed Program or the material or rights contained therein for any purpose other than the telecasting of the Program in Licensee's basic area; or (iv) subject Licensor to any liability. b. If Licensor elects to withdraw any Program as set forth in the preceding sub-paragraph (a) of this Paragraph 6, before its initial telecast. Licensee shall have the right, in its sole discretion to require Licensor either to deliver another Program of comparable quality (which Program shall be deemed to replace the Program withdrawn). Should Licensor's decision to withdraw be made, any transportation and dubbing costs incurred and paid by Licensee in regard to the withdrawn Program shall be refunded by Licensor immediately upon Licensee's presentation of reasonable evidence of such B-2 expenditures. c. If a tape of any withdrawn Program has bee shipped to Licensee. Licensee will promptly return it to Licensor. 6. WARRANTY AND INDEMNITY: Licensor MAKES NO REPRESENTATIONS. WARRANTIES OR ---------------------- INDEMNITIES, EXPRESS OR IMPLIED EXCEPT AS SPECIFICALLY SET FORTH IN THIS PARAGRAPH: a. Subject to Paragraph 18. hereof, Licensor agrees to indemnify and save Licensee harmless from the amounts of any damages (except loss of profits and consequential damages, if any) awarded in any final judgement entered against it together with reasonable costs and expenses of litigation and reasonable counsel fees of Licensee incurred in connection therewith by reason of any claim which may be made alleging that any of the Programs infringe upon the copyright, literary or dramatic right or right of privacy of any claimant or constitutes a libel or slander of such person, except with respect to any material added by Licensee and except with respect to music which is specifically covered by Paragraph 8 below. b. Licensee shall indemnify and hold Licensor, its officers and directors harmless from any and all claims, damages, liabilities, reasonable costs and expenses of litigation, including reasonable counsel fees, arising directly or indirectly from the breach of any provisions of this Agreement by Licensee from the broadcasting of any material other than material contained in the Programs as delivered by Licensor, in connection with, or relating directly or indirectly to, said Programs. 7. ADDITIONAL WARRANTIES: Licensor warrants and represents that to the best --------------------- of its knowledge, information and belief, the performing right in all musical compositions contained in the Program are controlled by (a) a performing rights society having jurisdiction; or (b) Licensor, or (c) in the public domain. Licensor does not represent or warrant that Licensee may exercise the performing rights to said musical compositions without the payment of a performing rights royalty or license fee. If Licensee is required to pay a performing rights royalty or license fee, Licensee shall be solely responsible for the payment of such royalty of fee and shall hold Licensor free and harmless therefrom. 8. FORCE MAJEURE: Neither party shall be liable to the other for any failure ------------- or delay in delivery of tapes, or the inability to telecast any of the Programs, due to labor disputes, act of God, failure of carriers, failure of delay of laboratories, or for any other cause beyond the control of the parties and such performances shall be excused to the extent that it is prevented by reason of any of the foregoing conditions. If at the end of the term the Licensor in good faith determines that any act of force majeure materially decreased the value of this license, Licensor in Licensor's sole discretion to be exercised in good faith may make an adjustment of said license payments. In no event shall any governmental action taken which deems the content of any Program to be unacceptable constitute an event of force majeure. 9. DEFAULT AND TERMINATION: If Licensee defaults in the payment of any ----------------------- installment of the license fee, or if Licensee defaults in the performance of any of the other obligations hereunder and such default shall not be cured within ten (10) days after written notice thereof to Licensee, or if Licensee (which petition, if filed against Licensee, shall not have been dismissed within thirty (30) days thereafter), or if Licensee executed an assignment for the benefit of creditors, or if a receiver is B-3 appointed for the assets of Licensee, or if Licensee takes advantage of any applicable insolvency or any other like statute, or if Licensor notifies Licensee that it in good faith has reasonable doubts that Licensee can or will continue to perform hereunder, and Licensee fails to give adequate financial security and assurances within fifteen (15) days off mailing of said notice (any of the above acts is hereinafter called "event of default"), then Licensor may, in addition to any and all other rights which it may have against Licensee, terminate this Agreement and any other agreements between the parties then in existence by giving written notice to Licensee at any time after the occurence of such event of default. Whether or not Licensor exercises such right of termination, Licensor shall upon the occurrence of such event of default have no further obligation to deliver tapes of Programs hereunder and shall be entitled to immediate return of all tapes theretofore delivered to and in possession of Licensee. Upon termination, Licensor may recover from Licensee the entire unpaid license fee, plus interest at 12% per annum on that portion of the license fee which was delinquent prior to the termination, and any consequential damages. Licensee acknowledges that the terms hereof and the industry custom of licensing Programs substantially in advance of the scheduled telecast dates, have the effect of rendering the Programs hereunder unremarkable in the area covered by the Licensee during any period which includes the period of this license or any part thereof. Licensee also acknowledges that, by reason of the foregoing, no method exists for accurate measurement of damages for any breach of Licensee's agreement to pay Licensor as provided in this Agreement. It is therefore agreed that, in addition to all other remedies available at law, in equity, or under other provisions of this Agreement, Licensor shall be entitled (upon breach by Licensee of such agreement to pay Licensor) to recover from licensee, as liquidated damages, the total unpaid license fees for all telecasts authorized hereunder, whether or not such telecasts actually occur, and in addition, reasonable attorney's fees or collection agency fees if an attorney is retained by Licensor at any time to enforce the provisions hereof, plus such other amounts as may be due hereunder. The remedies provided herein are not exclusive but are cumulative and in addition to all other remedies existing at law, in equity, or in courts of bankruptcy. In the event that neither party commences litigation to enforce, interpret or declare any of the terms, covenants, conditions or obligations of this Agreement, prevailing party shall be entitled to recover all costs, fees and expenses of or in preparation for, litigation, appeal, review, or post-judgement or order, collection or enforcement efforts. All parties to this Agreement agree that the court shall retain and reserve jurisdiction in any judgement over the parties and the subject matter for purposes of enforcing this paragraph. 10. COMPLETION OF TELECAST PRIOR TO EXPIRATION OF TERM: Anything herein -------------------------------------------------- contained to the contrary notwithstanding, if Licensee telecasts such Program the number of times permitted hereunder prior to the expiration of the terms set forth in Schedule "A", this license shall for all purposes be deemed terminated as of the date upon which the last permitted telecast occurs and any then remaining unpaid portion of the license fee will forthwith become due and payable. Failure by the Licensee to complete the remaining number of telecasts permitted hereunder on or before the expiration of the term of the license granted herein shall not serve to extend the term of this Agreement of the grant of any other right hereunder. 11. ASSIGNMENT: Except in the case of retransmission of the Programs within the ----------- Territory and the scope of this Agreement, this Agreement and the rights and licenses granted hereunder to the Licensee are personal to Licensee and Licensee shall not sell, assign, mortgage, pledge or hypothecate any such rights of licenses in whole or in part without obtaining the prior written consent of the Licensor, nor shall any of said rights or licenses be assigned or transferred by the Licensee to any third party by operation of law or otherwise. Any assignment in violation of the foregoing sentence shall be null and void and without effect. In the event Licensor consents to any such assignment by Licensee. B-4 Licensee shall nevertheless continue to remain fully and primarily responsible and liable to the Licensor for due, full, complete and faithful performance of all terms and conditions of this Agreement to be performed on the part of the Licensee. Licensor may assign, transfer, pledge or hypothecate all or any part of the license fees to be received by Licensor hereunder. Licensee agrees that in the event of receipt of written notice of assignment by Licensor, monies due to the Licensor shall be paid to any third party assignee in accordance with such instruction without offset, deduction, counter-claim, or other credits which the Licensee may have or claim to have against the Licensor. Licensor may assign the agreement to any corporation controlling, controlled by or under common control with Licensor or to any person, firm or corporation which may hereafter become the Licensor of the Programs. 12. RESERVATION OF RIGHTS: All licenses, rights and interest in, to and with --------------------- respect to the Programs and the Playboy Marks not specifically granted to Licensee, including but not limited to all theatrical and non-theatrical rights and all direct mail and other home video rights shall be and are specifically and entirely reserved to Licensor and may be fully exploited and utilized by Licensor, without regard to the extent to which any such rights may be competitive with Licensee or the license granted hereunder. 13. TAXES: Licensee shall pay, without limitation, any tax, levy or charge howsoever denominated, imposed or levied (excluding only any applicable net income or franchise taxes ("Licensor Taxes") imposed or levied against Licensor) by any statute, law, rule or regulation now in effect or hereafter enacted including, without limitation, sales, use, property and excise or other similar taxes, licenses, import permits, state, county, city or other taxes howsoever denominated relating to or imposed on license fees, rentals, negatives, tapes or other material, or the right or privilege to use the same in connection with any Program licensed hereunder whether or not billed or demanded by Licensor, it being the intent hereof that the license fee specified as the consideration of the license granted herein shall be net amount, free and clear of any tax, levy or charge of whatsoever kind or nature howsoever denominated except Licensor Taxes. In regard to Licensor Taxes, if Licensee pays any such tax for Licensor to local tax authorities, it may do so only if it simultaneously delivers written evidence of such payment (in the form of tax payment certificate or other similar document) to allow Licensor to deduct such tax payment in America. To the extent that any such other taxes, levies or charges or penalties and interest thereon are paid by Licensor, the Licensee shall reimburse Licensor on demand, and on the failure of Licensee to reimburse the Licensor, the Licensee will have available to it all of the remedies provided for herein with respect to unpaid license fees as well as such other remedies as may be provided by law. If Licensee denies liability for any tax, levy or charge which Licensor must pay or collect, Licensee shall indemnify Licensor for any liability, penalty or interest which may result and Licensor shall have the immediately aforementioned remedies against Licensee for the collection of same. Licensor shall have no obligation to contest or dispute any tax assessed or levied. Licensee shall have the right to do so at its sole cost and expense. 14. INDEMNITY: Licensee will indemnify Licensor, its officers, directors and --------- employees from all claims, liabilities and judgments together with reasonable costs and expenses of litigation and reasonable counsel fees arising from the breach or alleged breach of any provision of this Agreement by Licensee. Licensee shall specifically so indemnify Licensor and such other parties from such claims, liabilities, judgments, costs, expenses and fees made or assessed against Licensor arising from the telecasting of any material in connection with or relating to the Program other than material contained in any Program as delivered by Licensor, or from the temporary or permanent loss of any such material. 15. RECEPTION FROM OUTSIDE BROADCAST: Licensee acknowledges that broadcasts of -------------------------------- the B-5 Programs in the Language permitted hereunder originating outside the Territory and broadcasts in other languages originating within and without the Territory served by Licensee may be received by television sets located within such exclusive Territory and Licensee agrees that such reception shall not constitute a breach of this Agreement by Licensor. 16. ADVERTISING CREDITS: Licensee will comply with all instructions furnished -------------------- to it by Licensor or with respect to advertising credits and Licensee agrees to and will indemnify and hold Licensor harmless from any loss, damage, cost or expense (including reasonable attorney's fees) incurred or suffered by Licensor by reason of the failure by the Licensee to adhere to and observe any such credit instructions. 17. CONTINGENT ROYALTIES: In the event that any monies are paid to or become --------------------- due to or can be claimed by Licensee in connection with any use of the subject copyright or related materials other than as licensed hereunder, such monies shall be received and held by Licensee in trust for Licensor. 18. REQUIREMENTS FOR LICENSOR CONTENT INDEMNITY: Notwithstanding any other -------------------------------------------- terms herein to the contrary, Licensor's indemnification will be valid in the event of a claim involving an allegation of violation of the laws insofar as the content of the Programs is concerned, only in the event each of the following conditions is met: a. Immediate telephone contact be made with both the General Counsel's office of Licensor in Chicago at 312-751-3000 and Licensor's Senior Vice President, International Sales, in Beverly Hills at 310-246-4000 or other numbers hereafter specified by Licensor. Such telephone notification should be immediately followed with a letter containing copies of all papers that have been served and giving complete information then available regarding the incident. b. Licensor shall have the right to approve Licensee's choice of counsel and to determine in advance the terms of retention. c. Licensor will assist in defended actions only and will not be responsible in cases where there is any admissions of guilt by anyone charged with violation of the law as to the content of any Program. Settlement or dismissal of any case will not be allowed, except with Licensor's prior written consent. d. Actual or prospective parties involved in such prosecution shall make no voluntary disclosure regarding support or lack thereof by Licensor under this policy. 19. WAIVER: A waiver by either party of any breach or default by the other ------ party will not be construed as a continuing waiver of the same or any other breach or default under this Agreement. 20. CONSTRUCTION, JURISDICTION, DISPUTE RESOLUTION: This Agreement shall be ----------------------------------------------- deemed to have been made in California and shall be construed in all respects in accordance with the laws of California applicable to agreements to be performed wholly within California. Any dispute based on, arising out of or relating, directly or indirectly, to this Agreement or its subject matter shall be resolved by an action or proceeding filed and prosecuted in the County of Los Angeles, State of California. Licensee hereby consents to the exclusive jurisdiction of the courts of the State of California the United States District Court for the Central District of California, and the Los Angeles B-6 office of the Judicial Arbitration and Mediation Service for the resolution of such dispute. The parties acknowledge and agree that the County of Los Angeles, State of California, is the appropriate locale for the resolution of any such dispute and that such locale will not subject any party to unreasonable inconvenience or hardship. The party filing or instituting the action or proceeding may select the forum and that selection shall be binding upon the other party. Service of any process permitted or required in any such action or proceeding may be made by personal delivery; telex, telegraph, or facsimile transmission; or mail at the address for the party specified in Schedule "A." Service shall be deemed complete upon actual delivery in the case of personal delivery, transmission in the case of telex, telegraph, or facsimile, or on deposit in the mail enclosed in a properly addressed envelope with postage prepaid for the most expeditious form of mail delivery available. 21. NOTICES: All notices required to be given hereunder to the Licensor shall, -------- in the absence of specific written advice to the contrary, be telexed, telecopied, or facsimilied to Licensor at its home office, the address of which is set forth in Schedule "A", or as such other address as Licensor may hereafter specify; and all notices required to be given to Licensee hereunder shall, in the absence of specific written advice to the contrary, be sent by telex, telecopier, or facsimile to the Licensee at the address set forth in Schedule "A". 22. COUNTERPART EXECUTION: This Agreement may be executed in counterparts but ---------------------- shall not be deemed to be effective until and unless executed by the Licensor at its home office and the date of execution by the Licensor shall be deemed to be the effective date of the agreement. When so executed by each party, the counterparts together shall be deemed an original and shall constitute one and the same instrument. 23. TIME OF ESSENCE: Time shall be of the essence with respect to each and every ---------------- obligation of Licensee and Licensor hereunder. 24. ENTIRE AGREEMENT: This Agreement, including Schedule "A", constitutes the ----------------- complete and entire agreement between the parties and all prior understandings are merged herein. This Agreement cannot be changed or terminated orally and no amendments, modifications or assignments hereof shall be binding upon Licensor until accepted in writing by a duly authorized agent or officer of Licensor in California. The titles of the paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement of any paragraph hereof. 25. INVALIDITY: If any provision or any application of any provision hereof is ----------- adjudged illegal, unenforceable or invalid and such adjudication has become final and non-appealable, such provision or application shall be deemed deleted without affecting the remainder of this Agreement unless such deletion shall have a material adverse effect upon the rights or obligations of either party hereto and notice of such effect is given as provided in the following sentence. Either party may notify the other within forty-five (45) days after such adjudication has become final and non-appealable that in its opinion such deletion would have a material adverse effect upon the notifying party and that this Agreement is terminated by reason thereof; but the existence of such effect and the termination of this License shall be subject to contest by the partyreceiving such notice if it notifies the other party, within forty-five (45) days after service of the notice of termination upon it of its desire so to contest the matter and thereafter proceeds promptly with a proceeding so to contest the matter. During such time as the matter is being contested, this Agreement shall remain in full force and effect. -END OF DOCUMENT- B-7 EXHIBIT "C" TRADEMARK USAGE SUMMARY Licensee may publicize and advertise telecasts of the Programs or any person appearing therein (unless specifically notified to the contrary) in the market served by Licensee for publicity and exploitation only of the Programs, but in no event shall the names of such persons or of Licensor be used in such manner so that such use may be construed as an endorsement, express or implied, of any party, sponsor, product or service. All such advertising may be only in the Spanish or Portugese (or, at Playboy's discretion, English) language and shall be subject to Licensor's prior written approval at least thirty (30) days prior to its intended distribution. In regard to those Programs utilizing the Playboy Marks (as defined below) in the title, Licensor hereby acknowledges that the trade names "Playboy" and "Playmate" and the registered trademark and service mark "Playboy", the Playboy "Rabbit Head Design" and trade names "The Playboy Channel", "Playboy At Night" and "Playboy Television" (collectively, the "Playboy Marks") are the sole and exclusive property of Licensor and that all uses of the Playboy Marks shall inure solely to the benefit of Licensor, Licensee shall have the right to develop and distribute advertising, publicity and promotional materials relating to the Programs incorporating the Playboy Marks in connection with Licensee's rights hereunder, provided, however, that any such materials (other than material obtained directly from Producer) shall: (a) clearly identify the Playboy Marks with a legible credit line with the wording "Playboy' (or the 'Rabbit Head Design' or 'The Playboy Channel' or 'Playboy At Night' or 'Playboy Television' or 'Playmate', as the case may be) is the mark of and used with the permission of Playboy Enterprises, Inc." or such other words as Licensor may designate; (b) submit any such materials (except for Licensee's usual and ordinary program information sheets distributed to the presss and other similar organizations) in representative form to Licensor for Licensor's prior written approval at least thirty (30) days prior to their intended distribution. Licensor may disapprove any use if such use (i) jeopardizes the validity of any of the Playboy Marks, (ii) does not conform to previously approved uses of the Playboy Marks, or (iii) does not conform to Licensor's standards, which may vary from time to time. Licensee will not disseminate any material or packaging that has not been approved by Licensor, and (c) be issued only in Spanish, Portuguese or, at Playboy's discretion, English. It is expressly understood that Licensor shall retain all good will associated with the Playboy Marks, and no good will from same will inure to Licensee or to any portion of the Programs or any other owner of any rights therein or thereto. Other than as expressly set forth in this Paragraph 9, Licensee shall make no use of the Playboy Marks or any confusingly similar designation without the prior express written consent of Licensor in each instance. Licensee shall also make no use whatsoever of any other trademark, trade name or service mark that is the property of Licensor or any of its programs, suppliers or producers without the prior express written consent of Licensor in each instance. Licensee similarly agrees that it will not authorize or purport to authorize any third party to make any such use, and it will expressly provide in any applicable third party agreements that such third parties will only be entitled to use such names and markes on material supplied to them by Licensee in accordance with Licensee's rights hereunder. It is expressly understood that those Programs which may not be otherwise associated with the Playboy Marks will not be promoted, telecast, exhibited, advertised or otherwise exploited in any manner using the name "Playboy" or the Playboy Marks without the express prior aproval of Licensor. C-1 Exhibit "D" ----------- *** *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. D-1 EXHIBIT "E" NET REVENUE PER HOUSEHOLD ------------------------- 1. In this Schedule a "Household" means: a. for any year (or portion thereof) during which the Service is being transmitted by means of a satellite (such as, for example, the Galaxy III-R), any home in the Territory which on January 1 or December 31 (as the case may be) in that year is equipped with a satellite dish and any other receiving, decoding equipment or decompression equipment which is necessary in order to receive and view a television channel transmitted by such Satellite; and/or b. any home in the Territory which by January 1 or December 31 (as the case may be) in that year has been connected to a cable television system in the Territory by means of which the Service, as of January 1 or December 31 in that year (as the case may be), is being re-transmitted by any means for reception by subscribers to that cable television system. 2. The "net revenue per household" for any year shall be calculated by dividing the net revenue of the Venture by the average number of Households for that Year. The average 1 E-1 number of Households shall be calculated by aggregating the total numbers of Households on January 1 and on December 31 in that year and by dividing the resulting figure by two. 3. The number of Households which on January 1 and December 31 in each year fall within paragraph 1 (a) of this Schedule shall be determined by reference to the relevent figures published or provided by any direct-to-home provider carrying the Service (for example, Galaxy Latin America), as of January 1 or December 31 in that year (as the case may be) or as of the date which is closest to January 1 or December 31 in that year and for which such a figure is available by March 31 in the immediately following year. 4. The number of Households which on January 1 and December 31 in each year fall within paragraph 1(b) of this Schedule shall be determined by reference to the relevant figures published or provided by a source to be mutually-acceptable to the Venturers, as of January 1 or December 31 in that year (as the case may be) or as of the date which is closest to January 1 or December 31 in that year and for which such figure is or are available by March 31 in the immediate following year. 2 E-2 EXHIBIT "F" PLAYBOY TELEVISION INTERNATIONAL PROGRAMMING MODEL Product Model ------------- I. Premiere Programming --------------------
Categories # Titles per Month/Annual Hours per Month/Annual ---------- ------------------------- ---------------------- . Playboy Specials 2.0/24 2.0/24 . Couples (every other month) .5/6 .5/6 . Playboy Series 2.5/30 2.5/30 . PBTV Specials & Mini-Series 2.0/24 2.0/24 . Acquired Specials 1.0/12 1.0/12 . "Made by" Playboy Movies 1.0/12 1.5/18 . Acquired Movies 3.5/42 5.25/63 ----------- ------------ SUB TOTAL 12.5/150 14.75/177 ------------------------------------------------------------------------------ II. Additional Programming - --- ---------------------- . Encore Product - Movies 2.0/24 3.5/42 - Specials/Series 3.0/36 3.0/36 ----------- ------------ SUB TOTAL 17.5/210 21.25/255 . Locally produced product (after one or two years of operation) - Specials .5/6 .5/6 - LIVE 1.0/12 1.0/12 ----------- ------------ GRAND TOTAL 19.0/228 22.75/273
November 13, 1995 -1- TWENTY-FOUR HOUR OPERATIONAL PLAN 8X3 ROTATION One 8-hour block would include two (2) movies and four (4) special or series programs... ============================== 8:00 p.m. Special ------------------------------ 9:00 p.m. Special ------------------------------ 10:00 p.m. Movie ------------------------------ 12:00 a.m. Special ------------------------------ 1:00 a.m. Special ------------------------------ 2:00 a.m. Movie ==============================
Four "special/series" slots x 30 days = 120 slots divided by 11 "specials/series" each month results in 11.0 exhibitions per "special/series" per month. Two "movie" slots x 30 days = 60 slots divided by 6.5 "movies" each month results in 9 exhibitions per "movie" per month. Therefore, if Playboy TV is to run 24-hours a day in the 8 x 3 block configuration each; 1) "special/series" would receive 11 exhibition days per month with a total of 33 exhibitions, 2) "movie" would receive 9 exhibition days per month with a total of 27 exhibitions. Notes: 1) A premiering special, series or movie would initially be exhibited over a two month period. 2) Excluding issues related to the "start-up" of the schedule, each special, series or movie would be "rested" for a period of 6 to 10 months, after its two month premiere period, before it is "Encored". 3) Only selected, specials, series or movies would be "Encored". November 13, 1995 -2- F-2 CATEGORY EXAMPLES ----------------- . Playboy Specials - Playmate of the Year - Annual Calendar Review - Celebrity Centerfold - Maui Playmate Challenge - Girls of Radio . Couples - Love, Sex and Intimacy - Massage Series - Secrets of Making Love - 101 Ways to Excite Your Lover . Playboy Series - Eden - Erotic Fantasies - Sexy Lingerie - Love & Sex Test - Late Night . Playboy TV Specials and Mini-Series - Really Naked Truth (4 x 60) - Women of Color (4 x 60) - Adult Stars Close-Up - 360 - StripSearch . Acquired Specials - LaToya Jackson Exotic Club Tour . Made by Playboy Movies (Playboy's Eros Collection & After Dark) - The Affair - Lover's Leap - Watch Me - Scoring - Killing for Love . Acquired Movies - Varies by Territory -3- F-3 January 1996 Overview - Premiere Product Schedule
===================================================================================== Monday Tuesday Wednesday Thursday Friday Saturday Sunday - ------------------------------------------------------------------------------------- 1 2 3 4 5 6 7 Playboy Special Playboy Playboy #1 Movie Series #1 - ------------------------------------------------------------------------------------- 8 9 10 11 12 13 14 PBTV Special Movie Playboy #1 Series #2 - ------------------------------------------------------------------------------------- 15 16 17 18 19 20 21 Playboy Special Movie Playboy #2 Series #3 or Couples - ------------------------------------------------------------------------------------- 22 23 24 25 26 27 28 PBTV Special Movie Acquired #2 Special - ------------------------------------------------------------------------------------- 29 30 31 [Calendar of December 1995] [Calendar of February 1996] =====================================================================================
Printed by Calendar Creator Plus on 11/13/95 F-4 [PLAYBOY LOGO] WEEKLY SCHEDULE PRIMETIME GRID ================= PREMIERE PROGRAMS =================
=================================================================================================== Monday Tuesday Wednesday Thursday Friday Saturday Sunday - --------------------------------------------------------------------------------------------------- WEEK #1 8 Special Movie Special Movie PLAYMATE #1 PB MOVIE PB SERIES 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #2 8 Special Movie Special Movie PBTV SPECIAL MOVIE PB SERIES #2 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #3 8 Special Movie Special Movie PLAYMATE #2 MOVIE PB SERIES #3 OR COUPLES 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #4 8 Special Movie Special Movie PBTV SPECIAL 2 MOVIE ACQUIRED SPECIAL 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie ===================================================================================================
November 13, 1995 F-5 [PLAYBOY LOGO] WEEKLY SCHEDULE PRIMETIME GRID ============= MOVIE PATTERN =============
=================================================================================================== Monday Tuesday Wednesday Thursday Friday Saturday Sunday - --------------------------------------------------------------------------------------------------- WEEK #1 8 Special Movie Special Movie PLAYMATE #1 PB MOVIE PB SERIES 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #2 8 Special Movie Special Movie PBTV SPECIAL MOVIE PB SERIES #2 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #3 8 Special Movie Special Movie PLAYMATE #2 MOVIE PB SERIES #3 OR COUPLES 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie - --------------------------------------------------------------------------------------------------- WEEK #4 8 Special Movie Special Movie PBTV SPECIAL 2 MOVIE ACQUIRED SPECIAL 9 Special Special Special Special 10 Movie Movie Movie Movie Movie Movie Movie ===================================================================================================
November 13, 1995 F-6 EXHIBIT "G" PLAYBOY TV LATIN AMERICA Types of Products Subject to Home Video Holdback 1. Films with Production Costs under $1 Million -------------------------------------------- A. Films with pay television holdbacks in Latin America through 1995: Erotic Showcase I (produced in 1994) Erotic Showcase II (1994) Love and Desire (1994) Tales of Erotica (1988) Young Lady Chatterly II (1987) A Matter of Cunning (1983) Candy the Stripper (1983) Birds in Paradise I (1984) Birds in Paradise II (1984) Carnival in Rio (1983) Man & Women (1995) Total Films: 11 B. Films to date with pay television holdbacks in Latin America through 1996: Erotic Showcase III (1994) Lusty Liasions I (1988) Lusty Liasions II (1988) Passionate Interludes I (1988) Passionate Interludes II (1988) Dr. Yes: The Hyannis Affair (1983) On the Edge (1994) Lover's Leap (1994) Scoring (1995) Playtime (1994) I Like to Play Games (1994) Killing for Love (1995) Romancing Sara (1995) The Affair (1995) Watch Me (1995) Total Films: 15 G-1 C. Films to date with pay television holdbacks in Latin America through 1997: Gentlemen's Bet (1995) Who Killed Buddy Blue? (1995) Walnut Creek (1995) Fanny Hill (1995) Lap Dancing (1995) Over the Wire (1995) Other Men's Wives (1995) Love in the Night (1995) Ultimate Taboo (1994) Maui Heat (1996) Night Shade (1996) Total Films to Date: 11 D. Films to date with pay television holdbacks in Latin America through 1998: Hard Time (1996) Access Denied (1996) Jane Street (1996) Phantom Seductress (1996) Club V.R. (1996) Charade (1996) Total Films to Date: 6 Summary: As additional films are produced each year and sold into home video in Latin America, the number of films subject to pay television holdback in 1996 and beyond will, naturally, increase above these figures (which represent a "to date" snapshot). PEG will agree to limit to number of such films subject to holdback to 20 per year. G-2 2. One-Hour Programs ("Core Product") ---------------------------------- A. Core programs with pay television holdbacks in Latin America through 1995: Secrets of Making Love to the Same Person Forever (produced in 1990) Secrets of EuroMassage (1991) Sensual Pleasures of Oriental Massage (1992) Ultimate Sensual Massage (1991) Sexy Lingerie II (1990) Sexy Lingerie III (1991) Sexy Lingerie IV (1992) Sexy Lingerie V (1993) Wet & Wild II (1990) Wet & Wild III (1991) Wet & Wild IV (1992) Playmate Video Calendar 1994 (1993) Playmate of the Year 1994: Jenny McCarthy (1994) Total Programs: 13 B. Core programs to date with pay television holdbacks in Latin America through 1996: Erotic Fantasies II (1992) Erotic Fantasies III (1993) Secret Confessions (1993) Secret Confessions II (1994) College Girls (1993) Erotic Weekend Getaways (1992) How to Reawaken Your Sexual Powers (1992) Secrets of Making Love to the Same Person Forever, Volume II (1993) Wet & Wild V (1993) Playmate Video Calendar 1995 (1994) Playmate Video Calendar 1996 (1995) Playmate of the Year 1995: Julie Cialini (1995) Playmate of the Year 1996: Playmate to be Determined (1996) Total Programs: 13 G-3 C. Core programs to date with pay television holdbacks in Latin America through 1997: Erotic Fantasies IV (1995) Private Diaries (1994) International Playmates (1993) Secret Confessions III (1994) Real Couples (1995) Fabulous Forties (1994) Girls of Hawaiian Tropics (1995) Girls of Radio (1995) Women of Color : Summer Nights (1994) Sensual Fantasy for Lovers (1994) Love, Sex and Intimacy for New Relationships (1993) Night Dreams (1994) Sexy Lingerie: Dreams and Desire (1995) Wet & Wild VI: The Locker Room (1994) Wet & Wild VII: Hot Holidays (1995) The Best of Pamela Anderson (1995) Total Programs to Date: 16 D. Core programs to date with pay television holdbacks in Latin America through 1996: Hot Latin Ladies (1996) Girls of the Internet (1996) Sisters (1995) Strip (1995) Women of Color: Star Island (1995) Women of Color: Colors (1995) Arousal, Foreplay and Orgasm (1994) Tantric Lovemaking (1994) Ten Secrets for Greatest Sensual Pleasure (1995) The Best of Anna Nicole Smith (1995) Total Programs to Date: 10 Summary: As additional core programs are produced each year and sold into home video in Latin America, the number of core programs subject to pay television holdback in 1996 and beyond will, naturally, increase above these figures (which represent a "to date" snapshot). PEG will agree to limit to number of such core programs subject to holdback to 15 per year. G-4 EXHIBIT "H" PLAYBOY TV LATIN AMERICA Feature Film Distribution Contracts to Date 1. Films 1-4 (Production Costs in Excess of $1 Million) ----------------------------------------------------
A. Argentina/Bolivia/Chile/Paraguay/Uruguay Temptress (produced in 1995) all rights Cover Me (1995) all rights Playback (1995) all rights Glass Cage (1996) all rights B. Brazil Temptress (produced in 1995) all rights Cover Me (1995) all rights Playback (1995) all rights Glass Cage (1996) all rights
Summary: As of this date, we are still in negotiation with potential customers in several key territories in Latin America. This information is therefore likely to change in the near future. H-1 EX-10.4B 11 LETTER AGREEMENT EX 10.4(b) [LETTERHEAD OF GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP APPEARS HERE] January 13, 1997 BY FAX - ------ Mr. Anthony J. Lynn, President Playboy Entertainment Group, Inc. 9242 Beverly Boulevard Beverly Hills, CA 90210 Re: Playboy TV Latin America/Iberia Expansion ----------------------------------------- Dear Tony: I am writing to confirm the terms and conditions on which Playboy TV-Latin America, LLC (the "Venture") will expand its operations into Spain and Portugal ("Iberia"). 1. Expansion of Territory. The Venture's Operating Agreement shall be ---------------------- amended to provide that the Venture is authorized to operate the Playboy TV ("PTV") and AdulTVision ("ATV") television services in Iberia. The parties will mutually approve a Budget and Business Plan for the operations in Iberia, and the existing Budget and Business Plan (which are exhibits to the Operating Agreement) will be amended to reflect the joint operations in Latin America and Iberia. The Operating Agreement shall be amended to provide that for the purposes of triggering either party's right to terminate the Venture early for failure to meet projections, the measure of "net revenue per household" shall be determined separately for Latin America and Iberia. Therefore, a failure in one territory will only trigger the right to terminate operations in that territory, and the Venture will continue to operate in the other territory. 2. Media/Windows. All Playboy-branded programming will be available to the ------------- Venture after April 31, 1997. The unbranded series "Woman" (consisting of 26 half-hour episodes) is the only Playboy Entertainment Group, Inc. ("PEG") program licensed in Spain, and that license expires in 2002. GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP Mr. Anthony J. Lynn January 13, 1997 Page 2 Each PTV and ATV program will be licensed to the Venture for the same term, and with the same windows, as in Latin America. As in the existing deal, upon the reversion of rights in PTV programs, PEG may not sell those programs on a block or branded basis. The Venture will have a license to exploit the PTV and ATV programs in the same media as in Latin America, with the Venture to also have the rights for "expanded basic" or "basic" cable if PTV is to be offered to consumers in that manner. 3. Program Costs. ------------- 3.1 PTV --- a. Minimum. $*** per hour. ------- b. Overage. *** per subscriber plus ***% of net ------- pay-per-view revenue. c. Cap. ***% of net revenue. --- d. Escalator. The minimum hourly fee shall increase by ***% --------- at the end of years ***. e. Deferral of Program Fees. *** ------------------------ 3.2 ATV. $*** per movie, increasing by ***% per year for the --- first *** years, and *** thereafter. 4. Royalty. Playboy Enterprises Inc. will grant the Venture a license ------- to use the Playboy trademarks, service marks and trade name in Iberia in exchange for a royalty payment equal to a percentage of the adjusted gross revenue (as defined in the Operating Agreement) of the Iberian operations. *** 5. Ownership. The basic structure remains unchanged: 81% Cisneros/19% --------- PEG, with PEG to have an option to increase to 49.9% at founder's price until the sooner of cash breakeven (for the aggregate operations of the Venture in both Latin America and Iberia) or the end of the fifth fiscal year. The Operating Agreement and the Program License Agreement (for PTV programs) between the Venture and PEG provide *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. [LETTERHEAD OF GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP APPEARS HERE] Mr. Anthony J. Lynn January 13, 1997 Page 3 for the deferral of a portion of the program license fees owed by the Venture for Latin America (the "Deferred Fees"). With respect to such Deferred Fees: a. If PEG does not exercise its option to acquire additional percentage interests in the Venture prior to the date that the Deferred Fees become payable, PEG will forgive, $*** of Deferred Fees. b. If PEG exercises its option to acquire additional percentage interests in the Venture prior to the date that the Deferred Fees become payable, PEG will forgive an amount of the Deferred Fees equal to: *** 6. Launch Date. The Venture shall launch both the PTV and ATV services in ----------- Iberia prior to June 30, 1997, subject to the Venture having entered into an agreement for carriage of the services on a digital platform which permits such launch to occur by the date. 7. Distribution. The Venture itself will distribute PTV and ATV in Iberia. ------------ If the Venture determines that it would be beneficial for distribution or other reasons to associate with one or more local parties in Iberia, the Venture may grant distribution rights to such party(ies). The parties acknowledge that the Portuguese subsidiary of Grupo Abril would be a desirable equity participant and/or distributor of the services in Portugal. 8. First Negotiation/Matching Right. In the event PEG (or any of its -------------------------------- affiliates) decides to operate PTV, ATV or similar services in all or any territory of Sweden, Finland, Denmark, Norway, Germany, Australia, or Switzerland via a venture with a non-Playboy entity, Bloomfield Mercantile Inc. ("Bloomfield") shall have a right of first negotiation to participate in such new venture and a matching right with respect to the terms offered by any third party. To the extent any third party proposal includes carriage of the services, Bloomfield would not be required to match that element of the proposal. To the extent that the entity whose offer Bloomfield has matched is an operator *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP Mr. Anthony J. Lynn January 13, 1997 Page 4 of a digital platform or a dominant distributor of networks to cable in the subject territory, Bloomfield will not unreasonably prevent such venture from offering such distributor or operator an equity participation in the venture. 9. Documentation. Following execution of this letter, the parties agree to ------------- move expeditiously to amend the Operating Agreement and to execute a trademark license agreement and program license agreements for Iberia (with the boilerplate terms and conditions to be identical to those contained in the corresponding agreements for Latin America.) 11. Announcement. The parties intend to announce this agreement on ------------ January 14, 1997 at the NATPE convention. Very truly yours, Greenberg Glusker Fields Claman & Machtinger LLP By /s/ Glenn A. Dryfoos ---------------------------- Glenn A. Dryfoos Attorneys for Bloomfield Mercantile Inc. AGREED AND ACCEPTED - ------------------- PLAYBOY ENTERTAINMENT GROUP, INC. By /s/ Anthony J. Lynn -------------------------- Anthony J. Lynn, President GAD:rg cc: Jay Scharer Carlos Cisneros EX-10.5 12 MEMO OF UNDERSTANDING EXHIBIT 10.5 EXECUTED AGREEMENT PLAYBOYTV/SOUTH KOREA "ATV"/SOUTHKOREA MEMORANDUM OF UNDERSTANDING --------------------------- (As of February 26, 1997) 1. Overview and Definitions ------------------------ 1.1 This Memorandum of Understanding ("Agreement") sets forth the terms for the formation of a limited liability company or a joint stock corporation, as shall be mutually determined by the parties, organized under the laws of South Korea (the "Venture") by Daewoo Corporation, a corporation organized under the laws of South Korea ("Daewoo"), and the Playboy Entertainment Group, Inc., a corporation organized under the laws of Delaware ("PEGI"), that will operate initially one and eventually two adult oriented pay television services (the "Services") throughout the Territory (as defined below): (a) Playboy TV/South Korea ("PTVSK"), a Service based on Playboy TV as currently programmed in the United States, and (b) another Service, the name of which is to be agreed upon between the parties ("ATV"), which will consist of a mix of programs to be supplied by Daewoo and PEGI as provided below. As and to the extent set forth in Section 8 and Section 9, programming supplied to PTVSK and ATV will be exclusive to the Services in the Territory with respect to all forms of Non-Standard Television (as defined in Section 8 below). The parties agree to use their respective best efforts to negotiate and execute more formal agreements, including the Superseding Agreements described below, as soon as reasonably practicable, and the parties intend that such agreements will be executed within 90 days of the date hereof. Such Superseding Agreements will incorporate the terms of this Agreement and such other terms as the parties may mutually agree. In furtherance of such best efforts obligations, the parties will cause their respective executives authorized to make final decisions regarding these transactions and their counsel and other advisors to be available on a first priority basis. Until such Superseding Agreements are executed and if such Superseding Agreements are never executed, this Agreement, when executed by both Daewoo and PEGI and after attachment of the initial Business Plan, will constitute a binding agreement between the parties with regard to all matters covered herein. Specifically, any terms described herein to be included in a Superseding Agreement will, until such Superseding Agreement is executed and if such Superseding Agreement is never executed, be fully operative as terms of this Agreement. Upon execution of the Superseding Agreements, this Agreement will terminate and be of no further force and effect. 1.2 The PTVSK Service initially will be offered to hotels. The Venture will use its reasonable good faith efforts to launch the PTVSK Service in other forms of, and the ATV Service in all forms of, Non-Standard Television as soon as legally feasible and commercially practical (as mutually determined by Daewoo and PEGI in good faith and based upon reasonable business criteria taking into account the interests of the Venture and each of the respective Venturers), with the current outside target date for launch of the PTVSK Service in pay cable, direct broadcast satellite ("DBS") and other forms of direct-to-homes delivery, and to inns, beginning January, 1999. 1.3 Terms used in this Agreement are defined in Exhibit "A" attached hereto, which includes a list of the terms defined in the text of this Agreement. 2. Superseding Agreements ---------------------- It is contemplated that the Venture, the parties and their respective affiliates (as the case may be) will execute the following agreements in connection with the formation of the Venture, all of which will be subject to the mutual approval of the parties (the "Superseding Agreements"): 2.1 Shareholders Agreement and Articles of Incorporation. Daewoo and PEGI ---------------------------------------------------- (together, the "Venturers") will enter into a Shareholders Agreement and Articles of Incorporation (collectively, the "Shareholders Agreement"), which will establish the Venture and outline the structure of the Venture, including board/governance issues, ownership provisions, option mechanisms and price, termination provisions, minority owner protections, etc. The Shareholders Agreement will contain the terms set forth in Section 15 (Venture Ownership, Capitalization and Governance) and such further terms as the Venturers may mutually agree. The parties acknowledge and agree that it is not their intention by executing this Agreement to form a partnership or other entity prior to the formation of the Venture and the execution of the Articles of Incorporation and agree that neither party will take any action that may subject the other to any liability, including but not limited to making any agreements or incurring any obligations on behalf of the Venture prior to such formation and execution. 2.2 Program Supply Agreement for PTVSK. PEGI and the Venture will enter ---------------------------------- into a Program Supply Agreement under which PEGI will license programming to the Venture for PTVSK and receive compensation for such programming (as described in Sections 8,9,10 and 11 below). 2 2.3 Trademark License Agreement. --------------------------- 2.3.1 Playboy Enterprises, Inc. ("PEI") and the Venture will enter into a Trademark License Agreement (the "Trademark License Agreement") under which PEI, for a ***% royalty (as described in Section 12 below), will grant to the Venture those rights to the "Playboy" name, marks, etc. as are necessary for the effective marketing of the PTVSK Service. The Trademark License Agreement will contain PEI's customary approval rights and procedures for trademark usage and advertising, substantially as detailed in the Trademark Usage Summary attached hereto as Exhibit "B" (subject to such modifications as may be agreed upon between the parties in negotiating the Superseding Agreements), the terms described in Section 12 below, and such further terms as the parties may mutually agree. If any term in the text of this Agreement is inconsistent with the provisions of such Trademark Usage Summary, the term as contained in the text of this Agreement will prevail. 2.3.2 The Venture may choose to license (as described in Section 12 below) from PEI the rights to use the trademark "AdulTVision" and certain related trademarks in connection with ATV, in which case PEGI will cause PEI to grant such license. Alternatively, the Venture may develop another name and related trademarks for use, subject to the approval of Daewoo and PEGI, as the name of and in connection with ATV. In such event, the Venture will be deemed the owner of such approved name and related trademarks (as described in Section 12 below). 2.4 Program Supply Agreements for ATV. --------------------------------- 2.4.1 PEGI and the Venture will enter into a Program Supply Agreement under which PEGI will license programming to the Venture for ATV and receive compensation for such programming (as described in Sections 8, 9, 10 and 11 below). 2.4.2 Daewoo and the Venture will enter into a Program Supply Agreement under which Daewoo will license programming to the Venture for, initially PTVSK, and eventually ATV, and receive compensation for such programming (as described in Sections 8, 9, 10 and 11 below). 2.5 Management Services Contract. The Venture and Daewoo or a Daewoo ---------------------------- affiliate generally engaged in delivering such services will enter into a Management Services Contract under which Daewoo or such Daewoo affiliate ("Management Co.") will, for a ***% fee (as described in Section 14.3 below), provide back office support services for the Venture. The nature and scope of the services to be provided pursuant to the Management Services Contract will be agreed upon in negotiating the Superseding Agreements. *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 3 These documents together with the Business Plan (Section 3), and any other documents required by applicable law or deemed necessary by the parties, will constitute the formal agreements which establish and govern the Venture. 3. Business Plan/Annual Fiscal Year Budgets ---------------------------------------- 3.1 The Venturers will agree, within 60 days after the date of execution hereof, to a 10-year business plan which will be attached hereto as Exhibit "C" and will form a part of this Agreement, subject to such changes as to which the parties shall mutually agree prior to the commencement of the Venture (as so modified, the "Business Plan"). The Business Plan will be the financial model for the operation of PTVSK and ATV and will be incorporated into the Shareholders Agreement. Prior to the end of the fifth year of the Venture and prior to the end of every succeeding five year period thereafter, the Venturers will prepare 5 additional years of the Business Plan such that the Business Plan continues to have between five and ten years of coverage throughout the term of the Venture. Such additions to the Business Plan will require the approval of both Venturers. 3.2 The Business Plan will be updated annually by a budget (each, an "Annual Budget") for the coming fiscal year. The Venture's Representative Director (See Section 15) will prepare the Annual Budget and present it to PEGI and Daewoo for approval at least 90 days prior to commencement of the applicable fiscal year. The approved Annual Budget for a given fiscal year will supersede the data contained in the original Business Plan for that fiscal year. The Annual Budget for any fiscal year will require the approval of both Venturers. The Annual Budget for fiscal 1997 is included in the Business Plan. 3.3 If the Venturers fail to agree on or approve any matter arising out of or relating to this Agreement which requires such agreement or approval, including without limitation a failure to agree or to grant their approval under Section 3.1 or Section 3.2, the matter will be resolved according to the dispute resolution provisions of Section 20. During the pendency of any dispute involving approval of the Business Plan or an Annual Budget, the then existing Business Plan or the Annual Budget for the fiscal year immediately preceding the fiscal year of the Annual Budget in dispute, as the case may be, shall continue in force. 4. Territory --------- The "Territory" means South Korea. 5. Services; Availability; Etc. ---------------------------- 4 5.1 PTVSK Service. Initially, the PTVSK Service will operate from 8:00 ------------- p.m. until 4:00 a.m. (Korea time). 5.2 ATV Service. If and when government regulations permit and market ----------- conditions make it commercially practical (as mutual determined by Daewoo and PEGI in good faith based upon reasonable business criteria taking into account only the interests of the Venture), the Venture will launch the ATV Service. Following such launch, each Service will exhibit a minimum of 6 hours of programming per day, in each case 4 hours of which shall be exhibited between 8:00 p.m. and 2:00 a.m. (Korea time). The Superseding Agreements will provide decision-making procedures on this matter. 5.3 Viewer Purchase Options. Initially, when offered in forms of ----------------------- Non-Standard Television beyond pay per view by tape delivery to hotels, the Services will be offered on a monthly or annual subscription basis only. If and when market conditions make it commercially practical (as mutually determined by Daewoo and PEGI in good faith based upon reasonable business criteria taking into account only the interests of the Venture), pay per view will be added. 5.4 Initial Availability. Initially, the PTVSK Service will be available -------------------- on a pay per view basis by tape delivery to hotels. The ATV Service shall be launched and made available in such forms of Non-Standard Television as mutually determined by Daewoo and PEGI. For purposes of this Agreement, commencement of availability of a Service to hotels or any other form of Non-Standard Television constitutes a launch of such Service. 5.5 Continuous Programming. If and when market conditions make it ---------------------- commercially practical (as mutually determined by Daewoo and PEGI in good faith based upon reasonable business criteria taking into account only the interests of the Venture), the Services will be made available on a 24-hour per day basis. 5.6 Promotion. All sales, advertising and marketing programs for the --------- Services shall be subject to Daewoo's and PEGI's reasonable approval. 6. Term ---- 6.1 Term. The Venture shall continue in perpetuity until and unless ---- terminated pursuant to Section 6.2. 6.2 Early Termination. ----------------- 6.2.1 Either Venturer may terminate the Venture if controlling ownership of the other Venturer changes (other than a permitted change to an affiliate of such 5 Venturer). Any such termination will be effective as of the last day of the fiscal year in which such termination event occurs. 6.2.2 With respect to a particular Service (i.e., PTVSK or ATV) and starting at the end of the seventh fiscal year of the Venture, either party may terminate that Service if its actual operating income for the previous 3 fiscal year periods is below projections in the Business Plan (as modified by the Annual Budgets) for such period by more than 20%. Termination of ATV by either party does not affect the continued operation of PTVSK. Termination of PTVSK by Daewoo or PEGI gives rise to the right, but not the obligation, of the other party to terminate ATV. 6.2.2.1 Either Venturer may cure the other Venturer's right to terminate pursuant to Section 6.2.2 by making a payment to the Venture in the amount by which revenues fall short of projections minus the allowed variance. If such Venturer elects to invoke its cure right, it will guarantee any shortfall below 100% of budget in the following fiscal year. A Venturer's payment under this Section 6.2.2.1 will be treated as a non-reimbursable payment to the Venture and shall not affect the Venturers' respective equity interests. No such payment by a Venturer shall obligate the other Venturer to make a matching payment to the Venture or to such paying Venturer. 6.2.3 The Venturers may terminate this Agreement and the Venture at any time by mutual agreement. 6.2.4 Either party may without prejudice to any other remedies it may have terminate this Agreement and the Venture immediately by notice in writing to the other on or after the occurrence of any of the following: 6.2.4.1 the commission of one or more material breaches of this Agreement by the other party which are not capable of remedy; or 6.2.4.2 the commission of a material breach of this Agreement by the other party which is capable of remedy (a "remediable breach") which shall not have been remedied within a period of one month after the party in breach has been given notice in writing specifying that remediable breach and requiring it to be remedied; provided, however, that such one month period shall be extended for such additional period as shall be reasonably necessary if that remediable breach is incapable of remedy within that one month period and during that one month period the party in breach shall diligently endeavor to remedy that remediable breach, but only if such extension would not reasonably be expected to have a material adverse effect on the party giving notice of such breach; 6 6.2.4.3 the bankruptcy, insolvency, general assignment for the benefit of creditors or similar event, or the appointment of a trustee, receiver or similar person for the other party or the Venture; or 6.2.4.4 the termination of both Services or, if only one Service has been launched, the termination of such Service. 6.2.5 PEGI may, without prejudice to any other remedies it may have, terminate this Agreement by notice in writing to Daewoo if (other than on account of PEGI's breach or default under this Agreement) the Venture is not organized as a limited liability company or a joint stock corporation as mutually determined by the parties as contemplated herein, or the PTVSK Service has not been launched to hotels as contemplated herein, by the date nine months after the date of execution hereof; provided, however, that if the execution of the Superseding Agreements is delayed beyond 90 days from the date of execution hereof, the parties agree to discuss in good faith an extension of the nine- month period provided for herein. 6.2.6 Daewoo may, without prejudice to any other remedies it may have, terminate this Agreement by notice in writing to PEGI if on account of PEGI's breach or default under this Agreement, the Venture is not organized as a limited liability company or a joint stock corporation as mutually determined by the parties as contemplated herein, or the PTVSK Service has not been launched to hotels as contemplated herein, by the date nine months after the date of execution hereof. 6.3 Effect of Termination. --------------------- 6.3.1 Subject to Section 6.3.2, upon termination of the Venture, the Trademark License Agreement, Program Supply Agreements, Management Services Contract and related agreements will automatically terminate and all rights and obligations of the respective parties thereto will terminate, except for any claims, etc. that have arisen prior to such termination. Upon termination of the Venture, each Venturer shall have the right to compel the Venture to be promptly wound-up and liquidated. 6.3.2 If the Venture terminates, the parties will agree whether and for how long (if applicable) the Venture will continue to operate (the "Wind-Up Period"). The Venture will operate during any Wind-Up Period on the basis of the last approved Annual Budget, unless the parties otherwise agree. During the Wind-Up Period, the Superseding Documents will continue in effect and the Board of Directors will take such actions as are necessary to terminate or otherwise discharge the Venture's obligations to its customers at the end of such period. If necessary to terminate or discharge such obligations, the Wind-Up Period may be extended by unanimous consent of the Venturers, which consent may be withheld in each Venturer's absolute and sole 7 discretion. The dissolution, winding-up and liquidation of the Venture will be suspended during the Wind-Up Period and will automatically take effect at the end of such period. 7. Languages --------- 7.1 PEGI will license the Venture to transmit in Korean and English. PEGI may permit the Venture to transmit in other languages at PEGI's option. 7.2 The Venture will arrange for dubbing/subtitle services to be provided to the Venture at a competitive price. The Venture will give PEGI access to dubbed/subtitled programs for use in other territories, or in media other than Non-Standard Television within the Territory, subject to PEGI's payment of costs of such access, such as for duplication and delivery. 8. Media ----- 8.1 The Venture will be granted the exclusive license during the License Term (as defined below) to transmit the Services in the Territory in all forms of "Non-Standard Television", which means any television service or channel which is broadcast or distributed by, direct to homes satellite ("DTH")(including, but not limited to DBS and DSS), "over the air pay" subscription television ("STV"), pay cable, pay per view, multi-point distribution systems ("MMDS") or satellite master antenna television system ("SMATV"). Non-Standard Television specifically excludes basic cable and terrestrial broadcast television. 9. License Term and Media Holdbacks -------------------------------- 9.1 The Venture's License Term with respect to each program (the "License Term") will commence on the day such program is first exhibited on either of the Services and will end 18 months thereafter. During the License Term for a program, PEGI will not license such program licensed to the Venture hereunder to any third party for television exhibition in the Territory. The parties acknowledge and agree that certain programming to be supplied by PEGI hereunder is subject to existing license agreements for media other than Non-Standard Television, which agreements provide for exclusive windows for exhibition in such other media (e.g., Home Video windows or theatrical windows) and that such programming cannot be furnished by PEGI hereunder until the expiration of such windows. PEGI hereby agrees, however, that future Home Video licensing agreements for programing which is produced, owned and controlled by Playboy will limit the Home Video window to no more than six months after the date on which the applicable program is released in Home Video in the Territory. The parties acknowledge that Daewoo might be the Home Video licensee of certain PEGI programs in the Territory; with regard to such programs, Daewoo may notify the Venture on a case-by-case basis if it wishes to modify the length of the Home Video window for such a 8 program as to which it has licensed the Home Video rights, or if it wishes to reverse the Home Video and television windows for such program. Following the License Term, each of PEGI and Daewoo may license any program supplied by it into basic cable and/or terrestrial television as it sees fit; provided, however, that PEGI may not run any adult-oriented programs as part of a "Playboy" service. Notwithstanding the foregoing, at any time, whether during or after the License Term, each of PEGI and Daewoo can distribute on a branded or unbranded basis any program in the home video or other private exhibition market (including, without limitation, discs, cassettes or other forms of video grams now existing or invented in the future, collectively, "Home Video"). 9.2 The Venture will be entitled to transmit each program on 18 broadcasting days. 10. Program Supply -------------- 10.1 Subject to Sections 10.3 and 13, PEGI will supply to the Venture all of the programming to be exhibited on PTVSK and all available related interstitial, promo, on-air identifications, logos or similar material. 10.2 PEGI will provide, and the Venture will license under the applicable Program Supply Agreement, 150 program hours of New Programming to PTVSK for each year of operation commencing with the launch of PTVSK. For the purposes hereof, "New Programming" means programs never-before broadcast by either of the Services. In addition, in the first year of operation, PEGI will provide additional program hours of programming for programs that would otherwise be repeats at no cost to the Venture. 10.2.1 If and when the Venture launches the ATV Service as described in Section 5.2, the number of program hours of New Programming set forth in Section 10.2 will be increased from 150 to 180. 10.2.2 For purposes of this Agreement, program hours will be calculated as follows: (a) programs of 11-40 minutes in length will be treated as 30-minute programs, (b) programs of 41-70 minutes in length will be treated as 60-minute programs, and (c) programs of 71-100 minutes in length will be treated as 90-minute programs. 10.3 Until the launch of ATV, each of Daewoo and PEGI will provide, and the Venture will license for PTVSK under the applicable Program Supply Agreement, 25 New Movies for each year of operation, in addition to the 150 program hours provided by PEGI pursuant to Section 10.2, commencing with the launch of PTVSK. In addition, in the first year of operation, each of Daewoo and PEGI will provide up to 6 additional movies for programs that would otherwise be repeats at no cost to the Venture. For the purposes hereof, "New Movie" means a movie never before broadcast by either of the 9 Services, and for purposes of this Section 10, "movies" means a block of programming of 71-100 minutes in length. In the event that Daewoo elects not to provide the 25 New Movies to PTVSK for each year of operation commencing with the launch of PTVSK, it will so notify PEGI in writing and PEGI will license to the Venture under the applicable Program Supply Agreement, and at the applicable fees specified therein, the number of New Movies that Daewoo has not provided. 10.3.1 Daewoo will determine the specific movies under Section 10.3 it supplies to PTVSK, subject to PEGI's approval (not to be unreasonably withheld), and PEGI will determine the specific movies under Section 10.3 it supplies to PTVSK, subject to Daewoo's aproval (not to be unreasonably withheld). The movies supplied by PEGI to PTVSK hereunder will be similar to the movies licensed or acquired by PEGI from third parties for exhibition on PEGI's Playboy TV service in the United States as then currently programmed. 10.3.2 If and when ATV is lauched, as described in Section 5.2, Daewoo and PEGI shall no longer supply any New Movies to PTVSK pursuant to Sections 10.3 and 10.3.1, and, instead, each of Daewood and PEGI shall supply to ATV a minimum of 84 New Movies and a maximum of 102 New Movies, with the precise number of New Movies within such range to be agreed upon by the parties. Daewoo will determine the specific movies it supplies to ATV, subject to PEGI's approval (not to be unreasonably withheld), and PEGI will determine the specific movies it supplies to ATV, subject to Daewoo's approval (not to be unreasonably withheld). Any programming supplied by PEGI to ATV hereunder will be consistent with the quality and content standards of PEGI's AdulTVISION service in the United States as then currently programmed and the terms and conditions of this Agreement. In the event that Daewoo elects not to provide the number of New Movies to be provided by it pursuant to this Section 10.3.2, it will so notify PEGI in writing and PEGI will license to the Venture under the applicable Program Supply Agreement, and at the fees specified therein, the number of New Movies that Daewoo has not provided. 10.4 The Venture acknowledges that PEGI produces, commissions and/or distributes certain feature films ("Premium Films") with negative costs of at least $1,000,000 and that Premium Films will be excluded from the Program Supply Agreements. 10.4.1. Subject to any conflicting rights of third parties heretofore granted pursuant to other agreements to which PEGI is a party prior to the date of execution hereof, Daewoo shall have a right of first negotiation and first refusal to acquire all rights to Premimum Films in the Territory. PEGI will notify Daewoo of the release of each Premimum Film and the principal terms on which PEGI is proposing to license such Premium Film in the Territory. For a period of 30 days from the date of such notice, PEGI will negotiate in good faith with Daewoo with respect to Daewoo's acquition of 10 rights in such Premium Film. If Daewoo does not make an offer to acquire such rights in such Premium Film, PEGI shall be free to license such Premium Film to any third party on any terms PEGI shall deem acceptable. If Daewoo makes an offer to acquire such rights but Daewoo and PEGI are unable to reach agreement therefor prior to the expiration of such 30 day period, PEGI shall thereafter be free to license such Premium Film to any third party on terms no less favorable to PEGI than those set forth in the last written offer made by Daewoo prior to the expiration of such 30 day period. Other specific details (including any exceptions or limitations) with respect to such rights of first negotiation and first refusal shall be agreed upon between the parties in negotiating the Superseding Agreements. If Daewoo acquires rights to Premium Films in the Territory, Daewoo may supply such films to the Venture for PTVSK. PEGI will schedule such films in consultation with Daewoo, and the applicable Program License Fee set forth in Section 11.1 for each such film will be paid to Daewoo. If Daewoo supplies any such films for PTVSK, the number of program hours that PEGI is obligated to provide under Section 10.2 and Section 10.2.1 will be reduced by the number of program hours of such film. 11. Program License Fees -------------------- The Venture shall pay program license fees as set forth below (the "Program License Fees"): 11.1 For programming supplied to PTVSK by PEGI pursuant to Section 10.2, the greater of (a) the Section 10.2 Guaranteed Minimum Program License Fee (as defined below) for each 12 month period or (b) ***. For purposes hereof, "Section 10.2 Guaranteed Minimum Program License Fee" means, ***. 11.2 For the movies to be provided by Daewoo or PEGI to either PTVSK or ATV pursuant to Sections 10.3, 10.3.1 and 10.3.2, the Section 10.3 Guaranteed Program License Fee for the applicable period. For purposes hereof, "Section 10.3 Guaranteed Program License Fee" means ***. *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 11 *** 11.3 Payment of Program License Fees. The Program License Fees shall be ------------------------------- due and payable to PEGI and Daewoo, as applicable, as follows: (a) the Section 10.2 Guaranteed Minimum Program License Fee and the Section 10.3 Guaranteed Program License Fee shall be calculated on a monthly basis and paid quarterly in arrears within 30 days after the close of the quarter, and (b) any overages above the Section 10.2 Guaranteed Minimum Program License Fee shall be calculated on a annual basis and paid yearly within 45 days after the close of the applicable year. 12. Trademark License Agreement; Royalties -------------------------------------- 12.1 The Venture will pay to PEGI a trademark license royalty (the "Trademark Royalty") of ***% of the Adjusted Gross Revenue for the PTVSK Service. "Adjusted Gross Revenue" is defined as all revenues actually received by the Venture from subscribers to the PTVSK Service (including pay per view revenues) and all other revenues from operation of the PTVSK Service by the Venture, less (a) consumption and other taxes (other than income taxes), (b) costs paid by the Venture to protect the trademarks licensed by PEI pursuant to the Trademark License Agreement, and (c) any other amounts required to be deducted in calculating trademark license royalties under applicable South Korean law, as in effect from time to time. Without limiting the foregoing, in the event that the revenue of the PTVSK Service includes streams from advertising and/or home shopping, such revenue will be included in the Adjusted Gross Revenue as defined herein. The Trademark Royalty shall be calculated on a monthly basis and paid quarterly within 30 days after the close of the appropriate quarter. 12.2 PEGI will cause PEI to grant to the Venture a license to use the trademarks "Playboy" and the "Rabbit Head Design" and such other Playboy trademarks as will be described in the Trademark License Agreement in connection with PTVSK and the marketing and promotion of PTVSK. The grant of license will be made to the Venture on an exclusive basis for the Service but only with respect to Non-Standard Television and only in the Territory. The only exceptions to the foregoing exclusivity will be (a) customary presentation and logo credits in the title and end credits sequences of programs licensed to others as permitted hereunder and credit blocks in advertising therefor, and (b) use of the trademarks in any television service which is not intended for general reception in the Territory but which is received in the Territory. The Venture will not sub-license any trademarks licensed under the Trademark License Agreement except with the consent of PEI. PEI shall have the right to approve any and all permutations of the trademarks and any secondary, combination or derivative marks based on the trademarks, all of which, when approved, shall be the property of PEI and be licensed to the Venture under the terms of the Trademark License Agreement. PEI will have the right to control and conduct all proceedings relating to any infringement of *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 12 the trademarks in the Territory and any claim that the Venture's use of the trademarks in the Territory infringes the rights of any third party. The Venture will indemnify and hold harmless PEI from and against all losses arising from the use by the Venture of the trademarks. The Venture's use of the trademarks licensed by PEI shall be conditioned on the parties first having duly recorded the license (or a short form version thereof acceptable to PEI) in the Korean Industrial Property Office. The Venture may also choose to license from PEI, and PEGI will thereupon cause PEI to license to the Venture, the right to use the trademark "AdulTVision" and such related trademarks as will be described in the Trademark License Agreement in connection with ATV and the marketing or promotion of ATV. If the Venture so chooses to license such AdulTVision trademarks, such license will be on all of the same terms as are applicable with respect to the trademarks referred to in the above paragraph, provided that no royalty will be payable with respect to such trademarks. Alternatively, the Venture may wish to develop another name and related trademarks for use in connection with ATV, subject to the approval of Daewoo and PEGI, not to be unreasonably withheld. The Venture will own all rights to such Venture-developed name and trademarks. Upon any termination of the ATV Service or Venture, ownership of such Venture-developed name and marks shall vest equally with Daewoo and PEGI; provided that neither of them make any use of such name or marks without the prior written consent of the other. 12.3 Although the programs transmitted by the Services will depict nudity and allow strong or explicit language, PEGI will not deliver and the Venture will not transmit scenes or other material depicting any of the following: (i) the glorification of violence or gratuitous violence, (ii) rape, non-consensual intercourse or other non-consensual sexual activity, (iii) bondage, incest, sadism or masochism, bestiality, extreme sexual explicitness or the graphic close-up of genitals; or (iv) child pornography, including, without limitation, instances where an actor is the legal age for consent but is portrayed as under the legal age for consent. In that regard, no actor will appear nude or engaged in sexual conduct in any program transmitted by the Services who is not at least 18 years of age. Notwithstanding the foregoing, and subject to the censorship provisions of Section 19, the standards applied by PEGI from time to time for Playboy TV and AdulTVision, respectively, in the United States shall be the controlling standards and any materials transmitted on either such Playboy service and shall be deemed acceptable for transmission on the respective Service. 12.4 The parties acknowledge that any material breach by the Venture of the Trademark License Agreement or of this Agreement with respect to the use of trademarks will result in irreparable harm to PEI or PEGI, as applicable, for which there is no adequate remedy at law. Accordingly, PEI or PEGI, as applicable, shall be entitled to preliminary or temporary equitable relief pending a final determination in accordance with the dispute resolution provisions provided below, without the necessity of posting 13 bond unless otherwise required by applicable law, by way of any or all of the temporary and permanent injunctions and such other relief as a court of competent jurisdiction may deem just and proper. 13. PEGI Programming and Operational Responsibilities ------------------------------------------------- Subject to Sections 10.3 through 10.3.2, PEGI will control and manage all facets of the programming for PTVSK. This will include: 13.1 Exclusive PTVSK Program Supplier. Subject to Sections 10.3 through -------------------------------- 10.3.2., PEGI will be the exclusive supplier of all programming shown on PTVSK, regardless of whether such programming is produced or owned by PEGI, or whether PEGI acquires such programming for the Venture. The costs of producing or acquiring such programming furnished by PEGI for the Venture will be borne by PEGI. Notwithstanding the foregoing, the Venture will have the right at its own cost to produce its own programming targeted to the South Korean market pursuant to Section 13.2 ("Venture-produced Programming" or a "Venture-produced Program"). 13.2 Venture-Produced Programming. Venture-produced Programming will be ---------------------------- developed by mutual agreement between Daewoo and PEGI. Such programming will be consistent with PEGI's standards and subject to PEGI's approval, not to be unreasonably withheld, and will be produced locally by a production company selected by PEGI from one or more (as necessary) lists of such companies supplied by Daewoo. A budget for Venture-produced Programming will be identified in the Business Plan and Annual Budgets. 13.2.1 If the Venture produces such programming, the Venture will (i) be responsible for arranging and contracting for all production matters, including engaging talent, payroll and employment matters, securing facilities and supplies and securing all production and errors and omissions insurance, all consistent with PEGI's standards and subject to PEGI's approval, not to be unreasonably withheld and (ii) bear all production and completion risk and responsibility and will be responsible for compliance with local laws and regulations. 13.2.2 PEGI may recommend a supervising producer for a Venture- produced Program. If such person is approved by Daewoo (which approval will not be unreasonably withheld), such person will be paid in accordance with the Venture's production budget; if neither such person nor a substitute is approved, the Venture will allow such person to supervise production, but at PEGI's expense. Such supervising producer shall have control over the content and look of the program, consistent with the standards for the Playboy Programming. 14 13.2.3 With respect to each Venture-produced Program, PEGI will have 10 business days following the receipt of a program to approve such program (which approval will not be unreasonably withheld) or request changes; if no such approval or request for changes is delivered to the Venture within this 10 business day period, PEGI will be deemed to have approved such program. The costs of making changes requested by PEGI will be borne by the Venture. 13.2.4 After the Venture makes any changes requested by PEGI pursuant to Section 13.2.3, PEGI will have 5 business days from receipt of the changed program to approve such program (which approval will not be unreasonably withheld) or request additional changes; if no such approval or request for changes is delivered within this 5 business day period, PEGI will be deemed to have approved such program. If the changes initially requested by PEGI have not been made to PEGI's reasonable satisfaction, the costs of making further changes to conform to such initial comments will be borne by the Venture. Any further changes not previously requested by PEGI will be borne by PEGI. 13.2.5 After the Venture makes any changes requested by PEGI pursuant to Section 13.2.4, PEGI will have 5 business days from receipt of the changed program to approve such program (which approval will not be unreasonably withheld) or request additional changes; if no such approval or request for changes is delivered in this 5 business day period, PEGI will be deemed to have approved such program. The costs of making any changes previously requested by PEGI but not satisfactorily made shall be borne by the Venture, and any further changes not initially requested by PEGI will be borne by PEGI. 13.2.6 The inclusion of Venture-produced Programming in the Venture's program block will be in addition to the minimum number of program hours and movies to be supplied by Daewoo or PEGI. 13.2.7 PEGI will have the right, in its sole and absolute discretion, to withhold approval of production by the Venture of any programs or other materials that are Playboy-branded, contain Playboy-identified content or are otherwise identified as a Playboy-related product (collectively, "Playboy Identified Programs"). In the event the Venture wishes to produce any Playboy Identified Program, PEGI shall have the right, but not the obligation, to elect to finance fully the Venture's production thereof. Any such Playboy Identified Program which is so fully financed by PEGI is hereinafter referred to as a "PEGI Financed Ventured-produced Program". PEGI will own the copyright and all distribution rights in and to any such PEGI Financed Venture-produced Program. PEGI will license the same to the Venture for a license fee to be negotiated by the parties in good faith and to be included in the appropriate Superseding Agreements. 15 13.2.7.1 PEGI will grant Daewoo an exclusive license to distribute the PEGI Financed Venture-produced Programs within the Territory in theatrical and home video media. For this distribution, Daewoo will receive a distribution fee equal to ***% of gross revenues and be entitled to reimbursement for customary distribution costs and expenses. Accountings to Playboy will be on a quarterly basis, within 30 days after the close of the relevant quarter, with the excess of revenues over Daewoo's distribution fee and distribution costs and expenses to be paid over to PEGI. Although Daewoo makes no guaranties to PEGI regarding such distribution, Daewoo will use its commercially reasonable efforts to maximize the license fee it obtains from third parties for such PEGI Financed Venture-produced Programs. Daewoo will license such programming on terms substantially equivalent to terms applicable to the licensing of Daewoo's own similar programming; provided, that PEGI will have the right to approve any such transaction and will have the annual right to review the records of Daewoo with respect to all such licensing activities, upon reasonable notice, to ensure compliance with the terms hereof. If Daewoo acquires PEGI Financed Venture-produced Programs (or specific programs or series of programs therefrom) for use in a Daewoo-owned or -operated service or media, Daewoo will acquire such programs on arms' length terms to achieve fair market prices for PEGI with respect to such programs. If the PEGI Financed Venture- produced Programs are "bundled" with other programming by Daewoo in the course of its distribution efforts, Daewoo will make a fair and good faith allocation to such PEGI Financed Venture-produced Programs of the fees received. Except as provided in this Section 13.2.7.1, neither the Venture nor Daewoo shall be entitled to share in any revenue derived from any such PEGI Financed Venture- produced Program outside of the Territory or in any media other than Non- Standard Television in the Territory. With respect to any Playboy Identified Program which PEGI approves for production by the Venture but does not elect to fully finance, PEGI would nevertheless own the copyright thereto but (a) during the term of the Venture, distribution rights to such Venture financed and produced Playboy Identified Program would be licensed to PEGI pursuant to Section 13.2.8 below and (b) in the event of any dissolution of the Venture, Daewoo would continue to share in any revenue derived from any subsequent exploitation of such program in proportion to the respective interests of Daewoo and PEGI in the Venture as of the date of dissolution. 13.2.8 The Venture will grant PEGI an exclusive license to distribute the Venture-produced Programming (other than PEGI Financed Venture-produced Programs) outside the Territory in all media and within the Territory in all media other than Non-Standard Television. For this distribution, PEGI will receive a distribution fee equal to ***% of gross revenues and be entitled to reimbursement for customary distribution costs and expenses. Accountings to the Venture will be on a quarterly basis, within 30 days after the close of the relevant quarter, with the excess of revenues over PEGI's distribution fee and distribution costs and expenses to be paid over to the Venture. Although PEGI makes no guaranties to the Venture regarding such *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 16 distribution, PEGI will use its commercially reasonable efforts to maximize the license fees it obtains from third parties for such Venture-produced Programming. PEGI will license such programming on terms substantially equivalent to terms applicable to the licensing of PEGI's own similar programming; provided, that the Venture will have the right to approve any such transaction within the Territory and will have the annual right to review the records of PEGI with respect to all such licensing activities, upon reasonable notice, to ensure compliance with the terms hereof. If PEGI acquires Venture- produced Programming (or specific programs or series of programs therefrom) for use in a PEGI-owned or -operated service or media, PEGI will acquire such programs on arms' length terms to achieve fair market prices for the Venture with respect to such programs. If the Venture-produced Programming is "bundled" with other programming by PEGI in the course of its distribution efforts, PEGI will make a fair and good faith allocation to such Venture-produced Programming of the fees received. 13.3 Program Mix. ----------- 13.3.1 PTVSK: PEGI may program the PTVSK Service with any of the following, provided that such programming shall be of a quality and nature comparable to the programming shown on Playboy TV as programmed in the United States from time to time: (a) "Playboy Programming", which is programming produced, co-produced or owned by PEGI or one of its affiliates, or which is programming acquired by PEGI or one of its affiliates for multiple territories around the world, including the Territory; (b) "Venture Specific Programming", which is programming acquired by PEGI or one of its affiliates specifically for PTVSK; and (c) Venture-produced Programming, which is programming produced by the Venture pursuant to Section 13.2; provided, however, that prior to the launch of ATV, PEGI shall include in the program mix for PTVSK the movies to be provided by the parties pursuant to Section 10.3. PEGI will determine the mix of Playboy Programming, Venture Specific Programming and movies provided by the parties pursuant to Section 10.3, PEGI will determine the manner in which the Venture-produced Programming is scheduled. As noted in Section 13.2.6, Venture-produced Programming will be in addition to the 150 program hours or 180 program hours, as applicable, of New Programming supplied by PEGI, and the movies supplied by Daewoo and PEGI to PTVSK each year. 13.3.2 ATV: The parties will agree on the scheduling of the --- programming on ATV, it being the intent that the rotation/duration/content of the programs supplied will be reasonably related to the number of New Movies supplied by each party under Section 10.3.2. 13.4 Interstitials/Promos/On-Air Look. In consultation with the Venture, -------------------------------- PEGI will determine and direct the production and compilation of all interstitial and 17 promotional materials, as well as developing the on-air look of PTVSK and ATV. The costs of such production and compilation will be borne by the Venture. 13.4.1 Alternative Means of performance. In the event the Venture can -------------------------------- more cost effectively perform some or all of the functions described in Section 13.4 the Venture shall, at PEGI's request, assume such functions, although PEGI will retain control content and quality of such transferred functions. 13.5 Delivery Materials. ------------------ 13.5.1 For PTVSK and ATV: PEGI will supply one copy of each program, ----------------- interstitial, promo or other relevent item it is to furnish to the Venture, with the costs of duplication and shipping from Los Angeles to be borne by the Venture. Similarly, Daewoo will provide one copy of all such materials which it is to furnish to the Venture, with the costs of duplication and shipping to be borne by the Venture. Assembly of the finished program block for each Service will be implemented by the Venture at PEGI's direction and to PEGI's specification. PEGI will provide a nightly program log to enable the Venture's technical personnel to properly compile a given night's programming. The Venture will bear the costs of dubbing/subtitling and any necessary format conversions. PEGI and Daewoo will provide such materials to the Venture in sufficient time to provide for efficient implementation by the Venture. 13.5.2 Certificate of Erasure. At the end of the License Term for each ---------------------- item delivered to the Venture (excluding items that have been dubbed or subtitled and which PEGI desires to acquire pursuant to the terms hereof), the Venture will erase the tapes of such items and deliver to PEGI a certificate of erasure with respect thereto. 14. Operating Responsibilities -------------------------- 14.1 The Venture will employ a staff of sufficient size to efficiently handle all day-to-day sales and distribution, marketing, technical matters and other appropriate matters. 14.2 The Venture will secure errors and omissions and other customary liability insurance for the Venture covering exhibitions of programming by the Venture, which insurance policies shall meet PEGI's customary standards and otherwise be reasonably acceptable to PEGI, and liability and other insurance covering the activities of the Venturer consistent with good business customs and practices in South Korea. All insurance policies shall name PEGI, Daewoo and their respective affiliates as additional insureds. 14.3 Pursuant to the Management Services Contract, Management Co. will handle many of the day-to-day operational and financial responsibilities of the Venture 18 under the supervision of the Representative Director, with the specific nature and scope of the services to be provided to be agreed upon in negotiating the Superseding Agreements. Management Co. will receive a fee of ***% of the Adjusted Gross Revenue of PTVSK. 14.4 The Venture will be responsible for making arrangements for satellite transponders as necessary to insure coverage of the entire Territory. All costs of assembly, dubbing, subtitling, shipping, customs and duties, duplication, production of original "wrap around" material, and similar functions will be paid by the Venture. In the event PEGI expends its own funds for such services, such costs will be "rebilled" to the Venture, with the Venture to reimburse PEGI within 30 days. All costs shall be rebilled "at cost" with no markup by PEGI. The Venture will provide, or arrange for, dubbing/subtitle services on the terms set forth in Section 7.2. The Business Plan will attempt to identify the type and magnitude of these costs, with operating changes to be made as needed via subsequent Annual Budgets. 14.5 The Venture will obtain office facilities/computer and telecommunications infrastructure/other support services as needed. 15. Venture Ownership, Capitalization and Governance ------------------------------------------------ 15.1 Formation of Venture. The Venture will be organized as a limited -------------------- liability company or a joint stock corporation, as shall be mutually determined by the parties, under the laws of South Korea. 15.2 Ownership Provisions. -------------------- 15.2.1 The Venture will initially be owned 85% by Daewoo and 15% by PEGI. 15.2.2 The parties acknowledge that current South Korean law restricts the maximum ownership interest that investors are permitted to hold in a company engaged in the business of the Venture. If and to the extent it becomes permitted under applicable law, PEGI shall have the right to increase its percentage interest, up to 49% of the Venture. PEGI can buy its additional percentage interests in the form of additional shares from Daewoo once per fiscal year, in minimum increments of 5%. Until the end of the fiscal year in which cash breakeven occurs, PEGI can buy additional shares from Daewoo at the Founders' Price; after breakeven, PEGI's buy-in price will be a pro rata portion of the going concern value of the Venture, to be mutually agreed by the parties or determined by a mutually agreed third-party expert (i.e., the price per share will be going concern value divided by 100). The Founders' Price means the total capitalization (the "Total Capitalization") of the Venture as determined in the approved Business Plan divided by 100 (a "Price Per Share Point"); provided, however, that if the *** Confidential information omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. 19 projection for Total Capitalization of the Venture according to the approved Business Plan (as updated by the Annual Budget) at the time PEGI announces its intention to purchase additional shares is lower than the Total Capitalization identified in the approved Business Plan attached to this Agreement by 10% or more, then the Price Per Share Point will be recalculated according to such lower Total Capitalization. 15.2.3 Restrictions on Transfers of Interests. No member of the -------------------------------------- Venture may transfer ownership interests to any third party without the consent of all the other members; provided, however, that a party may transfer ownership interests to an affiliate if the transferor or its parent guarantees the financial or in-kind obligations of the transferee and, if any approvals are required under South Korea law for any such guarantees to be enforceable, satisfactory written evidence of all such approvals is delivered to the other Venturers by the proposed transferor. 15.2.4 Additional Rights Regarding Shares. Without limiting the ---------------------------------- requirements described above regarding approval of any transfer of shares in the Venture, the parties shall have preemptive rights and "come-along" rights and participation rights on customary terms in the event that either party desires to sell some or all of such party's shares in the Venture pursuant to a bona fide third-party offer or pursuant to a public offering of shares by such party. PEGI will have the right to come-along or otherwise participate in any such transaction up to a percentage equal to PEGI's then-current ownership interest in the Venture. 15.3 Capitalization. -------------- 15.3.1 The initial capital contribution of Daewoo will be the equivalent in Korean Won of U.S. Dollars equal to the greater of (a) the minimum, if any, required under applicable South Korean law, or (b) the amount shown in the Business Plan as required of Daewoo with respect to the first fiscal quarter. The initial capital contribution of PEGI will be the equivalent in Korean Won of the greater of (a) the minimum, if any, required under applicable South Korean law, or (b) the amount shown in the Business Plan as required of PEGI with respect to the first fiscal quarter. Daewoo and PEGI shall fund their initial capital contributions in cash. 15.3.2 If necessary to cover the deficits of the Venture, each member shall contribute additional capital pro rata in accordance with its respective percentage interests, with such capital calls subject to the aggregate maximum of the equivalent in Korean Won of 5 million U.S. Dollars. The Business Plan will include an estimated schedule of such additional capital calls, which are expected to occur quarterly at the beginning of the respective quarter, commencing with the second fiscal quarter. Once Playboy's contribution reaches the equivalent in Korean Won of 750,000 U.S. Dollars Playboy shall not be required to make any further capital contributions, except if and to the extent required under applicable law. Daewoo or related entities will lend funds to 20 the Venture as necessary to cover the cash requirements of the Venture to the extent that such cash requirements cannot be covered out of the Venture's cash flow, the Venture's capital or any permitted third party borrowings of the Venture. Such loans to the Venture will bear interest at a rate to be negotiated by PEGI and Daewoo in good faith and to be included in the appropriate Superseding Agreements (the "Applicable Rate"). Funds advanced by Daewoo and its related entities shall be evidenced by promissory notes of the Venture payable upon the demand of Daewoo; provided, however, that Daewoo shall not make demand thereon or be entitled to receive payment therefor until and unless and only to the extent that there is sufficient operating profit in excess of amounts reserved for payment of current and anticipated liabilities, including any liabilities owed to Daewoo (including management fees and Program License Fees payable to Daewoo) and any Trademark Royalties and Program License Fees payable to PEGI, or otherwise needed for use in the operation of the Venture's business for the current period, as determined in good faith by the Board of Directors. PEGI will not be obligated to guarantee loans made to the Venture by third parties or Daewoo or its related entities. 15.4 Governance Provisions. --------------------- 15.4.1 The day-to-day management of the Venture will be delegated to a Representative Director to be mutually approved by the Venturers, and subject to removal by either of the Venturers. The Representative Director will report to and be subject to the direction of a Board of Directors comprised of four representatives of Daewoo and two representatives of PEGI. 15.4.2 The Shareholders Agreement will include appropriate minority protections, including, but not limited to, provisions requiring the approval of PEGI prior to the Venture taking any of the following actions: (i) any amendment to the Superseding Agreements, (ii) any merger or other reorganization of the Venture, (iii) the issuance of additional interests in the Venture, declaration of dividends, stock splits, reverse stock splits or redemption of shares, (iv) any distribution by the Venture with respect to the interests therein other than distributions of operating profits (including, but not limited to, any distribution of non-cash assets), (v) the Venture taking actions that are inconsistent with an approved Business Plan or Annual Budget, or which are otherwise outside the ordinary course of business, including but not limited to the incurrence of indebtedness in excess of the levels contemplated by the applicable Business Plan or Annual Budget, (vi) the Venture entering into any business activities except as contemplated herein, (vii) loans by the Venture to any member, (viii) any transaction with an affiliate of any member (other than the Superseding Agreements), (ix) retaining outside counsel or accountants for the Venture, (x) tax decisions which could have a material adverse impact on PEGI or the Venture or (xi) except as expressly provided herein, the termination, dissolution or liquidation of the Venture: provided, however, that the matters recited in items (iv), (vii), (viii), and (ix) shall be subject to 21 such modifications as may be agreed upon between the parties in negotiating the Superseding Agreements. 15.4.3 It is the parties' intent that the structure of the Venture as a limited liability company or joint stock corporation, as shall be mutually determined, will limit the liability of the members for liabilities of the Venture to their respective interests in the Venture. However, if either Daewoo or PEGI becomes directly liable for any liability of the Venture resulting from an action of the other Venturer taken without the approval (on the terms provided herein) of such Venturer, then the Venturer taking such action will indemnify and hold the Venturer suffering such liability harmless from and against any liability arising from such action. The prior sentence shall not apply to liabilities of the Venture arising from censorship matters with respect to a program supplied in good faith by a Venturer. 15.4.4 Each member of the Venture will have the right to examine the books and records of the Venture, and will have the annual right to audit or cause an audit of the books and records of the Venture upon not less than 10 business days prior notice. The Management Co. under the supervision of the Representative Director will prepare regular periodic financial statements and annual financial statements to be prepared in accordance with GAAP. At the request of any member, the annual financial statements will be audited by a nationally recognized accounting firm. 16. Distribution of Profits ----------------------- The Venture will make distributions of operating profits on an annual basis to each Venturer, in proportion to its percentage interests at the end of that year. If the ownership percentages of the Venture change during a given year, the Venture will calculate simple arithmetic "mean" ownership positions for each party for that year. For example, if PEGI is permitted to increase its ownership in the Venture and chooses to purchase an additional 20% share, and if such purchase occurs at the beginning of the fourth month of such year, then PEGI's share of the Venture profits for that year will be [(15% * 3) + (35% * 9)]/12. The Venture will not withhold distributions except as necessary to provide for the reasonable conduct of the Venture's business as detailed in the Business Plan (as modified by the Approved Budget for a given fiscal year). 17. Advertising ----------- Daewoo and PEGI shall negotiate and mutually determine in the Superseding Agreements all details regarding advertising, if any, on the Services, including any advertising by the Venturers, as well as (consistent with the standards set forth below) all matters relating to the type and nature of advertising to be so carried. If the Venture carries advertising, the Services will at all times abide by the following advertising standards: 22 17.1 Categories that are not acceptable for advertising are firearms (or advertisements from any gun lobby organization) and other weapons; explosives or fireworks; massage parlors; telephone sex lines; sex clubs; sexually explicit audio visual products (e.g., X-rated or similar "hardcore" videos); sex toys; materials depicting graphic sexual conduct, violence, rape or non-consensual sex, sadism, sadomasochism, bondage, incest, bestiality, child pornography, including without limitation instances where an actor is the legal age for consent but is portrayed as under the legal age for consent but is portrayed as under the legal age for consent; classified advertising; advertising for psychics or similar services; religious organizations and/or cults. 17.2 The Venture will not accept advertisements for magazines which compete with any edition of the "Playboy" magazine or for any other publication, product or service published, produced, financed, branded, identified with or distributed by any person who is engaged in the publication or distribution of any magazine which competes with any edition of the "Playboy" magazine. 18. Non-Competition and Exclusivity ------------------------------- 18.1 Neither of the parties nor their affiliates will hold an ownership position of any kind in any competing primarily adult oriented television service in the Territory without the express written permission of the other. Further, neither of the parties nor their affiliates will distribute any product, service or programming in any media that carries the brand or name of or is identified with the publisher of a magazine or other publication that competes with any edition of the "Playboy" Magazine. As used in this Agreement, "adult oriented" means the service or program in question is erotic in nature and features nudity. The ownership or distribution of R-rated feature film produced by major studios does not represent ownership or distribution of "adult-oriented" programming for the purposes of this provision. In addition, nothing contained in this Agreement shall be deemed to (a) preclude PEGI or any of its affiliates from owning or operating or providing programming for another Playboy TV service in the Territory in any media, including Non-Standard Television, if the PTVSK Service is terminated for any reason, but the Venture continues to operate the ATV Service, or (b) preclude either party from owning or operating or providing programming for an adult service primarily featuring programming of the type primarily featured on the ATV Service if the ATV Service is terminated for any reason but the Venture continues to operate the PTVSK Service; provided, however, that the above restriction regarding products, services or programming that carries the brand or name of or is identified with the publisher of a magazine or other publication that competes with any edition of the "Playboy" magazine shall continue to apply. 23 19. Censorship ---------- If a certain program or series of programs is censored by the Korean government or the Venture reasonably believes it to violate South Korean censorship laws, the Venture will, upon consultation with PEGI, edit the program such that it will be suitable for airing in the Territory. The Venture will use all reasonable good faith efforts to modify any censored program to comply with the censorship requirements, with any editing changes to be subject to the approval of the party that furnished such program. The party that furnished such program may, at its option, substitute another program for the one in question if it feels that the integrity of the affected program will be compromised because of the editing necessary to satisfy censorship officials. If the Venture believes that the editing is cost prohibitive, it may request that the applicable party substitute another program for the one in question. All costs of editing will be borne by the Venture. 20. Dispute Resolution ------------------ 20.1 Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section 20, which shall be the sole and exclusive procedures for the resolution of any such disputes; provided, however, that this Section 20 shall not apply to any dispute concerning the validity, ownership or other rights with respect to the trademarks licensed by PEI to the Venture pursuant to the Trademark License Agreement, and instead any such dispute shall be litigated in a court of law. The parties intend to include substantially similar provisions in the Superseding Documents so that the following provisions will continue to govern dispute resolution with respect to the Venture and the Venturers. The parties intend that these provisions shall be valid, binding, enforceable and irrevocable and shall survive any termination of this Agreement or the Superseding Agreements. 20.2 The parties shall promptly notify each other in writing of any dispute arising out of or relating to this Agreement. The parties shall attempt in good faith to resolve any dispute arising out of or relating to this Agreement promptly by negotiation between executives who have authority to settle the controversy. All reasonable requests for information made by one party to the other will be honored. All negotiations pursuant to this clause are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. 20.3 If any such dispute remains unresolved within 30 days of original notice thereof, each party shall refer the dispute to a more senior executive of such party who has authority to settle the dispute and who shall likewise meet with the other to attempt to resolve the dispute. 24 20.4 Any controversy or claim arising out of or relating to this Agreement or the breach, termination or validity thereof, which remains unresolved 45 days after original notice thereof shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce; provided, however, that if either party will not participate in a non-binding procedure described above, the other may initiate binding arbitration before expiration of the above period. The tribunal shall consist of a sole arbitrator appointed jointly by the parties. In the case of the parties failing to choose a sole arbitrator, the tribunal shall consist of three arbitrators, two of whom shall be appointed by the respective parties and the third of whom shall be appointed jointly by the first two. Each arbitrator shall be knowledgeable in matters similar to those involved in the business of the Venture. The place of arbitration shall be Sydney, Australia, or such other location as the parties may agree. The language of the arbitration shall be English. Each arbitrator shall be independent and unrelated to any of the parties. 20.5 Except as expressly provided below, the arbitrator is not empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any right to recover such damages with respect to any dispute resolved by arbitration. The arbitrator shall have the authority to include, as an item of damages, the costs of arbitration, including legal fees and expenses, incurred by the prevailing party and to apportion such costs among the parties on a claim by claim basis as such party prevails thereon. For purposes of the foregoing, the "prevailing party" shall mean the party whose final settlement offer (or other position or monetary claim) prior to the start of arbitration is closest to the judgement awarded by the arbitrator, regardless of whether such judgement is entered into in favor of or against such party. 20.6 All negotiations pursuant to Sections 20.2,20.3 and 20.4 are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. 20.7 Each party agrees that service by registered or certified mail, return receipt requested, delivered to such party at the address provided in Section 21.9 (Notices) below, will be deemed in every respect effective service of process upon such person for all purposes of these provisions relating to arbitration. Subject to Section 20.1, each party irrevocably submits to the jurisdiction of the courts of the State of California and with respect to all matters governed by the laws of the State of California and to the jurisdiction of the courts of South Korea with respect to all other matters, in each case pursuant to Section 21.4, regardless of where any alleged breach or other action, omission, fact or occurrence giving rise thereto occurred. Each party hereby irrevocably waives any claim that any action or proceeding brought in California or South Korea in accordance herewith has been brought in any inconvenient forum. 25 20.8 The parties will negotiate in good faith and agree on such further or modified arbitration provisions as are reasonably necessary for awards and other judgements resulting from the provisions set forth above to be recognized and enforceable in the respective jurisdictions of organization of Daewoo and PEGI. 21. Miscellaneous ------------- 21.1 Effective Date. This Agreement will become effective as of the date -------------- on which it is fully executed by the parties. 21.2 Permits; Approvals; Launch. The parties will use their reasonable -------------------------- best efforts to cause the Venture to obtain promptly the governmental approvals, permits and other authorizations necessary to operate the Venture as contemplated herein. The parties acknowledge their mutual desire to have the Venture organized and the PTVSK Service launched by June 15, 1997, and in this regard each party agrees to use its reasonable best efforts to accomplish such objectives. 21.3 Currency: Payments. Except where otherwise expressly provided to the ------------------ contrary herein or in the Superseding Agreements: 21.3.1 All amounts due from either party to the other or from the Venture to PEGI, PEI or any of PEGI's other affiliates pursuant to this Agreement shall be paid in U.S. Dollars. If any portion of such payment is calculated on the basis of revenues received in other currencies, such revenues shall be calculated using the exchange rate published in the Wall Street Journal, as of the business day immediately preceding the date on which the payment initially is due. Such exchange rate shall also apply to any portion of a payment which is permitted to be deferred, regardless of whether deferred payment is represented by a promissory note or other instrument. 21.3.2 All payments owing pursuant to this Agreement will be made by wire transfer of immediately available funds, subject to any withholding required by applicable law. Each party will from time to time designate one or more accounts into which such payments will be made and may designate one or more accounts into which such payments will be made and may designate one or more affiliates to receive such payments. Daewoo will cooperate fully with PEGI in taking, or permitting or causing to be taken such actions as will minimize any withholding or other taxes or fees applicable to PEGI with respect to distributions or other payments by the Venture, including the assignment by PEGI of its rights to receive any payments. 21.3.3 Any payment hereunder not made when due will bear interest from the date due to and including the date of payment in full at the Applicable Rate. 21.3.4 The parties agree that if any payment owing by it or any of its affiliates is precluded or limited by a restriction imposed by jurisdiction of organization 26 or operation of the payor or the jurisdiction where the payor's funds are deposited, then an affiliate of such payor not subject to such restriction shall make the required payment. 21.4 Governing Law. With respect to matters (including, but not limited ------------- to program supply and trademark matters) involving the Venture's programming or intellectual property supplied by PEGI or PEI, this Agreement and the Superseding Agreements shall be governed by and construed under the laws of the State of California. Otherwise, with respect to all other matters, including, without limitation, matters or corporate governance and capitalization, this Agreement and the Superseding Agreements shall be governed by and construed under the laws of South Korea without reference to conflicts of laws principles. 21.5 Authority. Each party represents that (i) it has full power and --------- authority to enter into and perform this Agreement, (ii) this Agreement is the valid and binding obligation of such party, enforceable against it in accordance with its terms, and (iii) the performance by such party of its obligations under this Agreement does not violate any law, rule or regulation binding on such party or such party's charter documents. Without limiting the foregoing, Daewoo represents and warrants that its performance of the obligations required of it under this Agreement in accordance with the terms hereof shall not be inconsistent with or restricted or limited by any restrictions or limitations applicable to it under South Korean law regarding investment, lending or issuing guarantees. 21.6 Assignment; No Third Party Beneficiary. No party hereto shall --------------------------------------- assign its rights or delegate its obligations hereunder without written consent of the other party except to an affiliate of such party; provided that no such assignment shall relieve the assignor of its obligations. The provisions of this Agreement are for the benefit only of the parties, and no third party may seek to enforce or benefit from these provisions. 21.7 Agreement Negotiated. The parties hereto are sophisticated and have -------------------- been represented by lawyers throughout the negotiation and execution of this Agreement who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe the presumption of laws or rules relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive their effects. 21.8 Waivers, Remedies Cumulative, Amendments, etc. --------------------------------------------- 21.8.1 No failure or delay by any of the parties hereto in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof nor shall any single or partial exercise by any of the parties hereto of any right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. 27 21.8.2 The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. 21.8.3 No provision of this Agreement may be amended, modified, waived, discharged or terminated, other than by the express written agreement of the parties hereto nor may any breach of any provision of this Agreement be waived or discharged except with the express written consent of the party not in breach. 21.9 Notices. All notices, requests, demands and other communications ------- required to be given under this Agreement shall be in writing and shall conclusively deemed to have been duly given (a) when hand delivered to the other party, (b) the next business day if sent by a generally recognized overnight courier services that provides written acknowledgement by the addressee of receipt, or (c) when received, if sent by facsimile or other generally accepted means of electronic transmission. if to PEGI to: -------------- Playboy Entertainment Group, Inc. Attention: President 9242 Beverly Boulevard Beverly Hills, CA 90210 United States of America Fax number: (310) 246-4065 with a copy to: Playboy Enterprises, Inc. Attention: General Counsel 680 North Lake Shore Drive Chicago, IL 60611 United States of America Fax Number: (312) 266-2042 if to Daewoo to: --------------- Daewoo Corporation Attention: Mr. Patrick Woo 526 5-Ga Namdaemoon-Ro Jung-Gu, Seoul, Korea Fax number: 82 2 772 5524 or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. 28 21.10 Confidentiality. --------------- 21.10.1 Each Venturer and its respective affiliates shall maintain the confidentiality of all information of a confidential or proprietary nature which it may have or acquire regarding the customers, business, finances, assets or affairs of the Venture or the other Venturer and its affiliates except for (a) any information which is generally available to the public or becomes generally available to the public other than through disclosure in violation of this provision or (b) which is required_to be disclosed by applicable law or to enforce the provisions of this Agreement. 21.10.2 In recognition of each party's understanding that the other may in the future invite third parties to participate as equity or non-equity investors or other providers of finance in or to such party or its respective affiliates, the parties agree that each may provide to such entities copies of the Shareholders Agreement, Program Supply Agreement, Trademark License Agreement and other agreements governing the Venture, the Business Plan, financial statements and other financial information provided by the Venture to its members, and such other information as would be reasonable in the circumstances for a potential investor to require. Notwithstanding the foregoing, no such information will be provided until a confidentiality agreement for the benefit of the Venture, the Venturers and their respective affiliates has been signed by such potential investor. 21.10.3 In recognition of the fact that PEGI is a subsidiary of a publicly held company, the parties agree that PEGI may provide to institutional investors and analysts such information concerning the Venturer as is conventional to assist such investors in deciding whether to invest or such analysts to prepare their reports; provided, that no information may be disclosed without the prior consent of the Venture that would reasonably be expected to cause harm to the Venture, including with respect to its competitive position. 21.11 Public Announcements. Unless otherwise agreed by the parties or -------------------- as required by law or by the stock exchange on which PEI's stock is traded, no public 29 announcement will be made by either party or any of their respective affiliates with respect to the subject matter of this Agreement. 21.12 Addition of the Venture as a Party to the Shareholders Agreement. ---------------------------------------------------------------- If either party so desires, the parties shall cause the Venture to become a signatory to the Shareholders Agreement for purposes of confirming its agreement to the terms thereof insofar as they impose obligations on or otherwise apply to the Venture. AGREED AND ACCEPTED: - ------------------- PLAYBOYENTERTAINMENT GROUP, DAEWOO CORPORATION INC. By: /s/ Anthony J.Lynn By: /s/ Ju Ho Jung -------------------- ---------------- Name: Anthony J. Lynn Name: Ju Ho Jung Title: PRESIDENT Title: EXECUTIVE V.P. 30 EXHIBIT "A" DEFINED TERMS The following terms are defined in the indicated Sections of the text of the within Agreement:
TERM SECTION ---- ------- Adjusted Gross Revenue 12.1 Adult-oriented 18.1 Agreement 1.1 Annual Budget 3.2 Applicable Rate 15.3.2 ATV 1.1 Business Plan 3.1 Daewoo 1.1 DBS 1.2 Founders' Price 15.2.2 Home Video 9.1 License Term 9.1 Management Co. 2.5 MMDS 8.1 New Movies 10.3 New Programming 10.2 Non-Standard Television 8.1 PEGI 1.1 PEI 2.3.1 Playboy Identified Programs 13.2.7 Playboy Programming 13.3.1 Premium Films 10.4 Price Per Share Point 15.2.2 Program License Fees 11 PTVSK 1.1 Representative Director 15.4 Section 10.2 Guaranteed Minimum Program License Fee 11.1 Section 10.3 Guaranteed Program License Fee 11.2 Services 1.1 SMATV 8.1 STV 8.1 Superseding Agreements 2 Territory 4 Total Capitalization 15.2.2
EXHIBIT A-1 Trademark License Agreement 2.3.1 Trademark Royalty 12.1 Venture 1.1 Venture-produced Program 13.1 Venture-produced Programming 13.1 Venture Specific Programming 13.3.1 Venturers 2.1 Wind-Up Period 6.3.2 The following additional terms shall have the meanings set forth below: "affiliate" means any person controlled, controlling or under common control with the specified person. "control" (and controlled and controlling, respectively) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant person (whether by the holding of shares, the possession of voting rights or otherwise). "person" means any individual, corporation, partnership, limited liability company, trust, association or other legal entity. EXHIBIT A-2 EXHIBIT "B" TRADEMARK USAGE SUMMARY Licensee hereby acknowledges that the trade names "Playboy" and "Playmate" and the registered trademark and service mark "Playboy," the Playboy "Rabbit Head Design" and trade names "The Playboy Channel," Playboy TV "Playboy Television" and all related or derivative names or marks (collectively the "Playboy Marks") are the sole and exclusive property of Licensor and that all uses of the Playboy Marks shall inure solely to the benefit of Licensor, Licensee shall have the right to develop and distribute advertising, publicity, and promotional materials relating to the Programs incorporating certain Playboy Marks in connection with Licensee's rights hereunder ; provided, however, that any such materials shall: A. Clearly identify the Playboy Marks using a legible credit line with the wording "Playboy" (or the applicable Playboy Mark, as the case may be) is the mark of and used with the permission of Playboy Enterprises, Inc." or such other words as Licensor may designate; B. Be submitted in representative form to Licensor for Licensor's prior written approval in each case at least thirty (30) days prior to their intended distribution. Licensor may disapprove any use if, in Licensor's opinion, such use (i) jeopardizes the validity of any of the Playboy Marks, (ii) does not conform to previously approved uses of the Playboy Marks, (iii) does not conform to Licensor's standards, which may vary from time to time, or (iv) negatively affects or impacts the good name, good will or reputation of Licensor. Licensee will not disseminate any material or packaging that has not been so approved by Licensor; and C. Be issued only in the Korean Language. It is expressly understood that Licensor shall retain all good will associated with the Playboy Marks, and no good will from same will inure to Licensee or to any person or entity other than Licensor. Licensee also must secure Licensor's prior written approval of all media of advertising and distribution and the specific publications, broadcasters and exhibitors which will be running the advertisements. Licensee will not disseminate any advertising material that has not been so approved by Licensor in each instance. Other than as expressly set forth in this Trademark Usage Summary, Licensee shall make no use of the Playboy Marks or any confusingly similar designation without the prior express written consent of Licensor in each instance. Licensee shall also make no use whatsoever of any other trademark, trade name or service mark that is the property of Licensor or derived from any of Licensor's programs, suppliers or producers without the prior express written consent of Licensor in each instance. Licensee similarly agrees that it will not authorize or purport to authorize any third party to make any such use, and it will expressly provide in any applicable third party agreements that such third parties will only be entitled to use such names and marks in accordance with Licensee's rights hereunder. Licensee shall have no right to promote, telecast, exhibit, advertise, use or otherwise exploit in any manner any of the Playboy Marks in connection with the ATV Service or the programming thereof without the express prior written approval of Licensor in each instance. Rather, the trademarks, service marks and other identifying names or marks for the ATV Service shall be licensed by Licensor or Licensor's affiliate to Licensee under similar usage requirements as in this Trademark Usage Summary. EXHIBIT "C" BUSINESS PLAN To be attached pursuant to Section 3.1. EX-10.6 13 DISTRIBUTION AGREEMENT DATED 2/28/97 EXHIBIT 10.6 As of February 28, 1997 Universal Music & Video Distribution 70 Universal City Plaza Universal City, CA 91608 Attention: Michael Ostroff, Esq. RE: Amendment to Playboy Entertainment Group, Inc. Distribution Agreement Gentlemen: Reference is made to that certain letter agreement dated as of August 22, 1991 between Uni Distribution Corp., now known as Universal Music & Video Distribution ("Uni"), and Playboy Video Enterprises, Inc., the predecessor in interest to Playboy Entertainment Group, Inc. ("Playboy"), as such letter agreement has been supplemented and amended, including by that certain letter amendment dated as of March 24, 1995 between Uni and Playboy (such as of March 24, 1995 letter amendment is referred to as the "First Amendment"; and such August 22, 1991 letter agreement, as it has been supplemented and amended, is referred to as the "Agreement"). All defined terms used in this second letter amendment (the "Second Amendment") and not defined herein are defined in the Agreement. Uni and Playboy desire further to supplement and amend the Agreement as follows: 1. Term. The third contract year of the Term for both Catalog Programs and New Release Programs shall be extended to June 15, 1998, and the Term for both Catalog Programs and New Release Programs shall terminate on such date, subject to extension of the Term for only New Release Programs pursuant to subparagraph 3(a) of the First Amendment. 2. No Extension or Refund for Unrecouped Catalog Program Advances. Subparagraph 6(b)(vii) of the First Amendment is amended by deleting all of the remainder of such subparagraph 6(b)(vii) of the First Amendment after the words "to Playboy pursuant to Paragraph 7 below." in Line 10 of such subparagraph. Thus, if Uni has not recouped the total amount of the Advances for all contract years of the Term for Catalog Programs paid to Playboy pursuant to Paragraph 7 of the First Amendment, there shall be no potential extension of the Term for Catalog Programs beyond June 15, 1998, nor shall Playboy be obligated to refund to Uni any portion of the then- unrecouped amount of such total Advances paid to Playboy. 3. Formats. As of February 28, 1997, the format commonly known as "digital versatile disc(s)" ("DVD(s)") shall be excluded from the authorized formats under the 1 Agreement until the first to occur of the following dates (a) June 15, 1998, or (b) the date on which Uni notifies Playboy (or Playboy notifies Uni) in writing, accompanied by reasonably satisfactory written evidence, that published Electronic Industry Association statistics evidence that the installed base of DVD hardware players in the United States for home video only use (versus hardware players with computer DVD capabilities) has reached three million (3,000,000) individual units (the first of such dates to occur is referred to as the "DVD Termination Date"). If the DVD Termination Date is prior to June 15, 1998, then as of the DVD Termination Date the authorized formats under the Agreement shall once again include DVDs. 4. DVD Distribution. (a) Image Entertainment, Inc. Playboy shall have the right to grant to Image Entertainment, Inc. ("Image") the right to distribute any or all New Release Programs and Catalog Programs in any part of the Territory in the DVD format, at any time from February 28, 1997 through the DVD Termination Date. (b) Grace Period. If the DVD Termination Date is prior to June 15, 1998, then Playboy also shall have the right to grant to Image a six (6)- month "grace" period (the "Grace Period") following the DVD Termination Date during which Image shall continue to be authorized to manufacture, sell and distribute in the Territory DVDs of any or all New Release Programs and Catalog Programs that either have been previously released by Image or for which Image has paid Playboy an advance against Playboy's share of revenues from the distribution of such DVDs. (c) Uni Royalty. Playboy shall cause Image to pay to Uni a royalty equal to seven and one-half percent (7.5%) of all "net invoiced sales" by Image (and as otherwise defined in Section 5 of the Agreement) of DVDs of New Release Programs and Catalog Programs in the Territory during the period commencing February 28, 1997 and ending on the first to occur of (i) the end of the Grace Period, or (ii) June 15, 1998 (such period is referred to as the "DVD Distribution Term"). Such sums shall be payable by Image to Uni on a calendar quarterly basis. All allowances for reserves taken during the DVD Distribution Term shall be retroactively adjusted in accordance with the provisions of the Agreement regarding allowances for reserves, and any additional royalties payable to Uni on account of such adjustments shall be paid at the time of such adjustments, including, if applicable, after the DVD Distribution Term. (d) Suggested Retail and Wholesale Pricing for DVD. During the DVD Distribution Term, Playboy agrees that the suggested retail price in the Territory for DVDs of New Release Programs and Catalog Programs shall not be lower than the full suggested retail price for one-half inch (1/2") VHS videocassette copies ("Videocassettes") of the same New Release Program or Catalog Program in the Territory, and that the suggested wholesale price in 2 the Territory for DVDs of New Release Programs and Catalog Programs shall not be lower than the full suggested wholesale price for Videocassettes of the same New Release Program or Catalog Program in the Territory. (e) Uni DVD Responsibilities. During the DVD Distribution Term, Uni shall have no responsibility for the manufacture, sale, collection of revenue or the distribution of DVDs by Image. Except as set forth in this Second Amendment, the Agreement is not otherwise modified in any respect, and the Agreement, as supplemented and amendment by this Second Amendment, is ratified and confirmed. If this Second Amendment accurately reflects the agreement between Uni and Playboy with respect to the subject matter of it, please so indicate by signing this Second Amendment in the appropriate space provided below. Very truly yours, PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Myron DuBow -------------------------------- Myron DuBow Sr. V.P. Business and Legal Affairs - ------------------------------------- Name and Title ACCEPTED AND AGREED TO: UNIVERSAL MUSIC & VIDEO DISTRIBUTION By: /s/ Michael Ostroff -------------------------------- Michael Ostroff Sr. V.P. Business & Legal Affairs - ------------------------------------- Name and Title 3 EX-10.7 14 DISTRIBUTION AGREEMENT DATED 7/29/96 EXHIBIT 10.7 PLAYBOY ENTERTAINMENT GROUP, INC. July 29, 1996 Marlon W. Schulman Director, Business and Legal Affairs ORION PICTURES CORPORATION 1888 Century Park East, 7th Floor Los Angeles, California 90067 Dear Mr. Schulman: This letter, when the enclosed copy has been signed, dated and returned to you, will evidence our mutual agreement to further amend the Playboy Distribution Agreement between Playboy Entertainment Group, Inc. ("Playboy") and Orion Home Entertainment Corporation d/b/a Orion Home Video ("Orion") dated as of June 27, 1996 (the "Agreement") as follows: 1. Effective immediately, "EROS COLLECTION" will be added to the Trademarks as described under Paragraph 9.B. of the Agreement. 2. Effective immediately, "EROS COLLECTION" will be added to the Playboy Marks as described under Paragraph 9.C. of the Agreement. Use of the EROS COLLECTION mark shall include a legible trademark credit line with the wording, "EROS COLLECTION is a mark of and used with the permission of PEI" or other such words as Playboy may designate. 3. Except as modified above, all of the other terms and conditions of the Agreement, as amended, shall remain in full force and effect. If the above accurately sets forth your understanding of our agreement, please sign, date and return the enclosed copy of this letter. Very truly yours, Playboy Entertainment Group, Inc. By: /s/ Bill Asher ------------------------------------- Bill Asher Vice President of Planning -- New Business ACCEPTED and AGREED to: ORION HOME ENTERTAINMENT CORPORATION By: /s/ Herb Dorfman -------------------------------- HERB DORFMAN Its: President -------------------------- Dated: 7/30/96 -------- EX-11 15 COMPUTATION OF EARNINGS EXHIBIT 11 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER COMMON SHARE (In thousands, except per share amounts)
Quarters Ended Nine Months Ended March 31, March 31, ------------------------- ------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ---------- Primary: - ------- Earnings: Net income $ 2,510 $ 676 $ 6,372 $ 2,826 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 20,330 20,007 20,304 19,996 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 520 284 482 250 ------- ------- ------- ------- Weighted average number of common shares outstanding as adjusted 20,850 20,291 20,786 20,246 ======= ======= ======= ======= Primary earnings per common share: Net income $ 0.12 /1/ $ 0.03 /1/ $ 0.31 /1/ $ 0.14 /1/ ======= ======= ======= ======= Fully Diluted: - ------------- Earnings: Net income $ 2,510 $ 676 $ 6,372 $ 2,826 ======= ======= ======= ======= Shares: Weighted average number of common shares outstanding 20,330 20,007 20,304 19,996 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 640 346 522 273 ------- ------- ------- ------- Weighted average number of common shares outstanding as adjusted 20,970 20,353 20,826 20,269 ======= ======= ======= ======= Earnings per common share assuming full dilution: Net income $ 0.12 /1/ $ 0.03 /1/ $ 0.31 /1/ $ 0.14 /1/ ======= ======= ======= =======
/1/ This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-27 16 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUN-30-1997 JUL-01-1996 MAR-31-1997 2,001 0 35,198 3,757 21,942 112,129 37,951 27,208 160,859 92,518 0 0 0 216 59,730 160,859 219,250 219,250 180,915 206,889 0 0 386 11,736 5,364 6,372 0 0 0 6,372 .31 .31
-----END PRIVACY-ENHANCED MESSAGE-----