-----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, KldnjgwDdgwyQZJuAFV7aZRKCSQmb+6jkXX6NrLySUesRLXf5KR6fYbsE7QUVkiU io0nEh9lSVzuPeBWR1nYQQ== 0000950131-96-004797.txt : 19961001 0000950131-96-004797.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950131-96-004797 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 33 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06813 FILM NUMBER: 96636420 BUSINESS ADDRESS: STREET 1: 680 N LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (312) 751-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- --------------------- Class A Common Stock, par value $0.01 per share........New York Stock Exchange Pacific Stock Exchange Class B Common Stock, par value $0.01 per share........New York Stock Exchange Pacific Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of Class A Common Stock, par value $0.01 per share, held by nonaffiliates (based upon the closing sale price on the New York Stock Exchange) on August 31, 1996 was $17,548,713. As of August 31, 1996, there were 4,748,954 shares of Class A Common Stock, par value $0.01 per share and 15,560,087 shares of Class B Common Stock, par value $0.01 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Annual Report to Shareholders for the Part I, Item 1, to the extent fiscal year ended June 30, 1996 indicated under such item Part II, Item 5, to the extent indicated under such item, and Items 6-8 Notice of Annual Meeting of Stockholders Part III, Items 10-13, to and Proxy Statement (to be filed) relating the extent described to the Annual Meeting of Stockholders to be therein held in November 1996 PLAYBOY ENTERPRISES, INC. 1996 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. Business.......................................................... 3 Item 2. Properties........................................................ 18 Item 3. Legal Proceedings................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders............... 19 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters......................................................... 22 Item 6. Selected Financial Data........................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 22 Item 8. Financial Statements and Supplementary Data....................... 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................................ 22 PART III Item 10. Directors and Executive Officers of the Registrant................ 23 Item 11. Executive Compensation............................................ 23 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 23 Item 13. Certain Relationships and Related Transactions.................... 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 23
2 PART I Item 1. Business - ---------------- Playboy Enterprises, Inc. was organized in 1953 to publish Playboy magazine. The term "Company" means Playboy Enterprises, Inc., together with its subsidiaries, unless the context otherwise requires. Since its inception, the Company has expanded its publishing operations and has engaged in entertainment businesses that are related to the content and style of Playboy magazine. Additionally, the Company licenses its trademarks for use on various consumer products and operates a direct marketing business. The Company's businesses are classified into four industry segments: Publishing, Entertainment, Product Marketing and Catalog. The net revenues, income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle, and identifiable assets of each industry segment are set forth in the section "Financial Information Relating to Industry Segments" on page 24 of the Company's fiscal 1996 Annual Report to Shareholders ("fiscal 1996 Annual Report") and are incorporated herein by reference. The Company's trademarks are vital to the success and future growth of all of the Company's businesses. The trademarks, which are renewable periodically and which can be renewed indefinitely, include Playboy, Playmate, Rabbit Head Design, Sarah Coventry, Critics' Choice Video, Collectors' Choice Music and AdulTVision. PUBLISHING GROUP The Company's Publishing Group operations include the publication of Playboy magazine, and Playboy-related businesses, which include newsstand specials and calendars, overseas editions of Playboy magazine, and new media businesses. The revenues and operating income of the Publishing Group were as follows for the periods indicated in the following table (in millions):
Revenues Operating Income ---------------------- ---------------------- Years Ended June 30, Years Ended June 30, ---------------------- ---------------------- 1996 1995 1994 1996 1995 1994 ------ ------ ------ ------ ------ ------ Playboy Magazine................... $105.3 $104.4 $104.0 $ 3.6 $ 7.1 $ 3.5 Playboy-related Businesses......... 27.6 22.9 19.4 10.3 7.6 5.2 ------ ------ ------ ----- ----- ----- SUBTOTAL......................... 132.9 127.3 123.4 13.9 14.7 8.7 Administrative Expenses and Other.. - - - (4.7) (4.0) (5.0) ------ ------ ------ ----- ----- ----- TOTAL............................ $132.9 $127.3 $123.4 $ 9.2 $10.7 $ 3.7 ====== ====== ====== ===== ===== =====
Playboy Magazine Founded by Hugh M. Hefner in 1953, Playboy magazine is the best-selling men's magazine in the world. Worldwide monthly circulation, which includes overseas editions, is approximately 4.5 million copies. Approximately 3.3 million copies of the U.S. edition are sold monthly. According to Spring 1996 data published by Mediamark Research, Inc. ("MRI"), in the United States Playboy magazine is read by approximately one in every seven men aged 18 to 34. Playboy magazine is a general-interest magazine for men and offers a balanced variety of features. It has gained a loyal customer base and a reputation for excellence by providing quality entertainment and informative articles on current issues and trends. Each issue of Playboy magazine includes an in-depth, candid interview with a well-known, thought-provoking personality. Over the magazine's 43-year history, exclusive interviews have included prominent public figures, business leaders, entertainers, authors and sports figures. The magazine also regularly publishes the works of leading journalists, authors and other prominent individuals. It has long been known for its graphic excellence and features, and publishes the works of top artists and photographers. Playboy magazine also features lifestyle and service articles on consumer products, fashion, automobiles and consumer electronics and covers the worlds of sports and entertainment. It is also renowned for its pictorials of beautiful women and frequently features celebrities on its cover and in exclusive pictorials. 3 The net circulation revenues of the U.S. edition of Playboy magazine for the years ended June 30, 1996, 1995 and 1994 were $73.8 million, $73.4 million and $72.3 million, respectively. Net circulation revenues are gross revenues less provisions for newsstand returns and unpaid subscriptions and subscription agency commissions. Circulation revenue comparisons may be materially impacted with respect to any fiscal year which includes one or more issues of unusually high public interest. According to the Audit Bureau of Circulations ("ABC"), an independent audit agency, Playboy magazine's circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) at June 30, 1996 was larger than Newsweek and Cosmopolitan, and also greater than the combined circulation rate bases of Rolling Stone, Esquire and GQ, which have substantial adult male audiences. Playboy magazine's rate base compares to that of other selected publications as noted in the following table.
Selected U.S. Consumer Publications Rate Base (1) Ranking (2) ------------------------------------- ------------- ----------- Reader's Digest....................................... 15.00.......... 1 TV Guide.............................................. 13.00.......... 2 National Geographic................................... 8.70.......... 3 Time.................................................. 4.00.......... 10 PLAYBOY............................................... 3.15.......... 12 People................................................ 3.15.......... 12 Sports Illustrated.................................... 3.15.......... 12 Newsweek.............................................. 3.10.......... 15 Cosmopolitan.......................................... 2.25.......... 20 Rolling Stone......................................... 1.25.......... 42 Business Week......................................... 0.87.......... 78 Esquire............................................... 0.65..........111 GQ.................................................... 0.65..........111
__________ (1) Represents rate base at June 30, 1996 (in millions) as reported by ABC. (2) Based on rate base at June 30, 1996 as reported by ABC. Effective with the January 1996 issue, the Company reduced the rate base 7% to 3.15 million in response to the extraordinary increases in paper and postage prices in order to enable the Company to manage circulation more profitably, while maintaining the magazine's circulation leadership as one of the best- selling men's magazines. From fiscal 1987 until the January 1996 issue, the U.S. edition of Playboy magazine reported a circulation rate base of 3.40 million, which it met or exceeded in most of the six-month periods it was averaged over in each fiscal year, and did not meet the rate base by less than 5% in the other periods, including the six-month period leading up to the rate base reduction. Playboy magazine has historically generated over two-thirds of its revenues from subscription and newsstand circulation, with the remainder from advertising. Subscription copies as a percentage of total copies sold were approximately 80% for the year ended June 30, 1996. The Company believes that managing Playboy's circulation to be primarily subscription driven, like most major magazines, provides a stable and desirable circulation base, which is also attractive to advertisers. According to the MRI data previously mentioned, the median age of male Playboy subscribers is 32, with a median annual household income of $41,200. The price of a one-year subscription ranges from $19.97 to $34.96, depending on the source of the subscription and the length of time the subscription has been held. The Company continually tests a variety of subscription pricing strategies. The Company attracts new subscribers to the magazine through its own direct mail and television advertising campaigns and through agent-operated direct mail campaigns. The Company recognizes revenues from magazine subscriptions over the terms of the subscriptions. Subscription copies of the magazine are delivered through the U.S. Postal Service as second class mail. The Company attempts to contain these costs through presorting and other methods. The Company experienced a 4 postal rate increase of 14% during the second half of fiscal 1995. The Company also derives meaningful income from the rental of Playboy magazine's subscriber list, which consists of the subscriber's name, address and other information maintained by the Company. Distribution of the magazine to newsstands and other retail outlets is accomplished through Warner Publisher Services, a national distributor that maintains a network of approximately 300 wholesale distributors. Copies of the magazine are shipped in bulk to the wholesalers, who are responsible for local retail distribution. The Company receives a substantial cash advance from its national distributor at the time each issue goes on sale. The Company recognizes revenues from newsstand sales based on estimated copy sales at the time each issue goes on sale, and adjusts for actual sales upon settlement with its national distributor. These revenue adjustments generally are not material. Retailers return unsold copies to the wholesalers who count and then shred the returned magazines and report the returns via affidavit. The Company then settles with its national distributor based on the number of magazines that actually were sold compared to the number that initially were projected to sell. The number of issues sold on newsstands varies from month to month, depending in part on the cover, the pictorials and the editorial features. The last increase in the basic U.S. newsstand cover price (to $4.95; $5.95 for holiday issues), was completed in fiscal 1993. Based on test results, the Company increased the Canadian cover price to $5.95 in fiscal 1995 ($6.95 for holiday issues). (The Canadian cover prices are in Canadian dollars). No newsstand price increases are planned for copies sold in the U.S. or Canada in fiscal 1997. Advertising by category for fiscal 1996 was as follows:
Advertising Category % of Ad Pages -------------------- ------------- Retail/Direct Mail............ 25% Tobacco....................... 24 Beer/Wine/Liquor.............. 19 Toiletries/Cosmetics.......... 9 Automotive.................... 8 Jewelry/Optical/Photo......... 3 Drugs/Remedies................ 3 Apparel/Footwear/Accessories.. 3 Entertainment................. 2 All Other..................... 4 --- 100% ===
Playboy magazine targets a wide range of advertisers and continues to focus on securing new advertisers from underdeveloped categories. The Company utilizes information from its database of approximately 10 million names, including Playboy magazine subscribers, catalog customers and pay television viewers, to create a Playboy marketing system, which offers advertisers new ways to reach Playboy readers. In fiscal 1996 the Company implemented a national trade campaign, Growing Up, I never thought I'd be in Playboy, which features top executives from some of the magazine's most recognizable advertisers talking about the power and appeal of the magazine and the Playboy brand. The thrust of the campaign is to reinforce the mainstream, upscale nature of the publication and its readership to the advertising community, specifically targeting the fashion, fragrance and consumer electronics categories. In fiscal 1994, Playboy's advertising pages decreased by 10% from the prior year to 595 pages, while advertising revenues declined by 8%, reflecting the effect of a 5% cost per thousand ("CPM") increase in advertising rates effective with the January 1994 issue. Net advertising income decreased by 15%. In fiscal 1995, Playboy's advertising pages remained stable compared to the prior year at 595 pages, while advertising revenues declined by 1% based on higher frequency discounts, special pricing and a change in the mix of advertising pages sold. Net advertising income increased by 8%. 5 In fiscal 1996, Playboy's advertising pages decreased 4% from the prior year to 569 pages, while advertising revenues declined by 1% primarily due to the effect of a 2% CPM increase in advertising rates effective with the January 1996 issue. Net advertising income increased by 5%. Advertising sales for the fiscal 1997 first quarter issues of the magazine are closed, and the Company expects to report an 18% decrease in the number of advertising pages and a 19% decline in revenues compared to the fiscal 1996 first quarter. The Company plans to implement a 5% CPM increase in advertising rates effective with the January 1997 issue. In August of 1996, the Food and Drug Administration announced a regulation which prohibits the publication of tobacco advertisements containing drawings, colors, or pictures. The regulation does not apply to a publication, including a magazine, which is demonstrated to be an "adult publication," which is defined as a publication (i) whose readers younger than 18 years of age constitute 15% or less of the total readership as measured by competent and reliable survey evidence; and (ii) that is read by fewer than two million persons younger than 18 years of age as measured by competent and reliable survey evidence. Based on information available to the Company on its readership the Company believes that Playboy magazine qualifies as an "adult publication" and that the regulation is not applicable to the magazine. The Company publishes the U.S. edition of Playboy magazine in 15 advertising editions: eight regional, two state, four metro and one upper income zip-coded edition. All contain the same editorial material but provide targeting opportunities for advertisers. The net advertising revenues of the U.S. edition of Playboy magazine for the years ended June 30, 1996, 1995 and 1994 were $27.4 million, $27.6 million and $28.0 million, respectively. Net advertising revenues are gross revenues less advertising agency commissions, frequency and cash discounts and rebates. Levels of advertising revenues may be affected by, among other things, general economic activity and governmental regulation of advertising content. The Playboy Jazz Festival provides advertisers sponsorship and advertising opportunities through the festival program, free community concerts, and a national public radio broadcast. The Company has produced this music event on an annual basis in Los Angeles at the Hollywood Bowl since 1979. Playboy magazine and newsstand specials are printed at Quad/Graphics, Inc., located in Wisconsin. The actual print run varies each month and is determined with input from the Company's national distributor. Paper is the principal raw material used in the production of Playboy magazine. The Company uses a variety of types of high-quality coated paper that is purchased from a number of suppliers. Manufacturing costs for the year ended June 30, 1996 increased 26% compared to the prior year principally due to higher paper prices which began impacting the Company in the second half of fiscal 1995. For the year ended June 30, 1996, average paper prices were 46%, or $7.9 million, higher than the prior year. In an effort to mitigate the effect of this increase, in fiscal 1996 the Company lowered the advertising rate base as previously discussed. Paper prices have begun to decline, and the Company expects average paper prices to be lower in fiscal 1997 beginning in the second quarter compared to fiscal 1996. Magazine publishing companies face intense competition for both readers and advertising. Magazines primarily aimed at men are Playboy magazine's principal competitors. In addition, other types of media that carry advertising, such as newspapers, radio and television, compete for advertising revenues with Playboy magazine. From time to time, Playboy magazine, and certain of its distribution outlets and advertisers, have been the target of certain groups who seek to limit its availability because of its content. In its 43-year history, the Company has never sold a product that has been judged to be obscene or illegal in any U.S. jurisdiction. 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. The Company believes that the Military Act's prohibitions on the sale of sexually oriented material are, among other things, unconstitutional and intends to challenge it in court. 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 based on preliminary estimates, such impact on the Company's profitability would be immaterial for the last six months of fiscal 1996. 6 Playboy-related Businesses The Publishing Group has also created media extensions, taking advantage of the magazine's reputation for quality and its libraries of art, photography and editorial text. These products include photo newsstand specials and calendars, which are primarily sold in newsstand outlets and use both original photographs and photographs from the Company's library. In fiscal 1994, 16 specials were published. The group increased the number of specials published to 18 in fiscal 1995. In fiscal 1996, the Company published 21 specials, and expects to publish 21 specials in fiscal 1997. The Company began implementing programs in fiscal 1995 to help to offset some of the previously mentioned higher paper prices, including increasing the newsstand cover price to $6.95 in most of the country, which was completely rolled out in fiscal 1996. The Company licenses the right to publish 15 overseas editions of Playboy magazine in the following countries: Australia, Brazil, the Czech Republic, France, Germany, Greece, Italy, Japan, Mexico, Netherlands, Poland, Russia, South Africa, Spain and Taiwan. In fiscal 1996, the Company re-launched an edition of the magazine in Taiwan. The Polish edition is the first in which the Company has had an equity interest, which was increased from 45% to 90% in March 1996. Combined average circulation of the overseas editions is approximately 1.2 million copies monthly. Local publishing licensees tailor their overseas editions by mixing the work of their national writers and artists with editorial and pictorial material from the U.S. edition. The Company monitors the content of the overseas editions so that they retain the distinctive style, look and quality of the U.S. edition, while meeting the needs of their respective markets. The terms of the license agreements for Playboy magazine's overseas editions vary, but in general are for terms of three or five years and carry a guaranteed minimum royalty as well as a formula for computing earned royalties in excess of the minimum. Royalty computations are generally based on both circulation and advertising revenues. In fiscal 1996, the three largest-selling editions -- Brazil, Germany and Japan -- accounted for approximately 55% of the total licensing revenues from overseas editions. In fiscal 1995, the Company launched a home page on the World Wide Web which became one of the Internet's top-visited destination sites, currently averaging 4.6 million "hits" per day according to unaudited information from Nielsen I/PRO. Taking full advantage of the technological capabilities of the medium, the Web site contains popular editorial features from Playboy magazine, such as excerpts of Playboy Interviews, articles and Playboy Advisor columns, and select photos from Playmate pictorials. In fiscal 1996, the Company began generating revenues from the sale of advertising on the free site, which resulted in the site generating a profit in fiscal 1996. Late in fiscal 1996 the Company added a digital version of the Company's Playboy catalog to the site, called the Playboy Store, which offers, at 20% less than through the mail, branded merchandise such as clothing and accessories for men and women, Playboy CD-ROM and home video titles, and back issues of the magazine. Playboy on-line also promotes Playboy Television's monthly programming schedule, sells Playboy magazine subscriptions, and makes available the Company's financial information. The Company is currently testing a pay site which will be offered on a subscription and pay-per-visit basis and will offer a wide range of current as well as historical Playboy editorial on-line, as well as various interactive features. The free and pay sites combined will offer the Company four sources of revenue: advertising, shopping, subscription and pay-per-visit. The Company also enters into partnerships with companies to create multimedia products. In fiscal 1994, the Publishing Group introduced several new media products utilizing photographs, artwork and text from the Company's library as source material. These releases were The Playboy Electronic Datebook, a daily planner on PC diskette produced with Sierra On-Line Inc., and The Playboy Interview: Three Decades, a CD-ROM title containing the complete text of more than 350 in-depth Playboy Interviews produced with IBM's Multimedia Publishing Studio. The Women of Playboy Multimedia Screen Saver produced with Sony Imagesoft was released in fiscal 1995, and is a utility software that allows users to develop customized screen savers by mixing Playboy images and video with special effects and audio files. The Company released three additional CD-ROM titles in fiscal 1996: Pamela Anderson: Playmate Portfolio, the first of a series showcasing celebrity Playmates produced with Anomaly; PlanIt Playboy, a personal information manager also produced with Anomaly; and Personalities & Profiles: The Playboy Interview Collection, an updated version of a CD-ROM released in fiscal 1994 produced with IBM Multimedia Studio. With the Corel Corporation, the Company expects to release in fall 1996 The Art of Playboy CD-ROM, showcasing images from the Company's extensive art collection. 7 The Publishing Group also generates revenues from various ancillary media businesses which include 900-number Playboy-related audiotext services, Playboy Collectible Trading Cards and books. Other Publications In fiscal 1989, the Company purchased a 20% interest in duPont Publishing, Inc. ("duPont"), publisher of duPont Registry, A Buyers Gallery of Fine Automobiles and, beginning in July 1995, duPont Registry, A Buyers Gallery of Fine Homes. During fiscal 1993, the Company renegotiated certain provisions of the purchase agreement, under which it now has an option to acquire the remaining 80% interest in duPont at a price based on fair market value as of December 31, 1999, and receives management fees. This investment is accounted for on the equity method and the Company's proportionate share of duPont's net income or loss is included in nonoperating income or expense. ENTERTAINMENT GROUP The Company's Entertainment Group operations include the production and marketing of programming through Playboy Television, other domestic pay television, domestic home video and international television and home video markets as well as the co-production of feature-length movies. The revenues and operating income (loss) of the Entertainment Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, ------------------------- 1996 1995 1994 ------- ------- ------- REVENUES Playboy Television: Cable Pay-Per-View........................... $ 14.3 $ 11.9 $ 9.0 Cable Monthly Subscription................... 6.9 7.0 7.4 Satellite Direct-to-Home and Other........... 18.1 10.0 6.5 ------ ------ ------ Total Playboy Television........................ 39.3 28.9 22.9 Domestic Home Video............................. 9.4 9.5 7.0 International Television and Home Video......... 11.9 11.2 9.9 ------ ------ ------ Total Playboy Businesses........................ 60.6 49.6 39.8 AdulTVision..................................... 1.9 - - Movies and Other................................ 2.3 2.1 0.3 ------ ------ ------ Total Revenues............................. $ 64.8 $ 51.7 $ 40.1 ====== ====== ====== OPERATING INCOME (LOSS) Profit Contribution Before Programming Expense.. $ 30.5 $ 21.1 $ 10.9 Programming Expense............................. (21.3) (20.1) (18.2) ------ ------ ------ Total Operating Income (Loss).............. $ 9.2 $ 1.0 $ (7.3) ====== ====== ======
Programming The Entertainment Group develops, produces and distributes programming for Playboy Television, other domestic pay television, domestic home video and international television and home video markets. Its productions include feature-length films, magazine-format shows, dramatic series, game shows, a hosted series with reenactments of erotic situations, and anthologies of sexy short stories and erotic vignettes as well as music and other specials. The Company is investing aggressively in Playboy-style, original quality programming to support the planned expansion of its businesses. The Company invested $25.5 million, $21.3 million and $17.2 million in entertainment programming in fiscal 1996, 1995 and 1994, respectively. These amounts, which include expenditures for Playboy-branded programming, AdulTVision and feature- length films, resulted in 120, 86 and 71 hours of original programming being produced in fiscal 1996, 1995 and 1994, respectively. In fiscal 1997, the Company expects to invest approximately $29.0 million in Company-produced and licensed programming, which would result in approximately 150 hours of original programming being produced. These amounts could vary based on the timing of completion of productions. The increases in investments in entertainment programming in fiscal 1996 and 1995 were primarily due to the initial production of more movies, for which, because of the strong demand for this genre of programming, the Company is able to presell distribution rights to and earn a 8 faster rate of return. The increase in investments planned for fiscal 1997 is due in part to the co-production agreement recently announced between the Company and Zalman King Entertainment, Inc. ("Zalman King"). The Company and Zalman King will co-produce 18 new episodes of the popular cable television series Red Shoe Diaries, which will be co-financed by the Company and Showtime Networks Inc. ("Showtime"). The agreement grants the Company international distribution rights to the new episodes of Red Shoe Diaries, plus 48 episodes previously aired on Showtime. The agreement also provides for the Company and Zalman King to co-produce up to six feature-length films over the next three years. The following tables list the series still in distribution, each containing 26 episodes, and movies produced by the Company (except three of the Playboy Films which were produced in association with Motion Picture Corporation of America ("MPCA")) and certain information related to each:
FISCAL YEAR TITLE OF SERIES FIRST SOLD LENGTH OF EPISODES GENRE - --------------- ----------- ------------------ ----- Playboy Late Night Series I.................................. 1990 60 minutes magazine-format Series II................................. 1991 30 minutes magazine-format Series III................................ 1992 30 minutes magazine-format Series IV................................. 1995 30 minutes magazine-format Inside Out.................................. 1991 30 minutes anthology Eden........................................ 1993 30 minutes dramatic series Playboy's Secret Confessions and Fantasies.. 1993 30 minutes hosted series Playboy's Love & Sex Test................... 1992 30 minutes game show Erotic Fantasies............................ 1994 30 minutes anthology Women: Stories of Passion................... 1996 30 minutes anthology NUMBER MOVIES FISCAL YEAR OF RELEASES - ------ ----------- ----------- Playboy Films............................... 1995 Three 1996 Four The Eros Collection......................... 1995 Six 1996 Twelve
In fiscal 1996, the Company completed production of a new series, Women: Stories of Passion ("Women"), a 30-minute erotic anthology written, produced and directed by women. The Company's series are marketed internationally and air domestically on the Company's pay television service, Playboy Television. Additionally, some episodes have been released as Playboy Home Video titles or have been licensed to other networks. In fiscal 1994, the Company licensed its anthology of short stories, Inside Out, to Viewer's Choice and in fiscal 1996, licensed episodes of the Women series to Showtime, with an option to license additional episodes in fiscal 1997. In fiscal 1995, the Company, under a co-production and distribution agreement with MPCA, began releasing made-for-TV movies in the $1 million to $2 million range. Three movies were released in fiscal 1995, two of which, Temptress and Playback, were produced by the Company and one, Cover Me, was produced by MPCA. The following four additional movies were released in fiscal 1996: Ringer and Beneficiary, which were produced by the Company, and The Glass Cage and Midnight Blue, both produced by MPCA. All of these films have aired or will be aired on Playboy Television in the future, and certain of the international television rights have been sold and are continuing to be sold in additional markets. The Company and MPCA are equal profit participants in all of the movies. Also in fiscal 1995, the Company created and began marketing a new line of small-budget non-Playboy branded movies under the label The Eros Collection. These movies are released internationally through home video and television and air on Playboy Television. In fiscal 1996, the Company and Orion Home Video ("Orion") signed an agreement to release both our Playboy Films and The Eros Collection films in the domestic home video market. Orion will assume North American sales, marketing and distribution responsibility for the video, laser disc, CD-ROM and Digital Video Disc releases of movies produced under both labels. The Company's Playboy-branded programming is available in the United States through Playboy Television, and internationally through networks and foreign broadcasters. Playboy Television is offered on cable and through the satellite direct-to-home ("DTH") market on a pay-per-view and monthly subscription basis. In the fourth quarter of fiscal 1995, the first overseas Playboy Television channel was launched in the United 9 Kingdom, and a second was launched in Japan in the second quarter of fiscal 1996. The Company also distributes programming on videocassettes and laser discs which are sold or rented through retail outlets and sold through direct mail in domestic and foreign markets. The Company's Playboy-branded programming for television and home video features stylized eroticism in a variety of entertaining formats for men and women, with an emphasis on programming for couples. The programming does not contain depictions of explicit sex or scenes that link sexuality with violence, and is consistent with the level of taste and quality established by Playboy magazine. Playboy Television When the Company introduced its national pay cable network, Playboy Television, in 1982 it was available only through monthly subscriptions. In December 1989, the Company began to focus on the then-emerging pay-per-view market by promoting the pay-per-view option in addition to the monthly subscription option. Pay-per-view services are available in cable systems that are equipped with addressable hardware that allows cable subscribers to order specific programs. In recent years, Playboy Television has added viewers through the DTH business, which is the fastest-growing segment of the pay television business. In May 1994, the Company expanded Playboy Television from a ten-hour per night schedule to 24-hour availability. This change has enabled the Company to increase revenues through maximum utilization of its transponder on Hughes Communications' Galaxy V satellite by offering more blocks of programming to the consumer. At June 30, 1996, 3.9 million, or 35%, of the 11.3 million cable addressable households to which Playboy Television was available had around-the- clock access to the channel. The performance of Playboy Television in individual cable systems varies based principally on the ordering technology and the quantity and quality of marketing done by affiliated cable systems ("Cable Affiliates"). Pay-per-view permits customers to purchase only as much of the Company's programming as they wish and only when they desire to watch the programming. Pay-per-view also permits customers to control the viewing of the programming within their households. In addition, the relatively low price of an evening of pay-per-view programming is very competitive with many other forms of entertainment. Individual cable system operators determine the retail price of the pay-per-view service, although most range from $3.95 to $6.95 for a block of programming. Fee structures vary, but generally the Company receives approximately 40% of the retail price. The number of monthly subscribers has declined, as expected. As of June 30, 1996, Playboy Television had approximately 192,000 monthly subscribing households, down from 201,000 at June 30, 1995 and 205,000 at June 30, 1994. Individual Cable Affiliates determine the retail price of the monthly subscription service, although most range from $5 to $13, largely dependent on the number of premium services to which a household subscribes. Fee structures vary, but generally the Company receives approximately 35% of the retail price. The following table illustrates certain information regarding cable households in general, and Playboy Television (in thousands):
CABLE HOUSEHOLDS(A) PLAYBOY TELEVISION --------------------------------- -------------------------------- TOTAL CABLE ADDRESSABLE PAY-PER-VIEW MONTHLY HOUSEHOLDS CABLE HOUSEHOLDS HOMES(B) SUBSCRIBERS(C) ----------- ---------------- ------------ -------------- June 30, 1994 58,450 21,700 9,600 205 June 30, 1995 60,350 23,450 10,600 201 June 30, 1996 62,850 26,400 11,300 192 Compound Annual Growth Rate (1994-1996) 3.7% 10.3% 8.5% (3.2)%
- -------- (a) Source: Estimated by the Company based on information reported in 1996 by Paul Kagan Associates, Inc. for December 31 of each respective year. Kagan projects less than a 1% and 9% average annual increases in total cable households and total addressable cable households, respectively, through calendar 1999. 10 (b) Represents the number of addressable cable homes to which Playboy Television was available as of the end of the fiscal year. (c) Represents the number of cable monthly subscribers to Playboy Television in the last month of the fiscal year. Most cable service in the United States is distributed through large multiple system operators ("MSOs"). At June 30, 1996, the Company had arrangements with 16 of the nation's 20 largest MSOs. These 16 MSOs, through Cable Affiliates, controlled access to (i) approximately 49.1 million, or 78%, of the 62.9 million total cable households, and (ii) approximately 13.6 million, or 52%, of the 26.4 million addressable cable households. Once arrangements are made with an MSO, the Company is able to negotiate channel space for Playboy Television with the Cable Affiliates controlled by that MSO, and acceptance by Cable Affiliates provides the basis for expanding the Company's access to individual cable households. The Cable Affiliates of these 16 MSOs that are not yet carrying Playboy Television represent a potential market of an estimated 2.9 million additional cable addressable homes. Four of these 16 MSOs served approximately 8.3 million, or 73%, of the 11.3 million addressable cable households to which Playboy Television was available on June 30, 1996. At June 30, 1996, the cable systems in which Playboy Television was offered included approximately 21.9 million cable households. Of these households, 11.6 million could purchase Playboy Television on a monthly subscription basis, 4.9 million could purchase only on a pay-per-view basis and 6.5 million could purchase the programming on either basis. Management believes that the growth in cable access for the Company's domestic pay television business has 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. Management believes that the Telecommunications Act of 1996 (the "Act") discussed below has also slowed the growth in cable access. However, as addressable technology becomes more widely available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable homes. In February 1996, Congress passed the Act, and President Clinton signed it into law. Certain provisions of the 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 Act would be to require cable systems to employ scrambling or 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. In the alternative, Section 505 provides that a cable operator that does not employ scrambling or blocking technology must restrict the period during which the programming is transmitted. Penalties for violation of the Act are significant and include fines and imprisonment. The Company believes that Section 505 is unconstitutional and unnecessary but fully supports Section 504 of the Act, which mandates that cable operators place full audio and video blocks on any channel, at no charge, at a customer's request. On February 26, 1996, one of the Company's subsidiaries filed a civil suit challenging Section 505. Fifteen organizations representing a wide range of influential media, civil liberties and entertainment organizations filed friend of the court briefs supporting the Company's litigation. 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 is likely to succeed on the merits of its claim that Section 505 is unconstitutional. The TRO will remain in place until a special three-judge panel in the United States District Court for the District of Delaware decides the Company's motion for a preliminary injunction. The Company believes that if Section 505 were to be enforced, the Company's revenues attributable to its domestic pay television services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. 11 Growth in the pay-per-view market is expected to result in part from cable systems upgrades, utilizing fiber-optic, compression technologies or other bandwidth expansion methods that provide cable operators additional channel capacity. When implemented, compression technology, where employed, will dramatically increase channel capacity to as many as 500 channels. Industry analysts expect a large percentage of this additional channel capacity to be dedicated to pay-per-view programming. The timing and extent of these developments and their impact on the Company cannot yet be determined. Playboy Television's cable programming is delivered primarily through a communications satellite transponder. Playboy Television's current transponder lease, effective January 1, 1993, contains protections typical in the industry against transponder failure, including access to spare transponders on the same satellite as well as transponders on another satellite currently in operation. Access to the transponder may be denied under certain narrowly defined circumstances relating to violations of law or threats to revoke the license of the satellite owner to operate the satellite based on programming content. However, the Company has the right to challenge any such denial and believes that the transponder will continue to be available to it through the end of the expected life of the satellite (currently estimated to be in 2004). The Company's current lease term expires October 30, 2001. The Company also provides Playboy Television via encrypted signal, on both a pay-per-view and subscription basis, to home satellite dish viewers. As of June 30, 1996, 1995 and 1994, Playboy Television was available on a monthly subscription and/or pay-per-view basis to approximately 4,867,000, 3,282,000 and 1,926,000 DTH viewers, respectively. At the end of fiscal 1994, Playboy Television became one of the first networks to be launched on DirecTV, the first commercial digital broadcast satellite service. This service provides exceptional improvements in program delivery and consumer interface to households equipped with Digital Satellite System receiving units, consisting of an 18-inch satellite antenna, a digital receiver box and a remote control. Playboy Television expanded from 10-hour to 24-hour programming on DirecTV in August 1995. Playboy Television was added to a second digital broadcast satellite service, PrimeStar, at the end of fiscal 1995, and to a third, AlphaStar, in July 1996. As a result, Playboy Television is the only adult service available on all three of these U.S. satellite businesses. The significant growth in the DTH market has provided the Company with an expanded customer base that has historically shown higher buy rates than through traditional cable markets. Effective April 1, 1986, the Company terminated its agreement with the former distributor of its pay television service. The termination agreement provided for the assignment to the Company of all distribution contracts with cable system operators and others that carried the Company's pay television service. As of April 30, 1996, the Company is no longer obligated to make monthly royalty payments, equal to 5% of North American pay television revenues (including cable and DTH), that the Company had paid under the termination agreement since 1986. Profit contribution of Playboy Television and operating performance of the Entertainment Group will be favorably impacted by the termination of such royalty payments. While the Company's television programming is unique, its Playboy Television products compete with other services, including those offering adult- oriented programming, for cable channel space and viewer spending. Competition among pay cable services involves pricing to both consumers and Cable Affiliates, viewer perceived value and effectiveness of programming distribution. In fiscal 1996, the Company launched a flanker channel, AdulTVision, to drive distribution of Playboy Television. The new channel also allows the Company to more effectively appeal to the complete range of adult audiences. The Company's ability to operate profitably and expand its pay television business is dependent in part on the impact of Section 505 of the Act if it were to be enforced, and the continued access to and acceptance by cable systems in the United States. The Company believes that if Section 505 were to be enforced, the Company's revenues attributable to its domestic pay television services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. Additionally, from time to time, certain groups have sought to exclude the Company's programming from local pay television distribution because of the adult-oriented content of the programming. Management does not believe that any such attempts will materially affect the Company's access to cable systems, but the nature and impact of any such limitations in the future cannot be determined. 12 Domestic Home Video The Company also distributes its original programming domestically via videocassettes and laser discs that are sold or rented in video stores, music and other retail outlets and through direct mail, including two of the Company's catalogs. Playboy Home Video is one of the largest-selling brands of nontheatrically released special-interest videos in the U.S. Playboy Home Video surpassed all other sales labels, including Walt Disney Home Video, as Billboard magazine's "Top Video Sales Label" for calendar year 1995. The format of Playboy Home Videos is consistent with the style, quality and focus of Playboy magazine. During fiscal 1994 the Company released 14 new Playboy Home Video titles, in addition to the release of three "For Couples Only" titles that previously had been released exclusively through The Sharper Image. The Company released 14 new Playboy Home Video titles in fiscal 1995, including the release of The Best of Pamela Anderson in June 1995, which became the first Playboy Home Video title ever to reach the number one spot on Billboard magazine's weekly Top Video Sales Chart ("Sales Chart"), a position that it maintained for 12 weeks in fiscal 1996. Additionally, three other fiscal 1995 releases were in the top five on the Sales Chart. In addition, in fiscal 1995 the Company released four other titles including a documentary and a workout video. In fiscal 1996, the Company released 14 new Playboy Home Video titles, including The Best of Anna Nicole Smith which reached the number two spot on the Sales Chart. Eight of the 14 new titles entered the top five on the Sales Chart in fiscal 1996. The Company plans to release 13 Playboy Home Video titles in fiscal 1997. In fiscal 1995, two new product lines were launched, The Eros Collection, a small-budget Company-produced line of movies, and a direct-response continuity series with Warner Music Enterprises, Inc. to attract new customers and encourage regular purchases of Playboy titles. In fiscal 1996, Time Life Inc. replaced Warner Music Enterprises, Inc., both divisions of Time Warner Inc., as the distributor of this series. The Company's Playboy Home Video products have been distributed in the U.S. and Canada by Uni Distribution Corp. ("Uni"), an MCA Entertainment Group company, whereby, until the fourth quarter of fiscal 1995, the Company was responsible for manufacturing the video product and for certain marketing and sales functions. The Company's new release titles are still distributed in this manner, however, in the fourth quarter of fiscal 1995 the Company entered into a three-year distribution agreement with Uni related to backlist titles (titles in release for longer than a year). The Company now receives an annual guarantee for the backlist titles, subject to certain earn-out provisions in the final year, and manufacturing and marketing is the responsibility of Uni. The Company distributes its video programming via laser discs through an agreement with Image Entertainment, Inc. ("Image") under which Image will release all of the Company's videocassettes on laser discs. This agreement gives the Company control over certain aspects of the selling and marketing of its laser discs. International Television and Home Video The Company also markets its programming to foreign broadcasters and pay television services. As appropriate, typically the licensees then customize, dub or subtitle the programming to meet the needs of individual markets. At the end of fiscal 1996, the Company's programming was available in 135 countries, an increase of 30 countries compared to June 30, 1995. In countries that can support a Playboy programming tier, the Company has expanded its existing foreign network relationships by entering into exclusive multiyear multiproduct output agreements with overseas pay television distributors. These agreements enable the Company to have an ongoing branded presence in international markets and generate higher and more consistent revenues than selling programs on a show-by-show basis. As previously mentioned, in the fourth quarter of fiscal 1995 the Company launched the first international Playboy Television channel in the United Kingdom in a joint-venture agreement with Flextech plc, an entertainment company that is majority owned by a subsidiary of Tele-Communications, Inc., and British Sky Broadcasting Ltd. The Company owns 19% of the channel, retaining an option to acquire additional equity, and will receive license fees for programming and the use of the Playboy brand name. 13 During the second quarter of fiscal 1996, a second international Playboy Television channel was launched in Japan in partnership with Tohokushinsha Film Corp. in which the Company owns less than a 20% interest. Additionally, the Company entered into a long term output agreement under which it will provide 700 hours of programming over the first five years of the venture and will receive a brand royalty for the use of its logo and trademark. As the Company's overseas networks grow, the Company intends to produce programming specifically targeted to the local markets in order to maximize the appeal of Playboy Television among the Company's new customers. Through separate distribution agreements, the Company also distributes its U.S. home video products to 48 countries in South America, Europe, Australia, Asia and Africa. These products are based on the videos produced for the U.S. market, with dubbing or subtitling into the local language where necessary. AdulTVision In July 1995, the Company launched a second pay television channel, AdulTVision, as a flanker channel to Playboy Television to drive distribution of the Playboy channel. The new channel also allows the Company to more effectively appeal to the complete range of adult audiences. AdulTVision is principally offered on a pay-per-view basis and is primarily sold in combination with Playboy Television through cable operators, and to the direct-to-home market. At June 30, 1996, the channel was available in approximately 4.5 million cable and satellite homes. The channel reported an operating loss for fiscal 1996 but the Company expects that it will be profitable in fiscal 1997. AdulTVision's programming is available through a full-service distribution agreement with a third-party provider until June 1998. Under the terms of this agreement, uplink, encoding, access to a transponder and other services are provided. Management believes that upon expiration of the current agreement it will be able to continue with its current provider or locate another transponder for the transmission of AdulTVision. PRODUCT MARKETING GROUP The Product Marketing Group licenses the Playboy name, Rabbit Head Design and other trademarks and artwork owned by the Company for the worldwide manufacture, sale and distribution of a variety of consumer products. The revenues and operating income of the Product Marketing Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, -------------------- 1996 1995 1994 ------ ----- ----- REVENUES $ 7.1 $ 6.8 $ 7.0 ===== ===== ===== OPERATING INCOME $ 3.7 $ 3.4 $ 2.5 ===== ===== =====
The Product Marketing Group works with licensees to develop, market and distribute high-quality, branded merchandise. The Company's licensed product lines consist primarily of men's clothing, accessories, watches, jewelry, fragrances, small leather goods, stationery, eyewear, home fashions, condoms and cigars. These products are marketed principally in countries in Asia, primarily through retail outlets, including department and specialty stores, and through retail mail order catalogs by licensees under exclusive license agreements that authorize the manufacture, sale and distribution of products in a designated territory. Royalties are based on a fixed or variable percentage of the licensee's total net sales, in many cases against a guaranteed minimum. In fiscal 1996, approximately 75% of the royalties earned from licensing the Company's trademarks were derived from licensees in Asia, 10% from each of Europe and the United States, and the remainder from other territories. 14 The Company maintains control of the design and quality specifications of its licensed products to ensure that products are consistent with the quality of the Playboy image. To project a consistent image for Playboy-brand products throughout the world, the Company discontinued certain domestic products and low-end distribution in fiscal 1994, and, in fiscal 1995, launched a global advertising campaign and brand strategy to integrate all of the marketing efforts of the product licensees and to control the brand more effectively. To capitalize on its international name recognition, the Company is increasing its overseas product marketing activities and is dedicating additional resources to develop its licensing business in South America and Europe. During fiscal 1996, the Company's Hong Kong-based apparel licensee continued to expand by increasing the number of freestanding Playboy shops and Playboy boutiques within department stores in China. To more effectively control sales and distribution in mainland China, this licensee has set up five new distribution and sales offices throughout the country and is expected to complete construction of a new factory in early calendar 1997. Special Editions, Ltd. ("Special Editions") primarily licenses art-related products based on the Company's extensive collection of artwork, many of which were commissioned as illustrations for Playboy magazine and for use in the Company's other businesses. These include posters, limited-edition prints, art watches, art ties, clocks and collectibles. Prominent artists represented have included Salvador Dali, Keith Haring, Leroy Neiman, Patrick Nagel, Alberto Vargas, Ed Paschke, Andy Warhol, Bas Van Reek, Karl Wirsum and Roger Brown. In an effort to increase product distribution and improve profitability of the art- related products, Special Editions is continuing to shift its marketing approach from direct sales to licensing. Additionally, the Company owns all of the trademarks and service marks of Sarah Coventry, Inc., which it licenses primarily domestically. Costume jewelry and watches are the principal product lines distributed by Sarah Coventry licensees. To protect the success and potential future growth of the Company's product marketing and other businesses, the Company actively defends its trademarks throughout the world and monitors the marketplace for counterfeit products. Consequently, it initiates legal proceedings from time to time to prevent unauthorized use of the trademarks. In fiscal 1995, the Company developed and commenced use of a hologram on Playboy packaging as a mark of authenticity. While the trademarks differentiate the Company's products, the marketing of apparel and jewelry is an intensely competitive business that is extremely sensitive to shifts in consumer buying habits and fashion trends, as well as changes in the retail sales environment. CATALOG GROUP The Company's Catalog Group operations include the direct marketing of products through three catalogs: Critics' Choice Video, Collectors' Choice Music and Playboy. The revenues and operating income of the Catalog Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, -------------------- 1996 1995 1994 ------ ----- ----- REVENUES $71.7 $61.4 $48.5 ===== ===== ===== OPERATING INCOME $ 5.2 $ 5.2 $ 4.1 ===== ===== =====
The Critics' Choice Video catalog, one of the largest-circulation catalogs of prerecorded videocassettes, is published quarterly and features more than 2,000 video titles, including movies from all of the major film studios and hundreds of special-interest videos. The Company purchased the remaining 20% interest in Critics' Choice Video, Inc. effective July 1, 1993, for $3.0 million, which consisted of $1.5 million in cash and one-year promissory notes totaling $1.5 million, which were paid July 1, 1994. Critics' Choice Video's rapid growth has been aided by the overall growth in the video sell-through market and the Company's emphasis on superior customer service. 15 In fiscal 1994, the Company launched a new catalog, Collectors' Choice Music, which currently offers more than 1,500 titles from all music genres on CDs and cassettes. Since the catalog's inception, the Company has successfully increased the circulation and product offerings of the catalog, resulting in a 50% increase in fiscal 1996 revenues compared to the prior year. The Collectors' Choice Music catalog is published three times annually. In a continuing effort to provide superior customer service, the Critics' Choice Video and Collectors' Choice Music catalogs operate telephone search lines through which customers can inquire about the availability of any film or musical recording, including those not in the catalogs. This service not only provides immediate assistance to the customer, but information on the interests of the customers. Also, in fiscal 1996, the Company produced, under its own labels, eight exclusive video releases for Critics' Choice Video and 14 exclusive music releases for Collectors' Choice Music, resulting in unique merchandise and higher margin products. Playboy catalog products include Playboy-brand fashions, watches and gifts, Playboy Home Video titles, Playboy collectibles, such as calendars, back issues and newsstand specials, and CD-ROM products. The Playboy catalog is published three times annually. To expand the reach of the catalog's products, in April 1996 an on-line version of the Playboy catalog, called the Playboy Store, was added to the Company's World Wide Web site offering the same products as the printed versions. In fiscal 1995 and 1996, all three of the Company's catalogs were impacted by higher expenses related to paper price and postage rate increases. The Group's incremental profit as a result of higher revenues was sufficient to absorb these higher expenses, despite higher circulation from all three catalogs. The Company plans to continue to increase circulation for all three catalogs in fiscal 1997 but anticipates that paper costs will be lower compared to fiscal 1996 as paper prices have begun to decline, and the Critics' Choice Video and Collectors' Choice Music catalogs have changed to a different type of paper, similar in quality, but lower in price. In fiscal 1998, 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 built in fiscal 1997 in the same Chicago suburb and will be the second expansion in five years. The catalog facility houses fulfillment, customer service and administrative operations. The catalog business is subject to competition from other catalogs and distributors and retail outlets selling similar merchandise. The Company acquired certain of the assets of two competing videocassette catalogs in fiscal 1992, and is interested in reviewing other potential catalog acquisitions and joint ventures to publish catalogs that would offer products, especially entertainment software, that would appeal to customers who buy the Company's other merchandise. In the second quarter of fiscal 1996 the Critics' Choice Video catalog implemented a competitive pricing strategy in reaction to lower response rates in the two prior quarters which the Company believes were due in part to competition from mass marketers which offer popular videos at deeply- discounted prices. Based on the success of this competitive pricing strategy in fiscal 1996, the Company plans to continue this strategy in fiscal 1997. By the end of calendar 1997, the Company plans to launch on-line versions of both the Critics' Choice Video and Collectors' Choice Music catalogs to sites on the World Wide Web which will offer the products that are included in the printed versions. CASINO GAMING In fiscal 1996 the Company announced plans to re-enter the casino gaming business. The Company's image, international appeal and successful history in casino gaming makes this a logical extension into the fast growing field of adult entertainment. In June 1995 the Company, with a consortium of Greek investors, bid for an exclusive casino gaming license on the island of Rhodes, Greece and in November 1995 the Greek government officially notified the Company's consortium that it had won the competitive bid for this license. The Company's consortium expects to complete negotiations with the government for its contract to operate the casino in calendar 1996 and expects the casino to open in calendar 1997. The Company will receive licensing royalties on revenues of the hotel/casino and owns less than 20% of its equity. 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 consider taking equity positions. 16 SEASONALITY - ----------- The Company's businesses are generally not seasonal in nature. However, second quarter revenues and operating income are typically impacted by higher newsstand cover prices of holiday issues. This, coupled with higher sales of subscriptions of Playboy magazine, also results in an increase in accounts receivable. PROMOTIONAL AND OTHER ACTIVITIES - -------------------------------- The Company believes that its sales of products and services are enhanced by the public recognition of Playboy as a lifestyle. To establish such public recognition, the Company, among other activities, acquired in 1971, a mansion in Holmby Hills, California known as the "Playboy Mansion" where the Company's founder, Hugh M. Hefner, lives. The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production and magazine photography, business meetings, enhancing the Company's image, charitable functions and a wide variety of promotional and marketing purposes. The Playboy Mansion generates substantial publicity and recognition which increase public awareness of the Company and its products and services. As indicated in Item 13, Mr. Hefner pays rent to the Company for that portion of the Playboy Mansion used exclusively for his and his family's residence as well as the value of meals and other benefits received by him, his family and personal guests. The Playboy Mansion is included in the Company's financial statements as of June 30, 1996 at a cost, including all improvements and after accumulated depreciation, of approximately $2,910,000 and the operating expenses (including depreciation, taxes and security), net of rent received from Mr. Hefner were approximately $3,940,000, $3,865,000 and $3,950,000 for the years ended June 30, 1996, 1995 and 1994, respectively. Through the Playboy Foundation, the Company supports not-for-profit organizations and projects concerned with issues historically of importance to Playboy magazine and its readers, including anti-censorship efforts, civil rights, AIDS education, prevention and research, and reproductive freedom. The Playboy Foundation provides financial support to many of these organizations and also donates public service advertising space in Playboy magazine and in-kind printing and design services. EMPLOYEES - --------- At August 31, 1996, the Company employed 636 full-time employees compared to 593 at August 31, 1995. No employees are represented by collective bargaining agreements. The Company believes it maintains a satisfactory relationship with its employees. 17 Item 2. Properties - ------------------- The Company leases office space at the following locations: The Company is lessee under an initial fifteen-year lease effective September 1, 1989 of approximately 100,000 square feet of corporate headquarters space located at 680 North Lake Shore Drive, Chicago, Illinois. The Company's base rental is increased two percent per year until the tenth year of the term, after which the rent will be further adjusted to reflect the then-existing market conditions. As of June 30, 1996, the base rental was approximately $1,105,000. The Company was granted a rent abatement for the first two years of the lease. However, rent expense is being charged to operations on a straight- line basis over the term of the lease. Additionally, the lease requires the Company to pay its proportionate share of the building's real estate taxes and operating expenses. The majority of this space is used by all of the Company's operating groups, primarily Publishing. In August of 1996, the Company renegotiated this lease on more favorable terms, including a lower base rent which will result in savings of approximately $2.0 million over the initial term of the lease, combined with the Company obtaining certain expansion options in the building. Further, the lease term was extended three years to 2007, with a renewal option for an additional five years. The Company's Publishing Group headquarters in New York City consists of approximately 50,000 square feet of space in the Crown Building, 730 Fifth Avenue, Manhattan. The Crown Building lease expires in 2004, has an average annual base rental expense of approximately $1,380,000, and is subject to periodic increases to reflect rising real estate taxes and operating expenses. The Company was granted a rent abatement under this lease; however, rent expense is being charged to operations on a straight-line basis over the term of the lease. A limited amount of this space is utilized by the Entertainment and Product Marketing Groups and executive and administrative personnel. The Company's principal Entertainment Group offices are located at 9242 Beverly Boulevard, Beverly Hills, California ("Beverly Building"). The Company holds a lease for approximately 40,000 square feet in the Beverly Building through March 2002, with an average annual base rental expense of approximately $1,550,000 per year, which is subject to annual increases calculated on a formula involving tax and operating expense increases. The Company was granted a partial rent abatement for the first two years of the lease. However, rent expense is being charged to operations on a straight-line basis over the term of the lease. Additionally, a limited amount of space is utilized by the Publishing Group and executive and administrative personnel. The Company leases space for its operations facilities at the following locations: In fiscal 1993, the Company entered into a five-year lease, which includes a purchase option, for a 64,000 square foot warehouse facility in Itasca, Illinois, which is used by its Catalog Group for order fulfillment and related activities for its operations. The warehouse also houses a portion of the Company's data processing operation and serves as a storage facility for the entire Company. The average annual base rental expense under this lease is approximately $300,000. Additionally, the lease requires the Company to pay the building's real estate taxes and operating expenses. Due to the growth of the catalog business, in fiscal 1998 the Company will be leasing a larger facility in the same Chicago suburb to replace the existing facility. The Company's West Coast photography studio was relocated in March 1994 to Santa Monica, California, under terms of a ten-year lease, which commenced January 1, 1994. The lease is for approximately 9,800 square feet of space, with an average annual base rental expense of approximately $180,000. The Company was granted a rent abatement under this lease; however, rent expense is being charged to operations on a straight-line basis over the term of the lease. Additionally, the lease requires the Company to pay its proportionate share of the building's real estate taxes and operating expenses. In June 1995, the Company entered into a two-year lease effective July 1, 1995 for a motion picture production facility to be used by its Entertainment Group located in Los Angeles, California. The lease is for 11,600 square feet, with an annual base rental expense of approximately $105,000. The Company owns a Holmby Hills, California mansion property comprised of 5-1/2 acres. See "Promotional and Other Activities" under Item 1. 18 Item 3. Legal Proceedings - -------------------------- The Company is from time to time a defendant in suits for defamation and violation of rights of privacy, many of which allege substantial or unspecified damages, which are vigorously defended by the Company. The Company is presently engaged in other litigation, most of which is generally incidental to the normal conduct of its business and which is either immaterial in amount, expected to be covered by the Company's insurance carriers, reserved against, or which management believes to be without merit. Management believes that its reserves are adequate and that no such action will have a material adverse impact on the Company's financial condition. However, there can be no assurance that the Company's ultimate liability will not exceed its reserves. See Note R of Notes to Consolidated Financial Statements. On August 14, 1990, a purported class action for unspecified damages was filed by a stockholder in the Circuit Court of Cook County, Illinois, on behalf of an alleged class composed of those persons who are owners of shares of the common stock of the Company. The suit names as defendants the Company and the following present and former directors: Christie Hefner, Hugh M. Hefner, William A. Emerson, John R. Purcell, Robert Kamerschen, Mark H. McCormack, Richard S. Rosenzweig and Sol Rosenthal. During the third quarter of fiscal 1991, the plaintiffs agreed to dismiss the action against one of the Company's former directors, Mark H. McCormack. The suit alleges that the individual defendants violated their fiduciary duty to the class by approving the Company's stock recapitalization plan, which became effective on June 7, 1990. The suit also requests that the recapitalization plan be reversed. The Company and most of the individual defendants have been served and have filed an answer denying all substantive complaint allegations. In February 1995, the Court granted the Company's motion for summary judgment and the case was dismissed. Plaintiffs filed an appeal. In March 1996, the Illinois Appellate Court affirmed summary judgment in favor of the Company and the other named defendants and the case was dismissed. In accordance with the Company's bylaws and Delaware law, the Company agreed with all individual defendants to advance the fees and costs they might incur prior to the final disposition of the case, on the condition that such individuals shall repay the amounts advanced if it were finally determined that any respective individual were not entitled under Delaware law to be indemnified by the Company for such expenses. On February 26, 1996, Playboy Entertainment Group, Inc., a subsidiary of the Company, filed a civil suit challenging Section 505 of The Telecommunications Act of 1996 ("the Act") which was passed by Congress and signed into law in February 1996. Fifteen organizations representing a wide range of influential media, civil liberties and entertainment organizations filed friend of the court briefs supporting the Company's litigation. The Company believes that Section 505 is unconstitutional and unnecessary but fully supports Section 504 of the Act, which mandates that cable operators place full audio and video blocks on any channel, at no charge, at a customer's request. Certain provisions of the 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 Act would be to require cable systems to employ scrambling or 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. In the alternative, Section 505 provides that a cable operator that does not employ scrambling or blocking technology must restrict the period during which the programming is transmitted. Penalties for violation of the Act are significant and include fines and imprisonment. The suit names as defendants The United States of America, The United States Department of Justice, Attorney General Janet Reno and the Federal Communications Commission. 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 is likely to succeed on the merits of its claim that Section 505 is unconstitutional. The TRO will remain in place until a special three-judge panel in the United States District Court for the District of Delaware decides the Company's motion for a preliminary injunction. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1996. 19 EXECUTIVE OFFICERS - ------------------ The following table sets forth information with respect to the Company's executive officers: Name, Age and Position Business Experience During Past 5 Years - ---------------------- --------------------------------------- Hugh M. Hefner, 70 Founded the Company in 1953. Has been Chairman Emeritus and Chairman Emeritus and Editor-in-Chief Editor-in-Chief since November 1988. From October 1976 to November 1988 served as Chairman of the Board and Chief Executive Officer, and before that served as Chairman, President and Chief Executive Officer. Christie Hefner, 43 Appointed to present position in November Chairman of the Board 1988. From September 1986 to November and Chief Executive Officer 1988 served as Vice Chairman of the Board, President and Chief Operating Officer. From February 1984 to September 1986 served as President and Chief Operating Officer; had been President since April 1982. From January 1978 to April 1982 was a Corporate Vice President. She joined the Company in 1975 as Special Assistant to the Chairman of the Board. Richard S. Rosenzweig, 61 Appointed to present position in November Executive Vice President 1988. From May 1982 to November 1988 served as Executive Vice President, Office of the Chairman. From July 1980 to May 1982 served as Executive Vice President, Corporate Affairs. From January 1977 to June 1980 he was Executive Vice President for West Coast Operations. His other positions with the Company have included Executive Vice President, Publications Group, and Associate Publisher, Playboy magazine. He has been with the Company since 1958. Howard Shapiro, 49 Appointed to present position in May Executive Vice President, 1996. From September 1989 to May 1996, Law and Administration, served as Executive Vice President, Law General Counsel and Secretary and Administration and General Counsel. From May 1985 to September 1989 served as Senior Vice President, Law and Administration and General Counsel. From July 1984 to May 1985 served as Senior Vice President and General Counsel. From September 1983 to July 1984 served as Vice President and General Counsel. From May 1981 to September 1983 served as Corporate Counsel. From June 1978 to May 1981 served as Division Counsel. From November 1973 to June 1978 served as Staff Counsel. Anthony J. Lynn, 44 Appointed to present position in June Executive Vice President and 1992. From 1991 to 1992 served as President, Entertainment Group President of international television distribution and worldwide pay television at MGM-Pathe Communications Co., where he was Executive Vice President since 1987. Rebecca S. Maskey, 48 Appointed to present position in April Senior Vice President, 1993. From April 1993 to June 1995 also Finance served as Treasurer. From January 1990 to April 1993 served as Vice President, Financial Services and Treasurer. From August 1988 to January 1990 served as Vice President and Treasurer. From January 1987 to August 1988 served as Treasurer. From January 1985 to January 1987 served as Assistant Treasurer. 20 Name, Age and Position Business Experience During Past 5 Years - ---------------------- --------------------------------------- Herbert M. Laney, 51 Appointed to present position in September 1995. Senior Vice President From June 1993 to September 1995 served as and President, Catalog Group President, Catalog Group. From August 1990 to June 1993 served as Senior Vice President, Catalog Group. From June 1988 to August 1990 served as Senior Vice President, Direct Marketing. Martha O. Lindeman, 45 Appointed to present position in March 1992. Vice President, Corporate From 1986 to 1992 served as Manager of Communications and Communications at the Tribune Company, a leading Investor Relations information and entertainment company. 21 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters The stock price information, as reported in the New York Stock Exchange Composite Listing, set forth in Note S of Notes to Consolidated Financial Statements in the fiscal 1996 Annual Report is incorporated herein by reference. The registrant's securities are traded on the exchanges listed on the cover page of this Form 10-K Report. As of August 31, 1996, there were 8,445 and 9,004 record holders of Class A Common Stock and Class B Common Stock, respectively. There were no cash dividends declared during either of the two fiscal years in the period ended June 30, 1996. The Company's revolving credit agreement prohibits the payment of cash dividends. Item 6. Selected Financial Data The net revenues, income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle, total assets, long-term financing obligations, income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle per common share and cash dividends declared per common share for each of the five fiscal years in the period ended June 30, 1996, set forth under the caption "Selected Financial and Operating Data" on page 23 of the fiscal 1996 Annual Report are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 25 - 31 of the fiscal 1996 Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The following consolidated financial statements of the registrant and report of independent accountants set forth on pages 32 - 43 of the fiscal 1996 Annual Report are incorporated herein by reference: Consolidated Statements of Operations - Years ended June 30, 1996, 1995 and 1994. Consolidated Balance Sheets - June 30, 1996 and 1995. Consolidated Statements of Shareholders' Equity - Years ended June 30, 1996, 1995 and 1994. Consolidated Statements of Cash Flows - Years ended June 30, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Independent Accountants. Report of Management. The supplementary data regarding quarterly results of operations set forth in Note S of Notes to Consolidated Financial Statements on pages 41 and 42 of the fiscal 1996 Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 22 PART III Information required by Items 10, 11, 12 and 13 is contained in the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in November 1996, which will be filed within 120 days after the close of the registrant's fiscal year ended June 30, 1996, and is incorporated herein by reference. Information regarding executive officers is contained on pages 20 and 21 of this Form 10-K Report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- (a) Certain Documents Filed as Part of the Form 10-K Financial Statements of the registrant and report of independent accountants following as set forth under Item 8 of this Form 10-K Report and which have been incorporated by reference from pages 32 - 43 of the fiscal 1996 Annual Report: Consolidated Statements of Operations - Years ended June 30, 1996, 1995 and 1994 Consolidated Balance Sheets - June 30, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years ended June 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Independent Accountants* Report of Management The supplementary data regarding quarterly results of operations as set forth in Note S of Notes to Consolidated Financial Statements on pages 41 and 42 of the fiscal 1996 Annual Report and which have been incorporated by reference. Financial Statement Schedule of the registrant not included in the fiscal 1996 Annual Report but filed herewith: Page ---- Schedule II - Valuation and Qualifying Accounts 34 * The report of the registrant's independent accountants with respect to the Financial Statement Schedule appears on page 33 of this Form 10-K Report. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the fourth quarter of fiscal 1996 (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 from the Company's annual report on Form 10-K for the year ended June 30, 1995 (the "1995 Form 10-K")) 3.2 Restated bylaws of the Company (incorporated by reference to Exhibit 3.2 from the Company's annual report on Form 10-K for the year ended June 30, 1994 (the "1994 Form 10-K")) 10.1 Stock Incentive Plan a Playboy Enterprises, Inc. 1995 Stock Incentive Plan b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock Options which may be granted under the Plan c Form of Incentive Stock Option Agreement for Incentive Stock Option granted under the Plan d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan 23 (incorporated by reference to Exhibits 4.2, 4.3, 4.4 and 4.5 from the Registration Statement No. 33-58145 on Form S-8 dated March 20, 1995) 10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4 from the Registration Statement No. 333-06843 on Form S-8 dated June 26, 1996) 10.3 Playboy Magazine Printing and Binding Agreements a May 15, 1990 agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. regarding printing of Playboy Magazine b Letter agreement dated April 11, 1990 between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1995 Form 10-K) c First Amendment dated August 15, 1996 to May 15, 1990 agreement 10.4 Playboy Magazine Distribution Agreement dated as of June 6, 1994 between Playboy Enterprises, Inc. and Warner Publisher Services, Inc. (incorporated by reference to Exhibit 10.9 from the 1994 Form 10-K) 10.5 Playboy Magazine Subscription Fulfillment Agreement a July 1, 1987 agreement between Communication Data Services, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.12(a) from the Company's annual report on Form 10-K for the year ended June 30, 1992 (the "1992 Form 10-K")) b Amendment dated as of June 1, 1988 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(b) from the Company's annual report on Form 10-K for the year ended June 30, 1993 (the "1993 Form 10-K")) c Amendment dated as of July 1, 1990 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(c) from the Company's annual report on Form 10-K for the year ended June 30, 1991 (the "1991 Form 10-K")) d Amendment dated as of July 1, 1996 to said Fulfillment Agreement 10.6 Transponder Lease Agreement dated as of December 31, 1992 between Playboy Entertainment Group, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.3 from the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1992 (the "Second Quarter 1993 Form 10-Q")) 10.7 Distribution License to Exploit Home Video Rights effective October 1, 1991 between Playboy Video Enterprises, Inc. and Uni Distribution Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form 10-K) 10.8 Distribution Agreement dated as of March 24, 1995 between Playboy Entertainment Group, Inc. and Uni Distribution Corp. regarding licensing and sale of domestic home video product (incorporated by reference to Exhibit 10.8 from the 1995 Form 10-K) 10.9 Agreements effective November 1, 1995 between Playboy Entertainment Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and Playboy TV/Benelux Limited regarding the establishment of a Playboy TV pay television service in the United Kingdom 10.10 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha Film Corporation a Memorandum of Agreement and Amendment dated July 31, 1995 regarding the establishment of a Playboy TV pay television service in Japan b Amendment to July 31, 1995 agreement dated March 26, 1996 10.11 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide and TVN regarding distribution and services related to the AdulTVision pay television service 10.12 Distribution Agreement dated June 27, 1996 between Playboy Entertainment Group, Inc. and Orion Home Video regarding the distribution of certain home video programs and product 10.13 Affiliation Agreement between Playboy Entertainment Group, Inc. and DirecTV a Agreement dated November 15, 1993 regarding the satellite distribution of Playboy Television b First Amendment to November 15, 1993 agreement dated as of April 19, 1994 c Second Amendment to November 15, 1993 agreement dated as of July 26, 1995 10.14 Affiliation Agreement dated February 29, 1996 between Playboy Entertainment Group, Inc. and PrimeStar Partners, L.P. regarding the satellite distribution of Playboy Television 10.15 Warner Home Video/Critics' Choice Direct Marketing License Agreements a Agreement dated February 22, 1994 regarding purchase of Turner product b Agreement dated February 22, 1994 regarding purchase of non- Turner product (items (a) and (b) incorporated by reference to Exhibits 10.10 and 10.11, respectively, from the 1995 Form 10-K) c Agreement dated June 28, 1996 regarding purchase of Turner and non-Turner product 10.16 Product License Agreements between Playboy Enterprises, Inc. and Chaifa Investment, Limited a Agreement dated September 26, 1989 related to the Hong Kong territory b Agreement dated March 4, 1991 related to the People's Republic of China territory 24 c Amendment dated July 21, 1992 related to the March 4, 1991 agreement d Amendment dated August 17, 1993 related to the agreements dated September 26, 1989 and March 4, 1991 e Amendment dated January 23, 1996 related to the agreements dated September 26, 1989 and March 4, 1991 10.17 Revolving Line of Credit a Credit Agreement dated as of February 10, 1995 by and among Playboy Enterprises, Inc., Harris Trust and Savings Bank and LaSalle National Bank b First Amendment to February 10, 1995 Credit Agreement dated as of March 31, 1995 (items (a) and (b) incorporated by reference to Exhibits 10.12(a) and (b), respectively, from the 1995 Form 10-K) c Second Amendment to February 10, 1995 Credit Agreement dated as of March 5, 1996 10.18 Playboy Mansion West Lease Agreement, as amended, between Playboy Enterprises, Inc. and Hugh M. Hefner a Letter of Interpretation of Lease b Agreement of lease (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1991 Form 10-K) 10.19 Los Angeles Office Lease Documents a Office lease dated as of July 25, 1991 between Playboy Enterprises, Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to Exhibit 10.6(c) from the 1991 Form 10-K) b Amendment to July 25, 1991 lease dated June 26, 1996 c Amendment to July 25, 1991 lease dated September 12, 1996 10.20 Chicago Office Lease Documents a Office Lease dated April 7, 1988 by and between Playboy Enterprises, Inc. and LaSalle National Bank as Trustee under Trust No. 112912 (incorporated by reference to Exhibit 10.7(a) from the 1993 Form 10-K) b First Amendment to April 7, 1988 lease dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from the 1995 Form 10-K) c Second Amendment to April 7, 1988 lease dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from the Second Quarter 1993 Form 10-Q) d Third Amendment to April 7, 1988 lease dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) e Fourth Amendment to April 7, 1988 lease dated August 6, 1996 10.21 New York Office Lease Agreement dated August 11, 1992 between Playboy Enterprises, Inc. and Lexington Building Co. (incorporated by reference to Exhibit 10.9(b) from the 1992 Form 10-K) 10.22 Itasca Warehouse Lease Agreement dated as of October 20, 1992 between Teachers' Retirement System of the State of Illinois and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the Second Quarter 1993 Form 10-Q) 10.23 Itasca Warehouse Lease Agreement dated as of September 6, 1996 between Centerpoint Properties Corporation and Playboy Enterprises, Inc. 10.24 Selected Company Remunerative Plans a Executive Car Lease Program dated June 11, 1993 (incorporated by reference to Exhibit 10.18(a) from the 1995 Form 10-K) b Administrative Statement for the Executive Car Lease Program dated March 1, 1992 (incorporated by reference to Exhibit 10.2(b) from the 1992 Form 10-K) c Executive Protection Program dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) d Deferred Compensation Plan for Employees effective October 1, 1992 e Deferred Compensation Plan for Nonemployee Directors effective October 1, 1992 (items (d) and (e) incorporated by reference to Exhibits 10.2(g) and (h), respectively, from the 1992 Form 10-K) f First Amendment to Deferred Compensation Plan for Employees effective December 31, 1993 (incorporated by reference to Exhibit 10.1(f) from the 1994 Form 10-K) g Second Amendment to Deferred Compensation Plan for Employees effective April 1, 1996 h First Amendment to Deferred Compensation Plan for Nonemployee Directors effective April 1, 1996 10.25 Selected Employment, Termination and Other Agreements a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For Key Employees (the "1989 Option Plan")(incorporated by reference to Exhibit 10.4 (mm) from the 1991 Form 10-K) b Playboy Enterprises, Inc. 1989 Stock Option Agreement 25 c Letter dated July 18, 1990 pursuant to the June 7, 1990 recapitalization regarding adjustment of options (items (b) and (c) incorporated by reference to Exhibits 10.19(c) and (d), respectively, from the 1995 Form 10-K) d Consent and Amendment regarding the 1989 Option Plan e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors, as amended f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement for Non-Employee Directors (items (d), (e) and (f) incorporated by reference to Exhibits 10.4(aa), (rr) and (nn), respectively, from the 1991 Form 10-K) g Playboy Enterprises, Inc. Severance Agreement (incorporated by reference to Exhibit 10.4(vv) from the 1991 Form 10-K) h Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.4(bbb) from the 1992 Form 10-K) i Amendment dated August 15, 1996 regarding the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn j Letter Agreement dated February 26, 1993 regarding Special Incentive Compensation Plan for Herb Laney k Memorandum dated May 1, 1996 regarding extension of Special Incentive Compensation Plan for Herb Laney dated February 26, 1993 11 Computation of Net Income (Loss) Per Share 13 Annual Report to Security Holders Herewith filed as an exhibit only with respect to the parts incorporated by reference in this Form 10-K. The report, except for portions expressly incorporated by reference, is furnished for the information of the Commission only and is not to be deemed "filed" as part of the filing. 21 Parent and Subsidiaries 23 Consent of Independent Public Accountants 27 Financial Data Schedule (d) Financial Statement Schedules Not applicable 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLAYBOY ENTERPRISES, INC. September 20, 1996 By /s/Rebecca S. Maskey ------------------------- Rebecca S. Maskey Senior Vice President, Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Christie Hefner September 20, 1996 - ------------------------------------- Christie Hefner Chairman of the Board, Chief Executive Officer and Director /s/Richard S. Rosenzweig September 26, 1996 - ------------------------------------- Richard S. Rosenzweig Executive Vice President and Director /s/Dennis S. Bookshester September 27, 1996 - ------------------------------------- Dennis S. Bookshester Director /s/David I. Chemerow September 24, 1996 - ------------------------------------- David I. Chemerow Director /s/Robert Kamerschen September 27, 1996 - ------------------------------------- Robert Kamerschen Director /s/Sol Rosenthal September 23, 1996 - ------------------------------------- Sol Rosenthal Director /s/Sir Brian Wolfson September 24, 1996 - ------------------------------------- Sir Brian Wolfson Director /s/Rebecca S. Maskey September 20, 1996 - ------------------------------------- Rebecca S. Maskey Senior Vice President, Finance 27 All agreements listed below may have additional exhibits which are not attached. All such exhibits are available upon request, provided the requesting party shall pay a fee for copies of such exhibits, which fee shall be limited to the Company's reasonable expenses incurred in furnishing these documents.
Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 from the 1995 Form 10-K) 3.2 Restated bylaws of the Company (incorporated by reference to Exhibit 3.2 from the 1994 Form 10-K) 10.1 Stock Incentive Plan a Playboy Enterprises, Inc. 1995 Stock Incentive Plan b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock Options which may be granted under the Plan c Form of Incentive Stock Option Agreement for Incentive Stock Option granted under the Plan d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (incorporated by reference to Exhibits 4.2, 4.3, 4.4 and 4.5 from the Registration Statement No. 33-58145 on Form S-8 dated March 20, 1995) 10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4 from the Registration Statement No. 333-06843 on Form S-8 dated June 26, 1996) 10.3 Playboy Magazine Printing and Binding Agreements a May 15, 1990 agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. regarding printing of Playboy Magazine b Letter agreement dated April 11, 1990 between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1995 Form 10-K) *c First Amendment dated August 15, 1996 to May 15, 1990 agreement 10.4 Playboy Magazine Distribution Agreement dated as of June 6, 1994 between Playboy Enterprises, Inc. and Warner Publisher Services, Inc. (incorporated by reference to Exhibit 10.9 from the 1994 Form 10-K) 10.5 Playboy Magazine Subscription Fulfillment Agreement a July 1, 1987 agreement between Communication Data Services, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.12(a) from the 1992 Form 10-K) b Amendment dated as of June 1, 1988 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(b) from the 1993 Form 10-K) c Amendment dated as of July 1, 1990 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(c) from the 1991 Form 10-K) *d Amendment dated as of July 1, 1996 to said Fulfillment Agreement
28 10.6 Transponder Lease Agreement dated as of December 31, 1992 between Playboy Entertainment Group, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.3 from the Second Quarter 1993 Form 10-Q) 10.7 Distribution License to Exploit Home Video Rights effective October 1, 1991 between Playboy Video Enterprises, Inc. and Uni Distribution Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form 10-K) 10.8 Distribution Agreement dated as of March 24, 1995 between Playboy Entertainment Group, Inc. and Uni Distribution Corp. regarding licensing and sale of domestic home video product (incorporated by reference to Exhibit 10.8 from the 1995 Form 10-K) *10.9 Agreements effective November 1, 1995 between Playboy Entertainment Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and Playboy TV/Benelux Limited regarding the establishment of a Playboy TV pay television service in the United Kingdom *10.10 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha Film Corporation a Memorandum of Agreement and Amendment dated July 31, 1995 regarding the establishment of a Playboy TV pay television service in Japan b Amendment to July 31, 1995 agreement dated March 26, 1996 *10.11 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide and TVN regarding distribution and services related to the AdulTVision pay television service *10.12 Distribution Agreement dated June 27, 1996 between Playboy Entertainment Group, Inc. and Orion Home Video regarding the distribution of certain home video programs and product *10.13 Affiliation Agreement between Playboy Entertainment Group, Inc. and DirecTV a Agreement dated November 15, 1993 regarding the satellite distribution of Playboy Television b First Amendment to November 15, 1993 agreement dated as of April 19, 1994 c Second Amendment to November 15, 1993 agreement dated as of July 26, 1995 *10.14 Affiliation Agreement dated February 29, 1996 between Playboy Entertainment Group, Inc. and PrimeStar Partners, L.P. regarding the satellite distribution of Playboy Television 10.15 Warner Home Video/Critics' Choice Direct Marketing License Agreements a Agreement dated February 22, 1994 regarding purchase of Turner product b Agreement dated February 22, 1994 regarding purchase of non- Turner product 29 (items (a) and (b) incorporated by reference to Exhibits 10.10 and 10.11, respectively, from the 1995 Form 10-K) *c Agreement dated June 28, 1996 regarding purchase of Turner and non-Turner product *10.16 Product License Agreements between Playboy Enterprises, Inc. and Chaifa Investment, Limited a Agreement dated September 26, 1989 related to the Hong Kong territory b Agreement dated March 4, 1991 related to the People's Republic of China territory c Amendment dated July 21, 1992 related to the March 4, 1991 agreement d Amendment dated August 17, 1993 related to the agreements dated September 26, 1989 and March 4, 1991 e Amendment dated January 23, 1996 related to the agreements dated September 26, 1989 and March 4, 1991 10.17 Revolving Line of Credit a Credit Agreement dated as of February 10, 1995 by and among Playboy Enterprises, Inc., Harris Trust and Savings Bank and LaSalle National Bank b First Amendment to February 10, 1995 Credit Agreement dated as of March 31, 1995 (items (a) and (b) incorporated by reference to Exhibits 10.12(a) and (b), respectively, from the 1995 Form 10-K) *c Second Amendment to February 10, 1995 Credit Agreement dated as of March 5, 1996 10.18 Playboy Mansion West Lease Agreement, as amended, between Playboy Enterprises, Inc. and Hugh M. Hefner a Letter of Interpretation of Lease b Agreement of lease (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1991 Form 10-K) 10.19 Los Angeles Office Lease Documents a Office Lease dated as of July 25, 1991 between Playboy Enterprises, Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to Exhibit 10.6(c) from the 1991 Form 10-K) *b Amendment to July 25, 1991 lease dated June 26, 1996 *c Amendment to July 25, 1991 lease dated September 12, 1996 30 10.20 Chicago Office Lease Documents a Office Lease dated April 7, 1988 by and between Playboy Enterprises, Inc. and LaSalle National Bank as Trustee under Trust No. 112912 (incorporated by reference to Exhibit 10.7(a) from the 1993 Form 10-K) b First Amendment to April 7, 1988 lease dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from the 1995 Form 10-K) c Second Amendment to April 7, 1988 lease dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from the Second Quarter 1993 Form 10-Q) d Third Amendment to April 7, 1988 lease dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) *e Fourth Amendment to April 7, 1988 lease dated August 6, 1996 10.21 New York Office Lease Agreement dated August 11, 1992 between Playboy Enterprises, Inc. and Lexington Building Co. (incorporated by reference to Exhibit 10.9(b) from the 1992 Form 10-K) 10.22 Itasca Warehouse Lease Agreement dated as of October 20, 1992 between Teachers' Retirement System of the State of Illinois and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the Second Quarter 1993 Form 10-Q) *10.23 Itasca Warehouse Lease Agreement dated as of September 6, 1996 between Centerpoint Properties Corporation and Playboy Enterprises, Inc. 10.24 Selected Company Remunerative Plans a Executive Car Lease Program dated June 11, 1993 (incorporated by reference to Exhibit 10.18(a) from the 1995 Form 10-K) b Administrative Statement for the Executive Car Lease Program dated March 1, 1992 (incorporated by reference to Exhibit 10.2(b) from the 1992 Form 10-K) c Executive Protection Program dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) d Deferred Compensation Plan for Employees effective October 1, 1992 e Deferred Compensation Plan for Nonemployee Directors effective October 1, 1992 (items (d) and (e) incorporated by reference to Exhibits 10.2(g) and (h), respectively, from the 1992 Form 10-K) f First Amendment to Deferred Compensation Plan for Employees effective December 31, 1993 (incorporated by reference to Exhibit 10.1(f) from the 1994 Form 10-K) *g Second Amendment to Deferred Compensation Plan for Employees effective April 1, 1996 *h First Amendment to Deferred Compensation Plan for Nonemployee Directors effective April 1, 1996 31 10.25 Selected Employment, Termination and Other Agreements a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For Key Employees (the "1989 Option Plan")(incorporated by reference to Exhibit 10.4(mm) from the 1991 Form 10-K) b Playboy Enterprises, Inc. 1989 Stock Option Agreement c Letter dated July 18, 1990 pursuant to the June 7, 1990 recapitalization regarding adjustment of options (items (b) and (c) incorporated by reference to Exhibits 10.19(c) and (d), respectively, from the 1995 Form 10-K) d Consent and Amendment regarding the 1989 Option Plan e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors, as amended f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement for Non-Employee Directors (items (d), (e) and (f) incorporated by reference to Exhibits 10.4(aa), (rr) and (nn), respectively, from the 1991 Form 10-K) g Playboy Enterprises, Inc. Severance Agreement (incorporated by reference to Exhibit 10.4(vv) from the 1991 Form 10-K) h Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.4(bbb) from the 1992 Form 10-K) *i Amendment dated August 15, 1996 regarding the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn *j Letter Agreement dated February 26, 1993 regarding Special Incentive Compensation Plan for Herb Laney *k Memorandum dated May 1, 1996 regarding extension of Special Incentive Compensation Plan for Herb Laney dated February 26, 1993 *11 Computation of Net Income (Loss) Per Share *13 Annual Report to Security Holders Herewith filed as an exhibit only with respect to the parts incorporated by reference in this Form 10-K. The report, except for portions expressly incorporated by reference, is furnished for the information of the Commission only and is not to be deemed "filed" as part of the filing. *21 Parent and Subsidiaries *23 Consent of Independent Public Accountants *27 Financial Data Schedule - ------- * Filed herewith 32 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- ON FINANCIAL STATEMENT SCHEDULES -------------------------------- To the Shareholders and Board of Directors Playboy Enterprises, Inc. Our report on the consolidated financial statements of Playboy Enterprises, Inc. and its Subsidiaries has been incorporated by reference in this Form 10-K from page 43 of the fiscal 1996 Annual Report to Shareholders of Playboy Enterprises, Inc. and its Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 23 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Chicago, Illinois August 1, 1996 33 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (IN THOUSANDS)
============================================================================================================= COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------------- Additions ------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period - ----------------------------------------- ---------- ---------- ----------- ----------- ---------- Allowance deducted in the balance sheet from the asset to which it applies: Year ended June 30, 1996: Allowance for doubtful accounts $ 4,837 $ 504 $ 1,632(a) $ 3,964(b) $ 3,009 ======== ======== ======== ======== ======== Allowance for returns $ 20,952 $ -- $ 59,718(c) $ 58,731(d) $ 21,939 ======== ======== ======== ======== ======== Year ended June 30, 1995: Allowance for doubtful accounts (e) $ 3,155 $ 1,709 $ 2,042(a) $ 2,069(b) $ 4,837 ======== ======== ======== ======== ======== Allowance for returns $ 18,612 $ -- $ 57,057(c) $ 54,717(d) $ 20,952 ======== ======== ======== ======== ======== Year ended June 30, 1994: Allowance for doubtful accounts (e) $ 2,843 $ 1,294 $ 1,916(a) $ 2,898(b) $ 3,155 ======== ======== ======== ======== ======== Allowance for returns $ 21,631 $ -- $ 53,486(c) $ 56,505(d) $ 18,612 ======== ======== ======== ======== ========
Notes: (a) Represents provisions for unpaid subscriptions charged to net revenues. Also included in fiscal 1996 amount was $98 related to the consolidation of the VIPress Poland Sp. z o.o. balance at the acquisition date in March 1996. (b) Represents uncollectible accounts less recoveries. Also included in fiscal 1994 amount was $66 related to a discount for early payment of a receivable. (c) Represents provisions charged to net revenues for estimated returns of Playboy magazine, other Playboy publications and domestic home video. (d) Represents settlements on provisions previously recorded. (e) Certain reclassifications have been made to conform to the fiscal 1996 presentation. 34 EX-10.3(C) 2 FIRST AMENDMENT TO PRINTING AGREEMENTS Exhibit 10.3(c) FIRST AMENDMENT --------------- THIS FIRST AMENDMENT, dated August 15, 1996, by and between Playboy Enterprises, Inc. ("Publisher") and Quad/Graphics, Inc. ("Quad/Graphics") hereinafter referred to as the "Amendment". RECITALS: A. Publisher and Quad/Graphics entered into a certain Agreement, dated May 15, 1990, pertaining to the performance of press service, subject to quality, pricing and schedule, (including four (4) color editorial separations, stripping, ad handling, cromalins, final films) platemaking or cylinder engraving, press work (including gravure), binding, mailing and delivery to common carriers in connection with Publisher's magazine entitled, Playboy (the "Work"), with Agreement was modified by the addendum dated November 7, 1991, and the letter dated May 25, 1994, such Agreement, as so modified, is hereinafter collectively referred to as the "Agreement". B. Publisher and Quad/Graphics are desirous of amending the Agreement as hereinafter provided. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged by each party, Quad/Graphics and Publisher agree as follows: 1. The Agreement is amended to extend the term of the Agreement by one (1) year to expire November 1, 1997 (upon completion of production of the January 1998 issue of Playboy). 2. The Preparatory Price List, dated March 1, 1996, attached hereto as Exhibit A, will constitute the pricing in effect for preparatory production taking place on or after the signing date of this Amendment, subject to adjustment as provided in the Agreement as hereby amended. The Manufacturing Prices, dated May 30, 1996, and attached hereto as Exhibit B, will constitute the pricing in effect for print production taking place on or after the signing date of this Amendment, subject to adjustment as provided in the Agreement as hereby amended. The Manufacturing Prices attached hereto as Exhibit B include the 6% gravure and offset ink increase, effective December 1, 1994, and the 6% gravure ink increase, effective January 1, 1996. 4. The Paper Requirements, dated September 20, 1995 and attached hereto as Exhibit C, will constitute the paper requirements in effect at the time of this Amendment, subject to adjustment as provided in the Agreement. 5. Quad/Graphics will waive its entitlement to and forego the August 1, 1996 price escalation to reflect increases to Quad/Graphics' labor costs. 6. Section 10.05 of the Agreement is amended to guarantee that the Preparatory and Manufacturing Prices, attached hereto as Exhibits A and B. will remain firm against increases in labor costs through July 31, 1997. Thereafter, prices may be adjusted once annually on or after August first to reflect changes to Quad/Graphics' cost of labor and each such adjustment will not exceed 85% of the change in the "all items" listing (1982-84=100) of the Milwaukee, Wisconsin Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the immediately preceding first half of the calendar year as compared to the first half of the preceding calendar year. 7. Except as modified herein, the Agreement will continue in full force and effect without change. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers effective on the date herein set forth. Playboy Enterprises Quad/Graphics, Inc. By:/s/ MARIA DANAE MANDIS By:/s/ ROBERT C. FULLER ------------------------ ------------------------ Name:MARIA DANAE MANDIS Name:ROBERT C. FULLER ------------------- ------------------- Title: VP/ PROD DIRECTOR Title: CHICAGO SUBS MGR. ------------------ ------------------ Date: 8/26/96 Date: 8/26/96 ----------------------------- ---------------------- Exhibit A Playboy Enterprises, Inc. - Quad/Graphics, Inc. First Amendment Preparatory Price List (dated March 1, 1996)
QUAD/GRAPHICS, INC. 1996 PREPARATORY CONTRACT PRICING FOR PLAYBOY ENTERPRISES, INC. - -------------------------------------------------------------------------------- Prices are based on producing an 8-3/16" x 10-7/8" page size. PLAYBOY 1996 (CONTRACT PRICING) FURNISHED EDIT (BASED ON 4/C, BUT INCLUDES 2/C OR 3/C ALSO) ANY FULL PAGE STORIES OR CARTOONS AND ALSO PARTIAL PAGE CARTOONS. Furnished edit - (RREU negatives)................................. $ 100.00 each Furnished edit - (RRED positives without Matchprint proof)........ $ 30.00 each Furnished edit (RRED positives with Matchprint proof)..............$ 70.00 each B&W TYPE PAGES (FULL PAGE) Supplied RRED positives (for full page edit)...................... $ 15.00 each FULL PAGE FURNISHED ADS (2/C, 3/C OR 4/C) Supplied RREU negatives........................................... $ 135.00 each Supplied RRED negatives........................................... $ 175.00 each Supplied RRED positives........................................... $ 100.00 each FULL PAGE B&W ADS Supplied RREU negatives........................................... $ 27.00 each Supplied RRED positives........................................... $ 15.00 each PARTIAL PAGE ADS (BASED UPON B&W EDIT FILM. IF EDIT HAS SCANS, TINTS, K.O.'S, HANDWORK, ETC. WILL BE BILLED PER THE ATTACHED PRICE LIST) B&W ad (supplied RREU negatives).................................. $ 30.00 each 2/C, 3/C or 4/C ad supplied as RREU negatives (price based on one ad)............................................................... $ 155.00 each 2/C, 3/C or 4/C ad supplied as RREU negatives (price based on two ads).............................................................. $ 225.00 each PICK UP ADS (PARTIAL OR FULL PAGE) Pick up B&W ad.................................................... $ 25.00 each Pick up 2/C, 3/C or 4/C ad........................................ $ 45.00 each - -------------------------------------------------------------------------------- Quad/Imaging March 1, 1996 Page 1
4 QUAD/GRAPHICS, INC. 1996 PREPARATORY CONTRACT PRICING FOR PLAYBOY ENTERPRISES, INC. - -------------------------------------------------------------------------------- PLAYBOY SPECIALS BASE 4/C PAGE (8-3/16" X 10-7/8") BASE PAGE: (081) Base 4/C page............................................... $575.00 page Price includes ripping type and line art from a supplied disk, all random 4/C separations, color correction and touching up of skin blemishes or scratches as noted on each transparency, processing high resolution images into the desktop page file, outputting film, a composite Matchprint proof, color correction and retouching as noted on the first proof, reripping a page file, reprocessing high resolution images into the desktop page file, outputting a second set of final film and a second composite Matchprint proof and two blueline proofs. You can determine the additional cost of items not specified in the estimate such as silhouettes, drop shadows, versions, color corrections after the second proof show and author alterations per the attached price list. Your price estimate is based on the specifications and printed samples (September/October 1993 Lingerie book, November/December 1993 Lingerie book, Playboy's Video Playmates, Playboy's Satin, Leather & Lace supplement and the 1993 Centerfold Sensations) that you have provided. You can help meet the estimated price and complete your project on time by providing the following: . Macintosh based QuarkXPress page files created as single pages to be processed and output as final film. . Page files containing all type and line art (colored, tinted and built to butt), EPS files and square finish windows in position with low resolution images resident on the page. . Thermal proofs or laser proofs of designed pages containing trim marks, call outs for color breaks and tint values and low resolution files showing image position, size, cropping and angling. . A list of all CTs and fonts used in the document along with a list of the fonts, software and version used to create EPS files. - ------------------------------------------------------------------------------- Quad/Imaging March l, 1996 Page 2 QUAD/GRAPHICS, INC. 1996 PREPARATORY CONTRACT PRICE LIST FOR PLAYBOY ENTERPRISES, INC. - -------------------------------------------------------------------------------- Prices are based on producing an 8-3/16" x 10-7/8" page size. PLAYBOY 1996 (CONTRACT PRICE LIST) COLOR SEPARATION Price includes a random color proof and either positives or negatives. Each subject will be scanned for a comparable representation of the original transparency or to the written instructions on the transparency within scanner limitations. Scans that are, in our judgement, extremely difficult to reproduce will require handwork. COLOR CORRECTION IS ADDITIONAL.
(356) B & W separation........................................... $ 30.00 each Four color separation (301) 5" x 7".................................................... $ 90.00 each (302) 9" x 12"................................................... $ 125.00 each (303) 14" x 20".................................................. $ 190.00 each DESKTOP PAGE PROCESSING (036) Trap color................................................. $ 15.00 each (297) Black & white line scan.................................... $ 12.00 each (134) Page processing, per color, (outputting film additional)... $ 12.00 each (489) Digital file output (per color)............................ $ 12.00 each (073) Output film (per color).................................... $ 12.00 each ELECTRONIC SYSTEM (496) Electronic page assembly, color correction, swatch matching, retouching, special effects, rotation, extensive resizing, alteration of desktop page files........................... $ 200.00 hour CONVENTIONAL FILM ASSEMBLY (052) Color break mask........................................... $ 12.00 each (053) Tint screen (per value, per color)......................... $ 15.00 each (057) Reverse type............................................... $ 30.00 page (059) Knock out mask............................................. $ 30.00 each (032) Cadograph windows and rules................................ $ 15.00 page (069) Dupe film (per color, per item) does not include strips.... $ 12.00 each (054) Contact film (per color, per item) does not include strips. $ 12.00 each (061) Strip film element......................................... $ 6.00 film (168) Pick up with inspection (per color, per item).............. $ 4.00 film (021) Handwork (per hour)........................................ $ 55.00 hour (066) Final film (per color)..................................... $ 12.00 each (031) Ad inspection.............................................. $ 25.00 ad * Ad inspection includes checking the screen ruling and angle of films, inspecting films for holes and scratches, checking each film to the furnished proof, checking total density of the proof and noting any potential problems. Proofs are additional. PROOFING (065) Position proof (blueline).................................. $ 3.00 each (023) Black & white proof (Velox or LOP)......................... $ 10.00 each (025) Matchprint proof........................................... $ 50.00 each
- -------------------------------------------------------------------------------- Quad/Imaging March l, 1996 Page 3 EXHIBIT B Playboy Enterprises, Inc. - Quad/Graphics, Inc. First Amendment Manufacturing Price List (dated May 30, 1996) PLAYBOY ENTERPRISES PRICE SCHEDULES
- ------------------------------------------------------------------------------------------------ OFFSET PRESSWORK DEL. PLATES & RATE FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M - ------------------------------------------------------------------------------------------------ 4 Page Flat Cover (4/4) 4's 4 8 $1,400.00 $ 4.15 4 Page Flat Cover (5/5) 4's 4 10 $1,750.00 $ 4.45 4 Page Flat Cover (6/6) 4's 4 12 $2,100.00 $ 4.75 4 Page Flat Cover (7/4) 4's 4 11 $2,400.00 $ 5.05 4 Page Flat Cover (7/5) 4's 4 12 $2,600.00 $ 5.05 4 Page Flat Cover (8/4) 4's 4 12 $2,600.00 $ 5.25 4 Page Flat Cover (8/5) 4's 4 13 $2,800.00 $ 5.25 6 Page Gate Cover (4/4) 6's 2 8 $1,800.00 $10.35 6 Page Gate Cover (5/5) 6's 2 10 $2,250.00 $10.85 6 Page Gate Cover (6/6) 6's 2 12 $2,700.00 $11.35 6 Page Gate Center (4/2) 6's 2 6 $1,400.00 $ 7.25 6 Page Gate Center (4/4) 6's 2 8 $1,800.00 $ 7.25 6 Page Gate Center (5/4) 6's 2 9 $2,050.00 $ 7.75 6 Page Gate Center (5/5) 6's 2 10 $2,250.00 $ 8.00 2 Page Body (1/1) 2's 8 2 $ 500.00 $ 1.65 2 Page Body (2/2) 2's 8 4 $ 700.00 $ 1.65 2 Page Body (4/4) 2's 8 8 $1,400.00 $ 1.80 2 Page Body (5/5) 2's 8 10 $1,700.00 $ 1.95 4 Page Body (1/1) 4's 4 2 $ 500.00 $ 3.16 4 Page Body (2/2) 4's 4 4 $ 700.00 $ 3.16 4 Page Body (4/4) 4's 4 8 $1,400.00 $ 3.43 4 Page Body (5/5) 4's 4 10 $1,700.00 $ 3.73 4 Page Body (6/5) 4's 4 10 $1,850.00 $ 4.20 4 Page Gate Body (1/1) 4's 4 2 $ 500.00 $ 3.16 4 Page Gate Body (2/2) 4's 4 4 $ 700.00 $ 3.16 4 Page Gate Body (4/4) 4's 4 8 $1,400.00 $ 3.43 4 Page Gate Body (5/5) 4's 4 10 $1,700.00 $ 3.73 6 Page Gate Body (4/4+4/4) 6's 4 16 $4,000.00 $ 4.55 8 Page Body (1/1) 8's 2 2 $ 500.00 $ 5.88 8 Page Body (2/2) 8's 2 4 $ 700.00 $ 5.88 8 Page Body (4/4) 8's 2 8 $1,400.00 $ 6.40 8 Page Body (5/5) 8's 2 10 $1,700.00 $ 7.00 8 Page Body (1/1+1/1) 8's 4 4 $ 700.00 $ 3.58 8 Page Body (2/2+2/2) 8's 4 8 $1,400.00 $ 3.58 8 Page Body (4/4+1/1) 8's 4 10 $1,750.00 $ 3.60 8 Page Body (4/4+2/2) 8's 4 12 $2,125.00 $ 3.60 8 Page Body (4/4+4/4) 8's 4 16 $2,800.00 $ 3.60 8 Page Body (5/5+4/4) 8's 4 18 $3,150.00 $ 4.48 8 Page Body (5/5+5/5) 8's 4 20 $3,500.00 $ 4.63 8 Page Gate Body (4/4) 8's 2 8 $2,200.00 $ 7.50 8 Page Gate Body (5/5) 8's 2 10 $2,450.00 $ 8.25 -------------------------------------------------------------------------------------------
Page 1 Quad/Graphics Inc. May 30, 1996
PLAYBOY ENTERPRISES PRICE SCHEDULES - ------------------------------------------------------------------------------- OFFSET PRESSWORK DEL. PLATES & RATE FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M =============================================================================== 12 Page Body (1/1+1/1) 12's 2 4 $900.00 $6.70 12 Page Body (2/2+2/2) 12's 2 8 $1,600.00 $6 70 12 Page Body (4/4+1/1) 12's 2 10 $1,950.00 $6.75 12 Page Body (4/4+2/2) 12's 2 12 $2,300.00 $6.75 12 Page Body (4/4+4/4) 12's 2 16 $3,000.00 $6.75 12 Page Body (5/5+4/4) 12's 2 18 $3,350.00 $8.50 12 Page Body (5/5+5/5) 12's 2 20 $3,700.00 $8.80 16 Page Body (1/1) 8's 1 2 $500.00 $11.75 16 Page Body (2/2) 8's 1 4 $700.00 $11.75 16 Page Body (4/4) 8's 1 8 $1,400.00 $12.80 16 Page Body (5/5) 8's 1 10 $1,700.00 $14.00 16 Page Body (1/1+1/1) 8's 2 4 $700.00 $7.15 16 Page Body (2/2+2/2) 8's 2 8 $1,400.00 $7.15 16 Page Body (4/4+1/1) 8's 2 10 $1,750.00 $7.20 16 Page Body (4/4+2/2) 8's 2 12 $2,125.00 $7.20 16 Page Body (4/4+4/4) 8's 2 16 $2,800.00 $7.20 16 Page Body (5/5+4/4) 8's 2 18 $3,150.00 $8.95 16 Page Body (5/5+5/5) 8's 2 20 $3,500.00 $9.25 16 Page Body (1/1+1/1) 16's 2 4 $700.00 $6.70 16 Page Body (2/2+2/2) 16's 2 8 $1,400.00 $6.70 16 Page Body (4/4+1/1) 16's 2 10 $1,750.00 $6.75 16 Page Body (4/4+2/2) 16's 2 12 $2,125.00 $6.75 16 Page Body (4/4+4/4) 16's 2 16 $2,800.00 $6.75 16 Page Body (5/5+4/4) 16's 2 18 $3,150.00 $8.50 16 Page Body (5/5+5/5) 16's 2 20 $3,500.00 $8.80 - --------------------------------------------------------------------------------
Page 2 Quad/Graphics Inc. May 30, 1996 PLAYBOY ENTERPRISES PRICE SCHEDULES - ------------------------------------------------------------------------ OFFSET PRESSWORK DEL. PLATES & RATE FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M ======================================================================== 32 Page Body (1/1+1/1) 8's 1 4 $700.00 $14.30 32 Page Body (2/2+2/2) 8's 1 8 $1,400.00 $14.30 32 Page Body (4/4+1/1) 8's 1 10 $1,750.00 $14.40 32 Page Body (4/4+2/2) 8's 1 12 $2,125.00 $14.40 32 Page Body (4/4+4/4) 8's 1 16 $2,800.00 $14.40 32 Page Body (5/5+4/4) 8's 1 18 $3,150.00 $17.90 32 Page Body (5/5+5/5) 8's 1 20 $3,500.00 $18.50 32 Page Body (1/1+1/1) 16's 1 4 $700.00 $13.40 32 Page Body (2/2+2/2) 16's 1 8 $1,400.00 $13.40 32 Page Body (4/4+1/1) 16's 1 10 $1,750.00 $13.50 32 Page Body (4/4+2/2) 16's 1 12 $2,125.00 $13.50 32 Page Body (4/4+4/4) 16's 1 16 $2,800.00 $13.50 32 Page Body (5/5+4/4) 16's 1 18 $3,150.00 $17.00 32 Page Body (5/5+5/5) 16's 1 20 $3,500.00 $17.60 - ------------------------------------------------------------------------ Rates are guaranteed for 1,500,000 impressions, replacements will be invoiced as required thereafter. See below for plate and makeready changes ======================================================================== RATE OFFSET PRESS SUPPLEMENTAL PRICES MAKEREADY PER/M ======================================================================== Plate Charges, each $75.00 --- Makeready Changes, each plate $85.00 --- Rub Off $400.00 $2.05 Perf signature $200.00 $0.50 Multiple delivery charges, per delivery --- $0.45 Press down time, per hour $500.00 --- - ------------------------------------------------------------------------ Page 3 Quad / Graphics Inc. May 30, 1996 PLAYBOY ENTERPRISES PRICE SCHEDULES
- -------------------------------------------------------------------------------- GRAVURE PRESSWORK DEL. CYLINDERS & RATE FORM DESCRIPTION AS OUT CYLINDERS MAKEREADY PER/M ================================================================================ 12 Page Body (4/4) 12's 4 8 $14,560.00 $ 5.35 12 Page Body (5/5) 12's 4 10 $18,200.00 $ 6.10 16 Page Body (4/4) 16's 4 8 $14,880.00 $ 5.35 16 Page Body (5/5) 16's 4 10 $18,600.00 $ 6.10 20 Page Body (4/4) 20's 2 8 $15,200.00 $10.70 20 Page Body (5/5) 20's 2 10 $19,000.00 $12.20 24 Page Body (4/4) 24's 2 8 $15,520.00 $10.70 24 Page Body (5/5) 24's 2 10 $19,400.00 $12.20 28 Page Body (4/4) 28's 2 8 $15,840.00 $10.70 28 Page Body (5/5) 28's 2 10 $19,800.00 $12.20 32 Page Body (4/4) 32's 2 8 $16,160.00 $10.70 32 Page Body (5/5) 32's 2 10 $20,200.00 $12.20 36 Page Body (4/4) 36's 2 8 $16,480.00 $16.05 36 Page Body (5/5) 36's 2 10 $20,600.00 $18.30 40 Page Body (4/4) 20's 1 8 $16,800.00 $21.40 40 Page Body (5/5) 20's 1 10 $21,000.00 $24.40 48 Page Body (4/4) 16's 2 8 $17,440.00 $16.05 48 Page Body (5/5) 16's 2 10 $21,800.00 $18.30 48 Page Body (4/4) 24's 1 8 $17,440.00 $21.40 48 Page Body (5/5) 24's 1 10 $21,800.00 $24.40 56 Page Body (4/4) 28's 1 8 $18,080.00 $21.40 56 Page Body (5/5) 28's 1 10 $22,600.00 $24.40 60 Page Body (4/4) 20's 2 8 $18,400.00 $32.10 60 Page Body (5/5) 20's 2 10 $23,000.00 $36.60 64 Page Body (4/4) 32's 1 8 $18,720.00 $21.40 64 Page Body (5/5) 32's 1 10 $23,400.00 $24.40 72 Page Body (4/4) 24's 1 8 $19,360.00 $32.10 72 Page Body (5/5) 24's 1 10 $24,200.00 $36.60 72 Page Body (4/4) 12's 1 8 $19,360.00 $34.50 72 Page Body (5/5) 12's 1 10 $24,200.00 $39.00 84 Page Body (4/4) 28's 1 8 $20,320.00 $32.10 84 Page Body (5/5) 28's 1 10 $25,400.00 $36.60 96 Page Body (4/4) 32's 1 8 $21,280.00 $32.10 96 Page Body (5/5) 32's 1 10 $26,600.00 $36.60 96 Page Body (4/4) 16's 1 8 $21,280.00 $34.50 96 Page Body (5/5) 16's 1 10 $26,600.00 $39.00 - --------------------------------------------------------------------------------
Included in makeready charges are bromides, one set of cylinders with one press proof and the press makeready. - -------------------------------------------------------------------------------- Page 4 Quad / Graphics Inc. May 30, 1996
PLAYBOY ENTERPRISES PRICE SCHEDULES - -------------------------------------------------------------------------------- RATE GRAVURE PRESS SUPPLEMENTAL PRICES MAKEREADY PER/M ================================================================================ Additional bromides, per page, per color $16.50 --- Cylinder Charges, each $1,200.00 --- Makeready Changes, each cylinder $300.00 --- Additional proofs (per side) $1,700.00 --- Supplemental engraving for type only, each $508.00 --- Cylinder storage 1st month, each cylinder $200.00 --- Cylinder storage each additional month, each cylinder $100.00 --- Press down time, per hour $750.00 --- ================================================================================ COVER BODY OFFSET INK PRICES RATE RATE ================================================================================ 4/Color pages, per/M $0.356 $0.322 3/Color pages, per/M $0.296 $0.263 2/Color pages, per/M $0.178 $0.145 Black pages, per/M $0.059 $0.059 5/Color (non metallic) pages, per/M $0.533 $0.533 6/Color (non metallic) pages, per/M $0.711 $0.711 7/Color (non metallic) pages, per/M $0.889 $0.889 8/Color (non metallic) pages, per/M $1.067 $1.067 Metallic Color less than 1/2 page, per/M $0.356 $0.356 Varnish $0.592 $0.592 UV Coat covers 1 & 4 Makeready $250.00 Run Rate, per/M $9.00 UV Coat covers of gatefold (one side only) Makeready $250.00 Run Rate, per/M $13.50 ================================================================================ BODY GRAVURE INK PRICES RATE ================================================================================ 4/Color pages, per/M $0.540 3/Color pages, per/M $0.371 2/Color pages, per/M $0.238 Black pages, per/M $0.106 PMS ink will be invoiced at cost plus 10% --- - --------------------------------------------------------------------------------
Page 5 Quad/Graphics Inc. May 30, 1996
PLAYBOY ENTERPRISES PRICE SCHEDULES - -------------------------------------------------------------------------------- RATE PERFECT BINDING MAKEREADY PER/M ================================================================================ Up to 12 pockets $1,484.00 $32.77 13 pockets $1,566.00 $33.73 14 pockets $1,648.00 $34.69 15 pockets $1,731.00 $35.70 16 pockets $1,813.00 $36.71 17 pockets $1,896.00 $37.77 18 pockets $1,978.00 $38.83 19 pockets $2,060.00 $39.79 20 pockets $2,143.00 $40.96 21 pockets $2,225.00 $42.12 22 pockets $2,308.00 $43.23 23 pockets $2,390.00 $44.34 24 pockets $2,472.00 $45.45 25 pockets $2,555.00 $46.51 26 pockets $2,637.00 $47.57 27 pockets $2,720.00 $48.68 28 pockets $2,802.00 $49.74 29 pockets $2,885.00 $50.85 30 pockets $2,967.00 $51.91 31 pockets $3,049.00 $53.03 32 pockets $3,132.00 $54.09 33 pockets $3,214.00 $55.15 34 pockets $3,297.00 $56.26 35 pockets $3,379.00 $57.32 36 pockets $3,461.00 $58.43 - -------------------------------------------------------------------------------- Rate Per/M includes all costs up through the trimming unit. Makeready prices are based on (3) machines. - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ RATE PERFECT BINDING PREMIUMS MAKEREADY PER/M ================================================================================================ Bind-in and Blow-in cards are counted as pockets --- --- First pocket change per stop, per machine $82.00 --- Each additional pocket change per same stop, per machine $41.00 --- Demographic Insertion (body signatures only) (ink jet required) $300.00 $4.00 Demographic Insertion (cover form only) (ink jet required) $300.00 $3.00 Demographic Insertion (body forms and cover) (ink jet required) $500.00 $6.00 Apply furnished tip-ons $60.00 $3.05 Label Aire/Dot whacker $60.00 $3.05 Handwork, per hour $20.00 --- Binder holding time, per hour $200.00 --- - ------------------------------------------------------------------------------------------------
Page 6 Quad/Graphics Inc. May 30, 1996
PLAYBOY ENTERPRISES PRICE SCHEDULES - -------------------------------------------------------------------------------- IN-LINE POLYWRAP & MAILING RATE WITH ONE COLOR PRE-PRINTED SITMA PLASTIC PER/M ================================================================================ Up to 12 pockets on perfect binder $42.67 13 pockets on perfect binder $43.08 14 pockets on perfect binder $43.58 15 pockets on perfect binder $44.04 16 pockets on perfect binder $44.49 17 pockets on perfect binder $45.05 18 pockets on perfect binder $45.50 19 pockets on perfect binder $46.06 20 pockets on perfect binder $46.56 21 pockets on perfect binder $47.02 22 pockets on perfect binder $47.62 23 pockets on perfect binder $48.23 24 pockets on perfect binder $48.88 25 pockets on perfect binder $49.49 26 pockets on perfect binder $50.15 27 pockets on perfect binder $50.80 28 pockets on perfect binder $51.41 29 pockets on perfect binder $52.07 30 pockets on perfect binder $52.67 31 pockets on perfect binder $53.33 32 pockets on perfect binder $53.98 33 pockets on perfect binder $54.59 34 pockets on perfect binder $55.25 35 pockets on perfect binder $55.85 36 pockets on perfect binder $56.51 =============================================================================
- ----------------------------------------------------------------------------------------------------------- RATE IN-LINE POLYWRAP & MAILING PREMIUMS MAKEREADY PER/M =========================================================================================================== Inserts $25.50 $2.05 Pocket changes, each $50.00 --- Ink jet addressing and formatting upcharge (max 8 lines in one position) --- $2.54 Ink jet "out of pocket" upcharge (per position) $300.00 $5.00 Ink jet code & message or code only $150.00 $3.00 Demographic Insertion $300.00 $5.00 Additional colors and versions on poly film will be invoiced at cost plus 15% Label Aire/Dot whacker $60.00 $3.05 ----------------------------------------------------------------------------------------------------------
Page 7 Quad/Graphics Inc. May 30, 1996
PLAYBOY ENTERPRISES PRICE SCHEDULES - -------------------------------------------------------------------------------- RATE NEWSSTAND & BULK PACKING MAKEREADY PER/M ================================================================================ Shrinkwrap in bundles --- $13.40 Newsstand label preparation --- $1.00 Onsert newsstand letter, per bundle $0.08 --- ================================================================================ RATE OFF-LINE MAILING MAKEREADY PER/M =============================================================================== Off-line mail with paper labels $60.00 $34.00 List changes, each $30.60 --- Insert into supplied envelopes --- $137.70 Insert into quad supplied envelopes --- $211.14 Handwork, per hour $30.00 --- ================================================================================ RATE PACKING & HANDLING MAKEREADY PER/M ================================================================================ Off-line Polywrapping base piece $153.00 $32.15 Off-line polywrapping per insert $25.50 $2.05 Bulk in cartons, each (with attached shipping label) $1.30 --- Bulk on skids, each $15.00 --- Bulk on skids with sleeves, each $20.00 --- Tearsheets (based on per hour rate) $30.00 --- Handle furnished skids, each $15.30 --- Handling furnished stock, per cwt (as received) $0.45 --- - --------------------------------------------------------------------------------
Page 8 Quad/Graphics Inc. May 30, 1996 EXHIBIT C Playboy Enterprises, Inc. - Quad/Graphics, Inc. First Amendment Paper Requirements (dated September 20, 1995) PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------------------- 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ============================================================================================ 4 Page Flat Cover (4/4) 33.7500 22.750 80 1,293 37.49 4 Page Flat Cover (5/5) 33.7500 22.750 80 1,552 37.69 4 Page Flat Cover (6/6) 33.7500 22.750 80 1,810 38.08 Press Stops, each 33.7500 22.750 80 323 -- Plate Changes, per plate 33.7500 22.750 80 81 -- 6 Page Cover (4/4) 24.5000 22.750 80 1,126 51.89 6 Page Cover (5/5) 24.5000 22.750 80 1,314 52.39 6 Page Cover (6/6) 24.5000 22.750 80 1,502 53.38 Press Stops, each 24.5000 22.750 80 188 -- Plate Changes, per plate 24.5000 22.750 80 47 -- 6 Page Center (4/2) 23.1875 22.750 60 666 36.71 6 Page Center (4/4) 23.1875 22.750 60 666 36.71 6 Page Center (5/4) 23.1875 22.750 60 800 37.62 6 Page Center (5/5) 23.1875 22.750 60 800 37.62 Press Stops, each 23.1875 22.750 60 133 -- Plate Changes, per plate 23.1875 22.750 60 33 -- 2 Page Body (1/1) 33.5000 22.750 50 401 10.55 2 Page Body (2/2) 33.5000 22.750 50 481 10.67 2 Page Body (4/4) 33.5000 22.750 50 641 10.92 Page Body (5/5) 33.5000 22.750 50 802 11.05 Page Body (1/1) 33.5000 22.750 50 401 21.10 4 Page Body (2/2) 33.5000 22.750 50 481 21.35 4 Page Body (4/4) 33.5000 22.750 50 641 21.73 4 Page Body (5/5) 33.5000 22.750 50 802 21.97 4 Page Body (1/1) 33.5000 22.750 38 305 16.03 4 Page Body (2/2) 33.5000 22.750 38 366 16.22 4 Page Body (4/4) 33.5000 22.750 38 487 16.51 4 Page Body (5/5) 33.5000 22.750 38 610 16.69 4 Page Gatefold (1/1) 30.5000 22.750 50 365 19.69 4 Page Gatefold (2/2) 30.5000 22.750 50 438 19.94 4 Page Gatefold (4/4) 30.5000 22.750 50 584 20.19 4 Page Gatefold (5/5) 30.5000 22.750 50 731 20.36 Press Stops, each 30.5000 22.750 50 146 -- Plate Changes, per plate 30.5000 22.750 50 37 -- 6 Page Gatefold (4/4)(4/4) 19.1250 22.750 50 825 25.90 Press Stops, each, per web 19.1250 22.750 50 92 -- Plate Changes, per plate 19.1250 22.750 50 23 -- 8 Page Body (1/1) 33.5000 22.750 50 401 42.19 8 Page Body (2/2) 33.5000 22.750 50 481 42.70 8 Page Body (4/4) 33.5000 22.750 50 641 43.44 8 Page Body (5/5) 33.5000 22.750 50 802 43.93 8 Page Body (1/1) 33.5000 22.750 38 305 32.07 8 Page Body (2/2) 33.5000 22.750 38 366 32.45 8 Page Body (4/4) 33.5000 22.750 38 487 33.01 8 Page Body (5/5) 33.5000 22.750 38 610 33.39
Page 1 QUAD/GRAPHICS INC. September 20, 1995 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- ------------------------------------------------------------------------------------------------------------- 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ============================================================================================================= 8 Page Body (1/1+1/1) 33.5000 22.750 50 642 42.82 8 Page Body (2/2+2/2) 33.5000 22.750 50 802 43.31 8 Page Body (4/4+1/1) 33.5000 22.750 50 963 43.56 8 Page Body (4/4+2/2) 33.5000 22.750 50 1,123 43.56 8 Page Body (4/4+4/4) 33.5000 22.750 50 1,284 43.56 8 Page Body (5/5+4/4) 33.5000 22.750 50 1,444 43.69 8 Page Body (5/5+5/5) 33.5000 22.750 50 1,604 44.06 8 Page Body (1/1+1/1) 33.5000 22.750 38 488 32.54 8 Page Body (2/2+2/2) 33.5000 22.750 38 610 32.92 8 Page Body (4/4+1/1) 33.5000 22.750 38 732 33.11 8 Page Body (4/4+2/2) 33.5000 22.750 38 854 33.11 8 Page Body (4/4+4/4) 33.5000 22.750 38 976 33.11 8 Page Body (5/5+4/4) 33.5000 22.750 38 1,097 33.21 8 Page Body (5/5+5/5) 33.5000 22.750 38 1,219 33.48 8 Page Gatefold (4/4) 31.7500 22.750 50 912 42.69 8 Page Gatefold (5/5) 31.7500 22.750 50 1,064 43.33 Press Stops, each 31.7500 22.750 50 152 --- Plate Changes, per plate 31.7500 22.750 50 38 --- 12 Page Body (1/1+ 33.5000 22.750 38 244 32.54 1/1) 16.7500 22.750 38 122 16.27 12 Page Body (2/2+ 33.5000 22.750 38 305 32.92 2/2) 16.7500 22.750 38 152 16.46 12 Page Body (4/4+ 33.5000 22.750 38 366 33.11 1/1) 16.7500 22.750 38 183 16.55 12 Page Body (4/4+ 33.5000 22.750 38 427 33.11 2/2) 16.7500 22.750 38 213 16.55 12 Page Body (4/4+ 33.5000 22.750 38 488 33.11 4/4) 16.7500 22.750 38 244 16.55 12 Page Body (5/5+ 33.5000 22.750 38 549 33.21 4/4) 16.7500 22.750 38 274 16.60 12 Page Body (5/5+ 33.5000 22.750 38 610 33.48 5/5) 16.7500 22.750 38 305 16.74 16 Page Body (1/1) 33.5000 22.750 38 305 64.14 16 Page Body (2/2) 33.5000 22.750 38 366 64.90 16 Page Body (4/4) 33.5000 22.750 38 487 66.02 16 Page Body (5/5) 33.5000 22.750 38 610 66.78 16 Page Body (1/1+1/1) 33.5000 22.750 38 488 65.08 16 Page Body (2/2+2/2) 33.5000 22.750 38 610 65.84 16 Page Body (4/4+1/1) 33.5000 22.750 38 732 66.21 16 Page Body (4/4+2/2) 33.5000 22.750 38 854 66.21 16 Page Body (4/4+4/4) 33.5000 22.750 38 976 66.21 16 Page Body (5/5+4/4) 33.5000 22.750 38 1,097 66.41 16 Page Body (5/5+5/5) 33.5000 22.750 38 1,219 66.97 - -------------------------------------------------------------------------------------------------------------
Page 2 QUAD/GRAPHICS INC. September 20, 1995
PLAYBOY ENTERPRISES PAPER REQUIREMENTS - ---------------------------------------------------------------------------------------- 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ======================================================================================== 32 Page Body (1/1+1/1) 33.5000 22.750 38 488 130.16 32 Page Body (2/2+2/2) 33.5000 22.750 38 610 131.67 32 Page Body (4/4+1/1) 33.5000 22.750 38 732 132.42 32 Page Body (4/4+2/2) 33.5000 22.750 38 854 132.42 32 Page Body (4/4+4/4) 33.5000 22.750 38 976 132.42 32 Page Body (5/5+4/4) 33.5000 22.750 38 1,097 132.82 32 Page Body (5/5+5/5) 33.5000 22.750 38 1,219 133.94 Press Stops per web, each 33.5000 22.750 50 160 -- Press Stops per web, each 33.5000 22.750 38 122 -- Plate Changes, per plate 33.5000 22.750 50 40 -- Plate Changes, per plate 33.5000 22.750 38 30 -- - ----------------------------------------------------------------------------------------
PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------- 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ================================================================================ 4 Page Flat Cover (4/4) 33.7500 22.750 100 1,616 46.86 4 Page Flat Cover (5/5) 33.7500 22.750 100 1,940 47.11 4 Page Flat Cover (6/6) 33.7500 22.750 100 2,263 47.61 Press Stops, each 33.7500 22.750 100 404 -- Plate Changes, per plate 33.7500 22.750 100 102 -- 6 Page Cover (4/4) 24.5000 22.750 100 1,408 64.87 6 Page Cover (5/5) 24.5000 22.750 100 1,643 65.49 6 Page Cover (6/6) 24.5000 22.750 100 1,877 66.72 Press Stops, each 24.5000 22.750 100 235 -- Plate Changes, per plate 24.5000 22.750 100 59 -- 6 Page Center (4/2) 23.1875 22.750 80 888 48.95 6 Page Center (4/4) 23.1875 22.750 80 888 49.48 6 Page Center (5/4) 23.1875 22.750 80 1,066 50.16 6 Page Center (5/5) 23.1875 22.750 80 1,066 50.16 Press Stops, each 23.1875 22.750 80 178 -- Plate Changes, per plate 23.1875 22.750 80 44 -- 2 Page Body (1/1) 33.5000 22.750 80 642 16.89 2 Page Body (2/2) 33.5000 22.750 80 770 17.08 2 Page Body (4/4) 33.5000 22.750 80 1,026 17.48 2 Page Body (5/5) 33.5000 22.750 80 1,284 17.68 2 Page Body (1/1) 33.5000 22.750 60 481 12.67 2 Page Body (2/2) 33.5000 22.750 60 578 12.81 2 Page Body (4/4) 33.5000 22.750 60 769 13.11 2 Page Body (5/5) 33.5000 22.750 60 963 13.26 4 Page Body (1/1) 33.5000 22.750 60 481 25.32 4 Page Body (2/2) 33.5000 22.750 60 578 25.62 4 Page Body (4/4) 33.5000 22.750 60 769 26.07 4 Page Body (5/5) 33.5000 22.750 60 963 26.36 4 Page Body (1/1) 33.5000 22.750 40 321 16.88 4 Page Body (2/2) 33.5000 22.750 40 385 17.08 4 Page Body (4/4) 33.5000 22.750 40 513 17.38 4 Page Body (5/5) 33.5000 22.750 40 642 17.57 4 Page Gatefold (1/1) 30.5000 22.750 80 584 31.50 4 Page Gatefold (2/2) 30.5000 22.750 80 701 31.91 4 Page Gatefold (4/4) 30.5000 22.750 80 935 32.30 4 Page Gatefold (5/5) 30.5000 22.750 80 1,170 32.57 Press Stops, each 30.5000 22.750 80 234 -- Plate Changes, per plate 30.5000 22.750 80 58 -- 6 Page Gatefold (4/4)(4/4) 19.1250 22.750 80 1,320 41.44 Press Stops, each, per web 19.1250 22.750 80 147 -- Plate Changes, per plate 19.1250 22.750 80 37 -- 8 Page Body (1/1) 33.5000 22.750 60 481 50.63 8 Page Body (2/2) 33.5000 22.750 60 578 51.24 8 Page Body (4/4) 33.5000 22.750 60 769 52.12 8 Page Body (5/5) 33.5000 22.750 60 963 52.72 - --------------------------------------------------------------------------------
Page 4 QUAD/GRAPHICS INC. September 20, 1995 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------- 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ================================================================================ 8 Page Body (1/1) 33.5000 22.750 36 289 30.38 8 Page Body (2/2) 33.5000 22.750 36 347 30.74 8 Page Body (4/5) 33.5000 22.750 36 462 31.27 8 Page Body (5/5) 33.5000 22.750 36 578 31.63 8 Page Body (1/1+1/1) 33.5000 22.750 60 770 51.38 8 Page Body (2/2+2/2) 33.5000 22.750 60 963 51.98 8 Page Body (4/4+1/1) 33.5000 22.750 60 1,155 52.27 8 Page Body (4/4+2/2) 33.5000 22 750 60 1,348 52.27 8 Page Body (4/4+4/4) 33.5000 22 750 60 1,540 52.27 8 Page Body (5/5+4/4) 33.5000 22.750 60 1,733 52.43 8 Page Body (5/5+5/5) 33.5000 22.750 60 1,925 52.87 8 Page Body (1/1+1/1) 33.5000 22.750 36 462 30.83 8 Page Body (2/2+2/2) 33.5000 22.750 36 578 31.19 8 Page Body (4/4+1/1) 33.5000 22.750 36 693 31.36 8 Page Body (4/4+2/2) 33.5000 22.750 36 809 31.36 8 Page Body (4/4+4/4) 33.5000 22.750 36 924 31.36 8 Page Body (5/5+4/4) 33.5000 22.750 36 1,040 31.46 8 Page Body (5/5+5/5) 33.5000 22.750 36 1,155 31.72 8 Page Gatefold (4/4) 31.7500 22.750 60 1,095 51.23 8 Page Gatefold (5/5) 31.7500 22.750 60 1,277 51.99 Press Stops, each 31.7500 22.750 60 182 -- Plate Changes, per plate 31.7500 22.750 60 46 -- 12 Page Body (1/1+ 33.5000 22.750 36 231 30.83 1/1) 16.7500 22.750 36 116 15.41 12 Page Body (2/2+ 33.5000 22.750 36 289 31.19 2/2) 16.7500 22.750 36 144 15.59 12 Page Body (4/4+ 33.5000 22.750 36 347 31.36 1/1) 16.7500 22.750 36 173 15.68 12 Page Body (4/4+ 33.5000 22.750 36 404 31.36 2/2) 16.7500 22.750 36 202 15.68 12 Page Body (4/4+ 33.5000 22.750 36 462 31.36 4/4) 16.7500 22.750 36 231 15.68 12 Page Body (5/5+ 33.5000 22.750 36 520 31.46 4/4) 16.7500 22.750 36 260 15.73 12 Page Body (5/5+ 33.5000 22.750 36 578 31.72 5/5) 16.7500 22.750 36 289 15.86 16 Page Body (1/1) 33.5000 22.750 36 289 60.76 16 Page Body (2/2) 33.5000 22.750 36 347 61.48 16 Page Body (4/4) 33.5000 22.750 36 462 62.55 16 Page Body (5/5) 33.5000 22.750 36 578 63.27 - --------------------------------------------------------------------------------
Page 5 QUAD/GRAPHICS INC. September 20, 1995 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- ------------------------------------------------------------------------------ 8 1/8" x 10 7/8" Book Size ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ============================================================================== 16 Page Body (1/1+1/1) 33.5000 22.750 36 462 61.65 16 Page Body (2/2+2/2) 33.5000 22.750 36 578 62.37 16 Page Body (4/4+1/1) 33.5000 22.750 36 693 62.73 16 Page Body (4/4+2/2) 33.5000 22.750 36 809 62.73 16 Page Body (4/4+4/4) 33.5000 22.750 36 924 62.73 16 Page Body (5/5+4/4) 33.5000 22.750 36 1,040 62.92 16 Page Body (5/5+5/5) 33.5000 22.750 36 1,155 63.44 32 Page Body (1/1+1/1) 33.5000 22.750 36 462 123.31 32 Page Body (2/2+2/2) 33.5000 22.750 36 578 124.74 32 Page Body (4/4+1/1) 33.5000 22.750 36 693 125.45 32 Page Body (4/4+2/2) 33.5000 22.750 36 809 125.45 32 Page Body (4/4+4/4) 33.5000 22.750 36 924 125.45 32 Page Body (5/5+4/4) 33.5000 22.750 36 1,040 125.83 32 Page Body (5/5+5/5) 33.5000 22.750 36 1,155 126.89 Press Stops, per web, each 33.5000 22.750 80 257 -- Press Stops, per web, each 33.5000 22.750 60 193 -- Press Stops, per web, each 33.5000 22.750 36 116 -- Plate Changes, per plate 33.5000 22.750 80 64 -- Plate Changes, per plate 33.5000 22.750 60 48 -- Plate Changes, per plate 33.5000 22.750 36 29 -- - ------------------------------------------------------------------------------
Page 6 QUAD/GRAPHICS INC. September 20,1995
PLAYBOY ENTERPRISES PAPER REQUIREMENTS - ------------------------------------------------------------------------------------------ 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ========================================================================================== 12 Page Body (4/4) 66.875 33.500 38 4,481 47.82 12 Page Body (5/5) 66.875 33.500 38 5,377 48.51 16 Page Body (4/4) 89.125 33.500 38 5,971 63.73 16 Page Body (5/5) 89.125 33.500 38 7,166 65.25 20 Page Body (4/4) 55.750 33.500 38 3,735 79.74 20 Page Body (5/5) 55.750 33.500 38 4,482 80.89 24 Page Body (4/4) 66.875 33.500 38 4,481 95.65 24 Page Body (5/5) 66.875 33.500 38 5,377 97.03 28 Page Body (4/4) 78.000 33.500 38 5,226 111.56 28 Page Body (5/5) 78.000 33.500 38 6,271 113.17 32 Page Body (4/4) 89.125 33.500 38 5,971 127.47 32 Page Body (5/5) 89.125 33.500 38 7,166 129.31 36 Page Body (4/4) 66.875 50.250 38 6,721 143.47 36 Page Body (5/5) 66.875 50.250 38 8,065 145.54 40 Page Body (4/4) 55.750 33.500 38 3,735 159.47 40 Page Body (5/5) 55.750 33.500 38 4,482 161.77 48 Page Body (4/4) 89.125 50.250 38 8,957 191.20 48 Page Body (5/5) 89.125 50.250 38 10,748 193.96 48 Page Body (4/4) 66.875 33.500 38 4,481 191.29 48 Page Body (5/5) 66.875 33.500 38 5,377 194.05 56 Page Body (4/4) 78.000 33.500 38 5,226 223.12 56 Page Body (5/5) 78.000 33.500 38 6,271 226.34 60 Page Body (4/4) 55.750 50.250 38 5,603 239.21 60 Page Body (5/5) 55.750 50.250 38 6,723 242.66 64 Page Body (4/4) 89.125 33.500 38 5,971 254.94 64 Page Body (5/5) 89.125 33.500 38 7,166 258.62 72 Page Body (4/4) 66.875 50.250 38 6,721 286.94 72 Page Body (5/5) 66.875 50.250 38 8,065 291.08 84 Page Body (4/4) 78.000 50.250 38 7,839 334.68 84 Page Body (5/5) 78.000 50.250 38 9,407 339.50 96 Page Body (4/4) 89.125 50.250 38 8,957 382.41 96 Page Body (5/5) 89.125 50.250 38 10,748 387.93 Cylinder Changes, per cylinder 55.750 33.500 38 374 -- Cylinder Changes, per cylinder 66.875 33.500 38 448 -- Cylinder Changes, per cylinder 78.000 33.500 38 523 -- Cylinder Changes, per cylinder 89.125 33.500 38 597 -- Cylinder Changes, per cylinder 55.750 50.250 38 560 -- Cylinder Changes, per cylinder 66.875 50.250 38 672 -- Cylinder Changes, per cylinder 78.000 50.250 38 784 -- Cylinder Changes, per cylinder 89.125 50.250 38 896 -- - ------------------------------------------------------------------------------------------
Page 7 QUAD/GRAPHICS INC. September 20, 1995 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- ------------------------------------------------------------------------------------------------------ 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ====================================================================================================== 12 Page Body (4/4) 66.875 33.500 36 4,245 45.31 12 Page Body (5/5) 66.875 33.500 36 5,094 45.96 16 Page Body (4/4) 89.125 33.500 36 5,657 60.38 16 Page Body (5/5) 89.125 33.500 36 6,789 61.81 20 Page Body (4/4) 55.750 33.500 36 3,539 75.54 20 Page Body (5/5) 55.750 33.500 36 4,246 76.63 24 Page Body (4/4) 66.875 33.500 36 4,245 90.61 24 Page Body (5/5) 66.875 33.500 36 5,094 91.92 28 Page Body (4/4) 78.000 33.500 36 4,951 105.69 28 Page Body (5/5) 78.000 33.500 36 5,941 107.21 32 Page Body (4/4) 89.125 33.500 36 5,657 120.76 32 Page Body (5/5) 89.125 33.500 36 6,789 122.50 36 Page Body (4/4) 66.875 50.250 36 6,367 135.92 36 Page Body (5/5) 66.875 50.250 36 7,641 137.88 40 Page Body (4/4) 55.750 33.500 36 3,539 151.08 40 Page Body (5/5) 55.750 33.500 36 4,246 153.26 48 Page Body (4/4) 89.125 50.250 36 8,486 181.14 48 Page Body (5/5) 89.125 50.250 36 10,183 183.75 48 Page Body (4/4) 66.875 33.500 36 4,245 181.23 48 Page Body (5/5) 66.875 33.500 36 5,094 183.84 56 Page Body (4/4) 78.000 33.500 36 4,951 211.37 56 Page Body (5/5) 78.000 33.500 36 5,941 214.42 60 Page Body (4/4) 55.750 50.250 36 5,308 226.62 60 Page Body (5/5) 55.750 50.250 36 6,370 229.89 64 Page Body (4/4) 89.125 33.500 36 5,657 241.52 64 Page Body (5/5) 89.125 33.500 36 6,789 245.01 72 Page Body (4/4) 66.875 50.250 36 6,367 271.84 72 Page Body (5/5) 66.875 50.250 36 7,641 275.76 84 Page Body (4/4) 78.000 50.250 36 7,426 317.06 84 Page Body (5/5) 78.000 50.250 36 8,912 321.63 96 Page Body (4/4) 89.125 50.250 36 8,486 362.28 96 Page Body (5/5) 89.125 50.250 36 10,183 367.51 Cylinder Changes, per cylinder 55.750 33.500 36 354 --- Cylinder Changes, per cylinder 66.875 33.500 36 424 --- Cylinder Changes, per cylinder 78.000 33.500 36 495 --- Cylinder Changes, per cylinder 89.125 33.500 36 566 --- Cylinder Changes, per cylinder 55.750 50.250 36 531 --- Cylinder Changes, per cylinder 66.875 50.250 36 637 --- Cylinder Changes, per cylinder 78.000 50.250 36 743 --- Cylinder Changes, per cylinder 89.125 50.250 36 849 ---
Page 8 QUAD/GRAPHICS INC. September 20, 1995 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ============================================================================================================= 12 Page Body (4/4) 66.875 33.500 45 5,306 56.63 12 Page Body (5/5) 66.875 33.500 45 6,367 57.45 16 Page Body (4/4) 89.125 33.500 45 7,071 75.48 16 Page Body (5/5) 89.125 33.500 45 8,486 77.27 20 Page Body (4/4) 55.750 33.500 45 4,423 94.42 20 Page Body (5/5) 55.750 33.500 45 5,308 95.79 24 Page Body (4/4) 66.875 33.500 45 5,306 113.27 24 Page Body (5/5) 66.875 33.500 45 6,367 114.90 28 Page Body (4/4) 78.000 33.500 45 6,189 132.11 28 Page Body (5/5) 78.000 33.500 45 7,426 134.01 32 Page Body (4/4) 89.125 33.500 45 7,071 150.95 32 Page Body (5/5) 89.125 33.500 45 8,486 153.13 36 Page Body (4/4) 66.875 50.250 45 7,959 169.90 36 Page Body (5/5) 66.875 50.250 45 9,551 172.35 40 Page Body (4/4) 55.750 33.500 45 4,423 188.85 40 Page Body (5/5) 55.750 33.500 45 5,308 191.57 48 Page Body (4/4) 89.125 50.250 45 10,607 226.43 48 Page Body (5/5) 89.125 50.250 45 12,728 229.69 48 Page Body (4/4) 66.875 33.500 45 5,306 226.53 48 Page Body (5/5) 66.875 33.500 45 6,367 229.80 56 Page Body (4/4) 78.000 33.500 45 6,189 264.22 56 Page Body (5/5) 78.000 33.500 45 7,426 268.03 60 Page Body (4/4) 55.750 50.250 45 6,635 283.27 60 Page Body (5/5) 55.750 50.250 45 7,962 287.36 64 Page Body (4/4) 89.125 33.500 45 7,071 301.90 64 Page Body (5/5) 89.125 33.500 45 8,486 306.26 72 Page Body (4/4) 66.875 50.250 45 7,959 339.80 72 Page Body (5/5) 66.875 50.250 45 9,551 344.70 84 Page Body (4/4) 78.000 50.250 45 9,283 396.33 84 Page Body (5/5) 78.000 50.250 45 11,140 402.04 96 Page Body (4/4) 89.125 50.250 45 10,607 452.85 96 Page Body (5/5) 89.125 50.250 45 12,728 459.39 Cylinder Changes, per cylinder 55.750 33.500 45 442 -- Cylinder Changes, per cylinder 66.875 33.500 45 531 -- Cylinder Changes, per cylinder 78.000 33.500 45 619 -- Cylinder Changes, per cylinder 89.125 33.500 45 707 -- Cylinder Changes, per cylinder 55.750 50.250 45 663 -- Cylinder Changes, per cylinder 66.875 50.250 45 796 -- Cylinder Changes, per cylinder 78.000 50.250 45 928 -- Cylinder Changes, per cylinder 89.125 50.250 45 1,061 -- - -------------------------------------------------------------------------------------------------------------- Page 9 QUAD/GRAPHICS INC. September 20, 1995
September 9, 1996 [QUAD/GRAPHICS LOGO] TO: Maria Mandis FROM: Jackie Luedtke RE: Revised Paper Requirements - -------------------------------------------------------------------------------- Please find attached a copy of the revised paper requirements as per your request. These requirements are to replace Exhibit C which is attached to the new one year Amendment that was signed between Playboy and Quad/Graphics. I am sorry for any inconvenience this may have caused you in the interim. Please let me know if I can help with anything else. Thank You. QUAD/LOMIRA 952 Badger Road, Lomira, Wisconsin 53048-9999 PHONE 414-269-4700 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ======================================================================================================= 4 Page Flat Cover (4/4) 33.7500 22.750 100 1,616 46.86 4 Page Flat Cover (5/5) 33.7500 22.750 100 1,940 47.11 4 Page Flat Cover (6/6) 33.7500 22.750 100 2,263 47.61 Press Stops, each 33.7500 22.750 100 404 --- Plate Changes, per plate 33.7500 22.750 100 102 --- 6 Page Cover (4/4) 24.5000 22.750 80 1,126 51.89 6 Page Cover (5/5) 24.5000 22.750 80 1,314 52.39 6 Page Cover (6/6) 24.5000 22.750 80 1,502 53.38 Press Stops, each 24.5000 22.750 80 188 --- Plate Changes, per plate 24.5000 22.750 80 47 --- 6 Page Center (4/2) 23.1875 22.750 60 666 36.71 6 Page Center (4/4) 23.1875 22.750 60 666 37.11 6 Page Center (5/4) 23.1875 22.750 60 800 37.62 6 Page Center (5/5) 23.1875 22.750 60 800 37.62 Press Stops, each 23.1875 22.750 60 133 --- Plate Changes, per plate 23.1875 22.750 60 33 --- 2 Page Body (1/1) 33.5000 22.750 50 401 10.55 2 Page Body (2/2) 33.5000 22.750 50 481 10.67 2 Page Body (4/4) 33.5000 22.750 50 641 10.92 2 Page Body (5/5) 33.5000 22.750 50 802 11.05 4 Page Body (1/1) 33.5000 22.750 50 401 21.10 4 Page Body (2/2) 33.5000 22.750 50 481 21.35 4 Page Body (4/4) 33.5000 22.750 50 641 21.73 4 Page Body (5/5) 33.5000 22.750 50 802 21.97 4 Page Body (1/1) 33.5000 22.750 40 321 16.88 4 Page Body (2/2) 33.5000 22.750 40 385 17.08 4 Page Body (4/4) 33.5000 22.750 40 513 17.38 4 Page Body (5/5) 33.5000 22.750 40 642 17.57 4 Page Gatefold (1/1) 30.5000 22.750 60 438 23.63 4 Page Gatefold (2/2) 30.5000 22.750 60 526 23.93 4 Page Gatefold (4/4) 30.5000 22.750 60 701 24.23 4 Page Gatefold (5/5) 30.5000 22.750 60 877 24.43 Press Stops, each 30.5000 22.750 60 175 --- Plate Changes, per plate 30.5000 22.750 60 44 --- 6 Page Gatefold (4/4)(4/4) 19.1250 22.750 60 990 31.08 Press Stops, each, per web 19.1250 22.750 60 110 --- Plate Changes, per plate 19.1250 22.750 60 27 --- 8 Page Body (1/1) 33.5000 22.750 50 401 42.19 8 Page Body (2/2) 33.5000 22.750 50 481 42.70 8 Page Body (4/4) 33.5000 22.750 50 641 43.44 8 Page Body (5/5) 33.5000 22.750 50 802 43.93 8 Page Body (1/1) 33.5000 22.750 40 321 33.76 8 Page Body (2/2) 33.5000 22.750 40 385 34.16 8 Page Body (4/4) 33.5000 22.750 40 513 34.75 8 Page Body (5/5) 33.5000 22.750 40 642 35.15 - -------------------------------------------------------------------------------------------------------
Page 1 Quad / Graphics Inc. September 9, 1996 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- --------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M - --------------------------------------------------------------------------------------------- 8 Page Body (1/1+1/1) 33.5000 22.750 50 642 42.82 8 Page Body (2/2+2/2) 33.5000 22.750 50 802 43.31 8 Page Body (4/4+1/1) 33.5000 22.750 50 963 43.56 8 Page Body (4/4+2/2) 33.5000 22.750 50 1,123 43.56 8 Page Body (4/4+4/4) 33.5000 22.750 50 1,284 43.56 8 Page Body (5/5+4/4) 33.5000 22.750 50 1,444 43.69 8 Page Body (5/5+5/5) 33.5000 22.750 50 1,604 44.06 8 Page Body (1/1+1/1) 33.5000 22.750 40 513 34.25 8 Page Body (2/2+2/2) 33.5000 22.750 40 642 34.65 8 Page Body (4/4+1/1) 33.5000 22.750 40 770 34.85 8 Page Body (4/4+2/2) 33.5000 22.750 40 899 34.85 8 Page Body (4/4+4/4) 33.5000 22.750 40 1,027 34.85 8 Page Body (5/5+4/4) 33.5000 22.750 40 1,155 34.95 8 Page Body (5/5+5/5) 33.5000 22.750 40 1,284 35.25 8 Page Gatefold (4/4) 31.7500 22.750 60 1,095 51.23 8 Page Gatefold (5/5) 31.7500 22.750 60 1,277 51.99 Press Stops, each 31.7500 22.750 60 182 -- Plate Changes, per plate 31.7500 22.750 60 46 -- 12 PageBody (1/1+ 33.5000 22.750 40 257 34.25 1/1) 16.7500 22.750 40 128 17.13 12 Page Body (2/2+ 33.5000 22.750 40 321 34.65 2/2) 16.7500 22.750 40 160 17.33 12 Page Body (4/4+ 33.5000 22.750 40 385 34.85 1/1) 16.7500 22.750 40 193 17.42 12 Page Body (4/4+ 33.5000 22 750 40 449 34.85 2/2) 16.7500 22.750 40 225 17.42 12 Page Body (4/4+ 33.5000 22.750 40 513 34.85 4/4) 16.7500 22.750 40 257 17.42 12 Page Body (5/5+ 33.5000 22.750 40 578 34.95 4/4) 16.7500 22.750 40 289 17.48 12 Page Body (5/5+ 33.5000 22.750 40 642 35.25 5/5) 16.7500 22.750 40 321 17.62 16 Page Body (1/1) 33.5000 22.750 40 321 67.51 16 Page Body (2/2) 33.5000 22.750 40 385 68.31 16 Page Body (4/4) 33.5000 22.750 40 513 69.50 16 Page Body (5/5) 33.5000 22.750 40 642 70.30 16 Page Body (1/1+1/1) 33.5000 22.750 40 513 68.51 16 Page Body (2/2+2/2) 33.5000 22.750 40 642 69.30 16 Page Body (4/4+1/1) 33.5000 22.750 40 770 69.70 16 Page Body (4/4+2/2) 33.5000 22 750 40 899 69.70 16 Page Body (4/4+4/4) 33.5000 22.750 40 1,027 69.70 16 Page Body (5/5+4/4) 33.5000 22.750 40 1,155 69.91 16 Page Body (5/5+5/5) 33.5000 22.750 40 1,284 70.49 - ---------------------------------------------------------------------------------------------
Page 2 Quad / Graphics Inc. September 9, 1996
PLAYBOY ENTERPRISES PAPER REQUIREMENTS - ------------------------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ============================================================================================================= 32 Page Body (1/1+1/1) 33.5000 22.750 40 513 137.01 32 Page Body (2/2+2/2) 33.5000 22.750 40 642 138.60 32 Page Body (4/4+1/1) 33.5000 22.750 40 770 139.39 32 Page Body (4/4+2/2) 33.5000 22.750 40 899 139.39 32 Page Body (4/4+4/4) 33.5000 22.750 40 1,027 139.39 32 Page Body (5/5+4/4) 33.5000 22.750 40 1,155 139.81 32 Page Body (5/5+5/5) 33.5000 22.750 40 1,284 140.99 Press Stops, per web, each 33.5000 22.750 50 160 -- Press Stops, per web, each 33.5000 22.750 40 128 -- Plate Changes, per plate 33.5000 22.750 50 40 -- Plate Changes, per plate 33.5000 22.750 40 32 -- - -------------------------------------------------------------------------------------------------------------
Page 3 Quad/Graphics Inc. September 9, 1996 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ================================================================================ 4 Page Flat Cover (4/4) 33.7500 22.750 100 1,616 46.86 4 Page Flat Cover (5/5) 33.7500 22.750 100 1,940 47.11 4 Page Flat Cover (6/6) 33.7500 22.750 100 2,263 47.61 Press Stops, each 33.7500 22.750 100 404 -- Plate Changes, per plate 33.7500 22.750 100 102 -- 6 Page Cover (4/4) 24.5000 22.750 100 1,408 64.87 6 Page Cover (5/5) 24.5000 22.750 100 1,643 65.49 6 Page Cover (6/6) 24.5000 22.750 100 1,877 66.72 Press Stops, each 24.5000 22.750 100 235 -- Plate Changes, per plate 24.5000 22.750 100 59 -- 6 Page Center (4/2) 23.1875 22.750 80 888 48.95 6 Page Center (4/4) 23.1875 22.750 80 888 49.48 6 Page Center (5/4) 23.1875 22.750 80 1,066 50.16 6 Page Center (5/5) 23.1875 22.750 80 1,066 50.16 Press Stops, each 23.1875 22.750 80 178 -- Plate Changes, per plate 23.1875 22.750 80 44 -- 2 Page Body (1/1) 33.5000 22.750 80 642 16.89 2 Page Body (2/2) 33.5000 22.750 80 770 17.08 2 Page Body (4/4) 33.5000 22.750 80 1,026 17.48 2 Page Body (5/5) 33.5000 22.750 80 1,284 17.68 2 Page Body (1/1) 33.5000 22.750 60 481 12.67 2 Page Body (2/2) 33.5000 22.750 60 578 12.81 2 Page Body (4/4) 33.5000 22.750 60 769 13.11 2 Page Body (5/5) 33.5000 22.750 60 963 13.26 4 Page Body (1/1) 33.5000 22 750 60 481 25.32 4 Page Body (2/2) 33.5000 22.750 60 578 25.62 4 Page Body (4/4) 33.5000 22.750 60 769 26.07 4 Page Body (5/5) 33.5000 22.750 60 963 26.36 4 Page Body (1/1) 33.5000 22.750 40 321 16.88 4 Page Body (2/2) 33.5000 22.750 40 385 17.08 4 Page Body (4/4) 33.5000 22.750 40 513 17.38 4 Page Body (5/5) 33.5000 22.750 40 642 17.57 4 Page Gatefold (1/1) 30.5000 22.750 80 584 31.50 4 Page Gatefold (2/2) 30.5000 22.750 80 701 31.91 4 Page Gatefold (4/4) 30.5000 22.750 80 935 32.30 4 Page Gatefold (5/5) 30.5000 22.750 80 1,170 32.57 Press Stops, each 30.5000 22.750 80 234 -- Plate Changes, per plate 30.5000 22.750 80 58 -- 6 Page Gatefold (4/4)(4/4) 19.1250 22.750 80 1,320 41.44 Press Stops, each, per web 19.1250 22.750 80 147 -- Plate Changes, per plate 19.1250 22.750 80 37 -- 8 Page Body (1/1) 33.5000 22.750 60 481 50.63 8 Page Body (2/2) 33.5000 22.750 60 578 51.24 8 Page Body (4/4) 33.5000 22.750 60 769 52.12 8 Page Body (5/5) 33.5000 22.750 60 963 52.72 - --------------------------------------------------------------------------------
Page 4 Quad / Graphics Inc. September 9, 1996 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- -------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ================================================================================ 8 Page Body (1/1+1/1) 33.5000 22.750 60 770 51.38 8 Page Body (2/2+2/2) 33.5000 22.750 60 963 51.98 8 Page Body (4/4+1/1) 33.5000 22.750 60 1,155 52.27 8 Page Body (4/4+2/2) 33.5000 22.750 60 1,348 52.27 8 Page Body (4/4+4/4) 33.5000 22.750 60 1,540 52.27 8 Page Body (5/5+4/4) 33.5000 22.750 60 1,733 52.43 8 Page Body (5/5+5/5) 33.5000 22.750 60 1,925 52.87 8 Page Gatefold (4/4) 31.7500 22.750 60 1,095 51.23 8 Page Gatefold (5/5) 31.7500 22.750 60 1,277 51.99 Press Stops, each 31.7500 22.750 60 182 -- Plate Changes, per plate 31.7500 22.750 60 46 -- Press Stops, per web, each 33.5000 22.750 80 257 -- Press Stops, per web, each 33.5000 22.750 60 193 -- Plate Changes, per plate 33.5000 22.750 80 64 -- Plate Changes, per plate 33.5000 22.750 60 48 -- - --------------------------------------------------------------------------------
Page 5 Quad / Graphics Inc. September 9, 1996 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
--------------------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ========================================================================================================== 12 Page Body (4/4) 66.875 33.500 40 4,716 50.34 12 Page Body (5/5) 66.875 33.500 40 5,660 51.07 16 Page Body (4/4) 89.125 33.500 40 6,286 67.09 16 Page Body (5/5) 89.125 33.500 40 7,543 68.68 20 Page Body (4/4) 55.750 33.500 40 3,932 83.93 20 Page Body (5/5) 55.750 33.500 40 4,718 85.14 24 Page Body (4/4) 66.875 33.500 40 4,716 100.68 24 Page Body (5/5) 66.875 33.500 40 5,660 102.13 28 Page Body (4/4) 78.000 33.500 40 5,501 117.43 28 Page Body (5/5) 78.000 33.500 40 6,601 119.12 32 Page Body (4/4) 89.125 33.500 40 6,286 134.18 32 Page Body (5/5) 89.125 33.500 40 7,543 136.11 36 Page Body (4/4) 66.875 50.250 40 7,075 151.02 36 Page Body (5/5) 66.875 50.250 40 8,490 153.20 40 Page Body (4/4) 55.750 33.500 40 3,932 167.86 40 Page Body (5/5) 55.750 33.500 40 4,718 170.29 48 Page Body (4/4) 89.125 50.250 40 9,428 201.27 48 Page Body (5/5) 89.125 50.250 40 11,314 204.17 48 Page Body (4/4) 66.875 33.500 40 4,716 201.36 48 Page Body (5/5) 66.875 33.500 40 5,660 204.27 56 Page Body (4/4) 78.000 33.500 40 5,501 234.86 56 Page Body (5/5) 78.000 33.500 40 6,601 238.25 60 Page Body (4/4) 55.750 50.250 40 5,898 251.80 60 Page Body (5/5) 55.750 50.250 40 7,077 255.43 64 Page Body (4/4) 89.125 33.500 40 6,286 268.36 64 Page Body (5/5) 89.125 33.500 40 7,543 272.23 72 Page Body (4/4) 66.875 50.250 40 7,075 302.04 72 Page Body (5/5) 66.875 50.250 40 8,490 306.40 84 Page Body (4/4) 78.000 50.250 40 8,252 352.29 84 Page Body (5/5) 78.000 50.250 40 9,902 357.37 96 Page Body (4/4) 89.125 50.250 40 9,428 402.54 96 Page Body (5/5) 89.125 50.250 40 11,314 408.34 Cylinder Changes, per cylinder 55.750 33.500 40 393 --- Cylinder Changes, per cylinder 66.875 33.500 40 472 --- Cylinder Changes, per cylinder 78.000 33.500 40 550 --- Cylinder Changes, per cylinder 89.125 33.500 40 629 --- Cylinder Changes, per cylinder 55.750 50.250 40 590 --- Cylinder Changes, per cylinder 66.875 50.250 40 707 --- Cylinder Changes, per cylinder 78.000 50.250 40 825 --- Cylinder Changes, per cylinder 89.125 50.250 40 943 --- - ----------------------------------------------------------------------------------------------------------
Page 6 Quad / Graphics Inc. September 9, 1996
PLAYBOY ENTERPRISES PAPER REQUIREMENTS - ---------------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ==================================================================================================== 12 Page Body (4/4) 66.875 33.500 45 5,306 56.63 12 Page Body (5/5) 66.875 33.500 45 6,367 57.45 16 Page Body (4/4) 89.125 33.500 45 7,071 75.48 16 Page Body (5/5) 89.125 33.500 45 8,486 77.27 20 Page Body (4/4) 55.750 33.500 45 4,423 94.42 20 Page Body (5/5) 55.750 33.500 45 5,308 95.79 24 Page Body (4/4) 66.875 33.500 45 5,306 113.27 24 Page Body (5/5) 66.875 33.500 45 6,367 114.90 28 Page Body (4/4) 78.000 33.500 45 6,189 132.11 28 Page Body (5/5) 78.000 33.500 45 7,426 134.01 32 Page Body (4/4) 89.125 33.500 45 7,071 150.95 32 Page Body (5/5) 89.125 33.500 45 8,486 153.13 36 Page Body (4/4) 66.875 50.250 45 7,959 169.90 36 Page Body (5/5) 66.875 50.250 45 9,551 172.35 40 Page Body (4/4) 55.750 33.500 45 4,423 188.85 40 Page Body (5/5) 55.750 33.500 45 5,308 191.57 48 Page Body (4/4) 89.125 50.250 45 10,607 226.43 48 Page Body (5/5) 89.125 50.250 45 12,728 229.69 48 Page Body (4/4) 66.875 33.500 45 5,306 226.53 48 Page Body (5/5) 66.875 33.500 45 6,367 229.80 56 Page Body (4/4) 78.000 33.500 45 6,189 264.22 56 Page Body (5/5) 78.000 33.500 45 7,426 268.03 60 Page Body (4/4) 55.750 50.250 45 6,635 283.27 60 Page Body (5/5) 55.750 50.250 45 7,962 287.36 64 Page Body (4/4) 89.125 33.500 45 7,071 301.90 64 Page Body (5/5) 89.125 33.500 45 8,486 306.26 72 Page Body (4/4) 66.875 50.250 45 7,959 339.80 72 Page Body (5/5) 66.875 50.250 45 9,551 344.70 84 Page Body (4/4) 78.000 50.250 45 9,283 396.33 84 Page Body (5/5) 78.000 50.250 45 11,140 402.04 96 Page Body (4/4) 89.125 50.250 45 10,607 452.85 96 Page Body (5/5) 89.125 50.250 45 12,728 459.39 Cylinder Changes, per cylinder 55.750 33.500 45 442 -- Cylinder Changes, per cylinder 66.875 33.500 45 531 -- Cylinder Changes, per cylinder 78.000 33.500 45 619 -- Cylinder Changes, per cylinder 89.125 33.500 45 707 -- Cylinder Changes, per cylinder 55.750 50.250 45 663 -- Cylinder Changes, per cylinder 66.875 50.250 45 796 -- Cylinder Changes, per cylinder 78.000 50.250 45 928 -- Cylinder Changes, per cylinder 89.125 50.250 45 1,061 -- - ----------------------------------------------------------------------------------------------------
Page 7 Quad / Graphics Inc. September 9, 1996 PLAYBOY ENTERPRISES PAPER REQUIREMENTS
- ---------------------------------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ========================================================================================================== 12 Page Body (4/4) 66.875 33.500 50 5,896 62.93 12 Page Body (5/5) 66.875 33.500 50 7,075 63.83 16 Page Body (4/4) 89.125 33.500 50 7,857 83.86 16 Page Body (5/5) 89.125 33.500 50 9,428 85.85 20 Page Body (4/4) 55.750 33.500 50 4,915 104.92 20 Page Body (5/5) 55.750 33.500 50 5,898 106.43 24 Page Body (4/4) 66.875 33.500 50 5,896 125.85 24 Page Body (5/5) 66.875 33.500 50 7,075 127.67 28 Page Body (4/4) 78.000 33.500 50 6,876 146.79 28 Page Body (5/5) 78.000 33.500 50 8,252 148.90 32 Page Body (4/4) 89.125 33.500 50 7,857 167.72 32 Page Body (5/5) 89.125 33.500 50 9,428 170.14 36 Page Body (4/4) 66.875 50.250 50 8,843 188.78 36 Page Body (5/5) 66.875 50.250 50 10,612 191.50 40 Page Body (4/4) 55.750 33.500 50 4,915 209.83 40 Page Body (5/5) 55.750 33.500 50 5,898 212.86 48 Page Body (4/4) 89.125 50.250 50 11,786 251.58 48 Page Body (5/5) 89.125 50.250 50 14,143 255.21 48 Page Body (4/4) 66.875 33.500 50 5,896 251.70 48 Page Body (5/5) 66.875 33.500 50 7,075 255.33 56 Page Body (4/4) 78.000 33.500 50 6,876 293.57 56 Page Body (5/5) 78.000 33.500 50 8,252 297.81 60 Page Body (4/4) 55.750 50.250 50 7,372 314.75 60 Page Body (5/5) 55.750 50.250 50 8,847 319.29 64 Page Body (4/4) 89.125 33.500 50 7,857 335.45 64 Page Body (5/5) 89.125 33.500 50 9,428 340.29 72 Page Body (4/4) 66.875 50.250 50 8,843 377.55 72 Page Body (5/5) 66.875 50.250 50 10,612 383.00 84 Page Body (4/4) 78.000 50.250 50 10,314 440.36 84 Page Body (5/5) 78.000 50.250 50 12,377 446.71 96 Page Body (4/4) 89.125 50.250 50 11,786 503.17 96 Page Body (5/5) 89.125 50.250 50 14,143 510.43 Cylinder Changes, per cylinder 55.750 33.500 50 491 - Cylinder Changes, per cylinder 66.875 33.500 50 590 - Cylinder Changes, per cylinder 78.000 33.500 50 688 - Cylinder Changes, per cylinder 89.125 33.500 50 786 - Cylinder Changes, per cylinder 55.750 50.250 50 737 - Cylinder Changes, per cylinder 66.875 50.250 50 884 - Cylinder Changes, per cylinder 78.000 50.250 50 1,031 - Cylinder Changes, per cylinder 89.125 50.250 50 1,179 - - ---------------------------------------------------------------------------------------------------------
September 9, 1996 Page 8 Quad / Graphics Inc.
PLAYBOY ENTERPRISES PAPER REQUIREMENTS - -------------------------------------------------------------------------------- 8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M ================================================================================ 12 Page Body (4/4) 66.875 33.500 60 7,075 75.51 12 Page Body (5/5) 66.875 33.500 60 8,490 76.60 16 Page Body (4/4) 89.125 33.500 60 9,428 100.63 16 Page Body (5/5) 89.125 33.500 60 11,314 103.02 20 Page Body (4/4) 55.750 33.500 60 5,898 125.90 20 Page Body (5/5) 55.750 33.500 60 7,077 127.71 24 Page Body (4/4) 66.875 33.500 60 7,075 151.02 24 Page Body (5/5) 66.875 33.500 60 8,490 153.20 28 Page Body (4/4) 78.000 33.500 60 8,252 176.14 28 Page Body (5/5) 78.000 33.500 60 9,902 178.69 32 Page Body (4/4) 89.125 33.500 60 9,428 201.27 32 Page Body (5/5) 89.125 33.500 60 11,314 204.17 36 Page Body (4/4) 66.875 50.250 60 10,612 226.53 36 Page Body (5/5) 66.875 50.250 60 12,734 229.80 40 Page Body (4/4) 55.750 33.500 60 5,898 251.80 40 Page Body (5/5) 55.750 33.500 60 7,077 255.43 48 Page Body (4/4) 89.125 50.250 60 14,143 301.90 48 Page Body (5/5) 89.125 50.250 60 16,971 306.26 48 Page Body (4/4) 66.875 33.500 60 7,075 302.04 48 Page Body (5/5) 66.875 33.500 60 8,490 306.40 56 Page Body (4/4) 78.000 33.500 60 8,252 352.29 56 Page Body (5/5) 78.000 33.500 60 9,902 357.37 60 Page Body (4/4) 55.750 50.250 60 8,847 377.70 60 Page Body (5/5) 55.750 50.250 60 10,616 383.14 64 Page Body (4/4) 89.125 33.500 60 9,428 402.54 64 Page Body (5/5) 89.125 33.500 60 11,314 408.34 72 Page Body (4/4) 66.875 50.250 60 10,612 453.06 72 Page Body (5/5) 66.875 50.250 60 12,734 459.60 84 Page Body (4/4) 78.000 50.250 60 12,377 528.43 84 Page Body (5/5) 78.000 50.250 60 14,853 536.06 96 Page Body (4/4) 89.125 50.250 60 14,143 603.80 96 Page Body (5/5) 89.125 50.250 60 16,971 612.51 Cylinder Changes, per cylinder 55.750 33.500 60 590 -- Cylinder Changes, per cylinder 66.875 33.500 60 707 -- Cylinder Changes, per cylinder 78.000 33.500 60 825 -- Cylinder Changes, per cylinder 89.125 33.500 60 943 -- Cylinder Changes, per cylinder 55.750 50.250 60 885 -- Cylinder Changes, per cylinder 66.875 50.250 60 1,061 -- Cylinder Changes, per cylinder 78.000 50.250 60 1,238 -- Cylinder Changes, per cylinder 89.125 50.250 60 1,414 -- -------------------------------------------------------------------------------
Page 9 Quad / Graphics Inc. September 9, 1996 EX-10.5(D) 3 AMENDMENT TO SUBSCRIPTION FULFILLMENT AGREEMENT Exhibit 10.5(d) THIRD AMENDMENT dated as of the 1st day of July, 1996, by and between COMMUNICATIONS DATA SERVICES INC., an Iowa corporation ("CDS") with its principal office at 1901 Bell Avenue, Des Moines, Iowa 50315-1099 and PLAYBOY ENTERPRISES, INC., a ________ corporation (the "Publisher") with its principal office at 680 North Lake Shore Drive, Chicago, Illinois 60611. R E C I T A L S WHEREAS, CDS and the Publisher entered into a Subscription Fulfillment Agreement (the "Agreement") dated as of the 1st day of July, 1987; and WHEREAS, CDS and the Publisher amended the aforementioned Agreement by an Amendatory Agreement dated as of the 1st day of September, 1987 (the "Amendatory Agreement"), and by a Second Amendment dated as of the 1st day of July, 1990 (the "Second Amendment"); and WHEREAS the parties now desire to further amend the Agreement to extend the Term of the Agreement and make other changes as hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, it is agreed by and between the parties hereto as follows: 1. The last sentence in Section 1.5 (a) of the Agreement is hereby amended and restated to read as follows: "CDS will use its reasonable best efforts to mail invoices within four (4) working days following the master file reorganization provided that the Publisher has deposited sufficient monies with the U.S. Postal Service to cover postage costs prior to the mailing date." 2. Section 1.5 (c) of the Agreement is hereby amended and restated in its entirety to read as follows: "(c) The Publisher will provide invoices on a continuous form designed for Optical Character Recognition ("OCR") processing. The Publisher's mail components will conform to reasonable specifics provided by CDS, to be acceptable to CDS for computer processing and be compatible with the then existing CDS hardware." 3. Section 1.6 (a) of the Agreement is hereby amended and restated in its entirety to read as follows: "(a) Regular renewal promotions, which shall not exceed sixteen (16) efforts, shall be selected in accordance with a schedule provided by the Publisher in a form attached hereto as Exhibit B at least ten (10) working days prior to a master file reorganization, and CDS will use its reasonable best efforts to mail regular renewals within five (5) working days following the master file reorganization provided that the Publisher has deposited sufficient monies with the U.S. Postal Service to cover postage costs prior to the mailing date. An effort will be considered a regular renewal promotion hereunder only if it is mailed seven (7) months or less prior to the expiration of the addressee's subscription." 4. Section 1.9 of the Agreement is hereby amended to add the following sentences at the end: "If the Publisher becomes dissatisfied with CDS's performance of the lettershop Services, it shall notify CDS and CDS shall have thirty (30) days to correct the problem(s) specified by the Publisher, after which time if the problem(s) are not corrected to the reasonable satisfaction of the Publisher, the Publisher may retain another vendor to perform such Services. All mailing services, such as print programming and sortation, will be performed by the vendor providing lettershop services to the Publisher. CDS, in measuring it mailing performance under Sections 1.5(a) and 1.6(a), will exclude events beyond its control, e.g., stock shortages, incorrect or late mailing instructions from the Publisher, etc." 5. Section 1.13 (c) of the Agreement is hereby amended to add the following sentences at the end: "If the Publisher requests non-list rental selection services that CDS is not capable of providing, the Publisher may have such services performed by another vendor (with the understanding that list rental Services shall remain on an exclusive basis with CDS). CDS will ship list rental tapes within two (2) working days following receipt of the order. If the Publisher becomes dissatisfied with CDS's list rental performance, it shall notify CDS and CDS shall have thirty (30) days to correct the problem(s) specified by the Publisher, after which time if the problem(s) are not corrected to the reasonable satisfaction of the Publisher, the Publisher may retain another vendor to perform such list rental Services. In measuring performance, CDS will exclude events beyond its control, e.g., incorrect or late instructions, etc." 6. Section 1.13 (e) of the Agreement is hereby amended and restated in its entirety to read as follows: "(e) CDS will provide Rapid Evaluation and Circulation Tracking (REACT) and EasySuite Services to the Publisher based on the Publisher's requirements, if and when requested by the Publisher." 7. Section 1.13 of the Agreement is hereby amended to add the following new paragraph (j): "(j) The Publisher shall provide CDS with the opportunity to bid on merge/purge Services required by the Publisher involving the master file of the Magazine, other files maintained hereunder, and outside lists obtained by the Publisher. In soliticing bids, the Publisher agrees not to reveal CDS's bid to other vendors." 8. Section 2.1 of the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "2.1 Basic Service Charge. -------------------- The Publisher shall pay CDS the following annual Service charge per subscription of the Magazine: 2
Aggregate Number of Labels per Issue Annual Service Charge per Subscription ------------------- -------------------------------------- Tape-cleared Non-Tape Orders cleared Orders ------------ -------------- 0 - 500,000 $0.56 $0.64 500,000 - 1,000,000 $0.39 $0.50 1,000,001 - 2,000,000 $0.36 $0.47 2,000,001 - 2,400,000 $0.34 $0.43 2,400,001 - 3,200,000 $0.32 $0.40 3,200,001 and Over $0.31 $0.39
The Publisher shall be invoiced monthly for each Magazine. The billing mechanism for the Basic Service Charge is based on the applicable Annual Service Charge per Subscription rate divided by the number of issues per year (frequency) of the Magazine times the total number of labels produced during the preceding month. (Example using 2,800,000 labels produced with 1,316,000 tape-cleared orders and 1,484,000 non-tape cleared orders: $0.32 divided by 12 issues = $0.02667 per label x 1,316,000 = $35,097.72, plus $0.40 divided by 12 issues = $0.03333 per label x 1,484,000 = $49,461.72). The charge per label figures are based on the number of issues of the Magazine per year set forth in the recitals. If the number of issues increases or decreases, the charge per label figures will be decreased or increased proportionately so as to maintain the same aggregate charges per subscription on a yearly basis." 9. Section 2.2 of the Agreement is hereby amended and restated in its entirety to read as follows: "2.2 Merge/Purge. ------------ The Publisher shall provide CDS with the opportunity to bid on merge/purge services pursuant to Section 1.13(j) of this Agreement." 10. Section 2.3 (a) of the Agreement is hereby amended and restated in its entirety to read as follows: "(a) Basic Charge. ------------- Cheshire Labels or Tape* ------------------------ $3.00/M *$3.37/M will be added to the above Basic Charge when pressure sensitive labels are requested." 3 11. Section 2.3 of the Agreement, as previously amended, is hereby amended to add a new paragraph (e) to read as follows: "(e) Two (2) suppression files per year will be provided at no additional charge to the Publisher." 12. Section 2.5 (a) (i) (4) of the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "(4) Keys or commingled lettershop groups with like components, with quantities of 2,000 and over will be charged at the rate of: 1st and 2nd renewal effort inserting only: ------------------------------------------ Number of components (including envelope): 2 - 5 Components............................... $12.00/M 6 Components................................... $12.75/M 7 Components................................... $13.75/M 8 Components................................... $15.00/M All Other inserting: -------------------- Number of components (including envelope): 2 - 5 Components............................... $14.00/M 6 Components................................... $15.00/M 7 Components................................... $16.00/M 8 Components................................... $17.00/M" 13. Section 2.5 (a) (i) (5) of the Agreement is hereby amended and restated in its entirety to read as follows: "(5) Keys or commingled lettershop groups with like components, with quantities of 500 or more but less than 2,000 will be charged at the rate of: Number of components (including envelope): 2 - 5 Components............................... $24.00/M 6 Components................................... $25.00/M 7 Components................................... $26.00/M 8 Components................................... $27.00/M" 14. Section 2.5 (a) (iii) of the Agreement is hereby amended and restated in its entirety to read as follows: "(iii) Sorting, Tying & Bagging Third Class Mail ...... No Charge" ----------------------------------------- 4 15. Section 2.5 (a) (v) (3) of the Agreement is hereby amended and restated in its entirety to read as follows: "(3) 1 Fold.............................. $2.75/M 2 Folds............................. $2.75/M 3 Folds............................. $6.00/M" 16. Section 2.5 (a) (x) of the Agreement is hereby amended and restated in its entirety to read as follows: "(x) Printing -------- (1) Computer impact or Standard Laser Printing.............$18.00/M Feet (2) Plain Paper Color (PPC) Billing and Renewal Packages..Quoted upon request (3) Other print technologies (e.g., scanned logos and signatures, pictures, software-generated graphics, VIP custom character sets, etc.)...Quoted upon request CDS performance of laser printing shall be subject to compatibility of the Publisher's mailing stock with CDS equipment and to prior scheduling commitments. The Publisher agrees to submit new or proposed mailing packages to CDS for approval for laser printing. Publisher's requests for laser printing shall be through its CDS representative." 17. Section 2.8 of the Agreement is hereby amended and restated in its entirety to read as follows: "2.8 Laser Printing. -------------- Subject to compatibility of the Publisher's mailing stock with CDS equipment and to prior scheduling commitments, CDS will, at the Publisher's request through its CDS representative, perform laser printing at its Wilton, Iowa facility and charge the Publisher a rate of $18.00/M feet of paper printed." 18. Section 2.9 of the Agreement is hereby amended and restated in its entirety to read as follows: "2.9 REACT Reporting. --------------- REACT reporting and the Easy Suite package will be provided at the Publisher's request for a fee of $500.00 per month for the Magazine set forth in the recitals of this Agreement." 5 19. Section 2.17 of the Agreement is hereby amended and restated in its entirety to read as follows: "2.17 Change in Charges. ------------------ Except as may otherwise be expressly provided, the fees and charges set forth in this Agreement will remain in effect until June 30, 1999. On July 1, 1999 and on each July 1 thereafter, all of the fees and charges will be increased by a percentage equal to the percentage increase in the most recent Consumer Price Index, All Items, U.S. Department of Labor, publicly available on each July 1 as compared with such Index publicly available on the previous July 1, up to a maximum of a six percent (6%) increase above the fees and charges established for the prior twelve (12) month period." 20. Section 5.1 of the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "5.1 Term. ---- The Term of this Agreement shall continue until June 30, 2001, plus a period of time equal to the period(s) of time, if any, during which Services were not rendered hereunder due to an Event of Force Majeure affecting CDS or the Publisher. When used in this Agreement, the term "year" shall mean a consecutive twelve (12) month period." 21. Section 8.1 of the Agreement is hereby amended to add the following sentence at the end: "At the end of each quarter of the calendar year, CDS will provide the Publisher with a current copy of its subscriber master file on magnetic tape." 22. The last sentence of Section 11.3 of the Agreement is hereby amended to read as follows: "The representative(s) of both parties may be changed from time to time in which event the other party shall be notified as promptly as possible, with the understanding, however, that the CDS representative(s) shall be subject, within reason, to the approval of the Publisher." 23. Item 5 of Exhibit A to the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "5. Toll-free in-WATS telephone Service will be provided at the rate of $1.37 per call received for all calls requiring a live operator, and at the rate of $0.85 per call received for calls not requiring a live operator (VRU calls). The initial set-up for Voice Response Unit ("VRU") messages will be provided at no additional charge to the Publisher. VRU message changes, following the initial set-up, will be charged at the rate of $10.00 per message changed. In addition, if requested by the Publisher, CDS will provide: (i) its Upsell program at the rate of $2.00 per one-year subscription and 6 $4.00 per two-year subscription, and (ii) its Save-A-Subscriber program at the rate of $2.00 per subscription." 24. Item 6 of Exhibit A to the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "6. Special requests from the Publisher to CDS for new programs or systems will be charged at the rate of $85.00 per hour, with the understanding, however, that the Publisher shall receive two hundred (200) hours of programming Services per year at no additional charge to the Publisher." 25. Item 15 (a) of Exhibit A to the Agreement, as previously amended, is hereby amended and restated in its entirety to read as follows: "15. (a) CDS will process sweepstakes and direct mail responses in accordance with the Publisher's specific instructions at the following rates: "Yes" Responses in Response-identified Envelopes No Charge "No" Responses in Response-identified Envelopes: Gift $32.50/M Non-Gift $30.00/M Non-identified Envelopes: Gift $32.50/M Non-Gift $30.00/M Winning Number Screening $5.14/M Creation of "No" responses Electronic file: Finder Number key entry $0.05 each Name and address key entry $0.13 each OCR Scanner entry $0.02 each" 26. Exhibit A to the Agreement is hereby amended to add the following new item 19 to read as follows: "19. At the Publisher's request, CDS will provide, on a monthly basis, a feed of subscriber data from CDS to the Publisher's marketing database at Acxiom, as instructed by the Publisher, for a charge of $1.50/M Database records selected." 27. Exhibit A to the Agreement is hereby amended to add the following new item 20 to read as follows: "20. CDS has the capability to create a Marketing Database for the Publisher and provide Marketing Database Services involving the storage and selection of subscriber information (including multi-magazine subscription information, product information, promotion information, demographic information, and special interest information). The Publisher agrees to provide CDS with the opportunity to bid on Marketing Database Services in 1997. In soliciting bids, the Publisher agrees not to reveal CDS's bid to other vendors. If CDS is selected to provide the Marketing Database Services, the parties hereto agree to execute an amendment to this 7 Agreement or a separate agreement covering Services and prices for the Marketing Database." 28. Exhibit A to the Agreement is hereby amended to add the following new item 21 to read as follows: "21. Incoming fax orders and customer service faxes (incoming and outgoing) will be charged for at the rate of $0.75 per page, with the understanding that the Publisher will supply a fax machine at CDS." 29. Exhibit A to the Agreement is hereby amended to add the following new item 22 to read as follows: "22. The Publisher agrees to provide CDS with the opportunity to bid on premium fulfillment services. In soliciting bids, the Publisher agrees not to reveal CDS's bid to other vendors." 30. Exhibit A to the Agreement is hereby amended to add the following new item 23 to read as follows: "23. CDS will provide microfilming for order documents at the rate of $0.02 per piece." 31. Except as expressly amended hereby, the Agreement shall remain in full force and effect in accordance with its terms. 32. This Third Amendment shall become effective as of the date first above written. IN WITNESS WHEREOF, the parties have executed this Third Amendment as of the day and year first above written. COMMUNICATIONS DATA SERVICES, INC. PLAYBOY ENTERPRISES, INC. by /s/ Scott Weir by /s/ Phyllis Rotunno --------------------------- ---------------------- (signature) (signature) Scott Weir Phyllis Rotunno --------------------------- ---------------------- (print or type) (print or type) Title SR V.P. Title CIRC Director ------------------------ ------------------- 8 EX-10.9 4 AGREEMENTS RE: U.K. PAY TELEVISION SERVICE Exhibit 10.9 THIS AGREEMENT is made the 2nd day of February 1996 BETWEEN (1) CONTINENTAL SHELF 16 LIMITED registered in England under number 3,005,499 whose registered office is at The Quadrangle, Imperial Square, Cheltenham, Gloucester, GL50 1 YX ("Flextech") (2) PLAYBOY ENTERTAINMENT GROUP, INC. a Delaware corporation of 9242 Beverly Boulevard, Beverly Hills, California 90210, USA ("Playboy Entertainment") (3) PLAYBOY ENTERPRISES INC., of 680 North Lake Shore Drive, Chicago, Illinois 60611, USA ("Playboy Enterprises") (4) PLAYBOY TV UK/BENELUX LIMITED registered in England under the number 3,000,033 whose registered office is at Five Chancery Lane, Clifford's Inn, London EC4A 1BU (the "Company") NOW IT IS HEREBY AGREED as follows: 1. Definitions The "Original Documents" the documents set out in Part I of the Schedule hereto dated on or about 26th January 1995 and made effective on 12th January 1995. The "New Documents" the documents set out in Part II of the Schedule hereto. 2. Termination On signature of this Agreement by the parties and signature of the relevant parties hereto of each of the New Documents, the Original Document of the same name shall be terminated with immediate effect and no party thereto shall have any liability under such Original Documents as shall have been so terminated to any other party thereto, save for any rights accrued prior to such termination which rights, to the extent that they are against the Company, shall be deemed to relate to the Company prior to the date hereof and Precis (1378) Limited shall be deemed to have no liability therefor. 3. Governing Law This Agreement shall be governed by and construed in all respects in accordance with English law and the parties hereto submit to the jurisdiction of the courts of England. 1 THE SCHEDULE ------------ PART I 1. Shareholders' Agreement relating to the establishment of Playboy TV UK/Benelux Limited between Continental Shelf 16 Limited (1) Playboy Entertainment Group, Inc. (2) and Playboy TV/Benelux Limited (3) described. 2. Trade Mark Licence between Playboy Enterprises, Inc. (1) and Playboy TV UK/Benelux Limited (2). 3. Programme Supply Agreement between Playboy Entertainment Group, Inc. (1) and Playboy TV UK/Benelux Limited (2). 4. The Forbearance Agreement between Harris Trust and Savings Bank (1), Lasalle National Bank (2), Continental Shelf 16 Limited (3) and Playboy TV UK/Benelux Limited (4). 5. Thc Consent Agreement between Playboy Entertainment Group, Inc., (1) Playboy Enterprises Inc. (2) Continental Shelf 16 Limited (3) and Playboy TV UK/Benelux Limited (4). PART II 1. Shareholders' Agreement relating to the establishment of Playboy TV UK/Benelux Limited between Continental Shelf 16 Limited (1) Playboy Entertainment Group, Inc. (2) and Playboy TV/Benelux Limited (3) and Precis (1378) Limited (4). 2. Trade Mark Licence between Playboy Enterprises, Inc. (1) and Playboy TV UK/Benelux Limited (2). 3. Programme Supply Agreement between Playboy Entertainment Group, Inc. (1) and Playboy TV UK/Benelux Limited (2). 4. The Forbearance Agreement between Harris Trust and Savings Bank (1), Lasalle National Bank (2), Continental Shelf 16 Limited (3) and Playboy TV UK/Benelux Limited (4) and Precis (1378) Limited. 5. Thc Consent Agreement between Playboy Entertainment Group, Inc. (1) Playboy Enterprises Inc. (2) Continental Shelf 16 Limited (3) and Playboy TV UK/Benelux Limited (4) and Precis (1378) Limited. 2 SIGNED by ) for and on behalf of ) CONTINENTAL SHELF 16 ) LIMITED in the presence of: ) /s/ Roger Luard /s/ J. Butler /s/ Janine F. Butler SIGNED by ANTHONY J. LYNN ) for and on behalf of PLAYBOY ) ENTERTAINMENT GROUP, ) INC. in the presence of: ) /s/ Anthony J. Lynn /s/ P.D. Feely /s/ P. Feely SIGNED by ANTHONY J. LYNN ) for and on behalf of PLAYBOY ) ENTERPRISES, INC. ) in the presence of: ) /s/ Anthony J. Lynn /s/ P.D. Feely /s/ P. Feely SIGNED by ) for and on behalf of PLAYBOY ) TV UK/BENELUX LIMITED ) in the presence of ) /s/ Roger Luard /s/ J. Butler /s/ Janine F. Butler 3 DATED 2nd February 1996 ----------------------- (1) CONTINENTAL SHELF 16 LIMITED (2) PLAYBOY ENTERTAINMENT GROUP, INC. (3) PRECIS (1378) LIMITED (4) PLAYBOY TV UK/BENELUX LIMITED --------------------- SHAREHOLDERS' AGREEMENT Relating to the establishment of PLAYBOY TV UK/BENELUX LIMITED --------------------- EXECUTED AGREEMENT DENTON HALL FIVE CHANCERY LANE CLIFFORD'S INN LONDON EC4A 1BU TELEPHONE 0171 242 1212 FAX 0171 404 0087 MEMBER OF THE DENTON INTERNATIONAL
INDEX -------- CLAUSE PAGE ------ ---- 1. Definitions 2 2. Business of the Company and Launch of the Channel 12 3. Closing Arrangements 13 4. Provision of Finance 16 5. The Board and Management 20 6. Agreement to Perform 23 7. Information 23 8. Restrictions on the Company's Activities 25 9. Name 33 10. Dividend Policy 33 11. Confidentiality 33 12. Disclosure 34 13. Transfers of Shares and Loan Stock 35 14. Deemed Transfers 43 15. Option 45 16. Sell Down 52 17. Compulsory Purchase by Flextech and Sky 55 18. Representations and Warranties 57 19. Competition 58 20. No Assignment 58 21. Waivers, Remedies Cumulative, Amendments etc 59 22. Invalidity etc 59 23. No Partnership or Agency 60 24. Announcements 60 25. Costs 60 26. Entire Agreement 60 27. Conflict with Articles etc 61 28. Notices 61 29. Governing Law 62
AGREED FORM DOCUMENTS - --------------------- 1. Articles of Association 2. Resolutions 3. Loan Stock Deed and Certificate 4. Programme Supply Agreement 5. Trademark Licence 6. Legal Opinions 7. Consent Agreement 8. Initial Business Plan 9. Subscriber Management Services Agreement SCHEDULES --------- SCHEDULE I Particulars of the Company SCHEDULE II Details of Subscriptions by Shareholders at Closing SCHEDULE III Deed of Adherence SCHEDULE IV Funding SCHEDULE V Directors THIS AGREEMENT is made the 2nd day of February 1996 but made effective from 1st November 1995 BETWEEN: (1) CONTINENTAL SHELF 16 LIMITED registered in England under number 3,005,499 whose registered office is at The Quadrangle, Imperial Square, Cheltenham, Gloucester, GL50 lYX ("Flextech"); (2) PLAYBOY ENTERTAINMENT GROUP, INC. a Delaware corporation of 9242 Beverly Boulevard, Beverly Hills, California 90210 ("Playboy"); (3) PRECIS (1378) LIMITED registered in England under number 3092549 whose registered office is at 6 Centaurs Business Park, Grant Way, Isleworth, Middlesex TW7 5QD ("Sky"); (4) PLAYBOY TV UK/BENELUX LIMITED registered in England under number 3,000,033 whose registered office is at Five Chancery Lane, Clifford's Inn, London EC4A lBU (for itself and, under Clauses 11, 12 and 19, for itself and as trustee for its Subsidiaries for the time being) ("the Company"). WHEREAS: (A) The Shareholders have incorporated the Company and wish to procure that the Company will establish a pay television service to be known as "Playboy TV" based on the pay television service which is currently operated by Playboy in the United States of America under the name "Playboy TV" ("the Channel") in the Territory. (B) The Shareholders are entering into this Agreement with the Company (whose corporate details are set out in Schedule I) in order to record the basis of their relationship as shareholders in the Company and to establish the manner in which the business and affairs of the Company will be financed and conducted. NOW IT IS HEREBY AGREED as follows: 1. Definitions 1.1 In this Agreement and in the Recitals and Schedules hereto the following words and expressions shall save as otherwise specifically provided have the following meanings: "the Act": the Companies Acts 1985 to 1989 and the Companies Consolidation (Consequential Provisions) Act 1985 and the Company Directors Disqualification Act 1986 and all regulations made under any of the foregoing; "Advertising Material": audio and/or visual and/or audio visual films and/or sound recordings which in each such case are advertising, promoting or selling goods, services or facilities or otherwise as permitted in accordance with the relevant codes published from time to time by the ITC; "the Articles": the articles of association of the Company in the agreed form or as they may subsequently be altered from time to time in a manner consistent with the terms of this Agreement; "Associate": in relation to any company, another company which controls, is controlled by or is in common control with that company; and for the purposes of this definition a company shall be deemed to control any company which is a subsidiary or a subsidiary undertaking of such company; "the Board": the board of directors of the Company; "the Business": the operation of a pay television service and ancillary businesses (known as Playboy TV) in the Territory and in such other country in Europe as the Board may approve from 2 time to time and in respect of which the Company or any Subsidiary has a licence to operate such a service under the "Playboy" name; "the Business Plan": the initial business plan and budget of the Company in the agreed form or where the context permits any revision or amendment thereto and any other business plan and/or budget approved pursuant to Clause 8; "Chairman": the Chairman from time to time of the Board; "the Channel": a pay television service to be known as "Playboy TV" based on the pay television service which is currently operated by Playboy in the United States of America under the name "Playboy TV" as such service may be developed from time to time initially to operate primarily as a cable and DTH channel and thereafter to be transmitted by such other means as may be approved from time to time in accordance with Clause 8; "Closing": the date of completion of all of the matters specified in Clause 3.1; "consent Agreement": an agreement in the agreed form between Playboy, Playboy Enterprises, Inc., Flextech, Sky and the Company which (inter alia) permits the pledge of certain assets which would otherwise have been prohibited under the Transaction Documents (as amended and/or amended and restated from time to time); "Control": the meaning ascribed thereto in Section 416 of the Taxes Act; "Deed of Adherence": a deed of adherence in the form set out in Schedule III; "Directors": the directors for the time being of the Company; "Disqualified Participant": any person all or part of whose Interest or shareholding or interest in any other company taken alone or together with the Interest or shareholding or interest in any 3 other company of any other person or persons, after taking into account any issue of any shares or securities in the Company or any transfer of any Interest, in either case in respect of which the relevant person has indicated in writing an intention to acquire any such shares or securities and, has caused or would cause or be likely to cause (as determined in accordance with this Agreement), a Licence Event; "Encumbrance": means any assignment by way of security, charge, hypothecation, lien (other than a lien arising solely by operation of law in the normal course of trading, the aggregate amount of which is not material), mortgage, pledge, title retention (other than arising pursuant to a third party's standard conditions of supply of goods) right of set off, security interest, trust arrangement and any other preferential right or agreement to confer security, including any analogous security interest under local law. "Europe": all countries which are situated within the geopolitical entity known as Europe, for the avoidance of doubt, including, but without limitation all the countries which are members of the European Union or the European Free Trade Area. "Fair Value": (a) in respect of each Share the same proportion of the fair market value of the Company as a whole on the date of service of the Transfer Notice (or deemed date thereof) or in the event that clauses 8.5 and 8.6 apply the date of the Winding up Resolution or in the event that clause 15 applies on the date of the Option Exercise Notice as such Share bears to the whole of the issued ordinary share capital of the Company stated as a price per Share; and (b) in respect of each (Pounds) 1 principal amount of Loan Stock the lesser of: 4 (i) the principal amount thereof plus interest thereon which has accrued in accordance with the terms of issue of the Loan Stock but which remains unpaid; and (ii) the same proportion of the fair market value thereof treating each (Pounds) 1 of Loan Stock as if it were a fully paid Share calculated in accordance with (a) above as certified (except in relation to (b)(i)) by the Referee on the basis of a sale thereof as between a willing vendor and a willing purchaser on the assumption that the Shares and/or Loan Stock the subject of the Transfer Notice will be purchased in one lot by a purchaser contracting on arm's length terms, who has no other interest in the Company and (if the Company is then continuing as a going concern) on the assumption that all the Shares were ordinary shares of the same class and that the Company will continue in business as a going concern and having regard to any goodwill attaching to the Company though taking into account of the fact (if that be the case) that the Programme Supply Agreement and/or Trademark Licence has been terminated; "Foreign Licence Event": an event having a legal effect analogous to that of a Licence Event in any of the Territories (other than the United Kingdom); "Gross Revenues": all income and other payments receivable in the normal course of business as shown in the audited accounts of the Company from time to time less any value added tax or other similar taxes; "Group": in relation to a Shareholder, that Shareholder and any holding company or subsidiary of that Shareholder and any subsidiary of such holding company; "Indebtedness for Borrowed Money": any loan, debt, bond, note, loan stock, debenture or other obligation for borrowed moneys, any obligation under any hire purchase, conditional sale or title retention agreement or lease (other than for payment of rent and service charges not exceeding a 5 commercial rate under any lease of real property), any liability in respect of any acceptance credit or note or bill discounting facility, any amount of consideration left outstanding by way of loan or otherwise under any agreement for the sale or purchase of assets and/or the supply of services (other than normal trade credit) and any guarantee, indemnity or security in respect of any of the foregoing, the amount thereof in each case being taken for the purpose of this Agreement to be (a) the maximum amount capable of being outstanding from companies in the Playboy/Europe Group whether or not then due or owing from or advanced to companies in the Playboy/Europe Group at the time of calculation but (b) to be calculated excluding any amounts owing to other companies in the Playboy/Europe Group; "Interest": an interest of any person in Shares, Loan Stock or any other securities of the Company; "in the Agreed Proportions": where the term is used in relation to all the Shareholders in such proportions as equal the percentage which the nominal value of the Shares for the time being in issue and beneficially owned by each Shareholder respectively bears to the aggregate nominal value of all the Shares or, where the term is used in relation to some only of the Shareholders in such proportions as equal the percentage which the nominal value of the Shares for the time being in issue and beneficially owned by each relevant Shareholder bears to the aggregate nominal value of all the Shares held by such relevant Shareholders; "in writing": includes any communication made by letter, facsimile transmission or electronic mail; "ITC Satellite Licence": the non-domestic satellite service licence in respect of the Channel dated 7th June 1995 issued to the Company by the ITC in accordance with the provisions of the Broadcasting Act 1990; "the ITC": the Independent Television Commission; 6 "LIBOR": the three month London Interbank Offered Rate for Sterling Deposits, as published in the Financial Times on the first day of each month or on the next succeeding day on which the Financial Times is published; "Licence Event": any of the following events: (a) the ITC revoking or (in a manner which has or is reasonably likely to have a material adverse effect on the Company) reducing the period of the ITC Satellite Licence (and, for the avoidance of doubt, any reduction which results in the involuntary cessation of business by the Company shall be deemed to have such an effect); or (b) the ITC varying the terms of the ITC Satellite Licence which variation has or is likely to have a material adverse effect on the Company; or (c) the ITC declining to grant to the Company a renewal licence to provide a non-domestic satellite service on terms and conditions reasonably acceptable to the Company upon the expiry of the ITC Satellite Licence; or (d) a relevant change (as defined in sub-section 5(7) of the Broadcasting Act 1990) taking place in relation to the Company; or (e) the Company becoming a Disqualified Participant in relation to the holding of the ITC Satellite Licence by virtue of Schedule 2 to the Broadcasting Act 1990; "Loan Stock": unsecured floating rate loan stock of the Company 1999 to be constituted by a Loan Stock Deed, in the agreed form and/or such other loan stock whether of the same or a different series as the Company may issue to the Shareholders from time to time pursuant to this Agreement; "Loan Stock Certificate": a certificate in respect of Loan Stock in the agreed form; 7 "the Option": the options granted to Playboy pursuant to Clause 15; "the Original Shares": the number of ordinary shares of (Pounds)1 each in the capital of the Company as have been subscribed for by the Shareholders in accordance with clauses 3.1(b) and 4.1(b); "person": any individual, firm, company or other incorporated or unincorporated body; "Playboy/Europe Group": the Company and each of its subsidiaries from time to time; "plc": Flextech plc; "Prescribed Price": (a) in relation to a voluntary Transfer of Shares or Loan Stock in respect of which a Transfer Notice shall have been served pursuant to Clauses 13.5 or 13.11, the price per Share or, as the case may be, for each (Pounds)1 principal amount of Loan Stock, offered by the Proposed Transferee (as defined in Clause 13.5.1(a));or (b) in relation to a Transfer of Shares or Loan Stock in respect of which a Transfer Notice shall be deemed to have been served pursuant to Clauses 14 or 16.2, such price as the Shareholders may agree per Share and, as the case may be, for each (Pounds)1 principal amount of Loan Stock, or in default of agreement within 30 days after the date on which the Transfer Notice is deemed to be served, following a reference by either of the Shareholders, such price per Share and, as the case may be, for each (Pounds)1 principal amount of Loan Stock, as the Referee shall determine to be on the date of receipt of the relevant Transfer Notice: (i) in the case of Clause 14.1(a) and (b) and Clause 16.2, Fair Value; and 8 (ii) in the case of Clause 14.l(c) the Fair Value (for the avoidance of doubt, taking into account the breach of agreement which has given rise to the requirement to transfer pursuant to Clause 14.l(c)) less a discount of 10%. "Programme Service": the supply of television programmes by Playboy pursuant to the Programme Supply Agreement; "the Programme Supply Agreement": an agreement in the agreed form between the Company and Playboy relating to the Programme Service on the Channel; "Referee": such independent merchant or investment bank with acknowledged experience of the industry in which the Company operates as the Shareholders may agree or, in default of agreement within seven business days, as may be nominated, on the request of either Shareholder, by the President for the time being of the British Institute of Bankers, who shall be instructed to produce his certificate within thirty days of this appointment and who shall act as expert and not as arbitrator and whose certificate shall be final and binding on the parties hereto, save in the event of manifest error; "the Satellite": the Astra 1C satellite which is to be used for the transmission of the Channel or any other satellite which may from time to time be used for the transmission of the Channel in accordance with this Agreement; "the Shareholders": Flextech, Sky and Playboy and their permitted transferees pursuant to Clauses 13, 14, 15 and 17; "Shares": ordinary shares of (Pounds)1 each in the capital of the Company; "Sky parent": in clauses 13.5.9(b) and 14.1 British Sky Broadcasting plc and elsewhere British Sky Broadcasting Limited; 9 "Subscriber Management Services Agreement": an agreement between Satellite Encryption Services Limited ("SESL") and the Company relating to the management of subscriptions to the Channel; "subsidiary" and "holding company": have the respective meanings attributed to them by Section 736 of the Act; "the Taxes Act": the Income and Corporation Taxes Act 1988; "the Territories": the UK, the Republic of Ireland, Belgium, Luxembourg, the Netherlands and such other countries and regions in which the Channel has been launched or in which the Board subject to Clause 19.1 has decided to launch the Channel and in respect of which any company in the Playboy/Europe Group has a licence pursuant to the Trademark Licence to operate a pay television service under the "Playboy" name; "the Trademark Licence": a licence in the agreed form between the Company and Playboy Enterprises, Inc. granting to the Company the right to use the name, logo and trade mark "Playboy" in connection with the Business; "Transaction Documents": this Agreement, the Articles, the ITC Satellite Licence, the Trademark Licence, the Programme Supply Agreement, the Subscriber Management Services Agreement, the Consent Agreement, Deed of Forbearance, the Transponder Sub-Lease, the Uplink and Encryption Agreement and any Deed of Adherence which has been executed pursuant to this Agreement, each as it may subsequently be amended or altered from time to time; "Transfer": any sale, assignment, transfer, grant of lease or other disposition of any legal, equitable or other interest or the creation of an Encumbrance; "Transponder": the Transponder No. 42 on the Satellite, as defined in the Transponder Sub Lease; 10 "the Transponder Sub Lease": a sub-lease of specified capacity on the Transponder to be entered into between the Company and United Artists Entertainment Corporation and Bravo Classic Movies Limited. "UK": the United Kingdom of Great Britain and Northern Ireland which expression shall for the avoidance of doubt continue to include Northern Ireland notwithstanding that Northern Ireland may at any time hereafter cease to be part of the UK, the Channel Islands and the Isle of Man. "the Uplink and Encryption Agreement": an agreement of that name between the Company, United Artists Entertainment Corporation, Bravo Classic Movies Limited, United Artists Entertainment (Programming) Limited. 1.2 All references to "the Company" in Clauses 5, 7, 8, 9, 11 and 12 shall include a reference to each company in the Playboy/Europe Group so that each provision of such clauses shall, where the context admits, also apply to each company in the Playboy/Europe Group. 1.3 In this Agreement, references to statutes, statutory instruments and regulations shall include any statute statutory instruments and regulations modifying, re-enacting, extending or made pursuant to the same or which is modified re-enacted or extended by the same or pursuant to which the same is made. 1.4 A document is in "the agreed form" if it is in the form of a draft agreed between and initialled by or on behalf of the Shareholders on or before the date hereof. 1.5 References in this Agreement to Clauses, Sub-Clauses, paragraphs and Schedules are references to those contained in this Agreement. 1.6 The Schedules to this Agreement are an integral part of this Agreement and references to this Agreement include references to such Schedules. 11 1.7 Clause headings are for ease of reference only and shall not be taken into account in construing this Agreement. 1.8 "day" (except where it is used in the expression "business day") means any day and "business day" means any day other than a Saturday, Sunday or public holiday either in England or the United States of America. 2. Business of the Company and Launch of the Channel 2.1 The sole object of the Company shall be to carry on the Business and businesses ancillary or incidental thereto, and to that end the Board shall seek to secure such means to distribute the Channel as are, in the Board's opinion, viable in the context of the Business Plan and the Company's available resources. The Shareholders shall use their reasonable endeavours to procure that the Business shall be conducted in accordance with the Business Plan. 2.2 After Closing the Shareholders and the Company shall do all such things as are reasonably within their respective powers as Shareholders to ensure that the Channel is launched in the Territories (other than Republic of Ireland) for broadcast via cable and DTH operators on or before 1st November 1995 and in Republic of Ireland after, but not before, the first anniversary of the launch of the Channel in the Territory and to this end the Company shall as soon as practicable after Closing apply for any licences which have not already been obtained and which are necessary to launch the Channel in the Territories. 2.3 If any product using the brand name Playboy other than the Playboy Magazine and other Playboy publications ("a Playboy Product") is advertised on the Channel: (a) where all the rights to use the brand name in relation to such Playboy Product vest in any company in the Playboy Group the Company shall have the right to sell such Playboy Product on the Channel and shall be entitled to be paid a fee by Playboy (which shall be negotiated and agreed by Playboy and the Company in good faith) 12 which will, unless otherwise agreed be calculated by reference to an agreed percentage of the gross selling price of sales of such Playboy Product; (b) where the rights to use the brand name in relation to a Playboy Product have been licensed other than to a company in the Playboy Group, Playboy shall use its reasonable endeavours to procure advertising of such Playboy Product on the Channel on similar terms to those set out in relation to (a) above. 2.4 The Company shall not launch, or otherwise make available, the Channel outside the Territory without all parties unanimous approval. 3. Closing Arrangements -------------------- 3.1 Closing shall take place on the third business day after the signature of this Agreement when (if such has not already occurred): (a) the Shareholders shall cause to be passed at a duly convened Shareholders' meeting of the Company a resolution in the agreed form to adopt the Articles; (b) each Shareholder shall subscribe in cash at par for the number of Shares and principal amount of Loan Stock set opposite its respective name in Schedule II, provided that Associates of Flextech, Sky and Playboy may make such Loan Stock subscriptions in substitution for Flextech, Sky and Playboy respectively; (c) at a meeting of the Board, the Company shall allot and issue such Shares and Loan Stock to the Shareholders (or in respect of Loan Stock, where the provision in paragraph (b) has been utilised, the relevant Associates of the Shareholders) as so subscribed by them respectively and shall enter the names of the Shareholders (or, as appropriate their Associates in the case of Loan Stock) in the register of members and Loan Stock holders of the Company as registered holders of such Shares and Loan 13 Stock, and shall issue and deliver to the Shareholders (or as appropriate their Associates in the case of Loan Stock) the requisite Share and Loan Stock Certificates in the agreed form duly executed under seal by the Company; (d) the following officers of the Company shall be appointed: - Fred Vierra, Roger Luard, Mark Luiz, Leon Unterhalter, Brent Harman, Steve Brett as Flextech appointed Directors - David I. Chemerow and Anthony J. Lynn as Playboy appointed Directors; - David Chance, Chris MacKenzie and Nick Carrington as Sky appointed Directors; - Fred Vierra as first Chairman; - Mark Luiz as Company Secretary; - KPMG Peat Marwick as the Company's auditors; (e) the following Transaction Documents shall be duly executed: - the Loan Stock Deed - the Trademark Licence - the Programme Supply Agreement - the Consent Agreement 14 - the Subscriber Management Services Agreement - the Forbearance Agreement - the Transponder Sub-Lease - the Uplink and Encryption Agreement the Board shall adopt and approve the Business Plan; (g) Playboy will deliver a legal opinion addressed to Flextech, Sky and the Company by Howard Shapiro (General Counsel, Playboy Enterprises, Inc.) in the agreed form; and (h) Flextech will deliver a legal opinion addressed to Playboy, Sky and the Company by Denton Hall in the agreed form; (i) Sky will deliver a legal opinion addressed to Playboy, Flextech and the Company by Herbert Smith in the agreed form. 3.2 Any provision in Clause 3.1 to the effect that a Transaction Document shall be "entered into and completed in accordance with its terms" shall constitute several obligations on the parties to sign such agreement, and duly to perform its respective obligations under the clause therein headed "Completion" or "Closing". Where any party to such a Transaction Document is not also a party to this Agreement, the Shareholder (if any) of whom any such party is an Associate shall, to the extent practicable, make reasonable efforts to procure that such party so signs and performs. 3.3 The payments by the Shareholders under paragraph 3.1(b) shall each be made for value on the date of Closing by way of bankers' drafts drawn on a London Town Clearing Bank payable to the Company or by international wire transfer. 15 3.4 No party shall be obliged to complete this Agreement unless all of the matters referred to in Clause 3.1 are completed or, as appropriate, dealt with in accordance with that clause. 4. Provision of Finance 4.1 The parties agree that the approved budgeted, working capital, capital expenditure and other budgeted funding requirements of the companies in the Playboy/Europe Group as set out in any Business Plan and any other funding requirements shall be met in the following order of priority: (a) initially, out of the proceeds of the subscription for Shares and Loan Stock pursuant to Clause 3.1; (b) thereafter by the Shareholders (or, in the case of Loan Stock, Shareholder's Associates) by subscription in the Agreed Proportions at par for Shares and Loan Stock in the ratio of one Share for every (Pounds)3 principal amount of Loan Stock (or such other ratio as the Inland Revenue agrees is suitable for allowing all interest on such Loan Stock to be tax deductible for UK corporation tax purposes) on such dates and in such amounts as are set out in Schedule IV or in the event that the Board considers funding in excess of or earlier than that specified in Schedule IV is required, on the dates and in such amounts as may be determined by the Board having given to the Shareholders 14 days prior written notice thereof up to a maximum principal aggregate amount (including amounts previously advanced whether or not for the time being outstanding) of (Pounds)11,500,000; or (c) thereafter (subject to Clause 4.7) by borrowings (secured if necessary by charges over the assets of any company in the Playboy/Europe Group) from a bank or another financial institution on terms approved pursuant to Clause 8 provided that the Board 16 shall approve any such borrowings which are available on terms in all respects commercially reasonable and further provided that any Shareholder (or in the case of Loan Stock its Associate) may participate in such borrowings on such terms up to such amount (including all such borrowings) as such Shareholder may decide and if more than one in the Agreed Proportions; (d) thereafter (subject to Clause 4.7) by subscription for Shares and/or Loan Stock by one or more Shareholders (or, in the case of Loan Stock their Associates) in accordance with Clause 4.5 or any third parties nominated by a Shareholder. 4.2 If any Shareholder (or its nominated Associate in the case of Loan Stock) fails to provide funding pursuant to Clause 4.1(b), the other Shareholders (or their respective Associates) may forthwith (at their own election and without prejudice to their other rights under this Agreement or the general law) provide funding by the methods described in Clause 4.5 or subscribe for new Shares/Loan Stock at par ("the Subscription Price") to meet the resulting funding requirement deficit, in a ratio of one Share each for every (Pounds)2 principal amount of Loan Stock (the "Default Shares/Loan Stock") PROVIDED THAT if the Inland Revenue agrees a debt: equity ratio for the purposes of Clause 4.1(b) other than 3:1, this 2:1 ratio shall be adjusted pro rata. Any Loan Stock created pursuant to this clause shall be designated as a separate series of Loan Stock from any Loan Stock issued pursuant to Clause 4.1. 4.3 Where any Loan Stock has been issued to a Shareholder or its Associate pursuant to Clause 4.2 ("Clause 4.2 Loans") as a result of the default by another Shareholder ("the Defaulter") no outstanding Loan Stock of the Defaulter (or interest accrued due thereon) subscribed pursuant to Clauses 3.1 and 4.1 may be repaid or demanded for repayment without the other Shareholders' consent until all Clause 4.2 Loans and any loans of a Funding Shareholder pursuant to Clause 4.5 (and interest accrued thereon) have been fully discharged. 4.4 Save as specifically provided in Clause 3.1(b) and 4.l(b), no Shareholder shall be required to make any funding available to the Company. The maximum amount of funding which each 17 Shareholder is required to make available to the Company pursuant to Clause 3.1(b) and 4.1(b) is as follows: Flextech - (Pounds) 5,865,000; Subject to Clause 15, Playboy - (Pounds) 2,185,000 Subject to Clause 15, Sky - (Pounds) 3,450,000 4.5 Subject always to Clause 4.7 (save where funding is being provided pursuant to clause 4.2), if the Board determines that any company in the Playboy/Europe Group requires funds in excess of those currently available to it or them (whether from Shareholders or third parties) any Shareholder ("a Funding Shareholder") wishing to provide (and who commits in writing within 7 business days of such determination to provide or procure the provision of) such additional funds shall be entitled to do so. The method(s) for such additional funding (whether by way of borrowing, or the issue of loan capital or securities) shall be determined by the Funding Shareholder(s) or, in the event that more than one Shareholder so commits (each a "Funding Shareholder") and proposes different methods of providing additional funds, the Shareholders shall acting in good faith use their reasonable endeavours to agree the method of funding and the amount of such funding; failing which it shall be determined by the Funding Shareholder who holds the largest number of Shares PROVIDED THAT (i) no such method may provide for any Shareholder being obliged to incur any expenditure or financial commitment without its prior agreement; (ii) in the event of competition, unless otherwise agreed by the Funding Shareholders, the additional funds shall be provided in the Agreed Proportions. In any event, any opportunity to participate in any funding proposed pursuant to this clause 4.5 shall be offered first to the Shareholders in the Agreed Proportions and in the event that the method of funding determined is proposed to be or to include the subscription for Shares, the opportunity to provide such funding in the method or methods determined shall again be offered to each Shareholder in the Agreed Proportions, even if such Shareholder had not originally proposed to be a Funding Shareholder pursuant to this clause who shall have seven business days to provide all (but not part only of) such funding, failing which such Shareholder shall be deemed to have declined to participate. 18 4.6 Subject always to Clause 4.7, for the purpose of implementing any method of funding approved by the Board pursuant to Clause 4.5 each of the parties agrees that any provision in this Agreement, the Loan Stock Deed or the Articles which requires any particular agreement of the parties or any of them (including for the avoidance of doubt agreement to convert the Loan Stock into Shares or to subordinate the Loan Stock to any such funding) or a voting level or quorum or the vote of any class of Shareholder to increase the Company's authorised capital, to issue any securities or to create any Indebtedness for Borrowed Money shall not apply and (notwithstanding any other provision of this Agreement or of the Articles) the Shares held by any Shareholder(s) providing funds pursuant to Clause 4.2, a non-Defaulter(s) (in the case of clause 4.3) or a Funding Shareholder(s) (in the case of clause 4.5) shall on any vote carry such number of votes and entitle the holder(s) to fulfill such quorum requirements as will enable the necessary resolution(s) to be passed as required by the non-Defaulter(s) or Funding Shareholder(s) as appropriate. 4.7 Flextech undertakes to Playboy and Sky that it will exercise all voting rights and other powers of control available to it in relation to the Company so as to procure (in so far as it is able by the exercise of such rights) that the Board shall not approve any annual budget or business plan for the Company or implement any material amendment to or material departure from any of the same which would require funding to be provided or procured pursuant to clause 4.1(c) or (d) ("the Additional Funding") if the Directors appointed by Playboy or Sky pursuant to clause 5.1 do not approve such Additional Funding and (a) the proposal and/or the approval of such Additional Funding by the Directors appointed by Flextech pursuant to clause 5.1 is capricious; or (b) the Additional Funding is in excess of what is reasonably required for the normal commercial operations of the Business for the 12 month period covered by the then current Business Plan and annual budget 19 provided that this Clause 4.7 shall not apply and the Board shall be entitled to approve funding without reference to the restrictions contained in this clause for the purchase in any Year after the second Year (as determined in accordance with the Programme Supply Agreement) of Acquired Premium Movies (as defined in the Programme Supply Agreement). 4.8 In the event of any dispute as to whether Flextech has complied with its undertaking in Clause 4.7, the matter may be referred by any party hereto within 28 days of any proposal or approval of Additional Funding to an independent accountant agreed between the parties. The independent accountant shall act as expert and not as arbitrator; and shall be instructed to determine the matter within thirty days of such referral. 4.9 If the parties are unable to agree as to the appointment of the independent accountant pursuant to 4.8 above within 15 days of one party serving notice on the others calling for such appointment then the independent accountant shall be appointed on the application of any party to the President for the time being of the Institute of Chartered Accountants of England and Wales. 4.10 The decision of the independent accountant appointed pursuant to Clauses 4.8 or 4.9 shall be final and binding on the parties hereto, save in the event of manifest error. The costs of such independent accountant shall be borne by the party whose position on the proposal for the Additional Funding least prevails. 5. The Board and Management 5.1 The Board shall comprise not more than eleven Directors. Each Shareholder shall be entitled to appoint up to such number of Directors as is stated opposite its name in Schedule V and to remove and replace any such appointees provided that Flextech shall always be entitled to appoint a majority of the Directors so long as it holds more than 50% of the Shares. The right to appoint remove and/or replace a director shall be exercisable by notice to the Company a copy of which notice shall be given to the Shareholders not exercising or giving such notice. The Board shall act by majority vote only. 20 5.2 The Chairman shall be one of the Directors appointed by Flextech and shall not have a second or casting vote at Board or Shareholders' Meetings. 5.3 The appointment of the Chief Executive Officer, the Chief Financial Officer and the Marketing Manager (if any) of the Company shall be made by the Board in accordance with clause 8.1. 5.4 The Chief Financial Officer and the Marketing Manager (if any) shall report directly to the Chief Executive Officer. Any director of the Board shall have unrestricted direct access to such executives who shall be obliged, as a term of their respective service agreements, to respond to any enquiries from, and provide any information and documentation requested by, any such director. 5.5 Without prejudice to the rights of any such persons under their respective terms of employment to claim compensation for breach, any Shareholder beneficially owning (or Shareholders together beneficially owning) more than 15% of the Shares may terminate the employment of the Chief Executive Officer, the Marketing Manager (if any) or the Chief Financial Officer. 5.6 Save as otherwise provided or contemplated in this Agreement, the Company (so far as it is legally able) shall and the Shareholders shall exercise their powers in relation to the Company so as to ensure that the Company shall: (a) convene and hold a formal meeting of the Board at least once in every period of 4 months; (b) procure that (save for emergency meetings) not less than fourteen business days' prior written notice of any meeting of the Board shall be given to the Directors, that every such notice shall be accompanied by a written agenda specifying the business of such meeting. Directors shall be permitted to attend board meetings by telephone; 21 (c) carry on and conduct its business and affairs on a commercial basis, and in accordance with the Business Plan in force from time to time, (d) comply with the terms and conditions of the ITC Satellite Licence and any directions made by the ITC in relation to it and comply with the provisions of the Broadcasting Act 1990 and any other licences; (e) observe and duly perform its obligations under each Transaction Document to which it is a party. 5.7 Subject to clause 8.4 each Shareholder and each Director shall, in its capacity as Shareholder and/or Director of the Company, be entitled to vote in connection with the approval by the Company of any agreement, transaction or arrangement in or to which (as applicable) that Shareholder (or as appropriate Shareholder appointing such Director), or any of its Associates, is an interested party and in connection with any revisions or amendments to, or waiver of any rights under, such agreement, transaction or arrangement PROVIDED THAT its/his interest therein has been disclosed beforehand to the Board. 5.8 Upon a Shareholder ceasing to be entitled to appoint a director or directors of the Company (other than by Transfer of Shares to its Associate pursuant to Clause 13.2) it shall procure the resignation from the Board (and from any executive position held with the Company) of some or all the Directors (as the case may be) it has appointed to the Board without any claim for damages or compensation for loss of office of any kind whatsoever. 5.9 No non-executive Director shall be entitled to Directors' fees or to reimbursement by the Company of travelling or other expenses for attending meetings of the Board. 5.10 All references to "the Board" in Clause 5 shall include a reference to the board of directors of each company in the Playboy/Europe Group, so that each provision therein shall (where the 22 context admits) also apply to the board of directors of each company in the Playboy/Europe Group. 6. Agreement to Perform 6.1 Each Shareholder shall at all times exercise its respective powers and votes as shareholder of the Company to ensure that (to the extent that the same is within such powers and voting rights) the Company will comply with all of its obligations under each Transaction Document. 6.2 Each Shareholder undertakes with the others generally to use its reasonable endeavours to promote the Business and the Channel. 7. Information 7.1 The Company shall: (a) at all times keep true, accurate and up to date books and records of all the affairs of the Company; (b) subject to Clause 11, and subject to having received not less than 2 business days' prior notice, make available to the Shareholders and their duly authorised representatives during working hours on reasonable notice access to the books, records, accounts, documents and premises of the Company; and (c) subject to Clause 11, supply to each Shareholder such information relating to the Company as it may reasonably require and without prejudice to the foregoing shall keep the Shareholders fully and promptly informed as to all material developments regarding the Company's financial and business affairs and promptly notify the Shareholders of any significant event (including without limitation any litigation or 23 arbitration) the outcome of which will or is likely to materially affect the Company or its business, finances, assets or affairs. 7.2 Without detracting from the provisions of Clause 7.1, the Company shall at its own cost prepare and send to the Shareholders and each Director: (a) within 10 business days from the end of each calendar month unaudited management accounts of the Company for that month and cumulative management accounts for the current accounting period up to and including that month; (b) within forty five business days from the end of each of its financial years audited consolidated accounts of the Company (to be prepared, save as required by law, in accordance with UK Accounting Standards and certified by the auditors of the Company) and will convene and hold a meeting of Shareholders within one month thereafter to approve the same; and (c) without detracting from the provisions of clause 8.2(a) it shall be the responsibility of the Chief Executive Officer and the Chief Financial Officer, in consultation with Mark Luiz or such other person as may be nominated by Flextech from time to time and such person as each of Playboy and Sky may nominate from time to time, to prepare a budget, business plan and marketing plan for each fiscal year beginning after 31st December 1995 no later than the end of October in the year prior to the year to which the budget, business plan and marketing plan relates. 7.3 The Company may at any time serve written notice upon any Shareholder requiring it to provide the Company with any information, supported by a declaration or by such other evidence (if any) in support as the Company may reasonably require, for the purpose of: 24 (a) complying with any EC or UK merger or competition law or regulations in relation to the issue or transfer of Shares and/or Loan Stock in accordance with this Agreement; or (b) deciding whether a Licence Event has occurred or is likely to occur; or (c) deciding whether a Shareholder is, or is likely to become, a Disqualified Participant and such Shareholder shall promptly comply with any such notice. 7.4 The Company undertakes to each Shareholder to keep it informed of any matter of which the Company is aware which may lead to a Licence Event or to any Shareholder becoming a Disqualified Participant. 7.5 Each Shareholder shall use its reasonable endeavours to ensure that all data and information which is reasonably required by the ITC or any other regulatory body having jurisdiction or to ensure compliance with EC or UK merger or competition law or regulations or with the Broadcasting Act 1990 shall be duly and promptly supplied to that body. 8. Restrictions on the Company's Activities ---------------------------------------- 8.1 Save as expressly provided for in any Transaction Document, or in the initial Business Plan and subject to clause 8.2, so long as a Shareholder (together with its Associates) is the beneficial owner of not less than 15% of the Shares (and, additionally in the case of Playboy and its Associates) so long as Playboy is an Associate of Playboy Enterprises, Inc., and the Trademark Licence and the Programme Supply Agreement have not been terminated or are or is under notice of termination, other than by wrongful termination by the Company and additionally in the case of Sky, so long as Sky is an Associate of Sky parent the following matters shall require the prior written approval of such Shareholder and if the above condition does not apply the following matters shall require the prior approval of the Board and the Shareholders shall exercise all 25 voting rights and other powers of control available to them in relation to the Company so as to ensure (in so far as they are able by the exercise of such rights) that the Company shall not without such approval: (a) increase or reduce the authorised or issued share capital of the Company (other than to permit an issue of shares conducted in accordance with clause 4 of this Agreement) or consolidate, sub- divide, purchase, redeem or cancel any of such share capital or alter any right pertaining to any share or class of shares in such capital or otherwise re-organise, restructure or reduce the share capital of the Company; (b) issue or allot any share or security or grant or create any option or right to acquire any share or security in the capital of the Company other than by way of a rights issue offered in accordance with Clause 4 of this Agreement and the Articles; (c) alter the Company's Memorandum of Association or the Articles; (d) save where Clause 8.2(i) applies, take or permit the taking of any action to have the Company wound up PROVIDED THAT nothing in this clause shall prohibit such action taken upon the recommendation or decision of the Board (on the advice of the Company's auditors or legal counsel of not less than six years standing with experience in such matters) that the Company should cease trading in circumstances where, if the Company continued to trade, the Directors may, under the Insolvency Act 1986, be or become personally liable for the debts of the Company or to make a contribution to the Company's assets; (e) amend or assign or fail to implement or fail to enforce any Transaction Document; (f) enter into a scheme or arrangement, admit in writing its inability to pay its debts as they fall due, commence negotiations with creditors or any class thereof with a view to the readjustment or rescheduling of its indebtedness, make a general assignment for 26 the benefit of creditors, or save where Clause 8.1(d) applies take any action for the winding-up, administration, dissolution, liquidation or reorganisation (other than a solvent reorganisation) of the Company, or for the adjustment, protection or relief of the Company or its debts under any law relating to bankruptcy, insolvency or reorganisation; (g) enter into, renew, vary, terminate or continue after expiry any contract which is not on bona fide arm's length terms in all material respects; (h) subject to Clauses 5.3 and 5.4, engage or alter the terms of employment (including salary and benefits) of any person fulfilling the function of Chief Executive Officer, Chief Financial Officer, or Marketing Manager (if any); (i) approve any secure encryption system for the Channel or make any material change in such system such approval not to be unreasonably withheld or delayed; (j) make any material change in the character of the Channel from that set out in this Agreement and the Programme Supply Agreement; (k) subject to Clause 16, make any determination as to (i) whether a Licence Event has been caused or is likely to be caused, (ii) whether a person is or is likely to become a Disqualified Participant, or (iii) whether a Transfer Notice has been or is deemed to be given in accordance with Clause 16 provided that: (aa) the approval of such Shareholder shall not be required pursuant to (i) and/or (ii) of this clause once 14 days have elapsed after a direction or ruling in respect of the matter has been made by the ITC (unless, during such 14 days, such Shareholder has, at its own expense, applied to court for a judicial review or reversal of such direction or ruling and the application has been successful or is still sub judice the first instance court); and 27 (bb) in the event that such Shareholder fails to give approval, either such Shareholder or the Board may by notice in writing to the other refer the matter to such legal counsel of not less than six years standing with experience in such matters as shall be agreed between such Shareholder and the Board (or, in the event of failure to agree within 7 business days of such notice, to such legal counsel as above appointed by the President of the Bar Counsel) who shall be instructed to determine the matter as soon as reasonably practical, who shall act as expert and not as arbitrator and whose decision shall be final and binding on such Shareholder and the Board. The costs of such legal counsel shall be borne by such Shareholder if their position least prevails. Otherwise such costs shall be borne by the Company; (l) Transfer (other than by an Encumbrance) the whole or any material part of the undertaking, property and/or assets of the Company (or any interest therein), or contract so to do otherwise than in the ordinary and proper course of the Business; (m) consolidate, merge or amalgamate with any other person; (n) subject to clause 4 create, acquire or dispose of any subsidiary or otherwise acquire or dispose of any shares, securities or other interest in any company or business or incorporate or promote any company or permit any subsidiary to issue or allot any share or security or grant or create any option or right to acquire any share or security except to the Company or another wholly owned subsidiary of the Company; (o) declare or pay any dividend or other distribution or refrain from declaring or paying any dividend or other distribution other than in accordance with Clause 10; (p) incur, enter into or commit to Indebtedness for Borrowed Money or vary any terms or conditions of any such Indebtedness other than in accordance with clause 4; 28 (q) give any guarantee or indemnity or other similar undertaking or create any Encumbrance over any of the undertaking, property, assets or uncalled share capital of the Company except to the extent necessary to obtain Indebtedness to be incurred pursuant to clause 4 of this agreement; (r) make any loan or advance other than loans to another company in the Playboy/Europe Group and normal trade credit and season ticket loans to employees not exceeding (Pounds)2,500 for all employees; (s) approve the transmission of the Channel by means of a satellite other than the Satellite, such approval not to be unreasonably withheld or delayed; (t) use (other than in emergencies) any transponder, other than the Transponder such approval not to be unreasonably withheld or delayed; (u) change the hours during which the Channel is broadcast from the hours of midnight to 4.00 a.m. daily; (v) permit any change to the standard or quality of the programmes broadcast on the Channel from the standard and quality required by "the Programme Specification" contained in the Programme Supply Agreement. (w) cease to transmit the Channel by analogue signal or commence to transmit the Channel by digital signal (such approval in each case not to be unreasonably withheld or delayed). 8.2 Save as expressly provided for in any Transaction Document, or the Business Plan any decision relating to any of the following matters and any other matters of a non-routine nature shall require the prior approval of the Board alone and the Shareholders shall exercise all voting rights and other powers of control available to them in relation to the Company so as to procure (in so 29 far as they are able by the exercise of such rights) that the Company shall not without such approval: (a) approve any annual budget or any business plan for the Company or implement any amendment to or material departure from any of the same; (b) set, amend or waive any of the charges levied by the Company to subscribers to and/or advertisers on the Channel other than in the normal course of business; (c) approve the Company's audited balance sheet or profit and loss accounts or change the Company's accounting reference date, accounting policies or auditors; (d) vary or terminate (other than by effluxion of time) any long term contract or contract of material importance to the Company; (e) except in the case of emergency for the protection of the Company's business or assets institute or defend any litigation, arbitration or tribunal proceedings (other than normal debt collection in the ordinary course of business); (f) take or agree to take any leasehold interest in or licence over any land; (g) approve any payment of capital or interest (including capitalised interest) in respect of the Loan Stock; (h) enter into any joint venture, partnership, consortium or joint purchase arrangement; (i) take or permit the taking of any action to have the Company wound up if in the first Year (as defined in accordance with the Programme Supply Agreement) and the immediately succeeding two Years (the "Relevant Years") the aggregate of the Gross Revenues of the Company are less than 70% (seventy per cent) of the aggregate of the 30 projected Gross Revenues of the Company as shown in the initial Business Plan for the Relevant Years provided that in the event that the Board does take any such action the provisions of Clauses 8.5 - 8.6 shall apply. 8.3 Notwithstanding the provisions of Clause 8.2, if the Board shall not have approved the annual budget for any company in the Playboy/Europe Group before the commencement of the financial year to which it relates, the Company shall continue to carry on the Business for a period of six months on the basis of the previous year's approved budget in order to give the Board time in which to agree the annual budget for the financial year in question. 8.4 The exercise of the Company's rights under the Programme Supply Agreement (including without limitation its rights in relation to Programme Scheduling under clause 8 and Termination under clause 10.3) and the Trademark Agreement shall be exercised by the Company through a majority of the directors of the Company appointed by Flextech and Sky pursuant to Clause 5.1 and not otherwise and, so long as Sky parent or any Associate thereof holds any interest in any shares in SESL, the exercise of the Company's rights under the Subscriber Management Services Agreement shall be exercised by the Company through a majority of the directors of the Company appointed by Flextech and Playboy pursuant to Clause 5.1 and not otherwise. 8.5 In the event that the Board resolves to take or permit the taking of any action to have the Company wound up in the circumstances set out in Clauses 8.1(d) and 8.2(i) ("the Winding Up Resolution"): (i) the obligations of the Shareholders pursuant to Clause 4 shall forthwith cease save for obligations which have accrued due prior to the date of such Winding Up Resolution; (ii) any Shareholder may serve a notice on the other Shareholder(s) and the Company at any time within 30 days after the Winding Up Resolution has been passed, requiring the determination of Fair Value of the Shares and the Loan Stock; 31 (iii) any Shareholder may, within 30 days after such determination has been made serve a notice ("the Offer Notice") on the Shareholder(s) offering to acquire all the Shares and Loan Stock of the other Shareholder(s) at the price (which shall not be less than 90% of Fair Value determined pursuant to paragraph (ii)) per Share and per (pounds)1 in nominal value of Loan Stock specified by the Shareholder in the Offer Notice; (iv) any Shareholder may within 2 business days of service of an Offer Notice serve on the Shareholder(s) a notice ("the Counter Offer Notice") offering to acquire all the Shares and Loan Stock of the other Shareholder(s) at the price per Share and per (Pounds)1 in nominal value of Loan Stock specified in the Counter Offer Notice (being in each case a price which is higher than the price specified in the Offer Notice). If no Counter Offer Notice is served within such timescale, the Shareholder serving the Offer Notice shall prevail; (v) if a Counter Offer Notice is served the procedure set out in (iii) above shall continue and may be repeated until such time as no further Counter Offer Notice is served within 2 business days from the date of service of the immediately preceding Counter Offer Notice when the Shareholder serving the last Counter Offer Notice shall prevail. 8.6 The Shareholder who prevails and the other Shareholders shall be bound within 14 days of service of the successful Offer Notice or Counter Offer Notice (as the case may be) to complete the sale and purchase of all the Shares and Loan Stock in the Company (other than the Shares and the Loan Stock held by the prevailing Shareholder or any member of such Shareholder's Group) at the price per Share and per (Pounds)1 in nominal value of Loan Stock specified in the Offer Notice or Counter Offer Notice which prevails (as the case may be) and in the event that any of the other Shareholders fails to do so the Company may receive the purchase money and the Directors appointed by the successful Shareholder may authorise some person to execute a transfer as appropriate of the Shares and Loan Stock in favour of such Shareholder and the Company shall hold the purchase money in trust for the relevant Shareholder(s). 32 9. Name ---- The Company's right to use, or trade under, any name which includes the word "Playboy" shall be governed by the Trademark Licence. 10. Dividend Policy --------------- Subject to Clause 8.1 and except as may otherwise be agreed in writing by the Shareholders, and subject to the provisions of the Act, the terms of issue of any Loan Stock or other Company indebtedness and the Company's working capital and other capital requirements all of the Company's profits from time to time available for distribution shall be distributed to the Shareholders by way of dividend as soon as practicable. 11. Confidentiality --------------- 11.1 Each Shareholder shall at all times keep confidential (and shall procure that its Associates, officers and employees and agents shall keep confidential) any information which it may have or acquire in relation to the customers, business, finances, assets or affairs of the Company or the other Shareholders and their Associates or which, in consequence of the negotiation or operation of, or the exercise of rights under, any Transaction Document it may have or acquire in relation to the customers, business, finance, assets or affairs of the Company or the other Shareholders or their Associates, save for any information: (a) which is publicly available or becomes publicly available through no act of that Shareholder; (b) which is disclosed to that Shareholder by a third party which did not acquire the information under an obligation of confidentiality; 33 (c) which is independently acquired by that Shareholder as the result of work carried out by an employee to whom no disclosure of such information had been made; or (d) which is required to be disclosed by any law (including any order of a court of competent jurisdiction) or the rules of any stock exchange or governmental, revenue or other regulatory authority, whether or not having the force of law. Provided that nothing in this clause shall prevent any Shareholder or any Associate of such Shareholder from operating their respective businesses in the ordinary and normal course. 11.2 The Company shall, and the Company shall procure that each other member of the Playboy/Europe Group shall observe a similar obligation of confidence in favour of the Shareholders. 11.3 The provisions of this Clause shall survive any termination of this Agreement. 11.4 The Shareholders and the Company agree that for the purpose of Clause 8, the directors shall be entitled to pass any information relating to the Company, its business or affairs to any Shareholder and neither the Shareholder nor the Company shall raise any objection to such passing of information nor allege any breach of any duty of confidence to the Company as a result of such action. 12. Disclosure 12.1 In recognition of each Shareholder's understanding that the other Shareholders propose or may in the future propose to invite third parties to participate as equity or non equity investors or other providers of finance in or to plc or Flextech or Playboy or Playboy Enterprises, Inc. or Sky or Sky parent the parties agree that such other Shareholders may provide to such invitees copies of: (a) the Transaction Documents; 34 (b) any Business Plan; (c) accounting and other information provided to the Shareholders pursuant to this Agreement; and (d) such other information as it would be reasonable in all the circumstances for a potential investor to require in relation to the Company and the Business PROVIDED THAT no Shareholder may include in such copies any information which is commercially sensitive, disclosure of which could in its reasonable opinion cause harm to any company in the Playboy/Europe Group, any Shareholder or any company in its Group AND PROVIDED FURTHER that before providing such copies the invitee has signed a confidentiality agreement on terms which follow, at least, those conventionally followed in the United Kingdom, which agreement shall be expressed to be for the benefit of all parties to this Agreement and all the companies in the Playboy/Europe Group. Furthermore, in recognition of the fact that plc, Sky and Playboy are each subsidiaries of publicly-owned companies, the parties agree that (subject to the first of the preceding provisos) each Shareholder and its Associates may provide to institutional investors and analysts such information concerning the Company as is conventional to assist such investors in deciding whether to invest or such analysts to prepare their analyst reports. 12.2 The provisions of this Clause shall survive any termination of this Agreement. 13. Transfers of Shares and Loan Stock 13.1 No Shares may be Transferred: (a) at any time if the Transfer is to a Disqualified Participant; or (b) unless and until the terms of clause 13.4 are complied with. 35 13.2 Subject to Clause 13.1 a Shareholder may Transfer all, but not part only, of its Shares to any of its Associates but on terms that immediately upon such transferee ceasing to be the transferor's Associate such Shares shall be transferred to the transferor or another of its Associates. 13.3 Subject to Clause 13.1 and save for a Transfer in accordance with Clauses 13.2, 14, 15, 16 and 17, each Shareholder undertakes that it will not at any time Transfer any Shares except in accordance with Clause 13.5. 13.4 If any Shareholder ("the transferor") proposes to Transfer any Shares to any person ("the transferee") then it shall be a condition precedent to such Transfer and the registration thereof that the parties to this Agreement and the transferee shall execute a Deed of Adherence and deliver a legal opinion in a form, and from legal counsel, reasonably acceptable to the other Shareholders concerning the issues warranted and represented by them in Clause 3 of the Deed of Adherence. 13.5.1 Subject to Clauses 13.1 and 13.2 any Shareholder who wishes to sell any of its Shares (a "Vendor") shall give notice in writing to the Company and the other Shareholders of such wish (a "Transfer Notice") identifying: (a) the person to whom it proposes to sell any of its Shares (the "Proposed Transferee"); (b) the name of the Proposed Transferee's ultimate parent company and controlling shareholders, if any; (c) the Prescribed Price and other terms of the proposed sale and the extent to which (if any) such price assumes that the Proposed Transferee shall be entitled to receive all or any dividends or other distributions accrued due but not paid in respect of the Shares. The Transfer Notice shall not be effective if it does not contain such information unless it is a deemed Transfer Notice pursuant to Clause 14. A Transfer Notice, once given, cannot be 36 withdrawn without the consent of all the Shareholders (other than the Vendor). The Transfer Notice shall constitute the Company the Vendor's agent for the sale of all, but not some only, of the Shares the subject of the Transfer Notice ("the Sale Shares") to the other Shareholder(s) and/or (subject to Clause 13.5.4) any person procured or nominated by the other Shareholder(s) as it/they may in its/their absolute discretion determine ("a Nominee") at the Prescribed Price. The Transfer Notice shall be accompanied by the Vendor's share certificates and duly executed transfers in blank in respect thereof and (save as hereinafter provided) may not be withdrawn. 13.5.2 In any case where there is a deemed Transfer Notice and the determination of the Prescribed Price has been referred to the Referee, the Company shall as soon as it receives the Referee's certificate serve a certified copy thereof on the Shareholders. The fees and expenses of the Referee shall be borne as to one half by the purchaser(s) (if any) and as to the balance (or the whole if there are no purchasers) by the Vendor of the Sale Shares. 13.5.3 Within 7 business days of receipt of the Transfer Notice by the Company or, where a Referee's certificate is required, within 7 business days of receipt by the Company of the Referee's certificate, the Company shall give notice in writing to the other Shareholders specifying the number of Sale Shares and the Prescribed Price therefor and offering the Sale Shares for sale to the other Shareholders and/or (subject to Clause 13.5.4) a Nominee at the Prescribed Price. Such notice shall be accompanied by a copy of the Transfer Notice and, if applicable, the Referee's certificate and shall require the other Shareholders within 14 days of the receipt of the notice: (a) give notice that it and/or a Nominee is willing to purchase the Sale Shares at the Prescribed Price; or (b) (except in the case of a deemed Transfer Notice pursuant to Clause 14 or 16.2) give notice that it consents to the sale of all the Sale Shares within 28 days thereof to the Proposed Transferee at the Prescribed Price; 37 (c) give notice that it objects to the Transfer to the Proposed Transferee on the grounds set out in Clause 13.5.9. In the event that no notice or notices are received within the said period of 14 days or notice or notices have been given pursuant to Clause 13.5.3(a) but not in respect of all the Sale Shares then such other Shareholders shall be deemed to have served a notice or notices pursuant to Clause 13.5.3(b) at the end of such 14 day period. 13.5.4 In the event that a notice or notices are served pursuant to Clause 13.5.3(a) in respect of all of the Sale Shares, the other Shareholder or Shareholders or a Nominee of any such Shareholder or Shareholders shall within 28 days thereafter complete the purchase from the Vendor of the Sale Shares at the Prescribed Price provided that in the event of competition the Shareholders (and/or their Nominees) shall complete the purchase of the Sale Shares in the Agreed Proportions save that notwithstanding the above no purchase pursuant to this clause may be made by a Nominee of any Shareholder if there remains another Shareholder willing to purchase those Sale Shares which such Nominee would otherwise have purchased. The Vendor shall be bound to transfer the Sale Shares comprised in the notice to the other Shareholders or its/their Nominees at the Prescribed Price, and if it makes default in so doing the Company may receive the purchase money and the Directors appointed to the Board by the other Shareholders may authorise some person to execute a transfer as appropriate of the Sale Shares in favour of the other Shareholders and/or their Nominees ("the Shareholder Purchasers") and the Company shall hold the purchase money in trust for the Vendor. The receipt by the Company of the purchase money shall be a good discharge to the Shareholder Purchasers and after its or their name has been entered in the Company's Register of Members in exercise of the aforesaid power, the validity of the proceedings shall not be questioned by any person. If such purchase is not completed (for any reason other than the Vendor's delay or default) within such period of 28 days, then the certificate and duly completed transfer of the Sale Shares shall be returned to the Vendor and consent shall be deemed to have been given pursuant to Clause 13.5.3(b) and the provisions of Clause 13.5.5 shall apply. 38 13.5.5 In the event that a notice is given or deemed to be given by the other Shareholders pursuant to Clause 13.5.3(b) the Vendor shall, subject to Clause 13.6, be at liberty to sell all of the Sale Shares at any time within 28 days after the date of such notice (or, if no actual notice is given pursuant to Clause 13.5.3, the expiry of the period of 14 days provided for under Clause 13.5.3) to the Proposed Transferee at the Prescribed Price and otherwise upon no more favourable terms than those offered to the other Shareholders and as stated in the Transfer Notice PROVIDED THAT if prior to completion of the said sale an event has occurred which, if any Proposed Transferee had been a member of the Company at the date of the Transfer Notice would have meant that a deemed Transfer Notice arose under Clause 14 then the identity of the Proposed Transferee shall need to be re-approved and failing such re-approval, the Transfer Notice shall be deemed to have been withdrawn by the Vendor and such sale shall not take place. It shall be a condition precedent of completion of any such sale that the Proposed Transferee shall deliver to the Vendor an undertaking that no such event has occurred. 13.5.6 The Board shall refuse to register any Transfer of any Share other than a Transfer permitted by or under and made in accordance with the provisions of Clauses 13, 14, 15, 16 or 17, which Transfers the Board shall register. 13.5.7 All Shares Transferred pursuant to Clause 13.5 shall be transferred as beneficial owner and free from all Encumbrances together with all rights, benefits and advantages attached thereto as at the date of the Transfer Notice or deemed Transfer Notice except the right to any dividend declared or interest accrued but not paid prior to the date of the relevant Transfer Notice except where the benefit to the Proposed Transferee of such payments after the date of the Transfer Notice has been taken into account in determining the Prescribed Price. 13.5.8 Immediately upon completion of the Transfer of any Shares by any Shareholder pursuant to the provisions of this Agreement the Vendor shall procure the resignation of any Director in accordance with clause 5.8. 39 13.5.9 A notice under Clause 13.5.3(c) may only be given where the Proposed Transferee or its Associate engages in a business which has editorial control over either: (a) a men's sophisticate magazine which regularly features nudity; (b) a film, television or multi-media production company which regularly produces films or programming that features nudity; or (c) a television programme service consisting of programming that regularly features nudity PROVIDED THAT such notice may not be given where the Shareholder otherwise entitled to give it consents to the Transfer to the Proposed Transferee, such consent not to be unreasonably withheld. When deciding whether or not to give such consent, such Shareholder may take account of: (a) the value of its or its Associate's logo, trademark, brands, image and/or reputation (in the case of Playboy, including its reputation as a mainstream men's sophisticate publisher and its unique position as an advertising vehicle for many reputable businesses); (b) Playboy's, Sky parent and plc's (and plc's ultimate parent company, Tele-Communications, Inc's.) position as companies whose stock is publicly traded. The parties acknowledge that if the publisher of "Hustler", "Mayfair" or "Penthouse" magazines or the producer of "Spice", "Adam and Eve" or "The Adult Channel" television services becomes a Shareholder, the image and/or reputation of Playboy might be impaired and that it might be reasonable for Playboy to withhold consent to a Transfer to such an entity. In the event that a notice is duly given under this Clause the Vendor shall not be permitted to Transfer its Shares to the Proposed Transferee. 40 13.6 No Transfer shall be permitted pursuant to Clause 13.5.5, or Clause 13.11 read with Clause 13.5.5, by any Shareholder ("the Selling Shareholder") who together with its Associates holds the beneficial interest in Shares representing more than 35% of the Shares immediately prior to such Transfer if after the proposed Transfer the Selling Shareholder and its Associates would cease to hold the beneficial interest in shares representing at least 15% of the Shares unless the Selling Shareholder shall procure that the Proposed Transferee shall irrevocably offer (in writing) to acquire that proportion of Shares and Loan Stock held by each of the other Shareholders (and/or their respective Associates) as the proportion of Shares and Loan Stock which the Selling Shareholder proposes to Transfer bears to the total number of Shares and Loan Stock held by the Selling Shareholder and/or its Associates. Such offer shall be capable of acceptance, and shall be irrevocable, for not less than 14 days after it is given; such offer shall be at the Prescribed Price and otherwise on substantially no less favourable terms than those offered to the Selling Shareholder by the Proposed Transferee. If such offer is accepted, completion of the purchase thereby arising shall take place simultaneously with the completion of purchase by the Proposed Transferee from the Selling Shareholder. 13.7 The Shareholders shall together procure that at all times during the continuation of this Agreement the Board acts in accordance with the provisions of Clause 13. 13.8 Each Share and Loan Stock Certificate in respect of Shares and Loan Stock shall have typed on the face thereof the following legend: "Transfer is subject to restriction as appears on the back". and on the back the following legend: "The Shares/Loan Stock represented by this certificate are held and may only be Transferred by the registered owner subject to the terms of a Shareholders' Agreement dated [ ] (as amended from time to time)" 41 13.9 The Company undertakes with each Shareholder that it will from time to time and as necessary undertake, and each Shareholder severally undertakes with each other Shareholder that it will vote in favour of, any reorganisation of the Shares or Loan Stock in issue if the Company is reasonably requested to undertake any such reorganization by any Shareholder and, in the Company's reasonable opinion, such a reorganisation is necessary in order to avoid the occurrence of a Licence Event or a Shareholder becoming a Disqualified Participant, including, without limitation, the separation of voting and capital and income rights, the issue of new shares to any Shareholder or to its Associates and the sub-division or consolidation of Shares or Loan Stock held by any Shareholder or its Associates (as the case may be) PROVIDED THAT the Company shall not be requested to undertake any such reorganisation: (a) if that reorganisation would or would be likely to, as determined in accordance with the provisions of clause 16.1, cause a Licence Event or to make any Shareholder a Disqualified Participant; or (b) if that reorganisation would or would reasonably be likely, in the reasonable opinion of the Board (the Board having first consulted the auditors of the Company and considered any reasonable representation of any Shareholder), to have a material adverse effect on the Company or any of the other Shareholders (c) unless the Shareholder making the said request bears all the Company's and the other Shareholders' reasonable legal and other costs and expenses in relation to the reorganisation. 13.10 Each of the Shareholders hereby irrevocably consents for the purposes of Article 24 of the Articles to a transfer permitted by or made pursuant to the provisions of Clauses 13, 14, 15, 16 and 17. 13.11 Clauses 13.1 to 13.5 (excluding Clause 13.5.8) shall apply to Transfers of Loan Stock, mutatis mutandis. 42 14. Deemed Transfers of Shares -------------------------- 14.1 (a) If a Shareholder becomes unable to pay its debts within Section 123 of the Insolvency Act 1986 or makes a composition or arrangement with its creditors or puts a proposal to its creditors for a voluntary arrangement for a composition or arrangement for a composition of its debts or a scheme of arrangement or on the presentation of a petition that it be put into liquidation (which is not withdrawn or defeated within 28 days) or administration or passes a resolution putting into voluntary liquidation (other than for the purposes of amalgamation or reconstruction reasonably approved by the other Shareholders) or it suffers the appointment of a provisional liquidator, a receiver, manager or an administrative receiver or on the occurrence of an event which does result in the crystallisation of any floating charge over its business, undertaking, property or assets or any part thereof or is dissolved or an event occurs which is analogous to any of the above in any jurisdiction other than the UK in which the relevant Shareholder is incorporated; or (b) if Playboy or Sky parent cease to own on a diluted basis at least 10% of the Shares, or plc ceases to own on a diluted basis at least 20% of the Shares; (ownership on a diluted basis shall mean the "see through" percentage of such shares so that for example where a company (Company A) owns 50% of the shares in another company (Company B) and Company B owns 50% of the shares in another company (Company C), Company A will be deemed to own on a diluted basis 25% of the shares in Company C provided that in the event that Playboy exercises any of the Options under Clause 15, whether in whole or in part, the provisions of this Clause shall on completion of such exercise, cease to apply either to Playboy, Sky or to Flextech); or (c) if a Shareholder or any of its Associates shall commit a material breach of any material provision of this Agreement, or any other agreement with the Company to which it or any of its Associates is a party and shall have failed to remedy such 43 breach, if capable of remedy, within 30 days after the date of a notice from the other Shareholders specifying the nature of the breach and requiring it to be remedied (such Shareholder (or, in the case of (b) if the event happens to Playboy Enterprises, Inc., Playboy or if the event happens to plc, Flextech or if the event happens to Sky parent, Sky) being hereinafter referred to as "the Affected Party") then in any such event (without prejudicing or in any way limiting its other rights) the other Shareholders ("the Non-Affected Party") shall be entitled (by notice in writing to the others and to the Company given within 60 days of the later of the date of the event or of the date on which the Non-Affected Party become aware of the event giving rise to such rights under this Clause) in their entire discretion to treat the occurrence of any such event as the deemed service by the Affected Party of a Transfer Notice pursuant to Clauses 13.5 and Clause 13.11 the provisions of which shall accordingly apply mutatis mutandis. 14.2 Where any notice is given by the Non-Affected Party pursuant to Clause 14.1 the Non-Affected Party may specify (and the parties shall give effect thereto) that (notwithstanding any provision of the Articles) until completion of the Transfer in accordance with Clause 13: (a) any transfer by an Affected Party of its Shares or Loan Stock ("the relevant Units") (other than to or at the direction of the Non- Affected Party) shall be void; (b) no voting rights shall be exercisable by the Affected Party in respect of its Shares or Loan Stock; (c) no further Shares or Loan Stock shall be issued or need be offered to the Affected Party; (d) in the event that the notice is served pursuant to Clause 14.1(c) no interest, dividend or other payment shall be made of any sums due from the Company on the Affected 44 Party's Shares or Loan Stock or any other loans due from the Company (whether in respect of capital or otherwise) to the Affected Party but such sums shall be taken into account in determining the Prescribed Price; (e) all the Affected Party's rights (but not its obligations) under Clauses 4, 5, 7 and 8, 13 and 14, shall be suspended during that period and in the event that the Affected Party is Playboy or any of its Associates, its rights under Clause 15 of this Agreement shall lapse. 14.3 The Non-Affected Party may by notice remove or relax such restriction in whole or in any particular case at any time. 14.4 In case of dispute between the Non-Affected Party in relation to the provisions of this Clause 14 the decision of the Non-Affected Party holding together the largest number of Shares and Loan Stock in the Company shall prevail. 15. The Option ---------- 15.1 Sky hereby grants to Playboy (for itself, or in the case that Playboy has transferred Shares to an Associate in accordance with Clause 13.2, to hold on trust for such Associate) the option: (i) at any time during the period ending twenty four months after the Company commences the provision of the Service (as defined in the Programme Supply Agreement) for reception within the Territory (the "Launch Date") to purchase up to such number of the Original Shares as shall, following the exercise of such option and together with all other Original Shares held by Playboy or any Associate (as the case may be) at that time, result in Playboy or the Associate (as the case may be) holding not more than 29% of the Original Shares ("the First Option"). The consideration payable for the Original Shares in respect of which the First Option is exercised ("the 45 First Option Shares") shall be the aggregate price paid by Sky for the First Option Shares plus interest thereon at LIBOR + 3% from the date of payment by Sky therefor up to and including the date of completion of the First Option pursuant to Clause 15.6. (ii) if or to the extent that the First Option is not exercised in full, at any time during the 180 day period commencing on the third anniversary of the Launch Date to purchase up to such number of Original Shares as shall represent 10% of the total number of the Original Shares or such lesser number as shall, following the exercise of such option and together with all other Original Shares held by Playboy or an Associate (as the case may be) at that time including for the avoidance of doubt any Original Shares acquired pursuant to the First Option), result in Playboy or an Associate (as the case may be) holding not more than 29% of the Original Shares ("the Second Option"). The consideration payable for the Original Shares in respect of which the Second Option is exercised ("the Second Option Shares") shall be: (a) the Fair Value; or (b) the aggregate price paid by Sky for the Second Option Shares plus interest thereon at LIBOR + 3% from the date of payment by Sky therefor up to and including the date of Completion of the Second Option pursuant to clause 15.6; whichever is the greater. (iii) if or to the extent that the First Option and the Second Option are not exercised in full and subject to clause 15.2 below, at any time during the 180 day period commencing on the fifth anniversary of the Launch Date to purchase such number of Original Shares as shall, following the exercise of such option and together with all other Original Shares held by Playboy or an Associate (as the case may be) at that time, 46 (including for the avoidance of doubt any Original Shares acquired pursuant to the First Option and/or the Second Option), result in Playboy or an Associate (as the case may be) holding not more than 29% of the Original Shares ("the Third Option"). The consideration payable for the Original Shares in respect of which the Third Option is exercised ("the Third Option Shares") shall be: (a) the Fair Value; or (b) the aggregate price paid by Sky for the Third Option Shares plus interest thereon at LIBOR + 3% from the date of payment by Sky therefor up to and including the date of Completion of the Third Option pursuant to clause 15.6; whichever is the greater. 15.2 In the event that it appears to Playboy and Sky reasonably likely that (based on available audited accounts of the Company, management accounts and any annual budgets and projections for future financial years) Playboy will be entitled to receive the Bonus Licence Fee (as defined in the Programme Supply Agreement), Sky will on written request from Playboy to be received on or before the day on which the Third Option would have expired in accordance with clause 15.1 (iii) above, extend the period during which the Third Option may be exercised so that the Third Option may be exercised at any time during the period commencing on the date on which the Third Option would have expired in accordance with clause 15.1(iii) and ending on 30 days after (i) the Return of Investment Date (as defined in the Programme Supply Agreement); or (ii) the sixth anniversary of the Launch Date as defined in the Programme Supply Agreement, whichever is the earlier. If the Third Option is so exercised, payment of so much of the consideration for the Third Option Shares as equals the Board's estimate (based as aforesaid) of the Bonus Licence Fee or any relevant part thereof may be deferred, until 3 business days after each payment of the Bonus Licence Fee is made to Playboy so that amounts received by way of Bonus Licence Fee 47 may be used to satisfy the consideration payable in respect of the Third Option Shares, provided that: (i) the difference between the Bonus Licence Fee and the consideration payable for the Third Option Shares shall be payable within 3 business days after the consideration for the Third Option Shares shall have been determined; (ii) all payments of Bonus Licence Fee shall, to the extent necessary, be used to satisfy any consideration for the Third Option Shares which may be outstanding; (iii) interest shall be payable on any consideration deferred pursuant to this clause at LIBOR plus 3% from the third business day after the date on which the consideration for the Third Option Shares is established up to and including the date of payment of any deferred amount pursuant to this clause; (iv) for the purposes of Clause 15.7, Playboy shall be deemed on each payment made in respect of the Third Option Shares to have completed the Third Option in respect of that percentage of the Original Shares in respect of which the Third Option has been exercised as equals the percentage which the relevant payment being made bears to the total consideration payable for the Third Option Shares; and (v) all the consideration payable in respect of the Third Option Shares deferred pursuant to this clause (if not paid or payable before such date) shall be paid on the second anniversary of the exercise of the Third Option. 15.3 In calculating interest for the purposes of the above First, Second or Third Options respectively (and for the purposes of clause 15.5(iii)), interest shall accrue from day to day on the basis of a 365 day year and shall be compounded at six monthly intervals. 48 15.4 Each of the First Option, the Second Option and the Third Option ("the Options") may be exercised once only during the relevant periods set out above (time being of the essence as provided in clause 15.2 save in respect of the Third Option) by Playboy giving to Sky not more than 21 days' nor less than 7 business days' notice ("the Option Exercise Notice") in writing to expire on or before the last day of the relevant option period. 15.5 The right to exercise each of the Options shall be conditional on: (i) Playboy or an Associate (as the case may be) being the beneficial owner and registered holder of not less than 15% of the Shares (or not less than 10% provided that Playboy (or an Associate as the case may be) has not disposed of Shares which have resulted in neither Playboy's (nor any Associate as the case may be) being the registered holder of at least 15% of the Shares and Playboy are not in default under any provisions of Clause 4 of this Agreement) and Playboy being an Associate of Playboy Enterprises, Inc. on the date on which the Option is exercised; (ii) such exercise not resulting in or being reasonably likely to result in a Licence Event; (iii) Playboy or its Associates contemporaneously with completion of the relevant Option subscribing in cash for such principal amount of new Loan Stock as is equal to that proportion of the Loan Stock then held by Sky and its Associates as equals the proportion of Sky's Shares to be purchased under the relevant Option; such new Loan Stock shall be subscribed for in cash for the sum of: (A) the par value thereof; plus (B) an amount equal to interest on the said proportion of Loan Stock which is accrued or due but unpaid, calculated from the date of Sky's or its relevant Associates subscription for such Loan Stock to the date of completion of the relevant Option exercise; 49 (iv) the entire proceeds of the subscription pursuant to paragraph (iii) being applied on the date of completion of the relevant Option exerise to redeem the proportion of Sky's Loan Stock referred to in paragraph (iii) and interest due or accrued due thereon, for which purposes (and for the purposes of the calculations to be made under paragraph (iii)(B)) the "first in, first out" principal shall be applied. (v) no event having occurred which would mean that a Transfer Notice has or may (whether or not such Transfer Notice is served) be served in relation to Playboy or any of its Associates under clause 14; (vi) no notice having been served on Playboy to terminate the Programme Supply Ageement or the Trademark Licence and for the avoidance of doubt if either (i), (v) or (vi) above are not satisfied at any time when one or more Options remain available to be exercised, that Option and any other subsisting Option shall automatically terminate and be of no further force and effect. 15.6 Completion of the exercise of any of the Options shall take place within 3 business days after the consideration for the relevant Option Shares has been determined. 15.7 On completion of each of the Options: (a) Playboy shall pay or procure the payments to: (i) Sky (or as Sky may direct) of the consideration for the relevant Option; and (ii) the Company of the subscription price in respect of the new Loan Stock to be subscribed pursuant to Clause 15.5 (iii) 50 (b) the Company shall, out of the proceeds of the payment under paragraph (a)(ii), redeem the relevant proportion of Sky's Loan Stock pursuant to Clause 15.5(iv); (c) Sky shall deliver to Playboy transfers in respect of the relevant Option Shares duly signed and completed in favour of Playboy together with the certificate(s) therefor; (d) Each of the parties shall use their respective reasonable endeavours to procure that the said transfer shall be registered subject to (where applicable) being duly stamped and that the certificates be sealed and issued to Playboy in respect of the relevant Option Shares. 15.8 Any Option Shares shall be sold by Sky as beneficial owner free from all Encumbrances and together with all rights and benefits attached thereto on or after the date of the exercise, save that in relation to any dividend declared and paid in respect of any fiscal year in which the Option is exercised, Sky and Playboy shall be entitled to that proportion of the dividend relating to the relevant Option Shares as equals the proportion of the fiscal year to which the dividend relates during which they were the holder of the relevant Option Shares and Sky and Playboy hereby instruct the Company to make any such dividend payments in accordance with the above provision unless an entitlement to such proportion has been taken into account in calculating the consideration for the relevant Option Shares. 15.9 The Option shall be personal to Playboy and shall not be assignable, either separately or through a Deed of Adherence. 15.10 Nothing in this Clause 15 shall prevent Sky from transferring any of the Shares the subject of any of the Options in accordance with the provisions of Clauses 13 or 14 provided that (save where the Transfer is to any of its Associates pursuant to Clause 13.2):- (a) in the event that Sky transfers all or any of its Original Shares, immediately prior to such Transfer, the Options shall automatically terminate and be of no further force 51 and effect in relation to those Original Shares and the Original Shares shall be transferred by Sky free from the Option; or (b) in the event that after any such Transfer Sky retains Original Shares in excess of the maximum number of shares the subject of the Options which are still exercisable, the Options shall continue, subject to the other provisions of this Clause 15; or (c) to the extent that after any such Transfer the number of Original Shares held by Sky is less than the number of Original Shares the subject of any Options which are still exercisable, the relevant Option(s) shall be deemed forthwith on such Transfer to relate to the maximum number of Original Shares then held by Sky. 15.11 For the purposes of Clause 15.1O Sky shall be deemed to dispose first of its Original Shares and only after it has disposed of shares equal in number to the number of Original Shares for which it has subscribed shall it be deemed to dispose of shares which are not Original Shares. 15.12 Notwithstanding any of the preceding provisions of this Clause 15, the maximum number of Shares which Playboy has the right to purchase under the Option shall be such number (when added to the other Shares for the time being held by Playboy and its Associates) as equals 29% of all the Shares. 16. Selldown -------- 16.1 Where any provision in this Agreement requires a determination of whether a Licence Event has been caused or has occurred or is likely to be caused or to occur or whether a person is, or is likely to become, a Disqualified Participant, that matter shall be determined: (a) if the ITC shall have made a direction or ruling in respect of the matter, by the Board in accordance with that direction or ruling; and 52 (b) otherwise, in the reasonable opinion of the Board, provided that: (i) if, in the reasonable opinion of the Board, it is appropriate in all the circumstances for the Board to consult the ITC on the matter, the Board shall first consult the ITC; and (ii) the Company shall first have served a written notice of such duration (if any) as the Board shall in its reasonable discretion think fit on the Shareholder or Shareholders directly concerned with or affected by the matter specifying the grounds on which the Board believes that: (A) a Licence Event may have been caused or occurred or may be likely to be caused or occur; or (B) that a person may be a Disqualified Participant or may be likely to become a Disqualified Participant and shall consider any reasonable representation of the Shareholder(s) concerned. 16.2 Where the Board (following if the Board in its reasonable opinion considers it is appropriate so to do, consultation with the ITC) shall determine, in its reasonable opinion and having regard to all the relevant circumstances, that a Licence Event has been caused or has occurred or one or more Shareholder(s) has or have become a Disqualified Participant or Participants or there is a reasonable likelihood that a Licence Event will occur or be caused or that one or more Shareholders will become a Disqualified Participant or Participants then the Shareholders agree that the Company shall be entitled to serve notice ("a Licence Notice") upon the affected Shareholder(s) requiring it/them within 90 days (or such other period as may be specified by the ITC) of service of a Licence Notice to reduce its/their proportionate holding of the Shares to such maximum percentage shareholding (if any) as may be fixed pursuant to any decision of the ITC 53 or, in the absence of any fixed percentage, to such percentage as the Board may reasonably consider necessary in the circumstances ("the Reduced Percentage") the difference between the number of Shares in the Reduced Percentage and the comparable amount of Loan Stock and the total number of Shares and the Loan Stock held by the Shareholder being the "Relevant Number". A Licence Notice shall be deemed to constitute a Transfer Notice served by the affected Shareholder(s) offering to sell within the said period the Relevant Number of its/their holding of Shares and Loan Stock pursuant to the provisions of Clause 13.5.1 and (as the case may be) 13.11 save that (a) the Relevant Number of Shares and Loan Stock Units shall constitute the Sale Shares and Sale Loan Stock and (b) the Prescribed Price shall be determined pursuant to paragraph (b)(i) of the definition of Prescribed Price in Clause 1.1. 16.3 In the event that the provisions of Clause 16.1 or 16.2 apply then, with effect from the date of the Licence Notice, pending transfer of the Shares and Loan Stock in question, the affected Shareholder(s) shall to the extent required by the ITC be disenfranchised and lose any right to vote or receive dividends or other distributions in respect of the Shares and Loan Stock in question. Any such dividends or distributions shall belong to the transferee of any such Shares and Loan Stock and shall be taken into account in establishing the Prescribed Price. To the extent operation of this Clause 16.3 would cause any other Shareholder to be in the position where Clauses 16.1 or 16.2 applied to it then the relevant percentage of the Shares held by such other Shareholders shall also be so disenfranchised with effect from the same date, pending the said Transfer. 16.4 If at any time within six months after completion of a Transfer pursuant to Clause 16.2 the ITC or other relevant regulatory authority indicates it has changed its mind or its decision is found to be incorrect then in consideration of the repayment by the affected Shareholder(s) to the purchaser(s) thereof of the Prescribed Price paid by such purchaser under clause 16.2 plus interest thereon at LIBOR + 3% from the date of Transfer to the date on which such Shares are transferred back pursuant to this clause the Relevant Number of Shares and Loan Stock Units shall be transferred back to the affected Shareholder(s) who, together with the purchaser of such 54 Shares shall to the extent possible be put in the same position as if such Transfer had not taken place. 16.5 A Shareholder who reasonably believes that any other Shareholder is or may, or would or might with the passage of time, be likely to cause a Licence Event or become a Disqualified Participant shall forthwith notify the Company and the other Shareholders to that effect, provided that it has simultaneously so notified the relevant Shareholder, and the relevant Shareholder shall provide such information to the Company and the other Shareholders as any of them shall reasonably require. 16.6 The provisions of this Clause 16 shall apply so far as may be applicable to a Foreign Licence Event as if references in this Clause 16 to the ITC were deleted and reference to the analogous licensing body in the relevant territory was substituted in its place. 16.7 The Shareholders shall themselves respectively and shall procure that the Company shall use its reasonable endeavours to mitigate the effects on a Disqualified Participant of the provisions of this clause 16 provided that nothing in this clause shall require the Company or any of the Shareholders to take any action or omit to take any action which would in its reasonable opinion be prejudicial to the interest of any company in the Playboy/Europe Group or to such Shareholders. 17. Compulsory Purchase by Flextech and Sky --------------------------------------- 17.1 In the event that: (a) the Company terminates the Programme Supply Agreement pursuant to Clause 10.3(a) of that Agreement or terminates the Trade Mark Licence other than on grounds of breach by Playboy or any of its Associates; and 55 (b) Playboy and/or its Associates within 60 days of such termination serves a notice on the Company pursuant to clause 13.5.1 in respect of all its Shares and Loan Stock; and (c) a purchase of all such Shares and Loan Stock is not completed in accordance with clauses 13.5.4 or 13.5.5 Flextech and Sky on demand in writing by Playboy undertake to purchase or procure the purchase of all the Shares and Loan Stock held by Playboy and/or its Associates at the lower of: (i) the Prescribed Price (as defined in paragraph (a) of the definition of Prescribed Price) (if any); and (ii) the Fair Value pro rata to the Shares and Loan Stock held by Flextech and Sky on the date of demand or in such other proportions as Flextech and Sky shall agree. ("the Compulsory Price") 17.2 The Compulsory Price shall be notified to the Company and each of the Shareholders as soon as practicable after it has been established. Completion of the purchase shall take place not later than 14 days after the Compulsory Price has been notified as set out above. 17.3 The provisions of clause 13.5.8 shall apply to any Transfer pursuant to this clause 17. 56 18. Representations and Warranties ------------------------------ Each Shareholder hereunder represents and warrants to the other Shareholders that: (a) it, and each of its Associates which is a party to any Transaction Document, is a company duly incorporated and validly existing in all respects under the laws of the jurisdiction of its incorporation with full power and authority to own its assets and to carry on its business as it is now being conducted and no action has been taken or threatened (whether by it or any third party) for or with a view to its or their liquidation, receivership or analogous process; (b) the execution of any Transaction Document to which it or its relevant Associate is a party has been validly authorised and the obligations expressed as being assumed by it (or, as applicable, by its Associate) under such Transaction Documents constitute its (or, as applicable, its Associate's) valid, legal and binding obligations enforceable against it (or, as applicable, its Associate) in accordance with its terms; (c) neither the execution and delivery by it or its Associate of any Transaction Document to which it is a party nor the performance or observance of any of its or its Associate's obligations thereunder does or will: (i) conflict with, or result in any breach or violation of, any judgement, order or decree, indenture, mortgage, trust deed, agreement or other instrument, arrangement, obligation or duty by which it or such Associate is bound; or (ii) cause any limitation on any of its or its Associate's powers whatsoever, howsoever imposed, or on the right or ability of the directors of it or such Associate to exercise such powers, to be exceeded. 19. Competition ----------- 57 19.1 If Playboy wishes to launch (alone or with others) a channel which will be the same as or substantially similar to the Channel in any country in Europe other than the Territories ("the New Channel") using any of the assets of the Company, Playboy will negotiate reasonably and in good faith with Flextech, Sky and the Company with a view to Flextech, Sky and/or the Company participating in the New Channel. To enable Flextech, Sky and the Company to consider such launch, Playboy shall provide to Flextech, Sky and the Company copies of any reports, surveys and other information which they have obtained or prepared relating to the launch of such New Channel. Nothing in this Clause shall permit Playboy to launch or operate a New Channel (other than through a wholly owned subsidiary of the Company) using any assets of or facilities of the Company or any Company in the Playboy/Europe Group without the consent of the Company and the Company's rights under this clause shall be exercised by the Company through a majority of the directors of the Company appointed by Flextech and Sky and not otherwise. 19.2 Subject to clauses 11, 12 and 19.1, the Programme Supply Agreement and the Trademark Licence, the Subscriber Management Services Agreement no Shareholder or its Associates shall be prohibited or restricted from participating in other ventures that compete, or do not compete, with the Business or the businesses of any of the other parties. 20. No Assignment ------------- The provisions of this Agreement shall be binding on and enure to the benefit of the successors of each party hereto provided that save as otherwise provided in this Agreement no party may agree to assign, transfer, charge or otherwise dispose of or subcontract any of its rights or obligations hereunder without the prior written consent of the other parties. 58 21. Waivers, Remedies Cumulative, Amendments, etc. --------------------------------------------- 21.1 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. 21.2 The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. 21.3 No provision of this Agreement may be amended, modified, waived, discharged or terminated, otherwise 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 parties not in breach. 22. Invalidity etc. --------------- 22.1 Should any provision of this Agreement be or become ineffective for reasons beyond the control of the parties, the parties shall use reasonable efforts to agree upon a new provision which shall as nearly as possible have the same commercial effect as the ineffective provision. 22.2 Any provision contained in this Agreement or in any arrangement of which this Agreement forms part by virtue of which this Agreement or such arrangement is subject to registration under the Restrictive Trade Practices Act 1976 shall not come into effect until the business day following the date on which particulars of this Agreement and of any such arrangement have been furnished to the Office of Fair Trading (or on such later date as may be provided for in relation to any such provision) and the parties hereto agree to furnish such particulars within three months of the date of this Agreement. 59 23. No Partnership or Agency ------------------------ Nothing in this Agreement shall be deemed to constitute a partnership between the parties hereto nor, save as expressly set out herein, constitute any party the agent of another party for any purpose. In addition, unless otherwise agreed in writing between the Shareholders, none of them shall enter into contracts with third parties as agent for any member of the Playboy/Europe Group or for the other Shareholders or any member of its Group nor shall any Shareholder describe itself as agent as aforesaid or in any way hold itself out as being an agent as aforesaid. 24. Announcements ------------- Unless specifically otherwise agreed in writing or required by law or by The Stock Exchange no public announcement shall be made in respect of the subject matter of any Transaction Document without the prior written approval of the others as to its form and content. 25. Costs ----- Each of the parties hereto shall pay its own costs, charges and expenses connected with the preparation and implementation of this Agreement and the transactions contemplated by it. 26. Entire Agreement ---------------- This Agreement and the Transaction Documents constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and none of the parties hereto has entered into this Agreement in reliance upon any representation or warranty other than any such as may be set out herein. 60 27. Conflict with Articles, etc. --------------------------- In the event of any conflict between the provisions of this Agreement and the Articles the provisions of this Agreement shall prevail and the parties shall exercise all voting and other rights and powers available to them so as to give effect to the provisions of this Agreement and shall so far as they are able further if necessary procure any required amendment to the Articles as may be necessary. 28. Notices ------- 28.1 Any notice or other communication given or made under this Agreement shall be in writing and, without prejudice the validity of any other method of service, may be delivered personally or by courier or sent by facsimile transmission by prepaid recorded delivery letter (airmail if overseas), addressed as follows: (a) if to Flextech to: 13 Albermarle Street London W1X 3HX Facsimile transmission number (London 171) 499 7533 (b) if to Playboy to: 9242 Beverly Boulevard, Beverly Hills, California 90210 Facsimile transmission number: (Beverly Hills 310) 246 4065 (Attention President) with a copy to Playboy Enterprises, Inc, 680 North Lake Shore Drive, Chicago, Illinois 60611 Facsimile transmission number: (Chicago 312) 266 2042 (Attention General Counsel) 6l (c) if to Sky to 6 Centaurs Business Park Grant Way Isleworth Middlesex TW7 5QD (d) if to the Company to: Twyman House 16 Bonny Street, London NW1 NPG Facsimile transmission number: (London 171) 911 0145 with a copy to the other parties, other than the party giving the notice or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. 28.2 Any such notice or other communication shall be deemed to have been duly served, given or made (i) in the case of posting, 96 hours after the envelope containing such notice was posted and proof that any such envelope was properly addressed, prepaid, registered and posted shall be sufficient evidence that such notice or other communication has been duly served, given or made; or (ii) in the case of delivery, when left at the relevant address; or (iii) in the case of facsimile transmission one business day after transmission. 29. Governing Law ------------- This Agreement shall be governed by and construed in all respects in accordance with English law and the parties agree to submit to the exclusive jurisdiction of the English Courts as regards any claim or matter arising in relation to this Agreement. IN WITNESS whereof this Agreement has been duly executed. 62 SCHEDULE I PARTICULARS OF THE COMPANY Date of Incorporation: 9th December 1994 Place of registration: England and Wales Company Registration Number: 3,000,033 Authorised Share Capital: (Pounds)11,000,000 Accounting Reference Date: 31st December Directors: Roger Luard Fred Vierra Mark Luiz David I. Chemerow Anthony J. Lynn Name and address of Secretary: Mark Luiz Name of Auditors: KPMG Peat Marwick 63 SCHEDULE II DETAILS OF SUBSCRIPTIONS BY SHAREHOLDERS AT CLOSING
Shareholders Loan Stock Total Subscription Names Ordinary Shares (Pounds) Price (Pounds) - ------------ --------------- ----------------- ------------------ Flextech 340,552 1,021,658 1,363,210 Playboy 126,872 380,618 507,490 Sky 200,325 600,975 801,300 --------------- ----------------- ----------------- (Pounds)667,749 (Pounds)2,003,251 (Pounds)2,671,000
64 SCHEDULE III DEED OF ADHERENCE THIS DEED is made this ____ day of 199__ BETWEEN: (1) [Name of transferee] ("the New Shareholder") registered in [ ] under number [ ] whose registered office is at [ ]; and (2) [ INSERT DETAILS OF SHAREHOLDER [X] ]; and (3) [ INSERT DETAILS OF SHAREHOLDER [Y] ]; and (4) [ ] ("the Company") registered in England under number [ ] and having its registered office at [ ]; and [Any other person becoming bound by the Shareholders' Agreement]; WHEREAS: By virtue of the Transfer referred to in the Schedule to this Deed the New Shareholder became entitled subject, inter alia, to the execution of this Deed, to the Shares in the capital of the Company set out in the Schedule hereto. NOW THIS DEED WITNESSES as follows: 1. In this Deed and the Recitals hereto: 65 (a) "the Shareholders' Agreement": means the agreement dated [ ] and made between (b) terms and expression defined in the Shareholders' Agreement shall have the same meaning when used herein or in the Recital hereto, unless the context requires or admits otherwise 2. In consideration of the sum of (Pounds) 1 now paid by the Company (on behalf of itself and each other party hereto) to the New Shareholder, receipt whereof is hereby acknowledged, the New Shareholder hereby covenants with and undertakes to each other party to this Deed and to the Company as trustee for all other parties who hereafter become bound by the Shareholders' Agreement pursuant to a deed in a similar form to this Deed, entered into pursuant to the Shareholders' Agreement, to adhere to and be bound by the provisions of the Shareholders' Agreement as if the New Shareholder had been an original party to the Shareholders' Agreement. 3. [INSERT WARRANTIES BY ALL PARTIES SIMILAR TO CLAUSE [18] TO THE SHAREHOLDERS' AGREEMENT]. 4. Subject to the provisions of Clause 2 of this Deed, and the Shareholders Agreement the Company and the Shareholders hereby release the transferor from its obligations under the Shareholders' Agreement. 5. The provisions of this document (other than those contained in this clause) shall not have any effect until this document has been dated. IN WITNESS whereof this Deed has been duly executed. 66 SCHEDULE -------- Transferor Transferee Price ---------- ---------- ----- 67 SCHEDULE IV FUNDING Quarterly cash due date requirement lst July l995 (Pounds)753,000 1st October l995 (Pounds)1,918,000 1st January 1996 (Pounds)1,352,000 lst April l996 (Pounds)1,420,000 lst July 1996 (Pounds)945,000 1st October l996 (Pounds)1,010,000 lst January 1997 (Pounds)672,000 lst April l997 (Pounds)628,000 lst July 1997 (Pounds)107,000 1st October l997 (Pounds)145,000 lst January 1998 -- lst April l998 (Pounds)80,000 lst July 1998 (Pounds)2,468,000 (contingency)
68 SCHEDULE V BOARD OF DIRECTORS COMPOSITION
Percentage Ownership of Number of Shares Directors ------------ --------- Flextech 50.1%(Plus) 6 Playboy 0-9.9 0 10-27.9 2 27.9(Plus) 3 Sky 0.-9.9 0 10-27.9 2 27.9(Plus) 3
69 SIGNED by ) for and on behalf of ) /s/ Roger Luard CONTINENTAL SHELF 16 LIMITED ) in the presence of: ) Janine F. Butler SECRETARY FLEXTECH PLC 13 ALBEMARLE ST LONDON W1X 3HA SIGNED by ) for and on behalf of PLAYBOY ) /s/ Anthony J. Lynn ENTERTAINMENT GROUP, INC. in ) the presence of: ) Myron DuBow SR. V.P. PLAYBOY ENT. GROUP SIGNED by ) for and on behalf of ) /s/ David Chance PRECIS (1378) LIMITED ) in the presence of: ) /s/ Fleur Howard ---------------- Fleur Howard Solicitor British Sky Broadcasting Limited, London SIGNED by ) for and on behalf of ) /s/ Roger Luard PLAYBOY TV UK/BENELUX ) LIMITED in the presence ) of: ) Janine F. Butler SECRETARY FLEXTECH PLC 13 ALBEMARLE ST LONDON W1X 3HA 70 DATED 2nd February 1996 ----------------------- (1) PLAYBOY ENTERPRISES, INC (2) PLAYBOY TV UK/BENELUX LIMITED ----------------------------------------- TRADE MARK LICENCE ----------------------------------------- EXECUTED AGREEMENT DENTON HALL FIVE CHANCERY LANE CLIFFORD'S INN LONDON EC4A 1BU TELEPHONE 0171 242 1212 FAX 0171 404 0087 MEMBER OF THE DENTON INTERNATIONAL
INDEX ----- Page No. -------- 1. Interpretation 1 2. Licence 3 3. Quality Control 6 4. Use of the Trade Marks 6 5. Ownership of the Trade Marks 7 6. Infringements 8 7. Indemnity by Licensee 9 8. Termination 10 9. Post Termination 11 10. No Assignment 11 11. Force Majeure 11 12. Invalidity etc 12 13. Waivers, Remedies Cumulative, Amendments, etc. 12 14. Costs 12 15. Notices etc 13 16. Governing Law 14
Schedule - Part 1 - Registered Trade Marks Part 2 - Unregistered Trade Marks THIS DEED is made the 2nd day of February 1996 but made effective from 1st November 1995 BETWEEN: (1) PLAYBOY ENTERPRISES, INC of 680 North Lake Shore Drive Chicago Illinois 60611 United States of America ("the Licensor"); and (2) PLAYBOY TV UK/BENELUX LIMITED ("the Licensee") registered in England with number 3000033 whose address is Twyman House, 16 Bonny Street, London NW1 9PG. WHEREAS: Pursuant to the Shareholders' Agreement and the Programme Supply Agreement, the Licensor, who is the proprietor of the Playboy trade marks, wishes to permit the Licensee to use the Playboy trade marks in relation to a cable and satellite delivered television service and programmes transmitted in such service on the terms of this Deed NOW IT IS HEREBY AGREED as follows: 1. Interpretation 1.1 In this Deed (including the Recital hereto) the following words and expressions shall have the following meanings: "Flextech": Continental Shelf 16 Limited, a company registered in England and Wales under no. 3005499; "Permitted Licensee": any person who may be appointed by the Licensee to market, promote, sell, distribute or manage subscribers to the Service in any country within the Territory; "PROGAMME": any television programme which is, or is scheduled to be, broadcast or transmitted in the Service; "the Programme Supply Agreement": the programme supply agreement of even date herewith which is to be entered into between Playboy Entertainment Group, Inc. and the Licensee; "Promotional Material": any audio-visual, visual and/or audio material which is intended to promote the Service or the transmission of particular Programmes in the Service including but not limited to channel generic promotions, programme strand generic promotions and programme specific promotions; "the Service": the television programme service which is to be provided for reception within the Territory by the Licensee in accordance with the Shareholders' Agreement; "the Shareholders' Agreement": an agreement of even date herewith between Flextech, Playboy Entertainment Group, Inc., Sky and the Licensee relating to the Licensee; "Sky": Precis (1378) Limited, a company registered in England under no. 3092549 whose address is 6 Centaurs Business Park, Grant Way, Isleworth, Middlesex TW7 5QD; "Television Service": any television service or channel (other than the Service) which is broadcast, distributed or transmitted by any means (including but not limited to all forms of terrestrial, satellite and cable television transmission, broadcast and delivery) whether now known or hereafter invented and is capable of being received in any country within the Territory (whether or not that service or channel is primarily intended for reception outside the Territory); "the Territory": the United Kingdom of Great Britain and Northern Ireland (irrespective of whether Northern Ireland remains part of the United Kingdom), the Republic of Ireland, Belgium, Luxembourg, The Netherlands and any other country or countries in Europe to which the scope of this Deed is extended in accordance with Clause 2.2; "the Trade Marks": the registered trade marks and any service marks listed in Part 1 of the Schedule, the unregistered trade marks and service marks listed in Part 2 of the Schedule together with any registered or unregistered trade marks of the Licensor substantially similar to those listed in the Schedule in any country to which the scope of the licence granted under Clause 2.1 is extended pursuant to Clause 2.2; "Transmission Period": shall have the meaning ascribed to it in the Programme Supply Agreement. 2 1.2 In this Deed all words defined in the Shareholders Agreement shall when used herein, save where otherwise expressly provided, bear the same meaning as in the Shareholders Agreement. 1.3 References in this Deed to statutes, bye-laws, regulations and delegated legislation shall include any statute, bye-law, regulation or delegated legislation in force at the date hereof whether before or after the date hereof modifying, reenacting, extending or made pursuant to the same or which is modified, re-enacted or extended by the same or pursuant to which the same is made. 1.4 Clause headings in this Deed are for ease of reference only and shall not be taken into account in construing this Deed. 1.5 References in this Deed to Clauses, sub-clauses, paragraphs and Schedules are references to those contained in this Deed. 1.6 The Schedules to this Deed are an integral part of this Deed and reference to this Deed includes reference thereto. 2. Licence 2.1 In consideration of the Licensee hereby agreeing to pay to the Licensor the sum of One Pound ((Pounds) 1) upon signature hereof (receipt of which is hereby acknowledged) and to enter into the Programme Supply Agreement immediately following the signature of this Deed, the Licensor grants to the Licensee, on the terms set out in this Deed, an exclusive licence to use the Trade Marks in the Territory in relation to the broadcast, transmission and distribution of Programmes and Promotional Material in or as part of the Service and in relation to the promotion and marketing of the Service and of the Programmes in any medium or media whatsoever. 2.2 If at any time during the term of this Deed and in accordance with Clause 2.6 of the Shareholders Agreement the Licensee or any subsidiary (within the meaning of Section 736 of the Companies Act 1985) of the Licensee launches its television programme service in any country in Europe which prior to such launch is not within the Territory, then with the prior written consent of the Licensor: (a) the license granted under sub-clause 2.1 shall automatically be extended to that country; 3 (b) all references to the Territory in this Deed shall thereafter be deemed to include that country; and (c) the list of trade marks set out in the Schedule shall thereafter be deemed to include all registered or unregistered trade marks in that country the same or substantially similar to those listed in the Schedule. 2.3 The Licensee shall be entitled to grant sub-licences to any Permitted Licensee of such of the rights granted under sub-clause 2.1 in respect of any country in the Territory as may be necessary for the marketing, promotion, sale or distribution of or management of subscribers to the Service in that country provided that: (a) any sub-licence contains obligations on the Permitted Licensee relating to the use and protection of the Trade Marks at least equivalent to the obligations of the Licensee under this Deed; (b) the Licensee informs the Licensor within one month of the execution of each sub-licence that it has been signed; (c) the Licensee remains responsible for all acts and omissions of each Permitted Licensee as though they were by the Licensee; (d) on termination of this Deed for whatever reason any sub-licence shall, at the option of the Licensor, either be assigned to the Licensor or terminated by the Licensee. 2.4 The licence granted under sub-clause 2.1 shall continue in force until any termination of this Deed in accordance with the provisions of Clause 8. 2.5 The Licensee undertakes that during the term of this Deed it will not provide a television programme service using the Trade Marks which is intended for and capable of general reception outside the Territory PROVIDED THAT the Licensee shall not be in breach of this Clause if the Service is received outside the Territory so long as the Service is transmitted in encrypted form and decoders designed to receive and decode such encrypted transmissions are not made available to the general public outside the Territory by or with the authority of the Licensee. 4 2.6 The Licensor undertakes that during the term of this Deed it will not itself use or permit any other person to use the Trade Marks or any confusingly similar designation within the Territory in relation to any Television Service or any programmes or other items of any description included in any Television Service provided that use of the Trade Marks or any confusingly similar designation in relation to any Television Service, or any programmes or other items of any description included in any Television Service, which is intended solely for reception in any country or countries outside the Territory but which is also received in a country or countries within the Territory shall not constitute a breach of this clause so long as that Television Service was transmitted in encrypted form and decoders designed to receive and decode such encrypted transmissions are not made available to the general public within the Territory by or with the authority of the Licensor or any other licensee of any of the Trade Marks. 2.7 During the term of this Deed, any or all of the following shall not be used on or in connection with the Service without the Licensor's prior written consent: (a) permutations of any or all of the Trade Marks; (b) secondary marks derived from any of the Trade Marks; or (c) new words, devices, designs, slogans or symbols derived from any of the Trade Marks. Upon such authorisation by the Licensor and use by the Licensee, each such permutation, secondary mark, word, device, design, slogan and symbol derived from any of the Trade Marks shall be the property of the Licensor and shall be included as one of the Trade Marks subject to this Deed. 2.8 In the event that at any time during the term of this Deed the Licensee creates or develops any advertising, promotion, packaging or trade dress which is unique to the Service (collectively "Service Packaging"), it shall be and remain the property of the Licensee. Accordingly, the Licensee shall be free to use such Service Packaging throughout the world (excluding the United States of America) but the Licensee shall within thirty (30) days after the date of this Deed enter into a royalty-free licence with Flextech and Sky and with the Licensor entitling each of them to use such Service Packaging in perpetuity and throughout the world excluding the Territory and further excluding (in the case of the licences granted to Flextech and Sky) the United States of America. 5 3. Quality Control All Programmes transmitted in the Service by the Licensee under or by reference to the Trade Marks shall comply with the Programme Specification (as defined in the Programme Supply Agreement). 4. Use of the Trade Marks 4.1 The Licensee shall use the Trade Marks in the form stipulated by the Licensor and shall include such trademark and copyright notices as the Licensor may request and as are necessary for the protection of the Licensor's ownership of the Trade Marks. The Licensee shall also observe any reasonable directions given by the Licensor as to colours and size of the representations of the Trade Marks and their manner and disposition in connection with the Programmes, the Promotional Material and the Service. Save as expressly set out in sub-clause 2.8, any additional goodwill which may attach to the Trade Marks and which arises out of the Licensee's use of the Trade Marks under this Deed will inure solely to the benefit of the Licensor. Save as expressly set out in sub-clauses 2.1, 2.2 and 2.8 the Licensee has not acquired and will not acquire any proprietary rights in the Trade Marks by reason of this Deed. 4.2 The use of the Trade Marks by the Licensee shall at all times be in keeping with and seek to maintain their distinctiveness and reputation as determined by the Licensor. 4.3 Licensee hereby acknowledges that the trade names "Playboy" and "Playmate" and the Trade Marks are the sole and exclusive property of the Licensor. Licensee shall have the right to develop and distribute advertising, publicity and promotional materials relating to the Programmes, provided, however, that any such materials (other than material obtained directly from Licensor) shall: (a) clearly identify the Trade 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 not later than 60 days prior to the first transmission of the relevant Programme(s) in the Service; and 6. (b) in no event may any advertising, publicity or promotional material using the names of Licensor or any person appearing in a Playboy Programme (as defined in the Programme Supply Agreement) be used to constitute an endorsement, express or implied of any party, sponsor, product or service (other than the Service). Other than as expressly set forth in this Deed, Licensee shall make no use of the Trade 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 without the prior express written consent of Licensor in each instance. Licensee similarly agrees that it will not authorise or purport to authorise any third party to make any such use except as set out in Clause 2.3, 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 on material supplied to them by Licensee in accordance with Licensee's rights hereunder. 4.4 Licensee may publicise and advertise telecasts of the Programmes or (unless it is notified to the contrary prior to delivery of the relevant Programmes(s) in accordance with the Programme Supply Agreement) any person appearing therein in the Territory. 5. Ownership of the Trade Marks 5.1 The Licensor warrants that it is the proprietor of the Trade Marks and that it is not aware that any of the Trade Marks or the use of any of them on or in relation to Programmes or Promotional Material or the Service in the Territory infringes or will infringe the rights of any third party. 5.2 The Licensor shall pay all renewal fees necessary to maintain the registrations of the registered Trade Marks on the Register of Trade Marks ("the Register") during the term of this Deed. 5.3 The Licensee will on request give to the Licensor or its authorised representative any information as to its use of the Trade Marks which the Licensor may require and will during the term of this Deed render any assistance reasonably required by the Licensor at the Licensor's cost in maintaining the registrations of the registered Trade Marks. 5.4 The Licensee will not make any representation or do any act which may be taken to indicate that it has any right title or interest in or to the ownership or use of any of the Trade Marks except 7. under the terms of this Deed, and acknowledges that nothing contained in this Deed shall give the Licensee any right, title or interest in or to the Trade Marks save as granted hereby 5.5 Each party shall at its own expense, if required by the other, do all such acts and execute all such documents as may be necessary to confirm the licence granted hereunder in respect of any of the Trade Marks and to record the Licensee as a registered user of the registered Trade Marks on the trade marks register in any country within the Territory (including such of the applications as mature into registrations during the term of this Deed). The Licensee hereby agrees that any such entry on any trade mark register may be cancelled by the Licensor on termination of this Deed, for whatever reason, and that it will assist the Licensor so far as may be necessary to achieve such cancellation including by executing any necessary documents. 5.6 The Licensor shall indemnify the Licensee against all costs, damages, liabilities, fees and expenses which it may suffer or incur and all claims, actions and proceedings which may be made or brought against it, by any person claiming that use of the Trade Marks by the Licensee in accordance with this Deed infringes the rights of such person. The Licensee will notify the Licensor of any such claims promptly and allow the Licensor to control the defence thereof PROVIDED THAT, where the Licensee reasonably considers that it may be adversely or materially prejudiced thereby, the Licensee may elect to continue to be separately represented in the defence thereof and (if the Licensee shall so elect) no such claim, action or proceedings may be settled by the Licensor without the prior written consent of the Licensee. The Licensee will also provide any assistance reasonably requested by the Licensor at the Licensor's expense. 6. Infringements 6.1 Each party shall as soon as it becomes aware thereof give the other written particulars of any use or proposed use by any other person, firm or company of a trade name, trade mark or get-up or mode of promotion or advertising which amounts or might amount either to infringement in the Territory of the Licensor's registered rights in relation to the Trade Marks or to passing-off. 6.2 Each party shall, as soon as it becomes aware that any other person, firm or company alleges that the Trade Marks are invalid within the Territory or that use of the Trade Marks infringes any rights of another party or that the Trade Marks are otherwise attacked or open to attack within the Territory, give the other written particulars. 8 6.3 The Licensee will at the request of the Licensor give full co-operation to the Licensor in any action, claim or proceedings brought or threatened in respect of the Trade Marks within the Territory and the Licensor shall meet any reasonable expenses incurred by the Licensee in giving such assistance. 6.4 The Licensor shall in the first instance have the conduct of all proceedings relating to the Trade Marks and shall in its sole discretion decide what action (if any) to take in respect of any infringement or alleged infringement of the Trade Marks within the Territory or passing- off or any other claim or counter-claim brought or threatened in respect of the use or registration of the Trade Marks within the Territory. 6.5 If the Licensor does not take any action to protect the Trade Marks under the provisions of Clause 6.4 within two months of the circumstances giving rise to the need for such action coming to the attention of the Licensor (or earlier if the Licensor indicates that it does not intend to take such action) and if the Licensee receives advice from experienced trade mark counsel that proceedings could stand a reasonable chance of success, the Licensee shall, provided it has consulted with the Licensor as to the bringing of proceedings, have the option to commence proceedings at its own cost relating to the Trade Marks to which the Licensor shall lend its name and reasonable assistance subject to the Licensee reimbursing the Licensor for all costs and expenses that the Licensor may reasonably incur and any award of costs against it. All sums recovered by any such action representing damages suffered by the Licensee or unreimbursed costs of the Licensee shall belong to the Licensee. 6.6 The provisions of sub-clauses 6.1 - 6.5 inclusive shall also apply in relation to any registered or unregistered trade mark of the Licensor within the Territory which are substantially similar to the Trade Marks. 7. Indemnity by Licensee The Licensee shall indemnify the Licensor against all costs, damages, liabilities, fees and expenses which it may suffer or incur and all claims, actions and proceedings which may be made or brought against it as a result of any breach by the Licensee of the provisions of this Deed. The Licensor will notify the Licensee of any such claims promptly and allow the Licensee to control the defence thereof PROVIDED THAT, where the Licensor reasonably considers that it may be adversely or materially prejudiced thereby, the Licensor may elect to continue to be separately 9 represented in the defense thereof and (if the Licensor shall so elect) no such claim, action or proceedings may be settled by the Licensee without the prior written consent of the Licensor. 8. Termination 8.1 Either party may without prejudice to its other remedies terminate this Deed forthwith by notice in writing to the other on or after the occurrence of any of the following: (a) the persistent commission of material breaches of this Deed by the other party which are not capable of remedy; or (b) the commission of a material breach of this Deed 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 ALWAYS THAT the notice of termination may not be given 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 endeavour to remedy that remediable breach; or (c) a supervisor, receiver, administrator, administrative receiver or other encumbrancer taking possession of or being appointed over or any distress, execution or other process being levied or enforced (and not being discharged within thirty days) upon the whole or any substantial part of the assets of the other party PROVIDED ALWAYS THAT the Licensor shall not be entitled to terminate this Deed under this sub- clause 8.1(c) if Flextech and/or Sky shall notify the Licensor of its offer to acquire the entire shareholding of Playboy Entertainment Group, Inc., or any Associate of Playboy Entertainment Group, Inc. in the Licensee pursuant to Clause 8.5 of the Shareholders' Agreement; or (d) any event analogous to any of the foregoing occurring in any jurisdiction in relation to the other party. 8.2 Subject only to clause 9.2, this Deed shall automatically terminate on: 10. (a) the date on which any termination of the Programme Supply Agreement by the Licensee pursuant to Clause 10.2 or 10.3 of the Programme Supply Agreement takes effect; or (b) the date on which any termination of the Programme Supply Agreement by the Licensor pursuant to Clause 10.2 of the Programme Supply Agreement takes effect. 9. Post Termination 9.1 The termination of this Deed for whatever reason shall not affect any provision of this Deed which is expressed to survive or operate in the event of its termination and shall not prejudice or affect the rights of either party against the other in respect of any breach of this Deed or in respect of any moneys payable by one party to the other in relation to any period prior to termination. 9.2 Upon the date on which any termination of this Deed for whatever reason takes effect ("the Termination Date") the Licensee shall cease to make any use of the Trade Marks save that in relation to Programmes whose Transmission Period has not ended prior to the Termination Date the Licensee shall continue to be entitled to make use of the Trade Marks for so long as the Licensee continues to be entitled to transmit those Programmes by virtue of Clause 10.6 of the Programme Supply Agreement. 10. No Assignment The provisions of this Deed shall be binding on and enure to the benefit of the successors of each party hereto provided that no party may agree to assign, transfer, charge or otherwise dispose of or subcontract any of its rights or obligations hereunder (other than pursuant to sub-clause 2.3) without the prior written consent of the other party. 11. Force Majeure Either party shall be excused from performance of its obligations under this Deed if and to the extent that such performance is hindered or prevented (directly or indirectly) by reason of any strike, lockout, labour disturbance, government action, riot, armed conflict, accident, unavailability or breakdown of normal means of transport, act of God or any other matter whatsoever beyond the reasonable control of that party (other than a breach of the provisions of this Deed by the other party). 11. 12. Invalidity etc. --------------- 12.1 Should any provision of this Deed be or become ineffective for reasons beyond the control of the parties, the parties shall use reasonable efforts to agree upon a new provision which shall as nearly as possible have the same commercial effect as the ineffective provision. 12.2 Any provision contained in this Deed or in any arrangement of which this Deed forms part by virtue of which this Deed or such arrangement is subject to registration under the Restrictive Trade Practices Act 1976 shall not come into effect until the day following the date on which particulars of this Deed and of any such arrangement have been furnished to the Office of Fair Trading (or on such later date as may be provided for in relation to any such provision) and the parties hereto agree to furnish such particulars within three months of the date of this Deed. 13. Waivers, Remedies Cumulative, Amendments, etc. ---------------------------------------------- 13.1 No failure or delay by any of the parties hereto in exercising any right, power or privilege under this Deed 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. 13.2 The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. 13.3 No provision of this Deed may be amended, modified, waived, discharged or (other than pursuant to Clause 8) terminated, otherwise than by the express written agreement of the parties hereto nor may any breach of any provision of this Deed be waived or discharged except with the express written consent of the party not in breach. 14. Costs ----- Each of the parties hereto shall pay its own costs, charges and expenses connected with the preparation and implementation of this Deed and the transactions contemplated by it, except where otherwise expressly specified herein. 12 15. Notices ------- 15.1 Any notice or other communication given or made under this Deed shall be in writing and, without prejudice to the validity of any other method of service, may be delivered personally or by courier or sent by facsimile transmission and by prepaid airmail letter, addressed as follows: (a) if to the Licensor to: The General Counsel of the Licensor 680 North Lake Shore Drive Chicago IL 60611 United States of America Facsimile transmission number: (0101 312) 266 2042 with a copy to: The President of Playboy Entertainment, Inc. 9242 Beverly Boulevard Beverly Hills California 90210 United States of America Facsimile transmission number: (0101 310) 246 4065 (b) if to the Licensee to: Twyman House 16 Bonny Street London NW1 9PG Facsimile transmission number: (0171) 911 0145 with a copy to both of the following: The Chief Executive Head of Legal and Business Affairs Flextech plc Sky 13 Albemarle Street Grant Way London Isleworth W1X 3HA Middlesex TW7 5QD 13 Facsimile transmission number: Facsimile transmission number: (0171) 499 7553 (0171) 705 3254 or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. 15.2 Any such notice or other communication shall be deemed to have been duly served, given or made (i) in the case of posting, 96 hours after the envelope containing such notice was posted and proof that any such envelope was properly addressed, prepaid, registered and posted shall be sufficient evidence that such notice or other communication has been duly served, given or made; or (ii) in the case of delivery, when left at the relevant address; or (iii) in the case of facsimile transmission on the first business day in the country of the intended recipient after the date of transmission. 16. Governing Law ------------- 16.1 This Deed shall be governed by and construed in all respects in accordance with English law and the parties agree to submit to the exclusive jurisdiction of the English Courts as regards any claim or matter arising in relation to this Deed. 16.2 The Licensor hereby appoints O'Melveny & Myers of 10 Finsbury Square, London EC2A 1LA, as its authorised agent for the purpose of accepting service of process for all purposes in connection with this Deed. IN WITNESS whereof this Deed has been duly executed. 14
SCHEDULE -------- Part I ------ Registered Trade Marks ---------------------- Mark Country Reg. No Class Reg. Date Relevant - ---- ------- ------- ----- --------- -------- Goods/Services -------------- PLAYBOY United 1286798 41 10/14/93 radio, Kingdom television and stage entertainments; all included in this class RABBIT United 1324768 41 10/22/87 radio, HEAD Kingdom television and DESIGN stage entertainments PLAYBOY Benelux 424544 41 1/6/87 entertainment and amusements; and the production of radio and television programmes RABBIT Benelux 427684 41 1/6/87 entertainment HEAD and amusements; DESIGN and the production of radio and television programmes
15
Part 2 ------ Unregistered Trademarks ----------------------- Country Mark or Representation or Goods/Services - ------- ------------------------- -------------- Description of Get-up --------------------- Republic of PLAYBOY Entertainment services, Ireland namely, pay television services and pay per view television services Republic of RABBIT HEAD DESIGN Entertainment services, Ireland namely, pay television services and pay per view television services
16 EXECUTED AS A DEED by ) Anthony J. Lynn acting under ) the express authority of ) /s/ Anthony J. Lynn PLAYBOY ENTERPRISES, INC. ) in accordance with the laws ) of the State of Delaware ) P.D. Feely /s/ P. Feely EXECUTED AS A DEED by ) PLAYBOY TV UK/BENELUX LIMITED ) in the presence of: ) P.D. Feely /s/ P.D. Feely Director /s/ Roger Luard Director /s/ Anthony J. Lynn 17 DATED 2nd February 1996 ----------------------- (1) PLAYBOY ENTERTAINMENT GROUP, INC (2) PLAYBOY TV UK/BENELUX LIMITED -------------------------- PROGRAMME SUPPLY AGREEMENT -------------------------- EXECUTED AGREEMENT DENTON HALL FIVE CHANCERY LANE CLIFFORD'S INN LONDON EC4A 1BU TELEPHONE 0171 242 1212 FAX 0171 404 0087 MEMBER OF THE DENTON INTERNATIONAL THIS AGREEMENT is made the 2nd day of February 1996 but made effective from 1st November 1995 BETWEEN: (1) PLAYBOY ENTERTAINMENT GROUP, INC of 9242 Beverly Boulevard Beverly Hills California 90210 United States of America ("the Licensor") and (2) PLAYBOY TV UK/BENELUX LIMITED of Twyman House 16 Bonny Street London NWl 9PG ("the Company") WHEREAS: The Company wishes to licence from the Licensor and the Licensor has agreed to licence to the Company certain television programmes upon the terms set out in this Agreement. NOW IT IS HEREBY AGREED as follows: 1. Definitions and Interpretation ------------------------------ 1.1 In this Agreement the following words and expressions shall have the following meanings: "Accumulated Net Losses": means as at the end of any Year commencing after the Return of Investment Date, the amount by which the aggregate amount of the Losses of the Company in respect of that Year and all preceding Years (ignoring, for the avoidance of doubt, the fact that any such Losses may have been, or may be capable of being, surrendered by way of group relief) exceeds the aggregate amount of the Net Profits of the Company in respect of that Year and all preceding Years; "Acquired Premium Movie": any full-length (i.e. with a running time of not less than 84 minutes) motion picture (whether made for theatrical release and/or television exhibition) which falls within the Programme Specification and which may be acquired by the Licensor or the Company for transmission in the Service following a notice given by the Company pursuant to Clause 8.9; "Acquired Programme": means any television programme falling within the Programme Specification which is not a Playboy Programme or a Third Party Programme but (a) in or to which the Licensor or any Affiliate of the Licensor has acquired or does at any time during the Term acquire from a third party inter alia the Non-Standard Television Rights within the Territory and (b) which the Licensor delivers to the Company for first transmission in the Service in any Year and as part of the Minimum Number of Hours in respect of that Year; "Affiliate": of any person means any other person which is from time to time either directly or indirectly controlling, controlled by or under common control with the first person and for this purpose "control" means in relation to a person (the "Relevant Person") the power of another person ("the Controlling Person") to secure, whether by the holding of shares or the possession of voting rights in or in relation to the Relevant Person or any other person or the provisions of any agreement or otherwise, that the affairs of the Relevant Person are conducted in accordance with the wishes of the Controlling Person; "the Availability Date": in respect of any Third Party Programme or Acquired Programme means the first day of the Licence Period in respect of that Third Party Programme or Acquired Programme and in respect of any Playboy Programme means the later of the following: (a) the first day of the Licence Period in respect of that Playboy Programme; and (b) the expiry of the earlier of: (i) a period of twelve (12) months commencing upon the date on which the home video release of that Playboy Programme within the Territory takes place; and (ii) a period of twenty-four (24) months commencing upon the date of completion of production of that Playboy Programme; 2 "Available Cash Flow": means such amount of the monies received by the Company from the conduct of its business as is available for the purpose of paying the Bonus Licence Fee to the Licensor pursuant to this Agreement but after having made such provision as may be necessary, having regard to the reasonably projected income and cash flow of the Company, to pay the Company's projected cash requirements and needs, to pay and discharge the current liabilities and obligations of the Company and to pay and discharge the known contingent liabilities and obligations of the Company, which amount shall be determined in accordance with Clause 7.6; "Available Net Profits": means as at the end of any Year commencing after the Return of Investment Date, the amount (if any) by which the Net Profits of the Company in respect of that Year exceeds the Accumulated Net Losses of the Company as at the end of the immediately preceding Year; "the Basic Licence Fee": means in respect of each Year an amount calculated in accordance with the provisions of Schedule 3; "Bonus Amount": means the amount (if any) by which in respect of any of the second, third, fourth and fifth Years the total of the Basic Licence Fee and any Programming Premium payable by the Company in respect of that Year is less than US$2,000,000 and which shall, for the avoidance of doubt, be calculated on an annual basis following the end of each such Year; "Bonus Licence Fee": means an amount calculated by aggregating each Bonus Amount following the end of the fifth Year; "the Business Plan": means any plan which is from time to time in force and in accordance with which the business of the Company is to be managed and conducted pursuant to the Shareholders' Agreement; "Co-Production": means any television programme falling within the Programme Specification which was not produced solely by or under commission from the Licensor and is not an Acquired Programme but which is co-produced by the Licensor and/or any Affiliate of the Licensor with a third party; "the CPI": means the US City Average Consumer Prices Index for all urban consumers or any successor or replacement index. For the purpose of determining any percentage increase in the CPI over the twelve months immediately preceding the first day of any Year, reference shall be made to 3 the published figure for the CPI available for the month immediately preceding the first day of that Year ("the final figure") provided that, if the final figure is not available, the latest published figure available shall apply; "Delivery Material": means in relation to any Selected Programme, so-called "vignette" or promotional material the master of the Selected Programme, so- called "vignette" or promotional material in the form specified in Schedule 2 together with the other materials therein described and any dubbed or sub-titled version of the Selected Programme, so-called "vignette" or promotional material which the Licensor is required to deliver pursuant to Clause 5; "the Directive": means the Directive of the Council of European Communities of 3rd October 1989 No 89/552 EEC and/or any other Directive of the Council of European Communities which may modify, replace or supersede any of the provisions of that Directive (including but not limited to Articles 4, 5 and 6 of that Directive); "European Work": means a programme which complies with the definition of a European Work contained in the Directive; "the First Year": means the period commencing upon the Launch Date and ending upon 31st December in the calendar year in which the Launch Date falls; "Flextech": Continental Shelf 16 Limited, a company registered in England and Wales under no. 3005499; "Force Majeure": means any event or cause not within the control of the party affected by it (other than a breach of this Agreement by the other party) including (but not by way of limitation) accident or breakdown of any satellite or any other facilities equipment or apparatus (caused otherwise than by the wrongful act neglect or default of that party), act of God, flood, war, riot, rebellion, civil commotion, strike, lock-out or other industrial dispute or action, Act of Parliament, any act, order, direction or regulation of any government or any public, local or regulatory authority or imposition of government sanction, embargo or similar action, or of any law, judgment, order, decree, embargo or blockade; 4 "the Growth Factor": means, for the purpose only of calculating the Minimum Production Cost in any Year, the aggregate percentage increase in the CPI over the twelve months immediately preceding the first day of that Year or three (3) per cent, whichever is the greater; "the Launch Date": means the date on which the Company commences the provision of the Service for reception within the Territory; "LIBOR": the three month London Interbank Offered Rate for Sterling Deposits, as published in the Financial Times on the first day of each month or on the next succeeding day on which the Financial Times is published; "Licence Period": means in relation to: (a) each Playboy Programme, the period commencing upon the date of signature of this Agreement or (in the case of a Playboy Programme production of which has not prior to such date been completed) the date on which production of that Playboy Programme or the first episode of that Playboy Programme is completed and ending upon the later of (i) the final day of the Term and (ii) the date after the end of the Term on which any Transmission Period relating to that Playboy Programme ends in accordance with sub-clauses 10.6.2, 10.6.3 and 10.6.4; and (b) each Acquired Programme or Third Party Programme acquired on behalf of the Company by the Licensor, the duration of the Playboy Licence Period relating to that Acquired, Programme or Third Party Programme; "Licence Year": has the meaning ascribed to it in Clause 7.3; "the Licensor's Territory": means the United States of America; "Losses": means in respect of any Year, the losses shown by the audited profit and loss account of the Company for that Year (which losses shall be determined according to the Company's accounting policies but shall always take into account the amount of any Programming Premium payable in respect of that Year and shall in respect of the fifth Year take into account the full amount of the Bonus Licence Fee payable by the Company) but before interest on any loans made to the Company 5 by its shareholders pursuant to sub-clauses 3.1(b) and 4.1(b) of the Shareholders' Agreement of even date herewith; "Minimum Number of Hours": means in respect of each Year the minimum number of Programme Hours of Programmes which the Licensor is obliged to deliver to the Company in that Year pursuant to this Agreement for first transmission in the Service and which shall (A) in the First Year be calculated by multiplying 114 by the number of days during the First Year (including the Launch Date) and dividing the product of that multiplication by 365 and (B) be one hundred and fourteen (114) Programme Hours in each subsequent Year unless or until that number is reduced or increased (a) in accordance with Clause 8.6, Clause 8.7, Clause 8.8 or Clause 8.11; or (b) following any termination of this Agreement pursuant to Clause 10.3, "Minimum Production Cost": means an amount which shall increase during the Term as follows: (a) in the first Year, the sum of US$1,000,000 (one million United States dollars); and (b) in any subsequent Year, the sum which, by virtue of this definition, represented the Minimum Production Cost in the immediately preceding Year increased by the Growth Factor; "Net Profits": means in respect of any Year, the audited, after tax profits of the Company for that Year shown in the accounts of the Company for that Year prepared by its auditors (which profits shall be determined according to the Company's accounting policies but shall always take into account the amount of any Programming Premium payable by the Company in respect of that Year and shall in respect of the fifth Year take into account the full amount of the Bonus Licence Fee payable by the Company) but before interest on any loans made to the Company by its shareholders pursuant to sub-clauses 3.1(b) and 4.1(b) of the Shareholders' Agreement of even date herewith; "Net Revenue per Household": means an amount calculated in accordance with the provisions of Schedule 4; "Net Revenues": means in respect of any Year, the aggregate of all payments which are actually received by the Company during that Year, which (after making adequate provision for refunds, 6 discounts, bad debts and credits) the Company is entitled to retain and which represent charges made for the reception and/or re-transmission of the Service in its entirety, or of programmes (other than Premium Movies and Acquired Premium Movies included in the Service on a Pay-Per-View Basis), by any third party (including but not limited to any cable operator) after deduction of: (i) all amounts of Value Added Tax or similar sales taxes which may form part of such payments; and (ii) all sales and agency commissions and all subscriber management charges (including but not limited to charges for the supply of viewing cards and/or other decryption devices) which may be payable to third parties (including but not limited to Satellite Encryption Services Limited) as a result of or in connection with the receipt of any such payment(s) by the Company and which have not been deducted by such third party or parties prior to the receipt of the relevant payment(s) by the Company; "Non-Standard Television": means all forms of television exhibition, transmission and distribution whether now existing or developed in the future (other than Standard Television) and however transmitted or delivered, including but not limited to the following: (a) basic cable and pay cable; (b) "over the air pay" subscription television (STV), direct broadcasting by satellite (DBS), master antenna television systems (MATV), multipoint distribution systems (MDS), satellite master antenna television systems (SMATV), microwave transmission and video- on-demand services; (c) transmission via Non-Standard Television delivery systems to closed circuit television systems such as hotel, motel or hospital rooms, educational institutions and military locations; whether all of the foregoing (a), (b) and/or (c) are on a subscription, pay-per-view, licence, free or other basis; "the Non-Standard Television Rights": means the right to exhibit, or cause the exhibition of, a Programme or a Third Party Programme by means of Non- Standard Television; 7 "Payment Date": means any of the six dates specified in Clause 7.3; "Pay-Per-View Basis": means the inclusion of a programme in the Service on terms whereby a payment becomes due from a subscriber in consideration solely for the right to receive and view (a) that programme or (b) a number of programmes which are transmitted in the Service on the same day including that programme; "Playboy Acquired Programme": means any Acquired Programme acquired by the Licensor or any Affiliate of the Licensor pursuant to a licence: (a) under which the Licensor or that Affiliate was also granted the Television Rights in that Acquired Programme within the Licensor's Territory; (b) under which all of the Television Rights in that Acquired Programme granted to the Licensor and/or any Affiliate of the Licensor were granted on a sole and exclusive basis; (c) which was granted for a period of not less than five (5) years from the date of its commencement; and (d) under which the Television Rights in that Acquired Programme were granted within one of the following territories (in addition to the Licensor's Territory and the Territory): namely, Australia, Germany, France, Italy, Mexico or Brazil; "Playboy Licence Period": means in respect of any Acquired Programme, so-called "vignette" or (if applicable) Third Party Programme the period for which the Licensor or any Affiliate of the Licensor has acquired the Non-Standard Television Rights therein within the Territory; "Playboy Production Costs": means in respect of any Premium Movie the aggregate of (a) all fees and other remuneration paid to the Licensor and/or any Affiliate of the Licensor, and to any employee or officer of the Licensor and/or any such Affiliate, in connection with the production of that Premium Movie and (b) any part of the cost of production of that Premium Movie which represents overhead expenditure of the Licensor and/or any Affiliate of the Licensor that the Licensor and/or any such Affiliate would have incurred even if that Premium Movie had never been produced, including but not limited to expenditure incurred in paying salaries or other remuneration to employees and in owning, operating, occupying, using and/or leasing premises, office equipment, 8 facilities and/or services and/or equipment customarily used in the production of television programmes and/or motion pictures; "Playboy Programme": means (a) any television programme falling within the Programme Specification which is or was produced by, or under commission from, the Licensor or any Affiliate of the Licensor or (b) a Co-Production which in either case is not a Premium Movie; "Premium Movie": means a full-length film or motion picture - -------------- (a) which contains at least one actor or actress with a generally recognizable name value in the United States motion picture industry who, in the five years immediately preceding the date on which production of that film or motion picture was commenced, has appeared in a starring role in a motion picture theatrically released in the United States by one or more of the major Hollywood studios or had a starring role in a regular prime-time U.S. network television series or movie-of-the-week, (b) which is photographed in colour, using 35 millimeter film (c) which has a running time of not less than eighty-four (84) minutes (d) which is based upon a recognisable dramatic plot and/or storyline (e) which has a Total Production Cost in excess of the Minimum Production Cost and (f) whose Total Production Cost does not include Playboy Production Costs which in the aggregate exceed an amount equal to ten (10) per cent of the Minimum Production Cost (and to the extent that Playboy Production Costs in excess of that amount were included in the Total Production Cost such excess Playboy Production Costs shall be disregarded for the purposes of determining whether the relevant film or motion picture is a "Premium Movie" hereunder); "Programme": means: --------- (a) any Playboy Programme; or 9 (b) any Acquired Programme (including but not limited to any Playboy Acquired Programme) in or to which the Licensor or any Affiliate of the Licensor acquires owns or holds or is entitled to exercise, or authorise the exercise of, any or all of the Non-Standard Television Rights within the Territory; or (c) any Premium Movie but only insofar as the same may be licensed to the Company in accordance with Clause 3.2; and for the purposes of interpreting this definition, it is agreed and declared that, where a television programme consists of more than one episode or group of episodes, each series or serial of that television programme which consists of a single or discrete group of episodes shall be treated as a separate Programme; "Programme Duration": means in relation to any Programme or Third Party Programme or (in the case of a Programme or Third Party Programme consisting of more than one episode) any episode, the running time of the master of the Programme or Third Party Programme or episode (excluding, for the avoidance of doubt, commercial breaks, promotional material and advertisements interpolated in any Programme or Third Party Programme or episode and further excluding any so-called "vignettes") delivered to the Company by the Licensor as part of the Delivery Material or by the licensor of the Third Party Programme (as the case may be); "Programme Hour": means in relation to the Programme Duration of any Programme(s) or Third Party Programme(s), a period of forty-five (45) minutes; "the Programme Specification": means the description of the programming which is to be broadcast by the Company as part of the Service and is attached as Schedule 1; "Programming Premium": means, in respect of any Year commencing after the Year in which the Return of Investment Date falls, the amount (if any) payable to the Licensor in respect of that Year pursuant to sub-clause 7.l(b); "Quarter": shall mean any three month period ending on the last day of March, June, September and December; 10 "Requisite Percentage": means for the purpose of calculating the amount (if any) of the Programming Premium payable to the Licensor: (a) 33% (thirty-three per cent) of Available Net Profits; and (b) 20% (twenty per cent) of Net Revenues subject always to reduction of such percentages in accordance with the provisions of Clause 8.6, sub-clause 8.8(d), Clause 8.11 or sub-clause 10.4.2; "Return of Investment Date": the day on which each of the Company's shareholders shall actually have received (by way of the repayment of all loans made, by way of the return (by sale or repayment of shares or otherwise) of all share capital subscribed (including share premiums), and by way of the payment of interest or dividends thereon) an amount equal to the aggregate of: (a) the principal amount of all loans made, and share capital subscribed for in the capital of the Company, by each such shareholder pursuant to sub- clauses 3.1(b) and 4.1(b) of the Shareholders' Agreement of even date herewith (in each case the "Initial Cost"); PLUS (b) interest on the Lnitial Cost at LIBOR plus 3% (which interest shall accrue on a daily basis from the date of the relevant loan or subscription and shall be calculated and compounded on 30th June and 31st December of each Year) PLUS (c) the principal amount of all loans made, and share capital subscribed for in the capital of the Company, by each such shareholder in addition to the Initial Cost prior to the date on which the Initial Cost plus interest thereon calculated in accordance with (b) above has been received by each of the Company's shareholders in accordance with the foregoing provisions of this definition (in each case the "Additional Cost"); PLUS (d) interest on the Additional Cost at LIBOR plus 3% or (if higher) at the rate of interest contractually payable on the relevant loan to the relevant shareholder (which interest shall accrue on a daily basis from the date of the relevant loan or subscription and shall be calculated and compounded on 30th June and 31st December of each Year) PROVIDED THAT: 11 (i) where any such shares or loans are transferred to any person, including but not limited to upon exercise of any of the Options (as defined in Clause 15 of the Shareholders' Agreement of even date herewith), such person shall on such transfer be deemed to have subscribed for the shares and made the loans the subject of the transfer and there shall not be taken into account for the purposes of determining the Return of Investment Date such amount of the consideration paid by such person as exceeds the Initial Cost to the selling shareholder of the shares and loans the subject of the relevant transfer plus interest thereon, calculated in accordance with (b) above; and (ii) if any part of the Initial Cost or the Additional Cost shall be repaid to any shareholder through the use of monies borrowed by the Company from any third party (i.e. a person other than a shareholder in the Company or an Affiliate of such a shareholder), the Return of Investment Date shall not occur until all of those third party borrowings shall have been repaid by the Company to that third party together with interest thereon at the rate of interest contractually payable by the Company to that third party provided, however that if the Company has the funds to repay such third party but is not contractually permitted to prepay such third party, the Company will establish a fund to pay such borrowings with interest and will be deemed to have repaid such borrowings (with interest) to the extent of the amount from time to time standing to the credit of such fund; and (iii) if the Company is not contractually permitted to prepay any part of the Initial Cost or the Additional Cost which comprises (a) loan(s) made by a shareholder, the Company will establish a fund to repay such loan(s) with interest and will be deemed to have repaid such loan(s) (with interest) to the extent of the amount from time to time standing to the credit of such fund; "the Scheduler": the individual appointed in accordance with Clause 8.1, Clause 8.4, Clause 8.5, Clause 8.11 or Clause 10.4 who is to provide the services set out in Clause 8.2; "Selected Programme": means any Programme, Third Party Programme or so-called "vignette" which is selected by the Scheduler for inclusion in the Transmission Schedule and licensed to the Company by the Licensor pursuant to or by virtue of any provision of this Agreement; "the Service": means the television programme service consisting solely of: 12 (a) Programmes, Third Party Programmes and so-called "vignettes"; and (b) infomercials, advertisements and promotional and publicity material which is to be provided by the Company for reception within the Territory; "Service Language": means any of the following languages: English, Flemish, Dutch or any other language of any country within the Territory; "the Shareholders' Agreement": means the agreement which is for the time being in force between the holders of not less than ninety-five percent (95%) in nominal value of the issued share capital of the Company and which inter alia regulates the management and conduct of the business of the Company; "Standard Television": means exhibition by conventional free VHF or UHF television broadcast stations, the video and audio portions of which are intelligibly receivable without charge by means of a conventional home roof-top or television set built-in antenna; "the Standard Television Rights": means the right to exhibit, or cause the exhibition of, a Programme or a Third Party Programme by means of Standard Television; "the Term": means the period commencing on the date of signature hereof and ending on the date on which any termination of this Agreement takes effect pursuant to Clause 10; "the Television Rights": means the Non-Standard Television Rights and the Standard Television Rights; "the Territory": means the countries of the United Kingdom, the Republic of Ireland, Belgium, The Netherlands and Luxembourg together with any other countries in which the Service may from time to time be provided by the Company in accordance with the Business Plan and Shareholders' Agreement; "Third Party Programme": means 13 (a) any television programme which falls within the Programme Specification and which is not a Playboy Programme or an Acquired Programme; or (b) any Acquired Premium Movie, in respect of which the Licensor or any Affiliate of the Licensor acquires upon instruction from the Scheduler and/or the Company in accordance with Clause 8.6, Clause 8.9 or 8.11 the Non-Standard Television Rights therein within the Territory or the Company acquires the same in accordance with Clause 8.8, Clause 8.10, Clause 8.11 or Clause 10.4; "Total Production Cost": means, in respect of each Premium Movie, the actual cost of production of that Premium Movie (including without limitation the aggregate of direct, out-of-pocket costs, charges and expenses paid to third parties in connection with the acquisition of all underlying literary rights with respect to the production of the Premium Movie, and in connection with the preparation, production and completion of the Premium Movie including the costs of materials, equipment, physical properties, any completion bond fee (net of any rebate), personnel and services utilized in connection with the production of the Premium Movie, and cost of customary production insurances and Playboy Production Costs); "Trademark Agreement": means the agreement between the Company and Playboy Enterprises, Inc. of even date herewith relating to the use of the Trade Marks; "the Trade Marks": shall have the meaning ascribed to it in the Trademark Agreement; "Transmission Period": means in respect of any Programme, or any Third Party Programme acquired on behalf of the Company by the Licensor, the period commencing upon the Availability Date in respect of that Programme or Third Party Programme or (as the case may be) upon the date of any notice given by the Company pursuant to Clause 2.2 in respect of that Programme or Third Party Programme and ending upon the date on which the twenty-fourth (24th) transmission of that Programme or Third Party Programme (or, in the case of a Programme or Third Party Programme consisting of more than one episode, the final episode of that Programme or Third Party Programme) in the Service during that period takes place or (if earlier) the final day of the Playboy Licence Period in respect of an Acquired Programme or Third Party Programme; 14 "the Transmission Schedule": means the schedule to be prepared by the Scheduler in accordance with Clause 8.2 setting out the day, date and time of transmission of each Selected Programme, each so-called "vignette" and all interstitial material to be transmitted as part of the Service; "the United Kingdom": means Great Britain, Northern Ireland (irrespective of whether Northern Ireland is or remains part of the United Kingdom), the Channel Islands and Isle of Man; "Year": means the First Year and thereafter any calendar year. 1.2 In this Agreement references to a "programme" or "Programme" shall include a reference to any associated sound recording comprising the soundtrack thereto. 1.3 in this Agreement references to Clauses, sub-clauses, paragraphs and Schedules shall be references to Clauses, sub-clauses and paragraphs of and Schedules to this Agreement. 1.4 Whenever the Service is licensed or otherwise sold to a third party (including but not limited to a cable operator) as part of a package of satellite delivered television channels, then the Company shall negotiate with that third party and/or with the providers of the other television channels included in such package on an arm's length basis regarding the allocation between the television channels (including but not limited to the Service) included in such package of the revenues derived from the relevant licence or sale. 1.5 Whenever any of the Television Rights (including but not limited to the Non-Standard Television Rights) in a Programme (other than a Playboy Programme) or a Third Party Programme within the Territory are acquired by the Licensor or any Affiliate of the Licensor pursuant to Clause 8.6, 8.8, 8.9 or 8.11 and the relevant Television Rights are also acquired in respect of any country or countries outside the Territory, then for the purposes of sub-clauses 8.6(c), 8.8(c), 8.9(d) and 8.11.4(b) the Licensor shall on a fair and equitable arm's length basis allocate the licence fee(s) paid by the Licensor or its Affiliate for those Television Rights to the licensor of that Programme or Third Party Programme between the Television Rights so acquired by the Licensor within the Territory and the Television Rights so acquired by the Licensor in respect of any country or countries outside the Territory. 1.6 Whenever a Programme (other than a Playboy Programme) or a Third Party Programme is acquired by the Licensor or any Affiliate of the Licensor pursuant to Clause 8.6, 8.8, 8.9 or 8.11 and that 15 Programme or Third Party Programme is acquired as part of a package of television programmed then for the purposes of sub-clauses 8.6(c), 8.8(c), 8.9(d) and 8.11.4(b) the Licensor shall on a fair and equitable arm's length basis allocate the license fee(s) paid by the Licensor or its Affiliate to the licensor of that package of television programmes between that Programme or Third Party Programme and the other television programmes included in that package. 1.7 If so requested by the Company in writing, the Licensor shall within fourteen (14) days after the date of such request deliver to the Company a certificate signed as being true and accurate by the Senior Financial Officer of the Licensor and stating in respect of each Premium Movie specified in such request (a) the Total Production Cost of that Premium Movie and (b) the total amount of Playboy Production Costs included in that Total Production Cost. At any time after delivery of that certificate the Company may upon reasonable notice to the Licensor and during normal business hours inspect the books and records of the Licensor and or any Affiliate of the Licensor relating to the production of any Premium Movie specified in that certificate for the purpose of verifying the accuracy of that certificate. The provisions of this Clause shall not apply to any Premium Movie in which the Television Rights within the Territory have been granted to any third party pursuant to any legally binding agreement entered into by the Licensor prior to the date of this Agreement. 1.8 Whenever reference is made in this Agreement to a period of less than fourteen (14) days, a "day" shall for the purposes of calculating the length of that period be deemed to mean any day other than a Saturday, Sunday or public holiday in England or the United States of America. 2. Licence 2.1 The Licensor hereby grants to the Company by way of a sole and exclusive licence under copyright during the Licence Period in respect of each Programme or Third Party Programme (as the case may be) and within the Territory: (a) the sole and exclusive right to exercise the Non-Standard Television Rights in and to each Programme on not more than twenty-four (24) occasions during any Transmission Period relating to that Programme; and (b) all Television Rights and all other right title and interest acquired by the Licensor in and to each Third Party Programme 16 PROVIDED ALWAYS THAT the Company shall not make any transmission of any Programme, or any Third Party Programme acquired on its behalf by the Licensor, otherwise than during a Transmission Period relating to that Programme or Third Party Programme. 2.2 At any time after the end of the first Transmission Period in respect of a Programme the Company may by notice in writing to the Licensor elect to transmit that Programme during a further Transmission Period, then (subject always to the proviso to this Clause and unless the Licensor notifies the Company within seven (7) days after the date of receipt of the Company's notice that that Programme is an Acquired Programme and that the Licensor would be unable to perform its obligations under Clause 4.6 in relation to that Programme during that further Transmission Period) the following provisions shall apply: (a) that Programme shall automatically be deemed to be a Selected Programme during that further Transmission Period for all purposes of this Agreement SAVE THAT that Programme shall not count towards the Minimum Number of Hours in respect of any Year and the Company shall pay a licence fee to the Licensor in respect of that Programme in accordance with the provisions of Clause 7.7; and (b) (unless the then current Scheduler has been appointed by the Company under Clause 8.4, proviso (c) to Clause 8.5, Clause 8.11.4 or Clause 10.4) the Licensor shall procure that the Scheduler shall include that Programme in the Transmission Schedule for transmission in the Service during the further Transmission Period in respect of that Programme PROVIDED ALWAYS THAT, if the parties are unable to agree upon the amount of the license fee payable to the Licensor in respect of that Programme within the 30 day period described in sub-clause 7.7(a), the Company may by notice in writing to the Licensor decline to accept a further Transmission Period of that Programme at the licence fee specified in paragraph (ii) of sub- clause 7.7(a) and, if the Company does so decline, the provisions of sub- clauses (a) and (b) of this Clause shall not apply to that Programme. 2.3 The Licensor further grants to the Company by way of a sole and exclusive licence under copyright the sole and exclusive right during the Term and within the Territory to exercise the Non-Standard Television Rights in and to each so-called "vignette" delivered to the Company hereunder on not more than (subject to the provisions of Clause 4.8) twenty-four (24) occasions. 17 2.4 Notwithstanding the definition of the Territory, the licences granted to the Company under Clauses 2.1 and 2.3 shall not extend to the Republic of Ireland until the earlier of: (a) the first anniversary of the first day of the first Licence Year; and (b) the date on which the Licensor notifies the Company that those licences have been extended to the Republic of Ireland. 3. Supply of Programmes 3.1 In order to assist the Company in marketing the Service and the Scheduler in performing his duties under Clause 8, the Licensor shall: (a) within fourteen (14) days after the date of this Agreement supply to the Company and to the Scheduler a complete list of all of its Programmes, which list shall include in respect of each Programme the title, duration and number of episodes of that Programme, a brief description of that Programme and the year in which that Programme was produced and is attached as Schedule 5; (b) not later than the first day of each Year supply to the Company and to the Scheduler a list of all Programmes which have completed production, and of all television programmes which have for any reason become Programmes (for example, because the Licensor or any Affiliate of the Licensor has acquired the Non-Standard Television Rights therein), since the last such list (or the list supplied pursuant to sub-clause 3.l(a)) was supplied, and the Licensor shall include in that list in respect of each such Programme the information specified in sub-clause (a) of this Clause; (c) upon the Company's or the Scheduler's request, supply to the Company and the Scheduler details (if available) of audience viewing ratings achieved by any Programme on the last broadcast of that Programme by the Licensor or any Affiliate or licensee of the Licensor anywhere in the world; and (d) within 21 days after any request by the Company or the Scheduler, provide on loan a VHS viewing cassette of any Programme which may be requested by the Company or the Scheduler. 18 3.2 The Licensor shall not at any time during the Term licence any of the Television Rights in any Premium Movie within the Territory to any third party without first complying with the procedure set out in this Clause but the provisions of this Clause (other than sub-clause (d)) shall not apply to any Premium Movie in which the Television Rights within the Territory have been granted to any third party pursuant to any legally binding agreement entered into by the Licensor prior to the date of this Agreement. Whenever the provisions of this Clause apply to a Premium Movie, the Licensor shall send to the Company a viewing cassette of such Premium Movie (if the Premium Movie is already produced at the time of sending the notice hereunder) and a written notice (which notice shall specify the cost, budget and storyline of the Premium Movie if the Premium Movie is not available for viewing at the date of the notice) setting out the principal terms on which the Licensor is proposing so to grant Television Rights within the Territory in respect of each such Premium Movie. The following provisions shall apply to each Premium Movie offered for licence within the Territory by the Licensor in accordance with this Clause: (a) the Company shall have twenty-eight (28) days from receipt of such offer to accept such offer by notice in writing to the Licensor; (b) if the Company shall fail to accept such offer within that 28 day period and if the Licensor wishes to authorise a third party to exercise the Television Rights in that Premium Movie within the Territory, the Licensor shall be free to do so, and shall have no further obligation to offer that Premium Movie for licence to the Company, subject always to sub-clauses (c) and (d) of this Clause; (c) if the Company shall fail to accept such offer within that 28 day period and if the Licensor wishes to authorise a third party to exercise any of the Television Rights in that Premium Movie within the Territory, the Licensor shall not so authorise any third party upon terms which are more favourable to that third party than the terms offered by the Licensor to the Company pursuant to this Clause without first offering by notice in writing to the Company to licence that Premium Movie to the Company upon such more favourable terms. The Company shall have fourteen (14) days from receipt of such offer in which to accept such offer by notice in writing to the Licensor and, if the Company fails to accept such offer within that 14 day period, the Licensor shall (subject to sub-clause (d) of this Clause) be 19 free to authorise such third party to exercise the Television Rights in that Premium Movie within the Territory; (d) notwithstanding any failure by the Company to accept any offer made by the Licensor pursuant to this Clause or the absence of any obligation on the Licensor to make any offer pursuant to this Clause, the Licensor shall not authorise or permit any third party to broadcast, transmit or exhibit within the Territory (whether pursuant to the Standard Television Rights or the Non-Standard Television Rights) any Premium Movie, any excerpt from any Premium Movie or any promotional or advertising material or announcement publicising its transmission of any Premium Movie in any form (other than in the form of an on- screen credit and/or the display of the Licensor's logo in or immediately after the closing titles) which allows or causes any of the Trade Marks, the "Playboy" name or any logo, mark or symbol which is associated with the "Playboy" name or brand to be seen or heard by any member of the public at any time during any broadcast, transmission or exhibition of that Premium Movie, any such excerpt or any such promotional or advertising material or announcement; (e) if the Company shall accept any offer made by the Licensor pursuant to this Clause, that Premium Movie shall automatically become a Selected Programme for the purposes of this Agreement and be licensed to the Company as a Programme but on the terms of the offer accepted by the Company. 3.3 The Licensor shall not supply any Programme or Third Party Programme hereunder which would reasonably be designated regarded or treated as what is popularly known as "XXX Rated" in the United States of America. Programmes and Third Party Programmes supplied hereunder may include material rated "NC-17" by the Motion Picture Association of America (CARA) if the sexual content of such material is substantially similar to programming produced by the Licensor or any Affiliate of the Licensor itself unless such Programmes and/or Third Party Programmes will or might in the opinion of the Company be deemed obscene for the purposes of the Obscene Publications Act 1959 (or any modification re-enactment or replacement thereof) or in breach of any regulatory rules guidelines or codes applicable to the Service. In the event that the Company deems any Programme or Third Party Programme obscene or in breach of any applicable rule, guideline or code as aforesaid, the Company shall notify the Licensor to that effect and give the Licensor, if so requested, an opportunity to present arguments to the contrary to the board of directors of the Company. 20 3.4 The Company undertakes that, unless it is permitted to do so by virtue of any provision of this Agreement, it shall not any time during the Term transmit in the Service or otherwise for reception in the Territory any programme which is not a Programme or a Third Party Programme. 4. Undertakings by the Licensor The Licensor hereby agrees and undertakes with the Company that: 4.1 Each and every Playboy Programme will throughout the Term, and each and every Acquired Programme will throughout the Playboy Licence Period in respect of that Acquired Programme, be available on a sole and exclusive basis for delivery to and transmission by the Company within the Territory pursuant to this Agreement. Accordingly, the Licensor shall not and shall procure that each of its Affiliates shall not exercise, and shall not and shall procure that each of its Affiliates shall not directly or indirectly authorise license or permit any third party to exercise, the Non-Standard Television Rights or the Standard Television Rights (or any of them) in or to any Programme or Third Party Programme in any country within the Territory at any time during the Term. 4.2 If the Licensor or any Affiliate of the Licensor is at any time during the Term proposing or negotiating to acquire (whether by way of licence, by operation of law or otherwise) the Non-Standard Television Rights or the Standard Television Rights within the Licensor's Territory in any television programme which is a Co-Production or which would, if the Non- Standard Television Rights therein were so acquired, be an Acquired Programme, then the Licensor shall, or shall procure that such Affiliate shall, use its best endeavours to acquire in addition (whether by way of a licence, by operation of law or otherwise) the Non-Standard Television Rights in that television programme within each of the countries of the Territory. 4.3 In each Year: (a) the total number of Programme Hours of Programmes delivered to the Company in that Year for first transmission in the Service shall not be less than the Minimum Number of Hours in respect of that Year; and (b) the total number of Programme Hours of Playboy Programmes and of Playboy Acquired Programmes delivered to the Company in that Year for first transmission in the Service 21 shall not be less than eighty (80) per cent of the Minimum Number of Hours in that Year; and (c) the total number of Programme Hours of Playboy Acquired Programmes delivered to the Company for first transmission in the Service shall not exceed sixteen (16) per cent of the Minimum Number of Hours in that Year. 4.4 In each Year none of the Selected Programmes or so-called "vignettes" delivered to the Company for first transmission in the Service in that Year shall have been delivered to the Company pursuant to this Agreement in any previous Year and neither shall any of such Selected Programmes or so- called "vignettes" have been broadcast, transmitted or exhibited in any country within the Territory at any time prior to their delivery hereunder by means of any form of Standard Television or Non-Standard Television. 4.5 The standard, quality, freshness and commercial appeal of the Selected Programmes, so-called "vignettes", promotional material and other programming delivered to the Company pursuant to this Agreement for first transmission in the Service shall not be inferior to the overall standard, quality, freshness and commercial appeal of the programming included during the period of twelve (12) months immediately preceding the first day of the first Licence Year in the television service which is known as "Playboy TV" and is provided within the Licensor's Territory by the Licensor and/or an Affiliate of the Licensor ("the Playboy Service") or (if higher) to the overall standard, quality, freshness and commercial appeal of the programming from time to time included in the Playboy Service during the Term. 4.6 No Acquired Programme, Third Party Programme or so-called "vignette" shall be delivered to the Company by or on behalf of the Licensor for transmission in the Service, or scheduled for transmission in the Service by any Scheduler (other than a Scheduler appointed under Clause 8.4, proviso (c) or (d) to Clause 8.5, Clause 8.11.4 or Clause 10.4), unless (a) the unexpired portion of the Playboy Licence Period in respect of that Acquired Programme, Third Party Programme or so-called "vignette" is at least twenty-four (24) months commencing upon the first day of the calendar month in which the first transmission by the Company of that Acquired Programme, Third Party Programme or so-called "vignette" in the Service takes place and (b) the Licensor has acquired the right, and the Company is therefore entitled, to transmit that Acquired Programme, Third Party Programme or so-called "vignette" in the Service on not less than twenty- four (24) occasions. 22 4.7 Without prejudice to and in addition to its obligations under Clause 4.3, the Licensor shall: (a) deliver to the Company for transmission in the Service on a timely basis such quantity and duration of "vignettes", promotional material and other programming as may be necessary to fill each hour of transmission time on the Service during which a Programme, or a Third Party Programme acquired by the Licensor, is transmitted; and (b) ensure that the total running time of the "vignettes" delivered to the Company for first transmission in the Service in each Year shall not in any event be less than ten (10) per cent of the Minimum Number of Hours in respect of that Year. 4.8 In the event that the Company requests the Licensor in writing to increase the maximum number of transmissions of so-called "vignettes" which it is entitled to make pursuant to this Agreement above twenty-four (24), the Licensor shall be deemed to have agreed to such request unless the Licensor notifies the Company within seven (7) days after the date of such request that it is unable to do so without committing a breach of any agreement between the Licensor and any third party (other than an Affiliate of the Licensor). 5. Delivery Material 5.1 Following completion of the Transmission Schedule by the Scheduler for any Quarter in any Year, the Licensor shall deliver to the Company, at such place as the Company may from time to time direct by notice in writing, the Delivery Material in respect of each Selected Programme included in that Transmission Schedule (or licensed to the Company by virtue of the acceptance of any offer made pursuant to Clause 3.2 (as the case may be)) no later than two months before the commencement of that Quarter. In the event that the Licensor or any Affiliate of the Licensor has in its custody, control or possession a dubbed or sub-titled version of any Selected Programme in any of the Service Languages, the Licensor shall deliver that dubbed or sub-titled version to the Company as part of the Delivery Material in respect of that Selected Programme. The costs of delivering Delivery Material to the Company pursuant to this Clause 5.1 shall be borne as follows: (a) the cost of the blank tapes included in the Delivery Material and the cost of transporting the Delivery Material shall be borne by the Company; and 23 (b) all other such costs (including but not limited to duplication costs and labour costs) shall be borne by the Licensor. 5.2 It shall be the responsibility of the Company to examine any Delivery Material made available by the Licensor for technical suitability and to notify the Licensor in writing within 30 (thirty) days of receipt of the Delivery Material of any defect that prevents use. The Licensor shall use all reasonable endeavours at its expense to replace the relevant elements of the Delivery Material within 21 (twenty-one) days of receipt of such notice but, if no such replacement is possible within such twenty-one day period or the Company is able to demonstrate that such replacement is also defective to such a degree as to prevent use, the Licensor shall make available to the Company (a) substitute Programme(s) or Third Party Programmes(s) of comparable nature, quality and duration which shall have been approved by the Company and upon (so far as is reasonably practicable) all the same terms as applied to the Programme or Third Party Programme in respect of which the Delivery Material is defective. The Delivery Material (which term includes any such replacement material as is referred to above) shall be deemed to have been accepted by the Company on the expiry of the said period of thirty (30) days unless the Licensor is so notified. 5.3 If after the Company has accepted, or is deemed pursuant to Clause 5.2 to have accepted, any Delivery Material in relation to a Selected Programme the Company requests further Delivery Material to replace material which has been erased or for any other reason is not usable for the purposes of this Agreement, the Licensor shall at the Company's cost arrange for such further Delivery Material to be delivered to the Company. 5.4 The supply to the Company of Delivery Material shall not imply a change of ownership in the Delivery Material or the Selected Programmes contained therein. The Company shall take reasonable precautions consistent with those taken for the Company's own materials to safeguard the Delivery Material against loss or damage. 5.5 The technical quality of Delivery Material delivered to the Company hereunder shall not be inferior to the technical quality of the transmission tapes or other material used for the transmission of programming in the Playboy Service (as defined in Clause 4.5) PROVIDED THAT the Licensor shall use its reasonable efforts to ensure that the technical quality of such Delivery Material also meets the customary standards of technical quality from time to time prevailing in the United Kingdom television industry. 24 6. Editing, Publicity, Sub-titling and Dubbing 6.1 Subject to the provisions of Clauses 6.2, 6.3 and 6.6, the Company shall not without the prior written consent of the Licensor edit, abridge or in any way alter or rearrange any Selected Programme and shall (save in the event of an unexpected lack of time) broadcast each Selected Programme in its entirety. 6.2 The Company may edit Selected Programmes for the purposes of: 6.2.1 meeting programme timing requirements provided that: (a) in carrying out such editing the Company shall not impair the technical quality, meaning or integrity of any Selected Programme; and (b) the Company shall not delete or fail to transmit any credits, titles or copyright notices appearing in any Selected Programme unless such failure is caused by unexpected lack of time; OR 6.2.2 complying with any legislation or any rules regulations guidelines or codes of any competent regulatory authority of any country within the Territory having jurisdiction over the Service. 6.3 Subject to the provisions of Clause 6.8, the Company may at its own expense interpolate advertisements in the Selected Programmes but shall only do so during breaks in the Selected Programmes created or designated by the Licensor provided that such breaks comply with all rules and regulations relating to advertising which are applicable within the Territory. If the Licensor fails to create or designate breaks in any Selected Programme which comply with such rules and regulations, the Company shall be free to interpolate advertisements in that Selected Programme during breaks created by it but shall use all reasonable endeavours not to interrupt any Selected Programme at a place or in a manner which causes its technical quality, meaning or integrity to be impaired. The Licensor shall not supply to the Company any Selected Programme (or any Delivery Material in relation thereto) in which any advertisement or promotional material (other than promotional material promoting the transmission of Programmes or Third Party Programmes in the Service) is incorporated and, without prejudice to any other right or remedy of the Company, the 25 Company shall be entitled to delete from any Selected Programme any advertisement or promotional material which is incorporated in that Programme or Third Party Programme on delivery of the relevant Delivery Material. 6.4 The Company may: (a) broadcast and authorise third parties to broadcast sequences or excerpts from any Selected Programme for advertising and publicity purposes provided that no sequence so broadcast shall exceed two (2) minutes in running time and no excerpts so broadcast shall exceed three (3) minutes in running time; and (b) exhibit excerpts from any Selected Programme to potential investors in the Company, advertisers and similar bodies. The Licensor shall on a timely basis following any request by the Company make available excerpts selected by the Company and supply materials to the Company for this purpose. 6.5 The Company may, and may authorise third parties to, publicise its transmission of each Selected Programme in any medium or media (including but not limited to newspaper, magazine, billboard, direct mail, television and radio advertising and publicity) and may for that purpose use and authorize the use of the title of the Selected Programme, the name and likeness (in the form of photographs which shall be supplied for that purpose by the Licensor) of each contributor to the Selected Programme (but not so as to endorse the use of any goods or services) and all other publicity material comprised in the Delivery Material. 6.6 The Licensor shall incorporate at appropriate intervals (which shall be determined by the Licensor having due regard to the need to identify and promote the Service and to the views and requests of the Company) in the Delivery Material relating to Selected Programmes supplied by the Licensor under this Agreement the logo used by the Company in connection with the Service (which logo shall be in the form approved by the Licensor prior to the Launch Date, such approval not to be unreasonably withheld) but, if the Licensor shall fail to do so, the Company shall, without prejudice to any of its other rights and remedies, be entitled to add such logo to Selected Programmes. 6.7 Unless the Licensor shall have notified the Company prior to or concurrently with delivery of the Delivery Material in respect of any Selected Programme that the Licensor does not have the right to dub and/or sub-title that Selected Programme, the Company shall also be entitled at its own expense 26 to, and to authorise any third party to, translate, dub and/or sub-title the soundtrack of any Selected Programme into any or all of the Service Languages and to produce a version or versions of any Selected Programme in any of the Service Languages provided that the Company shall consult in good faith with the Licensor with a view to ensuring that the meaning or integrity of any Selected Programme is not impaired by any such dubbing or sub-titling. Ownership of all dubbed and/or sub-titled versions and foreign language tracks created by or on behalf of the Company pursuant to this Clause shall remain vested in the Company during the Term and thereafter shall be transferred to the Licensor without payment. The Company shall also make available to the Licensor at a price equal to 50% of the cost of dubbing or sub-titling access to and use of such versions and tracks during the Term. 6.8 Whenever the Company includes advertisements in the Service it shall: (a) use all reasonable endeavours not to accept advertisements for products and services which in any material way detract from the image established by the overall editorial content, graphic appeal and production qualities of the Playboy Programmes included in the Service ("the Playboy Image"); (b) not accept advertisements for: (i) any of the categories of products and services listed in Schedule 7; or (ii) magazines which compete with any edition of the "Playboy" magazine; or (iii) related publications which are published or distributed in printed form by any competitor of the Licensor or any Affiliate of the Licensor (i.e. any person who is engaged in the publication and distribution of any magazine which competes with any edition of the "Playboy" magazine); or (iv) any audio-visual products which compete with those produced, sold or distributed by the Licensor or any Affiliate of the Licensor within the Territory; (c) if the Licensor notifies the Company that any advertisement transmitted by the Company in the Service and specified by the Licensor in such notice does detract in a material way from the Playboy Image, only refuse to cease transmitting that advertisement in the Service 27 on reasonable grounds (having regard inter alia to its contractual obligations to third parties in relation to that advertisement provided that the Company shall, if it would otherwise be obliged to cease transmitting that advertisement, use reasonable endeavours to obtain a release from such contractual obligations). 6.9 The Company hereby grants to the Licensor without charge the right throughout the Term to use Playboy Airtime for the purpose of advertising "Playboy" publications, and to authorize any Permitted Advertiser to use Playboy Airtime for the purpose of advertising any of its products and services which such Permitted Advertiser is concurrently advertising or committed to advertise in any edition of the "Playboy" magazine PROVIDED THAT the Licensor shall not itself use or authorize any Affiliate of the Licensor to use Playboy Airtime for the purpose of advertising any product (including but not limited to any audio or audio-visual product) or any service other than editions of the "Playboy" magazine (whether published by or under licence from the Licensor or any Affiliate of the Licensor) and related publications which are published or distributed in printed form. For the purposes of this Clause: (a) a "Permitted Advertiser" shall mean any person who has during the twelve (12) months immediately preceding any use of Playboy Airtime by that person purchased or agreed to purchase advertising space in any edition of the "Playboy" magazine for the first time; and (c) "Playboy Airtime" shall mean in respect of each hour of transmission time on the Service a period of thirty (30) seconds during that hour which is reserved for the transmission of advertisements. All advertisements which are to be transmitted during Playboy Airtime pursuant to this Clause shall be produced and delivered to the Company at the sole cost and expense of the Licensor. All such advertisements shall be subject to the terms and conditions (other than the Company's ratecard and discount policy) upon which the Company is prepared to accept advertisements as stated from time to time by the Company within its printed standard terms and conditions. 7. Payment 7.1 In consideration of the rights granted to the Company under this Agreement and under the Trademark Agreement, the Company shall pay to the Licensor: 28 (a) in each Year the Basic Licence Fee; (b) in respect of each Year commencing after the Year in which the Return of Investment Date falls, an amount equal to the amount by which the lesser of: (i) the Requisite Percentage of Available Net Profits in that Year; and (ii) the Requisite Percentage of Net Revenues in that Year exceeds the Basic Licence Fee payable in respect of that Year; and (c) the Bonus Licence Fee (if any) upon the terms and subject to the conditions detailed in Clause 7.2. 7.2 In the event that the Return of Investment Date falls before the sixth anniversary of the Launch Date, then the Bonus Licence Fee shall be payable to the Licensor PROVIDED THAT: (a) if at any time after the Return of Investment Date and prior to payment of the Bonus Licence Fee in full any of the Company's shareholders (by whatever means and for whatever reason) provide(s) additional funding to the Company, payment of the balance of the Bonus Licence Fee shall be deferred until after repayment of all such funding (plus interest thereon) has (in the manner described and calculated in the definition of "Return of Investment Date" in Clause 1) been received by the relevant shareholder(s) in the Company; and (b) the Bonus Licence Fee shall only be payable to the Licensor out of Available Cash Flow and, to the extent that the Company does not as at the end of any Quarter have Available Cash Flow out of which to pay the Bonus Licence Fee, the Company shall have no liability to pay the Bonus Licence Fee on the final day of that Quarter pursuant to Clause 7.4(b) but the Bonus Licence Fee (or any unpaid balance thereof) shall be payable pursuant to Clause 7.4(b) as and when there is Available Cash Flow at the end of any subsequent Quarter. 7.3 The Basic Licence Fee in respect of each Year shall be payable as per the attached schedule marked Schedule 8. 29 Not later than thirty (30) days prior to the first day of each Licence Year the Company shall supply to the Licensor a signed purchase order committing in that Licence Year to pay to the Licensor the amount of the Basic Licence Fee applicable to that Licence Year in consideration for and subject to the Licensor delivering to the Company for that Licence Year the portion of the Minimum Number of Hours of Programmes which is applicable to that Licence Year for first transmission in the Service. That purchase order will also contain a list of the Programmes to be delivered for first transmission in that Licence Year if the Licensor has previously supplied that list to the Company. The obligations of the Company under this Paragraph of Clause 7.3 and the terms of any purchase order delivered by the Company hereunder shall be read and construed subject to all of the other provisions of this Agreement which shall, in the event of any conflict, prevail. Without prejudice to the generality of the foregoing, none of the provisions contained in this Clause 7.3 shall affect the calculation of the amount of the Programming Premium payable in respect of any Year or the Bonus Licence Fee (if any). For the purposes of this Agreement, a "Licence Year" shall mean any consecutive period of sixteen (16) months during the Term commencing upon June 15, 1995 and June 15 in each subsequent calendar year. 7.4 (a) In the event that a Programming Premium is payable to the Licensor in respect of any Year commencing after the Year in which the Return of Investment Date falls, the Company shall pay such Programming Premium to the Licensor within thirty (30) days after the date on which the amount of the Available Net Profits and the Net Revenues in that Year have been determined by the auditors of the Company and included in accounting statements approved by the directors of the Company. (b) On the first day of each Quarter in each Year commencing after the Return of Investment Date but in no event before the end of the fifth Year, the Company shall, until it has made payment of the Bonus Licence Fee in full, apply 100% of its Available Cash Flow in payment of the Bonus Licence Fee to the Licensor. (c) Only after 100% of the Bonus Licence Fee has been paid by the Company may the Company being paying dividends to any shareholder in the Company. 7.5 The license fees payable by the Company under this Clause 7 and under Clause 8 are exclusive of any and all amounts of Value Added Tax payable thereon, which amounts of Value Added Tax shall by paid by the Company provided that an appropriate invoice shall have been rendered to the Company by the Licensor. If the Company is compelled by law or required by any present or future 30 law, regulation, treaty or official directive to make any deduction or withholding from any amount of such licence fees, the Company shall be entitled to do so and shall not be required to pay any additional amount or amounts to the Licensor as a result of, or in order to compensate the Licensor for, any such deduction or withholding. 7.6 The Available Cash Flow of the Company as at the end of any Quarter shall for the purposes of sub-clause 7.2(b) be determined by the directors of the Company on a timely basis and a copy of such determination shall be provided to the Licensor. If the Licensor disagrees with any such determination, the Licensor may within 30 days after receipt of a copy thereof notify the Company to that effect whereupon the Company shall promptly refer the matter to its auditors (acting as experts and not as arbitrators) for their determination which shall be final and binding upon both parties. The costs of any such referral to the auditors shall be borne by the Licensor unless the auditors find that the determination made by the directors of the Company was materially incorrect in which case such costs shall be borne by the Company. 7.7 If the Company elects to transmit a Programme during a further Transmission Period pursuant to Clause 2.2 and provided that the Company does not subsequently decline to accept a further Transmission Period of that Programme pursuant to the proviso to Clause 2.2: (a) the licence fee payable by the Company in respect of that further Transmission Period shall be: (i) such sum as may be agreed in writing between the parties within a period of thirty (30) days after the date of the notice given by the Company pursuant to Clause 2.2 in respect of that Programme; or (ii) in the absence of such agreement within that 30 day period, a sum equal to forty (40) per cent of the Initial Licence Fee and for this purpose "the Initial Licence Fee" shall be the lower of US$13,158 per Programme Hour of that Programme and the amount paid to the third party licensor of that Programme (in the case of an Acquired Programme) in consideration for the right to transmit that Programme in the Service within the Territory. Any licence fee payable pursuant to this Clause shall be paid in six (6) equal instalments within thirty (30) days after the final day of every fourth month during the first two (2) years of the further Transmission Period; 31 (b) the Basic Licence Fee in respect of each Year shall be increased by the aggregate of the licence fees which the Company is liable to pay and reimburse to the Licensor in that Year pursuant to this Clause, and the references to the Basic Licence Fee in sub-clause 7.l(b) and in the definition of "the Bonus Amount" in Clause 1 shall, for the purpose of calculating any Programming Premium payable to the Licensor in respect of any Year and the Bonus Licence Fee (if any), mean the Basic Licence Fee as increased pursuant to this sub-clause. 7.8 In relation to each payment which is due to the Licensor pursuant to this Agreement, the Licensor shall deliver to the Company an invoice showing the amount of such payment and the Company shall make each such payment which is so invoiced in accordance with the relevant provision(s) of this Agreement. 8. The Scheduler and Scheduling 8.1.1 During the first four (4) Years ("the Initial Period") the Licensor shall, after consulting with the Company in good faith regarding its proposed choice and taking into account any comments made by the Company in relation thereto, appoint an individual from the Licensor's staff based in Los Angeles to be the scheduler of the Service. If the Scheduler appointed under this Clause 8.1 is an employee of the Licensor, the Licensor shall be free to terminate the employment of that Scheduler based upon the Licensor's normal business practices whereupon the Licensor shall forthwith notify the Company and the provisions of sub-clause 8.1.2 shall apply to the appointment of a replacement Scheduler. In addition the Company may by giving one month's notice in writing to the Licensor expiring at any time after the first anniversary of the first day of the first Licence Year and before the final day of the Initial Period require the Licensor to replace any Scheduler appointed under this Clause 8.1 whereupon the provisions of sub-clause 8.1.2 or Clause 8.4 (as the case may be) shall apply to the appointment of a replacement Scheduler. The Company may not however exercise its right under the immediately preceding sentence of this sub-clause on more than one occasion during any twelve (12) month period during the Initial Period. 8.1.2 If at any time during the Initial Period the Licensor terminates the employment of any Scheduler appointed by it under this Clause 8.1 or the Company exercises its right under sub-clause 8.1.1 to replace any such Scheduler, the Licensor shall, after consulting with the Company in good faith regarding its proposed choice and taking into account any comments made by the Company in relation thereto, on a timely basis appoint one of its employees to be the scheduler of the Service as 32 a replacement for the individual whose employment has been terminated by it or who is to be replaced by virtue of the exercise by the Company of its right under sub-clause 8.1.1. 8.2 The duties of the Scheduler shall include: 8.2.1 selecting the Programmes and Third Party Programmes for transmission in the Service and preparing a quarterly Transmission Schedule for the same in compliance with the Shareholders Agreement, the Business Plan and this Agreement (including but not limited to Clause 4 as well as the Minimum Number of Hours and Programme Specification). The Scheduler will supply to the Company and to the Licensor a copy of each quarterly Transmission Schedule not later than 75 days prior to the first day of the relevant Quarter. The Scheduler will only procure the acquisition of and schedule Third Party Programmes in accordance with the terms of this Agreement; 8.2.2 ensuring that the Selected Programmes and all interstitial material referred to in sub-clause 8.2.5 below are assembled in accordance with the Transmission Schedule; 8.2.3 ensuring that no Selected Programme is scheduled for transmission in the Service on more than fifteen (15) occasions during any Year (which number shall be reduced or increased pro rata if the Minimum Number of Hours is increased above or reduced below 114 pursuant to Clause 8.6, 8.7, 8.8, 8.11 or 10.4); 8.2.4 supervising the design of the on-screen appearance of the Service; 8.2.5 at the cost of the Licensor procuring (a) the supply of or commissioning where necessary all on-screen promotional and interstitial material which is required in order to promote both the Selected Programmes and the Service and in a form which is suitable for transmission within the Territory and (b) the insertion of the Company's logo in each Selected Programme. 8.3.1 Each Scheduler appointed by the Licensor under Clause 8.1 during the Initial Period will be based in Los Angeles but the Licensor shall procure that he or she will be available to the Company at the Company's offices in the United Kingdom as and when reasonably required by the Company for the proper discharge of the Scheduler's functions hereunder. The Licensor shall also procure that each 33 such Scheduler shall when not in the United Kingdom be generally readily available for consultation with the Company and its staff. 8.3.2 All costs (including, without limitation, all remuneration, benefits and bonuses) in connection with the engagement and provision of the services of the Scheduler and all related support personnel and services and with the performance of the Licensor's obligations under Clauses 8.1, 8.2 and 8.3 will be borne solely and exclusively by the Licensor (save only in the circumstances set out in Clause 8.4, in sub-clause 8.5.3 and in provisos (c) and (d) to Clause 8.5 and provided that all reasonable and vouchered travelling and accommodation costs incurred by the Scheduler in travelling to and whilst visiting the United Kingdom or elsewhere within the Territory at the request of the Company shall be borne by the Company). 8.3.3 The services of each Scheduler appointed under Clause 8.1, Clause 8.4 or Clause 8.5 shall (unless the Scheduler is engaged by the Company as an employee of the Company pursuant to Clause 8.4 or proviso (c) or (d) to Clause 8.5) be made available by the Licensor to perform inter alia the duties set out in Clause 8.2 on a first call basis in connection with the Service. The Licensor shall make available the services of each such Scheduler, together with all support personnel and office services and facilities reasonably required by that Scheduler, for such periods, at such times during the Licensor's normal working hours and in such a manner as may be necessary in order to enable that Scheduler to discharge his or her obligations effectively and efficiently hereunder. The Licensor shall (unless the Scheduler is engaged by the Company as an employee of the Company pursuant to Clause 8.4 or proviso (c) or (d) to Clause 8.5) procure that the Scheduler shall at all times perform his or her duties in accordance with the provisions of this Agreement and the Shareholders' Agreement. 8.4 If the Company wishes to replace any Scheduler appointed under Clause 8.1 with effect from any date after the final day of the Initial Period, it may do so upon giving not less than one month's written notice to the Licensor expiring at any time after the final day of the Initial Period. If the Company gives such a notice, the Company shall nominate in writing two or more individuals to act as Scheduler and, in respect of each individual so nominated by it, the Company shall specify the parameters of the financial terms on which it is proposing to engage that individual. Within fourteen (14) days thereafter the Licensor must choose one of the persons nominated and the Company will then engage at its own expense in the capacity of Scheduler hereunder either the individual so chosen by the Licensor or, if within that 14 day period the Licensor fails to choose any of the individuals 34 nominated, the individual chosen by the Company. The provisions of Clause 8.5 shall apply to the replacement of any Scheduler appointed under this Clause 8.4. 8.5 If at any time after the first anniversary of the date upon which the appointment of the Scheduler appointed under Clause 8.4 took effect either party wishes to replace the Scheduler appointed under Clause 8.4 or any successor thereof appointed under this Clause 8.5, it may (subject always to the provisions of sub-clauses 8.11.4 and 10.4.4) do so upon giving three months' written notice (a "Scheduler Replacement Notice") to the other party in which event: 8.5.1 each party shall use its best endeavours to reach agreement with the other party upon the appointment of a replacement Scheduler and, if within that 3 month notice period such agreement is reached, the agreed individual shall be appointed as the Scheduler; 8.5.2 if within that 3 month notice period the parties shall have been unable to reach agreement, each party shall not later than the final day of that 3 month period nominate in writing two individuals to act as Scheduler, the name of each individual so nominated shall be placed in a hat and the Chief Executive Officer of the Company shall draw one name out of that hat. The individual whose name is drawn out of the hat shall be appointed as the Scheduler; 8.5.3 if any Scheduler appointed under sub-clause 8.5.2: (a) was nominated by the Company; and (b) is not an employee of the Licensor that Scheduler shall be engaged by the Company at its expense; 8.5.4 if at any time either party wishes to replace an individual appointed under sub-clause 8.5.1 or 8.5.2, it shall follow the procedure hereinbefore set out in this Clause 8.5 PROVIDED ALWAYS THAT: (a) neither party may exercise the right to replace a Scheduler appointed under this Clause 8.5 at any time prior to the first anniversary of the date upon which the appointment of that Scheduler took effect; 35 (b) the Licensor may not exercise the right to replace a Scheduler appointed under Clause 8.4 or under this Clause 8.5 in the circumstances described in sub-clause 8.11.4 or 10.4.4 if: (i) at any time prior to the date of any Scheduler Replacement Notice given under this Clause 8.5, the Company has given a notice to the Licensor under Clause 8.6 or Clause 8.11; or (ii) as at the date of any Scheduler Replacement Notice given under this Clause 8.5, the Licensor holds less than fifteen (15) per cent in nominal value of the total issued ordinary shares in the capital of the Company and, if either paragraph (i) or (ii) above shall apply, the relevant Scheduler Replacement Notice given by the Licensor under this Clause 8.5 shall have no force or effect; and (c) if either paragraph (i) or (ii) of proviso (b) above shall apply as at the date of any Scheduler Replacement Notice given by the Company under this Clause 8.5 and if within the three month period specified in that notice the parties shall have been unable to reach agreement upon a replacement Scheduler, then the Company may nominate in writing two or more individuals to act as Scheduler and, in respect of each individual so nominated by it, the Company shall specify the parameters of the financial terms on which it is proposing to engage that individual whereupon the provisions of sub-clauses 8.5.1 to 8.5.3 shall not apply to the appointment of the replacement Scheduler. Within fourteen (14) days thereafter the Licensor must choose one of the persons nominated and the Company will then engage at its own expense in the capacity of Scheduler hereunder either the individual so chosen by the Licensor or, if within that 14 day period the Licensor fails to choose any of the individuals nominated, the individual chosen by the Company; and (d) if as at the date of any Scheduler Replacement Notice given under this Clause 8.5, the Licensor holds less than ten (10) per cent in nominal value of the total issued ordinary shares in the capital of the Company, the Company shall be freely entitled to replace the Scheduler and engage at its expense a replacement Scheduler of its choice and sub-clauses 8.5.1 to 8.5.3 and proviso (c) to this Clause 8.5 shall not apply to the appointment of any such replacement Scheduler by the Company. 36 8.6 If the Net Revenue per Household received by the Company during the fourth Year is less than One Pound and thirty-seven pence ((Pounds)1.37) then at any time prior to the first day of the sixth Year the Company may, or if the Company becomes entitled to (but does not) terminate this Agreement pursuant to sub-clause 10.2(b), then at any time thereafter the Company may, give notice to the Licensor (with a copy to the Scheduler) stating that the Minimum Number of Hours is with effect from a date specified in such notice which shall not fall less than ninety (9O) days after the date of such notice ("the Applicable Date") to be reduced and specifying such reduced Minimum Number of Hours in respect of each subsequent Year. If the Company gives such a notice, then the following provisions shall apply: (a) the aggregate Programme Duration of Programmes delivered to the Company by the Licensor for first transmission in the Service during each Year commencing after the Applicable Date shall comprise not less than fifty-one (51) per cent of the aggregate Programme Duration of all Programmes and all Third Party Programmes transmitted in the Service for the first time during that Year; (b) all Third Party Programmes broadcast by the Company for reception within the Territory following the Applicable Date shall fall within the Programme Specification; (c) following the Applicable Date Third Party Programmes shall (subject to the provisions of sub-clause (i) of this Clause 8.6) be acquired by the Licensor acting upon instruction from the Scheduler or the Company and as the agent of the Company on terms which shall first have been approved by the Company in writing and the Company shall within 21 days of receipt of the Licensor's invoice with respect thereto reimburse to the Licensor all licence fees which shall actually have been paid by the Licensor to the relevant third party with the prior written approval of the Company in accordance with this sub-clause and in consideration for the right to transmit the relevant Third Party Programme(s) in the Service within the Territory; (d) the Basic Licence Fee payable by the Company in respect of each Year commencing after the Year in which the Applicable Date falls shall be reduced pro rata to an amount calculated by: (i) multiplying the reduced Minimum Number of Hours specified in such notice by the Basic Licence Fee which would have been payable by the Company in respect 37 of the relevant Year if no notice had been given by the Company pursuant to this Clause; and (ii) dividing the product of that multiplication by the number which would have represented the Minimum Number of Hours in respect of the Year in which the Applicable Date falls if no notice had been given by the Company pursuant to this Clause; (e) the Basic Licence Fee payable by the Company in respect of the Year in which the Applicable Date falls shall be the aggregate of the following amounts: (i) an amount ("the First Amount") calculated by (A) dividing by 365 the amount of the Basic Licence Fee which would have been payable by the Company in respect of that Year if no notice had been given by the Company pursuant to this Clause and (B) multiplying the product of that division by the total number of days during that Year prior to (but excluding) the Applicable Date; and (ii) an amount calculated by (A) subtracting the First Amount from the amount of the Basic Licence Fee which would have been payable by the Company in respect of that Year if no notice had been given by the Company pursuant to this Clause, (B) dividing the figure resulting from that subtraction by the number which would have represented the Minimum Number of Hours in respect of that Year if no notice had been given by the Company pursuant to this Clause and (C) multiplying the product of that division by the reduced Minimum Number of Hours specified in such notice in respect of each subsequent Year; (f) each Requisite Percentage shall with effect from the Applicable Date be reduced pro rata to a percentage calculated in the manner detailed in paragraphs (i) and (ii) of sub-clause (d) of this Clause save that for the purposes of each such calculation the reference in paragraph (i) of sub-clause (d) to "the Basic Licence Fee which would have been payable by the Company" shall be read as a reference to the Requisite Percentage of Available Net Profits or Net Revenues (as the case may be) which applied for the purpose of calculating the Programming Premium (if any) payable to the Licensor in respect of the immediately preceding Year; 38 (g) the Minimum Number of Hours in respect of the Year in which the Applicable Date falls shall be the aggregate of the following numbers: (i) a number calculated by (A) dividing by 365 the number which would have represented the Minimum Number of Hours in respect of that Year if no notice had been given by the Company pursuant to this Clause and (B) multiplying the product of that division by the total number of days during that Year prior to (but excluding) the Applicable Date; and (ii) a number calculated by (A) subtracting the total number of days during that Year following (and including) the Applicable Date from 365, (B) dividing the figure resulting from that subtraction by 365 and (C) multiplying the product of that division by the reduced Minimum Number of Hours specified in such notice in respect of each subsequent Year; (h) the maximum percentage (i.e. 36%) of Programme Hours of Acquired Programmes and the maximum percentage of Playboy Acquired Programmes (i.e. 16%) which in any Year commencing after the Applicable Date the Licensor is entitled by virtue of sub-clauses 4.3(b) and 4.3(c) to deliver to the Company for first transmission in the Service shall each be reduced pro rata to a percentage calculated in the manner detailed in paragraphs (i) and (ii) of sub-clause (d) of this Clause save that for the purposes of this calculation the reference in paragraph (i) of sub-clause (d) to "the Basic Licence Fee which would have been payable by the Company" shall be read as a reference to the maximum percentage of Programme Hours of Acquired Programmes or (as the case may be) the maximum percentage of Playboy Acquired Programmes which the Licensor was entitled to deliver to the Company in the immediately preceding Year pursuant to sub-clause 4.3(b) or 4.3(c) for first transmission in the Service; (i) in the event that the Company gives a notice pursuant to this Clause 8.6 after the Company has become entitled (but has elected not) to terminate this Agreement pursuant to sub-clause 10.2(b), then following the Applicable Date: (i) the provisions of sub-clause (c) of this Clause 8.6 shall cease to apply, the Company shall be freely entitled at the Company's expense to licence Third Party Programmes from third parties and to schedule and transmit such Third Party 39 Programmes in the Service and the Company shall assume sole responsibility for such licensing and scheduling PROVIDED THAT all Third Party Programmes so transmitted in the Service shall fall within the Programme Specification and the Company shall comply with the provisions of sub-clause (a) of this Clause 8.6 (as amended by paragraph (iii) below); (ii) the Company shall be freely entitled to replace the Scheduler and to engage at its expense a replacement Scheduler of its choice and Clauses 8.1 and 8.5 shall not apply to the appointment of any such replacement Scheduler; (iii) the reference to "fifty-one (51) per cent" in sub-clause (a) of this Clause 8.6 shall be read as a reference to "fifty-one (51) per cent or such lesser percentage as the Licensor is able to deliver to the Company for first transmission in the Service in compliance with the provisions of Clause 4"; and (iv) if in any Year commencing after the Applicable Date the aggregate Programme Duration of Programmes transmitted by the Company in the Service during that Year shall comprise less than twenty-five (25) per cent of the aggregate Programme Duration of all Programmes and all Third Party Programmes transmitted in the Service during that Year, then the Licensor may within ninety (90) days after the final day of that Year give notice to the Company requiring the Company to remove the word "Playboy" from both the name of the Service and the name of the Company and the Company shall promptly comply with any such notice. 8.7 The Company shall be entitled at any time and from time to time after the first anniversary of the first day of the first Licence Year: (a) to notify the Licensor that in its reasonable opinion (whether based upon the results of then current market research, feedback from advertisers or potential advertisers, a failure to achieve the objectives of any Business Plan and/or any other valid reason specified in writing by the Company) the then current Minimum Number of Hours is not sufficient and needs to be increased; and 40 (b) pursuant to that notice to require the Licensor to deliver to the Company with effect from a date specified in that notice which shall fall not less than ninety (90) days after the date of that notice and in each subsequent Year commencing after the effective date of that notice such higher Minimum Number of Hours as may be specified by the Company in that notice PROVIDED THAT the higher Minimum Number of Hours so specified by the Company shall not exceed two hundred and twenty-eight (228). 8.8 If the Company gives such a notice pursuant to Clause 8.7: (a) the Licensor shall deliver such higher Minimum Number of Hours to the Company in accordance with that notice provided that, if the Licensor is unable to deliver such higher Minimum Number of Hours to the Company without committing a breach of one of its other obligations hereunder, it shall be entitled to refuse to do so by giving notice in writing to the Company within 30 days after receipt of such notice from the Company; (b) if the Licensor does so refuse to deliver such higher Minimum Number of Hours to the Company, then the Company shall be free to include Third Party Programmes in the Service and, solely for the purpose of calculating (i) any Programming Premium payable to the Licensor in respect of the Year in which that notice took effect (the "Current Year") and in respect of any subsequent Year commencing after the Current Year, and (ii) the Bonus Licence Fee (if any), the Basic Licence Fee in respect of the Current Year and in respect of each such subsequent Year shall be deemed to have been increased by the aggregate of all licence fees paid by the Company during the Current Year or that subsequent Year (as the case may be) in consideration for the right to include Third Party Programmes in the Service; (c) if the Licensor does deliver such higher Minimum Number of Hours to the Company, then with effect from the date specified in that notice in accordance with sub-clause 8.7(b): (i) the Company shall pay to the Licensor an additional licence fee at the Hourly Rate (as defined in paragraph (iv) below) for each Programme Hour in respect of those additional Playboy Programmes which are delivered to the Company for first transmission in the Service in any Year (an "additional" Playboy Programme being any Playboy Programme over and above those Playboy Programmes which are so delivered to the Company in that Year and whose aggregate Programme 41 Duration is ninety-one (91) Programme Hours) and that additional licence fee will be added to and paid as part of the Basic Licence Fee for that Year in accordance with Clause 7.3; (ii) the Company shall within 21 days after receipt of the Licensor's invoice with respect thereto reimburse to the Licensor such licence fees as may actually have been paid to third parties in consideration for the right to transmit any Acquired Programme(s) in the Service within the Territory and with the prior written approval of the Company provided that the provisions of this paragraph (ii) shall only apply to those Acquired Programmes which are delivered to the Company for first transmission in the Service and whose aggregate Programme Duration exceeds twenty-three (23) Programme Hours in any Year; (iii) the Basic Licence Fee in respect of each Year shall be increased by the aggregate of the licence fees which the Company is liable to pay and reimburse to the Licensor in that Year pursuant to paragraphs (i) and (ii) of this sub-clause, and in respect of the Current Year (as defined in sub-clause (b) above) and each subsequent Year commencing after the Current Year the references to the Basic Licence Fee in sub- clause 7.l(b) and in the definition of "the Bonus Amount" in Clause 1 shall, for the purpose of calculating any Programming Premium payable to the Licensor in respect of the Current Year and any subsequent Year commencing after the Current Year and the Bonus Licence Fee (if any), mean the Basic Licence Fee as increased pursuant to this paragraph; (iv) for the purpose of paragraph (i) of this sub-clause, "the Hourly Rate" shall mean thirteen thousand one hundred and fifty-eight United States Dollars (US$13,158); (d) if the Licensor does deliver such higher Minimum Number of Hours to the Company, the Company shall be entitled at any time thereafter to give notice to the Licensor (with a copy to the Scheduler) stating that the Minimum Number of Hours is with effect from a date specified in such notice which shall fall not less than ninety (90) days after the date of such notice ("the Applicable Date") to be reduced and specifying such reduced Minimum Number of Hours in respect of each subsequent Year PROVIDED THAT the reduced Minimum Number of Hours so specified pursuant to this sub-clause shall not be less than one hundred 42 and fourteen (114). If the Company gives such a notice, the provisions of sub-clauses 8.6(a) to (h) shall apply as if such notice had been given under Clause 8.6 SAVE AND EXCEPT THAT sub-clauses 8.6(c) and (h) shall not apply. 8.9 The Company may at any time by notice in writing to the Licensor require the Licensor to acquire and schedule for transmission in the Service a motion picture as an Acquired Premium Movie. Any such notice shall specify the criteria which any motion picture so acquired by the Licensor would have to satisfy ("the Criteria") including but not limited to the maximum amount of the licence fee which the Company is prepared to pay in order to acquire such a motion picture. The following provisions shall apply to the acquisition of Acquired Premium Movies: (a) the maximum number of Acquired Premium Movies which the Licensor can be required to acquire in any Year and the maximum amount which the Company may expend on such acquisitions in any Year shall be as follows: (i) in the First Year: one Acquired Premium Movie at a cost not exceeding one hundred thousand pounds ((Pounds)100,000); (ii) in the second Year: such number of Acquired Premium Movies as the directors of the Company may determine at an aggregate cost not exceeding four hundred thousand pounds ((Pounds)400,000) less such amount as may have been expended by the Company in the First Year on the acquisition of an Acquired Premium Movie; (iii) in the third and each subsequent Year: such number of Acquired Premium Movies and at such cost and aggregate cost as the directors of the Company may determine; (b) if the Company gives such a notice, the Licensor shall within fourteen (14) days after the date of that notice nominate in writing the titles of not less than three (3) motion pictures which satisfy the Criteria and, if the Company selects one of those three (3) motion pictures (a "Selected Title"), the Licensor shall use all reasonable endeavours to acquire that Selected Title for transmission in the Service; 43 (c) the Licensor shall only acquire a Selected Title for transmission in the Service upon terms which shall first have been approved in writing by the Company and, after having so acquired a Selected Title, shall promptly schedule or procure the scheduling of that Selected Title for transmission in the Service in accordance with the reasonable requirements of the Company; (d) if a Selected Title is so acquired by the Licensor and scheduled for transmission in the Service, the Company shall within 21 days of receipt of the Licensor's invoice with respect thereto reimburse to the Licensor all licence fees which shall actually have been paid by the Licensor with the prior written approval of the Company in accordance with this sub-clause and in consideration for the right to transmit the relevant Selected Title in the Service within the Territory; (e) if within ninety (90) days after the date of that notice the Licensor shall have been unable so to acquire a Selected Title for transmission in the Service or if the Licensor shall have failed to perform its obligations under this Clause, the provisions of Clause 8.10 shall apply. 8.10 If at any time when the Company is entitled to include Third Party Programmes in the Service hereunder and/or the Company requests or instructs the Licensor to obtain such Third Party Programmes on its behalf in accordance with the terms hereof and the Licensor refuses, fails or neglects to obtain the same or does not obtain them in a timely fashion and/or on terms reasonably acceptable to the Company, then the Company shall be entitled to license or procure the licensing of the same and to schedule and transmit such Third Party Programmes in the Service. 8.11 If at any time during the Term the Company is obliged under the laws of any country within the Territory to transmit in the Service a certain percentage ("the Quota Percentage") of programmes which are European Works, then the Company shall notify the Licensor in writing to that effect specifying the Quota Percentage and the following provisions shall apply: 8.11.1 within thirty (30) days after the date of any such notice the Licensor may by notice in writing to the Company elect with effect from the date which falls sixty (60) days after the date of the notice given by the Company ("the Applicable Date") to produce, co- produce or acquire and supply to the Company for first transmission in the Service in accordance with the provisions of this Agreement (including but not limited to the provisions of Clause 4) such number of Programme Hours of Programmes or Third Party Programmes which are 44 European Works as may be necessary to enable the Company to transmit in the Service the Quota Percentage of programmes which are European Works. 8.11.2 if the Licensor elects under sub-clause 8.11.1 to acquire Third Party Programmes, the Company may give notice to the Licensor stating that the Minimum Number of Hours is with effect from the Applicable Date to be reduced and specifying such reduced Minimum Number of Hours in respect of each subsequent Year whereupon the provisions of sub-clauses 8.6(a) to (h) shall apply as if such notice had been given under Clause 8.6 SAVE AND EXCEPT THAT: (a) the reference in sub-clause 8.6(a) to "fifty-one (51) per cent" shall be read as a reference to the Quota Percentage for the purposes of this Clause; and (b) the references in sub-clause 8.6(c) to "Third Party Programmes" shall be read as references to "Third Party Programmes which are European Works". 8.11.3 if the Licensor does not so elect under sub-clause 8.11.1, the provisions of sub-clause 8.11.2 shall apply SAVE AND EXCEPT THAT sub- clauses 8.6(c) and 8.11.2(b) shall not apply and the Company shall following the Applicable Date (subject only to its obligations under sub- clauses 8.6(a) and (b)) be entitled at the Company's expense to licence Third Party Programmes which are European Works from third parties and to schedule and transmit such Third Party Programmes in the Service and shall assume sole responsibility for such licensing and scheduling. 8.11.4 if the Licensor does not so elect under sub-clause 8.11.1, then the following provisions shall also apply: (a) the Company shall be freely entitled to replace the Scheduler and to engage at its expense a replacement Scheduler of its choice and Clauses 8.1 and 8.5 shall not apply to the appointment of any such replacement Scheduler; and (b) if the Licensor notifies the Company that it is able to license to the Company any Programme which is a European Work in addition to the Programmes which the Company is obliged to transmit pursuant to Clause 8.6, then the Company shall not unreasonably refuse to licence that Programme from the Licensor at a licence 45 fee not exceeding (i) US$13,158 per Programme Hour (in the case of a Playboy Programme) or (ii) the actual amount paid to the third party licensor of that Programme in consideration for the right to transmit that Programme in the Service within the Territory (in the case of an Acquired Programme). 9. Warranties ---------- 9.1 The Licensor warrants to the Company in relation to each Selected Programme that: (a) the Licensor has obtained and paid for, all such rights in the Selected Programme and has obtained and paid for all such releases licences and consents in relation to the material incorporated in it as are necessary to enable the Company to exercise the rights in the Selected Programme granted to it under this Agreement; (b) no material contained in the Selected Programme is or will be libellous or otherwise defamatory of any person or obscene or constitute an invasion of any rights of privacy; (c) the exercise by the Company of the rights hereby granted in the Selected Programme will not infringe the copyright, moral rights or any other similar right of any person; (d) the Licensor is not at the date of this Agreement aware of any legal proceedings or any threat of legal proceedings or any claim by any third party alleging that the Selected Programme infringes the rights (whether of copyright or otherwise) of any third party or that the exercise of the rights hereby granted in the Selected Programme will infringe the rights (whether of copyright or otherwise) of any third party; (e) there are not and will not at any time during the Term be any charges, liens, security interests or other encumbrances over or affecting the Selected Programme which would preclude the exercise by the Company of the rights hereby granted in the Selected Programme; (f) the content of the Selected Programme will comply with all censorship regulations and all broadcasting standards, regulations, codes and guidelines as to Programme content which may be applicable to television services such as the Service in each country within the 46 Territory and may have drawn up and/or imposed on such television services by any competent regulatory authority or body in any such country; and (g) all music synchronisation licence and recording and performance fees and royalties, and all residuals, use fees and other monies payable in connection with the Selected Programme or the rights upon which it is based or the performances incorporated in it have been or will prior to the delivery of the Delivery Material be paid and that no fees of any description whatsoever will be payable by the Company in respect of the exercise in the Territory of the rights hereby granted in the Selected Programme other than performing rights in respect of music contained in the Selected Programme. 9.2 Each party warrants to and undertakes with the other that: (a) it has full right title and authority to enter into this Agreement and to perform the obligations undertaken by it hereunder and that it has not entered into any agreement with any third party which does or will conflict with the terms hereof; and (b) it will indemnify the other against all actions proceedings claims costs and expenses (including without limitation legal fees) and any other damage suffered by the other as a direct or reasonably foreseeable result of a breach of any of the warranties, undertakings or agreements on its part contained or made in this Agreement. 10. Term, Termination and Extension ------------------------------- 10.1 This Agreement shall become effective upon the date hereof and shall remain in effect throughout the Term. 10.2 In addition to and not in substitution for any other right or remedy either party shall have the right to terminate this Agreement with immediate effect by written notice to the other party to that effect given at any time if: (a) the other party shall commit a material breach of any term or provision of this Agreement, or (subject to the provisions of Clause 10.7) any warranty made herein by the other party shall be found not to be true and accurate in all material respects (a "default"), and such breach or default if remediable shall not have been remedied by the other party within 47 twenty-eight (28) days after receipt of written notice specifying such breach or default and requiring the same to be remedied; or (b) the other party shall cease to carry on business or shall be unable to pay its debts as they fall due for payment or if under the laws of any jurisdiction a liquidator, administrator, receiver, or similar official is appointed of the other party or in respect of any of its assets or undertaking or if any liquidation, insolvency, winding-up, administration or similar proceedings are instituted against the other party under the laws of any jurisdiction PROVIDED ALWAYS THAT the Licensor shall not be entitled to terminate this Agreement under this sub-clause 10.2(b) if Flextech shall notify the Licensor of its offer to acquire the Licensor's entire shareholding in the Company pursuant to Clause 8.5 of the Shareholders' Agreement of even date herewith; or (c) the other party is prevented by an event of Force Majeure from performing its obligations, or if the party giving such notice of termination is prevented by an event of Force Majeure from exercising its rights, under this Agreement for a period in excess of one hundred and eighty (180) consecutive days; or (d) the Trademark Agreement shall be lawfully terminated by either party thereto. 10.3 The Company shall in addition to the foregoing have the right to terminate this Agreement by giving notice in writing to the Licensor if: (a) the Company has given any notice pursuant to Clause 8.6 and if during the first complete Year following the date of any such notice ("the Relevant Year") the Net Revenue per Household received by the Company is less than One Pound and thirty-seven pence ((Pounds)1.37) PROVIDED THAT any such notice of termination must be given by the Company within twenty-four (24) months after the final day of the Relevant Year; or (b) in any Year after the Licensor has given a notice of election pursuant to sub-clause 8.11.1 the Licensor has been unable to licence to the Company pursuant to this Agreement a sufficient Programme Duration of Programmes or Third Party Programmes which are European Works in order to enable the Company to comply with the Directive and with the laws of each country within the Territory PROVIDED THAT any such notice of termination 48 must be given by the Company within twelve (12) months after the final day of that Year; or (c) the Licensor fails to give a notice of election under sub-clause 8.11.1 within the 30 day period referred to in that sub-clause PROVIDED THAT any such notice of termination must be given by the Company within twelve (12) months after the final day of that 30 day period. Any such termination shall take effect immediately upon the first anniversary of the date of receipt by the Licensor of any such notice of termination (such anniversary being hereinafter referred to as "the Effective Date"). 10.4 In the event that the Company terminates this Agreement in accordance with the provisions of Clause 10.3 then: 10.4.1 the Company shall be entitled to continue to exercise its rights under the Trademark Agreement until the Effective Date; 10.4.2 for the remaining year of this Agreement ending upon the Effective Date, the Programme Duration of the Programmes in the Service will comprise not less than 51% (in the case of a termination pursuant to sub-clause 10.3(a)) or the Quota Percentage (in the case of a termination pursuant to sub-clause 10.3(b) or (c)) of the total Programme Duration of the Programmes and the Third Party Programmes included in the Service during such year, and the Programming Premium and the Basic Licence Fee payable by the Company during or in respect of such year shall each be reduced pro rata to the proportion which the Programme Duration of Programmes included in the Service during the said year bears to the aggregate Programme Duration of Programmes and Third Party Programmes included in the Service during the said year; 10.4.3 the Company shall be freely entitled at the Company's expense to licence Third Party Programmes from third parties and to schedule and transmit such Third Party Programmes in the Service and shall assume sole responsibility for such licensing and scheduling PROVIDED THAT all Third Party Programmes so transmitted in the Service shall fall within the Programme Specification and the Company shall comply with the provisions of sub-clause 10.4.2; 49 10.4.4 the Company shall be freely entitled to replace the Scheduler and to engage at its expense a replacement Scheduler of its choice and Clauses 8.1 and 8.5 shall not apply to the appointment of any such replacement Scheduler; 10.4.5 for a period of eighteen (18) months commencing upon the Effective Date the Licensor: (a) shall not use or authorise or permit any third party to use any of the Trade Marks within the Territory; and (b) shall not authorise or permit any third party to broadcast, transmit or exhibit (whether pursuant to the Standard Television Rights or the Non-Standard Television Rights) within the Territory any Programme, any excerpt from any Programme or any promotional or advertising material publicising its transmission of any Programme (i) in any form which allows or causes the word "Playboy", any of the Trade Marks or any other logo, mark or symbol which is associated with the "Playboy" name or brand to be seen at any time during any broadcast, transmission or exhibition of that Programme by any person viewing such broadcast, transmission or exhibition or (ii) which in any way suggests or implies that that Programme has been produced by, or licensed to that third part by, the Licensor or any Affiliate of the Licensor. 10.5 In the event that this Agreement is terminated by the Company pursuant to sub-clause 10.3(a) and in the event that prior to the Effective Date the Licensor has received or has become entitled to receive licence fees (other than amounts paid by the Licensor to third party licensors for the right to transmit Third Party Programmes in the Service and reimbursed to the Licensor by the Company hereunder) pursuant to any provision of Clause 7, Clause 8 or this Clause 10 (including but not limited to Clauses 7.1 to 7.4 inclusive, Clause 7.7 and Clause 8.8) amounting in the aggregate to less than US$7.5 million ("the Minimum Amount"), then, for so long as the programming included in the Service after the Effective Date is of the same genre as the Programmes and Third Party Programmes delivered to the Company hereunder prior to the Effective Date, the Company shall following the Effective Date licence from the Licensor on a sole and exclusive basis within the Territory and the Licensor shall deliver to the Company for first transmission in the Service such number of Programme Hours of Playboy Programmes selected by the Company as may be determined in accordance with the provisions of Schedule 6, upon and subject to the following terms and conditions: 50 10.5.1 the Licensor may by notice in writing given to the Company within thirty (30) days after the date of any notice of termination given by the Company pursuant to Clause 10.3 decline to licence further Playboy Programmes to the Company in the event that this Clause should apply following the Effective Date and, if so, the Company will have no obligation or liability to the Licensor pursuant to this Clause; 10.5.2 if the Licensor does not give a notice to the Company pursuant to Clause 10.5.1: (a) the licence fees payable by the Company following the Effective Date shall be at the rate of US$13,158 per Programme Hour or (in the case of a Playboy Programme which the Company elects to transmit during a further Transmission Period pursuant to Clause 2.2) determined in accordance with Clause 7.7; (b) the maximum period during which the provisions of this Clause 10.5 shall continue in force following the Effective Date shall be determined in accordance with the provisions of Schedule 6 but the provisions of this Clause shall in any event lapse once the Licensor has received pursuant to Clause 7, Clause 8 and this Clause licence fees amounting in the aggregate to the Minimum Amount; (c) subject to the provisions of sub-clauses (a) and (b) of this Clause and notwithstanding the termination of this Agreement, all Playboy Programmes licensed to the Company pursuant to this Clause shall be licensed upon and subject to the same terms and conditions (mutatis mutandis) as those which applied to the Programmes licensed under Clause 2 prior to the Effective Date including but not limited to those terms and conditions set out in Clauses 3.3, 4.1, 4.4, 4.5 and 6.5; and (d) the Company shall be entitled to transmit the Trade Marks only in the form and the places in which they appear in Playboy Programmes licensed to it pursuant to this Clause. 10.6 Following the date on which any termination of this Agreement takes effect ("the Termination Date"): 51 10.6.1 subject only to Clause 10.5, the Company shall have no obligation to licence or accept delivery of further Programmes or Third Party Programmes from the Licensor, and the Licensor shall have no obligation to deliver to the Company further Programmes or Third Party Programmes, for first transmission in the Service; 10.6.2 the licence granted to the Company pursuant to Clause 2 in relation to each Programme or Third Party Programme whose Transmission Period has not ended prior to the Termination Date shall (subject to sub- clauses 10.6.3 and 10.6.4) remain in force for a period of twenty- four (24) months after the Termination Date (in the case of a Playboy Programme) and for the full duration of the Playboy Licence Period (in the case of an Acquired Programme or Third Party Programme); and 10.6.3 notwithstanding the provisions of sub-clause 10.6.2, if this Agreement was terminated by the Licensor pursuant to sub-clause 10.2(a), the Licensor may by giving notice in writing to the Company within 30 days after the Termination Date terminate the licence granted to the Company pursuant to Clause 2 in relation to each Programme, and each Third Party Programme acquired on behalf of the Company by the Licensor, with immediate effect whereupon the Licensor shall within seven (7) days after the date of such notice pay to the Company an amount equal to the aggregate of all Excess Payments. For the purposes of this sub-clause, an "Excess Payment" shall mean in respect of each Programme, or each Third Party Programme acquired on behalf of the Company by the Licensor, whose Transmission Period has not ended prior to the Termination Date an amount equal to: C (A x B) x _ where: D A = US$13,158 or (in the case of a Third Party Programme) the actual amount paid to the third party licensor of that Third Party Programme in consideration for the right to transmit the same in the Service within the Territory B = the number of Programme Hour(s) of that Programme or Third Party Programme C = 24 (twenty-four) less the number of transmissions made by the Company in the Service of that Programme or Third Party Programme prior to the Termination Date 52 D = 24 (twenty-four). 10.6.4 notwithstanding the provisions of sub-clause 10.6.2, the Licensor may by giving notice in writing to the Company within six (6) months after the Termination Date terminate the licence granted to the Company pursuant to Clause 2 in relation to each Playboy Programme with effect from the expiry of the period of eighteen (18) months commencing upon the Termination Date ("the Licence Termination Date") whereupon the Licensor shall within seven (7) days after the date of such notice pay to the Company an amount equal to the aggregate of all Excess Payments. For the purposes of this sub-clause, an "Excess Payment" shall mean in respect of each Playboy Programme whose Transmission Period has not ended prior to the Licence Termination Date an amount equal to: (A x B) x C where: - D A = US$13,158 B = the number of Programme Hour(s) of that Playboy Programme C = 24 (twenty-four) less the number of transmissions made by the Company in the Service of that Playboy Programme prior to the Licence Termination Date D = 24 (twenty-four). 10.7 In the event that: (a) any warranty made herein by the Licensor in relation to any Selected Programme is found not to be true and accurate in all material aspects (a "default"); and (b) within twenty-eight (28) days after receipt of written notice from the Company specifying such default the Licensor has delivered to the Company for first transmission in the Service a replacement Playboy Programme or (if the Selected Programme in 53 question was not a Playboy Programme) an Acquired Programme or Third Party Programme of comparable quality, duration and commercial appeal, then without prejudice to any of its other rights and remedies in respect of such default the Company shall not be entitled to terminate this Agreement pursuant to sub-clause 10.2(a) as a result of such default. 11. Assignment Neither party may assign the whole or any part of this Agreement to any third party without the prior written consent of the other party PROVIDED THAT either party may assign the benefit of this Agreement to any Associate (as defined in the Shareholders' Agreement of even date herewith) without the consent of the other party but shall remain liable for the performance of its obligations under this Agreement. 12. Notices 12.1 Any notice or other communication given or made under this Agreement shall be in writing and, without prejudice to the validity of any other method of service, may be delivered personally or by courier or sent by facsimile transmission and by prepaid airmail letter, addressed as follows: (a) if to the Licensor to: The President of the Licensor 9242 Beverly Boulevard Beverly Hills California 90210 United States of America Facsimile transmission number: (0101 310) 246 4065 with a copy to the Senior Vice President, Legal and Business Affairs at the same facsimile transmission number (b) if to the Company, to: Twyman House 16 Bonny Street London NW1 9PG 54 Facsimile transmission number: (0171) 911 0145 with a copy to: The Chief Executive Flextech plc 13 Albemarle Street London W1X3HA Facsimile transmission number: (0171) 499 7553 Head of Legal and Business Affairs British Sky Broadcasting Limited Grant Way Isleworth Middlesex TW7 5QD Facsimile transmission number: (0171) 705 3254 or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. 12.2 Any such notice or other communication shall be deemed to have been duly served, given or made (i) in the case of posting, 96 hours after the envelope containing such notice was posted and proof that any such envelope was properly addressed, prepaid, registered and posted shall be sufficient evidence that such notice or other communication has been duly served, given or made; or (ii) in the case of delivery, when left at the relevant address; or (iii) in the case of facsimile transmission on the first business day in the country of the intended recipient after the date of transmission. 13. Waiver and Set-Off ------------------ 13.1 No express or implied waiver by either party of any provision of this Agreement or of any breach or default of either party shall constitute a continuing waiver or a waiver of any other provision or (subject to the other provisions of this Agreement) prevent either party from acting on the same or any subsequent breach or default. 13.2 In the event that the Company becomes entitled to terminate this Agreement pursuant to sub-clause 10.2(a) and (subject to Clause 10.7) within thirty (30) days after becoming aware of 55 such entitlement the Company does so terminate, then, without prejudice to any other right or remedy of the Company and notwithstanding any other provision of this Agreement, the Company shall be entitled without prejudice to any right or remedy of the Licensor to withhold payment of any or all amounts which may be or may thereafter become due to the Licensor pursuant to Clause 7 or Clause 8 and, if the Company decides to exercise such right, it shall promptly notify the Licensor of such decision. 14. Further Assurance ----------------- The Licensor shall at the request and cost of the Company execute and deliver all such further documents as the Company shall reasonably request to confirm and evidence the grant of such Television Rights as are granted to the Company pursuant to Clause 2. 15. No Partnership -------------- This Agreement is made between principals and does not constitute a partnership between the parties and neither of them shall hold itself out as the agent or partner of the other. 16. Entire Agreement ---------------- This Agreement together with the Trademark Agreement and the Shareholders' Agreement contains the entire understanding of the parties with regard to the licensing of Programmes to the Company and may be changed or modified only in writing signed on behalf of both parties. 17. Force Majeure ------------- Neither party shall be liable for any failure to perform its obligations under this Agreement to the extent that such failure is caused by an event of Force Majeure. 18. Severability Registration and Notification ------------------------------------------ 18.1 Should any provision of this Agreement be held by any competent court or authority to be invalid or unenforceable such provision shall (without prejudice to the remaining provisions) have no effect but the parties shall use all reasonable endeavours to replace the invalid or unenforceable 56 provision by a valid provision, the effect of which shall be the closest possible to the intended effect of the invalid or unenforceable provision. 18.2 Notwithstanding any other provision of this Agreement or any arrangement of which this Agreement forms part, any provision which may cause this Agreement and/or such arrangement to be registrable under the Restrictive Trade Practices Act 1976 shall be of no effect until the day after such day as particulars of this Agreement and/or such arrangement shall have been furnished to the Director General of Fair Trading. 18.3 If either of the parties is advised by its lawyers that this Agreement should be notified to the European Commission under Council Regulation 17/62, the other party shall on request co-operate in procuring such notification as soon as practicable. 19. Headings -------- The headings to the Clauses and sub-clauses in this Agreement are intended to make reference easier but not to affect its construction. 20. Governing Law ------------- 20.1 This Agreement shall be governed by and construed in all respects in accordance with English law and the parties agree to submit to the exclusive jurisdiction of the English Courts as regards any claim or maker arising in relation to this Agreement. 20.2 The Licensor hereby appoints O'Melveny & Myers of 10 Finsbury Square, London EC2A 1LA England as its authorised agent for the purpose of accepting service of process for all purposes in connection with this Agreement. AS WITNESS the hands of the duly authorised representatives of the parties the day and year first above written 57 SCHEDULE I ---------- The Programme Specification --------------------------- The Service is a television program service for adults featuring programming that is sexually oriented but of a non-pornographic nature. Programming included in the Service will depict nudity and will allow strong or explicit language. Playboy will not deliver and the Company will not transmit programming containing scenes which depict violent behaviour, particularly the glorification of violence or gratuitous violence. Generally speaking, Playboy will not deliver and the Company will not transmit programming containing depictions of rape, non-consensual intercourse or other non-consensual sexual activity. Generally speaking, Playboy will not deliver and the Company will not transmit programming containing scenes of bondage, incest, sadism or masochism, bestiality, extreme sexual explicitness or the graphic close-up of genitals. Child pornography is never to be shown on the Service, and, even if an actor is over 18 years of age, if that actor is portrayed as under 18, such showing is prohibited. Within the above guidelines, the Programmes and Third Party Programmes delivered to the Company by Playboy hereunder shall consist of motion pictures (including those made initially for television exhibition, for home video or for theatrical release), miscellaneous specials (both in the half-hour and hour length), dramatic series, game shows, magazine shows (as that term is generally used in American television), comedy shows, Playmate specials featuring specific Playmates, music specials, sexual advice specials, Playboy Video Centrefold specials and Playmate of the Year specials. The vignettes delivered by Playboy hereunder shall also comply with the above guidelines. No Programme or Third Party Programme delivered by the Licensor under this Agreement will have a running time of less than 22 minutes. 58 SCHEDULE 2 ---------- Delivery Material ----------------- 1. (a) The Licensor will supply a Beta SP master videotape for each Selected Programme, each so-called "vignette" and all promotional and interstitial material, together with a schedule of the running order in which these elements are to be broadcast. The Company will at its cost assemble the nightly programming block from these materials. (b) Each master videotape supplied by the Licensor shall be of broadcast quality and in either the NTSC or PAL standard. Where such a videotape is delivered in the NTSC standard, the Company shall create the necessary PAL transfer but the Licensor shall reimburse to the Company within 30 days after receipt of an invoice in respect thereof the actual out-of-pocket cost incurred by the Company in doing so. (c) If the Licensor supplies NTSC-standard materials and the Company converts them to PAL, the Licensor shall remain the owner of such PAL- standard materials, which shall be on loan to the Company for the Term or (if later) until the end of the Transmission Period in respect of the relevant Programme or Third Party Programme and shall thereafter be returned to the Licensor. (d) Each master videotape supplied by the Licensor shall comply with the following specification: Vision ------ Line up - One minute of Colour Bars 100% luminance, 75% Chroma. EBU(75/0/100/0) Ten seconds of Black before Start of each Selected Programme No pedestal on black Each Selected Programme should start at Time Code 10:00:00:00 Audio ----- Time Code should be continuous throughout the line up and programme and for at least 30 seconds after end of programme 59 Line up with Colour Bars - Zero Level Tone on linear tracks ('4' PPM) Maximum peak programme level +8dB above line up. 2. A music cue sheet in customary form and all billings information and credit requirements. 3. All advertising and promotional material (whether audio, audio-visual or visual material) which is available for use by the Company including but not limited to a plot or episodic synopsis, black and white stills, colour transparencies, a colour trailer and interstitial, "filler" and "behind the scenes" material. 60 SCHEDULE 3 ---------- Basic Licence Fees ------------------ 1. In this Schedule the following expressions shall have the following meanings: (a) "the Apportionment" means an amount calculated by: (i) subtracting from 365 the total number of days during the First Year (including the Launch Date); (ii) multiplying the figure resulting from that subtraction by US$1,000,000 (one million United States dollars); and (iii) dividing the product of that multiplication by 365. (b) "the Increment": means in respect of the second, third, fourth, fifth and sixth Years an amount calculated as follows: A x US$100,000 - 365 where A is the total number of days during the First Year (including the Launch Date); (c) "the Initial Amount": means in respect of each Year the amount set out below opposite that Year:
Year Amount (US$) ---- ------------ First Year US$1,000,000 less the Apportionment Second Year US$1,000,000 } Third Year US$1,100,000 } plus in each case Fourth Year US$1,200,000 } the Increment Fifth Year US$1,300,000 } for that Year Sixth Year US$1,400,000 }
61 Seventh Year US$1,500,000 and each subsequent Year 2. In respect of each Year the Basic Licence Fee shall be the Initial Amount in respect of that Year subject always to: (a) reduction in accordance with Clause 8.6, sub-clause 8.8(d) or Clause 8.11 or following any notice of termination of this Agreement given by the Company pursuant to Clause 10.3; and (b) increase in accordance with sub-clause 7.7(b), sub-clause 8.8(b) or sub-clause 8.8(c). 62 SCHEDULE 4 ---------- Net Revenue per Household ------------------------- 1. In this Schedule a "Household" means in respect of any Year: (a) during which (or any part of which) the Service is being transmitted by means of a medium-powered satellite (such as, by way of example, an Astra satellite), any person in the United Kingdom who on 1 January or 31 December (as the case may be) in that Year is equipped with a satellite dish and any other receiving or decoding equipment (other than viewing cards and other decryption equipment and devices which are only available to paying subscribers) and/or (if the Service is transmitted by means of a compressed signal) decompression equipment which is necessary in order to receive and view a television channel transmitted in an unencrypted form by means of the same satellite as that by which on 1 January or 31 December (as the case may be) in that Year the Service is being transmitted or by means of any other satellite which is compatible with that satellite; and/or (b) any person in the United Kingdom whose home has by 1 January or 31 December (as the case may be) in that Year been connected to a Relevant System and for this purpose a "Relevant System" means any cable television system in the United Kingdom by means of which the Service is as at 1 January or 31 December in that Year (as the case may be) being re-transmitted by any means for reception by subscribers to that cable television system. 2. The "Net Revenue per Household" in respect of any Year shall be calculated by dividing the Net Revenues of the Company in respect of that Year by the average number of Households in respect of that Year. The average number of Households shall be calculated by aggregating the total numbers of Households on 1 January and on 31 December in that Year and by dividing the resulting figure by two. 3. The number of Households which on 1 January and 31 December in each Year fall within paragraph l(a) of this Schedule shall be determined by reference to the relevant figure published or provided by Broadcasters' Audience Research Board Limited (or any replacement or successor body) as at 1 January or 31 December in that Year (as the case may be) or as at the date which 63 is closest to 1 January or 31 December in that Year and for which such a figure is available by 31 March in the immediately following Year. 4. The number of Households which on 1 January and 31 December in each Year fall within paragraph l(b) of this Schedule shall be determined by reference to the relevant figure(s) published or provided by the Cable Communications Association (or any replacement or successor body or by the operators of Relevant Systems) as at 1 January or 31 December in that Year (as the case may be) or as at the date which is closest to 1 January or 31 December in that Year and for which such figure(s) is or are available by 31 March in the immediately following Year. 64 SCHEDULE 5 ---------- List of existing Programmes --------------------------- 65
- ------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - ------------------------------------------------------------------------------------------------------------- Series 350 29 30 14.5 1990-1994 America Uncovered 4 30 2 1983-1987 Archival Reel 58 60 58 1970's The Club 6 30 3 1991 Comedy After Hours 6 30 3 1987 Consenting Adults 3 30 1.5 1984 Do it Now 3 30 1.5 1983 Duelling for Playmates 12 30 6 1983-1984 Eden 26 30 13 1992-1993 Erotic Images 5 60 5 1984-1985 Everything Goes 23 30-60 12 1982-1984 Fantasies 20 30 10 1986-1988 For a Good Time, Call... 4 30 2 1992 Friday Files 6 30-60 3.5 1983 Girls of the Comedy Store 3 60 3 1983-1985 Great American Stripoff 18 60 18 1983-1985 Hot List 3 30 1.5 1987-1988 Hot Rocks 28 30-60 15 1990-1994 Inside Out 26 30 13 1990-1991 Inside Playboy 7 30 3.5 1984 It Happened One Night 5 30-60 3 1994 Late Night I 26 60 26 1989-1990 Late Night II 26 30 13 1991 Late Night III 26 30 13 1992 Late Night IV 26 30 13 1995 Loving 5 30 2.5 1982 Pillow Previews 10 30 5 1984-1985 Playboy After Dark 52 60 52 1968-1970 Playboy Video Magazine 48 60 48 1982-1988 Playboy's Erotic Fantasies 26 30 13 1994 Playboy's Love & Sex Test 26 30 13 1992 Playmate Guide to Physical Fitness 6 30 3 1982-1983 Prime Cuts 4 30 2 1985 Private Moments 6 30 3 1983-1984 Private Party Jokes 7 30 3.5 1987-1988 Ribald Classics 5 30-60 4.5 1983-1992 Secret Confessions & Fantasies 26 30 13 1992-1993 Sexcetera 64 60 64 1983-1988 Shake it, Sexy 6 30 3 1983 Who's on Top 24 30 12 1993 World of Playboy 34 30 17 1991-1995 Women on Sex 48 30 24 1983-1988 - ------------------------------------------------------------------------------------------------------------- Sub Total Series 539.5 - --------------------------------------------------------------------------------------- * As is television industry practice, a "60-minute" program is typically 44- 45 minutes long (to account for commercial breaks), and a "30-minute" program is typically 22 minutes long. Similarly, throughout this document, a 60-minute episode length will refer to 45 minutes of actual programming, and a 30-minute episode length will refer to 22 minutes of actual programming. With respect to movies, running times are actual.
DENTON HALL
PLAYBOY TV UK/BENELUX PROGRAM LIBRARY - -------------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - -------------------------------------------------------------------------------------------------------------------- Specials 101 Ways to Excite Your Lover 1 60 1 1991 20th Century Beauty 1 60 1 1991 Anna Goes Australian 1 30 0.5 1987 Around the World with Donna Wanna 1 30 0.5 1993 Arousal, Foreplay, and Orgasm with Dr. Ruth Westheimer 1 60 1 1994 Art of Sensual Massage 1 60 1 1986 Bedtime Stories 1 60 1 1987 Best of Playboy 2 60 2 1988 Best of Sexy Lingerie 1 60 1 1992 Best of Video Calendar 1 60 1 1992 Best of Wet & Wild 1 60 1 1992 Best of the Playboy Channel 1 90 1.5 1988 Big Ed Show 1 60 1 1990 Blonde, Brunette, and Redhead 1 30 0.5 1989 Blonde Bombshells 1 30 0.5 1989 Body Flash 1 30 0.5 1985 Bunny Memories 1 60 1 1986 Bunny of the Year 1974 1 60 1 1974 Bunny of the Year 1976 1 90 4.5 1976 Cheech and Chong Interview 1 60 1 1984 College Girls 1 60 1 1993 Comedy on Campus 1 90 1.5 1986 Comedy Roast Don Adams 1 60 1 1985 Comedy Roast Tommy Chong 1 60 1 1986 Comedy Theatre: The Great Lounge Comedians 1 60 1 1985 Comedy Theatre: Henny Youngman 1 60 1 1985 Comedy Theatre: Mort Sahl 1 60 1 1985 Comedy Theatre: Phyllis Diller 1 60 1 1985 Comedy Theatre: Shecky Green 1 60 1 1985 Celebrity Video Centerfold: Patti Davis 1 60 1 1995 Celebrity Video Centerfold: Jessica Hahn 1 60 1 1993 Celebrity Centerfold: LaToya Jackson 1 60 1 1994 Celebrity Video Centerfold: Dian Parkinson 1 60 1 1994 Dear Homos 1 30 0.5 1983 Dorothy Stratten: The Untold Story 1 60 1 1985 Eden 1 1 120 2 1992 Eden 2 1 120 2 1992 Eden 3 1 120 2 1992 Eden 4 1 120 2 1993 Eden 5 1 120 2 1993 Eden 6 1 120 2 1993 Erotic Escapades 1 30 0.5 1994 Erotic Fantasies I 1 60 1 1992 Erotic Fantasies II 1 60 1 1993 Erotic Fantasies III 1 60 1 1993 Erotic Weekend Getaways 1 60 1 1992 Fabulous Forties 1 60 1 1994 Fantasies I 1 90 1.5 1987 Fantasies II 1 60 1 1990 Farmer's Daughters 1 60 1 1987 Girls of the Cabaret Royale 1 60 1 1991 Girls of Europe I 1 30 0.5 1987 Girls of Europe II 1 30 0.5 1987 Girls of Hawaiian Tropic 1 60 1 1994 Girls of Hooters 1 60 1 1994 Girls of Jamaica 1 30 0.5 1992 ------------------------------------------------------------------------------------------------------
* SEE NOTE PLAYBOY TV UK/BENELUX PROGRAM LIBRARY
- ---------------------------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - ---------------------------------------------------------------------------------------------------------------------------------- Specials, Girls of Rock 'n Roll 1 6O 1 1985 continued Girls of Spring Break 1 60 1 1991 Girls of the Big West 1 30 0.5 1990 Girls of the Moulin Rouge 1 30 0.5 1985 Great American Stripoff 1994 1 60 1 1994 History of Striptease 1 60 1 1994 Hollywood Hookers 1 60 1 1983 Hot, Sexy & Safer with Suzi Landolphi 1 60 1 1993 Hot Rock in Reno 1 120 2 1983 How to Reawaken Your Sexual Powers 1 60 1 1992 Hugh M. Hefner: Birthday Footage 1 330 5.5 1979-1986 Hugh M. Hefner: Miscellaneous Footage 1 90 1.5 1974-1995 Hugh M. Hefner: Once Upon a Time 1 90 1.5 1992 Inside Out I 1 9O 1.5 1992 Inside Out II 1 90 1.5 1993 Inside Out III 1 90 1.5 1993 Inside Out IV 1 90 1.5 1994 International Playmates 1 60 1 1993 Intimate Workout for Lovers 1 60 1 1991 International Beauty Pageant Promo Reel 1 30 0.5 1992 Japanese Erotica 1 30 0.5 1989 Jerry Lee Lewis in Concert 1 60 1 1886 Les Filles Fatales 1 30 0.5 1983 Lisa Lyons Lifestyles 1 30 0.5 1990 Love, Sex, and Religion 1 30 0.5 1984 Love, Sex & Intimacy for New Relationships 1 60 1 1993 Madcap Marathon 1 60 1 1980 Making of...Girls of Cabaret Royale 1 60 1 1991 Making of...Girls of Spring Break 1 30 0.5 1991 Making of...Playmate Challenge Cup 1 30 0.5 1984 Making of...Sexy Lingerie III 1 60 1 1992 Maui Playmate Challenge 1 60 1 1994 Miss Playboy International Beauty Pageant 1987 1 60 1 1987 Nancy Friday's Interviews 1 30 0.5 1982 Nancy Friday's Private Lives 1 120 2 1983 New Year's Eve at the Mansion 1982 1 30 0.5 1982 New Year's Eve at the Mansion 1983 1 30 0.5 1983 New Year's Eve at the Mansion 1984 1 30 0.5 1884 New Year's Eve at the Mansion 1985 1 30 0.5 1985 New Year's Eve at the Mansion 1986 1 30 0.5 1986 Pat McCormick Unleashed I 1 60 1 1980 Pat McCormick Unleashed II 1 60 1 1980 Playboy Club's 24th Anniversary Show 1 60 1 1984 Playboy Follies I 1 60 1 1983 Playboy Follies II 1 60 1 1985 Playboy Jazz Festival 1982 1 180 3 1982 Playboy Video Centerfold: Sherry Arnett 1 60 1 1985 Playboy Video Centerfold: Teri Weigel 1 60 1 1985 Playboy Video Centerfold: Rebekka Armstrong 1 60 1 1986 Playboy Video Centerfold: Luann Lee 1 60 1 1986 Playboy Video Centerfold: Lynne Austen 1 60 1 1987 Playboy Video Centerfold: Fawna MacLaren/35th Anniv. 1 60 1 1988 Playboy Video Centerfold: Dutch Twins 1 60 1 1989 Playboy Video Centerfold: Peggy McIntaggart 1 60 1 1989 Playboy Video Centerfold: Karen Foster/Deborah Driggs 1 60 1 1990 Playboy Video Centerfold: Kerry Kendall 1 60 1 1990 Playboy Video Centerfold: Tawnni Cable 1 60 1 1990 Playboy Video Centerfold: Julie Clark 1 60 1 1990 Playboy Video Centerfold: Morgan Fox 1 60 1 1991 - ----------------------------------------------------------------------------------------------------------------------------------
* SEE NOTE
PLAYBOY TV UK/BENELUX PROGRAM LIBRARY - -------------------------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - -------------------------------------------------------------------------------------------------------------------------------- Specials Playboy Video Centerfold: Pamela Anderson 1 60 1 1991 continued Playboy Video Centerfold: Tiffany Sloan 1 60 1 1992 Playboy Video Centerfold: Anna Marie Goddard/40th Anniv. 1 60 1 1994 Playboy's 20th Anniversary Show 1 60 1 1974 Playboy's 25th Anniversary Show 1 60 1 1979 Playboy's 35th Anniversary Special 1 30 0.5 1989 Playboy's 35th Anniv.: World of Hugh M. Hefner 1 90 1.5 1988 Playboy's 35th Anniv.: Hugh M. Hefner's Birthday 1 90 1.5 1988 Playboy's 35th Anniv.: Midsummer Night's Dream Parties 1 60 1 1985-1993 Playboy's 40th Anniversary Playmate Search 1 60 1 1993 Playboy's Guide to Amsterdam 1 60 1 1983 Playboy's Guide to the Land of G'Day 1 60 1 1989 Playboy's Hidden Camera 1 60 1 1994 Playboy Photographers 1 30 0.5 1989 Playmate Bloopers 1 30 0.5 1992 Playmate Party 1 60 1 1977 Playmate Playoffs 1 60 1 1986 Playmate Challenge Cup 1 60 1 1984 Playmate Guide to Physical Fitness 1 60 1 1983 Playmate Music Videos I 1 30 0.5 1989 Playmate Music Videos II 1 30 0.5 1992 Playmate of the Year 1984: Barbara Edwards 1 60 1 1984 Playmate of the Year 1987: Donna Edmondson 1 60 1 1987 Playmate of the Year 1988: India Allen 1 60 1 1988 Playmate of the Year 1989: Kimberley Conrad 1 60 1 1989 Playmate of the Year 1990: Renee Tenison 1 60 1 1990 Playmate of the Year 1991: Lisa Matthews 1 60 1 1991 Playmate of the Year 1992: Corrina Harney 1 60 1 1992 Playmate of the Year 1993: Anna Nicole Smith 1 60 1 1993 Playmate of the Year 1994: Jenny McCarthy 1 60 1 1994 Playmate of the Year 1990 Special 1 90 1.5 1990 Playmate Profiles: You Ought to Be In Pictures 1 30 0.5 1988 Playmate Rafting Adventure 1 30 0.5 1984 Playmate Review Hotline I 1 60 1 1992 Playmate Review Hotline II 1 60 1 1993 Playmate Review Hotline III 1 60 1 1994 Playmate Review 1 60 1 1983 Playmate Review II 1 60 1 1984 Playmate Review III 1 60 1 1985 Playmate Review 1992 1 60 1 1992 Playmate Review 1993 1 60 1 1993 . Playmate Six Pack 1 60 1 1992 Playmate Sneak Preview 1 30 0.5 1990 Playmate Spectacular I 1 30 0.5 1989 Playmate Spectacular II 1 30 0.5 1990 Playmate Sports Spectacular 1 60 1 1992 Playmate Video Calendar 1988 1 60 1 1987 Playmate Video Calendar 1989 1 60 1 1988 Playmate Video Calendar 1990 1 60 1 1989 Playmate Video Calendar 1991 1 60 1 1990 Playmate Video Calendar 1992 1 60 1 1991 Playmate Video Calendar 1993 1 60 1 1992 Playmate Video Calendar 1994 1 60 1 1993 Playmate Video Calendar 1995 1 60 1 1994 Playmate Video Calendar Preview Show 1 30 1 1988 Playmate Video Calendar Preview Show 1 30 1 1989 Playmate Video Calendar Preview Show 1 30 1 1990 Playmate Video Calendar Preview Show 1 30 1 1991 Playmate Video Calendar Preview Show 1 30 1 1992 Playmate Video Calendar Preview Show 1 30 1 1993 - --------------------------------------------------------------------------------------------------------------------------------
* see note PLAYBOY TV UK/BENELUX PROGRAM LIBRARY
- ------------------------------------------------------------------------------------------------------------------------------------ Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Data - ------------------------------------------------------------------------------------------------------------------------------------ Specials Playmate Video Calendar Preview Show 1 30 1 1994 continued Playmates at Play 1 60 1 1989 Playmates Home Video Party 1 30 0.5 1990 Playmates in the Movies 1 30 0.5 1989 Playmates in Paradise 1 60 1 1992 Playmates of the Year: the '8O's 1 60 1 1989 Playmates: the Early Years 1 60 1 1991 Playmates: Where are they Now I 1 30 0.5 1988 Playmates: Where are they Now II 1 30 0.5 1988 Private Diaries 1 60 1 1994 Private Pleasures 1 30 0.5 1993 Roller Disco and Pajama Party 1 60 1 1981 Romantic Visions I 1 30 0.5 1985 Romantic Visions II 1 30 0.5 1985 Secret Confessions I 1 60 1 1993 Secret Confessions II 1 60 1 1994 Secret Confessions III 1 60 1 1994 Secret Moment 1 30 0.5 1984 Secrets of EuroMassage 1 60 1 1989 Secrets of Making Love to the Same Person Forever I 1 60 1 1990 Secrets of Making Love to the Same Person Forever II 1 60 1 1992 Sensual Fantasy for Lovers 1 60 1 1993 Sensual Pleasures of Oriental Massage 1 60 1 1991 Sex Under Hot Lights 1 60 1 1994 Sex & Sensuality Test 1 60 1 1982 Sexy Lingerie I 1 60 1 1988 Sexy Lingerie II 1 60 1 1990 Sexy Lingerie III 1 60 1 1991 Sexy Lingerie IV 1 60 1 1991 Sexy Lingerie V 1 60 1 1992 Sexy Lingerie VI: Night Dreams 1 60 1 1993 Sexy Lingerie VII: Dreams & Desires 1 60 1 1994 Spring Break Madness 1 30 0.5 1989 Spring Fling 1 60 1 1983 Sunday's Child I 1 30 0.5 1983 Sunday's Child II 1 30 0.5 1983 Sunday's Child III 1 30 0.5 1983 Sunday's Child IV 1 30 0.5 1983 Sunday's Child V 1 30 0.5 1983 Sunday's Child VI 1 30 0.5 1983 Sunshine Girls 1 30 0.5 1988 Taking it Off 1 30 0.5 1989 Taste of Playboy 1 90 1.5 1983 Twenty-Nine Minutes 1 60 1 1990 Ultimate Sensual Massage 1 60 1 1991 Valentine's Day Footage 1990 1 60 1 1990 Valentine's Day Footage 1991 1 90 1.5 1991 The Wedding (Hugh M. Hefner/Kimberley Conrad) 1 60 1 1989 Wet & Wild I 1 60 1 1989 Wet & Wild II 1 60 1 1990 Wet & Wild III 1 60 1 1991 Wet & Wild IV 1 60 1 1992 Wet & Wild V 1 60 1 1993 Wet & Wild VI: The Locker Room 1 60 1 1994 Wet & Wild VII: On Vacation 1 60 1 1995 Windy City Comedy Blowout 1 60 1 1987 Women of Color 1 60 1 1993 Women of Radio 1 60 1 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Sub Total Specials 233 - ------------------------------------------------------------------------------------------------------------------------------------
* see note PLAYBOY TV UK/BENELUX PROGRAM LIBRARY
- ------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - ------------------------------------------------------------------------------------------------------------- Movies Affairs of the Heart 1 90 1.5 1994 After Dark I (Title TBD) 1 90 1.5 1995 After Dark II (Title TBD) 1 90 1.5 1995 After Dark III (Title TBD) 1 90 1.5 1995 After Dark IV (Title TBD) 1 90 1.5 1995 After Dark V (Title TBD) 1 90 1.5 1995 After Dark VI (Title TBD) 1 90 1.5 1995 After Dark VII (Title TBD) 1 90 1.5 1995 After Dark VIII (Title TBD} 1 90 1.5 1995 After Dark IX (Title TBD) 1 90 1.5 1995 After Dark X (Title TBD) 1 90 1.5 1995 American Blonde 1 90 1.5 1994 Animal Instinct 1 60 1 1993 Aroused 1 90 1.5 1995 Birds in Paradise I 1 90 1.5 1986 Birds in Paradise II 1 90 1.5 1986 Blind Spot 1 60 1 1993 Blonde Justice III 1 90 1.5 1993 Bonnie III 1 60 1 1994 Bonnie IV 1 90 1.5 1994 Candy the Stripper 1 90 1.5 1987 Carnival in Rio 1 60 1 1987 Cheating 1 90 1.5 1995 Comapnion 1 90 1.5 1995 Coven I 1 90 1.5 1994 Coven II 1 90 1.5 1994 Dominoes 1 60 1 1993 Dr. Yes: The Hyannis Affair 1 120 2 1985 Erotic Showcase I 1 90 1.5 1993 Erotic Showcase II 1 90 1.5 1993 Erotic Showcase II 1 90 1.5 1993 Forever Young 1 90 1.5 1994 Hardcore 1 90 1.5 1995 Icewoman I 1 90 1.5 1993 Icewoman II 1 90 1.5 1994 I Like to Play Games 1 90 1.5 1994 Immortal Desire 1 60 1 1993 Intimate Journey 1 60 1 1995 Letting Go 1 90 1.5 1995 Love & Desire 1 60 1 1991 Lover's Leap 1 90 1.5 1994 Lusty Liaisons I 1 90 1.5 1983-1992 Lusty Liaisons II 1 90 1.5 1983-1992 Man & Woman 1 90 1.5 1994 Mask 1 60 1 1993 Masseuse II 1 90 1.5 1994 Matter of Cunning 1 90 1.5 1986 Naked Reunion 1 60 1 1994 New Lovers 1 60 1 1993 Night Train 1 90 1.5 1994 On the Edge 1 90 1.5 1994 Oral Obsession 1 90 1.5 1994 Parlor Games 1 60 1 1993 Passionate Interludes I 1 90 1.5 1986-1988 Passionate Interludes II 1 90 1.5 1986-1988 Playtime 1 90 1.5 1994 Prostitutes of Paris 1 60 1 1983 Romancing Sarah 1 90 1.5 1995 Sexual Healing 1 90 1.5 1994 Scoring 1 90 1.5 1995 - ------------------------------------------------------------------------------------------------------------- * see note
PLAYBOY TV UK/BENELUX PROGRAM LIBRARY
- ------------------------------------------------------------------------------------------------------------- Program Number of Length per Total Program Completion Type Title Episodes Episode (min.)* Hours Date - ------------------------------------------------------------------------------------------------------------- Movies Sex II 1 90 1.5 1994 continued Silent Strangers 1 90 1.5 1995 Starlet 1 60 1 1993 Steamy Windows 1 60 1 1994 Suite 18 1 90 1.5 1994 Supermodel I 1 90 1.5 1994 Supermodel II 1 60 1 1994 Swap II 1 120 2 1994 Tales of Erotica 1 120 2 1993 Tempted 1 90 1.5 1995 Undress to Thrill 1 90 1.5 1994 Vagablonde 1 90 1.5 1994 Watch Me 1 90 1.5 1995 Young Lady Chatterly II 1 90 1.5 1985 - ------------------------------------------------------------------------------------------------------------- Sub Total Movies 104.5 - --------------------------------------------------------------------------------------- TOTAL ALL PROGRAMMING 877.0 - ---------------------------------------------------------------------------------------
SCHEDULE 6 ---------- Clause 10.5 ----------- 1. In this Schedule the following expressions shall have the following meanings: (a) "the Annual Quota": the maximum number of Programme Hours of Playboy Programmes which the Company shall be obliged to licence from the Licensor in each year following the Effective Date and which shall be fifty (50) Programme Hours per year; (b) "the Shortfall": the amount by which the aggregate amount of the licence fees (other than amounts paid by the Licensor to third party licensors for the right to transmit Third Party Programmes in the Service and reimbursed to the Licensor by the Company hereunder) received by the Licensor prior to the Effective Date pursuant to clauses 7, 8 and 10 is less than the Minimum Amount. 2. The total number of Programme Hours of Playboy Programmes which is to be licensed by the Company pursuant to Clause 10.5 ("the Total Number") shall be calculated by dividing the Shortfall by 13,158 (thirteen thousand one hundred and fifty-eight). 3. The maximum period during which the provisions of Clause 10.5 shall continue in force following the Effective Date shall be determined by dividing the Total Number by the Annual Quota. 73 SCHEDULE 7 ---------- Clause 6.8 ---------- Categories that are not acceptable for advertising are firearms (or ads from any gun lobby organization) and other weapons, explosives or fireworks, massage parlours, telephone sex lines, sex clubs, sexually explicit (e.g. adult bookstore, X or NC-17 or similarly rated hardcore) audio-visual products, sex toys, materials depicting graphic sexual conduct, violence, sadism, sadomasochism, bondage, incest, bestiality or child pornography, classified advertising, psychics or similar, religious organizations and cults.
SCHEDULE 8 ---------- - ---------------------------------------------------------------------------------------- 1995 1996 1997 - ---------------------------------------------------------------------------------------- DATE PAYMENT DATE PAYMENT DATE PAYMENT - ---------------------------------------------------------------------------------------- July 15 100,000 January 15 100,000 January 15 100,000 - ---------------------------------------------------------------------------------------- September 15 100,000 February 15 100,000 February 15 100,000 - ---------------------------------------------------------------------------------------- November 15 50,000 March 15 100,000 March 15 100,000 - ---------------------------------------------------------------------------------------- April 15 100,000 April 15 100,000 - ---------------------------------------------------------------------------------------- May 15 150,000 May 15 200,000 - ---------------------------------------------------------------------------------------- June 15 200,000 June 15 225,000 - ---------------------------------------------------------------------------------------- November 15 100,000 November 15 100,000 - ---------------------------------------------------------------------------------------- December 15 175,000 December 15 200,000 - ---------------------------------------------------------------------------------------- TOTAL 1995 250,000 TOTAL 1996 1,025,000 TOTAL 1997 1,125,000 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- 1998 1999 2000 - ---------------------------------------------------------------------------------------- DATE PAYMENT DATE PAYMENT DATE PAYMENT - ---------------------------------------------------------------------------------------- January 15 100,000 January 15 100,000 January 15 100,000 - ---------------------------------------------------------------------------------------- February 15 100,000 February 15 100,000 February 15 100,000 - ---------------------------------------------------------------------------------------- March 15 100,000 March 15 100,000 March 15 200,000 - ---------------------------------------------------------------------------------------- April 15 200,000 April 15 200,000 April 15 200,000 - ---------------------------------------------------------------------------------------- May 15 200,000 May 15 200,000 May 15 200,000 - ---------------------------------------------------------------------------------------- June 15 200,000 June 15 275,000 June 15 250,000 - ---------------------------------------------------------------------------------------- November 15 125,000 November 15 150,000 November 15 175,000 - ---------------------------------------------------------------------------------------- December 15 200,000 December 15 200,000 December 15 200,000 - ---------------------------------------------------------------------------------------- TOTAL 1998 1,225,000 TOTAL 1999 1,325,000 TOTAL 2000 1,425,000 - ---------------------------------------------------------------------------------------- ----------------------------- 2001 AND EACH YEAR THEREAFTER DATE PAYMENT ----------------------------- January 15 150,000 ----------------------------- February 15 175,000 ----------------------------- March 15 200,000 ----------------------------- April 15 200,000 ----------------------------- May 15 200,000 ----------------------------- June 15 200,000 ----------------------------- November 15 175,000 ----------------------------- December 15 200,000 ----------------------------- TOTAL EACH YEAR 1,500,000 -----------------------------
75 SIGNED by ) ANTHONY J. LYNN ) /s/ Anthony J. Lynn for and on behalf of ) THE LICENSOR ) SIGNED by ) ) for and on behalf of ) /s/ Roger Luard THE COMPANY ) 76 FROM: PLAYBOY ENTERTAINMENT GROUP, INC of 9242 Beverly Boulevard Beverly Hills California 90210 United States of America ("the Licensor") TO: PLAYBOY TV UK/BENELUX LIMITED of Twyman House 16 Bonny Street London NW1 9PG ("the Company") Dated 2nd of February 1996 but made effective from 1st November 1995 Dear Sirs, We refer to the Programme Supply Agreement which you are proposing to enter into with us today ("the Agreement"). Words and expressions used in this letter agreement and defined in the Agreement shall have the respective meanings ascribed to them in the Agreement. In consideration of the Company agreeing to pay to us upon signature hereof the sum of (Pounds)1 (receipt of which is hereby acknowledged) and of the Company hereby agreeing to enter into the Agreement today, the Licensor hereby agrees and undertakes with the Company that the Licensor shall notwithstanding the provisions of the Agreement:- (a) licence and deliver to the Company in the First Year and in the second Year such number (which shall be in excess of the Minimum Number of Hours in respect of the First Year and in respect of the second Year) of Programme Hours of Programmes as may from time to time be required by the Scheduler for first transmission in the Service ("the Additional Programme Hours"); and (b) perform its obligations under paragraph (a) above at no additional cost, charge or expense to the Company over and above (i) the Basic Licence Fee payable under the Agreement in respect of the First Year and the second Year and (ii) any costs and expenses of the kind payable by the Company under Clauses 5 and 6 of the Agreement which shall during the First Year and the second Year also be payable in relation to the Additional Programme Hours, but otherwise it is hereby agreed by the parties that all of the terms and conditions of the Agreement (including without limitation the provisions of Clauses 2 and 4 of the Agreement) shall apply to the licensing, supply and delivery by the Licensor of the Additional Programme Hours under this letter agreement. In the event of any conflict between the terms of this letter agreement and the terms of the Agreement, the terms of this letter agreement shall prevail. 1 This letter agreement shall be governed by and construed in all respects in accordance with English law and the parties agree to submit to the exclusive jurisdiction of the English Courts as regards any claim or matter arising in relation to this letter agreement. The Licensor hereby appoints O'Melveny & Myers of 10 Finsbury Square, London EC2A 1LA as its authorised agent for the purpose of accepting service of process for all purposes in connection with this letter agreement. Please signify your agreement to and acceptance of the foregoing by signing and returning to us the enclosed duplicate of this letter. Yours faithfully, /s/ Anthony J. Lynn ................................ for and on behalf of PLAYBOY ENTERTAINMENT GROUP, INC Agreed and Accepted: /s/ Roger Luard ................................ for and on behalf of PLAYBOY TV UK/BENELUX LIMITED 2 This Agreement is entered into this 2nd day of February 1996, but made effective from 1st November 1995 by and between: (1) Harris Trust and Savings Bank of 111 West Monroe Street, Chicago, Illinois 60603, United States of America ("Harris"); (2) LaSalle National Bank of 120 La Salle Street, Chicago, Illinois 60603, United States of America ("LaSalle"); (3) Continental Shelf 16 Limited a company registered in England under no. 3005499 whose address is Twyman House, 16 Bonny Street, London NWl 9PG ("Flextech"); (4) Precis (1378) Limited a company registered in England under number 3092549 whose address is 6 Centaurs Business Park, Grant Way, Isleworth, Middlesex TW7 5QD ("Sky"); (5) Playboy TV UK/Benelux Limited of Twyman House, 16 Bonny Street, London NW1 9PG ("the Joint Venture") WHEREAS the parties are entering into this Agreement pursuant to an agreement dated 2nd February 1996 between Playboy Entertainment Group, Inc. ("Playboy"), Playboy Enterprises, Inc. ("Playboy Enterprises"), Flextech, Sky and the Joint Venture ("the Head Agreement"). NOW IT IS HEREBY AGREED as follows: 1. For the purposes of this Agreement: (a) all capitalised words and expressions used but not defined in this Agreement shall be defined as in the Head Agreement; 1 (b) the expression "the Lenders" shall mean each of Harris and La Salle and their respective assigns and successors in title under the Loan Documents; (c) the expression a "Default" shall mean any default by Playboy Enterprises in or in respect of any of its obligations under the Loan Documents or any other occurrence which in either case results in action by or on behalf of either or both of the Lenders to foreclose upon, assert control over, take possession of, sell or otherwise enforce its or their security over the Collateral or any part thereof; (d) the expression "Programming Collateral" shall mean the entire right title and interest of Playboy and each Affiliate of Playboy (including but not limited to Playboy Enterprises), and of their successors in title and assigns, in and to the Programmes, Third Party Programmes, any Future Programmes, the Trade Marks and any Delivery Material in respect of any of the Programmes, Third Party Programmes or Future Programmes; (e) the expression "Collateral" shall mean the Programming Collateral and the respective Interests (as defined in the Shareholders' Agreement) of Playboy and Playboy Enterprises in the Joint Venture; (f) the expression "Affiliate of Playboy" shall mean any person which is from time to time either directly or indirectly controlling, controlled by or under common control with Playboy and for this purpose "control" means in relation to a person the power of another person ("the Controlling Person") to secure, whether by the holding of shares or the possession of voting rights in or in relation to that person or any other person or the provisions of any agreement or otherwise, that the affairs of that person are conducted in accordance with the wishes of the Controlling Person; (g) the expression a "Future Programme" shall mean any Programme or Third Party Programme which (notwithstanding the absence of any obligation on the 2 Lenders to fund the creation or distribution of new Programmes or Third Party Programmes) comes into existence at any time after any Default. 2. In consideration of Flextech, Sky and the Joint Venture each agreeing to observe and comply with the provisions of the Shareholders' Agreement, the Trademark Agreement, the Programme Agreement and/or the Head Agreement which it is bound to observe and comply with, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, each of the Lenders hereby undertakes and covenants with Flextech, Sky and the Joint Venture that the Lenders shall: (a) promptly notify Flextech, Sky and the Joint Venture of the occurrence of any Default; (b) in the event of any Default forebear from exercising (other than in compliance with the provisions of Clause 3) any of their rights against, in or to the Programmes and Third Party Programmes then in existence, any Future Programmes or the Trade Marks, or any of them, or any Delivery Material in relation to any of the Programmes or Third Party Programmes, or any Future Programmes; (c) not, at any time whilst the Collateral is pledged to it, take any action (other than in compliance with the provisions of Clause 3) which would interfere with the performance by Playboy or Playboy Enterprises of their respective obligations under the Programme Agreement or under the Trademark Agreement or the exercise by the Joint Venture of any of its rights under the Programme Agreement or under the Trademark Agreement with respect to the Programmes and Third Party Programmes then in existence or any Future Programmes or with respect to the Trade Marks provided that neither Flextech nor Sky nor the Joint Venture is in default of and shall comply with all of their respective payment obligations under the Shareholders' 3 Agreement and the Programme Agreement in accordance with their terms, and subject always to the provisions of Clause 3. 3. Notwithstanding anything in this Agreement to the contrary: (a) action may be taken by or on behalf of any one or more of the Lenders to foreclose upon, assert control over, take possession of, sell or otherwise enforce its liens or security interests on the Collateral or any part thereof PROVIDED HOWEVER THAT (subject to the provisions of Clause 4): (i) any such action shall be taken subject to the terms of the sole and exclusive license granted to the Joint Venture under the Programme Agreement in and to each Programme and Third Party Programme within the territory ("the Territory") of the United Kingdom, the Republic of Ireland, Belgium, the Netherlands and Luxembourg (and each other country to which the Lenders have agreed with Playboy in writing) and subject also to the terms of the exclusive license granted to the Joint Venture to use the Trade Marks within the Territory under the Trademark Agreement; (ii) following the taking of any such action the Lenders shall either (A) permit and make available to the Joint Venture (or such person as the Joint Venture may direct the Lenders in writing) access (in each case to the extent that it is within the rights of the Lenders to do so) to the Delivery Material required to be furnished by Playboy to the Joint Venture under the Programme Agreement; or (B) (in the case of any sale or disposition of the Programming Collateral (or any part thereof) to any person under or by virtue of such action) require that person to permit and make available 4 to the Joint Venture (or such person as the Joint Venture may direct the Lenders in writing) access to the Delivery Material required to be furnished by Playboy to the Joint Venture under the Programme Agreement; (b) neither the Lenders, nor any person who acquires any rights in any Programming Collateral under or by virtue of any disposition or other enforcement of the Lenders' rights therein, assumes liability for any positive obligations of Playboy under the Programme Agreement including without limitation the obligations of Playboy to provide a Scheduler, to create or physically deliver Delivery Material to the Joint Venture, to create or fund the creation of Programmes or Delivery Material or to acquire or fund the acquisition of Third Party Programmes (it being understood and agreed that in the event of a Default the Lenders have no obligation to consent to, and shall be entitled to take steps to prevent, the creation by Playboy (or any other person acting on behalf of Playboy) of any Future Programmes or any Delivery Material in relation to any Future Programmes). 4. Provisos (i) and (ii) to sub-clause 3(a) above shall continue to apply if and so long as: (a) all payments due and to become due (if any) to Playboy under the Programme Agreement after the Joint Venture has been notified of any Default by the Lenders shall (subject to laws which provide third party priorities or otherwise provide to the contrary, to the order of any court of competent jurisdiction, to the provisions of Clause 5 below and to Playboy Enterprises continuing to perform its obligations under the Trademark Agreement in accordance with its terms and to the extent to which Playboy is continuing to perform its obligations under the Programme Agreement in accordance with its terms) have been made directly to the Lenders or their designee (to the extent so requested by the Lenders in writing to the Joint Venture); and 5 (b) in the event that any payments made by the Joint Venture to the Lenders or their designee pursuant to sub-clause 4(a) above are not in an amount sufficient to reimburse the Lenders for their reasonable out-of-pocket costs and expenses (if any) of permitting access to the Delivery Material in accordance with proviso (ii) to sub-clause 3(a) above, the Lenders shall have received within twenty-one (21) days after having notified the Joint Venture to that effect such additional amount as will so reimburse them. 5. In the event that the Joint Venture pays any additional amount to the Lenders pursuant to sub-clause 4(b) above, the Lenders agree that the Joint Venture shall be entitled to deduct such additional amount from any payment(s) which subsequently become(s) due to Playboy under the Programme Agreement. 6. Except where any governmental department, agency or regulatory body requires a Lender to assign to a governmental department, agency or regulatory body the promissory notes evidencing that Lender's credit to Playboy so as to maintain that Lender's liquidity, each of the Lenders undertakes that it shall not assign any of its rights under any of the Loan Documents to any person unless that person shall first have entered into an agreement with Flextech, Sky and the Joint Venture which is substantially similar in form and substance to this Agreement. 7. This Agreement shall be construed and the rights and obligations of the parties hereunder determined in accordance with the law of the State of Illinois, United States of America. The parties hereby consent to the non- exclusive jurisdiction of the federal courts of the federal districts having jurisdiction over the State of Illinois located in Cook County. 6 IN WITNESS WHEREOF, the parties herein have caused this Agreement to be entered into as of the date set forth above. HARRIS TRUST AND SAVINGS BANK /s/R. L. Dell'Artino By:__________________________ Its: Vice President LASALLE NATIONAL BANK /s/Robert Kastenholz By:__________________________ Its: Senior Vice President CONTINENTAL SHELF 16 LIMITED By:__________________________ Its: PLAYBOY TV UK/BENELUX LIMITED By:__________________________ Its: PRECIS (1378) LIMITED By:__________________________ Its: 7 IN WITNESS WHEREOF, the parties herein have caused this Agreement to be entered into as of the date set forth above. HARRIS TRUST AND SAVINGS BANK By:__________________________ Its: LASALLE NATIONAL BANK By:__________________________ Its: CONTINENTAL SHELF 16 LIMITED /s/Roger Luard By:__________________________ Its: PLAYBOY TV UK/BENELUX LIMITED /s/Roger Luard By:__________________________ Its: PRECIS (1378) LIMITED /s/D. Chance By:__________________________ Its: 8 AGREEMENT --------- This Agreement is entered into this 2nd day of February 1996, but made effective from 1st November 1995, by and between Playboy Entertainment Group, Inc. ("Playboy"), Playboy Enterprises, Inc. ("Playboy Enterprises"), Continental Shelf 16 Limited ("Flextech"), Precis (1378) Limited ("Sky") and Playboy TV UK/Benelux Limited (the "Joint Venture"). WHEREAS, Playboy, Playboy Enterprises, Flextech, Sky and the Joint Venture intend to enter into today that certain Programme Supply Agreement (the "Programme Agreement"), that certain Shareholders' Agreement (the "Shareholders' Agreement") and that certain Trademark Agreement (the "Trademark Agreement"); and WHEREAS, Playboy Enterprises has entered into, among other things, a loan and security agreement and related agreements (the "Loan Documents") with the Harris Trust and Savings Bank and the LaSalle National Bank (collectively, the "Lenders" which expression shall include their successors in title and assigns) pursuant to which the Lenders have or will cause to make a loan or a series of loans and other financial accommodations to Playboy Enterprises; and WHEREAS, to secure Playboy Enterprises' obligations under the Loan Documents, Playboy Enterprises has or intends to pledge certain assets to the Lenders as collateral for the aforementioned loans (the "Bank Collateral"); and WHEREAS, included among the Bank Collateral pledged or to be pledged to the Lenders in accordance with the Loan Documents are or may be those certain "Programmes" and "Third Party Programmes" as those terms are defined in Section 1.1 of the Programme Agreement and the "Trade Marks" as that term is defined in Section 1.1 of the Trademark Agreement; and WHEREAS, Flextech and Sky have sought assurances from Playboy and Playboy Enterprises as to their rights in and to the Programmes and the Third Party Programmes as set forth in the Programme Agreement and in and to the Trade Marks as set forth in the Trademark 1 Agreement in the event of any default by Playboy Enterprises under the Loan Documents or any other occurrence which results in any action by or on behalf of the Lenders to foreclose upon or assert control over the Bank Collateral; and WHEREAS, the parties herein deem it necessary to enter into this Agreement immediately prior to executing the Shareholders' Agreement, the Programme Agreement and the Trademark Agreement; NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth below and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Notwithstanding the provisions of the Shareholders' Agreement, the Programme Agreement and the Trademark Agreement but subject to the performance by Playboy and Playboy Enterprises of their obligations under paragraph 2 and sub-paragraph 3(a) hereof: (a) Flextech and Sky hereby consent to the pledging to the Lenders of any or all of the shares in the capital of, and the other Interests (as defined in the Shareholders' Agreement) in, the Joint Venture held by Playboy and/or Playboy Enterprises. (b) Each of Flextech and Sky hereby waives any rights which it might have pursuant to the Shareholders' Agreement to treat the pledging of any such shares to the Lenders as the deemed service by Playboy of a Transfer Notice (as defined in the Shareholders' Agreement) provided that nothing contained in this Agreement shall preclude either of Flextech and Sky from exercising any rights which it may have, whether under the Shareholders' Agreement or otherwise, in the event that any of the Lenders propose(s) to Transfer (as defined in the Shareholders' Agreement) any shares in the capital of the Joint Venture to any person. 2 (c) Each of Flextech and Sky hereby undertakes that it shall not Transfer any of its shares in the capital of the Joint Venture to any person other than Playboy or Playboy Enterprises unless Flextech and Sky (as the case may be) shall have obtained from any such person (a copy of which shall be delivered promptly to Playboy and Playboy Enterprises) a consent, waiver and undertaking substantially similar in form and substance to the consent, waiver and undertaking hereinabove given in sub-paragraphs l(a), (b) and (c). (d) The Joint Venture hereby consents to the pledging to the Lenders as part of the Bank Collateral of the following: (i) the Programmes, the Third Party Programmes and the Trade Marks; and (ii) the benefit of the Programme Agreement and the Trade Mark Agreement. 2. In consideration of Flextech, Sky and the Joint Venture each agreeing today to enter into the Shareholders' Agreement, the Trademark Agreement and/or the Programme Agreement and of the consents and waiver given by Flextech, Sky and the Joint Venture under paragraph 1 hereof, Playboy shall not later than 1st November 1995 obtain from each of the Lenders and deliver to Flextech, Sky and the Joint Venture a forbearance agreement duly executed by each of the Lenders in the form attached to this Agreement (the "Forbearance Agreement"). 3. The obligations of Playboy and Playboy Enterprises under this Agreement shall be continuing in nature such that: (a) in the event that Playboy Enterprises enters into any such other or further secured lending agreements with institutions other than the Lenders; or 3 (b) in the event that any of the Lenders assigns any of its rights under any of the Loan Documents to any person (other than any governmental department, agency or regulatory body as described in the exception to paragraph 6 of the Forbearance Agreement) Playboy and Playboy Enterprises shall promptly obtain from any such lender(s) or assignee(s) and deliver to Flextech, Sky and the Joint Venture an agreement substantially similar in form and substance to the Forbearance Agreement. 4. Playboy and Playboy Enterprises hereby jointly and severally warrant and represent to Flextech, Sky and the Joint Venture that the entry into the Loan Documents and the pledging of the Bank Collateral to the Lenders will not (unless any of the Lenders default in the performance of their obligations to Flextech, Sky and the Joint Venture under the Forbearance Agreement) interfere in any material respect with the performance by Playboy or Playboy Enterprises of their respective obligations (if any) under the Programme Agreement or under the Trademark Agreement or the exercise by the Joint Venture of any of its rights under the Programme Agreement or under the Trademark Agreement with respect to the Programmes and Third Party Programmes or with respect to the Trade Marks. 5. The obligations and liability of Playboy and Playboy Enterprises under this Agreement shall be joint and several. 6. This Agreement shall be governed by and construed in all respects in accordance with English law and the parties agree to submit to the exclusive jurisdiction of the English Courts as regards any claim or matter arising in relation to this Agreement. Playboy hereby appoints O'Melveny & Myers of 10 Finsbury Square London EC2A 1LA, England as its authorised agent for the purpose of accepting service of process for all purposes in connection with this Agreement. 7. In the event of any inconsistency between the provisions of this Agreement on the one hand and the provisions of the Shareholders' Agreement, the Programme Agreement 4 and the Trademark Agreement on the other hand, the provisions of this Agreement shall prevail. IN WITNESS WHEREOF, the parties herein have caused this Agreement to be entered into as of the date set forth above. PLAYBOY ENTERTAINMENT PLAYBOY ENTERPRISES, INC. GROUP, INC. By: /s/ Myron DuBow By: /s/ Robert D. Campbell ---------------------------------- ----------------------------------- Its: Senior Vice-Pres. Its: Treasurer PLAYBOY TV UK/BENELUX LIMITED CONTINENTAL SHELF 16 LIMITED By: /s/ Roger Luard By: /s/ Roger Luard --------------------------------- ----------------------------------- Its: Its: PRECIS (1378) LIMITED By: /s/ D. Chance By: --------------------------------- ----------------------------------- Its: D. Chance Its: 5 APPENDIX -------- This Agreement is entered into this day of 1995, by and between: (1) Harris Trust and Savings Bank of 111 West Monroe Street, Chicago, Illinois 60603, United States of America ("Harris"); (2) LaSalle National Bank of 120 La Salle Street, Chicago, Illinois 60603, United States of America ("LaSalle"); (3) Continental Shelf 16 Limited a company registered in England under no. 3005499 whose address is Twyman House, 16 Bonny Street, London NW1 9PG ("Flextech"); (4) Precis (1378) Limited a company registered in England under number 3092549 whose address is 6 Centaurs Business Park, Grant Way, Isleworth, Middlesex TW7 5QD ("Sky"); (5) Playboy TV UK/Benelux Limited of Twyman House, 16 Bonny Street, London NW1 9PG ("the Joint Venture") WHEREAS the parties are entering into this Agreement pursuant to an agreement dated 1995 between Playboy Entertainment Group, Inc. ("Playboy"), Playboy Enterprises, Inc. ("Playboy Enterprises"), Flextech, Sky and the Joint Venture ("the Head Agreement"). NOW IT IS HEREBY AGREED as follows: 1. For the purposes of this Agreement: 6. (a) all capitalised words and expressions used but not defined in this Agreement shall be defined as in the Head Agreement; (b) the expression "the Lenders" shall mean each of Harris and La Salle and their respective assigns and successors in title under the Loan Documents; (c) the expression a "Default" shall mean any default by Playboy Enterprises in or in respect of any of its obligations under the Loan Documents or any other occurrence which in either case results in action by or on behalf of either or both of the Lenders to foreclose upon, assert control over, take possession of, sell or otherwise enforce its or their security over the Collateral or any part thereof; (d) the expression "Programming Collateral" shall mean the entire right title and interest of Playboy and each Affiliate of Playboy (including but not limited to Playboy Enterprises), and of their successors in title and assigns, in and to the Programmes, Third Party Programmes, any Future Programmes, the Trade Marks and any Delivery Material in respect of any of the Programmes, Third Party Programmes or Future Programmes; (e) the expression "Collateral" shall mean the Programming Collateral and the respective Interests (as defined in the Shareholders' Agreement) of Playboy and Playboy Enterprises in the Joint Venture; (f) the expression "Affiliate of Playboy" shall mean any person which is from time to time either directly or indirectly controlling, controlled by or under common control with Playboy and for this purpose "control" means in relation to a person the power of another person ("the Controlling Person") to secure, whether by the holding of shares or the possession of voting rights in or in relation to that person or any other person or the provisions of any agreement or otherwise, that the affairs of that person are conducted in accordance with the wishes of the Controlling Person; 7. (g) the expression a "Future Programme" shall mean any Programme or Third Party Programme which (notwithstanding the absence of any obligation on the Lenders to fund the creation or distribution of new Programmes or Third Party Programmes) comes into existence at any time after any Default. 2. In consideration of Flextech, Sky and the Joint Venture each agreeing to observe and comply with the provisions of the Shareholders' Agreement, the Trademark Agreement, the Programme Agreement and/or the Head Agreement which it is bound to observe and comply with, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, each of the Lenders hereby undertakes and covenants with Flextech, Sky and the Joint Venture that the Lenders shall: (a) promptly notify Flextech, Sky and the Joint Venture of the occurrence of any Default; (b) in the event of any Default forebear from exercising (other than in compliance with the provisions of Clause 3) any of their rights against, in or to the Programmes and Third Party Programmes then in existence, any Future Programmes or the Trade Marks, or any of them, or any Delivery Material in relation to any of the Programmes or Third Party Programmes, or any Future Programmes; (c) not, at any time whilst the Collateral is pledged to it, take any action (other than in compliance with the provisions of Clause 3) which would interfere with the performance by Playboy or Playboy Enterprises of their respective obligations under the Programme Agreement or under the Trademark Agreement or the exercise by the Joint Venture of any of its rights under the Programme Agreement or under the Trademark Agreement with respect to the Programmes and Third Party Programmes then in existence or any Future Programmes or with respect to the Trade Marks 8. provided that neither Flextech nor Sky nor the Joint Venture is in default of and shall comply with all of their respective payment obligations under the Shareholders' Agreement and the Programme Agreement in accordance with their terms, and subject always to the provisions of Clause 3. 3. Notwithstanding anything in this Agreement to the contrary: (a) action may be taken by or on behalf of any one or more of the Lenders to foreclose upon, assert control over, take possession of, sell or otherwise enforce its liens or security interests on the Collateral or any part thereof PROVIDED HOWEVER THAT (subject to the provisions of Clause 4): (i) any such action shall be taken subject to the terms of the sole and exclusive license granted to the Joint Venture under the Programme Agreement in and to each Programme and Third Party Programme within the territory ("the Territory") of the United Kingdom, the Republic of Ireland, Belgium, the Netherlands and Luxembourg (and each other country to which the Lenders have agreed with Playboy in writing) and subject also to the terms of the exclusive license granted to the Joint Venture to use the Trade Marks within the Territory under the Trademark Agreement; (ii) following the taking of any such action the Lenders shall either (A) permit and make available to the Joint Venture (or such person as the Joint Venture may direct the Lenders in writing) access (in each case to the extent that it is within the rights of the Lenders to do so) to the Delivery Material required to be furnished by Playboy to the Joint Venture under the Programme Agreement; or 9. (B) (in the case of any sale or disposition of the Programming Collateral (or any part thereof) to any person under or by virtue of such action) require that person to permit and make available to the Joint Venture (or such person as the Joint Venture may direct the Lenders in writing) access to the Delivery Material required to be furnished by Playboy to the Joint Venture under the Programme Agreement; (b) neither the Lenders, nor any person who acquires any rights in any Programming Collateral under or by virtue of any disposition or other enforcement of the Lenders' rights therein, assumes liability for any positive obligations of Playboy under the Programme Agreement including without limitation the obligations of Playboy to provide a Scheduler, to create or physically deliver Delivery Material to the Joint Venture, to create or fund the creation of Programmes or Delivery Material or to acquire or fund the acquisition of Third Party Programmes (it being understood and agreed that in the event of a Default the Lenders have no obligation to consent to, and shall be entitled to take steps to prevent, the creation by Playboy (or any other person acting on behalf of Playboy) of any Future Programmes or any Delivery Material in relation to any Future Programmes). 4. Provisos (i) and (ii) to sub-clause 3(a) above shall continue to apply if and so long as: (a) all payments due and to become due (if any) to Playboy under the Programme Agreement after the Joint Venture has been notified of any Default by the Lenders shall (subject to laws which provide third party priorities or otherwise provide to the contrary, to the order of any court of competent jurisdiction, to the provisions of Clause 5 below and to Playboy Enterprises continuing to perform its obligations under the Trademark Agreement in accordance with its terms and to the extent to which Playboy is continuing to perform its obligations under the Programme Agreement in accordance with its terms) 10 have been made directly to the Lenders or their designee (to the extent so requested by the Lenders in writing to the Joint Venture); and (b) in the event that any payments made by the Joint Venture to the Lenders or their designee pursuant to sub-clause 4(a) above are not in an amount sufficient to reimburse the Lenders for their reasonable out-of-pocket costs and expenses (if any) of permitting access to the Delivery Material in accordance with proviso (ii) to sub-clause 3(a) above, the Lenders shall have received within twenty-one (21) days after having notified the Joint Venture to that effect such additional arnount as will so reimburse them. 5. In the event that the Joint Venture pays any additional amount to the Lenders pursuant to sub-clause 4(b) above, the Lenders agree that the Joint Venture shall be entitled to deduct such additional amount from any payment(s) which subsequently become(s) due to Playboy under the Programme Agreement. 6. Except where any governrnental department, agency or regulatory body requires a Lender to assign to a governmental department, agency or regulatory body the promissory notes evidencing that Lender's credit to Playboy so as to maintain that Lender's liquidity, each of the Lenders undertakes that it shall not assign any of its rights under any of the Loan Documents to any person unless that person shall first have entered into an agreement with Flextech, Sky and the Joint Venture which is substantially similar in form and substance to this Agreement. 7. This Agreement shall be construed and the rights and obligations of the parties hereunder determined in accordance with the law of the State of Illinois, United States of America. The parties hereby consent to the non- exclusive jurisdiction of the federal courts of the federal districts having jurisdiction over the State of Illinois located in Cook County. 11 IN WITNESS WHEREOF, the parties herein have caused this Agreement to be entered into as of the date set forth above. HARRIS TRUST SAVINGS BANK By: /s/ R.L. Dell'Artino ------------------------ Its: Vice President LASALLE NATIONAL BANK By: /s/ Robert Kastenholz ------------------------ Its: Senior Vice President CONTINENTAL SHELF 16 LIMITED By: ------------------------ Its: PLAYBOY TV UK/BENELUX LIMITED By: ------------------------ Its: PRECIS (1378) LIMITED By: ------------------------ Its: 12 EX-10.10(A) 5 MEMORANDUM DTD 7/31/95 RE: PAY TV SERVICE IN JAPAN Exhibit 10.10(a) MEMORANDUM OF AGREEMENT PLAYBOY CHANNEL--JAPAN The following sets forth the mutual understanding as of July 31, 1995, of Playboy Entertainment Group, Inc. ("Playboy") and Tohokushinsha Film Corporation ("Tohokushinsha") with respect to the material terms of their agreement to form and operate a programming service venture (the "Venture") in Japan, which agreement, including the terms described in this Memorandum of Agreement and such additional terms as the parties may mutually agree, after good faith negotiations, will be set forth in a Shareholders' Agreement, a Program Supply Agreement and a Trademark License Agreement (collectively, the "Definitive Agreements"). Those material terms are as follows: PURPOSE OF VENTURE: The Venture will own and operate a subscriber-based adult oriented television service in Japan. The name of the adult oriented television service will be "The Playboy Channel" (the "Channel"). For purposes hereof and of the Definitive Agreements (other than the purpose of defining the Channel), an "adult programming service" is any block of programming that (a) represents at least 60% of the hours of programming between 5:00 p.m. and 3:00 a.m. on a channel (irrespective of such channel's method of distribution), and (b) regularly contains nudity, depicts sexual acts and is adult-oriented. FORMATION: The Venture will be organized as a corporation under the laws of Japan on the following basis ("Y" means-Japanese Yen; "M" means millions): OWNERSHIP: 80.125% to Tohokushinsha and 19.875% to Playboy. PAID-IN-CAPITAL: Y120,000,000, of which Tohokushinsha will contribute 80.125% (Y96,150,000) and Playboy will contribute 19.875% (Y23,850,000). Playboy's contribution of Y23,850,000 will be the first and last capital contribution that Playboy will be required to make, except as otherwise expressly provided herein. Because Playboy is required by law to make payment in full for its shares at the time of their issuance, rather than allowing for the execution of a promissory note or other arrangement as consideration, Tohokushinsha will advance to Playboy the funds for such capital contribution, which advance will be recouped by Tohokushinsha from any monies due Playboy from the Venture or Tohokushinsha. DISTRIBUTIONS: Notwithstanding the above, it is agreed that (a) the venturers will be entitled at all times to a percentage EXECUTED AGREEMENT interest of the net profits of the Venture distributable to its shareholders in accordance with their respective ownership percentage interest in the Venture, and (b) if a Liquidity Event (as defined below) occurs, Playboy will be entitled to 30% of any net proceeds therefrom distributed to the Venture's shareholders less an amount that is the greater of (i) the number of shares that constitutes 10.125% of the stock on a fully diluted basis, without giving effect to the Liquidity Event, at the time of the Liquidity Event (i.e., as if additional authorized, but unissued, shares had been issued in an amount equal to 10.125% of the outstanding shares), times the per share Initial Value (as defined in Issued Shares below), plus accrued interest thereon at the Japanese Prime Lending Rate as announced by The Industrial Bank of Japan for domestic lending from the date of initial capitalization, or (ii) the Book Value (which shall be defined for all purposes herein as the difference between total assets and total liabilities (after giving effect to taxes, interest and depreciation) as reflected in the Venture's financial records and determined as of the date immediately prior to the date of such transaction in accordance with Japanese generally accepted accounting principles consistently applied) of 10.125% of the Venture on a fully diluted basis without giving effect to such Liquidity Event; provided, however, that for the purpose of calculating the foregoing reduction, in no event shall such Book Value of 10.125% of the Venture be greater than the net proceeds of the Liquidity Event that would be distributable to a holder of 10.125% of the then currently issued and outstanding shares. The venturers will cause the Venture to distribute promptly to the venturers all Excess Cash (as defined below), including, but not limited to, Excess Cash resulting from the net proceeds of a Liquidity Event. For purposes hereof, "Liquidity Event" means any of the following: (i) a sale of all or part of the assets of the Venture, (ii) a public offering of shares in the Venture, whether or not the offered shares are newly issued for such purpose, (iii) a merger or other reorganization if after such event the equity interests in the surviving corporation or other entity is held other than by Tohokushinsha and Playboy in the proportions each held shares in the Venture immediately prior to such event, or (iv) a total or partial liquidation of the Venture. For purposes hereof, "Excess Cash" means that amount in excess of amounts reserved for payment of current and anticipated liabilities, including any liabilities owed to Tohokushinsha and any Base Trademark Royalties and Program License Fees (as defined below) payable to Playboy, 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. The Venture will not declare any dividend or make any distribution on its shares so long as there remains outstanding any indebtedness of the Venture or of Playboy to Tohokushinsha. Page 2 Issued Shares: 2,400, with an initial value of Y50,000 per share (the "Initial Value"). Authorized Capital: Y120 M; unless required by Japanese regulators to increase in connection with the Venture's application for DTH (as defined below). If Playboy and Tohokushinsha are so required by Japanese regulators to make additional capital contributions to the Venture, such additional capital contributions will be made by each venturer in accordance with its respective ownership percentage interest in the Venture. At Playboy's request (to the extent that there are insufficient funds then owing to Playboy from the Venture), Tohokushinsha will advance to Playboy the funds for such additional capital contribution, which advance will be recouped by Tohokushinsha from any monies due Playboy from the Venture or Tohokushinsha. Powers: The Venture will have all customary powers of a business corporation, including the power to issue securities to the public. Additional Rights Re Shares: Without limiting the requirements described below regarding approval of any direct or indirect 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. Playboy will have the right to come-along or otherwise participate in any such transaction up to 30% thereof. "DIRECT-TO-HOMES" TRANSMISSION ("DTH"): The Channel initially will be offered to cable systems, hotels and multiple-dwelling closed-circuit systems. The Venture will use its reasonable efforts to obtain a license to transmit "direct-to- homes" via direct broadcast satellite or other direct-to-homes delivery systems. The parties expect to make such application as soon as feasible, and, in good faith based upon reasonable business criteria (taking into account only the interests of the Venture), will mutually determine when the Venture will seek such license, and, if a license is obtained, when such transmissions will commence. If the government refuses to grant such a license due to the Venture's exhibition of non-Playboy programming, the Venture will use reasonable efforts to conform such programming so that the DTH license may be obtained, so long as such conformance is not materially financially detrimental to the Venture. CORPORATE GOVERNANCE: The Venture will have four directors, one of whom will be appointed by Playboy and three by Tohokushinsha. Meetings of the Board will require not less than 30 days' prior Page 3 written notice. Japanese broadcast law requires that all directors of companies providing DTH service be Japanese nationals. Accordingly, prior to the Venture making application to provide DTH service, Playboy will appoint Japanese nationals in place of any of its non-qualified directors. The following events will require the approval of each party: amendments to charter documents, merger or other reorganization, issuance of additional shares, declaration of dividends, distributions, stock splits, reverse stock splits or redemption of shares, acting in a manner which is materially inconsistent with an approved Business Plan or an annual budget, or otherwise materially outside the ordinary course of business, a public offering of shares by the Venture, entering into any other businesses, and extending the Channel to different media or to different territories (without prejudice to Playboy's separate right as Licensor under the Trademark License Agreement and Program Supply Agreement to withhold consent, in its sole discretion, to any territorial expansion of the Channel), loans by the Venture to any Shareholder, or termination, dissolution or liquidation of the Venture other than as expressly provided below. The parties will negotiate in good faith regarding further reasonable corporate governance provisions for the protection of the minority shareholder in connection with the Definitive Agreements. Each venturer will have the right to examine the books and records of the Company and, in addition, Playboy at its own cost will have the annual right to audit or cause an audit of the books and records of the Venture by a Japanese licensed accountant (other than the Venture's accountant) during the Venture's normal business hours upon not less than ten (10) business days prior written notice to Tohokushinsha within ninety (90) days after Playboy's receipt of the Venture's audited annual financial statements for the year then ended. Each shareholder of the Venture shall bear its own costs of attendance at Board meetings. There will be an operating advisory committee comprised of four members, two of whom will be appointed by each of the parties hereto. Decisions of the operating advisory committee must be unanimously agreed to by the parties. VENTURE OPERATING COSTS: Tohokushinsha or related entities will lend funds to 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 third-party borrowings of the Venture. Such loans to the Venture will bear interest at the Prime Lending Rate in Japan for domestic lending as announced from time to time by The Industrial Bank of Japan. Funds advanced by Tohokushinsha and its related entities shall be evidenced by promissory notes of the Venture payable upon the demand of Tohokushinsha; provided, however, that Tohokushinsha shall not make demand thereon or be entitled to receive payment therefor until and unless and only to the extent that there is sufficient Excess Cash. Playboy will Page 4 not be obligated to guarantee loans made to the Venture by third parties or by Tohokushinsha or its related entities. The term "related entities" will include any lenders controlled by, controlling or under common control with, Tohokushinsha. TRADEMARK LICENSE: Playboy will cause Playboy Enterprises, Inc. to grant to the Venture a license in the form of the trademark license agreement attached hereto as Exhibit A (the "Trademark License Agreement") to use the trademarks "Playboy" and the "Rabbit Head Design" and such combination or additional trademarks as described in and pursuant to the Trademark License Agreement (the "Trademarks"), in, and in connection with, the Channel and the marketing and promotion of the Channel. This grant of license will be made to the Venture on an exclusive basis with respect to television services only, and only for use in the country of Japan. The only exceptions to the foregoing exclusivity will be customary presentation and logo credits to "Playboy" and "The Playboy Channel" in the title and end credits sequences of programs licensed to others as permitted hereunder and the other exceptions described in the Trademark License Agreement. The Venture will not sub-license the Trademarks except with the consent of Playboy. Until the Definitive Agreements are executed, references in the Trademark License Agreement to the Shareholders' Agreement and the Program Supply Agreement will be deemed to be a reference to the applicable provisions of this Memorandum of Agreement. BASE TRADEMARK ROYALTY: For the right to use the Playboy Trademarks as set forth above, the Venture will pay Playboy a base trademark royalty equal to 2.5% of Adjusted Gross Revenues ("Base Trademark Royalty"). "Adjusted Gross Revenues" shall mean the gross revenues actually received by the Venture from subscribers to the Channel (including pay per view revenues) and all other revenues from operation of the Channel by the Venture less (a) consumption and other taxes (other than income taxes), (b) the costs of collection (not including any "overhead" type charges of the Venture or Tohokushinsha) of the gross revenues and (c) costs paid by the Venture of protecting the Trademarks in Japan applicable to the Venture as provided in the Trademark License Agreement. Notwithstanding the foregoing, for the purpose of calculating the Base Trademark Royalty, the term "Adjusted Gross Revenues" will not include revenues derived from home shopping and advertising. BONUS TRADEMARK ROYALTY: At the end of any applicable year, the Venture will pay to Playboy certain bonus trademark royalties based upon the formula set forth in Exhibit B attached hereto and incorporated herein by reference, which will be calculated on a quarterly basis during such year and on a year-end annual basis as set forth in the Trademark License Agreement (the "Bonus Trademark Royalty"). Page 5 PROGRAMMING RESTRICTIONS: Non-Playboy supplied programming is to be consistent with the quality and content standards of Playboy as evidenced by the programming exhibited on Playboy TV in the United States. In no event will the Venture utilize non-Playboy supplied programming which, if such programming were subject to Japan's voluntary rating system, would not be rated, or which would violate the prohibitions set forth in Section 4.1 of the Trademark License Agreement. The percentage of edited versions of what would otherwise (i.e., absent the editing) constitute in the United States X or NC-17 or similarly rated programming shall be reasonably consistent with the then prevailing percentage of such programming on Playboy TV in the United States. In addition, the Venture will consider in good faith any comments Playboy may have with respect to other matters regarding programming content, format and other material elements of the Channel's transmission format, but the judgment of the Venture will be binding, subject to any specific requirements or restrictions contained herein or in the Trademark License Agreement. At Playboy's option, Playboy shall have the right to cause the Venture to hire, at reasonable compensation and at the Venture's expense, an individual to evaluate all non-Playboy supplied programming for purposes of insuring compliance with the programming and advertising restrictions herein and in the Trademark License Agreement (the "Program Evaluator"). Playboy shall designate the individual it desires to have serve as such Program Evaluator, which designation shall be subject to Tohokushinsha's good faith approval not to be unreasonably withheld. The Program Evaluator shall have access all non-Playboy programming and materials to be exhibited on the Channel reasonably in advance of the scheduling of such exhibition. The Program Evaluator shall report directly to a Playboy or Playboy Enterprises, Inc. executive to be designated by Playboy. If the Program Evaluator determines any program or other material to be unacceptable, he shall immediately notify both Playboy and the Venture, the Venture shall immediately refrain from any use of such program or material and the Venture shall either (i) propose alternative or edited programming that addresses and eliminates the Program Evaluator's concerns or (ii) if the Venture disputes the assertion that such program or material violates applicable restrictions, the parties will submit such dispute to mediation and arbitration as set forth below. Pending resolution of any such dispute, no use shall be made of the program or material in question. Playboy shall at any time have the right to cause the Venture to fire any such Program Evaluator and hire a replacement, provided that such replacement shall be subject to Tohokushinsha's good faith approval not to be unreasonably withheld. If the parties are unable to agree with respect to the hiring or replacement of any Program Evaluator, the matter shall be submitted to mediation and arbitration as set forth below. Page 6 Prior to the appointment of any Program Evaluator, or at any time thereafter, the Venture will submit to Playboy for its inspection and at its expense, representative samples of all items and materials to be exhibited on the Channel as may be reasonably requested by Playboy for purposes of determining compliance with the terms hereof. Playboy shall have three (3) business days to notify Tohokushinsha in writing of any objection to any such items or materials or the same shall be deemed approved. If Playboy objects to any program or material or part thereof as being violative of the terms hereof, the Venture shall immediately cease any use thereof pending resolution by the parties or pursuant to mediation and arbitration as provided for below. The Venture will not market, promote, distribute, sell, telecast, cablecast or otherwise exploit any product or service that is produced or licensed by and that carries the brand name or logo of any other men's sophisticate magazine, such as Penthouse or Hustler. The Venture will also be subject to the restrictions on advertising (including home shopping) on and or for the Channel set forth in Section 4.2 of the Trademark License Agreement. SUPPLYING OF PROGRAMS: Subject to any rights existing in favor of others as of the date hereof as described in Exhibit C attached hereto (the "Existing Rights"), Playboy will make available to the Venture all of its program inventory and, in any event, in each of the indicated years of operation, Playboy will make available to the Venture and the Venture will license from Playboy not less than the following number of program hours: 1st Year - 120 Hours 2nd Year - 130 Hours 3rd Year - 150 Hours 4th Year - 160 Hours 5th Year - 170 Hours Subsequent Years - 180 Hours All programs offered to the Venture will be of the same general type, and at least the same level of production value, as programs exhibited on Playboy TV in the United States. Notwithstanding the foregoing, Playboy will not be obligated to supply those motion pictures produced by Playboy that (a) have a negative cost in excess of $1 million, which minimum amount will be adjusted annually by an amount equal to the increase in the Consumer Price Index for Los Angeles County for the applicable year, (b) are plot driven, (c) have at least two recognizable names, (d) are at least 80 minutes in length and (e) are licensed on a multiple territory basis which includes Japan; it being agreed that, subject to the Existing Rights, Tohokushinsha shall have a right of first negotiation for a period of thirty (30) days and first refusal (i.e., the right to match any offer which Playboy is willing to accept which is less favorable to Playboy Page 7 than the last offer by Tohokushinsha during such first negotiation period) with respect to any such film which satisfies the requirements of (a)-(d) above, but which is offered by Playboy for license in Japan on a single territory basis (as opposed to on a multiple territory basis which includes Japan), and if Tohokushinsha elects to exercise such first negotiation right it must be for all of the rights which Playboy is offering for license in such film in Japan (for example, if Playboy is offering the film for licensing on a "all rights" basis, then such first negotiation shall be for the acquisition of "all rights"; or for example, if Playboy has licensed all theatrical rights to the film as part of a multiple territory license, but the television rights are available for licensing on a Japan only basis, then such rights of first negotiation and first refusal shall apply to such television rights). If any such film is licensed by the Venture, the Venture will have the option to apply the portion of the fee paid for such film attributable to the television exhibition rights thereto toward the aggregate Minimum Guaranteed Program License Fee payable for the minimum number of program hours the Venture is obligated to license for the applicable year, as provided below. If the Venture elects to so apply such fee, the number of hours of programming will correspondingly be applied against the minimum number of program hours that Playboy is required to make available to the Venture. Not more than 25% of the program hours offered by Playboy will be "filler," that is, programs of 10 minutes or less in length. The following will not apply toward the minimum number of program hours to be offered by Playboy each year: programs exhibited or transmitted in Japan via any form of television during the immediately preceding three-year period; programs for which the cost of making changes for compliance with the Japanese broadcast code would not be commercially reasonable; and programs previously offered to and accepted by the Venture. With respect to programs that were previously offered and accepted, or programs exhibited or transmitted during the immediately preceding three-year period, the Venture may at its option license such programs at a reduced rate equal to 60% of the otherwise applicable program license fees, and, in such event, (i) the program license fees actually paid for television rights for such programs shall apply toward the aggregate Minimum Guaranteed Program License Fees (as defined below) payable for the minimum number of program hours the Venture is obligated to license for the applicable year, as set forth below, and (ii) the number of hours of such programming so licensed will correspondingly be applied against the minimum number of program hours that Playboy is required to make available to the Venture. PROGRAM LICENSE TERMS: In each of the indicated years of operation set forth above, the Venture will license from Playboy the corresponding indicated minimum number of program hours Page 8 specified above under "Supplying of Programs." Such licenses will be for television rights only, for a one year period from first availability, for twenty (20) exhibition days per program, with up to three (3) exhibitions in any one consecutive twenty-four (24) hour period counted as a single exhibition day. Subject to the Existing Rights and any future licenses to JSB (which future licenses shall not allow for an expansion of the adult programming licensed by Playboy to JSB beyond twenty-five (25) hours per year), during the term of the Venture, Playboy will not enter into any license agreement with any third party which allows for the television exhibition in Japan of any program in Playboy's inventory (other than pictures which are the subject of the third sentence under "Supplying of Programs") (i) on a competing adult programming service prior to the expiration of a period of twelve (12) months after the expiration of the one year license period for such program or (ii) on any non-adult programming service prior to the expiration of a period of six (6) months after expiration of the one year license period for such program. Playboy reserves and shall be free to exercise, license and otherwise exploit all rights, other than television rights, in and to its program inventory at any time; provided that no license of home video rights shall provide for a holdback of the right to license television rights to any program for a period of more than one year after home video availability for that program. Subject to the applicable exhibition holdback periods specified in the third sentence of this section, Playboy shall have the right to license television rights to the programs in the Playboy inventory to third parties; provided that any such licensing of Playboy inventory to any such third party must be (i) for exhibition on a so-called "unbranded" basis (i.e., such licenses shall not allow the use of the Playboy Trademarks in connection with such programs or the advertising thereof other than in customary production, presentation and logo credits in advertising for, and in the title or end sequences of, such programs) and (ii) pursuant to an agreement which also provides for the licensing of home video or other rights in addition to such television rights. Notwithstanding the foregoing restrictions on Playboy's right to license program inventory to others or any other provision hereof, if the Venture is permitted to enter the DTH market but Tohokushinsha determines (in violation of the terms hereof) that the Venture will forego the DTH market, then the Venture's rights with respect to any Playboy programming inventory and Trademarks, including rights pursuant to then existing program licenses hereunder, shall automatically be converted to non-exclusive rights for all uses licensed hereunder, other than for the DTH market, and Playboy shall thereafter have the exclusive rights to use or license such programming and Trademarks in the DTH market notwithstanding any subsequent entry by the Venture in the DTH market. In the event that Japanese subtitled or dubbed materials are created pursuant to Playboy's license agreements with any third party, to the Page 9 extent that Playboy controls the rights thereto, Playboy will provide to the Venture access to such materials; provided, however, that the Venture will pay Playboy for any out of pocket costs incurred in making such materials available. Playboy will request applicable third party licensees to make such materials available to the Venture. PROGRAM LICENSE FEES: The Venture will pay Playboy or its designated affiliate a per-program license fee (the "Program License Fee") equal to the greater of (i) US $.05 per subscriber per hour, or (ii) the highest fee per program hour paid by the Venture to any other program supplier during the preceding twelve-month period to the Venture (excluding any fee per program hour paid to any program supplier which supplied to the Venture not more than two (2) programs which in the aggregate do not exceed four (4) hours of programming at such fee during such twelve-month period). Notwithstanding the foregoing, Playboy shall be entitled to receive a minimum guaranteed program license fee ("Minimum Guaranteed Program License Fee") for each hour of Playboy programming adjusted annually as follows: Year 1 Y300,000 Year 2 Y330,000 Year 3 Y360,000 Year 4 Y390,000 Year 5 Y420,000 Year 6 Y450,000 Year 7 Y465,000 Year 8 and each year thereafter Y480,000 Playboy shall receive with respect to each program hour, (a) the greater of (x) the amount of the Minimum Guaranteed Program License Fee noted above or (y) an amount calculated pursuant to clause (i) or (ii) of the first sentence of this Section, whichever is applicable, plus (b) a percentage of the Venture's share of revenues from pay-per-view transactions, which percentage will be negotiated in good faith prior to the entry of the Venture into the pay-per-view business. For the purpose of this Program License Fee computation on a per-program basis: 1. The "applicable number of subscribers" will be determined as follows: the sum of (a) the number of subscribers to the Channel existing at the end of the month immediately preceding the first month in which the relevant program became available to the Channel for exhibition and (b) the number of subscribers existing at the end of the fifth month following the first month of such program's availability, which sum is to be divided by two. 2. The subscriber count per hotel will be computed using the higher of a 60% occupancy rate and the occupancy rate agreed to in the particular hotel license agreement. Page 10 3. Program length will be prorated 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. c. programs of 71-100 minutes in length will be treated as 90-minute programs. d. "filler" programs will be offered by Playboy in blocks of 60 minutes and shall be applied toward program length for Program License Fee calculation purposes only in such blocks. 4. Program License Fee computations will be performed by the Venture within 30 days following the end of the fifth month following the first month of each program's availability to the Channel. The Venture will withhold from all sums (including any Base and Bonus Trademark Royalties and Program License Fees) otherwise payable to Playboy hereunder an amount equal to any advances of capital made by Tohokushinsha to or on behalf of Playboy, and apply such withheld sums to same. Playboy hereby irrevocably instructs and authorizes the Venture to withhold such sums and to pay such sums directly to and in accordance with the instructions of Tohokushinsha. The Venture undertakes that the aggregate Program License Fees payable to Playboy for the first 120 hours of programs supplied by Playboy will not be less than Y36 M. The Venture will prepare and furnish Program License Fees and Base and Bonus Trademark Royalty statements to Playboy for each quarter within 60 days after the end of such quarter. The Venture will also prepare and furnish to each venturer unaudited monthly management financial statements and audited annual financial statements. Such audited annual financial statements shall be prepared in accordance with Japanese generally accepted accounting principles consistently applied. ADVERTISING: When and if the Venture commences the practice of carrying advertising on the Channel, the Venture will make available without cost to Playboy and its affiliates an aggregate of six (6) minutes per calendar day (at exhibition times mutually agreed upon by the parties in good faith) of free advertising time for products bearing Playboy-owned trademarks (other than television programming) sold by Playboy and its affiliates, of which three (3) minutes shall be transmitted within the hours of 9:00 p.m. to 12:00 midnight local Japanese time, or, at Playboy's Page 11 option, some or all of such three (3) minutes may be transmitted within a block of Playboy supplied programming not transmitted during the period of 9:00 p.m. to 12:00 midnight. Each such advertisement will be consistent with the format generally used by the Channel (e.g., thirty (30) second spots). PAYMENTS: (a) The Venture will pay Playboy the Program License Fees, Base Trademark Royalties and Bonus Trademark Royalties as follows: (i) The Minimum Guaranteed Program License Fees payable for the minimum number of program hours in each year will be due on the first day of such year but may be paid in equal quarterly installments on the first business day of each quarter of such year; (ii) The actual amount of Program License Fees earned during each quarter will be computed as of the last day of such quarter and the Venture will pay the excess (if any) of such amount over the amount paid with respect to such quarter pursuant to sub-paragraph (i) above within 60 days after the last day of such quarter; (iii) The Base Trademark Royalties earned during each quarter will be computed as of the last day of such quarter and paid within 60 days after the last day of such quarter; and (iv) The Bonus Trademark Royalties earned during each quarter will be computed as of the last day of such quarter and, after taking into account any year-end adjustments to such quarterly calculations necessitated by the year-end annual basis calculation pursuant to Section 3.2(b) of the Trademark License Agreement, the aggregate amount of the Bonus Trademark Royalties earned during each year will be paid within 60 days after the last day of such year. (b) All the above payments will be made by wire transfer of immediately available funds, net of any withholding required by applicable law. Playboy will from time to time designate one or more accounts into which such payments will be made. (c) All the above payments will be made in U.S. Dollars using the yen to dollar conversion rate at the Telegraph Transfer Sell price published daily by The Industrial Bank of Japan then in effect upon the due date of such payment. (d) Any payment not made when due will bear interest from the date due to and including the date payment is made in full at a rate equal to the average of the reference rate charged by The Bank of America, N.A., and the Japanese prime rate charged Page 12 by the Industrial Bank of Japan to domestic customers in effect during such period. (e) All other terms of payment of the Program License Fees, the Base Trademark Royalties and the Bonus Trademark Royalties will be negotiated by the parties and reflected in the Definitive Agreements. THIRD PARTIES: Playboy will be responsible for payment of all third-party payments arising out of or in connection with agreements entered into by Playboy in connection with programs furnished by Playboy hereunder, including royalties, residuals and participations. NON COMPETE: The parties agree that Tohokushinsha will not have an equity interest in a competing adult programming service (as defined above) during the lifetime of the Venture. However, Tohokushinsha will have the right to distribute a competing adult programming service; provided that such arrangement will require the consent of Playboy if the aggregate of any distribution fees and other compensation (excluding compensation received for services and materials provided at market rates by Tohokushinsha such as uplink and transponder fees) is in excess of 25% of the gross revenues derived from such distribution, in which event Playboy shall then have the right to receive 30% of the aggregate of such distribution fees and other compensation in excess of such 25% (however named or described) paid to Tohokushinsha. If the aggregate of such distribution fees and other compensation payable to Tohokushinsha equals or is less than 25% of the gross revenues derived from distribution of such competing service, Tohokushinsha must notify Playboy of the existence of such arrangement but Playboy shall have no rights in or to such distribution fee or other compensation. Tohokushinsha will have the right to acquire programming from third parties and to license same to the Venture upon the terms applicable to transactions with related entities set forth below; provided, however, that Tohokushinsha must refrain from licensing such a program to a competing adult programming service for a period of twelve (12) months after its last exhibition on the Channel and to any non-adult programming service for a period of six (6) months after its last exhibition on the Channel. DELIVERY: For each Playboy-supplied program licensed by the Venture, Playboy, at its expense, will make physical delivery of broadcast quality program masters in customary format and meeting customary technical specifications for Japan to a shipper designated by the Venture (the cost of such shipment to be a Venture expense), as well as all other customary delivery items. The tape stock for master tapes only will be supplied by Playboy on a loan basis. The Venture will pay the cost of conforming program masters to import regulations and Japanese broadcast code Page 13 requirements regarding content, where commercially reasonable to do so (and if not commercially reasonable, will select substitute programs), and dubbing and/or subtitling costs. The Venture will give Playboy access to dubbed tracks for its use, subject to payment of costs, including third-party payments resulting from Playboy's use thereof, such as duplication and delivery. The Venture will not otherwise have the right to edit the Playboy-supplied programs without Playboy's prior consent. At the termination of the Venture all modified or altered versions of programs will, at the election of Playboy, (i) revert to and become the property of Playboy upon its payment of an amount equal to 40% of the cost of such modifications or alterations, or (ii) be destroyed. PROGRAM BLOCKS: The Channel will run Playboy-supplied programs in time blocks separate from time blocks for non-Playboy-supplied programs, such time blocks to be separately identified to viewers through the use of "bumpers" or "walls" of such duration and manner to be mutually determined by the parties. "Filler" programs supplied by Playboy without a Playboy or related logo or presentation credit may be run in either the Playboy or non-Playboy time blocks. Subject to the provisions of the "Programming Restrictions" section above, scheduling decisions will be made by the management of the Venture. Playboy executives will have access to executives of the Venture to discuss scheduling. RELATED PARTIES. The Venture may enter into contracts and other arrangements, including, without limitation, facilities and services agreements, with a venturer or entities controlling, controlled by or under common control with, or an officer, director or shareholder of, a venturer ("Related Parties") provided such arrangements are on commercially reasonable terms and conditions consistent with those then prevailing in the industry and no less favorable to the Venture as then prevailing market terms with non-affiliated third parties; it being understood and agreed, however, that the restrictions set forth in this sentence shall not apply to the Definitive Agreements. It is contemplated that the Venture will contract with Tohokushinsha for uplink and transponder procurement services; post-production services, including localization; program acquisition services; advertising agency services; and other appropriate facilities and services. RESTRICTIONS ON TRANSFER: So long as the Venture's shares are not publicly traded, direct or indirect transfer of shares will require the approval of 85% of all of the members of the Board of Directors, except that a transfer to an entity controlled by, which controls, or which is under common control with a venturer will be unrestricted, but the original venturer shall remain responsible and liable for such transferee's compliance with all Page 14 of the transferor's obligations hereunder and in the Definitive Agreements. In any event, all terms and conditions which bind a venturer will bind such venturer's successors, assignees and transferees. Such restrictions will be noted by a legend affixed to all share certificates issued by the Venture and will be included in the Articles of the Venture. BUSINESS PLAN: The Venture will prepare and furnish to its venturers a business plan for its first four years of operations and a series of annual budgets for each year of operations covered by such business plan (the "Initial Business Plan"), all of which must be approved by the venturers (such approval may not be unreasonably withheld) prior to commencement of the Venture's operations. At least three (3) months prior to the expiration of any business plan, the Venture will prepare and furnish a business plan (including appropriate annual budgets) for the following three-year period thereafter (a "Three-year Plan") and each such Three-year Plan must be approved by both parties hereto (such approval may not be unreasonably withheld). If such approval is not obtained from both parties within forty-five (45) days after its receipt of any such Three-year Plan, both parties will submit the dispute to mediation and, if required, to binding arbitration in accordance with the procedures set forth herein. Each Three-Year Plan will conform to the format and level of detail of the Initial Business Plan. Any amendments to the Initial Business Plan and each Three-Year Plan must be mutually agreed by the venturers. TERMINATION OF VENTURE: (a) The Venture may only be terminated as follows: (i) at any time by mutual agreement of the parties; (ii) by Tohokushinsha upon its good faith determination that continuation of the Venture is commercially impracticable due to market forces or government action or regulations; (iii) by either party upon the breach of the other party of any of its material obligations under the Definitive Agreements (after notice thereof and reasonable opportunity to cure); (iv) by either party upon 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 Venture or the other party; provided, that the insolvency of the Venture shall not be a basis for termination so long as Tohokushinsha provides funds to the Venture to enable it to meet its obligations as they become due; (v) otherwise as required under Japanese law; provided, that to the fullest extent permitted, the parties waive any other grounds or basis for termination of the Venture under Japanese law to the extent more extensive than those set forth in this paragraph (a), including, but not limited to, any provision providing for the termination, dissolution, liquidation or other winding up of the Venture upon the vote of a specified percentage of the members of the Board of Directors or the shareholders; and (vi) by either party upon a Page 15 Two-Year Event of Termination (defined below) as provided in paragraph (c) below. Notwithstanding the foregoing, prior to the end of the sixth year of the Venture, neither party may terminate the Venture except pursuant to clauses (i), (iii), (iv) and (v) above. (b) Promptly following any proper election to terminate the Venture, the Program Supply Agreement (subject to paragraphs (d) and (g) below) and the Trademark License Agreement will automatically terminate and the Venture will be wound up and dissolved. After payment or other satisfaction of all liabilities of the Venture, the remaining tangible assets of the Venture will be liquidated and the proceeds distributed to the shareholders. (c) Beginning at the end of the sixth year of the Venture, the following shall constitute a "Two-Year Event of Termination": (i) for any two consecutive years (including, by way of clarification and not limitation, the fifth and sixth years of the Venture) the actual operating income of the Venture for each such year is more than 20% less than that which was projected for such applicable year in the applicable Three-Year Plan, and (ii) for the same two consecutive years described in (i), the Bonus Trademark Royalty actually paid to Playboy in each of such two consecutive years is less than 90% of the Bonus Trademark Royalty projected for each such year as described in the applicable Business Plan, as it may be amended prior to the date with respect to which such calculation of Bonus Trademark Royalty is made, ("Anticipated Annual Bonus Trademark Royalty") and the Venture fails to pay within sixty (60) days following receipt from Playboy of a notice of termination an amount equal to the difference between (A) the amount of Bonus Trademark Royalty actually paid for such year by the Venture and (B) the greater of (x) the Anticipated Annual Bonus Trademark Royalty or (y) the minimum Anticipated Annual Bonus Trademark Royalty which shall be equal to the following amounts for the year indicated: Year 5 Y50,000,000 Year 6 Y55,000,000 Year 7 Y60,000,000 Year 8 and thereafter, such minimum Anticipated Annual Bonus Trademark Royalty as may be mutually agreed by the parties in subsequent Business Plans, as the same may be amended from time to time (d) If Playboy terminates the Venture due to a Two-Year Event of Termination and, as of such termination, Tohokushinsha has not recouped all funds furnished to the Venture through capital contributions and loans, notwithstanding the termination of the Definitive Agreements thereby, Playboy will enter into a new Page 16 Program Supply Agreement such that Tohokushinsha shall have access to programming thereunder on an non-exclusive basis until the earlier of (i) the second anniversary of such termination by Playboy or (ii) the date on which Tohokushinsha has recouped all such funds. In addition, if Playboy terminates the Venture due to a Two-Year Event of Termination, Playboy will forfeit its equity interest in the Venture by transferring all of its shares in the Venture to Tohokushinsha without consideration therefor. (e) If Tohokushinsha terminates the Venture other than due to Playboy's material breach or bankruptcy and continues the business of the Venture, Tohokushinsha will buy all Playboy's shares in the Venture for the Book Value of such shares. (f) If Tohokushinsha terminates the Venture (other than due to Playboy's material breach or bankruptcy) and, pursuant to negotiations entered into within seventy-five (75) days and sale concluded within nine (9) months of the date of such termination, sells all or a part of the business of the Venture to an entity or person other than an entity controlling, controlled by or under common control with Tohokushinsha, Tohokushinsha will buy a corresponding percentage of Playboy's shares in the Venture as follows: for the greater of (i) the sum of (A) 19.875% of the fair market value of the total consideration received by Tohokushinsha in such sale, and (B) 10.125% of the fair market value of the total consideration received by Tohokushinsha in such sale less an amount equal to the greater of (1) the number of shares that constitutes 10.125% of the stock on a fully diluted basis, without giving effect to such sale (i.e., as if additional authorized, but unissued, shares had been issued in an amount equal to 10.125% of the outstanding shares), times the per share Initial Value, plus accrued interest thereon at the Prime Lending Rate in Japan for domestic lending from the date of initial capitalization, or (2) the Book Value of 10.125% of the Venture on a fully diluted basis, without giving effect to such sale (provided, however, that for the purpose of calculating the foregoing reduction, in no event shall such Book Value of 10.125% of the Venture be greater than 10.125% of the fair market value of the total consideration received by Tohokushinsha in such sale), and (ii) the Book Value of 30% of the Venture less an amount equal to the greater of (A) the number of shares that constitutes 10.125% of the stock on a fully diluted basis, without giving effect to such sale (i.e., as if additional authorized, but unissued, shares had been issued in an amount equal to 10.125% of the outstanding shares), times the per share Initial Value, plus accrued interest thereon at the Prime Lending Rate in Japan for domestic lending from the date of initial capitalization, or (B) the Book Value of 10.125% of the Venture on a fully diluted basis, without giving effect to such sale. The amount payable pursuant to the foregoing sentence will be Page 17 decreased by any amount previously received by Playboy pursuant to paragraph (e) above. (g) For purposes of this Memorandum of Agreement, the phrase "terminate the Venture" and other phrases referring to the termination or dissolution of the Venture means the termination of the relationships between the parties set forth in the Definitive Agreements, except as otherwise expressly agreed by the parties in writing in connection with a termination of the Venture (e.g., where the parties have agreed or may agree to continue certain rights or obligations of a party after such termination). Termination of the Venture may, but will not necessarily, require the winding-up and dissolution of the corporation formed for the Venture; provided, however, that if the Venture is terminated by Tohokushinsha other than in accordance with the terms hereof or of the Definitive Agreements or is terminated and a substantially similar business is not continued by Tohokushinsha or sold to a third party, Playboy will have the right to compel a winding-up and dissolution of the corporation and the distribution of the proceeds thereof in accordance with applicable law. If the corporation is not wound-up or dissolved immediately following the termination of the Venture, the name of the corporation will be changed to omit any references to Playboy or any of its trademarks. RIGHT OF FIRST REFUSAL: If Playboy has elected to terminate the Venture (other than by mutual agreement or due to Tohokushinsha's material breach or bankruptcy) or is in material breach of this Memorandum of Agreement or the Definitive Agreements, as applicable, and so long as Tohokushinsha is not in- material breach of this Memorandum of Agreement or the Definitive Agreements, as applicable, Tohokushinsha will have a right of first refusal as to any transaction offered to, or solicited by, Playboy (that Playboy is prepared to accept) with regard to the transmission or other exploitation of the Playboy Channel or other adult programming service in Japan for a period of eighteen (18) months after such termination of the Venture. The existence or exercise of such right will not in any way affect the other rights or remedies of the parties under this Memorandum of Agreement or the Definitive Agreements. GOVERNING LAW: With respect to matters involving the Venture's programming and intellectual property and the license thereof, this Memorandum of Agreement and the Definitive 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 of corporate governance and capitalization, this Memorandum of Agreement and the Definitive Agreements shall be governed by and construed under the laws of Japan without reference to conflicts of law principles. Page 18 CONFIDENTIALITY: Each of the parties agrees to preserve the confidentiality of this Memorandum of Agreement and all of its terms herein and all non-public or proprietary information relating to the other party, its affiliates and their respective businesses, whether or not disclosed in connection with the negotiation of this Memorandum of Agreement or the Definitive Agreements or in connection with the operation of the Venture's business. The parties intend to issue two press releases regarding the execution of this Memorandum of Agreement and the commencement of the Channel and will issue such releases as mutually acceptable to the parties. Except as otherwise agreed herein, neither party shall disclose any such information or the fact that they have entered into this Memorandum of Agreement; provided, however, that should disclosure (whether by press release or otherwise) of the existence and terms of this Memorandum of Agreement or other information be required under applicable United States or Japanese law, required in order to enforce the provisions hereof or be made upon the mutual consent of both parties, the parties will mutually cooperate in the preparation of such disclosure or press release and no disclosure or press release shall be made without the consent of both parties except where, after good faith effort to obtain such consent, a party is advised by counsel that such disclosure is legally required or is necessary to enforce this Memorandum of Agreement. MEDIATION AND ARBITRATION: (a) Any dispute arising out of or relating to this Memorandum of Agreement will be resolved in accordance with the procedures specified herein which will be the sole and exclusive procedures for the resolution of any such disputes. The parties intend that these provisions shall be valid, binding, enforceable and irrevocable and shall survive any termination of this Memorandum of Agreement or the Definitive Agreements. (b) The parties will attempt in good faith to resolve any dispute arising out of or relating to this Memorandum of Agreement promptly by negotiation between executives who have authority to settle the controversy. All reasonable requests for information made by one party to the order will be honored. (c) If the dispute has not been resolved by negotiation within 15 business days, the parties will endeavor to resolve such dispute by mediation under the Center for Public Resources Mediation Procedure for Business Disputes. Unless the parties agree otherwise, the mediator will be selected from the Center for Public Resources Panel of Neutrals with notification to Center for Public Resources. (d) (i) Any controversy or claim arising out of or relating to this Memorandum of Agreement or the breach, termination or Page 19 validity thereof, which remains unresolved thirty (30) business days after appointment of a mediator, will be settled by final and binding arbitration in accordance with the Center for Public Resources Non-Administered Arbitration Rules, by a sole arbitrator; provided, however, that if either party will not participate in a non-binding procedure, the other may initiate binding arbitration before expiration of the above period. The arbitration will 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 will be Los Angeles, California. The arbitrator is not empowered to award punitive, consequential or incidental damages and each party hereby irrevocably waives any right to recover such damages, with respect to any dispute resolved by arbitration. (ii) The arbitrator will 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" will mean the party whose final settlement offer (or other position or monetary claim) prior to the start of arbitration is closest to the judgment awarded by the arbitrator, regardless of whether such judgment is entered into in favor of or against such party. (iii) The statute of limitations of the State of California applicable to the commencement of a lawsuit will apply to the commencement of an arbitration hereunder, except that no defenses will be available based upon the passage of time during any negotiation or mediation called for by the preceding paragraphs. (e) All negotiations pursuant to paragraphs (b) and (c) above are confidential and will be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. (f) Each party agrees that service by registered or certified mail, return receipt requested, delivered to such party at the address provided on the signature page hereof 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 submits to the jurisdiction of the courts of the State of California, United States of America, and any federal court located within said state for the purpose of any suit, action, proceeding or judgment with respect to this Memorandum of Agreement, regardless of where any alleged breach or other action, omission, fact or occurrence giving rise thereto occurred. Each party hereby waives any claim that any suit, action or proceeding brought in California has been brought in any inconvenient forum. Page 20 BINDING AGREEMENT: The parties contemplate (and hereby agree to use their reasonable efforts) promptly negotiating in good faith and executing the Definitive Agreements, and such other related agreements as may be required, embodying the foregoing and other customary terms and conditions. However, until such Definitive Agreements or other related agreements are executed, this Memorandum of Agreement constitutes a binding agreement between the parties and their entire understanding of the material terms and conditions regarding the Venture, subject to any modifications or additions as may be agreed by the parties in writing. This Memorandum of Agreement has been duly authorized by all required corporate actions and each signatory hereto has all power and authority to bind its respective corporation. COUNTERPARTS: This Memorandum of Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties indicate their agreement to the foregoing by signing in the space provided below. AGREED TO AND ACCEPTED: TOHOKUSHINSHA FILM CORPORATION By: /s/ Tetsu Uemura --------------------------- Address: 17-7 Akasaka 4-chome Minato-ku Tokyo 107, Japan Attention: Managing Director PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Anthony J. Lynn --------------------------- Address: 9242 Beverly Boulevard Beverly Hills, California 90210 Attention: President Page 21 EXHIBIT A Form of Trademark License Agreement ------------------------ TRADEMARK LICENSE AGREEMENT ------------------------ BETWEEN PLAYBOY ENTERPRISES, INC. AS LICENSOR AND THE PLAYBOY CHANNEL JAPAN, INC. AS LICENSEE Dated as of _________________, 1995 TABLE OF CONTENTS ----------------- Page No. -------- 1. DEFINITIONS..................................................... 1 2. GRANT OF LICENSE................................................ 2 3. TRADEMARK ROYALTIES............................................. 5 4. QUALITY CONTROL................................................. 8 5. TITLE AND PROTECTION OF THE TRADEMARKS; USE OF THE TRADEMARKS...................................................... 9 6. OWNERSHIP OF THE TRADEMARKS..................................... 11 7. INFRINGEMENTS................................................... 12 8. INDEMNIFICATION................................................. 13 9. TERMINATION..................................................... 14 10. EFFECTS OF TERMINATION.......................................... 15 11. EQUITABLE RELIEF................................................ 16 12. MISCELLANEOUS................................................... 16 (i) THIS TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and entered into as of __________________, 1995 between PLAYBOY ENTERPRISES, INC. (the "Licensor") and THE PLAYBOY CHANNEL JAPAN INC. (the "Licensee"). RECITALS -------- WHEREAS, Licensor is the owner of certain rights in and to the trademarks identified in Schedule I hereto; WHEREAS, pursuant to the Shareholders' Agreement and the Program Supply Agreement (each, as defined below), Licensor wishes to permit Licensee to use the Trademarks (as defined below) in connection with a television service and certain programs transmitted in such service, on the terms and subject to the conditions of this Agreement; and WHEREAS, Licensee acknowledges the reputation and quality of goods and services heretofore sold or distributed under the Trademarks and the Licensor's desire to safeguard, promote and enhance that reputation by ensuring the future quality of goods and services sold or distributed under the Trademarks. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, and intending to be legally bound, the parties agree as follows: 1. DEFINITIONS. In this Agreement (including the Recitals hereto) the following terms shall have the following meanings: "License Year" means each calendar year during the term hereof; provided, that the first License Year shall commence on the date hereof and end at midnight on December 31, 1996; further provided, that if the expiration or termination of this Agreement is effective other than at the end of a calendar year, then the final period of less than a calendar year ending at midnight on the effective date of such expiration or termination shall be deemed to be the final License Year. "License Quarter" means each three (3) month period commencing each January 1, April 1, July 1 and October 1 of each License Year; provided, that the first License Quarter of the first License Year shall commence on the date hereof and end at midnight on the last day prior to the commencement of the next regular License Quarter; further provided, that if the expiration or termination of this Agreement is effective other than at the end of such a three month period, then the final period of less than three (3) months ending at midnight on the effective date of such expiration or termination shall be deemed to the final License Quarter. 1 "Playboy Program" means any Program supplied by Licensor under the Program Supply Agreement. "Program" means any television program which is, or is scheduled to be, broadcast or transmitted in the Service, including, but not limited to, any Playboy Program. "Program Supply Agreement" means the Program Supply Agreement of even date herewith between Playboy Entertainment Group, Inc. and Licensee or in the absence of a fully-executed Program Supply Agreement, the applicable provisions of that certain Memorandum of Agreement of even date herewith. "Service" means the television program service which is to be provided for reception within the Territory by Licensee in accordance with the Shareholders' Agreement and the Program Supply Agreement. "Shareholders' Agreement" means the Shareholders' Agreement of even date herewith among Playboy Entertainment Group, Inc., Tohokushinsha Film Corporation and Licensee relating to the formation and governance of Licensee or in the absence of a fully-executed Shareholders' Agreement, the applicable provisions of that certain Memorandum of Agreement of even date herewith. "Television Service" means any television service or channel (other than the Service) which is (i) broadcast, distributed or transmitted by any means (including but not limited to all forms of terrestrial, satellite and cable television transmission, broadcast and delivery) whether now known or hereafter invented, and (ii) received in the Territory. "Territory" means the nation of Japan. "Trademarks" means the trademarks registered or for which there are pending applications, as listed in Schedule I and, subject to the provisions of the second sentence of Section 2.7 below, any Additional Marks (as defined in Section 2.7) included as Trademarks pursuant to Section 2.7. "Transmission Period" has the meaning set forth in the Program Supply Agreement. 2. GRANT OF LICENSE. 2.1 Grant of Exclusive License. (a) Upon and subject to the terms and conditions set forth in this Agreement, Licensor hereby grants to Licensee, and Licensee hereby accepts, an exclusive license to use the Trademarks in the Territory in relation to the broadcast, transmission and distribution of the Service and the Programs as 2 part of the Service, and in relation to the promotion and marketing of the Service and the Programs as part of the Service in any media whatsoever. Notwithstanding the foregoing, Licensee shall not have any right to use any of the Trademarks on or in connection with any Program that is not a Playboy Program except as the name of the Service. Further, Licensee shall not have the right to use the Trademarks on or in connection with any product, goods or services except the Service and the Programs as part of the Service. (b) During the term of this Agreement, Licensor shall not itself use or authorize any other person to use the Trademarks or any confusingly similar designation within the Territory in relation to any Television Service; provided, however, that (i) use of the Trademarks or any confusingly similar designation in customary production, presentation and logo credits in advertising for and the title or end credits sequences of programs licensed to others in the Territory as permitted under the Program Supply Agreement shall be permitted and shall not constitute a breach of this sub-paragraph (b), and (ii) use of the Trademarks or any confusingly similar designation in relation to any Television Service, or any programs or other items of any description included in any Television Service, which is intended solely for reception in any country or countries outside the Territory but which is also received in the Territory shall not constitute a breach of this sub-paragraph (b) so long as (1) that Television Service was transmitted in a manner not intended for general reception in the Territory and (2) Licensor did not have actual knowledge at the time it granted the respective license that the Television Service was generally and regularly received in the Territory. (c) Notwithstanding the provisions of sub-paragraphs (a) and (b) above to the contrary, the license granted hereunder shall become non-exclusive in the Territory without any further action on the part of either Licensor or Licensee if the Licensee fails to enter the Direct-to-Homes ("DTH") market in violation of the terms of the Shareholders' Agreement (all as more fully described in the Shareholder's Agreement); provided, however, that Licensee shall not have any license with respect to the DTH market and Licensor shall have the exclusive right to use and/or License the use of the Trademarks in the DTH market in the Territory. All the other terms and conditions of this Agreement shall continue in full force and effect. 2.2 All Other Rights Retained by Licensor. All rights not expressly granted to Licensee hereunder are reserved to Licensor for its own use and benefit. Without limiting the generality of the foregoing, nothing in this Agreement shall prevent Licensor from doing any or all of the following: (a) subject to Section 2.1(b)(ii), using or granting one or more others the right or license to use the Trademarks on or in connection with a Television Service in any area of the world other than the 3 Territory; (b) using or granting one or more others the right or license to use the Trademarks on or in connection with any service (other than a Television Service) or goods in any or all areas of the world including the Territory; and (c) retaining and exercising the exclusive rights hereby reserved to Licensor to design, manufacture, advertise, promote, sell and distribute and license the design, manufacture, advertising, promotion, sale and distribution of any and all products and services in any or all areas of the world including the Territory other than a Television Service in the Territory. 2.3 Restriction on Sub-Licensing. Licensee shall not be entitled to grant any sub-license of any of the rights granted under Section 2.1 without, in each case, the express prior written approval of Licensor. 2.4 Duration of License. The license granted under Section 2.1 shall continue in force until any termination of this Agreement in accordance with the provisions of Section 9. 2.5 Restriction on Scope of Service. During the term of this Agreement, Licensee shall not be involved in providing a television program service using the Trademarks which is intended for general reception, whether by use of decoder devices or otherwise, outside the Territory. 2.6 Restrictions on Modifications of Trademarks. Licensee shall not use, cause or authorize to be used any word, device, design, slogan or symbol confusingly similar to any or all of the Trademarks. During the term of this Agreement, any or all of the following shall not be used by Licensee on or in connection with the Service or the Programs without, in each case, Licensor's express prior written consent: (a) permutations of any or all of the Trademarks; or (b) secondary or combination marks including or derived from any of the Trademarks; or (c) new words, devices, designs, slogans or symbols derived from any of the Trademarks; or (d) new words, devices, designs, slogans or symbols created especially for use with the Service or the Programs as part of the Service which do not derive from, include or represent a permutation of any of the Trademarks ("Licensee Originated Marks"). Notwithstanding the foregoing, Licensor shall not withhold consent for any Licensee Originated Mark unless it reasonably determines that such Licensee Originated Mark or Licensee's intended use thereof would be detrimental to the Trademarks or Licensor. In addition, except as provided in the 4 next sentence, upon termination of the Venture, Licensee shall cease all use of all Licensee Originated Marks and all rights therein shall automatically be transferred to and vest equally in Licensor and Licensee; provided that neither Licensor nor Licensee shall make any use of any such Licensee Originated Marks without the prior written consent of the other. Notwithstanding the provisions of the immediately preceding sentence, upon termination of the Venture Licensee shall have the right to continue to use, and shall own all rights in, any Licensee Originated Mark which (i) Licensee creates and utilizes during the term of this Agreement for the express purpose of differentiating non-Playboy supplied programming transmitted over the Service from Playboy supplied programming (for example Licensee Originated Marks created for the purpose of identifying program blocks of non-Playboy supplied programming) and (ii) do not derive from or include, is not confusingly similar to, and was not used during the term hereof in combination with any of the Trademarks. 2.7 License of Additional Trademarks. Licensor hereby agrees to include as Trademarks licensed hereunder (i) any trademarks or permutations, secondary, combination or derivative marks owned by Licensor and used in connection with the broadcast, transmission, advertising or promotion of the Playboy Channel television service in the United States provided that the same are, in Licensor's reasonable determination, at such time applicable to the Service and/or the Playboy Programs and are available for use by Licensee pursuant hereto and are available for registration by Licensor in the Territory, and (ii) any other mark to which Licensor consents pursuant to Section 2.6(a), (b) or (c) above (all of such marks referred to in (i) and (ii) being herein sometimes referred to as "Additional Marks"). The parties understand and agree that, notwithstanding anything to the contrary contained herein, no Additional Marks or Licensee Originated Marks shall be subject to any of the representations, warranties or protection, maintenance or indemnification obligations of Licensor hereunder and that if Licensor elects to register any such Additional Marks in the Territory, Licensor will pay for the costs of such registration and the maintenance thereof during the term of this Agreement, unless such registration is made at the request of Licensee, in which case Licensee shall reimburse Licensor for such costs Pursuant to the foregoing, Licensor agrees that the following secondary or combination marks shall constitute Additional Marks hereunder: "The Playboy Channel" and "Playboy Television". 3. TRADEMARK ROYALTIES. ------------------- 3.1 Base Trademark Royalties. Licensee will pay to Licensor base trademark royalties (the "Base Trademark 5 Royalties") in an amount equal to 2.5% of Adjusted Gross Revenues (as defined below). For purposes hereof, "Adjusted Gross Revenues" means the aggregate amount of gross revenues actually received by Licensee in connection with the Service from subscribers (including pay per view revenues) and all other revenues from operation of the Service (excluding only advertising and home shopping revenues) less the sum of (a) consumption and other taxes (excluding any taxes based on or measured by income or revenues), (b) the costs of collection of the Adjusted Gross Revenues (excluding any items allocable to overhead or otherwise associated with the usual conduct of Licensee's business), and (c) the costs paid by Licensee of protecting the Trademarks in Japan as provided in this Agreement. 3.2 Bonus Trademark Royalties. (a) In addition to Base Trademark Royalties, Licensee will pay to Licensor certain bonus trademark royalties (the "Bonus Trademark Royalties") calculated as of the end of each License Quarter in accordance with the following formula; provided, that the following formula shall never be deemed to yield a result of less than zero: Bonus Trademark Royalty = (X - Y) x W x Z WHERE: X = The average number of subscribers to the Service during such License Quarter; Y = The number of subscribers indicated in the relevant Business Plan (as defined in the Shareholders' Agreement), as the same may be amended prior to the date with respect to which such calculation is made, as the "Break-even Number of Subscribers"; W = a dollar amount calculated by dividing (i) the total gross revenues of Licensee from all sources during such License Quarter less the sum of any indebtedness for borrowed money owing by the Licensee to any of its shareholders, by (ii) the number identified for X above; and Z = 8%. (b) Licensee shall also calculate the Bonus Trademark Royalty on an annual basis (i.e. by adjusting the items of the formula to reflect a License Year period). (c) A statement of the Bonus Trademark Royalties earned during each License Quarter and each License Year shall be prepared by Licensee and delivered to Licensor within sixty (60) days after the end of such License Quarter and License Year, respectively. 6 3.3 Payment Terms. ------------- (a) Licensee will pay Licensor the Base Trademark Royalties and Bonus Trademark Royalties as follows: (i) The Base Trademark Royalties earned during each License Quarter will be computed as of the last day of such License Quarter and paid within 60 days after the last day of such License Quarter; and (ii) The Bonus Trademark Royalties earned during each License Quarter will be computed as of the last day of such License Quarter. If the aggregate of the Bonus Trademark Royalties so computed varies from the Bonus Trademark Royalties computed for the related License Year, the amount of Bonus Trademark Royalties will be increased or decreased, as applicable, to reflect the License Year computation (which the parties agree is intended to take into account applicable year-end adjustments to such quarterly calculations). The aggregate amount of the Bonus Trademark Royalties earned during each License Year will be paid within 60 days after the last day of such License Year. (b) All the above payments will be made by wire transfer of immediately available funds, net of any withholding required by applicable law. Licensor 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. (c) Although all the above calculations will be made on the basis of Japanese Yen, the above payments will be made in United States Dollars using the Japanese Yen to United States Dollar conversion rate at the Telegraph Transfer Sell price published daily by The Industrial Bank of Japan then in effect upon the due date of such payment. (d) Any payment not made when due will bear interest from the date due to and including the date payment in full is made at a rate equal to the average of the reference rate charged by the Bank of America, N.A., and the Japanese prime rate charged by The Industrial Bank of Japan to domestic customers in effect during such period. 4. QUALITY CONTROL. All Programs and other material transmitted by Licensee shall comply with the specifications set forth in this Section 4. 4.1 Program Restrictions. Although the Programs transmitted by the Service will depict nudity and will allow strong or explicit language, Licensee is prohibited from transmitting and covenants that it will not permit the transmission of scenes or other material depicting any of the following: (i) the 7 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 to appear nude and for consent to marriage, but is portrayed as under the legal age for consent to appear nude. In that regard, no actor will appear in any Program who is not at least 18 years of age and no actor will be depicted as under the age of 16 or such more senior age as may be required by Japanese law. Notwithstanding the foregoing, immaterial exceptions to the restrictions set forth in clauses (ii) and (iii) above (i.e., immaterial in frequency or duration) shall not constitute a breach of this Section 4.1. 4.2 Advertising and Home Shopping Restrictions. All advertising transmitted on the Service and all direct marketing activities conducted on the Service shall comply with the specifications set forth in this Section 4.2. Licensee shall not transmit advertising or direct marketing programs which advertise or promote any of the following: (i) firearms (or advertisements from any gun lobby organization) and other weapons, explosives or illegal fireworks; (ii) massage parlors, telephone sex lines, sex clubs, sexually explicit (e.g., adult bookstore, X or NC-17 or similarly rated hard-core) audio-visual products, sex toys, materials depicting graphic sexual conduct or depicting any matter subject to the restrictions set forth in Section 4.1 above; (iii) classified advertising, including, but not limited to, psychics or similar persons or services; and (iv) religious organizations and cults. Further, Licensee shall not advertise or promote the Service or otherwise use the Trademarks in any media in connection with any of the foregoing. 4.3 Compliance with Program Supply Agreement. In addition to and not by way of limitation of Sections 4.1 or 4.2 above, all Programs and other material transmitted by Licensee shall comply with the terms and conditions of the Program Supply Agreement. 4.4 Inspection Rights. At Licensor's expense, Licensee shall submit to Licensor for its inspection, representative samples of all items and materials in connection with which a Trademark is utilized pursuant hereto, as may reasonably be requested by Licensor for purposes of determining compliance with the terms of this Agreement. 5. TITLE AND PROTECTION OF THE TRADEMARKS; USE OF THE TRADEMARKS. 5.1 Title. (a) Licensee hereby acknowledges that except for the license expressly granted in this Agreement, Licensee has not acquired and will not acquire any rights, title or interest in 8 the Trademarks by reason of this Agreement and further acknowledges each of the following: the great value of the goodwill associated with the Trademarks; the worldwide recognition thereof; that the proprietary rights therein and the goodwill associated therewith are solely owned by and belong to Licensor; that the Trademarks and other related words, devices, designs and symbols are inherently distinctive or have secondary meaning firmly associated in the mind of the general public with Licensor, its subsidiaries and affiliates and its or their activities; and that all additional goodwill associated with the Trademarks created through the use of such Trademarks by Licensee shall inure to the sole benefit of Licensor. Licensee agrees not to use the Trademarks in any manner which, directly or indirectly, would dilute, demean, ridicule or otherwise tarnish the image of the Trademarks or Licensor or any of its affiliates; provided, however, that Licensee's use of the Trademarks for the purposes set forth in, and in accordance with the terms of, this Agreement and the Shareholders' Agreement shall not be deemed a breach of this restriction. During and after the term hereof, Licensee shall not: (i) attack or question the validity of, or assist any individual or entity in attacking or questioning, the title or any rights of or claims by any or all of Licensor, its subsidiaries and affiliates and their respective licensees and sublicensees in and to the Trademarks or any other trademark, copyright or such other intellectual or intangible property associated or connected with Licensor, its affiliates, their publications, published material and activities; (ii) directly or indirectly seek for itself or assist any third party to use or acquire, any rights, proprietary or otherwise, in any patent, trademark, copyright or such other intellectual or intangible property so associated or connected, without, in each case, the prior express written consent of Licensor; (iii) subject to subparagraph (b) below, in any way seek to avoid Licensee's duties or obligations under this Agreement because of the assertion or allegation by any individual or entity that any or all of the Trademarks are invalid or by reason of any contest concerning the rights of or claimed by Licensor; or (iv) file or prosecute one or more trademark applications regarding Licensee's use of the Trademarks, unless expressly requested to do so in writing by Licensor. (b) Notwithstanding the provisions of subparagraph (a) above to the contrary, if it is finally determined pursuant to an action brought by a third party that Licensor did not have the right to grant the license to Licensee hereunder with respect to 9 any of the Trademarks, Licensee shall be entitled, with respect to such Trademark only, to cease its compliance with the restrictions and other terms hereof. Upon such an event, the parties will negotiate in good faith to determine whether and, if so, in what amount the Base Trademark Royalties should be reduced. Any further use of such Trademark by Licensee shall be at Licensee's sole risk and liability and Licensee shall cease any use thereof which indicates or suggests that such use is made under authority of this Agreement or with the consent of Licensor. 5.2 Form. Licensee shall use the Trademarks in the form stipulated by Licensor and shall include such trademark and copyright notices as Licensor may request in connection with the protection of Licensor's ownership of the Trademarks. Licensee shall also observe all directions given by Licensor as to colors and size of the representations of the Trademarks and their manner and disposition in connection with the Programs and the Service. 5.3 Maintenance of Distinctive Quality of Trademarks. The use of the Trademarks by Licensee shall at all times be in keeping with and seek to maintain their distinctiveness and reputation as determined by Licensor. 5.4 Advertising and Publicity. Licensee hereby acknowledges that, as between Licensee and Licensor, the Trademarks are the sole and exclusive property of Licensor. Licensee shall have the right to develop and distribute advertising, publicity and promotional materials relating to the Service and the Programs as part of the Service; provided, however, that any such materials (other than material obtained directly from Licensor) shall: (a) comply with the restrictions set forth in Section 4.2; (b) clearly identify the Trademarks with a legible credit line with the wording "'Playboy' (or the 'Rabbit Head Design', etc.) is used under license from Playboy Enterprises Inc." or such other words as Licensor may designate from time to time; and (c) in no event may any advertising, publicity or promotional material using the names of Licensor or any person appearing in a Playboy Program (as defined in the Program Supply Agreement) be used to constitute an endorsement, express or implied of any party, sponsor, product or service (other than the Service). Other than as expressly set forth in this Agreement, Licensee shall make no use of the Trademarks or any confusingly similar designation without the prior express written consent of Licensor 10 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 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, if Licensor's consent thereto is obtained in accordance with Section 2.3, it will expressly provide in any applicable third party agreements that such third parties will only be entitled to use such names and marks on material supplied to them by Licensee in accordance with Licensee's rights hereunder. 6. OWNERSHIP OF THE TRADEMARKS --------------------------- 6.1 Licensor Warranty. Licensor warrants that it is the proprietor of the Trademarks set forth in Schedule I, that it has the right to grant the rights to Licensee hereunder and that Licensee's use of such Trademarks for the purposes set forth in, and in accordance with the terms of, this Agreement does not and will not infringe the rights of any third party. 6.2 Prosecution and Maintenance of Trademarks. Licensor shall pay all renewal fees and take such other actions as are necessary to prosecute the applications for and maintain the registrations of the Trademarks set forth in Schedule I in the Territory during the term of this Agreement. 6.3 Cooperation of Licensee. Licensee will on request give to Licensor or its authorized representative any information as to its use of the Trademarks which Licensor may require and will during the term of this Agreement render any assistance reasonably required by Licensor in registering and maintaining the registrations of the Trademarks. 6.4 Covenant of Licensee. Licensee will not make any representation or do any act to the effect that it has any right title or interest in or to the ownership or use of any of the Trademarks except under the terms of this Agreement. 6.5 Cooperation of Parties to Register Trademarks. Each party shall at its own expense, if required by the other, do all such acts and execute all such documents as may be necessary to confirm the license granted hereunder in respect of any of the Trademarks and to record Licensee as a registered user of the registered Trademarks on the trademarks register in the Territory. Licensee hereby agrees that any such entry on any trade mark register may be cancelled by Licensor on termination of this Agreement, for whatever reason, and that it will assist Licensor so far as may be necessary to achieve such cancellation including by executing any necessary documents. 7. INFRINGEMENTS. ------------- 11 7.1 Infringements By Third Parties. (a) Notice. Each party shall as soon as it becomes aware thereof give the other written notice of any use or proposed use by any other person, firm or company of a trade name, trade mark or trade dress or mode of promotion or advertising which amounts or might amount either to infringement in the Territory of Licensor's rights in relation to the Trademarks or to passing-off in the Territory. (b) Control of Proceedings. Licensor shall have the first right to control and conduct all proceedings relating to any claim or suit described in sub-paragraph (a) above and to decide what action (if any) to take in respect thereof. If Licensor elects not to control or conduct any such proceedings, Licensee may control and conduct such proceedings, provided that (i) such proceeding relates directly to Licensee's use of the Trademarks hereunder, (ii) Licensor determines in good faith that such action by Licensee would not reasonably be expected to have a material adverse effect on the Trademarks and (iii) Licensee has been advised by competent trademark counsel that the action Licensee proposes to take has a reasonable likelihood of success on the merits. 7.2 Allegations that the Trademarks are Invalid or Infringe on Third Party's Rights. (a) Notice. Each party shall, as soon as it becomes aware that any other person, firm or company alleges that any of the Trademarks are invalid within the Territory or that use of any of the Trademarks infringes any rights of another party or that any of the Trademarks are otherwise attacked or open to attack within the Territory, give the other written notice thereof. (b) Control of Proceedings. Licensor shall undertake and conduct the defense of any claim or suit described in sub-paragraph (a) above at Licensor's expense and shall have the sole and exclusive control over such defense. Licensee expressly covenants no discussions by Licensee whatsoever with any and all claimants and litigants, no compromise or settlement by Licensee of any claim or suit and no negotiations by Licensee with respect to any compromise or settlement shall be had, made or entered into without the prior written approval of Licensor. 7.3 Procedures and Costs. The party controlling and conducting any proceeding shall bear the cost thereof and shall be entitled to retain any damages recovered pursuant to such proceeding. Each party shall also provide any assistance reasonably requested by the controlling party at the controlling party's expense. The parties may mutually agree to jointly conduct and control any such proceeding, in which case the costs and proceeds thereof shall be borne equally by the parties. In 12 any proceeding controlled and conducted by Licensor, Licensee may through counsel of its choice and at its expense, participate in such proceeding but, notwithstanding such participation, Licensor's sole control shall continue and Licensor's decisions with respect thereto shall continue to govern. 8. INDEMNIFICATION. --------------- 8.1 By the Licensor. Licensor shall indemnify Licensee and its permitted sublicensees, and its and their respective directors, officers, shareholders, employees, agents and affiliates from and against all claims, losses, damages, expenses, judgments, costs and liabilities (including reasonable attorneys' fees) ("Losses") incurred by Licensee, arising out of or resulting from (i) any claim of trademark infringement relating to the authorized use by Licensee of the Trademarks hereunder, or (ii) any breach of a representation, warranty or agreement made by Licensor herein. 8.2 By the Licensee. Licensee shall indemnify Licensor and its directors, officers, shareholders, employees, agents and affiliates from and against all Losses incurred by Licensor, arising out of or resulting from (i) any use by Licensee or any permitted sub-licensee of the Trademarks, including, but not limited to any unauthorized use of the Trademarks, but excluding any Losses for which Licensor must indemnify Licensee pursuant to Section 8.1 above, or (ii) any breach of a representation, warranty or agreement made by Licensor herein; provided, however, that Licensee shall not be obligated to indemnify Licensor from and against any Losses that arise out of or result from any actions taken or omitted to be taken by Licensee that are required by the terms of this Agreement or pursuant to, and in compliance with, an instruction from Licensor. 8.3 Procedure. If a claim by a third party is made against an indemnified party, the indemnified party shall promptly notify the indemnifying party of such claim. Failure to so notify the indemnifying party shall not relieve the indemnifying party of any liability which the indemnifying party might have, except to the extent that such failure materially prejudices the indemnifying party's legal rights. The indemnifying party shall have thirty (30) days after receipt of such notice to undertake, conduct and control through counsel of its own choosing (subject to the approval of the indemnified party, such approval not to be unreasonably withheld) and at its expense, the settlement or defense of such claim, and the indemnified party shall cooperate with the indemnifying party in connection therewith; provided, however, that (i) the indemnifying party shall permit the indemnified party to participate in such settlement or defense through counsel chosen by the indemnified party, provided that the fees and expenses of such counsel shall be borne by-the indemnified party and (ii) the indemnifying party shall reimburse the indemnified party for the full amount of any Loss resulting 13 from such claim and all related expenses incurred by the indemnified party within the limits of this Section 8 as such are incurred. Notwithstanding anything contained herein, the indemnifying party shall not enter into any settlement without the consent of the indemnified party, which consent shall not be unreasonably withheld. If the indemnifying party does not notify the indemnified party within thirty (30) days after receipt of the indemnified party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof or so notifies the indemnified party but fails to undertake or maintain such defense promptly and in good faith, the indemnified party shall have the right to contest, settle or compromise the claim in the exercise of its reasonable judgement and without prejudice to the rights of the indemnified party to indemnification hereunder. 8.4 Survival. The provisions of this Section 8 shall survive the termination or expiration of this Agreement. 9. TERMINATION. ----------- 9.1 Termination on Breach or Insolvency. Either party may without prejudice to its other remedies terminate this Agreement immediately by notice in writing to the other on or after the occurrence of any of the following: (a) the commission of one or more material breaches of this Agreement by the other party which are not capable of remedy; or (b) 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 Trademarks or in Licensor's rights therein; or (c) 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; provided, that the insolvency of Licensee shall not be a basis for termination so long as it receives funds from its controlling shareholder sufficient to enable Licensee to meet all its obligations as they become due. 14 9.2 Termination on Termination of Program Supply Agreement or Shareholders' Agreement. This Agreement shall automatically terminate on the date on which any termination of the Program Supply Agreement or Shareholders' Agreement takes effect. 9.3 Cross Default. Any breach or default by Licensee under the Program Supply Agreement or the Shareholder's Agreement shall be deemed to constitute a breach or default hereunder. 10. EFFECTS OF TERMINATION. ---------------------- 10.1 The termination of this Agreement for whatever reason shall not affect any provision of this Agreement which is expressed to survive or operate in the event of its termination and shall not prejudice or affect the rights of either party against the other in respect of any breach of this Agreement or in respect of any moneys payable by one party to the other in relation to any period prior to termination. 10.2 Upon the date on which any termination of this Agreement for whatever reason takes effect ("the Termination Date") all rights of Licensee hereunder shall immediately terminate and automatically revert to Licensor and Licensee shall cease to make any use of the Trademarks except that, in relation to Programs whose Transmission Period has not ended prior to the Termination Date, Licensee shall continue to be entitled to make use of the Trademarks solely in customary presentation and logo credits in the title and end credit sequences of such Playboy Programs for so long as Licensee continues to be entitled to transmit those Playboy Programs under the Program Supply Agreement; provided, that such right shall be deemed a royalty-free license. Further, Licensee shall immediately amend its charter documents so that its name no longer includes any reference to any trademark of Licensor. 10.3 Upon termination of this Agreement, the parties shall perform all other acts which may be necessary or useful to render effective the termination of Licensee's interests in the Trademarks and Licensee shall execute any assignment, conveyance, acknowledgement or other document that Licensor may reasonably request relinquishing such interests and the goodwill associated therewith. Without limiting the foregoing, Licensee hereby consents to any application which Licensor may make to limit or terminate Licensee's status as a registered use and irrevocably agrees not to contest, oppose or dispute such application. 11. EQUITABLE RELIEF. Licensor and Licensee acknowledge that any material breach of this Agreement by such party, including, by way of example, Licensee's failure to cease using the Trademarks upon the expiration or termination of this Agreement (except as provided in Section 10.2 above), will result in irreparable harm to the other party for which there is no 15 adequate remedy at law. Accordingly, in such event, Licensor or Licensee, as the case may be, shall be entitled to seek preliminary or temporary equitable relief pending a final determination in accordance with Section 12.6 without the necessity of posting bond by way of any or all of the temporary and permanent injunctions and such other relief as any court of competent jurisdiction may deem just and proper. 12. MISCELLANEOUS ------------- 12.1 Binding Effect; No Assignment. The provisions of this Agreement shall be binding on and enure to the benefit of the successors of each party hereto; provided, that no party may agree to assign, transfer, charge or otherwise dispose of or subcontract any of its rights or obligations hereunder without the prior written consent of the other party; provided, however, that either party may so assign, etc. to an entity controlled by, which controls or which is under common control with such party but the original party shall remain responsible and liable for such transferee's compliance with all of such original party's obligations hereunder. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective permitted successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 12.2 Invalidity etc. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdictions. 12.3 Waivers, Remedies Cumulative, Amendments, etc. --------------------------------------------- (a) 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. (b) The rights and remedies herein provided are cumulative and not exclusive of any rights and remedies provided by law. (c) 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. 16 12.4 Notices. ------- (a) Any notice or other communication given or made under this Agreement shall be in writing and shall be delivered by registered or certified mail, delivered personally or by courier or sent by facsimile transmission (with appropriate answerback) addressed as follows: if to Licensor to: ----------------- Playboy Enterprises, Inc. Attention: General Counsel 680 North Lake Shore Drive Chicago, IL 60611 United States of America Fax number: (312) 266-2042 with a copy to: Playboy Entertainment Group, Inc. Attention: President 9242 Beverly Boulevard Beverly Hills, CA 90210 United States of America Fax number: (310) 246-4065 if to Licensee to: Tohokushinsha Film Corporation Attention: Managing Director 17-7 Akasaka 4-chome Minato-Ku Tokyo, Japan Fax number: 03-3584-2824 with a copy to: M. Kenneth Suddleson, Esq. c/o Kaye, Scholer, Fierman, Hays & Handler 1999 Avenue of the Stars, Suite 1600 Los Angeles, California 90067 United States of America Fax number: (310) 788-1200 or to such other address, or facsimile transmission number as the relevant addressee may hereafter by notice hereunder substitute. (b) All notices will be deemed given when received at the address(es) as provided in paragraph (a) above. 17 12.5 Governing Law. ------------- THIS AGREEMENT HAS BEEN NEGOTIATED AND ENTERED INTO IN THE STATE OF CALIFORNIA, UNITED STATES OF AMERICA, AND ALL QUESTIONS WITH RESPECT TO THE AGREEMENT AND THE RIGHTS AND LIABILITIES OF THE PARTIES WILL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, UNITED STATES OF AMERICA, IRRESPECTIVE OF THE CHOICE OF LAWS PROVISIONS OF CALIFORNIA, UNITED STATES OF AMERICA, OR OF ANY OTHER JURISDICTION. 12.6 Dispute Resolution. ------------------ (a) Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section 12.6, which shall be the sole and exclusive procedures for the resolution of any such disputes. The parties intend that this Section 12.6 shall be valid, binding, enforceable and irrevocable and shall survive any termination of this Agreement. (b) 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. (c) If the dispute has not been resolved by negotiation within 15 business days, the parties shall endeavor to resolve such dispute by mediation under the Center for Public Resources Mediation Procedure for Business Disputes. Unless the parties agree otherwise, the mediator will be selected from the Center for Public Resources Panel of Neutrals with notification to Center for Public Resources. (d) (i) Any controversy or claim arising out of or relating to this contract or the breach, termination or validity thereof, which remains unresolved 30 business days after appointment of a mediator, shall be settled by final and binding arbitration in accordance with the Center for Public Resources Non-Administered Arbitration Rules, by a sole arbitrator; provided, however, that if either party will not participate in a non-binding procedure, 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. The arbitrator shall not be empowered to award punitive, consequential or incidental damages and each party hereby irrevocably waives any right to recover and agrees not to seek such damages with respect to any dispute arising hereunder. 18 (ii) 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. (iii) 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 12.6. (e) All negotiations pursuant to paragraphs (b) and (c) of this Section 12.6 are confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence. (f) Each party agrees that service by registered or certified mail, return receipt requested, delivered to such party at the address provided in Section 12.4 hereof shall be deemed in every respect effective service of process upon such person for all purposes of this Section 12.6. Each party submits to the jurisdiction of the courts of the State of California, United States of America, and any federal court located within said state for the purpose of any suit, action, proceeding or judgment 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 waives any claim that any suit, action or proceeding brought in California has been brought in any inconvenient forum. 12.7 Entire Agreement. This Agreement, together with its attachments constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. 12.8 Rules of Construction. --------------------- (a) Headings. The section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Agreement or of any particular section. 19 (b) Tense and Case. Throughout this Agreement, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. (c) 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. 12.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.10 Relationship Between the Parties. This Agreement shall not be construed to place the parties in the relationship of partners or joint venturers; any such relationship shall be determined and evidenced solely by the express terms of the Shareholder's Agreement. Licensee shall have no power to obligate or bind any or all of Licensor and its subsidiaries or affiliates in any manner whatsoever. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written. LICENSOR: PLAYBOY ENTERPRISES, INC. By:_______________________ Name: Title: LICENSEE: THE PLAYBOY CHANNEL JAPAN, INC. By:_______________________ Name: Title: 21 SCHEDULE I ---------- REGISTERED AND PENDING TRADEMARKS IN JAPAN
================================================================================ INTERNATIONAL APPLICATION OR MARK CLASS REGISTRATION NUMBER ================================================================================ PLAYBOY 38 Reg. No. 3025707 - ------------------------------------------------------------------------------- PLAYBOY 41 Appl. No. 4-281372 - ------------------------------------------------------------------------------- RABBIT HEAD DESIGN 38 Appl. No. 4-281374 - ------------------------------------------------------------------------------- RABBIT HEAD DESIGN 41 Appl. No. 4-281375 - ------------------------------------------------------------------------------- PLAYBOY AT NIGHT 41 Appl. No. 4-281378 - -------------------------------------------------------------------------------
Schedule I Page 1 EXHIBIT B Bonus Trademark Royalty Formula Bonus Trademark Royalty Formula: To Be Calculated on a Quarterly Basis - ------------------------------------- Royalty = (X-Y) . W . Z X = Average Number of subscribers to the Channel during period Y = break even number of subscribers as indicated in the applicable Business Plan W = a dollar amount equal to the fraction: Total Gross Revenues During Period less the sum of any indebtedness for borrowed money owing by the Venture to any of its shareholders ----------------------------------------------------------------------- X Z = 8% EXHIBIT C --------- Listing of Licensees with Existing Rights PLAYBOY TELEVISION CURRENT LICENSES OUTSTANDING IN JAPAN FOR TELEVISION AND HOTEL/MOTEL
- ------------------------------------------------------------------------------------------------------------------------------------ Program Production Licensee Grant of Rights Program Hours Year Term of License - ------------------------------------------------------------------------------------------------------------------------------------ Mitsubishi/USB Pay TV and Inside Out (26 episodes @ 30 minutes each) 13 1991 6/15/93 - 4/30/96 Hotel/Motel ------------------------------------------------------------------------------------------------ Sexy Lingerie II 1 1990 10/15/83 - 12/31/96 Sexy Lingerie III 1 1991 Wet & Wild IV 1 1992 Playmate review '92 1 1992 ------------------------------------------------------------------------------------------------ Wet & Wild V 1 1993 6/15/94 - 8/31/96 Wet & Wild II 1 1990 Sexy Lingerie V 1 1992 Playmate Review '93 1 1993 ------------------------------------------------------------------------------------------------ Playmate of the Year 1990: Renee Tenison 1 1990 11/1/94 - 12/31/96 Playmate of the Year 1991: Lisa Matthews 1 1991 Playmate of the Year 1992: Corina Harney 1 1992 Playmate of the Year 1993: Anna Nicole Smith 1 1993 ------------------------------------------------------------------------------------------------ Late Night IV (26 episodes @ 30-minutes each) 13 1995 2/1/95 - 3/31/97 - ------------------------------------------------------------------------------------------------------------------------------------ Sumitomo Basic Pay Eden (6 volumes @ 1.5 hours each) 9 1993 10/1/94 - 9/30/96 - ------------------------------------------------------------------------------------------------------------------------------------ Pony Canyon Hotel/Motel* Erotic Fantasies I 1 1994 2/1/94 - 12/31/98 Intimate Workout for Lovers 1 1991 101 Ways to Excite Your Lover 1 1991 Wet & Wild IV 1 1992 Playmate of the Year 1993: Anna Nicole Smith 1 1993 Erotic Weekend Getaways 1 1992 Playmates in Paradise 1 1990 Ultimate Sensual Massage 1 1991 Playmate Video Calendar 1994 1 1994 Playmate of the Year 1994: Jenny McCarthy 1 1994 International Playmate 1 1992 Erotic Fantasies II 1 1994 Inside Out I 1.5 1991 Inside Out III 1.5 1991 Eden I 1.5 1993 Eden II 1.5 1993 Eden III 1.5 1993 - ------------------------------------------------------------------------------------------------------------------------------------ STP Multiple Rights Temptress 1.5 1994 15 years from delivery of International Cover Me 1.5 1995 each item (on behalf of Playback 1.5 1995 TOEI Corp.) 7 additional movies TBA @ 1.5 hours each) 10.5 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL 81.5
* No satellite business; our product is available on a pay channel in approximately 25 hotels. Guests generally select movies from 3 channels: a) U.S. movies; b) Japanese X-rated product; c) U.S. X-rated product. Agents sell hotel packages of product including a Playboy title (different titles are offered each month). Also, the same cassettes are "rented" from a shop inside the hotel. As of July 31, 1995 ------------- Playboy Entertainment Group, Inc. and Playboy Enterprises, Inc. 9242 Beverly Boulevard Beverly Hills, California 90210 Attention: Mr. Tony Lynn Please refer to the Memorandum of Agreement between you ("Playboy") and the undersigned, Tohokushinsha Film Corporation ("Tohokushinsha"), of even date herewith (the "Agreement"). Please also refer to the Trademark License Agreement of even date herewith (the "Trademark License Agreement") between Playboy Enterprises, Inc. ("Enterprises") and Tohokushinsha. This letter agreement sets forth certain modifications or additions to the Trademark License Agreement and, pursuant to the last paragraph of the Agreement, also sets forth certain modifications or additions to the Agreement as agreed by the parties in writing, and constitutes an inducement and material part of the consideration to each party to enter into the Agreement and the Trademark License Agreement. Except as expressly set forth herein, the Agreement and the Trademark License Agreement remain in full force and effect without change. All capitalized terms used in this letter agreement without definition shall have the respective meanings set forth in the Agreement or the Trademark License Agreement, as applicable. 1. Options. a. In order to effect and secure Playboy's rights under the Agreement to participate in the proceeds of Liquidity Events and the rights described under the heading "Additional Rights re Shares" in the Agreement (each of the events triggering such rights being referred to herein as an "Additional Rights Event"), Tohokushinsha hereby grants to Playboy options to purchase from Tohokushinsha that number of shares in the Venture equal to 10.125% of the Venture on a fully diluted basis without giving effect to the Liquidity Event or Additional Rights Event, as the case may be, at the time of exercise (the "Options"). b. The Options may be exercised, in whole or in part, in the event of any failure by the Venture or Tohokushinsha to discharge its obligations under the Agreement to Playboy with respect to any Liquidity Event or Additional Rights Event within the 30 days following the consummation of such event. In the case of a Liquidity Event or an Additional Rights Event, Playboy shall have the option to participate in such event first out of its interest represented by the Options so that Playboy retains the maximum number of shares in the Venture after its participation in such Liquidity Event or Additional Rights Event, as the case may be, and any such exercise must be of no less than the number of Options which represent the difference between (i) the full value Playboy would have been entitled to receive as of the date of such event had it exercised the Options immediately prior to such event and participated directly therein and (ii) any portion of such value it otherwise received. c. Notwithstanding the fact that Tohokushinsha and the Venture shall have said period of 30 days following any Liquidity Event or Additional Rights Event to discharge its obligations to Playboy with respect thereto, in discharging such obligations, Tohokushinsha and the Venture shall be required to make Playboy whole for the full value it wou1d have been entitled to receive as of the date of such event had it exercised the Options immediately prior to such event and participated directly therein (and Playboy shall be entitled to payment of interest for the period from the consummation of the Liquidity Event or Additional Rights Event in question to the date of discharge of all obligations of Tohokushinsha and the Venture with respect thereto at a rate equal to the average of the reference rate charged by the Bank of America, N.A., and the Japanese prime rate charged by the Industrial Bank of Japan to domestic customers in effect during such period); it being understood and agreed that if the value in question would have been paid in shares of stock or other non-cash property had Playboy participated directly in such event, Playboy will be entitled to receive a number of such shares or an amount of such property (or if such shares or property are not severable into the interests contemplated hereby, the cash equivalent thereof) equal to the full value of the shares or property it would have received on the day the event in question occurred had Playboy then held shares equal to the applicable portion of the 10.125% of the Venture with respect to which Playboy would have been entitled to participate in such event. d. If Playboy is prevented from exercising the Options, in whole or in part, due to applicable legal restrictions, Playboy shall be entitled to put to Tohokushinsha (the "Put") all or part of the Options Playboy would otherwise have been entitled to exercise for the full value, as set forth in c. above, it would have been entitled to receive as of the date of the applicable Liquidity Event or Additional Rights Event had it exercised such Options immediately prior to such event and participated directly therein. Page 3 e. In either an exercise of Options or the Put, Playboy will be entitled to receive the proceeds indicated, less an amount that is the greater of (i) the number of shares that constitutes 10.125% of the stock of the Venture on a fully diluted basis without giving effect to the Liquidity Event or Additional Rights Event (i.e., as if additional authorized, but unissued, shares had been issued in an amount equal to 10.125% of the outstanding shares) times the per share Initial Value (as defined in Issued Shares in the Agreement), plus accrued interest thereon at the Japanese Prime Lending as announced by The Industrial Bank of Japan for domestic lending from the date of initial capitalization, or (ii) the Book Value of 10.125% of the Venture on a fully diluted basis without giving effect to such Liquidity Event or Additional Rights Event, as the case may be; provided, however, that for the purpose of calculating the foregoing reduction in no event shall such Book Value of 10.125% of the Venture be greater than the net proceeds of such Liquidity Event or Additional Rights Event that would be received or distributable to the holder of 10.125% of the then currently issued and outstanding shares of the Venture. f. Following any exercise of the Options or the Put, the Options will be reduced by the percentage interest in the Venture that the exercise represented (e.g., if Playboy exercises the Options with respect to a number of shares that represent 2% of the Venture at the time of exercise, the Options remaining shall be 8.125% of the Venture as measured on the next exercise date). g. Notwithstanding anything to the contrary set forth herein, at no time shall Playboy beneficially own more than 19.9% of the Venture. h. Playboy may exercise the Options or the Put by written notice to Tohokushinsha specifying the percentage interest in the Venture represented by such exercise. i. If Playboy is prevented from exercising the Options in whole or in part due to applicable legal restrictions and Playboy exercises the Put, and Tohokushinsha breaches its obligations to make payment, after written notice thereof and reasonable opportunity to cure, Playboy shall be entitled, without prejudice to the application of subparagraph c. above, to transfer the number of Options that the Put represents, as the case may be, without restriction (including any restrictions on transfer generally as set forth in the Agreement or the Definitive Agreements) to any person or entity that is not legally prohibited from acquiring the respective interest in the Venture; provided that if the issue of breach is in dispute and Page 4 Tohokushinsha timely submits such issue to mediation and arbitration pursuant to Section 5 below, Playboy shall not transfer the Options in question during the pendency of such mediation and arbitration. Except as provided above and as provided in the Agreement generally regarding assignment, the Options and Put rights shall not be assigned or transferred by Playboy. 2. Effect on Bonus Trademark Royalties. Upon each exercise by Playboy of the Options or the Put, in whole or in part, and provided that Tohokushinsha has satisfied its obligations with respect thereto, the Bonus Trademark Royalties formula will be amended by multiplying the result thereof by a fraction, the numerator of which is the percentage interest in the Venture that remains subject to the Options and Put (as of the time they may be exercised), and the denominator of which is 10.125%. 3. Termination of Agreement. This letter agreement shall terminate and the Options shall expire upon the termination of the Venture as set forth in the Agreement or the Definitive Agreements, as the case may be. 4. Bonus Trademark Royalty Formula Adjustment. The Bonus Trademark Royalty formula referred to in Section 3.2(a) of the Trademark License Agreement will be adjusted prospectively by mutual agreement of the parties if the Bonus Trademark Royalty actually paid to Licensor in any year is less than 90% or more than 110% of 10.125% of the net profits of the Venture for such year then ended without giving effect to the Bonus Trademark Royalty paid for such year. In addition, in the event that Licensee decides to commence DTH transmission, the parties shall mutually agree upon a revised formula for the Bonus Trademark Royalty based upon revised projections for Licensee giving effect to such transmission. If the parties are unable, after good faith negotiations, to agree on any such adjustment required by either of the two preceding sentences, they will submit to mediation and, if necessary, binding arbitration in accordance with the terms below. 5. Incorporation of Certain Terms. The terms of the Agreement under the heading "MEDIATION AND ARBITRATION" are hereby incorporated herein by reference as if fully set forth herein, with such changes as the context shall require. 6. Remedies Cumulative. Playboy's and Enterprises' respective rights hereunder are in addition to, and not by way of limitation of, any rights or remedies it may have under the Agreement. Page 5 7. Counterparts. This letter agreement may be signed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing accurately sets forth your understanding of our agreement, please so indicate by executing this letter agreement in the space provided for below. Very truly yours, TOHOKUSHINSHA FILM CORPORATION By: /s/ Tetsu Uemura --------------------------- Its: Managing Director -------------------------- ACCEPTED AND AGREED TO: PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Anthony J. Lynn --------------------------- Its: President -------------------------- PLAYBOY ENTERPRISES, INC. By: /s/ Anthony J. Lynn --------------------------- Its: Executive Vice President -------------------------- EX-10.10(B) 6 AMENDMENT TO 7/31/95 AGREEMENT DTD 3/26/96 Exhibit 10.10(b) [LOGO] [LETTERHEAD OF TOHOKUSHINSHA FILM CORPORATION] March 26, 1996 PLAYBOY ENTERTAINMENT GROUP, INC. 9242 Beverly Blvd. Beverly Hills, CA 90210 U.S.A. Ladies and Gentlemen: Reference is made to that certain Memorandum of Understanding between us dated as of July 31, 1995 (the "MOU"; all capitalized terms used in this letter agreement without definition have the respective meanings set forth in the MOU). We have discussed an amendment to the terms of the MOU and the purpose of this letter is to set forth our mutual agreement with respect to such amendment. The MOU provides under the heading "SUPPLYING OF PROGRAMS" that, in the first year of the Venture, Playboy will make available to the Venture and the Venture will license from Playboy not less that than 120 program hours. The first year of the Venture is not a calendar year, but commenced at the inception of the Venture and ends on December 31, 1996. We hereby agree to increase such minimum number of program hours for such period from 120 to 150 program hours. Such additional program hours will be subject to the minimum Guaranteed Program License Fee for year 1 as set forth in the MOU under the heading "PROGRAM LICENSE FEES" and to all other applicable terms of the MOU. All other terms of the MOU remain in full force and effect and are hereby ratified and confirmed. To indicate your agreement with the foregoing, please execute two copies of this letter and, retaining one copy for your files, return a fully executed copy to us. TOHOKUSHINSHA FILM CORPORATION BY: /s/ Tetsu Uemura --------------------------- Tetsu Uemura Managing Director ACCEPTED AND AGREED: PLAYBOY ENTERTAINMENT GROUP, INC. BY: /s/ Myron DuBow ------------------------------ Myron DuBow Senior Vice President EX-10.11 7 DEAL MEMORANDUM DATED 6/22/95 Exhibit 10.11 [LOGO OF TVN] 2901 WEST ALAMEDA AVENUE, 7TH FLOOR BURBANK, CALIFORNIA 91505 (818) 846-4TVN FAX (818) 846-4626 - -------------------------------------------------------------------------------- ARTHUR FIELDS Senior Executive Vice President June 22, 1995 PERSONAL AND CONFIDENTIAL -------------------------- James L. English President Playboy Networks Worldwide 9242 Beverly Boulevard Beverly Hills, CA 90210 TVN - PLAYBOY DEAL MEMORANDUM Dear Jim: This Deal Memo summarizes the key deal points whereby TVN will provide certain services for and also serve as a distributor of Playboy's newly announced 24 hour a day adult movie based entertainment channel, named "AdulTVision". Our mutual goal is to have TVN provide a complete turn-key service for Playboy's AdulTVision Channel when TVN's own pay-per-view programming services move to G-IIIR, including transponder, uplink, playback, encryption, and tier-bit control/authorization services. The deal points are as follows: 1. Commencing July 1, 1995, TVN will provide VideoCipher II Plus ("VCII Plus") encryption and tier bit control services for the AdulTVision Channel, as well as playback service using the programming elements provided by Playboy as described in Paragraph 6 below, and uplink service to a Playboy leased transponder on the Anik-2 ("E-2") satellite for transmission to the cable and C-Band home satellite dish (HSD) markets, for which Playboy will pay TVN the sum of $25,000 per month. Tier bit control service will cover authorizations for pay-per- view, subscription and cable head-ends. At that time or subsequently, TVN may also "turn-around" this AdulTVision transmission from E-2, and re-encrypt and uplink it to one of TVN's transponders on the Telstar 303 satellite ("T-303"), also for transmission and distribution by TVN to the cable and C-Band HSD markets. As a result, there may be a period of dual illumination on T-303 and E-2, prior to the planned transition of the AdulTVision service to a TVN leased transponder on the Galaxy III-R satellite ("G-IIIR"). During the Term hereof, TVN will market, promote, distribute and sell the AdulTVision service as described below. 1 - -------------------------------------------------------------------------------- TVN ENTERTAINMENT CORPORATION 2. At such time as TVN transitions its multi-channel pay-per-view services from T-303 to G-IIIR, but not before January 1, 1996, TVN will provide the use of one of its G-IIIR transponders, which shall provide analog VCII Plus encrypted transmission solely for the AdulTVision channel and meet Hughes' specifications for such G-IIIR transponders. It will serve as the sole source for transmission of AdulTVision to C-Band HSD markets, and as a source of transmission to the cable market, to which Playboy may transmit its AdulTVision service by other means as well. In the event that the G-IIIR transponder fails to meet its specifications, TVN will provide the use of the T-402R transponder for AdulTVision referenced in (P)7 below. TVN will also provide the necessary playback, uplink, encryption (VC II Plus) and tier bit control/authorization services for AdulTVision Playboy will pay TVN the sum of $200,000 per month from such time as TVN transitions its multi-channel PPV services from T-303 to G-IIIR, and throughout the remaining Term of this Agreement (subject to Paragraph 4 below), payable by Playboy on the first day of each month for the services to be provided by TVN in that month. 3. This deal will remain in effect for a period of three (3) years (a "Term") commencing as of the date of execution of this Deal Memo, and shall automatically be renewed for a consecutive three (3) year Term unless either party gives written notice to the other of non-renewal no later than ninety (90) days before the expiration of any Term. In the event that it becomes illegal to operate, transmit, distribute or sell the AdulTVision service in all or substantially all of the United States, either party may forthwith and in writing terminate this Agreement and its obligations thereunder, except for those which have accrued prior to such termination. If Playboy determines in good faith that it has become economically unfeasible for it to continue operating the AdulTVision programming service, then it may terminate this Agreement by providing no less than ninety (90) days written notice to TVN that it will discontinue such service, in which event this Agreement will terminate without further liability by either party to the other on the later of 90 days from the date of such written notice, or the date on which Playboy ceases operations of the AdulTVision programming service. Any such discontinuance of the service will be handled in a reasonable manner, so as to foster a positive relationship with AdulTVision customers. 4. As additional consideration for the services provided by TVN pursuant to paragraphs l and 2 above, TVN shall be the exclusive distributor of the AdulTVision programming service to the C-Band HSD market in all transactional modes, including but not limited to pay-per-view ("PPV"), pay-per-block ("PPB"), pay-per-night ("PPN"), pay-per-day ("PPD") sales, subscription sales (monthly, quarterly or yearly and/or impulse sales ("IPPV") by means of store and forward technology, i.e. through VIDEOpal. TVN will provide encryption with its own TVN provided VCII Plus encoder, set up with encoder redundancy, i.e., in the event that the VCII Plus encoder used by TVN for encryption of AdulTVision malfunctions or fails, TVN represents that it will utilize one of its other VCII Plus encoders so that encryption of AdulTVision is maintained. TVS will also provide 2 tier bit control from whatever transponder(s) AdulTVision may be transmitted, including from both T-303 and E-2 during any period of dual illumination, and TVN represents that it will at all times during each Term hereof make available tier bits necessary to provide pay- per-view and subscription authorizations for AdulTVision. TVN will a) pay Playboy a license fee equal to thirty percent (30%) of all such HSD sales, with a minimum license fee of $1.785 per pay-per-view buy (based on a suggested retail price of $5.95), b) provide complete end- to-end customer service, including order processing, CSR, billing and authorization functions for all such sales of the AdulTVision service, and c) actively market, promote and sell AdulTVision to its existing HSD subscriber base (approximately 750,000), and to the rest of the C-Band HSD market. The 30% license fee payable by TVN to Playboy shall be offset each month against the $200,000 monthly fee payable by Playboy to TVN per paragraph 2 above and Playboy will send TVN a check each month for the net amount owed to TVN, after offsetting the TVN license fee owed to Playboy; if the 30% license fee exceeds the $200,000 fee payable by Playboy, TVN will remit such excess amount to Playboy by check monthly. TVN will not accept orders for the AdulTVision service from such states as Playboy determines that its service will not be made available for viewing by HSD and/or cable subscribers. 5. At such time as TVN and Playboy mutually agree upon the license fee payable by TVN for its AdulTVision sales to cable subscribers, TVN will also be a non-exclusive distributor of the AdulTVision service to the cable market, which it may offer via PPV, PPB, PPN, PPD and/or on a subscription basis, only marketed together with TVN's own multi- channel pay-per-view movie, event and transactional processing services under the name TheatreVisioN Plus. TVN will coordinate its AdulTVision marketing activity with Playboy, TVN will market and promote the AdulTVision service, and TVN's marketing and promotional materials utilizing the AdulTVision name will be subject to Playboy's review and approval, in all instances and at all times, and will bear Playboy's approved trademark designations. 6. With respect to the playback services TVN provides for Playboy, [deletion] Playboy will create and provide TVN with fully edited, ready-for-air videotapes of all AdulTVision programming elements, in Beta SP format. Such videotapes will include all films, shows, interstitial materials, music, graphics, programming and all other elements necessary for TVN to assemble and playback the AdulTVision service as a complete 24 hour a day, 7 days a week high quality television channel, which meets the industry accepted RS250(b) standard. Playboy will1 deliver such videotaped materials to TVN in a form capable of being assembled and aired by TVN without editing or additional post-production, and in a reasonable time prior to any scheduled air-date. However, TVN will provide an electronic count-down clock and titling capability which can be keyed in during interstitial programming. Playboy will be solely responsible for all AdulTVision programming content, and will indemnify, defend and hold harmless TVN and its transponder provider from any and all third party claims and/or governmental or agency actions based on or 3 related to such programming content. TVN will indemnify, defend and hold harmless Playboy from any and all third party claims arising from TVN's willful acts or omissions while performing its services for Playboy hereunder. C-Band HSD customers who want to order the AdulTVision service from TVN, whether via PPV, PPB, PPN, PPD or subscription, need not pay any initial fees for, order or subscribe to any other programming service owned, provided or distributed by TVN. 7. TVN represents to Playboy that a) AT&T has leased a transponder on the Telstar 402R satellite to a wholly owned subsidiary of Viacom, Inc., which begins on the in-service date of that satellite, b) it is a "bronze" level transponder, leased for a three (3) year term with options to renew, c) Viacom has assigned to TVN its rights to such T-402R transponder, d) TVN has the right to provide the use of such T-402R transponder to Playboy for AdulTVision, and will do so in the event that (i) Hughes fails to approve, or approves but subsequently terminates, Playboy's use of TVN's G-IIIR transponder for AdulTVision, or (ii) there is a G-IIIR launch failure. TVN will obtain from Viacom and provide to Playboy, within five (5) business days, written confirmation of the foregoing and that Viacom will make this T-402R transponder available to Playboy for the AdulTVision service without interruption if that is within Viacom's control, in the event that TVN's right to do so is terminated. 8. After this Deal Memo is signed by the parties, they shall begin work and planning for the start of on-air operations, during which time a Definitive Agreement consistent with the provisions of this Deal Memo and containing a more detailed description of each party's respective rights duties and obligations shall be prepared by the parties' counsel. TVN will obtain written approval from Hughes, and provide same to Playboy, for Playboy's use of TVN's G-IIIR transponder for AdulTVision and to permit Playboy to directly assume TVN's rights, duties and obligations under TVN's Transponder Lease Agreement with Hughes with respect to the G-IIIR transponder used for AdulTVision without interruption if that is within Hughes' control, including Playboy's right and obligation to pay directly to Hughes the monthly transponder fee payable by TVN for such transponder, only in the event that TVN's rights to such transponder are terminated by Hughes. If TVN is unable to obtain such approval from Hughes within a mutually approved reasonable period of time, TVN agrees that it will provide the use of its above described T-402R transponder for AdulTVision, instead of its G-IIIR transponder, except that Playboy's fee therefor shall be $175,000 per month, instead of $200,00 per month, payable as provided in (Paragraph) 2 above. For the months of July-December 1995, TVN shall retain the 30% license fee which would have been payable to Playboy, up to $400,000, the first $200,000 of which will be a credit against the first month's fee payable by Playboy, and the next $200,000 (or a portion thereof) of which will be a credit against the last month's fee payable by Playboy. If the 30% license fee falls short of $400,000 during such six (6) month period, this shortfall will be made up, subject to (Paragraph) 4, in the last month's fee payable by Playboy. Any 30% license fee amount in excess of $400,000 shall be paid by TVN to 4 $400,000 shall be paid by TVN to Playboy. If the T-402R transponder is used instead of the G-IIIR transponder as above described, the "up to" amount will be $350,000, half of which will be credited against the first, and the other half against the last, month's fee payable by Playboy. TVN shall obtain an acknowledgment from Hughes of the prepaid transponder concept. The provisions of this Deal Memorandum, and all discussions and negotiations regarding same, shall be kept strictly confidential by each company and may not be disclosed to third parties without each parties' prior mutual written approval. 9. The parties agree that after the execution hereof they will issue a joint or separate press releases regarding TVN's role in the AdulTVision service. Such press releases and other publicity concerning TVN's role in AdulTVision shall be jointly planned and coordinated by the parties, and shall refer to AdulTVision being the new adult programming service which may be marketed together with TVN's TheatreVisioN Plus movie programming. Neither party shall issue any press release or make any press announcement regarding TVN's role in AdulTVision, without the prior written approval of each other party, which shall not be unreasonably withheld. Nothing contained herein shall restrict Playboy's promotion of AdulTVision. 10. This Deal Memorandum contains the essential deal points agreed upon by the parties with respect to the subject matter hereof. It supersedes all prior and other contemporaneous agreements or negotiations, whether oral or written, by the parties or their agents with respect hereto; it may be amended only in writing signed by each party and it may be executed in one or more counterpart copies via fax delivery to the other party of a copy containing that party's signature, which together with the other party's executed counterpart fax copy shall constitute a single document having the same force and effect as a fully executed original. 11. This Deal Memorandum and the rights, duties and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be wholly performed in that state. It describes a contractual, independent contractor/distributor relationship, and nothing contained herein shall be deemed to create any partnership, joint venture, employment or similar relationship between the parties. 12. The above referenced Definitive Agreement shall contain terms and conditions consistent with this Deal Memorandum, as well as other mutually agreed terms and conditions including, but not limited to, those providing for audit rights, license fee reports, payment and report due dates, marketing plans, sales of AdulTVision by third party packagers through TVN, and performance criteria for TVN's sales and customer service operations for AdulTVision. Before such Definitive Agreement is signed by the parties, this Deal Memorandum shall remain in effect as the binding agreement between the parties. 5 Kindly signify your agreement to the foregoing Deal Memorandum by signing below where indicated. Sincerely, /s/ Arthur Fields ----------------------------------------- Arthur Fields Senior Executive Vice President AGREED: Playboy Networks Worldwide, a division of Playboy Entertainment Group, Inc. /s/ James L. English By: ---------------------------------- James L. English President 6 EX-10.12 8 DISTRIBUTION AGREEMENT DTD 6/27/96 RE: HOME VIDEO Exhibit 10.12 [LOGO - ORION] HOME VIDEO Mr. Bill Asher Director of Planning - New Business PLAYBOY ENTERTAINMENT GROUP, INC. 9242 Beverly Blvd. Beverly Hills, CA 90210 As of June 27, 1996 Re: Playboy Distribution Agreement ------------------------------ Dear Mr. Asher: This deal letter, when signed by both parties, shall confirm the agreement ("Agreement") between Orion Home Entertainment Corporation d/b/a Orion Home Video ("Orion") and Playboy Entertainment Group, Inc. ("Playboy"), that Orion shall be the exclusive distributor of certain home video programs and product produced by and/or on behalf of Playboy as set forth below, throughout the Territory (as defined below). 1. Output Term: The term of the Agreement shall be for three years commencing March 1, 1996 ("Output Term"). After two years, if Playboy is no longer in the business of producing or having produced on its behalf motion pictures of like type and kind as described herein, Playboy may terminate the Agreement, upon written notice to Orion, as to the third year of the Output Term. 2. Distribution Term: For each individual Product (as defined below), distributed under this Agreement, Orion shall have a Distribution Term of seven and one-half (7 1/2) years from the earlier of the complete delivery of materials for that motion picture or street date of such Product ("Distribution Term"), Orion shall have a right of "Sell-Off" (as that term is commonly used in the industry) of six (6) months for each individual Product. Notwithstanding the expiration of the Distribution Term for a particular motion picture, Orion retains a right of last refusal as to the renewal/extension of the distribution rights for each individual motion picture. 3. Territory: The territory ("Territory") is the United States of America and Canada, their respective territories, possessions and commonwealths, including, without limitation, Puerto Rico, Guam and the US Virgin Islands. The Territory shall also include United States and Canadian armed forces installations anywhere in the world, airlines and ships serviced out of the United States and/or Canada and other similar areas customarily included in such territories. Orion specifically retains the right to distribute the Product in sub-titled and/or dubbed format(s). If Playboy requests Orion to distribute the Product in a specified language (whether sub-titled or dubbed) and Orion declines to so distribute the 1888 Century Park East, Los Angeles, California 90067-1728 (310) 282-0550 Fax: (310) 201-0798 Product in such format, then Playboy is free to license those specific, limited distribution rights as to that individual Product in the specified language and/or format to another company. 4. Product: ------- A. Playboy shall produce or have produced on Playboy's behalf and deliver a minimum of six Playboy branded motion pictures per year of the Output Term as follows: Each of the said six motion pictures ("Branded Product") shall have a production budget of between $1,200,000 and $2,000,000 per motion picture and shall be at least equal in production value and content to the Impulse films previously produced by or on behalf of Playboy which said films have been previously shown to Orion. B. Playboy shall also produce or have produced on Playboy's behalf and deliver a minimum of eight unbranded motion pictures per year of the Output Term as follows: Playboy guarantees that each of the said motion pictures ("Unbranded Product") shall have a production budget within ten percent (10%) of the average production budget of the eight Unbranded Product motion pictures selected by Orion for release during the first year of the Output Term which are as follows: Gentleman's Bet, Hard Time, Who Killed Buddy Blue?, Romancing Sara, Killing For Love, The Affair, Access Denied, Hungry for You. Playboy shall make available to Orion for inspection, audit and/or review the budgets of these Unbranded Product motion pictures upon Orion's request for same. C. Branded Product and Unbranded Product shall be collectively referred to as "Product", although distribution rights are individual to each motion picture. D. Orion requires both an Unrated and MPAA-Rated version of Unbranded Product. Only a Rated version of Branded Product is required for Orion. Product shall be delivered pursuant to Orion's standard delivery schedule (attached hereto as schedule A). Orion will identify its post-production house for purposes of delivery by Playboy but Orion reserves its right to quality check all materials, the cost of such checks being recoupable distribution expense. 5. Rights Granted: -------------- A. Playboy hereby grants Orion the sole and exclusive right to manufacture, distribute, advertise, publicize, promote, rent and sell all Product on video cassette (analog and/or digital) and all linear translations and forms (non-interactive) of video and optical disc (including but not limited to laser disc, CD-ROM and Digital Versatile Disc ("DVD")) in the Territory during the Distribution Term. 2 B. Playboy shall, whenever possible, pre-approve acceptable uses of the Playboy name, credit block(s), artwork and logo(s). Subject to the following, Orion may so use the Playboy name, credit block(s), artwork and/or logo(s) for each Product. Orion shall have the right to use the Playboy logo and name on the video/disc packaging of Branded Product, but may not use the Playboy logo or name on the video/disc packaging of Unbranded Product. If Orion contemplates using the Playboy name, credit block(s), artwork and/or logo(s) in a manner inconsistent with the Playboy's previous approval, then Orion shall seek Playboy's approval for this inconsistent use. If Orion does not receive approval or disapproval from Playboy within 5 days after the request for such, then the material submitted is then deemed approved. C. In trade advertising, Orion shall have the right to the full and reasonable use of the Playboy name, logo and other brand equity for both Unbranded and Branded Product. In consumer advertising, only Branded Product may be afforded the use of the Playboy name logo and/or other brand equity, all subject to Paragraph 9 herein. D. Playboy shall have meaningful consultation rights as to marketing plans for each Product. Playboy shall have approval of all premium offers, unless preapproved by Playboy. Orion shall have the right to offer Playboy branded premiums (logo/name cups, shirts, mugs, pens, etc.) for Branded Product. Such promotional items shall be available to Orion at Playboy's acquisition cost. E. Orion shall release and distribute Product in a like manner and kind as other similar Orion Home Video direct-to-video releases. 6. Distribution Fees and Guarantees: --------------------------------- A. Branded Product: Orion's distribution fees shall be 20% of the gross receipts received by Orion. After the payment of Orion's distribution fees on Branded Product, the remainder of gross receipts for each Branded Product motion picture shall be payable as follows: (1) Recoupment: Orion shall recoup all customary manufacturing, distribution, marketing, advertising and promotional costs and expenses directly paid or incurred from gross receipts, including but not limited to printing, packaging, duplication, shipping and delivery costs, residuals (which Orion shall pay after Playboy supplies the pertinent information), and such marketing costs and expenses as for publicity and talent tours, multi-pack premiums, and the VSDA screener program. The maximum allowable fixed marketing expense per Branded Product motion picture shall be $105,700 (see attached Schedule A). The maximum 3 allowable mailer advertisement expense per Branded Product for the first year of the Output Term shall be $90,000. Thereafter, the maximum allowable mailer expense will be adjusted upward to account for distributor rate changes. Orion specifically reserves the right to consult with Playboy and seek approval for additional marketing expenditures. (2) Allocations of marketing expenses shall be done on a pro rata basis as between like Product (multiple Branded Product, multiple Unbranded Product) or Product with non-Playboy motion picture(s) (Branded Product with non-Playboy motion picture(s), Unbranded Product with non-Playboy motion picture(s)). If an allocation on a non-pro rata basis is contemplated by Orion, then Orion shall seek the approval of Playboy for such allocation. (3) Advance Guarantee: There shall be a guaranteed advance for each Branded Product paid as follows to Playboy in the total amount of $350,000: (a) Fifty percent (50%) of the total Advance Guarantee ($175,000.00) shall be paid to Playboy upon complete delivery of all materials for each Branded Product. (b) Twenty-five percent (25%) of the total Advance Guarantee ($87,500.00) shall be paid to Playboy 120 days after the complete delivery of all materials for each Branded Product. (c) The remaining twenty-five percent (25%) of the total Advance Guarantee ($87,500) shall be paid to Playboy 210 days after the complete delivery of all materials for each Branded Product. (3) Remainder: The remainder of gross receipts, after recoupment by Orion of (A) (1), (2) and (3) above, shall be paid 25% to Orion and 75% to Playboy. B. Unbranded Product: On a motion picture-by-motion picture basis, gross receipts from the sale and exploitation of Unbranded Product shall be payable as follows: (1) Advance Acquisition Payment: A total of $50,000 per Unbranded Product shall be paid as follows by Orion to Playboy as complete and total payment for the acquisition of Distribution and related rights for each Unbranded Product motion picture: 4 (a) Fifty percent (50%) of the total Advance Acquisition Payment ($25,000) shall be paid by Orion to Playboy upon the complete delivery of materials for each Unbranded Product motion picture. (b) Twenty-five percent (25%) of the total Advance Acquisition Payment ($12,500) shall be paid by Orion to Playboy 120 days after the complete delivery of materials for each Unbranded Product motion picture. (c) The remaining twenty-five percent ($12,500) of the total Advance Acquisition Payment ($12,500) shall be paid by Orion to Playboy 210 days after the complete delivery of materials for each Unbranded Product motion picture. 4. Remainder: All gross receipts after the payments as noted above shall be paid to Orion. 7. Design, Duplication and Packaging: Orion shall perform all customary design, marketing, printing, packaging, duplication, shipping and delivery services in the regular course of business and shall recoup the same as set forth in Paragraph 6 above. Playboy shall supply to Orion, upon reasonable request (if available), and at no cost or expense to Orion, design materials, artwork, films, slides and the like for the purposes of box (sleeve) design and advertising. 8. Representations and Warranties: The parties to this Agreement represent and warrant that they each have the power and authority to enter into this Agreement, to grant all of the rights herein granted, that there are not now known to either party any outstanding claim, lien, encumbrance or right of any nature which can or will impair or interfere with any of the rights herein granted to Orion, that the exercise of any of the rights granted Orion will not violate the rights of any third party nor require Orion to make any payment of any kind to a third party. Playboy shall indemnify Orion, its officers, shareholders and employees from any claim inconsistent with this Paragraph. 9. Trademarks, Service Marks, Copyrights and Credits: The parties agree that the trademarks and copyrights of each party shall be protected and that credits and logos shall be appropriately utilized upon reasonable and appropriate notice thereof. A. Except as otherwise provided herein, Orion shall submit all advertising, or marketing and packaging materials concerning any element of any Product in representative form to Playboy for Playboy's prior written approval at least fifteen (15) days prior to their intended distribution. Orion also must secure Playboy's prior written approval of all media for advertising and distribution and the specific publications, broadcasters and exhibitors which will be running the advertisements. Orion will not disseminate any advertising material or packaging that has not been so approved by 5 Playboy in each instance. If Orion submits advertising, packaging, marketing or other material to Playboy for approval and does not receive either approval or disapproval from Playboy within five (5) business days from such submission, then the material shall be deemed approved by Playboy; and B. Orion 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" and "Playboy at Night" (collectively, the "Playboy Marks") are the sole and exclusive property of Playboy. Orion shall have the right to develop and distribute advertising, publicity, and promotional materials relating to any Product and packing therefor incorporating both Orion's trademarks, trade names or service marks and/or the Playboy Marks in connection with Orion's rights hereunder; provided, however, that any such materials and packaging (other than material obtained directly from Playboy) shall, C. 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 "Playmate," as the case may be) is the mark of and used with the permission of Playboy Enterprises, Inc." or such other words as Playboy may designate: D. Be submitted in representative form to Playboy for Playboy's prior written approval in each case at least fifteen (15) days prior to their intended distribution. Playboy 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 Playboy's standards, which may vary from time to time. Except as otherwise provided herein, Orion will not disseminate any material or packaging that has not been so approved by Playboy. If Orion submits advertising, packaging, marketing or other material to Playboy for approval and does not receive either approval or disapproval from Playboy within five (5) business days from such submission, then the material shall be deemed approved by Playboy; and, E. Other than as otherwise expressly set forth herein, Orion shall make no use of the Playboy Marks or any confusingly similar designation without the prior express written consent of Playboy in each instance. Orion shall also make no use whatsoever of any other trademark, trade name or service mark that is the property of Playboy or any of its programs, or suppliers of Playboy without the prior express written consent of Playboy in each Instance. Orion 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 on materials supplied to them by Orion in accordance with Orion's rights hereunder. 6 10. Notices: All notices and other communications shall be in writing and shall be delivered as follows: A. If to Playboy, to: Playboy Entertainment Group, Inc.. 9242 Beverly Boulevard Beverly Hills, CA 90210 Fax: (310) 246-4050 Attention: Mr. Barry Leshtz Sr. V.P. & General Manager, Home Video Copy to: Sr. V.P., Business & Legal Affairs B. If to Orion, to: Orion Home Entertainment Corporation 1888 Century Park East Los Angeles, CA 90067 Fax: (310) 282-9902 Attention: Mr. Herbert Dorfman Copy to: Attention: Business & Legal Affairs Fax (310) 282-9902 11. Governing Law: This Agreement shall be governed by and construed in accordance with the laws, of the State of California. The parties intend to execute a more formal agreement in near future incorporating certain additional terms and conditions, to be negotiated in good faith. Until such more formal document is executed, this letter, when signed by both parties, shall constitute the binding agreement between the parties. AGREED AND ACCEPTED: PLAYBOY ENTERTAINMENT GROUP, ORION HOME ENTERTAINMENT INC. CORPORATION d/b/a ORION HOME VIDEO By: /s/ Myron DuBow By: /s/ Herb Dorfman ---------------------------- ---------------------------- Its SR. Vice-Pres. President - Orion Home Video 7 SCHEDULE A DELIVERY SCHEDULE ----------------- This Schedule "A" is attached to and incorporated in the agreement ("Agreement") between Playboy Entertainment Group, Inc. ("Producer") and Orion Home Entertainment Corporation ("Orion" or "Distributor") dated as of June 27, 1996 with respect to certain home video programs and product defined therein as Product. Producer agrees as a material obligation hereunder to make full and complete delivery of each and every item listed below to Distributor in the Los Angeles area to the persons and places designated by Distributor (except as specifically noted below where only access to Distribution is required). Such delivery by Producer will consist of making physical delivery to Distributor or its designee at Producer's sole cost and expense (transportation costs prepaid). 1. Composite Answer Print: Delivery of our access to one complete, final, first class composite 35mm positive print of the Picture, printed liquid gate, fully corrected to release print standards in the color process in which the Picture was photographed, fully cut, main and end titled, edited, scored and assembled with the soundtrack printed thereon in perfect synchronization with the photographic action and fit and ready for exhibition and distribution (the "answer print"). The answer print shall be manufactured by the laboratory approved by Distributor, and capable of manufacturing release prints of the Picture. 2. Negatives: Delivery of or access to the complete original 35mm picture negative and the optical composition sound negative in perfect synchronization with the picture negative, both fully cut, main and end titled, scored, edited and assembled and conformed in all respects to the answer print, which negatives shall be of first class quality so that first class intermediates and positive prints can be made therefrom, and shall be free of scratches or injury. 3. Interpositive: Delivery of or access to one first class 35mm interpositive (IP) of the Picture (picture only). The IP shall be fully cut, main and end titled, edited and assembled and conformed in all respects to the above-mentioned composite positive print, and original negative. The IP must be manufactured using the liquid gate process, in first generation from the original negative after the answer print has been manufactured in accordance with Paragraph 1 above. 4. Magnetic Music Master: One magnetic 1/4" track or DAT of the original music score for the Picture, suitable for reproducing first class stereophonic tapes or other recordings therefrom. 5. Textless Background: Delivery of or access to a clear background (textless, i.e., without any superimposed lettering) negative of the main and end titles and all descriptive titles, including the backgrounds for inserts, if any, in the Picture and of any other parts of the Picture which contain any lettering together with an interpositive of the foregoing items. 6. Work Print: If editing on film, access to the work print of the Picture, consisting of the editing and/or cutting prints that were used in the final editing of the Picture, assembled and conformed in all respects to the answer print, together with the separate 35mm magnetic dialogue, music and sound effects working tracks which shall also be assembled and conformed in all respects to the answer print. If posted electronically, access to the work cassettes. Access to all applicable paperwork. 7. (a) Magnetic Print Master (Domestic): Delivery of or access to a complete first class clean dubbed and rerecorded master of the soundtrack of the Picture on 35mm magnetic, 24 track, or other mutually agreed upon professional audio format fully cut, edited and assembled and conformed in all respects to the answer print. Track configuration should be standard LT-RT printmaster with matrix encoding (Dolby or Ultra) and Dolby A or SR noise reduction. 1 (b) Magnetic Master (Foreign): If available, for purposes of looping dialogue into foreign language versions of the Picture, access to or delivery of: (i) A full and complete 35mm magnetic, 24 track or other mutually agreed upon professional audio format composed of music and fully filled effects tracks recorded in a standard L-C-R-S track configuration without matrix encoding, but with Dolby A or SR noise reduction, fully cut, edited and assembled and conformed in all respects to the answer print. (c) Three-Stripe Magnetic Print Master (Domestic): Delivery of or access to a complete first class clean dubbed and rerecorded master of the soundtrack of the Picture on 35mm magnetic, 24 track, or other mutually agreed upon professional audio format composed of separate dialogue, music and sound effects tracks (3-stripe) fully cut, edited and assembled and conformed in all respects to the answer print. Track configuration should be standard D,M,E, with Dolby A or SR noise reduction. (d) Stems: Delivery of or access to the final dialogue, music and effects stems used for the final mix. 8. Video Material: D-1 525/60 is required of all delivered versions with audio channels 1&2 being LTRT and 3&4 M&E. Textless backgrounds should be recorded at least 2 minutes after end of program with additional color bars. 9. Trailer Material: All positive and negative picture and sound material required for publicity and advertising purposes, including selected "takes" and "out-takes" of the Picture requested by Distributor. 10. Television Version: Delivery of or access to the negative and positive print of all alternative takes, cover shots, looped dialogue lines and other material (hereinafter collectively referred to as "cover material") which Distributor requires in connection with rating, censorship and television exhibition requirements. Producer shall create a complete television version of the Picture, at least 8,460 feet in length of 35mm film, suitable for exhibition by television in the licensed territory and conforming to the continuity standards of United States television networks and United States television stations generally. In this connection, Producer shall provide access to the following: (a) One (1) first class 35mm IP, printed liquid gate, of the entire reel of each reel of the TV Version of the Picture fully cut, edited and assembled, in which there is contained all or any part of the cover material. (b) Magnetic Print Master (Television): Delivery of or access to a complete first class clean dubbed and rerecorded master of the television version soundtrack of the Picture on 35mm magnetic, 24 track, or other mutually agreed upon professional audio format fully cut, edited and assembled and conformed in all respects to the television version. Track configuration should be standard LT-RT printmaster with matrix encoding (Dolby or Ultra) and Dolby A or SR noise reduction. 11. Alternate Music Versions: If Orion approves an alternate music version, the following items, to the extent required, if any portion of the musical compositions or sound recordings (collectively "music") contained on the soundtrack of the Picture is not available for use in any and all media: (a) One (1) original soundtrack negative for the entire reel of each reel of the Picture in which there is contained all or any part of any eliminations of and/or substitute music for any music contained in the original soundtrack negative of the Picture, fully cut, edited and assembled in perfect synchronization with the photographic action in all respects and conformed in all respects to the entire reel of each reel of the sample composite positive print, including therein any dubbed sound, sound effects or music dubbed into said original soundtrack negative. 2 (b) The complete 3-stripe magnetic soundtrack master from which the soundtrack negative referred to in (a) above was made. (c) If the main and/or end titles of the original 35mm picture negative of the Picture contained any credits relating to music contained in the original soundtrack negative, but not contained in the alternate soundtrack negative referred to in (a) above, then a newly photographed set of 35mm negative main and/or end titles, as the case may be, of the Picture, fully cut, edited and assembled and conformed in all respects (including, without limitation, length) to the main and/or end titles, as the case may be, of the original 35mm picture negative of the Picture referred to above, excluding only from such newly photographed main and/or end titles, as the case may be, any credits relating to music which are contained in the original soundtrack negative referred to above, but not contained in the alternate soundtrack negative referred to in (a) above, but, including in such newly photographed main and/or end titles, as the case may be, such credits as may be required for any music contained in the original soundtrack negative which are not contained in the original soundtrack negative referred to above. (d) One (1) interpositive printed from the original negative of the main and/or end titles, as the case may be, referred to in (c) above, fully cut, edited and assembled and conformed in all respects to the original negative of the main and/or end titles, as the case may be, referred to in (c) above. 12. Miscellaneous Material: Delivery of or access to all such film, soundtrack facilities and material as may be available, necessary and proper for the purpose of enabling Distributor to obtain and manufacture positive release prints of the Picture and all trailers thereof as may be reasonably required by Distributor for the purpose of distributing, exhibiting, and exploiting the Picture and said trailers throughout the distribution territory in 35mm and 16mm and in all systems, i.e., standard, wide screen, scope, etc. 13. Cuts, Trims: Delivery of or access to the negative and positive prints of all cutouts, trims, second takes, tests, sound effects tracks, dialogue tracks and music tracks made by Producer in connection with the production of the Picture, together with all scrap film connected with the Picture, whether or not included in the completed Picture. 14. Stills: The original black and white and color negatives, two (2) sets of black and white contact proof sheets of all still photographs taken in connection with said Picture, and all color transparencies. In no event shall Producer deliver less than the black and white negatives and two (2) corresponding positive prints of each of the following; 100 production stills of said Picture, 85 of which shall depict production scenes of the Picture and 15 of which shall be gallery or portrait sittings of the principal members of the case of said Picture, and no less than 75 color transparencies. All of said 100 black and white negatives shall be 8" x 10" in size (which may be enlarged to said 8" x 10" size from any other smaller original negative), and each such photograph shall be of reproduction quality suitable for use by Distributor for advertising and lithograph material and so-called poster artwork. Each photograph shall bear an appropriate caption identifying the subject and scene depicted. Any and all approvals or other authorizations that may be required in connection with Distributor's use of said photographs will be secured by Producer and delivered to Distributor at the time Producer delivers the respective photographs to Distributor. 15. Publicity Material: All publicity material which may have been prepared by or for Producer by any person, firm or corporation in connection with the Picture, but not less than one complete set of all advertising materials available, including without limitation press books, posters and publicity material. 16. Dialogue and Action Continuity: One (1) typewritten or photo-reproduced copy of a detailed combined dialogue and action continuity of the completed Picture, conformed in all respects to the dialogue and action contained in the completed Picture. 3 17. Screenplay: One (1) copy of the final screenplay or shooting script used by Producer in connection with photography of the Picture, as well as the film editor's papers, code books and similar materials if requested by Orion. 18. (a) Music Cue Sheets: One (1) copy of the music cue sheet(s) of the Picture and any other materials delivered to Distributor which contain music, including without limitation trailer and promotional reels, in the form attached as Exhibit "B-1" hereto, setting forth: (1) the title of the musical compositions and sound recordings, if applicable, (2) names of the composers and their performing rights society affiliation; (3) names of recording artists; (4) the nature, extent and exact timing of the uses made of each musical composition in the Picture, (5) the name and address of the owner of the copyright of each musical composition and sound recording, (6) the name and address of the publisher and company which controls the sound recording, and (7) the other information requested in Exhibit "B-1." (b) Composer and Conductor's Score: If requested by Distributor, the entire musical score used by the composer and/or conductor, together with all original music (including all musical compositions), manuscripts, instrumental and vocal parts and other music prepared by or under the supervision of Producer in connection with the Picture. 19. Music Licenses: Copies of all synchronization, performance and master use licenses in connection with the music contained in the Picture. 20. Contracts: Copies of all employment contracts with principal cast members, directors, producers, writers and composers, and all chain-of-title documentation regarding the literary property upon which the Picture is based. To the extent requested by Distributor, any additional licenses, contracts, releases, assignment and/or other written permissions from the proper parties in interest permitting Producer to use any musical, literary, dramatic and other materials of whatever nature used by it in the production of the Picture. 21. M.P.A.A.: A paid rating certificate from the Code and Rating Administration of America, Inc., and production code number. 22. Copies of Synopses: One (1) copy of a brief synopsis in the English language of the story of the Picture and one (1) copy of any synopsis prepared in a foreign language. 23. Producer's Statement Re Credits: A complete statement in triplicate setting forth the names of all persons to whom Producer is contractually obligated to accord credit on the screen or in any paid advertising, publicity or exploitation of the Picture, hereinafter referred to as "credit", and to include in such statement excerpts from any such agreements defining or describing the form and nature of such required paid advertising credits, in accordance with the Agreement to which this exhibit is attached. Producer agrees that such statement shall be delivered to Distributor as early as possible and in no event shall such statement contain inconsistent requirements for credit. Producer shall also deliver a list identifying all cast members of the Picture. Time is of the essence with respect to these requirements, and failure to make timely delivery shall constitute a material breach of this Agreement. 24. Statement of Costs: A certified statement of the actual direct costs of production of the Picture. 25. Other Instruments: Upon Distributor's request, such instruments as Distributor may deem necessary or proper to evidence, maintain or effectuate any or all of the security or other rights granted to Distributor under any provisions of this Agreement; and should Producer fail to execute, acknowledge and deliver any such instrument upon Distributor's request therefor, Distributor may do so, for and on behalf of Producer, as Producer's attorney-in-fact. 26. Name and Address of Custodian of Undelivered Material; With respect to any material provided for herein which is not physically delivered to Distributor, the name and address of the custodian as to each undelivered element. 4 27. Title to Foreign Language Elements: If any foreign language elements of the Picture are in the possession or custody of a foreign laboratory, Distributor shall have access to said foreign language elements, notwithstanding that other distributors may have access thereto as well. If Distributor has advanced monies for such foreign language elements, title to such elements shall be held by the foreign laboratory in the name of Distributor. 28. Errors and Omissions Insurance: Certificate of Producer's Errors and Omissions insurance policy covering the Picture and required endorsements thereto adding Distributor as an additional named insured. 29. Laboratory Access Letter: If all preprint material is not owned and held in the name of Orion, a letter from a first class laboratory in a form similar to the attached Exhibit "B-2" certifying that all preprint materials are in good condition and that first class, commercially acceptable release prints can be processed from the negative materials. 30. Residuals: A statement in the form attached hereto as Exhibit "B-3" containing the following information for purposes of determining residual payments: (1) Date principal photography commenced; (2) Name and address of each writer, director, actor, actress, unit production manager, first and key second assistant directors and any other personnel entitled to residuals (and, if writer, director, actor, actress, unit production manager, first and key second assistant directors or other personnel is a loan-out, name of lender also), together with the following information concerning each: (i) Social Security number, (ii) W-4 classification (marital status and number of dependents claimed) and a photocopy of individual's W-4 form if available, (iii) length of employment of SAG personnel (actual time worked or guaranteed time, whichever is higher, expressed in weeks and days) and (iv) a copy of Notice of Tentative Writing Credits or if no WGA writer involved, a statement by Producer so stating. If PGA or DGA personnel employed, Producer must list same or submit a statement setting forth that no members of such unions or guilds were employed in connection with the Picture. If AFM personnel employed, Producr must so state. 31. Ownership, Exemption or Reduced Rate Certificate: A certified statement containing the name and address of each participant in net profits to whom Distributor must account and make payment (including the Producer) who is not a resident of the United States, and with respect to each: (1) United States Internal Revenue Form #1001 (Ownership, Exemption or Reduced Rate Certificate) completed in full and signed by each such participant; (2) From the appropriate taxing or other authority of the government of the foreign country of residence of each participant in net profits: (i) A certificate described in Paragraph "A" of said Form #1001 that such nonresident profit participant is either a nonresident alien individual or fiduciary, a foreign partnership, a foreign corporation or other foreign entity, a nonresident foreign partnership composed in whole or in part of nonresident aliens, or a nonresident foreign corporation, and (ii) Any other certificate issued to the Distributor as withholding agent to be used to qualify the nonresident profit participant for exemption from withholding tax under existing tax treaties. 32. Legal Opinions, etc: All legal opinions, searches and other documents which Producer is required to deliver to Orion under the foregoing Agreement. 33. Picture Produced Outside U.S.: If the Picture was produced, in whole or in part, outside the United States and if requested by Distributor, the following additional items: (a) A Certificate of Nationality and Certificate of Origin issued by local authorities. (b) Censorship clearance certificate issued by local authorities. (c) An export license covering all negative and positive film relating to the Picture issued by local authorities. 34. Exclusive License: An Exclusive License in the form attached as Exhibit "A". 5 35. Sexually Explicit Scenes: If the Picture contains any sexually explicit scenes, then Producer shall deliver to Orion a statement, which identifies the scenes and sets forth the names and ages of all performers appearing in scenes; said statement shall be delivered in accordance with the Child Protection and Obscenity Enforcement Act of 1988. Acceptance by Orion of less than all of the foregoing items with respect to the Picture and/or release of the Picture, prior to delivery of all of the aforesaid items, shall in no event be construed as a waiver by Distributor of Producer's obligation to deliver any such item not so delivered. No waiver of delivery of any such item shall be valid or binding unless in writing and signed by Distributor. Distributor shall have the right to inspect and examine the material and documents tendered as delivery hereunder and shall advise Producer within thirty (30) days after the tendered delivery if and wherein same is not complete, whereupon Producer shall promptly deliver to Distributor any items which it shall have failed to deliver in the first instance. Distributor may (but shall not be obligated to) accept delivery of the Picture if such delivery shall not be complete, in which event Distributor may supply, or require Producer thereafter to supply, at the sole cost and expense of Producer, such items which Producer shall have failed to deliver in the first instance. Such acceptance of incomplete delivery shall not be deemed to be a waiver of Distributor's right to demand and require a full delivery as herein defined. All sums advanced by Distributor which Distributor shall have the right but not the obligation to advance, for delivery items not furnished or made available by Producer shall be paid to Distributor by Producer promptly on demand. To secure the payment by Producer to Distributor of any such sum, Producer assigns to Distributor any and all amounts otherwise payable to Producer under this Agreement. 6 EXHIBIT "A" EXCLUSIVE LICENSE ----------------- In consideration of Ten Dollars ($10.00), paid by Orion Home Entertainment Corporation ("Licensee"), and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned does hereby grant, assign and license to Licensee under the copyright laws of the United States and Canada, the following rights: 1. Picture: ------------------------ 2 Term: Seven and One-Half (7 1/2) years from the earlier of complete delivery of materials for each individual motion picture or street date for that individual motion picture. 3. Territory: The "Territory" hereunder shall mean the United States and Canada, their respective territories and possessions, including, without limitation, Puerto Rico, Guam, the U.S. Virgin Islands and the Panama Canal Zone, and their armed forces PX's wherever located (the "Licensee Territory"). 4. Rights: The sole and exclusive right and license to manufacture Licensed Video Devices respecting the Picture; to distribute, sell, rent, advertise, publicize and promote such Licensed Video Devices in the Territory for non- commercial private home use; to authorize others to do each of the foregoing; and to issue or authorize the issuance of public performance licenses for such Licensed Video Devices ("Home Video Rights"). This license is executed in accordance with and is subject to the terms and conditions of the Letter Agreement dated as of June 27, 1996, between the undersigned and Licensee relating to the license to Licensee of the above described rights in the Picture. IN WITNESS WHEREOF, the undersigned has caused these presents to be signed by its duly authorized officer on ____________, 1996. PLAYBOY ENTERTAINMENT GROUP, INC. By: -------------------------- Its: ------------------------- EX-10.13(A) 9 AFFILIATION AGREEMENT DTD 11/15/93 Exhibit 10.13(a) EXECUTION VERSION AFFILIATION AGREEMENT FOR DBS SATELLITE EXHIBITION OF CABLE PROGRAMMING AGREEMENT, made as of this 15 day of November, 1993, by and between Playboy Entertainment Group, Inc., a Delaware corporation ("Programmer") with offices at 9242 Beverly Blvd., Beverly Hills, CA 90210, and DirecTv, Inc., a California corporation with offices at 2230 East Imperial Highway, El Segundo, California 90245 ("Affiliate"). WHEREAS: A. Affiliate is in the process of establishing a direct broadcast service ("DBS") satellite-based television system in North America; and B. Affiliate desires to obtain the rights to distribute Playboy TV (the "Service", as defined in Section l(b) below) via the DBS Distribution System in the Fifty (50) United States (the "Territory") and for no other purpose and will provide or cause to be provided all necessary facilities to receive the signal transmitted by Programmer. NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS: 1. Grant of Rights. (a) Programmer hereby grants to Affiliate (which as used for all purposes in this Agreement shall mean DirecTv and/or its designees or affiliates) or its agents the right to distribute the Service in the Territory, including, without limitation, to hotels, motels, commercial office buildings and multiple dwelling facilities (provided, however, that Affiliate shall not have the right to distribute the Service in any common areas to which the public has free access of any commercial office buildings or multiple dwelling facilities), via the DBS Distribution System during the Term (as defined in Section 6(a) below) hereof. Subject to the terms and conditions of this Agreement, the terms and conditions upon which Affiliate distributes the Service to DirecTv Subscribers, including, without limitation, the retail price charged, shall be determined by Affiliate in its sole discretion. Nothing herein shall prevent or restrict Programmer from distributing the Service in the Territory or elsewhere via any medium or technology other than the DBS Distribution System (including, without limitation, EXECUTION VERSION any Ku-Band satellite distribution system other than the DBS Distribution System). The term "DBS Distribution System" shall mean the distribution system for video and other programming services (including, without limitation, cable programming services) whereby the cable programming satellite signal or feed is received from Programmer's transponder source by a DirecTv turnaround earth- station facility which compresses and encrypts the signal or feed and then uplinks it at one of the DirecTv Frequencies on a DBS communications satellite located at or about the 101 (degrees) West Longitude orbital location (a "DBS Satellite") for transmission to DirecTv Subscribers. "DirecTv Subscribers" shall mean those customers authorized to receive DBS service via the DBS Distribution System, including, without limitation, each residential unit in a multiple dwelling unit which is authorized to receive the DBS service via the DBS Distribution System. "Service Subscriber" shall mean any DirecTv Subscriber who is authorized to receive the service through the DBS Distribution System. "DirecTv Frequencies" shall mean the DBS operating frequencies associated with the 101 (degrees) West Longitude orbital location, for which Hughes Communications Galaxy, Inc. ("HCG") (an affiliate of DirecTv, Inc.) is the FCC- authorized permittee. (b) The "Service" shall mean and consist of the national feed (or, if Programmer uses multiple feeds for the Service, such other of such multiple feeds designated by Affiliate) of the programming service commonly known as "Playboy TV", which shall consist of entertainment programming for adult audiences, presented on a 10-hour per day schedule from 8 PM (eastern time) until 6 AM (eastern time) (each such 8 PM - 6 AM exhibition time block being referred to hereinafter as an "Exhibition Day"), the content of which as Programmer may determine in its sole discretion, including the substitution or withdrawal of any scheduled programs, and of commercial, promotional or other announcements. All rights and title in and to the entire contents of the Service, including, but not limited to, films and recordings thereof, title or titles, names, trademarks, concepts, stories, plots, incidents, ideas, formulas, formats, general content and any other literary, musical, artistic, or other creative material included therein shall, as between Programmer and Affiliate, remain vested in Programmer. (c) Subject to Section 17, Affiliate shall distribute the Service as transmitted by Programmer, in its entirety, in the order and at the time transmitted by Programmer without any intentional editing, delays, alterations, interruptions, deletions or additions. Programmer acknowledges that the DBS Distribution System requires and applies digital compression and encryption processes prior to transmission and decryption and decompression processes upon reception and agrees that such processing does not constitute an alteration and/or other modification of the Service. Notwithstanding the first sentence of this Section 1(c), Affiliate shall offer the Service to 2 EXECUTION VERSION DirecTv Subscribers on a subscription (al a carte or package) basis (collectively, the "Subscription Offerings") and on a pay-per-transaction (e.g., pay-per-night, pay-per-title, pay-per-hour etc.) basis (collectively, the "PPV Offerings"). Affiliate shall determine in its sole discretion whether to sell Subscription Offerings on an al a carte or package basis. Affiliate shall have the right (but not obligation) in its discretion to exhibit the service through the PPV Offerings in blocks of time as short as 60 minutes and up to the full amount of time offered by the Service; provided, however, that any partial exhibition of the Service which consists only of motion pictures must be no shorter than 120 minutes. (d) Except as allowed pursuant to this Agreement, Affiliate shall not redistribute any portion of the Service except as specifically authorized by Programmer. (e) Programmer and Affiliate shall use their respective commercially reasonable efforts to maintain for the Service a high quality of signal transmission in accordance with their respective technical standards and procedures. (f) Affiliate shall have the right, in its sole discretion and for Affiliate's sole benefit as between Programmer and Affiliate, to utilize the channel capacity used to transmit the Service during the hours which the Service is not exhibited. 2. Reports and Payments. (a) Compensation. As full and complete compensation for Affiliate's right to distribute the Service, Affiliate shall pay to Programmer the applicable percentage of Gross Receipts for such calendar month (as such percentage is calculated as set forth on Exhibit A based on the Per Capita Gross Receipts (as defined in Exhibit A)). (i) "Gross Receipts" are defined as the sum of all monies received by affiliate during any calendar month derived solely from Affiliate's distribution of the Service after deduction of taxes (other than income or franchise taxes); provided, however, that Gross Receipts shall in no event include any charge specifically made for access to programming other than the service or any general access charge, hardware licensing charge or other charge made on a "blanket" basis (which shall mean that such charge will relate to access to all program services available from Affiliate by means of the DBS Distribution System). If Affiliate packages the Service with other programming services, then Affiliate shall determine the Service's allocable share of revenues from such package by application of the following formula: 3 EXECUTION VERSION S = (A/B) X P where S = the Service's allocable share of revenues from such package A = the Service's DirecTv al a carte price then in effect B = the sum of the DirecTv al a carte prices of all programming services included in such package (including, without limitation, the Service) then in effect P = the price of such package To the extent that a DirecTv Subscriber prepays any portion of monies owed solely in connection with Affiliate's distribution of the Service, then the amount prepaid shall be included in Gross Receipts for the calendar month in which such prepayment was received. Affiliate shall deduct the amount of any Credit Transaction (as defined below in Section 2(a)(ii)), as such amount is reasonably determined by Affiliate, from the Gross Receipts of the calendar month; in which such Credit Transaction occurs. (ii) "Credit Transaction" shall mean any refund (or other payment or credit) to a DirecTv Subscriber in connection with (A) prepayments for the Service, (B) Programmer's inability to transmit the Service to Affiliate for distribution via the DBS Distribution System for any reason other than Affiliate's non-performance of an obligation hereunder, (C) a Force Majeure Event or (D) credits (excluding free previews of the Service not authorized by Programmer) allowed by Affiliate in its commercially reasonable judgment consistent with Affiliate's policies and procedures applied consistently to Programmer and Affiliate's other sources of programming services. (iii) Affiliate shall be responsible for the collection of all Gross Receipts and shall account to Programmer with regard to the Gross Receipts for the Service on a calendar month basis, not later than 30 days after the last day of the calendar month in which the Gross Receipts are received by Affiliate. Each such accounting shall be certified by an appropriate officer of Affiliate or an independent billing service as to the accuracy of such print-out or statement and shall include: (A) the aggregate Gross Receipts for such calendar month; 4 EXECUTION VERSION (B) the origin of all Gross Receipts for such calendar month, itemized by PPV Offerings and Subscription Offerings; (C) the number of DirecTv Subscribers as of the fifteenth calendar day of such calendar month; (D) the Per Capita Gross Receipts (as defined on Exhibit A); (E) the applicable Programmer Share from Exhibit A; (F) the dollar amount of Programmer's share of Gross Receipts for such calendar month; (G) for each type of Subscription Offering made available by Affiliate during such calendar month, the number of Service Subscribers as of the 15th day of such calendar month, the number of Service Subscribers connecting to the Service during such calendar month and the number of Service Subscribers disconnecting the Service during such calendar month; (H) for each type of PPV Offering, the number of Service Subscribers purchasing such PPV Offering on each calendar day of such calendar month; (I) a list, for all hotels and motels to which the Service is provided via the DBS Distribution System and the number of Available Hotel/Motel Rooms (as defined on Exhibit B) during such calendar month; and (J) the Hotel/Motel License Fee (as defined below in Section 2(b)). Programmer shall accord confidential treatment to any information contained in the aforementioned statement in accordance with Section 15. (b) The parties understand and agree that the terms of this Section 2(b), and not Section 2(a), shall govern in the case of monies received from the distribution of the Service to hotels or motels. In no event shall Affiliate pay any fees or other charges on any Gross Receipts pursuant to both this Section 2(b) and any other section of this Agreement. Affiliate shall pay to Programmer a license fee (the "Hotel/Motel License Fee") simultaneously with the accounting rendered to Programmer as set forth in section 2(a)(iii); the Hotel/Motel License Fee shall be 5 EXECUTION VERSION equal to the license fee set forth on Exhibit B attached to this Agreement. Affiliate, simultaneously with such payment, shall notify Programmer in writing, in a form reasonably requested by Programmer, of the names, addresses and room capacities of all hotels and motels to which Affiliate shall have either commenced or ceased distribution of the Service during the relevant calendar month. (c) At Programmer's request, Affiliate shall permit Programmer or its representatives to review, during the Term (no more than once each calendar year) and for one (1) year and on a one-time basis only thereafter, such DirecTv Subscriber records as are reasonably necessary for the purpose of verifying such statements at reasonable times, upon reasonable advance written notice and during normal business hours at Affiliate's offices. Such review shall be at Programmer's sole cost and expense and the information and process shall be subject to the confidentiality provisions of Section 15. In the event any such audit reveals an underpayment in excess of ten percent (10%) of the total payment actually due for the period in question, Affiliate shall pay all of Programmer's reasonable out-of-pocket costs of the review. (d) Any amounts not paid by Affiliate by the date payment is due shall accrue interest at the rate of one percent (1%) per month compounded monthly or at the highest lawful rate, whichever shall be the lesser, from the date such amounts were due until they are paid. (e) Neither Programmer's acceptance of any information or payment nor Programmer's inspection or audit of Affiliate's records or accounts will prevent Programmer from later disputing the accuracy or completeness of any payment made or information supplied by Affiliate or prevent Affiliate from later disputing the accuracy of, or contesting the obligation to make, any payment hereunder. (f) Programmer represents and warrants that the compensation level set forth in Exhibit A and in Section 2(b) comply with all applicable Laws. Such compensation level is substantially similar to Programmer's corresponding cable rates. If Programmer at any time after the Service Commencement Date (as defined in Section 6(a)) allows any distributor of the Service other than Affiliate (an "Other Distributor") with a number of Service Subscribers at any time equal to or less than a number equal to the then-existing number of Affiliate's Service Subscribers (an "Equal Distributor") to distribute the Service and charges a compensation level or computes penetration discounts or volume discounts, or provides cooperative marketing funds or other terms or conditions which effectively provide discounts to such compensation level, on a basis not substantially similar to such distribution network than as set 6 EXECUTION VERSION forth on Exhibit A or in Section 2(b) ("Favored Fees"), then, as of the date which is six months after the Service Commencement Date and again every six months thereafter during the Term (individually, a "Review Date"), Programmer shall so notify Affiliate in writing of such Favored Fees and Affiliate shall be immediately entitled to incorporate into this Agreement the Favored Fees so promulgated on substantially similar terms and conditions offered such Equal Distributor effective as of the Review Date on which Programmer became obligated to notify Affiliate of the Favored Fees. Nothing in the preceding sentence shall require Affiliate to incorporate the Favored Fees and such terms and conditions into this Agreement. As used in this Agreement, "Law" shall mean any FCC and any other governmental (whether international, federal, state, municipal or otherwise) statute, law, rule, regulation, ordinance, code, directive and order, including without limitation, any court order. 3. Commercial Avails. Programmer hereby warrants and represents that it does not make available to any distributor of the Service commercial announcements of any nature in the schedule of the Service. If at any time during the Term, Programmer shall provide the right to make commercial announcements to any distributor of the Service, then Programmer shall offer such right to Affiliate on terms and conditions no less favorable than those offered to any other distributor of the Service. 4. Marketing, Promotion and Distribution of Programmer Programminq Services by Affiliate. (a) Throughout the Term hereof, Affiliate shall assign one single channel of transmission on which the Service shall be distributed in its entirety. (b) Affiliate shall market and promote the Service in a similar manner as Affiliate markets and promotes other similar premium programming services; provided, however, that Affiliate may market and promote any other such premium programming service differently and/or more frequently, if such service provider provides Affiliate with consideration or compensation therefore. In connection therewith, Programmer shall provide Affiliate, upon Affiliate's request, with promotional and marketing advice. Affiliate shall make all marketing and promotion decisions in its sole discretion, but the parties understand and agree that Affiliate currently expects to use a range of promotional media (including, without limitation, print advertising and cross-channel promotional spots on the DBS Distribution System) to market and promote the Service. Affiliate shall publicize the schedule of the Service in the Territory in a manner similar to that which it employs, and based on the same factors it considers, in publicizing the schedule of other similar premium programming services distributed via the DBS Distribution System, 7 EXECUTION VERSION including, without limitation, the publication of the Service programming schedule in the television listings and program guides which Affiliate, as applicable, distributes. (c) Subject to Section 17, Affiliate shall not at any time during the Term (i) cease marketing or promoting the Service or (ii) withdraw distribution of Service in any area of the Territory after the introduction thereof in such area. (d) Affiliate will expend the percentages (as set forth on Exhibit A) of the Gross Receipts it receives from distribution of the Service, up to, as set forth in the next sentence, an aggregate amount per 12-month period (with each l2-month period starting on the Service Commencement Date (as defined in Section 6(a) or the anniversary thereof) (a "l2-Month Period") for marketing, advertising and promoting the distribution of the Service via the DBS Distribution System. The aggregate limit on Affiliate's obligations set forth in the preceding sentence shall be $l00,000 for the first two l2-Month Periods and $150,000 for each 12-Month Period thereafter. Subject to the terms and conditions of this Agreement, Affiliate shall make any decisions relating to such marketing, advertising, promotion and expenditures in its sole discretion, including, without limitation, the selection of promotional media (such as print advertising, direct mail pieces, cross-channel promotional spots on the DBS Distribution System etc.) and the scheduling of such marketing, advertising and promotion activities. Any expenditure not made with unaffiliated third parties shall be accounted for at fair market value. Affiliate's use of its on-air programming guide shall be valued at zero dollars for purposes of this Section 4(d). In cases where Affiliate makes expenditures for more than one programming service, Affiliate shall make an equitable allocation of such expenditure based on dividing the amount of the expenditure by the number of services marketed, promoted or advertised by such expenditure. If Affiliate intends to promote all programming services then offered on the DBS Distribution System (other than the Service) in one promotion piece, then Affiliate shall be obligated to include the Service in such promotion piece, and Affiliate shall promote the Service in a similar manner as the manner in which Affiliate promotes the other programming services in such promotion piece. Affiliate shall deliver to Programmer, within 60 days after the last day of each 12-month Period, documentation evidencing the amount and nature of any such expenditures certified by an officer of Affiliate. (e) Programmer shall place at least one national full-page advertisement in Playboy Magazine each 12-Month Period promoting solely the distribution of the Service via the DBS Distribution System. In addition, Programmer shall use its best endeavors to place three regional full-page advertisements each 12-Month Period in Playboy Magazine in each of Playboy Magazine's 8 EXECUTION VERSION 12 regions in existence as of the date of this Agreement (collectively, the "12 Regions") promoting solely the distribution of the Service via the DBS Distribution System. (f) From time to time, Programmer may offer Affiliate an opportunity to exhibit the Service free to DirecTv Subscribers ("Free Previews"). Free Previews shall be made only with Programmer's prior written authorization and shall be offered to Affiliate on a frequency and basis no less favorable than those offered to any other distributor of the Service. 5. Representations, Warranties and Covenants. (a) Affiliate Representations, Warranties and Covenants. Affiliate warrants, represents and covenants to Programmer that it: (i) has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (ii) has obtained, and shall maintain in full force during the Term hereof, such federal, state and local authorizations as are necessary to operate the business it is conducting in connection with its rights and obligations under this Agreement; (iii) shall distribute the Service in the Territory in accordance with the terms set forth in this Agreement; (iv) shall arrange for reception of the Service from a domestic communications satellite or other distribution vehicle acceptable to Affiliate in its sole discretion as such may be designated by Programmer to Affiliate from time to time. The signal(s) for the Service may be encoded and scrambled at the sole option and expense of Programmer. Affiliate agrees to maintain a high quality signal for the Service when transmitted from the applicable DBS Satellite to the DBS Subscribers via the DBS Distribution System (provided that any failure to do so due to a Force Majeure Event (as defined in Section 6(d)) shall not constitute a breach of this Agreement) and agrees to acquire and maintain, at Affiliate's sole expense, any equipment, including, without limitation, backup or reserve descramblers, which may be necessary to decode and unscramble the signal(s) for the Service; (v) shall not, without Programmer's consent, knowingly authorize or cause or knowingly suffer any portion of the Service to be recorded, duplicated, cablecast, exhibited or otherwise used (except on a videocassette 9 EXECUTION VERSION recorder or other home taping device for private, noncommercial use) for any purpose other than for distribution by Affiliate at the time the same is made available. If Affiliate becomes aware that any unauthorized third party is recording, duplicating, cablecasting, exhibiting or otherwise using the Service for any other purpose, Affiliate shall immediately so notify Programmer and Affiliate will take reasonable steps to prevent such unauthorized use; (vi) shall not knowingly authorize or knowingly permit the exhibition of the Service or any portion thereof at any place where admission for exhibition of such services is charged; (vii) shall submit to Programmer such reports, logs or statements, certified by an appropriate officer, as required pursuant to Section 2 hereof; (viii) shall not knowingly use the rights granted to it hereunder for any unlawful purpose; (ix) shall not, without Programmer's prior written approval, use the name of or logo for "Playboy TV" or the names, titles or logos of the Service or any of its programs, or the names, voices, photographs, likenesses or biographies of any individual participant or performer in, or contributor to, any program or any variations thereof, for any purpose other than in material intended solely to advise DirecTv Subscribers or potential DirecTv Subscribers of the availability and scheduling of the Service or as a channel identifier. Programmer shall promptly provide Affiliate with any and all promotional materials of the Service which it provides to cable operators and other distributors of the Service having a subscriber base similar in size to Affiliate's, at Programmer's sole cost and expense. If Affiliate shall request additional such materials, then Programmer shall promptly provide such materials, if available, to Affiliate and Affiliate shall reimburse Programmer for the actual costs thereof. Affiliate shall not publish or disseminate any material which violates restrictions imposed by Programmer or Programmer's suppliers and disclosed in advance and in writing to Affiliate by Programmer. The restrictions set forth in this Section 5(a)(ix) shall apply only to the extent they are applied by Programmer uniformly with respect to all of its cable providers and shall not apply if Affiliate has received a valid authorization from a third party for any of the uses described in this Section 5(a)(ix); 10 EXECUTION VERSION (x) shall use its reasonable efforts to make the customer service representatives at Affiliate's telemarketing center available for training by Programmer; provided, that such training shall take place at Affiliate's telemarketing center, shall occur no more than once every six months and shall not exceed 30 minutes in duration for each customer service representative; and (xi) shall cooperate in conducting commercially reasonable marketing tests and surveys, rating pools and other research, provided however, that any proprietary information so furnished by Affiliate shall be kept confidential, and Affiliate shall keep confidential all research funded by Programmer and delivered to Affiliate pursuant to Section 5(b)(iii) of this Agreement. (b) Programmer Representations, Warranties and Covenants. Programmer warrants, represents and covenants to Affiliate that it: (i) has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (ii) has obtained, and shall maintain in full force during the Term hereof, such federal, state and local authorizations as are necessary to operate the business it is conducting in connection with its rights and obligations under this Agreement; (iii) shall cooperate in conducting commercially reasonable marketing tests and surveys, rating pools and other research, provided however, that any proprietary information so furnished by Affiliate shall be kept confidential. Programmer shall provide Affiliate with written copies of such research and shall reimburse Affiliate for any reasonable out-of-pocket costs incurred by Affiliate in connection with such cooperation; (iv) shall cause its uplink authorization center to authorize and enable Affiliate's descramblers to receive and descramble the Service; (v) shall not, without Affiliate's prior written approval, use the name of or logo for "DirecTv" or the names, titles or logos of the DBS Distribution System or any of its programs, or the names, voices, photographs, likenesses or biographies of any individual participant or performer in, or contributor to, any program or any variations thereof, for any purpose other than as set forth in Section 4(e); 11 EXECUTION VERSION (vi) has obtained or will obtain at its sole expense all necessary trademarks, copyrights, licenses and any other intellectual property or use rights required in connection with, or for Affiliate's distribution of, the Service (including, without limitation, the right to use the name of or logo for "Playboy TV" or the names, titles or logos of the Service or any of its programs, or the names, voices, photographs, music, likenesses or biographies of any individual participant or performer in, or contributor to, any program or any variations thereof and to perform its obligations hereunder and grant the rights granted pursuant to Section 1; (vii) is in compliance with and will comply with all applicable Laws, including without limitation, the Cable Television Consumer Protection and Competition Act of 1992 and the regulations issued pursuant thereto; (viii) has no (and there are no), and Programmer covenants that it shall not enter into directly or indirectly, allow or otherwise permit any, affiliation, subdistribution or other agreements, whether written or oral, granting to cable distributors and/or any other third party, person or entity any form or type of exclusive or other rights that would limit or restrict in any way Affiliate's rights to distribute the Service in the Territory; (ix) has not been convicted for the criminal violation of, and has not been found by the FCC or other federal, state or local governmental authority with appropriate jurisdiction (collectively, the "Governmental Authority") to have violated, any federal, state or local law or regulation as applicable concerning illegal or obscene program material or the transmission thereof (the "Obscenity Laws"), and Programmer is not aware of any pending investigation (including, without limitation, a grand jury investigation) involving the Service or any pending proceeding against Programmer for the violation of any Obscenity Laws; and (x) will notify Affiliate as soon as it receives notification of, or becomes aware of, any pending investigation by any Governmental Authority, or any pending criminal proceeding against Programmer, which investigation or proceeding concerns distribution of the Service, including, without limitation, Obscenity Laws. For purposes of this Section 5(b)(xi), Programmer shall be deemed to be aware of any such investigation or proceeding if any of the directors, officers, agents, representatives or employees of managerial functions of Programmer or Affiliated Companies 12 EXECUTION VERSION (as defined in Section 8(a)) becomes aware of any such investigation or proceeding. 6. Term; Termination. ----------------- (a) The initial term of this Agreement shall be for the period commencing on the date hereof and ending on the third anniversary of Service Commencement Date (such term, as it may be extended below, the "Term"). This Agreement shall thereafter be automatically extended for successive one (1) year periods, unless either party notifies the other, at least three (3) months before the end of the then-applicable Term, of its intention not to further extend such Term, in which case this Agreement shall terminate at the end of such Term. The "Service Commencement Date" means the date on which Affiliate commences distribution of programming services for revenue-generating purposes over a fully operational DBS Satellite as selected and determined by Affiliate in its discretion and, subject to Programmer's provision of the Service pursuant to the terms of this Agreement, shall commence no later than 30 days after Affiliate's first DBS Satellite is fully operational and is being used for the distribution of programming services for revenue-generating purposes. It is the current intention of Affiliate to launch the distribution of the Service over its first operational DBS Satellite. (b) This Agreement may be terminated by either party (the "Affected Party"), in its discretion, at any time after any of the following occurrences, except as provided in this Agreement, with respect to the other party (the "Other Party"): (i) the failure by the Other Party, its successors or assigns to perform any material obligation hereunder which is not cured or as to which reasonable steps to cure have not been commenced (or are not thereafter diligently pursued) within thirty (30) days after receipt of written notice thereof from the Affected Party; or (ii) the filing of a petition in bankruptcy or for reorganization by or against the Other Party under any bankruptcy act; the assignment by the Other Party for the benefit of its creditors, or the appointment of a receiver, trustee, liquidator or custodian for all or a substantial part of the Other Party's property, and the order of appointment is not vacated within thirty (30) days; or the assignment or encumbrance by the Other Party of this Agreement contrary to the terms hereof. (c) Either party may terminate this Agreement if: (i) the Service Commencement Date has not occurred on or before December 31, 1995; or 13 EXECUTION VERSION (ii) a Force Majeure Event (as defined below in Section 6(d)) occurs, continues for 270 consecutive days and is continuing as of the proposed effective date of termination. (d) Notwithstanding any other provision in this Agreement, neither Programmer nor Affiliate shall have any liability to the other or any other person or entity with respect to any failure of Programmer or Affiliate, as the case may be, to transmit or distribute the Service or perform its obligations hereunder if such failure is due to any failure or degradation in performance of the satellite providing Programmer's signal or feed or the DBS Satellite(s) or transponders on such satellites (as applicable) or of the DBS Distribution System (in which case, Affiliate shall be excused from its distribution obligations under this Agreement), or of any scrambling/descrambling equipment or any other equipment owned or maintained by others (including, without limitation, Affiliate's automated billing and authorization system), any failure at the origination and uplinking center used by Programmer or Affiliate, any labor dispute, fire, flood, riot, legal enactment, government regulation, Act of God, or any cause beyond the reasonable control of Programmer or Affiliate, as the case may be (a "Force Majeure Event"), and such non-performance shall be excused for the period of time such failure(s) causes such non-performance; provided, however, that if Affiliate reasonably determines that it is commercially or technically unfeasible to cure a Force Majeure Event with respect to the DBS Distribution System or DBS Satellite and so notifies Programmer, then either party may terminate this Agreement effective upon written notice to the other party. (e) Termination of this Agreement pursuant to this Section 6 shall not relieve either party of any of its liabilities or obligations under this Agreement which shall have accrued on or prior to the date of such termination. (f) Affiliate may terminate this Agreement in the event the Service shall no longer consist primarily of programming of the type or genre described in Section l(b), as reasonably determined by Affiliate. 7. Separate Entities. No officer, employee, agent, servant or independent contractor of either party hereto or their respective subsidiaries or affiliates shall at any time be deemed to be an employee, servant or agent of the other party for any purpose whatsoever, and the parties shall use commercially reasonable efforts to prevent any such misrepresentation. Nothing in this Agreement shall be deemed to create any joint-venture, partnership or principal- agent relationship between Programmer and Affiliate, and neither shall hold itself out in 14 EXECUTION VERSION its advertising or in any other manner which would indicate any such relationship with the other. 8. Indemnification; Limitation of Liability. ---------------------------------------- (a) Programmer shall indemnify and hold harmless each of Affiliate, its Affiliated Companies (as defined below), Affiliate's contractors, subcontractors and authorized distributors and the directors, officers, employees and agents of Affiliate, such Affiliated Companies and such contractors, subcontractors and distributors (collectively, the "Affiliate Indemnitees") from, against and with respect to any and all claims, damages, liabilities, costs and expenses (including reasonable attorneys' and experts' fees) incurred in connection with any claim against any of the Affiliate Indemnitees arising out of (i) Programmer's breach of any provision of this Agreement, (ii) material or programming supplied by Programmer pursuant to this Agreement, (iii) the distribution or cablecast of any programming of the Service which violates or requires payment for use or performance of any copyright, right of privacy or literary, music performance or dramatic right, (iv) Programmer's advertising and marketing of the Service, and/or (v) any other materials, including advertising or promotional copy, supplied or permitted by Programmer. In addition, Programmer shall pay and hold the Affiliate Indemnitees harmless from any federal, state, or local taxes or fees which are based upon revenues derived by, or the operations of, Programmer. As used in this Section 8, "Affiliated Companies" shall mean, with respect to any person or entity, any other person or entity directly or indirectly controlling, controlled by or under common control (i.e., the power to direct affairs by reason of ownership of voting stock, by contract or otherwise) with such person or entity and any member, director, officer or employee of such person or entity. (b) Affiliate shall indemnify and hold harmless each of Programmer, its Affiliated Companies, Programmer's contractors, subcontractors and authorized distributors, each supplier to Programmer of any portion of the Service hereunder and each participant therein and the directors, officers, employees and agents of Programmer, such Affiliated Companies, such contractors, subcontractors and distributors and such suppliers and participants therein (collectively, the "Programmer Indemnitees") from, against and with respect to any and all claims, damages, liabilities, costs and expenses (including reasonable attorneys' and experts' fees) incurred in connection with any claim against the Programmer Indemnitees arising out of (i) Affiliate's breach of any provision of this Agreement, (ii) the distribution by Affiliate of the Service (except with respect to claims relating to the specific content of the Service for which Programmer is solely responsible pursuant to Section 8(a)(ii)), (iii) Affiliate's advertising and marketing of the 15 EXECUTION VERSION Service, and (iv) any other materials, including advertising or promotional copy, supplied or permitted by Affiliate. In addition, Affiliate shall pay and hold Programmer harmless from any federal, state, or local taxes or fees, including any fees payable to local franchising authorities, which are based upon revenues derived by, or the operations of, Affiliate. (c) Termination of this Agreement shall not affect the continuing obligations of each of the parties hereto as indemnitors hereunder. The party wishing to assert its rights set forth in this Section 8 shall promptly notify the other of any claim or legal proceeding with respect to which such party is asserting such right. If the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with any claim or suit involving only the payment of money (a "Money Claim"), then the indemnifying party shall have the option to settle or to undertake and conduct the defense of any such Money Claim. The indemnified party may, through counsel of its own choice and at its own expense, participate in any such defense of the Money Claim, but in such event the indemnifying party shall have sole and exclusive control over such defense and the indemnifying party's decision shall govern and control. The indemnified party expressly covenants that no compromise or settlement of any such Money Claim, or any preliminary negotiations with respect to any compromise or settlement, shall be made or entered into without the prior written approval of the indemnifying party. (d) If Programmer engages the services of any collection agency or independent legal counsel to collect past due fees owed to Programmer by Affiliate under this Agreement, Programmer shall be entitled to full reimbursement from Affiliate for all costs and expenses incurred in such collection efforts. (e) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT: (1) IN NO EVENT SHALL ANY PARTY BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER FORESEEABLE OR NOT, OCCASIONED BY ANY FAILURE TO PERFORM OR THE BREACH OF ANY OBLIGATION UNDER THIS AGREEMENT FOR ANY CAUSE WHATSOEVER. (2) IN NO EVENT SHALL ANY PROJECTIONS, FORECASTS, ESTIMATIONS OF SALES AND/OR MARKET SHARE OR EXPECTED PROFITS, OR OTHER ESTIMATIONS OR PROJECTIONS BY AFFILIATE OR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR AFFILIATES, REGARDING OR RELATED TO AFFILIATE'S DBS BUSINESS BE BINDING AS COMMITMENTS OR, IN ANY WAY, PROMISES BY AFFILIATE. 16 EXECUTION VERSION 9. Notices. Except as set forth below, all notices hereunder shall be in writing and delivered by hand or sent by certified mail, return receipt requested, facsimile machine, an overnight delivery service to the receiving party at its address set forth above or as otherwise designated by written notice. Notice to Programmer shall be provided as follows: If by mail, facsimile Playboy Entertainment Group, Inc. or overnight or 9242 Beverly Blvd. personal delivery: Beverly Hills, CA 90210 Attention: Senior Vice President Business and Legal Affairs Fax: (310) 246-4077 Notice to Affiliate shall be provided as follows: If by mail DirecTv, Inc. or facsimile: P.O. Box 92424 Los Angeles, California 90009 Attention: Vice President, Programming cc: Corporate Counsel cc: Business Affairs Fax: (310) 535-5222 If by overnight or DirecTv, Inc. personal delivery: 2230 East Imperial Highway El Segundo, California 90245 Attention: Vice President, Programming cc: Corporate Counsel cc: Business Affairs Notice given by mail shall be considered to have been given five (5) days after the date of mailing, postage prepaid certified or registered mail. Notice given by telegram shall be considered to have been given on delivery of such telegram to a telegraph office with charges therefor paid by or to be billed to the sender. Notice given by facsimile machine shall be considered to have been given on the date receipt thereof is electronically acknowledged. Notice given by an overnight delivery service shall be considered to have been given on the next business day. 10. Waiver. The failure of any party to insist upon strict performance of any provision of this Agreement shall not be construed as a waiver of any subsequent breach of the same or similar nature. All rights and remedies reserved to either party shall be cumulative and shall not be in limitation of any other right or remedy which such party may have at law or in equity. 11. Binding Agreement: Assignment. This Agreement shall be binding upon the parties hereto and their respective successors and assigns, except that it may not be assigned by Affiliate 17 EXECUTION VERSION without the prior written consent of Programmer, which consent shall not be unreasonably withheld; provided, however, that Affiliate may assign its rights and obligations under this Agreement, in whole or in part (including without limitation, Affiliate's right to distribute the Service) (i) to a successor entity to Affiliate's DBS business or (ii) to a third party, provided Affiliate remains primarily liable for the performance of such third party's obligations hereunder. 12. Laws of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and fully performed therein, except to the extent that the parties' respective rights and obligations are subject to mandatory local, State and Federal laws or regulations. 13. Entire Agreement and Section Headings. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof, and supersedes all prior agreements, arrangements, or understandings relating to the subject matter hereof. This Agreement shall not be modified other than in a writing, signed by each of the parties hereto. The section headings hereof are for the convenience of the parties only and shall not be given any legal effect or otherwise affect the interpretation of this Agreement. 14. Severability. The parties agree that each provision of this Agreement shall be construed as separable and divisible from every other provision and that the enforceability of any one provision shall not limit the enforceability, in whole or in part, of any other provision hereof. In the event that a court of competent jurisdiction determines that a restriction contained in this Agreement shall be unenforceable because of the extent of time or geography, such restriction shall be deemed amended to conform to such extent of time and/or geography as such court shall deem reasonable. 15. Confidentiality. The parties agree that they and their employees have maintained and will maintain, in confidence, the terms and provisions of this Agreement, as well as all data, summaries, reports or information of all kinds, whether oral or written, acquired or devised or developed in any manner from the other party's personnel or files, and that they have not and will not reveal the same to any persons not employed by the other party except (i) at the written direction of such party; (ii) to the extent necessary to comply with the law or the valid order of a court of competent jurisdiction, in which event the disclosing party shall so notify the other party as promptly as practicable (and, if possible, prior to making any disclosure) and shall seek confidential treatment of such information, or in connection with any arbitration proceeding; (iii) as part of its normal reporting or review procedure to its parent company, its auditors and its 18 EXECUTION VERSION attorneys, and such parent company, auditors and attorneys agree to be bound by the provisions of this Section 15; (iv) in order to enforce any of its rights pursuant to this Agreement; and (v) to potential investors, insurers, financing entities and, in the case of Affiliate, to any entity engaged in its DBS business; provided, however, that such person agrees to be bound by the provisions of this Section 15. Promptly after the Execution Date, the parties shall use their best reasonable efforts to agree upon a mutually acceptable press release with respect to the parties' general business relationship under this Agreement and to jointly issue and release such press release at a date mutually agreed upon. During the Term, neither party shall issue an independent press release with respect to this Agreement or the transactions contemplated hereby without the prior written consent of the other party. 16. Inadequacy of Money Damages. Programmer and Affiliate hereby acknowledge and agree that Affiliate's distribution and marketing of the Service pursuant to the terms and conditions contained herein are of the essence of this Agreement. Affiliate further acknowledges and agrees that such carriage and marketing requirements are special and unique, and that Programmer would not be adequately compensated by the payment of money damages in the event that Affiliate failed to comply with any of such requirements. Programmer further acknowledges and agrees that the grant of rights to Affiliate hereunder are special and unique, and that Affiliate would not be adequately compensated by the payment of money damages in the event that Programmer failed to comply with any of its obligations under this Agreement, including without limitation, providing access to any Service programming to Affiliate, as required hereunder. 17. Cessation of Program Distribution. (a) If, in connection with Affiliate's distribution of the Service via the DBS Distribution System, (i) Programmer is indicted or is otherwise similarly charged as a defendant in a criminal proceeding, or is convicted under any Obscenity Law or has been found by any Governmental Authority to have violated any such law; (ii) based on Affiliate's distribution of the Service via the DBS Distribution System, Affiliate is indicted or otherwise similarly charged as a criminal defendant, becomes the subject of a criminal proceeding or a governmental action seeking a fine, license revocation or other sanctions, or any Governmental Authority seeks a cease and desist or other similar order or filing; 19 EXECUTION VERSION (iii) the FCC has issued an order initiating a proceeding to revoke Affiliate's authorization to operate the Satellite or the DBS Distribution System; (iv) Affiliate obtains a court order pursuant to Section 17.(c), below, or a court or Governmental Authority of competent jurisdiction orders Affiliate to cease distribution of the Service; or (v) if Affiliate receives notice (the "Illegal Programming Notice"), written or oral, from a Governmental Authority that such authority considers the Service to be in violation of Obscenity Laws (the "Illegal Programming"), and that if Affiliate does not cease transmitting such Illegal Programming, then Affiliate and/or its affiliates and/or any of their executives will be indicted or otherwise charged as a criminal defendant, will become the subject of a criminal proceeding or a governmental action seeking a fine, license revocation or other sanctions, or that such Governmental Authority will seek a cease and desist or other similar order or filling (with Affiliate being obligated, to the extent permitted by law, to provide Programmer with a copy of such Illegal Programming Notice, if written, or with other verification, including the details thereof, if oral); then upon notice from Affiliate to Programmer (the "Cessation of Program Distribution Notice"), which may be oral, Affiliate may cease distributing immediately, in the case of a cessation of program distribution pursuant to subparagraphs (i), (ii), (iii) or (iv) above, or within 24 hours following receipt of such notice, in the case of a cessation of program distribution pursuant to subparagraph (v) above, the programming service which was the subject of the violation or alleged violation of the Obscenity Laws or otherwise gave rise to the denial of access (the "Illegal Programming Service"). (b) If Affiliate ceases, or has given Programmer notice of its intent to cease, distribution of the Service pursuant to the provisions of this Section 17, and if, in the case of a cessation of program distribution pursuant to subparagraphs (i), (ii), (iii) or (iv) above, Programmer does not believe the conditions set forth therein to Affiliate's cessation of program distribution have been met; or in the case of subparagraph (v), if Programmer does not believe the conditions set forth in subparagraph (v) to Affiliate's cessation of program distribution have been met or if Programmer believes that the Illegal Programming Notice does not require cessation of all segments of the Service, then Programmer shall have the immediate right to seek injunctive relief, including a temporary restraining order on notice of four (4) hours or more to Affiliate, to prevent the cessation or continuing cessation of such 20 EXECUTION VERSION program distribution by Affiliate AND SUCH RIGHT SHALL BE PROGRAMMER'S SOLE AND EXCLUSIVE REMEDY HEREUNDER OR OTHERWISE AT LAW OR IN EQUITY FOR ANY CESSATION OF PROGRAM DISTRIBUTION PURSUANT TO THIS SECTION 17. (c) Affiliate shall also have the right to seek: (i) injunctive relief, including a temporary restraining order on notice of four (4) hours or more to Programmer, to prevent, suspend or otherwise limit the distribution of the Service where Affiliate believes such distribution has resulted or will result in a violation of any Obscenity Law; or (ii) declaratory relief to establish its right to cease distribution of the Service under this Agreement. (d) Either party shall be entitled to oppose the other's attempt to obtain equitable relief. However, in order to enable either party to obtain a resolution of any such dispute as expeditiously as possible, both parties hereby agree that: (i) neither party will contest the jurisdiction of, or the venue of, any action for equitable relief brought by the other party in the following courts: U.S. District Court for the Southern District of New York, and the U.S. District Court for the Central District of California; (ii) the party opposing equitable relief (the "Opposing Party") will make itself available to accept service by telecopy or personal delivery on a 24 hour-a-day basis for five (5) consecutive days following receipt by the Opposing Party of the other party's notice of its intent to seek such equitable relief; and (iii) if either party seeks a temporary restraining order and provides notice to the Opposing Party at least four (4) hours before the scheduled court hearing, then the Opposing Party will not challenge the timeliness of such notice. (e) All remedies of Affiliate set forth in this Agreement shall be cumulative and in addition to, and not in lieu of any other remedies available to Affiliate at law, in equity or otherwise, and may be enforced by Affiliate concurrently or from time to time. (f) In addition to any other indemnification obligations found elsewhere in this Agreement, Programmer shall indemnify, defend and save Affiliate, its directors, officers, employees, and its affiliates from any liability or expense arising out of or related to matters set forth in Sections 17(a) (i), (ii), (iv) or (v) of this Agreement. Programmer shall pay all expenses (including attorneys' fees) incurred by Affiliate in connection with all legal or other formal or informal proceedings, instituted by any private third party or any Governmental Authority, and arising out of or related to matters set forth in Sections 17(a) (i), (ii), (iv) or (v) of this Agreement, and 21 EXECUTION VERSION Programmer shall satisfy all judgments, fines, penalties, costs, or other awards which may be incurred by or rendered against Affiliate as a result thereof, as and to the extent permitted by law. Affiliate will cooperate with Programmer in the defense of any such proceedings with counsel reasonably satisfactory to Affiliate, and Affiliate will not compromise or settle any such proceeding without the prior written consent of Programmer, which consent shall not be unreasonably withheld. (g) If cessation of program distribution has occurred pursuant to Section 17(a), and, within the term of this Aqreement, (i) if access was denied under Section 17(a) (i), the indictment or other charge against Programmer is dismissed or the conviction or finding is reversed; (ii) if access was denied under Section 17(a) (ii), the indictment or other charge against Affiliate is dismissed, or Affiliate is notified that it is no longer the subject of a criminal proceeding or governmental action or that the Governmental Authority is dismissing or will not longer seek a cease and desist order; (iii) if access was denied under Section 17(a) (iii), the FCC withdraws, revokes, or cancels its order or dismisses its proceeding; (iv) if access was denied under Section 17(a) (iv), the court order expires or is revoked or reversed; or (v) if access was denied under Section 17(a) (v), the Illegal Programming Notice is withdrawn by such Governmental Authority; then, upon notice from Programmer to Affiliate (the "Resumption of Program Distribution Notice"), which notice shall be in writing, Affiliate shall resume distribution of the Service pursuant to the terms of this Agreement. 18. Survival of Representations and Warranties. All representations and warranties contained herein or made by the parties, and each of them, in connection herewith shall survive any independent investigation made by either party. 19. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original 22 EXECUTION VERSION and all such counterparts together shall constitute but one and the same instrument. The parties also agree that this Agreement shall be binding upon the faxing by each party of a signed signature page thereof to the other party. If such a faxing occurs, the parties agree that they will each also immediately post, by Federal Express, a fully executed original counterpart of the Agreement to the other party. 20. Home Shoppinq Service. Programmer has informed Affiliate that Programmer might at some future time undertake distribution of a home shopping service (the "Home Shopping Service"). The parties understand and agree that the Home Shopping Service is not a part of this Agreement. The parties agree, when and if Programmer decides in its sole discretion to undertake distribution of the Home Shopping Service, to discuss the distribution of the Home Shopping Service on the DBS Distribution System; it being further understood, however, that neither Programmer nor Affiliate shall be bound to the other (i) in any way whatsoever to offer the Home Shopping Service for distribution, to distribute the Home Shopping Service, to negotiate for distribution rights of the Home Shopping Service or to refrain from discussing similar concepts with other parties or (ii) in any way whatsoever in connection with the Home Shopping Service or similar concepts. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written. DIRECTV 11-16-93 /s/ Larry N. Chapman - ---------------------------------- By: ------------------------------------- Date Name: LARRY CHAPMAN Title: VICE PRESIDENT, BUSINESS AFFAIRS AND NEW BUSINESS DEVELOPMENT Playboy Entertainment Group, INC. November 16, 1993 /s/ MK Fleming - ----------------------------------- By: ------------------------------------ Date Name: Michael K. Fleming Title: Sr. Vice President, General Manager 23 EXECUTION VERSION EXHIBIT A --------- PROGRAMMER'S RATE CARD FOR NON-HOTEL/MOTEL DISTRIBUTION -------------------------------------------------------
Required Marketing, Advertising, Promotion Affiliate Expenditure Programmer Per Capita Gross Receipts Share by Affiliate Share - ------------------------- ----- ------------ ----- $0.00-$1.099 53% 3% 47% $1.10-$1.599 55% 1.5% 45% $1.60--above 58% 0% 42%
The "Per Capita Gross Receipts" for any month shall be determined by taking the amount of Gross Receipts for any such month and dividing that amount by the number of DirectTv Subscribers as of the fifteenth calendar day of such month. 24 EXECUTION VERSION EXHIBIT B --------- PROGRAMMER'S RATE CARD FOR HOTEL/MOTEL DISTRIBUTION --------------------------------------------------- Affiliate shall pay to Programmer the Hotel/Motel License Fee. The "Hotel/Motel License Fee" shall be equal to $1 per calendar month for each Available Hotel/Motel Room. "Available Hotel/Motel Rooms" shall mean all private residence rooms in all hotels and motels to which Affiliate distributes the service pursuant to this Agreement which are (i) normally held out to the general public for rental, (ii) operational during the majority of the relevant calendar month and (iii) available to Affiliate for revenue-producing purposes during the majority of the relevant calendar month. 25 PLAYBOY ENTERTAINMENT GROUP, INC. November 15, 1993 Ed Huguez Senior Manager DirecTv, Inc. P.O. Box 92424 Los Anqeles, California 90009 Dear Ed: This letter will serve as a side agreement to the contract dated November 15, 1993 entered into between Playboy Entertainment Group, Inc. ("PROGRAMMER") and DirecTv, Inc. ("AFFILIATE") (the "CONTRACT"). Because of the requirements of a pre-existing contract between Programmer and an unnamed third party (the "UNNAMED PARTY"), Programmer and Affiliate agree that, notwithstanding Section 15 of the Contract, Programmer may make the following statement to the Unnamed Party: Playboy Entertainment Group, Inc. has entered into an agreement pursuant to which it has granted DBS distribution rights for the programming service commonly known as "Playboy TV". The terms of such agreement are less favorable to the new distributor than those previously granted to you in connection with our agreement with you to distribute Playboy TV. Programmer agrees that it will not disclose to the Unnamed Party or any other person or entity the specific terms in the Contract or any other information covered by Section 15 of the Contract. Programmer further agrees that it will not disclose Affiliate's identity to the Unnamed Party. Programmer represents to Affiliate that (i) Programmer's pre-existing contractual obligation is a current, legal, valid and binding obligation of the Programmer and (ii) Programmer's pre-existing contractual obligation requires the disclosure outlined above and prevents Programmer from disclosing to Affiliate the identity of the Unnamed Party. Programmer further represents that it will provide the above statement to the Unnamed Party only upon the Unnamed Party's agreement that it will keep all such information confidential, and will disclose such information only to its officers, directors, employees, auditors or attorneys. Nothing in this side letter or in Section 15 of the Contract shall prevent Programmer from 9242 Beverly Boulevard, Beverly Hills, CA 90210/(310) 246-4000 FAX (310) 246-4077 making a representation to any third party that the terms of any contract offered by Programmer to such third party are as favorable as, or more favorable than, those offered to all other distributors. Sincerely, PLAYBOY ENTERTAINMENT GROUP, INC. AGREED AND ACCEPTED: /s/ MK Fleming ----------------------------------------- Michael Fleming DIRECTV, INC. Senior Vice President By: /s/ Larry N. Chapman ------------------------------ Title: VICE PRESIDENT, BUSINESS AFFAIRS -------------------------------- AND NEW BUSINESS DEVELOPMENT EX-10.13(B) 10 FIRST AMENDMENT TO 11/15/93 AGREEMENT DTD 4/19/94 Exhibit 10.13(b) FIRST AMENDMENT TO AFFILIATION AGREEMENT FOR DBS SATELLITE EXHIBITION OF CABLE PROGRAMMING This First Amendment to that certain "Affiliation Agreement for DBS Satellite Exhibition of Cable Programming" made as of November 15, 1993 between Playboy Entertainment Group, Inc., a Delaware corporation ("Programmer") with offices at 9242 Beverly Blvd., Beverly Hills, CA 90210, and DirecTv, Inc., a California corporation with offices at 2230 East Imperial Highway, El Segundo, California 90245 ("Affiliate") (the "Original Agreement") is made and entered into as of April 19, 1994. For other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged: 1. Amendment. The parties hereto amend the Original Agreement as follows: a. The last two sentences of Section 2(a)(i)/1/ of the Original Agreement (the "Original Sentences") are deleted in their entirety and are replaced with the following sentence: To the extent that a DirecTv Subscriber prepays any portion of monies owed solely in connection with Affiliate's distribution of the Service, then the amount prepaid shall not be included in Gross Receipts unless and until a Credit Transaction in connection with prepayments for the Service (as defined below in Section 2(a) (ii)(A)) has occurred which is credited against such prepayment. 2. No Other Amendment. Except as specifically provided above in Section 1, all terms and provisions of the Original Agreement shall remain unmodified and in full force and effect. - ----------------------- 1. Which read as follows: "To the extent that a DirecTv Subscriber prepays any portion of monies owed solely in connection with Affiliate's distribution of the Service, then the amount prepaid shall be included in Gross Receipts for the calendar month in which such prepayment was received. Affiliate shall deduct the amount of any Credit Transaction (as defined below in Section 2(a)(ii)), as such amount is reasonably determined by Affiliate, from the Gross Receipts of the calendar month in which such Credit Transaction occurs." 1 3. Possible Future Amendment of the Original Agreement. The parties agree that upon the earlier to occur of (i) the time at which Affiliates financial system is reasonably capable of including prepayments in Gross Receipts for the calendar month in which a prepayment is received (as determined by Affiliate in its reasonable discretion) or (ii) the time at which Affiliate accounts to any of its other distributors for prepayments in the calendar month in which a prepayment is received rather than at the time at which a DirecTV Subscribers views the programming (if either event actually occurs), then the Original Agreement shall be deemed to be amended such that the Original Sentences are inserted in place of the amendment set forth in Section 1, above. Each of the parties agrees that, if either event actually occurs, then it will promptly execute such documents as are reasonably necessary to memorialize such amendment. 4. Counterparts. This First Amendment may be executed in counterparts, each of which shall be deemed to an original, and all such counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, this First Amendment is duly executed by the parties as of the date first written above. DIRECTV, INC. PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Larry N. Chapman By: /s/ Myron DuBow --------------------------- -------------------- Larry N. Chapman Name: Myron DuBow Vice President, Programming Title: Senior V.P. 2 EX-10.13(C) 11 SECOND AMENDMENT TO 11/15/93 AGREEMENT DTD 7/26/95 Exhibit 10.13(c) EXECUTION VERSION SECOND AMENDMENT TO AFFILIATION AGREEMENT FOR DBS SATELLITE EXHIBITION OF CABLE PROGRAMMING BY AND BETWEEN PLAYBOY ENTERTAINMENT GROUP, INC. AND DIRECTV, INC. This Second Amendment (the "Second Amendment") to that certain AFFILIATION AGREEMENT FOR DBS SATELLITE EXHIBITION OF CABLE PROGRAMMING dated as of November 15, 1993, as amended by the First Amendment dated as of April 19, 1994 (as so amended, the "Agreement") by and between Playboy Entertainment Group, Inc. a Delaware corporation ("Programmer") with offices at 9242 Beverly Blvd., Beverly Hills, CA 90210, and DIRECTV, Inc., a California corporation with offices at 2230 East Imperial Highway, El Segundo, CA 90245 ("Affiliate"), is hereby made and entered into this 26th day of July, 1995, as follows: 1. Amendments. For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto amend the Agreement, pursuant to Section 13 thereof, as follows: A. Schedule. The first sentence of Section 1(b) is hereby amended to read as follows: (b) The "Service" shall mean and consist of the national feed (or, if Programmer uses multiple feeds for the Service, such other of such multiple feeds designated by Affiliate) of the programming service commonly known as "Playboy TV," which shall consist of entertainment programming for adult audiences, presented (i) on a 10-hour per day schedule from 8 PM (eastern time) until 5:59 AM (eastern time), or (ii) commencing August 21, 1995 (the "24 Hour Launch Date"), on a 24-hour per day schedule as the parties shall mutually agree upon (each such 10 hour or 24 hour exhibition time block, as the case may be, shall be referred to hereinafter as an "Exhibition Day"), the content of which Programmer may determine in its sole discretion, including the substitution or withdrawal of any scheduled programs, and of commercial, promotional or other announcements. B. PPV Offerings. The last sentence of Section 1(c) is hereby amended to delete the period at the end of the sentence and add the following clause thereafter: ; and provided further, commencing on the 24 Hour Launch Date and continuing for such time as the Service is presented on a 24-hour per day schedule, Affiliate shall exhibit the Service through the PPV Offerings in 2 blocks of 12 hours each per Exhibition Day. C. Launch Fees. The following paragraph is hereby inserted as Section 2(g): (g) With respect to each of the periods from September 15 to October 14, 1995, and from October 15, 1995 to November 14, 1995 (each, a "Calculation Period"), Affiliate shall deduct "Launch Fees" from the applicable percentage of Gross Receipts paid to Programmer, which Launch Fees shall equal the difference of the applicable percentage of Gross Receipts otherwise payable to 1 EXECUTION VERSION Programmer for such Calculation Period minus $267,000. (For example, in the event the applicable percentage of Gross Receipts otherwise payable to Programmer for the period from September 15 to October 14, 1995 equals $400,000, then Affiliate shall deduct Launch Fees in the amount of $400,000 minus $267,000, or $133,000, from the Gross Receipts paid to Programmer.) In the event the aggregate Launch Fees deducted by Affiliate for the two Calculation Periods equal less than $200,000, Affiliate shall deduct from the applicable percentage of Gross Receipts otherwise payable to Programmer for the second Calculation Period that amount equal to the difference between $200,000 and the aggregate Launch Fees for the two Calculation Periods. Notwithstanding the foregoing, in the event Affiliate discontinues carrying the Service on a 24-hour basis at any time prior to August 20, 1996, Affiliate shall pay to Programmer, within 60 days of such termination of 24 hour programming, an amount equal to the product of the Launch Fees previously deducted by Affiliate and any amounts received by Affiliate from Programmer pursuant to this Section 2(g), times 12 minus the number of months during which the Service is offered on a 24-hour basis, divided by 12. (For example, in the event 24 hour programming of the Service is discontinued after 5 months, Affiliate would return to Programmer 7/12 of all Launch Fees and other amounts paid by Programmer to Affiliate under this Section 2(g).) D. Advertising. The second, fourth, fifth, sixth and last sentences of Section 4(d) are hereby deleted effective as of June 30, 1995, and the first sentence of Section 4(d) is hereby amended to read as follows: (d) Affiliate may expend such amounts as it deems necessary or desirable, in its sole discretion after June 30 1995, during any 12-month period (with each 12-month period starting on the Service Commencement Date as defined in Section 6(a) or the anniversary thereof) (a "12-Month Period") for marketing, advertising and promoting the distribution of the Service via the DBS Distribution System. E. Playboy Magazine Advertisements. Section 4(e) is hereby amended to delete the second sentence and add the following sentences after the last sentence thereof: Programmer shall provide to Affiliate one free advertisement (promoting the distribution of the Service via the DBS Distribution system or any other aspect of Affiliate's business, in Affiliate's sole discretion,) in Playboy Magazine, for each advertisement purchased by Affiliate in Playboy Magazine after August 21, 1995 at the applicable market rate; provided, however, in no event shall Programmer be required to provide more than 2 free advertisements to Affiliate in any one year period commencing on July 1 and ending on June 30 of a given year. Affiliate shall have sole discretion as to whether such free advertisement is a national advertisement or consists of regional advertisements placed in each of the 12 Regions. 2 EXECUTION VERSION F. Exclusivity. The word "and" which is the last word in clause (x) of Section 5(a) is hereby deleted; and the period at the end of clause (xi) of Section 5(a) is hereby deleted and replaced with: ; and In addition, a new clause (xii) is hereby added to Section 5(a), to read as follows: (xii) shall not offer adult audience entertainment programming (e.g., "Spice") on a 24-hour per day basis (other than the Service) during the 60 days commencing with the 24 Hour Launch Date. 2. Exhibit A. Programmer and Affiliate acknowledge and agree that Exhibit A is hereby amended to read as set forth in the attached Revised Exhibit A. 3. No Other Amendment. Except as specifically provided in Sections 1 and 2 above, all terms and provisions of the Agreement shall remain unmodified and in full force and effect; provided however, that in the event that Affiliate discontinues carrying the Service on a 24-hour per day basis at any time during the Term, the amendments set forth in Sections 1 and 2 above (excluding Affiliate's obligation to pay Programmer the amounts set forth in the penultimate sentence of Section 1.C) shall be of no further force and effect; and provided further, that with respect to Section 4(d) of the Agreement, Affiliate's obligation to expend any minimum amount on marketing, advertising and promotion of the distribution of the Service shall be prorated to equal only that proportion of any 12-Month Period during which the Service is not offered on a 24-hour per day basis. 4. Counterparts. This Second Amendment may be executed in counterparts, each of which shall be deemed an original, and all such counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Second Amendment through their duly authorized representatives as of the date first set forth above. ACCEPTED AND AGREED TO: Playboy Entertainment Group, Inc. DIRECTV, Inc. By: /s/ James L. English By: /s/ Lawrence N. Chapman ------------------------------ ------------------------ Name: James L. English Name: Lawrence N. Chapman ---------------------------- ---------------------- Title: President Worldwide Network Title: Senior Vice President --------------------------- --------------------- 3 EXECUTION VERSION REVISED EXHIBIT A ----------------- PROGRAMMER'S RATE CARD FOR NON-HOTEL/MOTEL DISTRIBUTION ------------------------------------------------------- For the period prior to August 21, 1995: - ----------------------------------------
Required -------- Marketing, ---------- Advertising, ----------- Promotion --------- Per Capita Gross Receipts* Affiliate Expenditure Programmer - ------------------------- --------- ----------- ---------- Share** By Affiliate Share** -------- ------------ ------- $0.00-$1.099 53% 3% 47% $1.10-$1.599 55% 1.5% 45% $1.60-Above 58% 0% 42%
For the period beginning August 21, 1995: - ----------------------------------------
Per Capita Gross Receipts* Affiliate Programmer - ------------------------- ---------- ---------- Share** Share** ------- ------- $0.00-$1.099 53% 47% $1.10-$1.599 55% 45% $1.60-above 58% 42%
*The "Per Capita Gross Receipts" for any month shall be determined by taking the amount of Gross Receipts for such month and dividing that amount by the number of DIRECTV Subscribers as of the fifteenth calendar day of such month. ** As of January 1, 1995, the Affiliate Share and Programmer Share is currently 60% and 40%, respectively, as a result of the adoption of Favored Fees pursuant to Section 2(f) of the Agreement. 4 EX-10.14 12 AFFILIATION AGREEMENT DTD 2/29/96 Exhibit 10.14 AFFILIATION AGREEMENT BY AND BETWEEN Playboy Entertainment Group, Inc. AND PRIMESTAR(R) PARTNERS L.P., DATED February 29, 1996 TABLE OF CONTENTS 1. RIGHTS 2. TERM 3. CONTENT OF THE SERVICE 4. DELIVERY AND DISTRIBUTION OF THE SERVICE 5. FEES 6. REPORTS 7. PROMOTION 8. WARRANTIES AND INDEMNITIES 9. EARLY TERMINATION RIGHTS 10. FORCE MAJEURE 11. NOTICES 12. CONFIDENTIALITY; PRESS RELEASES 13. MISCELLANEOUS (a) Assignment; Binding Effect (b) Entire Agreement: Amendments; Waivers (c) Governing Law (d) Relationship (e) Severability (f) No Inference Against Author (g) No Third Party Beneficiaries (h) Headings (i) Non-Recourse EXHIBIT A, License Fees AFFILIATION AGREEMENT --------------------- THIS AGREEMENT made as of the 29th day of February, 1996 is by and between Playboy Entertainment Group, Inc., a Delaware Corporation, ("Network"), and PRIMESTAR(R) Partners, L.P., ("Affiliate"), regarding the carriage of the television programming service known as Playboy TV (the "Service"). 1. RIGHTS: ------ (a) Grant of Rights. Network hereby grants to Affiliate, and Affiliate hereby accepts the non-exclusive right, and the obligation, to (1) receive the signal of the Service, (2) digitize, compress or modify the signal of the Service as set forth in Section 4(f) hereof, and to encode, re-uplink and transmit the Service to any satellite for transmission and distribution to Satellite Subscribers (3) authorize Affiliate's Distributors (pursuant to terms and conditions, including fees, determined by Affiliate) to resell and redistribute the Service to Satellite Subscribers, and (4) authorize the reception of the Service nationwide (including collectively the fifty (50) United States, its territories, possessions and commonwealths, and the District of Columbia) by Satellite Subscribers who receive the signal of the Service by means of equipment capable of receiving audio/visual/data signals and/or programming directly from any K- or Ku-band satellite including, but not limited to, medium power and high power satellites ("Satellites"). As used herein, "Satellite Subscribers" or a "Satellite Subscriber" shall mean each location to which Affiliate knowingly provides the Service, including, without limitation, Single family residences, whether detached single family dwellings or multiple dwelling units, including, but not limited to, apartment houses, condominiums, cooperatives, town homes, and, subject to Network's prior approval (which shall not be unreasonably delayed or withheld), the individual lodging rooms of dormitories, hotels and motels. "Distributor" shall mean any entity authorized by Affiliate to resell or redistribute the Service to Satellite Subscribers but shall not include any entity which retransmits the Service. (b) In the event Network provides an eastern and western feed of the signal of the Service, Network shall provide Affiliate with advance notice thereof, and Affiliate shall have the right to elect, in its sole and absolute discretion, to exhibit either the eastern or western feed of such signal. 2 2. TERM: ---- Unless earlier terminated pursuant to the terms of this Agreement, the initial term of this Agreement shall be for one (1) year commencing on February 29, 1996 and expiring on February 28, 1997. 3. CONTENT OF THE SERVICE: ---------------------- (a) Throughout the Term the Service shall contain at least ten (10) hours of programming per day, exclusive of Infomercials (as defined below), which ten (10) hours must consist of adult programming. Notwithstanding the foregoing, Affiliate may, at Affiliate's option, distribute the Service, in accordance with the terms and conditions of this Agreement, for more than ten (10) hours per day upon Affiliate's written notice to Network of its desire to increase the carriage hours for the Service and identifying the additional hours during which the Service shall be distributed. Network shall, for each month of the Term, send one (1) copy of its monthly program schedule as soon as it is available to Affiliate, ATTENTION: Vice President, Marketing. During (i) the hours of the day that Network is not transmitting the Service ("Dark Hours"), (ii) the hours, if any, between 8 a.m. and 10 p.m. Eastern time that Affiliate is not transmitting the Service (the "Additional Hours") and (iii) the hours of the day that Network is transmitting sixty (60) minutes or longer program length commercials ("Infomercials"), Affiliate may carry any programming Affiliate desires, in Affiliate's sole and absolute discretion, without first notifying Network. Network and Affiliate acknowledge that Infomercials are not a part of the Service, and that Affiliate shall not be obligated to distribute such Infomercials; provided, however that in the event that Affiliate elects, in its sole and absolute discretion to distribute the Infomercials, Network shall indemnify Affiliate in connection with such distribution as provided in Section 8(d) hereof. Affiliate acknowledges that the Service includes 900 number spots of two (2) minutes each in duration, that the Service includes "Playboy Home Shopping" and that once per week Network transmits an up to sixty (60) minute block of promotional programming intended for its affiliates. Further, Affiliate acknowledges that such 900 number spots, the "Playboy Home Shopping" programming and sixty (60) minute promotional programming spots are not included in and are separate and apart from Infomercials. (a)(1) Network shall use commercially reasonable efforts to provide Affiliate with a "clean" entry point to the Service at 10 p.m. Eastern time each day, provided, however, that Network's occasional failure to provide such entry due to live events or other programming shall not be considered a breach of this Agreement. (b) Network shall promptly give written notice of any offer made by Network to any of Network's affiliate distributors for commercial announcement time on the Service, and the terms and conditions of such offer. Network shall make available to Affiliate the most favorable number of minutes of commercial announcement time per hour of the Service given or offered by Network to any of Network's affiliate distributors, which commercial announcement time may be used at Affiliate's option and control. In addition, such commercial announcement time shall be provided to Affiliate under the most favorable terms and conditions for which commercial announcement time is provided by Network to any such distributor, including, but not limited to, the distribution of such commercial announcement time throughout the Service, placement of such commercial announcement time in the Service programming, and insertion of such commercial announcement into the Service programming time by Network. Affiliate shall 3 have the right to retain for itself all of the proceeds derived from the sale of the commercial announcement time furnished to it hereunder. (c) If for any reason, including without limitation causes beyond the control of Network, Affiliate, in good faith, determines that the Service does not include programming as required in Section 3(a) hereof, Affiliate may, in addition to any and all remedies available to Affiliate hereunder, in law or in equity, discontinue carriage of the Service upon the expiration of thirty (30) days following Affiliate's notice to Network thereof, unless Network has cured such default prior to the expiration thereof (d) During the Term, Network shall provide the Service in its entirety to Affiliate. When the phrase "in its entirety" is used in this Section 3(d), it means that each subscriber of Affiliate receiving the Service shall be able to receive, at all points in time between the hours of 10 p.m. and 8 a.m. Eastern time, or as such carriage hours may be increased pursuant to Paragraph 3(a), programming received at each such point in time by any other subscriber to the Service, and if any subscriber to the Service is receiving, at any given point in time, programming that is different than the programming received by any subscriber of Affiliate receiving the Service at such point in time, Affiliate shall have the unconditional right to elect which programming it desires to subdistribute as permitted by this Agreement, and/or which programming it will authorize for reception by Satellite Subscribers. 4. DELIVERY AND DISTRIBUTION OF THE SERVICE ---------------------------------------- (a) During the Term, Network shall, at its own expense, deliver an analog signal of the service to Affiliate's uplink facility by transmitting such signal via a domestic satellite commonly used for transmission of cable television programming and shall, at its own expense, fully encode the satellite signal of the Service utilizing scrambling technology commonly used in the domestic cable television industry. Except as otherwise provided in this Section 4(a), Affiliate shall, at its own expense, furnish an earth station and all other facilities necessary for the receipt of such satellite transmission and the uplink of such transmissions to a Satellite, including a back-up receiver decoder. (b) Network shall provide to Affiliate a video and audio signal of the Service of a technical quality equivalent to the technical quality of audio and video signals delivered by other cable television programming services. (c) Affiliate may distribute the Service as a part-time service, between the hours of 10 p.m. and 8 a.m. Eastern time, or as such carriage hours may be increased pursuant to Paragraph 3(a), (excluding Dark Hours, Additional Hours and Infomercials) and will distribute the Service over one (1) designated channel without alteration, editing or delay. Network agrees that Affiliate will have complete authority to control, to designate and to change the channels on which the Service is carried, provided, however, that Affiliate shall provide Network with written notice of such change within thirty (30) days thereof, and any new channel over which the Service is carried shall provide signal quality equal to or better than the channel it replaces. (d) Affiliate retains and reserves any and all rights in and to all signal distribution capacity contained within the bandwidth of the Service as received by Affiliate, including, without limitation, the vertical blanking interval, audio sub-carriers and any other portions of the bandwidth of the signal of the Service. Affiliate shall have no obligation to digitize, compress, re-uplink or otherwise transmit any of the signal distribution capacity contained within the bandwidth of the Service as received by 4 Affiliate, including, without limitation, the vertical blanking interval, audio channels and any other portions of the bandwidth that may be created or made usable as a result of the conversion of the signal of the Service to a compressed, digital or other non-analog format, except the principal audio carriage frequency (including closed captioning information) and the principal video carriage frequency of the Service. Nothing herein shall preclude Affiliate from exercising and exploiting such rights by any means and in any locations freely and without restriction; provided, however, that any such use by Affiliate shall not materially degrade, or otherwise materially interfere with, the picture quality of the Service or the audio portion of the Service signal which is the principal audio carriage frequency of the Service (including closed captioning information). (e) Affiliate and its Distributors may sell and distribute the Service on a pay-per-transaction (e.g., pay-per-title, pay-per-hour, etc.) basis (collectively the "PPV Offerings"). In addition, Affiliate agrees to use commercially reasonable efforts to make available, no later than June 1, 1996, for its Distributors to sell and distribute the Service on a monthly subscriber basis (the "Subscription(s)"). Affiliate shall have the right (but not the obligation) in its discretion to make the PPV Offerings available in blocks as short as sixty (60) minutes, and no longer than four (4) hours; provided, however, that any PPV Offerings which consists of a motion picture shall be no shorter than one hundred-twenty (120) minutes. A Subscription shall last for a period of no less than one (1) calendar month and shall entitle the viewer to receive the Service during all of the hours the Service is broadcast by Affiliate. (f) Network hereby grants Affiliate the right to receive the signal of the Service, to digitize, compress, modify, replace, convert or otherwise technologically manipulate the signal, and to transmit the signal as so altered (the "Altered Signal") to a satellite, including, without limitation a Ku-Band Satellite, and/or to a location designated by Affiliate (in its sole and absolute discretion), for redistribution to terrestrial or other reception sites capable of receiving and utilizing the Altered Signal as set forth in Section 1(a) of this Agreement, provided that no such alteration, transmission, redistribution, reception or other use will cause a material change in a viewer's perception of the principal video or principal audio presentation of the Service. Furthermore, Network shall not change the signal of the Service in such a way as to technically or technologically defeat, or otherwise interfere with, Affiliate's rights under this Section 4(f). In the event Network interferes with or otherwise prevents receipt, digitization, compression, modification, replacement, conversion, utilization or manipulation of the signal of the Service by Affiliate pursuant to the terms of this Section 4(f), then Affiliate shall have the right to discontinue carriage, immediately, of the Service. 5. FEES In consideration of the terms and conditions set forth herein, Affiliate shall, subject to Sections 5(b)(i) - (iv), pay the following fees ("Fees" and or "Fee"): (a) For each calendar month during the Term, Affiliate shall pay Network a Fee for each Satellite Subscriber who receives the Service hereunder, whether Service is received by Satellite Subscriber on a PPV Offerings or Subscription basis. The Fee(s) shall be calculated as set forth in Exhibit A. (b) In calculating Fee(s) due as described under Section 5(a) above, Satellite Subscriber shall not include (i) up to one hundred (100) full-time employees of Affiliate or Distributor or any affiliated party who are not charged for the Service, subject 5 to Network's consent (which shall not be unreasonably delayed or withheld); or (ii) subscribers who have not paid their monthly rate to Distributor for a given month and are subsequently deauthorized; (iii) subscribers of Distributor who are authorized to receive the Service as a free preview, provided, that such free preview may be offered only with the Network's consent, or (iv) retail locations (e.g., dealer showrooms) and other public locations (e.g., shopping malls and fairs) where Affiliate or a Distributor is demonstrating the Service for marketinq and promotional purposes. (b)(1) Affiliate shall provide Network, at Affiliate's sole cost, with two (2) integrated receiver decoders and the Service, one (1) at Network's corporate office in Beverly Hills, California, and one (1) at the Playboy mansion in Los Angeles, California; such locations shall not be deemed Satellite Subscribers for the purposes of the payments provisions hereof. (c) Any undisputed Fees payable by Affiliate to Network hereunder shall be due and payable forty-five (45) days after the end of the pertinent calendar month during the Term. In the event of a good faith dispute regarding any Fees, Affiliate shall notify Network of the basis of the dispute, the parties shall use their respective good faith efforts to resolve the dispute within sixty (60) days following Affiliate's notice to Network thereof, and no such disputed Fees shall be due or payable by Affiliate to Network unless and until such dispute has been resolved to the satisfaction of Affiliate and Network. (d) Any undisputed Fees that are unpaid within forty-five (45) days after they are due and payable shall accrue interest at one and one-half percent (1 1/2%) per month or the highest lawful rate, whichever is less, from the due date until payment is received by Network. Affiliate shall be liable to Network for all reasonable costs and expenses (including, but not limited to, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) in connection with the collection of any such overdue amounts. 6. REPORTS ------- (a) Affiliate shall send to Network, as and when available due to current technical constraints, but when sent, not later than forty-five (45) days after the end of each calendar month during the Term, a statement on a form mutually acceptable to Affiliate and Network. Affiliate shall deliver such statement to Network prior to or along with the amount payable to Network as provided in this Agreement. Each such accounting statement shall be certified by an appropriate officer of Affiliate or an independent billing service as to the accuracy of such statement, and shall include: (i) the aggregate Fees in connection with the PPV Offerings for the calendar month; (ii) the aggregate Fees in connection with Subscriptions for the calendar month; (iii) the origin of all Fees for such calendar month, itemized by PPV Offerings and Subscription length; (iv) the dollar amount of Network's share of Fees for such calendar month; (v) for each type of PPV Offering, the number of Satellite Subscribers purchasing such PPV Offering and the number of purchases of PPV Offerings each day during such calendar month; and the total number of 6 Affiliate's subscribers for both PPV Offerings and Subscriptions during such calendar month; (vi) the total number of active Subscriptions, by Subscription term length at the end of the last day of the applicable month, and at the end of the last day of the immediately preceding month, and the total number of authorizations and de-authorizations by Subscription term length during the applicable month; and (vii) a list of all hotels and motels to which the Service is provided by Affiliate during such calendar month. (b) Affiliate agrees to keep and maintain accurate books and records of all matters directly relating to this Agreement in accordance with generally accepted accounting principles. During the Term and for one (1) year after the termination of this Agreement, Affiliate's books and records shall be available to Network for inspection and audit, during normal business hours, at Network's expense, at Affiliate's offices upon reasonable notice to Affiliate. Network's right to perform such audit shall be limited to once in any twelve (12) month period during the Term and shall be limited to an audit with respect to amounts to be paid in the current and prior calendar year only. If Network audits Affiliate's books hereunder, Network must make any claim against Affiliate within the earlier of three (3) months after Network's representative leaves Affiliate's offices, or twenty-four (24) months after the close of the earliest month which is the subject of such claim. In addition, any such claim, if and when made, must relate to the then-current calendar year or the immediately preceding calendar year only. If a claim is not made within any limitation set forth herein, then the Fees, any Renewal Fees, and all reports required hereunder shall be deemed final and uncontestable, and Network will be deemed to have forever and conclusively waived its right, whether known or unknown, to collect any shortfalls from Affiliate for the period(s) audited. If any such audit reveals an under-payment to Network of greater than ten percent (10%) of the sum due to Network hereunder, then Affiliate shall reimburse Network for the reasonable costs of such audit, and any applicable interest thereon pursuant to Subparagraph 5 (d) hereof. 7. PROMOTION AND MARKETING SUPPORT ------------------------------- (a) Network shall establish a marketing fund for Affiliate to utilize in promoting the Service, the amount of which shall equal the additional Fees during the first month of this Agreement attributable to the additional two (2) hours during which Affiliate shall transmit the Service pursuant to this Agreement (the "Marketing Fund"). The Marketing Fund shall be calculated by subtracting the license fees payable to Network generated from purchases during the month of February 1996 from the license fees payable to Network generated from purchases during the month of March 1996, which calculation shall be determined and disclosed to Network by Affiliate in writing no later than July 10, 1996. Network will reimburse marketing claims submitted by Affiliate for pre-approved promotions which encourage Satellite Subscribers to purchase the PPV Offerings or Subscriptions when offered. Claims towards these funds must be submitted to Network by February 28, 1997; any unused portion of this fund shall remain with Network upon the expiration of the Term hereof. Affiliate shall market and promote the Service in a manner similar to its marketing and promotion of other similar, adult premium and/or pay-per-view services; provided, however, that Affiliate may market and promote other such services differently and/or more frequently, if such service provides Affiliate with consideration or compensation therefore. In connection therewith, Network shall provide Affiliate, upon Affiliate's request, with promotional and marketing advice. Affiliate shall make all marketing and promotion decisions in its sole discretion; the parties understand and agree that Affiliate currently expects to use a range of media 7 (including without limitation, print, advertising and cross channel promotional spots) to market and promote the Service. Affiliate shall publicize the schedule of the Service in the Territory in a manner similar to other similar adult premium and/or pay-per-view services, including without limitation the publication of the Service programming schedule in the television listinqs and program guides which Affiliate distributes. (i) Affiliate shall allow Network reasonable access to Affiliate's and Distributor's customer service representatives for training by Network, at Network's sole expense, no more than two (2) times per calendar year. (ii) Affiliate shall cooperate with Network in commercially reasonable marketing tests, surveys, ratings pools and other research, provided, however, that any proprietary information furnished by Affiliate shall be kept confidential and Affiliate shall keep confidential all research funded by network and delivered to Affiliate. Network agrees to forward to Affiliate any and all information and reports resulting from such research; provided, however, that Network shall not be required to forward any information protected under confidentiality terms with a third party. (b) Affiliate acknowledges that the names and marks "Playboy" and "Playmate" (and the names of certain programs which appear in the Service) are the exclusive property of Network and its suppliers and that Affiliate has not and will not acquire any proprietary rights therein by reason of this Agreement. Network shall have the right to approve any of Affiliate's mentioning or using of such names or marks in publicity about Network or the products or programming included in the Service. Uses of such names and marks in routine promotional materials such as program guides, program listings and bill stuffers, shall be deemed approved unless Network specifically notifies Affiliate to the contrary prior to such use by Affiliate. 8. WARRANTIES AND INDEMNITIES -------------------------- (a) Network represents and warrants to Affiliate that (i) Network is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) Network has the power and authority to enter into this Agreement and to fully perform its obligations hereunder; (iii) Network is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Network has the authority to do so; (v) Network is in compliance with all laws, rules, regulations and court and administrative decrees to which it is subject including, without limitation, all applicable rules and regulations of the Federal Communications Commission (the "FCC"); (vi) Network has, or will have acquired at the pertinent time all or part of the Service is made available to Affiliate, good title to, and/or each and every property right (whether relative to tangible or intangible property), or license, usage or other right necessary or appropriate to effectuate the acts or performances contemplated by, or satisfy the obligations imposed on it pursuant to, this Agreement, including, without limitation, all permits, rights, licenses and approvals necessary, required or appropriate for any and all performances included through to the premises and to the listeners frequenting the premises of Satellite Subscribers; (vii) neither the Service, any program related thereto, or any component thereof is subject to, or the subject of, any lien, encumbrance, charge, lis pendens, administrative proceeding, governmental investigation, or litigation pending or threatened; (viii) the use and exhibition of the Service by Affiliate, as contemplated by this Agreement, will not cause Affiliate to violate any law, rule, regulation or court or administrative decree; and (ix) the obligations created 8 by this Agreement, insofar as they purport to be binding on Network, constitute legal, valid and binding obligations of Network enforceable in accordance with their terms. (b) Affiliate represents and warrants to Network that (i) Affiliate is a limited partnership duly organized and validly existing under the laws of the State of Delaware, (ii) Affiliate has the power and authority to enter into this Agreement and to fully perform its obligations hereunder, (iii) Affiliate is under no contractual or other legal obligation which shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Affiliate has the authority to do so; and (v) the obligations created by this Agreement, insofar as they purport to be binding on Affiliate, constitute legal, valid and binding obligations of the Affiliate enforceable in accordance with their terms. (c) Affiliate and Network shall each indemnify, defend and forever hold harmless the other, the other's affiliated companies and each of the other's (and the other's affiliated companies') respective officers, shareholders, directors, employees, partners and agents, against and from any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and court or administrative costs) arising out of any breach of any term of this Agreement or any warranty, covenant or representation contained herein. (d) Without limiting the provisions of Section 8(c) hereof, Network will indemnify, defend and forever hold Affiliate, its Distributors and their respective affiliated companies, and each of Affiliate's and its Distributor's and their respective affiliated companies' respective officers, shareholders, directors, employees, partners and agents harmless from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) arising directly or indirectly out of the content of the Service and/or the Infomercials or the use and delivery of the Service and/or the Infomercials hereunder (including, but not limited to, sponsorship, promotional and advertising spots, any background music and anything else inserted by Network or any party other than Affiliate), including, without limitation, any losses, liabilities, claims, costs, damages and expenses based upon any suit, lien, encumbrance, charge, lis pendens, administrative proceeding, government investigation or litigation relating to the Service, any program included therein or any component thereof, or based upon alleged or proven libel, slander, defamation, invasion of the right of privacy or publicity, or violation or infringement of copyright (including music performance rights for any and all performances through to subscribers), literary or music synchronization rights, obscenity, indecency, or any other form or forms of speech (whether or not protected by the Constitution of the United States or any State) or otherwise arising out of the content of the Service as furnished by Network hereunder (provided that Affiliate shall, to like extent, indemnify Network for any deletion or addition of material by Affiliate to the Service which deletion from, or addition to, the Service gives rise to losses, liabilities, claims, costs, damages or expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and court or administrative costs)). (e) In connection with any indemnification provided for in this Section 8, each party shall so indemnify the other only if such other party claiming indemnity shall give the indemnifying party prompt notice of any claim or litigation to which its indemnity applies, it being agreed that the indemnifying party shall have the right to assume the full defense of any or all negotiations, claims or litigation to which its indemnity applies subject to the indemnified party's prior consent, which consent shall not be unreasonably withheld or delayed. The indemnified party will cooperate fully (at the cost of the 9 indemnifying party) with the indemnifying party in such defense and in the settlement of such claim or litigation, and the indemnified party shall make no compromise or settlement of any such claim without the prior written consent of the indemnifying party. The settlement of any claim or action by the indemnified party without the prior written consent of the indemnifying party shall release the indemnifying party from its obligations hereunder with respect to such claim or action so settled. (f) Network represents, warrants and covenants that (i) it has obtained general liability insurance covering the Service and all elements thereof from a nationally recognized insurance carrier and in accordance with industry standards; (ii) such insurance shall remain in full force and effect throughout the Term; (iii) Affiliate shall be named as an additional insured and loss payee on the insurance policy and such policy shall provide that the proceeds thereof shall be payable to Affiliate; (iv) Network shall provide Affiliate with documentation to such effect upon the execution hereof; (v) at least thirty (30) days prior to the expiration of such policy Network shall provide Affiliate with appropriate proof of issuance of a policy continuing in force and effect the insurance covered by the insurance so expiring; and (v) Network shall provide Affiliate with thirty (30) days written notice of any changes in such policy. (g) The representations, warranties and indemnities contained in this Section 8 shall continue throughout the Term and the indemnities shall survive the expiration or termination of this Agreement, regardless of the reason for such expiration or termination. 9. EARLY TERMINATION RIGHTS: ------------------------ (a) In addition to Network's other rights at law or in equity or pursuant to other provisions of this Agreement, Network may, by so notifying Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of this Agreement, provided, however, that if such breach is of the type that is curable, then Network shall not exercise its termination or other rights at law or in equity hereunder unless Network has, by so notifying Affiliate in writing, given Affiliate at least thirty (30) days from the time such notice is received by Affiliate to fully cure such material breach and to demonstrate to Network that such material breach has been cured; or (ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has sought relief under any law related to Affiliate's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Affiliate, or any relief under any such law has been sought by any creditors of Affiliate, unless such involuntary petition is dismissed, or such relief is denied within thirty (30) days after it has been filed or sought. (b) In addition to Affiliate's other rights at law or in equity or pursuant to other provisions of this Agreement, and in addition to any other right to terminate provided hereunder, Affiliate may, by so notifying Network, terminate this Agreement: (i) if Network is in material breach of this Agreement, including, but not limited to Network changing the content or reducing the volume of hours of the Service as described in Section 3 hereunder; provided, however, if such breach is of the type that is curable, then Affiliate shall not exercise its termination or other rights at law or in equity hereunder unless Affiliate has, by so notifying Network, given Network at least thirty (30) days from the time such notice is sent, to fully cure such material breach and to demonstrate to Affiliate that such material breach has been cured, or (ii) if Network has filed a petition in bankruptcy, is insolvent or has sought relief under any law related to Network's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Network, or any relief under any such law has been 10 sought by any creditors of Network, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) on at least fifteen (15) days' notice in the event that delivery of the Service is discontinued or interrupted for a continuous period of fifteen (15) days. Notwithstanding anything contained herein to the contrary, Affiliate shall have the right, in Affiliate's sole and absolute discretion, to discontinue carriage of the Service by providing Network with written notice within thirty (30) days of such deletion. 10. FORCE MAJEURE: -------------- Except as herein provided to the contrary, neither Affiliate nor Network shall have any rights against the other party hereto for the non-operation of facilities or the non-furnishing of the Service if such non-operation or non- furnishing is due to an act of God; inevitable accident; fire; lockout; flood; tornado; hurricane, strike, or other labor dispute; riot or civil commotion; earthquake, war; act of government or governmental instrumentality (whether federal, state or local); failure of performance by a common carrier; failure in whole or in part of technical facilities; or other cause (financial inability excepted) beyond such party's reasonable control. In the event of non-operation or non-furnishing of the Service, Affiliate shall have the right, immediately, to insert programming of its choice on the channel otherwise identified with the Service until such time as the Service resumes full operation. Credit will be given to Affiliate, however, on that portion of the Service which is affected by any interruption during any month equal to the product of (x) the Fees or any Renewal Fees which would be due for such month, calculated in accordance with this Agreement, assuming no interruption of Service during such month, multiplied by (y) a fraction, the numerator of which is the total number of hours of interruption of the Service during such month and the denominator of which is the total number of hours of the Service which would have been provided and carried by Affiliate during such month absent such interruptions). 11. NOTICES: -------- Any notice or report given under this Agreement shall be in writing, shall be sent postage prepaid by registered or certified mail return receipt requested or by hand or messenger delivery, or by Federal Express or similar overnight delivery service, or by facsimile transmission, to the other party, at the following address (unless either party at any time or times designates another address for itself by notifying the other party thereof by certified mail, in which case all notices to such party thereafter shall be given at its most recently so designated address): To Network: Playboy Entertainment Group, Inc. 9242 Beverly Boulevard Beverly Hills, California 90210 ATTN.: Vice President, Satellite cc: General Counsel Fax: 310-246-4098 To Affiliate: PRIMESTAR Partners, L.P. Three Bala Plaza West, Suite 700 Bala Cynwyd, Pennsylvania 19004 ATTN.: Director of Programming & PPV Fax: 610-617-5312 cc: General Counsel Fax: 610-668-2862 11 Notices or reports given by personal delivery shall be deemed given on delivery. Notices or reports given by mail shall be deemed given on the earlier to occur of actual receipt thereof or on the fifth day following mailing thereof in accordance with the notice requirements of this Section 11. Notices or reports given by Federal Express or similar overnight delivery service shall be deemed given on the next business day following delivery of the notice or report to such service with instructions for overnight delivery. Notices or reports given by facsimile transmission shall be deemed given on the day of transmission if transmitted prior to 5 P.M. on a business day, or on the next business day after the day of transmission if transmitted after 5 P.M. on a business day, holiday, Saturday or Sunday. 12. CONFIDENTIALITY:PRESS RELEASES ------------------------------ Neither Affiliate nor Network shall disclose (whether orally or in writing, or by press release or otherwise) to any third party (other than each party's respective officers, directors and employees, in their capacity as such, and their respective auditors and attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such officers, directors, employees, auditors or attorneys), any information with respect to the terms and provisions of this Agreement and Network shall not disclose any information obtained in any inspection and/or audit of Affiliate's books and records, or any information contained in any data or report required or delivered hereunder or any materials related thereto, and any information regarding Affiliate's subscribers or Satellite Subscribers including, but not limited to, the number of such subscribers, including Satellite Subscribers, except: (i) to the extent necessary (but redacted to the greatest extent possible) to comply with law or with the valid order of an administrative agency or a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other as promptly as practicable (and, if possible, prior to making such disclosure) and shall seek confidential treatment of such information, (ii) as part of its normal reporting or review procedure to its parent company, its auditors or its attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such parent company, its auditors or attorneys (iii) in order to enforce its rights or perform its obligations pursuant to this Agreement provided that prior to such disclosure such party shall seek confidential treatment of such information; and (iv) if mutually agreed by Affiliate and Network, in advance of such disclosure, in writing. Network shall comply with all laws, rules, regulations and court and administrative decrees to which it is subject. In addition, Network shall not use or disclose information (whether personally identifiable information or not) to any third party regarding Affiliate's subscribers or Satellite Subscribers and shall not engage in any direct mailing or telephone solicitation, for any purpose, to subscribers or Satellite Subscribers of Affiliate. This Section 12 shall survive, indefinitely, the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 13. MISCELLANEOUS ------------- (a) Assignment, Binding Effect. This Agreement, including both its obligations and benefits, shall redound to the benefit of, and be binding on the respective 12 transferees and successors of, the parties, except that neither this Agreement nor either party's rights or obligations hereunder shall be assigned or transferred by either party without the prior written consent of the other party; provided, however, no consent shall be necessary in the event of an assignment to any or each partner or owner of Network or Affiliate as of the date hereof. (b) Entire Agreement: Amendments; Waivers. This Agreement contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof. This Agreement may not be modified except in writing executed by both parties hereto. Any waiver of any provision of, or right included in, this Agreement must be in writing and signed by the party whose rights are being waived. No waiver by either Affiliate or Network of any breach of any provision hereof shall be or be deemed to be a waiver of any preceding or subsequent breach of the same or any other provision of this Agreement. The failure of Affiliate or Network to enforce or seek enforcement of the terms of this Agreement following any breach shall not be construed as a waiver of such breach. (c) Governing Law. The obligations of Affiliate and Network under this Agreement are subject to all applicable federal, state and local laws, rules and regulations (including, but not limited to, the Communications Act of 1934, as the same may be amended from time to time, and the rules and regulations of the FCC promulgated thereunder) and this Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York, without regard to choice of law rules. (d) Relationship. Neither Affiliate nor Network shall be, or hold itself out as, the agent of the other under this Agreement. No subscriber of Affiliate shall be deemed to have any privity of contract or direct contractual or other relationship with Network by virtue of this Agreement or Network's delivery of the Service to Affiliate hereunder. Likewise, no supplier of advertising or programming or anything else included in the Service by Network shall be deemed to have any privity of contract or direct contractual or other relationship with Affiliate by virtue of this Agreement or Affiliate's carriage of the Service hereunder. Nothing contained herein shall be deemed to create, and the parties do not intend to create, any relationship of partners, joint venturers or agents, as between Affiliate and Network, and neither party is authorized to or shall act toward third parties or the public in any manner which would indicate any such relationship with the other. (e) Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein; provided however, that both parties shall negotiate in good faith with respect to an equitable modification of the provision, or application thereof, held to be invalid and provisions logically related thereto. (f) No Inference Against. Network and Affiliate each acknowledge that this Agreement was fully negotiated by the parties and, therefore, no provision of this Agreement shall be interpreted against any party because such party or its legal representative drafted such provision. 13 (g) No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. (h) Headings. The titles and headings of the sections in this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement. (i) Non-Recourse. Notwithstanding anything contained in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that each and every representation, warranty, covenant, undertaking and agreement made in this Agreement was not made nor intended to be made as a personal representation, undertaking, warranty, covenant, or agreement on the part of any incorporator, stockholder, director, officer, partner, employee or agent, past, present or future, or any of them, and any recourse, whether known or unknown, in common law, in equity, by statute or otherwise, against any of them is hereby forever waived and released. The parties hereto have executed this Agreement as of the date first above written. AFFILIATE: NETWORK: PRIMESTAR Partners, L.P. Playboy Entertainment Group, Inc. By: /s/ Dennis Wilkenson By: /s/ Douglas H. Lindquist --------------------------- ------------------------------------ Title: S.V.P. Title: Vice President, Playboy Satellite ------------------------ --------------------------------- 14 EXHIBIT A To Affiliation Agreement By and Between Playboy Entertainment Group, Inc. and PRIMESTAR(R) Partners, L.P., Dated February 29, 1996. License Fees With regard to the PPV Offerings, for each month during the Term, Affiliate shall pay to Network a Fee equal to the greater of (i) Forty percent (40%) of Gross Receipts, as defined below, and (ii) either (a) One Dollar and Ninety- Eight Cents ($1.98) per two (2) hour PPV Offerings or (b) Two Dollars and Thirty-Eight Cents ($2.38) per four (4) hour PPV Offerings (excluding Special Events as defined below) during such month. With regard to Subscriptions, for each month during the Term, Affiliate shall pay to Network a Fee equal to Forty Percent (40%) of Gross Receipts; provided, however, that the minimum Fee(s) for Subscriptions shall not be less than Three Dollars and Ninety-Eight Cents ($3.98) per month for each Subscription. "Gross Receipts" shall mean the gross monthly PPV Offerings and Subscription revenue received from Satellite Subscribers for the Service (excluding revenues from Special Events); provided, however that revenue received from the sale of Subscriptions shall be calculated each month during the Term, by employing the number of Subscription Satellite Subscribers equal to the average of the actual number of Subscription Satellite Subscribers as of the first day of the month and the actual number of Subscription Satellite Subscribers as of the last day of the month. "Special Events" shall mean specific programs or blocks of programs intended for pay-per-view distribution at a higher than usual retail rate and designated by Network as such in advance, in its sole discretion. The License Fee payable for Special Event shall be determined by Network, in its sole discretion; provided, however, that not withstanding anything contained in the Agreement to the contrary, Affiliate shall have the right not to distribute any such Special Event. EX-10.15(C) 13 DIRECT MARKETING LICENSE AGREEMENT DTD 6/28/96 Exhibit 10.15(c) Critics' Choice VIDEO ***** June 28, 1996 Mr. Jim Cardwell MGM/UA Home Entertainment, Inc. 4000 Warner Blvd. Burbank, CA 91522 Dear Jim, We have agreed to extend the direct marketing license agreement dated February 23, 1994, between Warner Home Video, a division of Time Warner Entertainment Company, L.P. ("WHV") and Critics' Choice Video, Inc. ("Critics' Choice") on the terms outlined below: 1. Extend the agreement for a period of 18 months, covering the period from February 23, 1997, to August 23, 1998, plus a 6-month sell-off period extending to February 23, 1999. 2. Critics' Choice shall pay to WHV an additional advance in the sum of five hundred thousand dollars ($500,000) split as follows between the two labels: 70% Turner ($350,000) and 30% non-Turner ($150,000), which is consistent with the original agreement. The advance shall be paid no later than February 23, 1997. 3. Critics' Choice shall be permitted to continue to recoup royalties paid to WHV on the unearned portion of the current agreement through the end of the extended term, as well as during the 6 month sell-off period. 4. Critics' Choice agrees to feature Turner and non-Turner titles which are or become the subject of this agreement on 30% of the front or back covers produced by Critics' Choice during the entire term of this extension beginning immediately. Front and back cover titles will be featured exclusively only with other MGM product. 800 W. Thorndale Avenue, Itasca, IL 60143 708 775-3300 Facsimile 708 775-3340 5. Critics' Choice understands and agrees that Post-1986 titles are not included in this extension. 6. Critics' Choice understands and agrees that WHV will continue to make available through a version of the catalog exclusive program additional Turner titles, though exclusivity is not guaranteed. 7. Except as provided above, all of the other terms and conditions of the license agreement between us will remain as is. Very truly yours, Accepted and Agreed to: Warner Home Video, A Division of Time Warner Critics' Choice Video, Inc. Entertainment Company, L.P. By: /s/ Herbert M. Laney By: /s/ Jim Cardwell ------------------------ ------------------------- Name: Herbert M. Laney Name: Jim Cardwell ---------------------- ----------------------- Its: President Its: Executive V.P., WHV ----------------------- ------------------------ Date: June 28, 1996 Date: June 29, 1996 ---------------------- ----------------------- EX-10.16(A) 14 PRODUCT LICENSE AGREEMENT DTD 9/26/89 Exhibit 10.16(a) INDEX TO CHAIFA INVESTMENT, LIMITED PRODUCT LICENSE AGREEMENT ------------------------------------------------------------- THE SCHEDULE
PARAGRAPH PAGE NO. - --------- -------- 1. GRANT OF LICENSE a. Grant l - 2 b. Term 2 c. Minimum Net Sales 2 d. License Year and License Quarter 2 e. Territory 3 2. COVENANTS OF LICENSEE a. Use 3 - 4 b. Best Efforts 4 c. Royalties (i) Guaranteed Royalties 4 (ii) Earned Royalties 4 (iii) Interest 5 d. Statements 5 - 6 e. Payments 6 - 7 f. Records and Audit 7 g. Expenses of Conducting Examinations 7 - 8 h. Product Quality 8 i. Submission of Samples of Products, Wrapping Materials and Related Materials 8 - 9 j. Preservation of Trademarks and Copyrights 9 k. Submission of Manufactured Samples, Wrapping Materials and Related Materials and Permission to Inspect 10 - 11 l. List of Sources and Customers 11 m. Inventory 11 - 12 n. Trademarks and Non-Competitive Brands 12 o. Indemnification by Licensee 13 p. Title and Protection 13 - 14 q. Advertising Expenditures 14 3. ADDITIONAL COVENANTS OF THE PARTIES a. Reservation of Rights 15 b. Rights of Licensor 15 c. Rights of Licensee 16 4. TITLE AND PROTECTION a. Indemnification by Licensor 16 b. Enforcement 16 - 17
INDEX TO CHAIFA INVESTMENT, LIMITED PRODUCT LICENSE AGREEMENT ------------------------------------------------------------- (Continued)
PARAGRAPH PAGE NO. - --------- -------- 5. RELATIONSHIP BETWEEN THE PARTIES a. No Joint Venture 17 b. Assignment 17 - 18 6. SUBLICENSING 7. DEFAULTS AND RIGHTS OF TERMINATION a. Defaults and Right to Cure 18 b. Bankruptcy or Assignment for Creditors, Business Discontinuance 18 c. Loss of Trademark Rights 18 d. Impossible Performance 19 8. TERMINATION OR EXPIRATION a. Effect of Termination or Expiration 19 b. Reserved Rights 19 c. Inventory 19 - 20 d. Continued Sales After Termination or Expiration 20 e. Equitable Relief 20 f. Continuity of Sales 20 - 21 g. Guaranteed Royalties 21 9. NOTICES 21 10. INVALIDITY 21 - 22 11. CONSENTS AND APPROVALS 22 12. APPLICABLE LAW 22 13. BROKER 22 14. TITLES 22 15. ENTIRE AGREEMENT 22 - 23
THE SCHEDULE referred to in the Agreement dated as of September 26, 1989 S.1. THE LICENSOR: Playboy Enterprises, Inc. 919 North Michigan Avenue Chicago, Illinois 60611 S.2. THE LICENSEE: Chaifa Investment, Limited Unit 1, 17/F, Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong S.3. THE LICENSED TRADEMARKS: PLAYBOY, PLAYMATE and RABBIT HEAD DESIGN S.4. THE TYPE OF LICENSE: Exclusive S.5. THE USE OF THE TRADEMARKS: Design, manufacture, advertise, sell and distribute S.6. THE PRODUCTS: Men's and ladies' underwear, swimwear, socks, robes, pajamas, outerwear, shirts, activewear, jeans, and jeanswear, suits, belts, scarves, small leather goods, hankies, ties, hats, caps, wristbands, headbands and totebags (but specifically excluding footwear) ALL SPECIFIC PRODUCTS PRODUCED UNDER THESE GENERAL PRODUCT CATEGORY HEADINGS TO BE APPROVED OF BY LICENSOR FROM TIME TO TIME. S.7. THE TERRITORY: Hong Kong S.8. Initial Term ------------ THE COMMENCEMENT DATE: October 1, 1989 THE EXPIRATION DATE: September 30, 1994 Extended Term (if applicable): ----------------------------- October 1, 1994 - September 30, 1999 THE SCHEDULE (Continued) S.9. THE GUARANTEED ROYALTY: $100,000.00 (U.S.) per each License Year (including each License Year of the Extended Term, if applicable). S.10. THE EARNED ROYALTY: Five percent (5%) of net sales (as defined in Paragraph 2.d.(ii) of the agreement) of the Products. S.ll. THE MINIMUM NET SALES: Initial Term: ------------ 1st License Year (10/1/89 - 9/30/90) - HK$20,000,000.00 2nd License Year (10/1/90 - 9/30/91) - HK$25,000,000.00 3rd License Year (10/1/91 - 9/30/92) - HK$30,000,000.00 4th License Year (10/1/92 - 9/30/93) - HK$40,000,000.00 5th License Year (10/1/93 - 9/30/94) - HK$50,000,000.00 Extended Term (if applicable): ----------------------------- The Minimum Net Sales in each and every License Year of the Extended Term (if applicable) shall be HK $50,000.00. S.12. THE ADDRESS WHERE BOOKS KEPT: See S.2 PLAYBOY ENTERPRISES, INC. (LICENSOR) By /s/ W. Stokkan --------------------- CHAIFA INVESTMENT, LIMITED (LICENSEE) For and on behalf of CHAIFA INVESTMENT LIMITED By /s/ John Chan Chun Tung --------------------------------------- Authorized Signature LICENSE AGREEMENT ----------------- This agreement is made as of the 26th day of September, 1989, between the corporation described in Paragraph S.1. of the Schedule attached hereto and made a part hereof (hereinafter called "Licensor") and the corporation described in Paragraph S.2. of the Schedule (hereinafter called "Licensee"). WHEREAS, Licensor has certain rights to the trademark PLAYBOY and other trademarks identified in Paragraph S.3. of the Schedule (hereinafter collectively referred to as the "Trademarks"); WHEREAS, Licensee recognizes that the Trademarks have been used: a. in an internationally distributed magazine (Playboy) published by Licensor or its subsidiaries, affiliates or licensees; b. in widespread advertising, publicity, broadcasting and telecasting and allied fields by Licensor, its subsidiaries and affiliates; c. in promotional and advertising material in diverse businesses by Licensor, its subsidiaries and affiliates; d. in the manufacture, advertisement, distribution and sale world-wide of a broad range of consumer products including, but not limited to, jewelry, clothing, footwear, leather goods, audio and visual recordings, and personal health, home and automotive articles and accessories; WHEREAS, the parties hereto desire that Licensor grant to Licensee a license to use the Trademarks in the design, manufacture, advertising and sale of "Products" (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual promises herein contained, it is mutually aqreed as follows: 1. GRANT OF LICENSE. ---------------- a. Grant: Upon and subject to the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee, and Licensee hereby accepts the right, license and privilege specified in Paragraph S.4. of the Schedule, of using the Trademarks in connection with, and only with, the use, specified in Paragraph S.5. of the Schedule, of specifically designated and approved articles of merchandise specified in Paragraph S.6. of the Schedule (such articles of merchandise bearing the Trademarks are hereinafter collectively referred to as the "Products") in the territory specified in Paragraph S.7. of the Schedule (hereinafter called the "Territory"). Such right, license and privilege is hereinafter called the "License." b. Term: ---- (i) The term of the License shall commence on the date specified in Paragraph S.8. of the Schedule (hereinafter called "Commencement Date") and shall expire on the date specified in Paragraph S.8. of the Schedule, unless sooner terminated as provided under this agreement. (ii) See ADDENDUM. c. Minimum Net Sales: Anything in this agreement to the contrary notwithstanding, if Licensee's "net sales", as hereinafter defined, in any License Year shall be less than the Minimum Net Sales specified in Paragraph S.ll. of the Schedule for such License Year, then Licensor shall have the right at any time to either (i) declare this License to be a non-exclusive License thereby giving Licensor the right to either itself design, manufacture, advertise, distribute and sell the Products or grant non-exclusive licenses to other parties to design, manufacture, advertise, distribute and sell the Products; or (ii) terminate the License herein granted by notifying Licensee of its election to terminate within thirty (30) days after Licensor's receipt of the statement for such License Year for which Minimum Net Sales were not attained. Such declaration of non-exclusivity as set forth in (i) above or termination as set forth in (ii) above shall have no effect upon the amounts due and payable to Licensor for periods prior to or after such declaration or prior to termination. d. License Year and License Quarter: -------------------------------- (i) For all purposes under this agreement a "License Year" shall be twelve (12) consecutive calendar months commencing on the Commencement Date and ending twelve (12) months thereafter and each twelve (12) month period thereafter, and if the termination of this License is effective other than at the end of such twelve (12) month period, then the final less than twelve (12) month period ending on the effective date of termination shall be deemed to be a License Year. (ii) For all purposes under this agreement, a "License Quarter" shall be the first (lst) and each succeeding three (3) month period of each License Year; and if the termination of this License is effective other than at the end of a License Year, then the final less than three (3) month period ending on the effective date of termination shall be deemed to be a License Quarter. -2- e. Territory: The License shall extend only to the Territory and the use by Licensee of the Trademarks shall be confined to the Territory. 2. COVENANTS OF LICENSEE. --------------------- a. Use: --- (i) Subject to Licensor's prior approval as hereinafter required, Licensee shall commence the manufacture, sale and distribution of each and every one of the Products as soon as practicable after the Commencement Date. If Licensee has not commenced the manufacture, sale and distribution of an approved line of Products by June 30, 1990, Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement. (ii) Licensee shall not cause or authorize any use of the Trademarks in any area of the world outside the Territory and shall not knowingly manufacture, sell or otherwise deal with or distribute any of the Products or any other goods, articles or services bearing any words or symbols associated with or confusingly similar to the Trademarks or associated with Licensor on behalf of, or to, any person, firm or corporation, that Licensee believes or has reason to believe intend, or are likely, to deal with the same in any area of the world outside the Territory. Licensee shall, upon notice from Licensor, immediately and permanently cease delivering Products to any person, firm or corporation named in such notice as one that directly or indirectly deals with the Products outside the Territory. (iii) Nothing contained in this Paragraph 2.a. or this agreement shall prevent Licensor from (a) using or granting others the right or license to use the Trademarks on or in connection with the Products in any area of the world other than the Territory or on or in connection with goods (other than the Products) of all other types and descriptions in any area of the world, including the Territory or (b) producing or having produced limited quantities of the Products to be used by Licensor or its affiliates in the Territory specifically for promotional and advertising purposes and not for sale. (iv) Licensee warrants and represents that it has, and will continue to have throughout the entire term of this agreement, the legal right to enter into this agreement and to assume the obligations hereunder and that there are no, and Licensee shall not enter into during the term hereof, contracts, agreements or -3- understandings with anyone which would in any way restrict or prevent Licensee from its performances and obligations under this agreement. Licensee shall be responsible for obtaining, at its own expense, any and all licenses, permits, approvals (including governmental or other agency licenses, permits and approvals) necessary for Licensee to design, manufacture, advertise, distribute and sell the Products, or to pay royalties or taxes or to fulfill any other obligation or exercise any right of Licensee under this License. In the event Licensee is unable, for any reason, to obtain all of the necessary permits, licenses or approvals prior to the Commencement Date, Licensor shall have the right to terminate this agreement upon notice to Licensee without any period of grace and without any obligation to Licensee whatsoever. b. Best Efforts: Licensee shall, throughout the term of the License and as permitted by this agreement, constantly use its best efforts in the advertising, promoting, selling and distributing and any other dealing with or disposal of the Products to protect the good name and goodwill associated with the Trademarks and Licensor and to obtain the greatest number of sales of the Products, such sales to be reported in measurements of both units and local currency, throughout the entire Territory and the entire term of this agreement and any extensions thereof. Except as provided in Paragraphs 2.a.(iii) and 2.q. hereof, Licensee shall be responsible for and shall assume and pay for all costs and expenses related to the design, manufacture, sale, promotion, advertising and distribution of the Products. c. Royalties: (i) Guaranteed Royalties: Licensee shall pay to Licensor or its nominee guaranteed minimum royalties (hereinafter called "Guaranteed Royalty" or "Guaranteed Royalties") in the amount specified in Paragraph S.9. of the Schedule; which shall be payable in four (4) equal installments with each such installment due on or before the first (lst) day of each License Quarter (i.e., October 1, January 1, April 1 and July 1) of each such License Year. (ii) Earned Royalties: In addition to Guaranteed Royalties, Licensee shall pay to Licensor or its nominee percentage royalties (hereinafter called "Earned Royalties") for each License Year in the amount equal to the amount by which in each License Year the amount specified in Paragraph S.10. of the Schedule exceeds the Guaranteed Royalty for such License Year. Earned Royalties shall be payable in accordance with the terms and conditions of Paragraph 2.d. and 2.e. below. -4- (iii) Interest: All sums including but not limited to the Guaranteed and Earned Royalties, that shall not be paid on the due date shall bear interest at an amount equal to the highest percentage allowed by law over the prime rate of interest as established by The First National Bank of Chicago in Chicago, Illinois applicable to ninety (90) day commercial loans effective on the date that such sum should have been paid from such due date until the date on which such sum is paid in full. d. Statements: (i) Within forty-five (45) days after each License Quarter, Licensee shall furnish to Licensor or its nominee a complete and accurate statement certified to be true by the Chief Financial Officer or Company Secretary of Licensee showing for the preceding License Quarter and the License Year through such period the units, description and computations in local currency of "net sales," as hereinafter defined, of all the Products distributed, sold or otherwise disposed of by Licensee in each country in the Territory during the preceding License Quarter, the computation of Earned Royalties as set forth in Paragraph 2.c.(ii) hereof and the amount of Earned Royalties due and payable thereon. When during any License Year such statement shows that the amount of the Guaranteed Royalty for such License Year has been exceeded, Licensee shall commence payment of Earned Royalties for such License Year by remittance, accompanying such statement, of Earned Royalties payable through the period covered by such statement. Any overpayments or underpayments of Earned Royalties caused by errors in prior quarterly statements revealed by the statement for the last License Quarter of any License Year shall be immediately adjusted by the parties. Such statement shall also reflect the advertising expenditures made by Licensee through such period pursuant to Paragraph 2.q. hereof (which will include the details of all such advertising expenditures, supported by copies of vouchers and copies of any print advertising). (ii) As used in this agreement, the term "net sales" means the invoice price charged by Licensee for the Products less (x) refunds, credits and allowances actually made or allowed to customers for returned Products, (y) customary trade discounts (including anticipations) afforded to and actually taken by customers against payment for the Products and (z) value added tax (only where applicable) assessed on sales. If Licensee sells Products to a marketing organization or any individual or company in whole or in part controlled by Licensee, the invoice price used to determine net -5- sales hereunder shall be the invoice price at which the Products are resold by such entity to an unrelated customer in an arm's length transaction. (iii) In the event the percentage of returns of Products in any License Year exceeds thirty percent (30%) of net sales for such License Year, then Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement and Paragraph 7. hereof shall apply. e. Payments. (i) All payments Licensee is required to make by the terms of this Agreement shall be made in United States Dollars through a bank specified by Licensor. No deduction shall be made for income or other taxes without Licensor's written permission, unless Licensee is compelled to do so by law; in which case Licensee shall provide Licensor with evidence that such tax has been paid in the proper amount. Licensee shall give due notice to Licensor of any such proposed deductions. In the event payments in the manner provided in this Paragraph 2.e. shall become impossible or illegal by reason of the action of governmental authority, then, at Licensor's option, this Agreement may be terminated; and whether or not Licensor exercises such option, while such restrictions remain in effect, all payments due Licensor shall be made to an account in the Territory, or elsewhere where permitted by law, to be designated by Licensor. (ii) In determining the proper rate of exchange to be applied to the payments due hereunder, it is agreed that: (a) Licensee shall calculate Earned Royalties on a calendar month basis in local currency (with each such month considered to be a separate accounting period for the purpose of computing Earned Royalties). (b) Licensee shall compute a conversion of each such monthly total into United States currency utilizing the rate of exchange in effect on the last day of each relevant calendar month as determined by the Bankers Trust Co. of New York City, New York (U.S.A.). (c) The converted amounts (in U.S. currency) shall be added together on a cumulative basis and when during any License Year such computation shows -6- that the amount of the Guaranteed Royalty for such License Year has been exceeded, Licensee shall commence payment of Earned Royalties for such License Year by remittance of such excess in U.S. currency to Licensor; which remittance will accompany the statement required by Paragraph 2.d. hereof. If there is no excess, no Earned Royalties will be payable for such License Year by Licensee (but in no event shall Licensor be responsible for returning to Licensee any portion of the Guaranteed Royalties paid or payable). f. Records and Audit: Licensee shall keep accurate books of account and records (including but not limited to utilization of consecutively numbered invoices) covering all transactions relating to this agreement or arising out of the License (which records shall be maintained separately from Licensee's books and records relating to other items manufactured or sold by Licensee) and shall permit Licensor or any of its nominees, employees or agents to have full access to and to inspect the same at all reasonable hours of the day to enable Licensor and its nominees, employees or agents to conduct an examination of and to copy, at Licensor's expense, all such books and records. Licensee shall maintain in good order and condition all such books and records for a period of two (2) years after the expiration or termination of the License or, in the event of a dispute between the parties hereto, until that dispute is resolved, whichever date is later, and such books and records shall be kept at the address stated in Paragraph S.12 of the Schedule; except as such address may be changed from time to time in accordance with Paragraph 9. hereof. Receipt or acceptance by Licensor of any statement furnished pursuant hereto or any sums paid by Licensee hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and if any inconsistencies or mistakes are discovered in such statement or payment, they shall be immediately rectified and prompt adjustment and corresponding payments shall be made to compensate therefor. g. Expenses of Conductinq Examinations: If an examination referred to in Paragraph 2.f. above discloses an overpayment or underpayment of Earned Royalties, the appropriate amount shall be immediately paid or refunded to the party entitled thereto. If such examination reveals that for the period covered by such examination there is an error of five percent (5%) or more in the Earned Royalty previously reported as being due from Licensee, all expenses involved in the conducting of such examination shall be borne by Licensee. If such error is less than five percent (5%), such expenses shall be borne by Licensor. In the event an examination discloses an underpayment in excess of nine percent (9%) for -7- any License Year, then Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement. h. Product Quality: Licensee hereby warrants and agrees that, the Products manufactured, advertised, promoted, sold, distributed or otherwise disposed of under this agreement shall bear faithfully produced Trademarks and shall meet the high standards of quality, workmanship, material, design, size, color and style established by Licensor in accordance with the terms and conditions of Paragraphs 2.h., 2.i., 2.j. and 2.k. hereof; and Licensee will not knowingly cause or authorize any Product not conforming to the conditions of this Paragraph 2. to be available for sale within the Territory as doing so may adversely affect Licensor's goodwill in the Trademarks. All Products made available for sale in the Territory shall conform to and comply with, in all respects, all governmental and jurisdictional laws, rules and regulations governing the design, quality or safety of such Products. Licensee shall not cause or authorize: the use of any substandard or offensive materials in or used in connection with the Products; in its actions under or related to this License, any violation of any governmental or jurisdictional law, rule or regulation, including but not limited to regulations imposing advertising standards or requiring trade or content description of Products; the use of the Trademarks or any other word, device or symbol associated in any way with Licensor, its subsidiaries and affiliates in connection with any product or activity that is not the subject of this License. i. Submission of Samples of Products, Wrappinq Materials and Related Materials: Licensee acknowledges that all Products and other items bearing the Trademarks must be approved in advance by Licensor. Licensee shall, at its own expense submit to Licensor or its nominee at least two (2) signed and dated samples, prototypes or equivalents acceptable to Licensor of each of the cartons, containers, labels, wrappers, packages or other inner or outer packaging materials, fixtures, displays, artwork, printing, advertising, sales, marketing and promotional materials and other items bearing the Trademarks and intended for use in connection with the Products (hereinafter called "Wrapping Materials and Related Materials") and of each of the Products that Licensee intends to manufacture, advertise, promote, sell, distribute or otherwise dispose of in the Territory from time to time. Licensee agrees not to commence or permit such manufacture, advertisement, promotion, sale, distribution of or dealing in Products, Wrapping Materials or Related Materials until Licensee has received: (i) the written approval of Licensor, or its nominee, for such Product and such Wrapping Material and Related Material and (ii) a sample, prototype or -8- equivalent acceptable to Licensor that has been signed and dated by Licensor as a record of its approval of the same. If any sales by Licensee of Products, Wrapping Materials or Related Materials do not conform in Licensor's sole opinion to the previously approved samples, then Licensor shall have the right to notify Licensee, in writing, specifying in what respect Licensor disapproves; in such event, Licensee shall, immediately upon receipt of notification of disapproval, suspend all advertising, manufacture, sale and distribution of the disapproved Product, Wrapping Materials or Related Materials until Licensee has made all necessary changes and corrections to the satisfaction of Licensor and obtained Licensor's written reapproval of such Product, Wrapping Materials or Related Materials. Sales by Licensee of Products, Wrapping Materials or Related Materials that do not conform to the previously approved samples shall constitute a material default under the terms of this License. Licensor shall use its best efforts to signify its approval or reapproval (which shall not be unreasonably withheld) or disapproval within fourteen (14) business days of receipt by Licensor of any Product, Wrapping Material or Related Material. In the event Licensee shall not have been advised of the approval or disapproval by the beginning of the second (2nd) full business day preceding such deadline, Licensee shall notify such person or persons as Licensor may designate from time to time, by telegram, telex, cable or facsimile, and in the event Licensor's designees shall not have notified Licensee of Licensor's disapproval within two (2) business days after receipt of such telegram, telex, cable or facsimile, Licensor's approval of such Product, Wrapping Material or Related Material shall be conclusively presumed. j. Preservation of Trademarks and Copyriqhts: Licensee shall: (i) affix to any Product, Wrapping Material or Related Material such trademark and copyright notices and notices of the sponsorship of Licensor as Licensor may request from time to time or as required by law during the term of the License; (ii) manufacture, sell, distribute or otherwise deal with Wrapping Materials or Related Materials solely in connection with the Products; (iii) not cause or grant permission to any third parties to acquire any copyright or other proprietary right in connection with any such word, device, design or symbol used by Licensee in connection with any of the Products, Wrapping Materials or Related Materials. -9- k. Submission of Manufactured Samples, Wrapping Materials and Related ------------------------------------------------------------------ Materials and Permission to Inspect: ----------------------------------- (i) Licensee shall, within seven (7) days of a specific demand from Licensor, dispatch to Licensor at Licensee's expense, samples of any of the Products, Wrapping Materials and Related Materials that Licensee is using, manufacturing, selling or distributing or otherwise disposing of under the terms of this agreement for inspection. Also, to ensure that all of the Products, Wrapping Materials and Related Materials dealt with by Licensee are constantly maintained in conformance with the previously approved samples, Licensee shall take such action as may be required to ensure that Licensor and its designated agents and representatives shall have the right to enter upon and inspect, at all reasonable hours in the day, any office, factory, warehouse or other facility where any of the Products or Wrapping Materials and Related Materials are designed, manufactured, stored or otherwise dealt with; and Licensor shall have the right to take, without payment, such samples of any of the Products, Wrapping Materials and Related Materials at any such place as Licensor reasonably requires for the purposes of such inspection. If any such dispatched or taken Products, Wrapping Materials and Related Materials fail to conform to the previously approved samples, then Licensor shall have the right to notify Licensee in writing, specifying in what respect Licensor disapproves; in such event, Licensee shall, immediately upon receipt of notification of disapproval, suspend all manufacture, sale and distribution and wherever possible call back from Licensee's customers all of the disapproved Product, Wrapping Material or Related Material until it has made all necessary changes and corrections to the satisfaction of Licensor and obtained Licensor's written reapproval of such Product, Wrapping Material or Related Material. Products, Wrapping Materials or Related Materials that do not conform to the approved samples, including seconds, shall not be sold, distributed or otherwise released by Licensee unless all references to all Trademarks shall have first been completely obliterated or removed or otherwise made totally unidentifiable. (ii) Licensee may, however, dispose of Products as "off-quality" merchandise. Whenever such off-quality merchandise is sold as aforesaid, no use of or reference to the Trademarks shall be made. Licensee shall notify its customers to assure compliance by them with the requirements of this Paragraph 2.k.(ii). Licensee shall be deemed to have met this obligation by its removal of all labels, tags and marks which would identify the goods as Products and by placing the following legend on all purchasers' invoices for such goods: -10- "Purchaser agrees that it will not use the Trademarks (here described, e.g., PLAYBOY, PLAYMATE and RABBIT HEAD DESIGN) or any other phrase or statement using the Trademarks (here described, e.g., PLAYBOY, PLAYMATE and RABBIT HEAD DESIGN) on any advertising, publicity, labeling, wrapping or packaging with respect to the merchandise listed hereon." (iii) In the event the percentage of off-quality Products in any License Year exceeds thirty percent (30%) of net sales for such License Year, then Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement and Paragraph 7. hereof shall apply. 1. List of Sources and Customers: Licensee, on demand from Licensor, shall provide Licensor with a list of the names and addresses of all manufacturing sources, subcontractors, suppliers, dealers, wholesalers, retailers and customers who have been engaged in the manufacture, sale, distribution or other dealings with the Products, Wrapping Materials and Related Materials during the term of the License (such list shall include customers to whom Products, Wrapping Materials or Related Materials have been delivered after the expiration or termination of this License); and such list shall, if so requested by Licensor, contain the full specification of any designs, utility models, patents or trademarks that may be involved, directly or indirectly, in the manufacture, production or distribution of any of the Products, Wrapping Materials or Related Materials; and Licensee shall obtain the consent of any relevant third parties for such disclosure. Such list will be kept confidential and will not be used by Licensor other than as provided in this Paragraph 2.1. All copies of such list in Licensor's possession will be returned to Licensee or destroyed by Licensor upon the termination or expiration of this agreement (in which case Licensor shall provide Licensee with an appropriate certificate of destruction). Licensor will not be obligated to maintain the confidentiality of any information that: (i) is or becomes generally available to the public other than as a result of a disclosure by Licensor; (ii) becomes available to Licensor on a nonconfidential basis from a source other than Licensee; or (iii) is disclosed as a result of an order of court. m. Inventory: It is the intent of this agreement that, insofar as practical, Licensee shall at all times be able to fulfill all orders for Products promptly and yet not have an excessive inventory on hand at the time of the termination or expiration of the License. Within forty-five -11- (45) days after each License Year, Licensee will furnish Licensor with a statement signed by the Chief Financial Officer or Company Secretary of Licensee, setting forth in detail the quantities of finished goods and work in progress inventories of the Products. n. Trademarks and Non-Competitive Brands: ------------------------------------- (i) Licensee shall not during or after the term of this agreement use or cause or authorize to be used any words, device, design or symbol confusingly similar to the Trademarks. Any permutations of the Trademarks and any secondary marks adopted and used by Licensee on or in connection with the Products and any words, device, design or symbol or any new packaging or tradedress developed or created by Licensee for use on or in connection with the Products shall be and become the property of Licensor and shall be included as Trademarks subject to this agreement. Licensee shall make no use of same except in regard to the Products and will assign to Licensor the beneficial ownership of all rights that Licensee has acquired or may acquire in such permutations, secondary marks, developments and creations. (ii) Licensee shall not during the term of this agreement manufacture, distribute, advertise, promote, sell or deal with in any way in the Territory, any product, design, symbol, tradedress, packaging, wrapping materials or services using any brand or trademark that is in any manner competitive with or confusingly similar to those borne by, or authorized in connection with, the Products or associated in any way with the Products or Licensor or Licensor's subsidiaries or affiliates, unless approved in writing by Licensor. o. Indemnification by Licensee: Licensee shall indemnify, defend and hold Licensor, its subsidiaries and affiliates, their respective shareholders, licensees, franchisees, and the agents, officers, directors and employees of all the foregoing harmless from any costs, claims, suits, losses, damages and expenses (including attorneys' fees) whatsoever arising out of or in connection with the design, manufacture, advertisement, distribution or sale or any other dealing with the Products, Wrapping Materials and Related Materials. -12- p. Title and Protection: -------------------- (i) Licensee hereby acknowledges the great value of the goodwill associated with the Trademarks and the worldwide recognition of the same and that the proprietary rights therein, and goodwill attached thereto, are solely owned and belong to Licensor and that the Trademarks and other words, devices, designs and symbols have a secondary meaning that is firmly associated in the mind of the general public with Licensor, its subsidiaries and affiliates and their respective publications, published material and other activities; and any additional goodwill attached to the Trademarks, created through the use of such Marks by Licensee shall inure to the benefit of Licensor alone. During and after the term of the License, Licensee shall not: (a) directly or indirectly seek for itself, or assist any third party to use or acquire, any rights, proprietary or otherwise, in any patent, trademark, copyright or such other intellectual or intangible property so associated or connected, without the prior written authority of Licensor; (b) in any way seek to avoid its obligations under this agreement because of the assertion or allegation by any person(s) that the Trademarks or any of them are invalid or by reason of any contest concerning the rights of Licensor; (c) file or prosecute trademark applications regarding Licensee's use of the Trademarks unless asked to do so in writing by Licensor. Licensee will cooperate with Licensor in connection with any such filings. (ii) (a) Licensee shall use the Trademarks in each jurisdiction strictly in accordance with the legal requirements in such jurisdiction. Licensee shall cooperate fully with Licensor in preparing and causing to be recorded in every jurisdiction where applicable Registered User agreements and all other documents which may be necessary or desirable to evidence, protect and implement the rights of Licensor pursuant to the agreement. Upon expiration or termination of this agreement for any reason whatsoever, Licensee shall execute and file documents, as required by Licensor, terminating any and all Registered User agreements and other documents regarding the Trademarks, or, at Licensor's option, shall, and hereby does, authorize Licensor to terminate all Registered User -13- agreements and other documents regarding the Trademarks on Licensee's behalf. (b) In the event any designs developed by Licensor for the Products may be made the subject of patent, trademark or copyright protection, Licensor shall have the right, at its own expense, to file applications therefor, and shall be the exclusive owner of such rights. Licensee shall cooperate with Licensor or its designees in obtaining and perfecting such rights, including providing Licensor or its designees with copies of documents, sketches, renderings or the like normally prepared by Licensee in connection with the manufacture of the Products and executing such documents as may reasonably be required. Nothing herein contained shall be construed as a transfer of, or obligation to transfer, any patent rights for products developed by Licensee. q. Advertising Expenditures: In addition to all other amounts or payments, and not to be credited against any Guaranteed or Earned Royalty payment otherwise required under this agreement, Licensee agrees to spend within each License Year for advertising and promotion (specifically trade and/or consumer media such as newspapers, magazines, television and/or radio), not less than three percent (3%) of Licensee's net sales for such License Year. A portion of such advertising sums shall be paid to Licensor as follows: (i) Concurrently with the remittance of the statements required under Paragraph 2.d.(i) hereof, Licensee shall remit to Licensor for use in Licensor's advertising and promotion pool an amount equal to one percent (1%) of Licensee's net sales for the time period covered by such statement, which amount shall be credited against Licensee's annual advertising expenditures required herein. (ii) If the report included with the statement required under Paragraph 2.d.(i) hereof for the last License Quarter of each License Year shows that the required amount has not been spent, the difference between the amount actually spent and the amount to be spent must be remitted to Licensor for use in Licensor's advertising and promotion pool within thirty (30) days after such statement is due. -14- 3. ADDITIONAL COVENANTS OF THE PARTIES. ----------------------------------- a. Reservation of Rights: All rights not expressly and specifically granted herein to Licensee are reserved by Licensor. b. Rights of Licensor: Without limiting the generality of Paragraph 3.a. hereof, nothing herein contained shall be construed as prohibiting Licensor, its subsidiaries and affiliates from: (i) purchasing any of the Products from Licensee and offering any such Products for sale and selling same to consumers at any nightclub, restaurant, cabaret, resort, hotel or casino operated or franchised by Licensor, its subsidiaries and affiliates or through Licensor's direct mail fulfillment programs. Licensee shall have the option to fill all such orders at such prices as given to other customers ordering the same quantities of similar merchandise. Licensee shall have thirty (30) days from the date it receives such orders within which to notify Licensor of the exercise of Licensee's option. In the event Licensee does not exercise such option or fails to notify Licensor of the exercise of such option within the thirty (30) day time limit, anything in this Paragraph 3.b. or elsewhere in this agreement to the contrary notwithstanding, Licensor, its subsidiaries and affiliates shall be allowed to purchase such Products from other manufacturing sources without liability to Licensee and sell such Products as indicated in this Paragraph 3.b. (ii) In the event of any such sale of Products by Licensee to Licensor, Licensee shall ship or deliver such Products either directly to Licensor or, as Licensor may direct, to any other business concern or person. Such sales of Products by Licensee to Licensor shall be, at Licensor's option, at such prices less the applicable Earned Royalty. If Licensor elects to have such sales made less the applicable Earned Royalty, Licensee will not have to pay additional royalties on such sales and will not be required to include such sales in the statements required under Paragraph 2.d.(i) hereof. Licensee may, however, include such sales in the computation of net sales under Paragraph l.c. hereof. Licensee shall bill Licensor in accordance with Licensee's normal billing procedure for any such Products shipped or delivered. -15- c. Rights of Licensee: Except as provided in Paragraphs 2.a.(iii) and 3.b.(i) hereof, Licensee enjoys the full exclusive License granted herein and Licensor agrees not to import or authorize any third (3rd) party to import into the Territory the Products from any place outside of the Territory. 4. TITLE AND PROTECTION. --------------------- a. Indemnification by Licensor: Licensor represents and warrants that: it is the owner of the Trademarks; the Trademarks are valid; and the Trademarks are, to the best of its knowledge, free from any claim by third parties that would interfere with the rights granted to Licensee under this agreement. Licensor shall indemnify, defend and hold Licensee, its agents, officers, directors and employees harmless against any claims or suits, provided prompt notice of which is given Licensor by Licensee, arising solely and directly out of the authorized use of the Trademarks on the Products by Licensee in the Territory, but in no event shall such indemnification include consequential damages. Licensor shall have the option to settle or to undertake and conduct the defense of any such claim or suit; but Licensee shall, upon notice from Licensor and pursuant to Licensor's instructions, handle, undertake and conduct the defense of any such suit at Licensor's expense. If Licensor does not so notify Licensee, Licensee may through counsel of its own choice and at its own expense participate in any such litigation, but in such event Licensor shall have sole and exclusive control over such defense and Licensor's decisions shall govern and control. Licensee expressly covenants that no compromise or settlement of any claim or suit, or any preliminary negotiations with respect to any compromise or settlement, shall be made or entered into without the prior written approval of Licensor. b. Enforcement: Licensee shall promptly notify Licensor in writing of any actual, suspected or apparent infringement or imitation of the Trademarks on products similar or identical to the Products that may come to the attention of Licensee. Licensor shall take that action in regard to such infringement or imitation as Licensor, in its sole judgment, deems to be reasonable. Licensor shall, in its sole and absolute discretion, decide whether to undertake or conduct any suit or assert any claim with respect to such infringement or imitation; but Licensee shall, upon notice from Licensor and pursuant to Licensor's instructions, vigorously handle, undertake and conduct any such suit or assert any such claim at Licensor's expense in the name of Licensor, or Licensee or in both names as Licensor may direct. Licensee expressly covenants that no compromise or settlement of any such suit or claim, or any preliminary -16- negotiations with respect to any compromise or settlement, shall be made or entered into without the prior written approval of Licensor. Licensee may share in any damage recovery obtained by Licensor as a result of any such suit or claim only if Licensee notified Licensor upon the initiation of such suit or claim that Licensee desires to participate financially in such suit or claim and only in an amount that shall bear the same ratio to the damage recovery as the amount of Licensee's financial participation bears to the total costs and expenses incurred by Licensor in obtaining such damage recovery. In no event shall Licensor be responsible to Licensee for any consequential damages that may result from such infringement or imitation. 5. RELATIONSHIP BETWEEN THE PARTIES. --------------------------------- a. No Joint Venture: Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and Licensee shall have no power to obligate or bind Licensor, its subsidiaries and affiliates in any manner whatsoever. b. Assignment: ----------- (i) Licensor, in entering into this agreement, is relying entirely upon the skills, reputation and personnel, including the officers, directors and shareholders, of Licensee. This agreement and all rights and duties hereunder are personal to Licensee and shall not, without the prior consent of Licensor (which may be given or withheld in the sole discretion of Licensor), be sold, transferred, leased, assigned, mortgaged or otherwise encumbered by Licensee or by operation of law. Any attempt to sell, transfer, lease, assign, mortgage or otherwise encumber this agreement, or any of the rights and duties hereunder, or any change in the principal officers, principal directors or shareholders of Licensee or an entity having a financial interest in Licensee (other than non-controlling shareholders of a corporation whose shares are freely traded on a nationally recognized stock exchange), without the prior written consent of Licensor shall constitute a material violation of and an incurable default under this agreement. The consent of Licensor to any one assignment, transfer, sublicense or subcontract shall not be deemed to be consent to any subsequent assignment, transfer, sublicense or subcontract. (ii) Licensor may assign this agreement to any of its subsidiaries or affiliates or to any entity that succeeds to the interest of Licensor in the Trademarks without the consent of Licensee and shall have the right -17- to nominate any other person, company or corporation to receive royalty income or to undertake the obligations of Licensor under the terms of this agreement whether or not this agreement is so assigned. 6. SUBLICENSING. Licensee may not, without the prior written approval of Licensor, whose approval may be withheld without providing any reasons and whose discretion shall be final and absolute, enter into sublicense or subcontract agreements, with respect to the manufacture, sale and distribution of the Products in the Territory. 7. DEFAULTS AND RIGHTS OF TERMINATION. a. Defaults and Riqht to Cure: If Licensee violates any of its obligations or warranties under the terms of this agreement and fails to remedy such violations within fifteen (15) days after receipt of notice from Licensor of such violations, Licensor shall have the right and option, but not the duty, to terminate this License upon ten (10) days' prior written notice to Licensee. The termination of this License shall be without prejudice to any rights that Licensor may otherwise have against Licensee under this agreement or under law. b. Bankruptcy or Assiqnment for Creditors, Business Discontinuance: If Licensee files a petition in bankruptcy or is adjudicated a bankrupt, or if a petition in bankruptcy is filed against Licensee, or if Licensee shall become insolvent or shall make or agree to make an assignment for the benefit of creditors or an arrangement pursuant to any bankruptcy law, or if Licensee discontinues business, or if a receiver shall be appointed for Licensee, the License shall automatically terminate forthwith without the necessity of any notice whatsoever. If the License is so terminated, Licensee or its receivers, representatives, trustees, agents, administrators, successors or assigns shall have no right to sell, exploit or in any way deal with any Products, Wrapping Materials or Related Materials, except with and under the special written consent and instructions of Licensor that they shall be obligated to follow. c. Loss of Trademark Riqhts: If Licensee's right to use the Trademarks is adjudged illegal or invalid, and such adjudication has become final and non-appealable, or if a settlement agreement is entered into that prohibits Licensee's right to use the Trademarks, this License shall automatically terminate as of the date of such final and non-appealable adjudication or the entry of such settlement agreement without the necessity of any notice whatsoever. Licensee shall have no claim of any nature against Licensor for the loss of the right to use the Trademarks. -18- d. Impossible Performance: Licensee and Licensor shall be released from their respective obligations under this agreement and the License shall terminate, if governmental regulations or other causes arising out of a state of national emergency or war, or any other similar cause beyond the control of the parties hereto, shall render performance impossible. Either party shall so inform the other in writing of any such cause and of its desire to be released, and immediately thereafter the License shall terminate and all royalties on sales of the Products theretofore made shall become immediately due and payable. 8. TERMINATION OR EXPIRATION. ------------------------- a. Effect of Termination or Expiration: Upon and after the expiration or termination of the License, all rights granted to Licensee under this agreement shall forthwith revert to Licensor. Licensee will refrain from any further use of the Trademarks or any further reference to anything, including but not limited to words, devices, designs and symbols, similar to the Trademarks or in any way associated with Licensor, its subsidiaries and affiliates, in connection with the conduct of Licensee's business, except with the written consent of Licensor and except as expressly provided in this Paragraph 8. b. Reserved Riqhts: The expiration or termination of this License under any of the terms of this License shall not relieve Licensor or Licensee, respectively, of any obligations incurred prior or subsequent to such expiration or termination; nor shall expiration or termination impair or prejudice any of the rights of Licensor or Licensee, respectively, accruing prior or subsequent thereto. Except as provided in Paragraph 8.g. hereof, upon termination, the Guaranteed Royalty for the then current License Year shall be prorated based on the ratio that the number of days in such License Year prior to termination bears to three hundred sixty-five (365). Earned Royalties due for such License Year shall be the excess of Earned Royalty over such prorated Guaranteed Royalty. Any overpayment or underpayment of Guaranteed or Earned Royalties shall be adjusted by the parties in accordance with Paragraph 2.d.(i) hereof. c. Inventory: Within ninety (90) days prior to the expiration of the License, or in the event of its termination, within ten (10) days after (i) receipt of notice of termination or (ii) the happening of any event that terminates the License where no such notice is required, Licensee shall furnish to Licensor a complete and accurate statement showing the number and description of Products in process and on hand. Licensor or its authorized agents shall have the right to conduct a physical inspection and take -19- inventory to ascertain or verify such inventory and statement, and any refusal by Licensee to submit to such physical inventory by Licensor or its authorized agents shall forfeit Licensee's right to complete any work in process and to dispose of all such inventory; Licensor retaining all other legal and equitable rights it may have in the circumstances, which rights are hereby reserved. d. Continued Sales After Termination or Expiration: Upon the expiration of the term of this License or if this License is terminated pursuant to any paragraph of this agreement except paragraphs 2.i., 2.k.(iii) and 7.b. hereof, and except as provided in Paragraph 8.c. above or expires, Licensee may for a period of ninety (90) days after expiration of the term of this License or notice of termination dispose of, through Licensee's existing, recognized network of distributors, Products, the samples for which have previously been approved as provided under this agreement and that are in process or on hand at the date of expiration of the term of this License or the time such notice of termination is received; but in such event Licensee shall pay royalties and furnish statements with respect to said period in accordance with the terms of this agreement as though the License were still in effect; except that if this License is terminated for failure of Licensee to pay those royalties required under the terms of this agreement, Licensor shall be entitled to receive and Licensee shall pay to Licensor, in addition to Earned Royalties payable on such sale, all amounts received by Licensee for the sale of such Products until all past due amounts, including interest thereon, have been paid. e. Equitable Relief: Subject to Paragraph 8.d. above, Licensee hereby acknowledges that its failure to cease the manufacture, sale or distribution of the Products, Wrapping Materials and Related Materials upon the termination or expiration of this agreement, will result in damage to Licensor and to the rights of any subsequent licensee for which there is no adequate remedy at law. Accordingly, in the event of such failure, Licensor shall be entitled to equitable relief by way of temporary and permanent injunction and such other relief as any court of competent jurisdiction may deem just and proper. In this regard Licensee hereby consents to the judgment of temporary and permanent injunction in favor of Licensor in order to give effect to this Paragraph 8.e. f. Continuity of Sales: In order to enable Licensor to maintain continuity of sales of the Products upon expiration or termination of this agreement, Licensor shall have the right, notwithstanding anything to the contrary contained in Paragraph l.a. hereof, to authorize another person or firm -20- to manufacture, to show, and to solicit and receive orders for, the Products for a time three (3) months preceding the expiration of this agreement, or from the time that notice is given of termination of this agreement, whichever is sooner. Such person or firm shall not, however, be authorized to ship to its customers any of the Products so manufactured and shown until after this agreement has expired or has been terminated. g. Guaranteed Royalties: Anything in this agreement to the contrary notwithstanding, if Licensor terminates this agreement as a result of default by Licensee, Licensee shall immediately pay to Licensor as liquidated damages all outstanding Guaranteed Royalties required to be paid during the "Full Term" (as hereinafter defined) of this agreement in addition to any Earned Royalties that may be due through the effective date of termination. As used in this Paragraph 8.g., "Full Term" shall mean each and every License Year of the initial term and any renewal term that may be in effect at the time of such termination as if this agreement had not been terminated as contemplated under this Paragraph 8.g. 9. NOTICES. All notices, requests, consents, demands and other communications required or permitted by the terms of this agreement shall be in writing and shall be sent to Licensee at the address specified in Paragraph S.2. of the Schedule and to Licensor at the address specified in Paragraph S.1. of the Schedule marked, Attention: General Counsel. All reports required or permitted by the terms of this agreement shall be sent marked, Attention: Licensing Operations Director. All material requiring approval shall be sent to Licensor at 919 North Michigan Avenue, Chicago, Illinois 60611 marked, Attention: Vice President, International Licensing or to such different or additional parties and addresses as A. William Stokkan or Licensor may hereafter designate from time to time. All notices and other material shall be sent postage prepaid, certified or registered mail, return receipt requested or by telex or facsimile, provided answer-back confirmation is requested and received. Notices and other material shall be deemed conclusively to have been served when actually received or refused by the addressee or upon notification of non-deliverability by the postal authorities, or upon receipt of answer-back confirmation in the case of telex or facsimile as the case may be. Notice of any change of address or addressee shall be made in accordance with the terms of this Paragraph 9. 10. 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 -21- 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 the License is terminated by reason thereof; but the existence of such effect and the termination of the License shall be subject to contest by the party receiving 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. 11. CONSENTS AND APPROVALS. In this agreement where the consent or approval of Licensor is required to any action of Licensee, such consent or approval shall only be effective if granted in writing by Licensor. If Licensor fails or declines to grant such consent or approval to Licensee, Licensor shall not be liable to give any reason therefore nor for any events or circumstances that arise as a result of such failure. 12. APPLICABLE LAW. This agreement shall be governed by the laws of the State of Illinois (U.S.A.). 13. BROKER. Licensee and Licensor acknowledge that P&B Company, Inc. acted as broker for this agreement. Licensee is under no obligation to pay any brokerage fees or commissions in connection with this agreement. 14. TITLES. The titles to the sections, subsections or other headings in this agreement are for reference purposes only and shall not define, limit or affect the meaning or interpretation of this agreement. 15. ENTIRE AGREEMENT. This agreement represents the entire understanding of the parties. None of the terms of this agreement can be waived or modified except by an express agreement in writing signed by the parties. There are no representations, promises, warranties, covenants or undertakings other than those contained in this agreement. The failure of either party hereto to enforce, or the delay by either party in enforcing, any of its rights under this agreement shall not be deemed as constituting a waiver or a modification thereof and either party may, within the time provided by applicable law, commence appropriate proceedings to enforce any or all of such rights. No person, firm, group or corporation other than Licensee, Licensor, its subsidiaries and affiliates shall be deemed to have acquired any rights by reason of anything contained in this agreement. -22- IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the day and year first above written. PLAYBOY ENTERPRISES, INC. (LICENSOR) By /s/ W. Stokkan _______________________________________ CHAIFA INVESTMENT, LIMITED (LICENSEE) By /s/ W. Stokkan _______________________________________ For and on behalf of CHAIFA INVESTMENT LIMITED /s/ John Chan Chun Tung ......................................... Authorized Signature -23- ADDENDUM ATTACHED TO AND MADE A PART OF THE PRODUCT LICENSE AGREEMENT BETWEEN PLAYBOY ENTERPRISES, INC. AND CHAIFA INVESTMENT LIMITED DATED AS OF SEPTEMBER 26, 1989 1. b. (ii) If, but only if, Licensee's "net sales" (as hereinafter defined) in the License Year that ends September 30, 1994 equals or exceeds Hong Kong Fifty Million (HK$50,000,000.00), Licensee shall have the option of renewing this agreement on the same terms and conditions, except as hereinbelow provided, for an additional five (5) License Years (from October 1, 1994 through September 30, 1999). Licensee must exercise its option, if applicable, in writing, not less than ninety (90) days prior to September 30, 1994. In the event Licensee exercises its option, the "Guaranteed Royalties" (as hereinafter defined) for each License Year of such additional term shall be One Hundred Thousand Dollars ($100,000.00 U.S.) and the Minimum Net Sales of each License Year of such additional term shall be Hong Kong Fifty Million (HK$50,000,000.00). If Licensee fails to exercise its option or exercises its option, but fails to meet the minimum net sales requirements, the exercise of such option shall be null and void and of no force and effect. EX-10.16(B) 15 PRODUCT LICENSE AGREEMENT DTD 3/4/91 Exhibit 10.16(b) CHINA AGREEMENT INDEX TO CHAIFA INVESTMENT, LIMITED PRODUCT LICENSE AGREEMENT ------------------------- THE SCHEDULE
PARAGRAPH PAGE NO. - --------- -------- 1. GRANT OF LICENSE a. Grant 1 - 2 b. Term 2 c. License Year and License Quarter 2 d. Territory 3 e. Minimum Net Sales 3 2. COVENANTS OF LICENSEE a. Use 3 - 4 b. Best Efforts 4 c. Royalties (i) Guaranteed Royalties 5 (ii) Earned Royalties 5 (iii) Interest 5 d. Statements 5 - 6 e. Payments 6 - 7 f. Records and Audit 7 - 8 g. Expenses of Conducting Examinations 8 h. Product Quality 8 - 9 i. Approval of Products, Wrapping Materials and Related Materials 9 - 10 j. Title and Protection and Preservation of Trademarks and Copyrights 10 - 12 k. Right to Subcontract and Lists of Sources and Customers 12 - 13 l. Production Costs 13 m. Inventory 13 n. Trademarks and Non-Competitive Brands 13 - 14 o. Indemnification and Product Liability Insurance 14 - 15 p. Advertisinq Expenditures 15 3. ADDITIONAL COVENANTS OF THE PARTIES a. Reservation of Rights 16 b. Rights of Licensor 16 4. TITLE AND PROTECTION a. Indemnification by Licensor 17 b. Enforcement 17 - 18
INDEX TO CHAIFA INVESTMENT, LIMITED PRODUCT LICENSE AGREEMENT ------------------------- (Continued) PARAGRAPH PAGE NO. - --------- ------- 5. RELATIONSHIP BETWEEN THE PARTIES a. No Joint Venture 18 b. Assignment 18 6. SUBLICENSING 19 7. DEFAULTS AND RIGHTS OF TERMINATION a. Defaults and Right to Cure 19 b. Bankruptcy or Assignment for Creditors, Business Discontinuance 19 c. Loss of Trademark Rights 19 - 20 d. Impossible Performance 20 8. TERMINATION OR EXPIRATION a. Effect of Termination or Expiration 20 b. Reserved Rights 20 c. Inventory 20 - 21 d. Continued Sales After Termination or Expiration 21 e. Equitable Relief 21 f. Continuity of Sales 22 g. Guaranteed Royalties 22 9. NOTICES 22 - 23 10. INVALIDITY 23 11. CONSENTS AND APPROVALS 23 12. APPLICABLE LAW 23 13. NO BROKER 23 14. TITLES 23 15. ENTIRE AGREEMENT 23 - 24
THE SCHEDULE referred to in the Agreement dated as of March 4, 1991
S.l. THE LICENSOR: Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 S.2. THE LICENSEE: Chaifa Investment, Limited Unit 1, 17/F Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong S.3. THE TRADEMARKS: PLAYBOY and RABBIT HEAD DESIGN S.4. THE TYPE OF LICENSE: Exclusive S.5. THE USE OF THE TRADEMARKS: Design, manufacture, advertise, sell and distribute S.6. THE PRODUCTS: Clothing specifically, men's and ladies underwear, swimwear, socks, robes, pajamas, outerwear, shirts, activewear, jeans and jeanswear, suits, scarves, hankies, ties, hats, caps, wristbands, headbands, shoes, and small leather goods, specifically, belts and luggage including tote bags. S.7. THE TERRITORY: People's Republic of China S.8. THE COMMENCEMENT DATE: January 1, 1991 THE EXPIRATION DATE: December 31, 1994 S.9. THE GUARANTEED ROYALTY:
1st License Year (01/01/91 - 12/31/91) - $50,000 2nd License Year (01/01/92 - 12/31/92) - $50,000 3rd License Year (01/01/93 - 12/31/93) - $50,000 4th License Year (01/01/94 - 12/31/94) - $50,000 THE SCHEDULE (Continued) S.10. THE EARNED ROYALTY: Five percent (5%) of "net sales" (as defined in Paragraph 2.d.(ii) of the agreement) of the Products. S.11. MINIMUM NET SALES: 0 S.12. THE ADDRESS WHERE BOOKS KEPT: See S.2 PLAYBOY ENTERPRISES, INC. (LICENSOR) By /s/ M. E. Levenson -------------------------------- CHAIFA INVESTMENT, LIMITED (LICENSEE) By /s/ John Chan Chun Tung -------------------------------- CHAIFA INVESTMENT, LIMITED -------------------------- This agreement is made as of the 4th day of March, 1991, between the corporation described in Paragraph S.1. of the Schedule attached hereto and made a part hereof (hereinafter called "Licensor") and the corporation described in Paragraph S.2. of the Schedule (hereinafter called "Licensee"). WHEREAS, Licensor has certain rights to the trademark PLAYBOY and other trademarks identified in Paragraph S.3. of the Schedule (hereinafter collectively referred to as the "Trademarks"); WHEREAS, Licensee recognizes that the Trademarks have been used: a. in an internationally distributed magazine (Playboy) published by Licensor or its subsidiaries, affiliates or licensees; b. in widespread advertising, publicity, broadcasting and telecasting and allied fields by Licensor, its subsidiaries and affiliates; c. in promotional and advertising material in diverse businesses by Licensor, its subsidiaries and affiliates; d. in the manufacture, advertisement, distribution and sale world- wide of a broad range of consumer products, including, but not limited to, jewelry, clothing, footwear, leather goods, audio and visual recordings, and personal health and home articles and accessories; WHEREAS, the parties hereto desire that Licensor grant to Licensee a license to use the Trademarks in the design, manufacture, advertising and sale of "Products" (as hereinafter defined); NOW, THEREFORE, in consideration of the mutual promises herein contained, it is mutuallY aqreed as follows: 1. GRANT OF LICENSE. ---------------- a. Grant: ----- (i) Upon and subject to the terms and conditions hereinafter set forth, Licensor hereby grants to Licensee, and Licensee hereby accepts the right, license and privilege specified in Paragraph S.4. of the Schedule, of using the Trademarks in connection with, and only with, the use, specified in Paragraph S.5. of the Schedule, of specifically designated and approved articles of merchandise specified in Paragraph S.6. of the Schedule (such articles of merchandise bearing the Trademarks are hereinafter collectively referred to as the "Products") in the territory specified in Paragraph S.7. of the Schedule (hereinafter called the "Territory"). Such right, license and privilege is hereinafter called the "License." (ii) Nothing contained in this agreement shall prevent Licensor from (a) using or granting others the right or license to use the Trademarks on or in connection with the Products in any area of the world other than the Territory or on or in connection with any goods other than the Products in any area of the world including the Territory, (b) manufacturing or having manufactured in the Territory the Products for sale outside the Territory, or (c) producing or having produced limited quantities of the Products to be used in the Territory specifically for promotional and advertising purposes and not for sale. In-house direct mail order sales, premium sales and incentive sales of the Products are specifically excluded from this License and are expressly reserved by Licensor. b. Term: The term of this License shall commence on the date specified in Paragraph S.8. of the Schedule (hereinafter called "Commencement Date") and shall expire on the date specified in Paragraph S.8. of the Schedule, unless sooner terminated as provided under this agreement. c. License Year and License Ouarter: -------------------------------- (i) For all purposes under this agreement a "License Year" shall be twelve (12) consecutive calendar months commencing on the Commencement Date and ending twelve (12) months thereafter and each twelve (12) month period thereafter, and if the termination or expiration of this License is effective other than at the end of such twelve (12) month period, then the final less than twelve (12) month period ending on the effective date of termination or expiration shall be deemed to be a License Year. (ii) For all purposes under this agreement, a "License Quarter" shall be the first (lst) and each succeeding three (3) month period of each License Year; and if the termination of this License is effective other than at the end of a License Year, then the final less than three (3) month period ending on the effective date of termination shall be deemed to be a License Quarter. 2 d. Territory: The License shall extend only to the Territory and the use by Licensee of the Trademarks shall be confined to the Territory. e. Minimum Net Sales: Anything in this agreement to the contrary notwithstanding, if Licensee's "net sales" (as hereinafter defined), in any License Year shall be less than the Minimum Net Sales specified in Paragraph S.11. of the Schedule for the Territory in such License Year, then Licensor shall have the right at any time to either declare the License in the Territory to be a non-exclusive License thereby giving Licensor the right to design, manufacture, advertise, distribute and sell the Products itself or grant non- exclusive licenses to other parties to design, manufacture, advertise, distribute and sell the Products; or terminate the License herein granted by notifying Licensee of its election to terminate within thirty (30) days after Licensor's receipt of the statement for such License Year for which Minimum Net Sales were not attained. Such declaration of non-exclusivity or termination as set forth above shall have no effect upon the amounts due and payable to Licensor for periods prior to or after such declaration or deletion or prior to termination. 2. COVENANTS OF LICENSEE. a. Use: (i) Subject to Licensor's prior approval as hereinafter required, Licensee shall commence the manufacture, sale and distribution of each and every one of the Products as soon as practicable after the Commencement Date. If Licensee has not commenced the manufacture, sale and distribution of an approved line of Products within 6 months (180 days) of the Commencement Date, Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement. If, during any License Year, Licensee has not on a regular and ongoing basis sold or distributed any specific Product within the category of Products under Paragraph S.6. of the Schedule in the Territory, Licensor shall have the right to delete any one or more of such Products from this License upon not less than thirty (30) days prior written notice to Licensee with the effect that Licensee shall have no further right to manufacture, sell or distribute such Products and Licensor may license such right to manufacture, sell or distribute to any party Licensor may designate. (ii) Licensee shall not cause or authorize any use of the Trademarks in any area of the world outside the Territory and shall not knowingly manufacture, sell or otherwise deal with or distribute any of the Products on 3 behalf of, or to, any person, firm or corporation, that Licensee believes or has reason to believe intend, or are likely, to deal with the same in any way outside the Territory. Licensee shall, upon notice from Licensor, immediately and permanently cease delivering Products to any person, firm or corporation named in such notice as one that directly or indirectly deals with the Products outside the Territory. (However, Licensee may manufacture the Products outside the Territory provided that Licensee strictly complies with Paragraph 2.k. herein.) (iii) Licensee warrants and represents that it has, and will continue to have throughout the entire term of this agreement, the legal right to enter into this agreement and to assume the obligations hereunder and that there are no, and Licensee shall not enter into during the term hereof, contracts, agreements or understandings with anyone which would in any way restrict or prevent Licensee or Licensor from their performances and obligations under this agreement or which would in any way interfere with Licensor's contractual relationships with any other Licensees, subsidiaries, affiliates or other 3rd parties. Licensee shall be responsible for obtaining, at its own expense, any and all licenses, permits, approvals (including governmental or other agency licenses, permits and approvals) necessary for Licensee to design, manufacture, advertise, distribute and sell the Products, or to pay royalties or taxes or to fulfill any other obligation or exercise any right of Licensee under this License. In the event Licensee is unable, for any reason, to obtain prior to the Commencement Date or maintain throughout the term of this License all of the necessary permits, licenses or approvals, Licensor shall have the right to terminate this agreement upon notice to Licensee without any period of grace and without any obligation to Licensee whatsoever. b. Best Efforts: Licensee shall, throughout the term of the License and as permitted by this agreement, constantly use its best efforts in the advertising, promoting, selling and distributing and any other dealing with or disposal of the Products to protect the good name and goodwill associated with the Trademarks and Licensor and to obtain the greatest number of sales of the Products throughout the entire Territory and the entire term of this agreement. 4 c. Royalties: (i) Guaranteed Royalties: Licensee shall pay to Licensor or its nominee guaranteed minimum royalties (hereinafter called "Guaranteed Royalty" or "Guaranteed Royalties") in the amount specified in Paragraph S.9. of the Schedule; which shall be payable in four (4) equal installments with each such installment due on or before the first (lst) day of each License Quarter of each such License Year. Licensee's obligation to pay Guaranteed Royalties hereunder shall be secured by an irrevocable letter of credit in Licensor's favor in form and content reasonably satisfactory to Licensor and drawn on a bank reasonably satisfactory to Licensor. Licensee will provide Licensor with a copy of such letter of credit upon execution of this agreement for the first (lst) License Year and will provide Licensor with letters of credit for each subsequent License Year not later than thirty (30) days prior to the first (lst) day of each such subsequent License Year. (ii) Earned Royalties: In addition to Guaranteed Royalties, Licensee shall pay to Licensor or its nominee percentage royalties (hereinafter called "Earned Royalties") for each License Year in the amount equal to the amount by which in each License Year the amount specified In Paragraph S.10. of the Schedule exceeds the Guaranteed Royalty for such License Year. Earned Royalties shall be payable in accordance with the terms and conditions of Paragraph 2.d. and 2.e. below. (iii) Interest: All sums including but not limited to the Guaranteed and Earned Royalties, that shall not be paid on the due date shall bear interest at an amount equal to the highest percentage allowed by law over the prime rate of interest as established by The First National Bank of Chicago in Chicago, Illinois applicable to ninety (90) day commercial loans effective on the date that such sum should have been paid from such due date until the date on which such sum is paid in full. d. Statements: (i) Within forty-five (45) days after each License Quarter, Licensee shall furnish to Licensor or its nominee a complete and accurate statement in a format acceptable to Licensor certified to be true by the Chief Financial Officer or Company Secretary of Licensee showing for the preceding License Quarter and the License Year through such period (a) a listing of Licensee's accounts in each country of the Territory and the units and description of all the Products distributed and sold 5 to each such account or otherwise disposed of by Licensee; (b) the computations of "net sales" (as hereinafter defined) on all such sales; and (c) the computation of Earned Royalties as set forth in Paragraph 2.c.(ii) hereof and the amount of Earned Royalties due and payable thereon. When during any License Year such statement shows that the amount of the Guaranteed Royalty for such License Year has been exceeded, Licensee shall commence payment of Earned Royalties for such License Year by remittance, accompanying such statement, of Earned Royalties payable through the period covered by such statement. Any overpayments or underpayments of Earned Royalties caused by errors in prior quarterly statements revealed by the statement for the last License Quarter of any License Year shall be immediately adjusted by the parties. Such statement shall also reflect the advertising expenditures made by Licensee through such period pursuant to Paragraph 2.o. hereof (which will include the details of all such advertising expenditures, supported by copies of vouchers and copies of any print advertising). (ii) As used in this agreement, the term "net sales" means the invoice price charged by Licensee for the Products less (x) refunds, credits and allowances actually made or allowed to customers for returned Products, (y) customary trade discounts (including anticipations) afforded to and actually taken by customers against payment for the Products and (z) value added tax assessed on sales (only where applicable). If Licensee sells Products to a marketing organization or any individual or company in whole or in part controlled by Licensee, the invoice price used to determine net sales hereunder shall be the invoice price at which the Products are resold by such entity to an unrelated customer in an arm's length transaction (iii) In the event the percentage of returns of Products in any License Year exceeds thirty percent (30%) of net sales for such License Year, Licensor may elect to treat such an occurrence as an incurable default by Licensee under this agreement. e. Payments. (i) All payments Licensee is required to make by the terms of this Agreement shall be made in United States Dollars through a bank specified by Licensor. No deduction shall be made for income or other taxes without Licensor's written permission, unless Licensee is compelled to do so by law; in which case Licensee shall provide Licensor with evidence that such tax has been 6 paid in the proper amount. Licensee shall give due notice to Licensor of any such proposed deductions. In the event payments in the manner provided in this Paragraph 2.e. shall become impossible or illegal by reason of the action of governmental authority, then, at Licensor's option, this Agreement may be terminated; and whether or not Licensor exercises such option, while such restrictions remain in effect, all payments due Licensor shall be made to an account in the Territory, or elsewhere where permitted by law, to be designated by Licensor. (ii) In determining the proper rate of exchange to be applied to the payments due hereunder, it is agreed that: (a) Licensee shall calculate Earned Royalties on a calendar month basis in local currency (with each such month considered to be a separate accounting period for the purpose of computing Earned Royalties). (b) Licensee shall compute a conversion of each such monthly total into United States currency utilizing the rate of exchange in effect on the last day of each relevant calendar month as determined by the Bankers Trust Co. of New York City, New York (U.S.A.). (c) The converted amounts (in U.S. currency) shall be added together on a cumulative basis and when during any License Year such computation shows that the amount of the Guaranteed Royalty for such License Year has been exceeded, Licensee shall commence payment of Earned Royalties for such License Year by remittance of such excess in U.S. currency to Licensor; which remittance will accompany the statement required by Paragraph 2.d.(i) hereof. If there is no excess, no Earned Royalties will be payable for such License Year by Licensee (but in no event shall Licensor be responsible for returning to Licensee any portion of the Guaranteed Royalties paid or payable). f. Records and Audit: Licensee shall keep accurate books of account and records (including but not limited to utilization of consecutively numbered invoices) covering all transactions relating to this agreement or arising out of this License (which records shall be maintained separately from Licensee's books and records relating to other items manufactured or sold by Licensee) and shall permit Licensor or any of its nominees, employees or agents to have full 7 access to and to inspect the same at all reasonable hours of the day to enable Licensor and its nominees, employees or agents to conduct an examination of and to copy, at Licensor's expense, all such books and records. Licensee shall maintain in good order and condition all such books and records for a period of two (2) years after the expiration or termination of the License or, in the event of a dispute between the parties hereto, until that dispute is resolved, whichever date is later, and such books and records shall be kept at the address stated in Paragraph S.12 of the Schedule; except as such address may be changed from time to time in accordance with Paragraph 9. hereof. Receipt or acceptance by Licensor of any statement furnished pursuant hereto or any sums paid by Licensee hereunder shall not preclude Licensor from questioning the correctness thereof at any time, and if any inconsistencies or mistakes are discovered in such statement or payment, they shall be immediately rectified and prompt adjustment and corresponding payments shall be made to compensate therefor. In the event of an underpayment by Licensee in excess of nine percent (9%) in any License Year, Licensor may elect to treat such occurrence as an incurable default by Licensee under this agreement. g. Expenses of Conducting Examinations: If an examination referred to in Paragraph 2.f. above discloses an overpayment or underpayment of Earned Royalties, the appropriate amount shall be immediately paid or refunded to the party entitled thereto. If such examination reveals that for the period covered by such examination there is an error of five percent (5%) or more in the Earned Royalty previously reported as being due from Licensee, all expenses involved in the conducting of such examination shall be borne by Licensee. If such error is less than five percent (5%), such expenses shall be borne by Licensor. h. Product Ouality: Licensee hereby warrants and agrees that, the Products manufactured, advertised, promoted, sold or distributed under this agreement shall bear faithfully produced Trademarks and shall meet the high standards of quality, workmanship, material, design, size, color and style established by Licensor in accordance with the terms and conditions of this agreement; and Licensee will not knowingly cause or authorize any Product not conforming to the conditions of this agreement to be available for sale within the Territory as doing so may adversely affect Licensor's goodwill in the Trademarks. All Products made available for sale in the Territory shall conform to and comply with, in all respects, all governmental, jurisdictional and local laws, rules and regulations governing the design, quality or safety of such Products. Licensee shall not cause or authorize: (i) the use of any substandard or offensive materials in Products; (ii) in its actions under or related to this License, any 8 violation of any governmental, jurisdictional or local law or regulation, including, but not limited to, regulations imposing advertising standards or requiring trade or content description of Products; or (iii) the use of the Trademarks or any other word, device or symbol associated in any way with Licensor, its subsidiaries and affiliates in connection with any product or activity that is not the subject of this License. i. Approval of Products, Wrapping Materials and Related Materials: (i) Licensee understands and agrees that all Products and other items bearing the Trademarks or intended for use in connection with the Products (including, but not limited to, cartons, containers, labels, wrappers, packages and other inner and outer packaging materials, fixtures, displays, artwork, printing, advertising, sales, marketing and promotional materials - collectively hereinafter called "Wrapping Materials and Related Materials") must be approved in advance by Licensor. Licensee shall, at its own expense submit to Licensor or its nominee for written approval, samples of each of the Products, Wrapping Materials and Related Materials, which shall include, but not be limited to: (a) an initial sketch or photograph; (b) a sample, prototype or equivalent acceptable to Licensor; and (c) two (2) actual manufactured or produced Products, Wrapping Materials or Related Materials in its final form as intended to be sold and distributed by Licensee. In no event shall Licensee commence or permit the mass manufacture, advertisement, sale or distribution of any Product, Wrapping Material or Related Material until Licensee has received Licensor's written approval of the actual manufactured samples of same pursuant to (c) above. While Licensor shall have the sole and absolute discretion to approve or withhold approval of any Product, Wrapping Material or Related Material or any sample of them throughout each stage of development of same without providing any reasons to Licensee, Licensor shall only withhold approval on the actual manufactured items submitted pursuant to (c) above because such items do not conform to the previously approved samples. In the event Licensor fails to signify its approval or disapproval of any Product, Wrapping Material or Related Material within fourteen (14) days of Licensor's receipt of same, Licensor shall be deemed to have disapproved of same. (ii) To ensure that all of the Products, Wrapping Materials or Related Materials dealt with by Licensee are constantly maintained in conformance with the previously 9 approved samples, Licensee shall, within seven (7) days of a demand from Licensor, dispatch to Licensor, at Licensee's expense, samples of any of the Products, Wrapping Materials or Related Materials that Licensee is using, manufacturing, selling, distributing or otherwise disposing of under the terms of this agreement for inspection. In addition, Licensor and its designated agents and representatives shall have the right to enter upon and inspect, at all reasonable hours in the day, any office, factory, warehouse or other facility where any of the Products, Wrapping Materials or Related Materials are designed, manufactured, stored or otherwise dealt with and to take, without payment, such samples of any of the Products, Wrapping Materials and Related Materials as Licensor reasonably requires for the purposes of such inspection. (iii) If any Product, Wrapping Material or Related Material dispatched or taken pursuant to (ii) above or otherwise comes to the attention of Licensor does not conform in Licensor's sole opinion to the previously approved samples, Licensor shall so notify Licensee, in writing, specifying in what respect such Product, Wrapping Material or Related Material is unacceptable. Immediately upon receipt of such notice, Licensee shall suspend all manufacture, sale and distribution of and shall call back from Licensee's customers all such Product, Wrapping Material or Related Material and shall not resume the manufacture, sale or distribution of such item or items unless and until Licensee has made all necessary changes to the satisfaction of Licensor and has received Licensor's written reapproval of such Product, Wrapping Material or Related Material. (iv) Product, Wrapping Materials or Related Materials that are not approved by Licensor or that are determined by Licensor to be "off-quality" shall not be sold, distributed or otherwise dealt with by Licensee. All such Products, Wrapping Materials or Related Materials shall be destroyed by Licensee with, if Licensor so requests, an appropriate certificate of destruction provided to Licensor. Sales by Licensee of off-quality or unapproved Products, Wrapping Materials and Related Materials shall constitute a material default under the terms of this agreement. j. Title and Protection and Preservation of Trademarks and Copyriqhts: (i) Licensee hereby acknowledges; the great value of the goodwill associated with the Trademarks; the worldwide recognition of the same; that the proprietary 10 rights therein, and goodwill attached thereto, are solely owned and belong to Licensor; that the Trademarks and other words, devices, designs and symbols have a secondary meaning that is firmly associated in the mind of the general public with Licensor, its subsidiaries and affiliates and their respective publications, published material and other activities; and that any additional goodwill attached to the Trademarks, created through the use of such Marks by Licensee shall inure to the benefit of Licensor alone. During and after the term of the License, Licensee shall not: (a) attack or question the validity of, or assist any other person in such action, the title or any rights of Licensor, its subsidiaries and affiliates or any of their respective licensees or sublicensees in and to the Trademarks or any other trademark, copyright or such other intellectual or intangible property associated or connected with Licensor, its subsidiaries or affiliates or any of its or their publications, published material or other activities or licensees; (b) directly or indirectly seek for itself, or assist any third party to use or acquire, any rights, proprietary or otherwise, in any patent, trademark, copyright or such other intellectual or intangible property so associated or connected, without the prior written authority of Licensor; (c) in any way seek to avoid its obligations under this agreement because of the assertion or allegation by any person(s) that the Trademarks or any of them are invalid or by reason of any contest concerning the rights of Licensor; (d) file or prosecute trademark applications regarding Licensee's use of the Trademarks unless asked to do so in writing by Licensor. Licensee will cooperate with Licensor in connection with any such filings. (ii) Licensee shall: (a) use the Trademarks in each jurisdiction strictly in accordance with the legal requirements in such jurisdiction. Licensee shall cooperate fully with Licensor in preparing and causing to be recorded in every jurisdiction where applicable Register User agreements and all other documents which may be necessary or desirable to evidence, protect and implement the riqhts of Licensor 11 pursuant to this agreement. Upon expiration or termination of this agreement for any reason whatsoever, Licensee shall execute and file documents, as required by Licensor, terminating any and all Register User agreements and other documents regarding the Trademarks or, at Licensor's option shall, and hereby does, authorize and empower Licensor to terminate all Registered User or other documents regarding the Trademarks on Licensee's behalf and in Licensee's name. (b) affix or imprint irremovably and legibly on each Product, and on, or within all Wrapping Material and Related Material such trademark credit notices and copyright notices as Licensor directs; (c) manufacture, sell, distribute or otherwise deal with Wrapping Materials and Related Materials solely in connection with the Products; (d) not cause or grant permission to any third parties to acquire any copyright or other proprietary right in connection with any word, device, design or symbol used by Licensee in connection with any of the Products, Wrapping Materials or Related Materials. k. Right to Subcontract, Licensees Financial Statements and Lists of Sources and Customers: (i) Licensee may subcontract the manufacture of any Product (or portion of any Product) bearing the Trademarks under this agreement provided Licensee obtains from any and all such subcontractors an agreement in writing, with a copy to Licensor, that no use of the Trademarks will be made for any purpose other than supplying Products solely to Licensee; (ii) With the statement submitted at the end of each License Year pursuant to Paragraph 2.d.(i) hereof and at any other time so requested by Licensor, Licensee shall provide Licensor: a) copies of Licensee's most recent financial statements, such as annual reports, 10-K's, balance sheets or other similar public documents that indicate Licensee's financial status; and b) with an updated list of the names and addresses of all manufacturing sources, suppliers, dealers, wholesalers, retailers and customers who have been engaged in the manufacture, sale, distribution or other dealings with the Products, Wrapping Materials and Related Materials during the term of the License (such list shall include customers to whom Products, Wrapping Materials or Related 12 Materials have been delivered after the expiration or termination of this License); and such list shall, if so requested by Licensor, contain the full specification of any designs, utility models, patents or trademarks that may be involved, directly or indirectly, in the manufacture, production or distribution of any of the Products, Wrapping Materials or Related Materials; and Licensee shall obtain the consent of any relevant third parties for such disclosure. l. Production Costs: Except as provided in Paragraphs 1.a.(ii) and 2.o. hereof, Licensee shall be responsible for and shall assume and pay for all costs and expenses related to the design, manufacture, sale, promotion, advertising and distribution of the Products. m. Inventory: It is the intent of this agreement that, insofar as practical, Licensee shall at all times be able to fulfill all orders for Products promptly and yet not have an excessive inventory on hand at the time of the termination or expiration of this License. Within forty-five (45) days after each License Year or within ten (10) days of a request from Licensor, Licensee will furnish Licensor with a statement signed by the Chief Financial Officer or Company Secretary of Licensee, setting forth in detail the quantities of finished goods and work in progress inventories of the Products. n. Trademarks and Non-Competitive Brands: (i) Licensee shall not during or after the term of this agreement use or cause or authorize to be used any words, device, design or symbol confusingly similar to the Trademarks. Permutations of the Trademarks, secondary marks or new words, devices, designs, slogans or symbols shall not be used on or in connection with the Products without Licensor's prior written consent and approval. Upon such authorization by Licensor and use by Licensee, such permutations, secondary marks, words, devices, designs, slogans and symbols shall be and become the property of Licensor and shall be included as Trademarks subject to this agreement. Should Licensee create or develop any packaging or tradedress unique to the Products, such packaging or tradedress shall be and become the property of Licensor and shall not be used by Licensee on or in connection with any other product or merchandise during or after the term of this agreement. Upon termination or expiration of this agreement or at any other time Licensor so requests, Licensee will assign, without charge to Licensor, all of Licensee's right, title and interest, including all rights of copyright, in and to such packaging or tradedress and shall cooperate fully with Licensor in preparing and 13 recording whatever documentation may be necessary to effect said assignment. (ii) Licensee shall not during the term of this agreement manufacture, distribute, advertise, promote, sell or deal with in any way in the Territory any product that is in Licensor's sole and absolute judgment competitive with the Products produced by Licensee under this agreement without Licensor's prior written consent. (iii) Licensee shall not during or after the term of this agreement and use color combinations or designs or styles unique to the Products on or in connection with any other brand of product and will assign to Licensor the beneficial ownership of all rights that Licensee has acquired or may acquire in such color combinations, designs or styles upon expiration or termination of this agreement. o. Indemnification and Product Liability Insurance: Licensee shall: (i) indemnify, defend and hold Licensor, its subsidiaries and affiliates, their respective shareholders, licensees, franchisees, and the agents, officers, directors and employees of all the foregoing harmless from any costs, claims, suits, losses, damages and expenses (including attorneys' fees) arising out of or in connection with the manufacture, sale, distribution or any other dealing whatsoever with the Products or any other alleged action whatsoever by Licensee or arising out of any alleged defect in any of the Products or non-conformity to or non-compliance with any statutory or other regulations pertaining to the design, quality, safety, advertising or marketing of the Products, Wrapping Materials and Related Materials; (ii) Forthwith obtain and maintain, at its own expense, satisfactory product liability insurance in the minimum amount of Five Million Dollars ($5,000,000.00) of primary and umbrella coverage from an insurance company reasonably satisfactory to Licensor and qualified to transact business in the Territory (such insurance policy shall name Licensor, its subsidiaries and affiliates, and their respective shareholders and licensees and the agents, officers, directors and employees of all of the foregoing, as required by Licensor, as additional insureds (as Licensors) by reason of the indemnity contained in this Paragraph 2.o. and shall evidence the insurer's agreement that such insurance shall not be amended, cancelled, terminated or permitted to lapse without thirty (30) days' prior 14 written notice to Licensor), and provide Licensor with a certificate of such insurance upon execution of this agreement by Licensee and on each anniversary date of the grant or issue of each such policy evidencing that each such policy has not been altered with respect to Licensor, its subsidiaries and affiliates in any way whatsoever nor permitted to lapse for any reason, and evidencing the payment of premium of each such policy; (iii) cause such policies to be in full force and effect prior to the commencement of any manufacture, sale, distribution or dealing with any of the Products whatsoever. Failure by Licensee to obtain the required insurance prior to the commencement of any manufacture, sale, distribution or dealing with any of the Products whatsoever or failure by Licensee to adequately maintain such insurance during the term of this License shall be an incurable default by Licensee under this agreement. p. Advertisinq Expenditures: In addition to all other amounts or payments, and not to be credited against any Guaranteed or Earned Royalty payment otherwise required under this agreement, Licensee agrees to expend within each License Year for advertising and promotion (specifically trade and/or consumer media such as newspapers, magazines, television and/or radio, but specifically excluding displays, fixtures or other point-of-sale materials), not less than three percent (3%) of Licensee's net sales for such License Year. A portion of such advertising sums shall be paid to Licensor as follows: (i) Concurrently with the remittance of the statements required under Paragraph 2.d.(i) hereof, Licensee shall remit to Licensor for use in Licensor's advertising and promotion pool an amount equal to one percent (1%) of Licensee's net sales for the time period covered by such statement, which amount shall be credited against Licensee's annual advertising expenditures required herein. (ii) If the report included with the statement required under Paragraph 2.d.(i) hereof for the last License Quarter of each License Year shows that the required amount has not been spent, the difference between the amount actually spent and the amount to be spent must be remitted to Licensor for use in Licensor's advertising and promotion pool within thirty (30) days after such statement is due. 15 3. ADDITIONAL COVENANTS OF THE PARTIES. ----------------------------------- a. Reservation of Rights: All rights not expressly and specifically granted herein to Licensee are reserved by Licensor. b. Riqhts of Licensor: Without limiting the generality of Paragraph 3.a. hereof, nothing herein contained shall be construed as prohibiting Licensor, its subsidiaries and affiliates from: (i) purchasing any of the Products from Licensee and offering any such Products for sale and selling same to consumers in connection with any business or event operated or sponsored by Licensor, its subsidiaries and affiliates or through a direct mail fulfillment programs which Licensor may designate. Licensee shall have the option to fill all such orders at such prices as given to other customers ordering the same quantities of similar merchandise. Licensee shall have thirty (30) days from the date it receives such orders within which to notify Licensor of the exercise of Licensee's option. In the event Licensee does not exercise such option or fails to notify Licensor of the exercise of such option within the thirty (30) day time limit, anything in this Paragraph 3.b. or elsewhere in this agreement to the contrary notwithstanding, Licensor, its subsidiaries and affiliates shall be allowed to purchase such Products from other manufacturing sources without liability to Licensee and sell such Products as indicated in this Paragraph 3.b. (ii) In the event of any such sale of Products by Licensee to Licensor, Licensee shall ship or deliver such Products either directly to Licensor or, as Licensor may direct, to any other business concern or person. Such sales of Products by Licensee to Licensor shall be, at Licensor's option, at such prices less the applicable Earned Royalty. If Licensor elects to have such sales made less the applicable Earned Royalty, Licensee will not have to pay additional royalties on such sales and will not be required to include such sales in the statements required under Paragraph 2.d.(i) hereof. Licensee may, however, include such sales in the computation of net sales under Paragraph l.c. hereof. Licensee shall bill Licensor in accordance with Licensee's normal billing procedure for any such Products shipped or delivered. 16 4. TITLE AND PROTECTION. -------------------- a. Indemnification by Licensor: Licensor represents and warrants that: it is the owner of the Trademarks; the Trademarks are valid; and the Trademarks are, to the best of its knowledge, free from any claim by third parties that would interfere with the rights granted to Licensee under this agreement. Licensor shall indemnify, defend and hold Licensee, its agents, officers, directors and employees harmless against any claims or suits, provided prompt notice of which is given Licensor by Licensee, arising solely and directly out of the authorized use of the Trademarks on the Products by Licensee in the Territory, but in no event shall such indemnification include consequential damages, including, but not limited to any compensation or reimbursement for loss of prospective profits, anticipated sales or other losses occasioned by cancellation or termination of this agreement or any other reason. Licensor shall have the option to settle or to undertake and conduct the defense of any such claim or suit; but Licensee shall, upon notice from Licensor and pursuant to Licensor's instructions, handle, undertake and conduct the defense of any such suit at Licensor's expense. If Licensor does not so notify Licensee, Licensee may through counsel of its own choice and at its own expense participate in any such litigation, but in such event Licensor shall have sole and exclusive control over such defense and Licensor's decisions shall govern and control. Licensee expressly covenants that no compromise or settlement of any claim or suit, or any preliminary negotiations with respect to any compromise or settlement, shall be made or entered into without the prior written approval of Licensor. b. Enforcement: Licensee shall promptly notify Licensor in writing of any actual, suspected or apparent infringement or imitation of the Trademarks on products similar or identical to the Products that may come to the attention of Licensee. Licensor shall take that action in regard to such infringement or imitation as Licensor, in its sole judgment, deems to be reasonable. Licensor shall, in its sole and absolute discretion, decide whether to undertake or conduct any suit or assert any claim with respect to such infringement or imitation; but Licensee shall, upon notice from Licensor and pursuant to Licensor's instructions, vigorously handle, undertake and conduct any such suit or assert any such claim at Licensor's expense in the name of Licensor, or Licensee or in both names as Licensor may direct. Licensee expressly covenants that no compromise or settlement of any such suit or claim, or any preliminary negotiations with respect to any compromise or settlement, shall be made or entered into without the prior written approval of Licensor. Licensee may share in any damage recovery obtained by Licensor as a result of any such suit or claim only if 17 Licensee notified Licensor upon the initiation of such suit or claim that Licensee desires to participate financially in such suit or claim and only in an amount that shall bear the same ratio to the damage recovery as the amount of Licensee's financial participation bears to the total costs and expenses incurred by Licensor in obtaining such damage recovery. In no event shall Licensor be responsible to Licensee for any consequential damages that may result from such infringement or imitation. 5. RELATIONSHIP BETWEEN THE PARTIES. -------------------------------- a. No Joint Venture: Nothing herein contained shall be construed to place the parties in the relationship of partners or joint venturers, and Licensee shall have no power to obligate or bind Licensor, its subsidiaries or affiliates in any manner whatsoever. b. Assignment: ---------- (i) Licensor, in entering into this agreement, is relying entirely upon the skills, reputation and personnel, including the officers, directors and shareholders, of Licensee. This agreement and all rights and duties hereunder are personal to Licensee and shall not, without the prior consent of Licensor (which may be given or withheld in the sole discretion of Licensor), be sold, transferred, leased, assigned, mortgaged or otherwise encumbered by Licensee or by operation of law. Any attempt to sell, transfer, lease, assign, mortgage or otherwise encumber this agreement, or any of the rights and duties hereunder, or any change in the principal officers, principal directors or shareholders of Licensee or an entity having a financial interest in Licensee (other than non-controlling shareholders of a corporation whose shares are freely traded on a nationally recognized stock exchange), without the prior written consent of Licensor shall constitute a material violation of and an incurable default under this agreement. The consent of Licensor to any one assignment or transfer shall not be deemed to be consent to any subsequent assignment or transfer. (ii) Licensor may assign this agreement to any of its subsidiaries or affiliates or to any entity that succeeds to the interest of Licensor in the Trademarks without the consent of Licensee and shall have the right to nominate any other person, company or corporation to receive royalty income or to undertake the obligations of Licensor under the terms of this agreement whether or not this agreement is so assigned. 18 6. SUBLICENSING. Licensee may not, without the prior written approval of Licensor, whose approval may be withheld without providing any reasons and whose discretion shall be final and absolute, enter into sublicense or subcontract agreements for any of the rights or obligations of Licensee under this License. The consent of Licensor to any one sublicense shall not be deemed to be a consent to any subsequent sublicense. 7. DEFAULTS AND RIGHTS OF TERMINATION. ---------------------------------- a. Defaults and Right to Cure: If Licensee shall violate any of its obligations or warranties under the terms of this agreement, Licensor shall have the right and option, but not the duty, to terminate this License upon ten (10) days' prior written notice, but no neglect or failure to serve such notice shall be deemed to be a waiver of any breach of any covenant or stipulation under this agreement. Such termination of this License shall become effective unless the violation complained of shall be completely remedied to the satisfaction of Licensor within such ten (10) day period. If the violation complained of is of a kind that a remedy or cure cannot effectively restore the prior circumstances, then this agreement shall terminate forthwith upon service of such notice without any period of grace as aforesaid. The termination of this License shall be without prejudice to any rights that Licensor may otherwise have against Licensee under this agreement or under law. b. Bankruptcy or Assignment for Creditors' Business Discontinuance: If Licensee files a petition in bankruptcy or is adjudicated a bankrupt, or if a petition in bankruptcy is filed against Licensee, or if Licensee shall become insolvent or shall make or agree to make an assignment for the benefit of creditors or an arrangement pursuant to any bankruptcy law, or if Licensee discontinues business, or if a receiver shall be appointed for Licensee, this License shall automatically terminate forthwith without the necessity of any notice whatsoever. If this License is so terminated, Licensee or its receivers, representatives, trustees, agents, administrators, successors or assigns shall have no right to sell, exploit or in any way deal with any Products, Wrapping Materials or Related Materials, except with and under the special written consent and instructions of Licensor that they shall be obligated to follow. c. Loss of Trademark Riqhts: If Licensee's right to use the Trademarks is adjudged illegal or invalid, and such adjudication has become final and non-appealable, or if a settlement agreement is entered by Licensor into that prohibits Licensee's right to use the Trademarks, this License shall automatically terminate as of the date of such final and non- appealable adjudication or the entry of such settlement 19 agreement without the necessity of any notice whatsoever. Licensee shall have no claim of any nature against Licensor for the loss of the right to use the Trademarks. d. Impossible Performance: Licensee and Licensor shall be released from their respective obligations under this agreement and this License shall terminate, if governmental regulations or other causes arising out of a state of national emergency or war, or any other similar cause beyond the control of the parties hereto, shall render performance impossible. Either party shall so inform the other in writing of any such cause and of its desire to be released, and immediately thereafter this License shall terminate and all royalties on sales of the Products theretofore made shall become immediately due and payable. 8. TERMINATION OR EXPIRATION. ------------------------- a. Effect of Termination or Expiration: Upon and after the expiration or termination of this License, all rights granted to Licensee under this agreement shall forthwith revert to Licensor. Licensee will refrain from any further use of the Trademarks or any further reference to anything, including but not limited to words, devices, designs and symbols, similar to the Trademarks or in any way associated with Licensor, its subsidiaries and affiliates, in connection with the conduct of Licensee's business, except with the written consent of Licensor and except as expressly provided in this Paragraph 8. b. Reserved Rights: The expiration or termination of this License under any of the terms of this agreement shall not relieve Licensor or Licensee, respectively, of any obligations incurred prior or subsequent to such expiration or termination; nor shall expiration or termination impair or prejudice any of the rights of Licensor or Licensee, respectively, accruing prior or subsequent thereto. Upon termination, the Guaranteed Royalty for the then current License Year shall be prorated based on the ratio that the number of days in such License Year prior to termination bears to the number of days in the License Year had the agreement not been terminated. Earned Royalties due for such License Year shall be the excess of Earned Royalty over such prorated Guaranteed Royalty. Any overpayment or underpayment of Guaranteed or Earned Royalties shall be adjusted by the parties in accordance with Paragraph 2.d.(i) hereof. c. Inventory: Within ninety (90) days prior to the expiration of this License, or within ten (10) days after (i) receipt of notice of termination or (ii) the happening of any event that terminates this License where no such notice is required, Licensee shall furnish to Licensor a complete and 20 accurate statement showing the number and description of all Products in process and on hand. Licensor or its authorized agents shall have the right to conduct a physical inspection and take inventory to ascertain or verify such inventory and statement, and any refusal by Licensee to submit to such physical inventory by Licensor or its authorized agents shall forfeit Licensee's right to complete any work in process and to dispose of any such inventory; Licensor retaining all other legal and equitable rights it may have in the circumstances, which rights are hereby reserved. d. Continued Sales After Termination or Expiration: Upon the expiration of the term of this License or if this License is terminated pursuant to any paragraph of this agreement except paragraphs 2.i. or 7.b. hereof, and except as provided in Paragraph 8.c. and provided Licensee is in complete compliance with the payment of all royalties or other amounts owed to Licensor, Licensee may for a period of ninety (90) days after the Expiration Date or notice of termination (the "Sell-off Period") dispose of, through Licensee's existing, recognized network of distributors, Products that have been approved by Licensor and that are in process or on hand at the date of expiration of the term of this License or the time such notice of termination is received; but in such event Licensee shall pay royalties and furnish statements with respect to the Sell-off Period in accordance with the terms of this agreement as though this License were still in effect. It is expressly understood and accepted by Licensee that the Sell-off Period provided for under this Paragraph 8.d. shall be non- exclusive. If this License is terminated pursuant to Paragraphs 2.i. or 7.b. hereof or for failure of Licensee to pay royalties or any other payment required under the terms of this agreement, Licensor shall forfeit any and all rights to a Sell-off Period and shall be obligated to turn over to Licensor all Products in process or on hand at the time of termination. e. Equitable Relief: Subject to Paragraph 8.d. above, Licensee hereby acknowledges that its failure to cease the manufacture, sale or distribution of the Products, Wrapping Materials and Related Materials upon the termination or expiration of this agreement, will result in damage to Licensor and to the rights of any subsequent licensee for which there is no adequate remedy at law. Accordingly, in the event of such failure, Licensor shall be entitled to equitable relief by way of temporary and permanent injunction and such other relief as any court of competent jurisdiction may deem just and proper. In this regard Licensee hereby consents to the judgment of temporary and permanent injunction in favor of Licensor in order to give effect to this Paragraph 8.e. 21 f. Continuity of Sales: In order to enable Licensor to maintain continuity of sales of the Products upon expiration or termination of this agreement, Licensor shall have the right, notwithstanding anything to the contrary contained in Paragraph l.a. hereof, to authorize another person or firm to manufacture, to show, and to solicit and receive orders for, the Products for a time three (3) months preceding the expiration of this agreement, or from the time that notice is given of termination of this agreement, whichever is sooner. Such person or firm shall not, however, be authorized to ship to its customers any of the Products so manufactured and shown until after this agreement has expired or has been terminated (but may ship Products on a nonexclusive basis during the Sell-Off Period, if any, pursuant to Paragraph 8.d. hereof). g. Guaranteed Royalties: Anything in this agreement to the contrary notwithstanding, if Licensor terminates this agreement as a result of default by Licensee, Licensee shall immediately pay to Licensor as liquidated damages all outstanding Guaranteed Royalties required to be paid during the "Full Term" (as hereinafter defined) of this agreement in addition to any Earned Royalties that may be due through the effective date of termination. As used in this Paragraph 8.g., "Full Term" shall mean each and every License Year of the initial term and any renewal term that may be in effect at the time of such termination as if this agreement had not been terminated as contemplated under this Paragraph 8.g. 9. Notices. All legal notices, consents, and other communications required by the terms of this agreement, including any change of address or addressee, shall be in writing and shall be sent to Licensee at the address specified in Paragraph S.2. of the Schedule and to Licensor at the address specified in Paragraph S.1. of the Schedule marked, Attention: Senior Vice President, Product Licensing, with a separate copy marked, Attention: General Counsel. Such legal notices shall be sent by telex or facsimile with a copy sent postage prepaid, certified or registered mail, return receipt requested and shall be deemed conclusively to have been served when actually received or refused by the addressee or upon notification of non-deliverability by the postal authorities, as the case may be. All reports required by the terms of this agreement shall be sent marked, Attention: Senior Vice President, Product Licensing. All material requiring approval shall be sent to Licensor marked, Attention: Brand Director or to such different or additional parties and addresses as Licensor may designate from time to time. All reports and material requiring approval and responses to same may be sent by telex or facsimile provided the sender requests and receives written confirmation from the addressee that such communication has been received and is legible; and such reports and material shall be deemed conclusively to have been given upon receipt by the sender of the confirmation of 22 receipt and legibility. Reports or material requiring approval that cannot be sent by telex or facsimile shall be sent postage pre-paid, DHL or other similar express mail carrier, return receipt requested and shall be deemed conclusively to have been given when actually received or refused by the addressee or upon notification of non-deliverability by the postal authorities, as the case may be. 10. 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 License is terminated by reason thereof; but the existence of such effect and the termination of this License shall be subject to contest by the party receiving 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. 11. CONSENTS AND APPROVALS. In this agreement where the consent or approval of Licensor is required to any action of Licensee, such consent or approval shall only be effective if granted in writing by Licensor. If Licensor fails or declines to grant such consent or approval to Licensee, Licensor shall not be liable to give any reason therefore nor for any events or circumstances that arise as a result of such failure. 12. APPLICABLE LAW. This agreement shall be governed by the laws of the State of Illinois (U.S.A.). 13. NO BROKER. Licensee warrants and represents that Licensee used no broker in connection with this transaction. 14. TITLES. The titles to the sections, subsections or other headings in this agreement are for reference purposes only and shall not define, limit or affect the meaning or interpretation of this aqreement. 15. ENTIRE AGREEMENT. This agreement represents the entire understanding of the parties. None of the terms of this agreement can be waived or modified except by an express agreement in writing signed by the parties. There are no representations, promises, warranties, covenants or undertakings other than those 23 contained in this agreement. The failure of either party hereto to enforce, or the delay by either party in enforcing, any of its rights under this agreement shall not be deemed as constituting a waiver or a modification thereof and either party may, within the time provided by applicable law, commence appropriate proceedings to enforce any or all of such rights. No person, firm, group or corporation other than Licensee, Licensor, its subsidiaries and affiliates shall be deemed to have acquired any rights by reason of anything contained in this agreement. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the day and year first above written. PLAYBOY ENTERPRISES, INC. (LICENSOR) By /s/ M.E. Levenson ------------------------------- CHAIFA INVESTMENT, LIMITED (LICENSEE) By /s/ John Chan Chun Tung ------------------------------- 24 EX-10.16(C) 16 AMENDMENT DTD 7/21/92 RE: 3/4/91 AGREEMENT Exhibit 10.16(c) PLAYBOY ENTERPRISES, INC. Mr. John Chan Chun Tung July 21, 1992 Chaifa Investment, Limited Unit 1, 17/F Westlands Centre 20 Westlands Road Quarry Bay, HONG KONG Dear Mr. Chan: This letter, when the enclosed copy has been signed, dated and returned by you, will evidence our mutual agreement to amend the Product License Agreement between Chaifa Investment, Limited ("Licensee") and Playboy Enterprises, Inc. ("Licensor") dated as of March 4, 1991 (the "Agreement") as follows: 1. The Agreement will be extended for five (5) additional License Years (from January 1, 1995 through December 31, 1999), unless earlier terminated as provided under the Agreement. 2. The Guaranteed Royalty for each such additional License Year shall be $50,000.00. U.S. 3. The Earned Royalty for each such additional License Year shall be five percent (5%) of net sales of the Products. 4. Except as modified above, all of the other terms and conditions of the Agreement 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 ENTERPRISES, INC. For and on behalf of CHAIFA INVESTMENT LIMITED By: /s/ M.E. Levenson --------------------------- /s/ John Chan Chun Tung M.E. Levenson - ------------------------------ Senior Vice President Authorized Signature Product Licensing ACCEPTED and AGREED to: CHAIFA INVESTMENT, LIMITED By: JOHN CHAN CHUN TUNG --------------------------------- Title: DIRECTOR & GENERAL MANAGER ------------------------------ Date: 31 JULY 1992 ------------------------------- 680 NORTH LAKE SHORE DRIVE / CHICAGO, ILLINOIS 60611 / 312-751-8000 EX-10.16(D) 17 AMENDMENT DTD 8/17/93 RE: 9/26/89 & 3/4/91 AGREE Exhibit 10.16(d) PLAYBOY ENTERPRISES, INC. August 17, 1993 Mr. John Chan Chun Tung Chaifa Investment, Limited Unit 1, 17/F Westlands Centre 20 Westlands Road, Quarry Bay HONG KONG Dear Mr. Chan: This letter, when the enclosed copy has been signed, dated and returned by you will evidence our mutual agreement to further amend: (i) the Product License Agreement between Playboy Enterprises, Inc. ("Licensor") and Chaifa Investment, Limited ("Licensee") dated as of September 26, 1989 ("the Hong Kong Agreement"); and (ii) the Product License Agreement between Licensor and Licensee dated as of March 4, 1991 ("the PRC Agreement") (which are sometimes hereinafter collectively referred to as "the Agreements") as follows: 1. a. The PRC and Hong Kong Agreements will be further extended through December 31, 2004, unless earlier terminated as provided under the Agreements. b. Licensor agrees in principle to extend the Agreements for two additional five-year periods, 2005-2009 and 2010-2014, on terms to be negotiated (taking into account, among other considerations, the working relationship between Licensor and Licensee and such other factors as Licensor deems appropriate). 2. The expiration date of the first extended term under the Hong Kong Agreement will be December 31, 1999 (which will make the last License Year for such term the 15-month period from October 1, 1998 through December 31, 1999 and each subsequent License Year coincide with the calendar year). 680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611 312-751-8000 3. Guaranteed Royalties under the PRC Agreement will be:
License Year Amount (in U.S.D.) ------------ ------------------ 1/1/2000 - 12/31/2000 $1,400,000 1/1/2001 - 12/31/2001 $1,650,000 1/1/2002 - 12/31/2002 $1,900,000 1/1/2003 - 12/31/2003 $2,150,000 1/1/2004 - 12/31/2004 $2,400,000
4. Guaranteed Royalties under the Hong Kong Agreement will be $350,000 U.S.D. for each License Year referred to in Paragraph 3. above. 5. Minimum net sales under the PRC Agreement will be:
License Year Amount (in U.S.D.) ------------ ------------------ 1/1/2000 - 12/31/2000 $20,000,000 1/1/2001 - 12/31/2001 $23,000,000 1/1/2002 - 12/31/2002 $26,000,000 1/1/2003 - 12/31/2003 $29,000,000 1/1/2004 - 12/31/2004 $31,000,000
6. Minimum net sales under the Hong Kong Agreement will be:
License Year Amount (in U.S.D.) ------------ ------------------ 1/1/2000 - 12/31/2000 $5,000,000 1/1/2001 - 12/31/2001 $5,500,000 1/1/2002 - 12/31/2002 $6,000,000 1/1/2003 - 12/31/2003 $6,500,000 1/1/2004 - 12/31/2004 $7,000,000
7. Earned Royalties will be 7% of net sales under the Agreements. 8. Licensor and Licensee agree to extend the trademark protection under the Agreements so that Licensor shall have the right to approve the overall design, marketing and merchandising of and in the shops, but does not include the day-to-day operation and management of the shops. 9. The above amendments to the Agreements will be conditional upon the successful completion of Licensee's initial public offering. If such initial public offering is not successfully completed on or before December 31, 1993, this letter agreement shall be null and void and of no force or effect. 2 10. Except as modified above, all of the other terms and conditions of the Agreements, as previously amended, shall remain in full force and effect. If the above accurately sets forth your understanding of our mutual agreements, please sign, date and return the enclosed copy of this letter. Very truly yours, PLAYBOY ENTERPRISES, INC. By /s/ Robert Beleson ------------------------- Robert Beleson Chief Marketing Officer ACCEPTED and AGREED to: CHAIFA INVESTMENT, LIMITED By: /s/ John Chan Chun Tung --------------------------------- JOHN CHAN CHUN TUNG Title: DIRECTOR & GENERAL MANAGER ------------------------------ Date: 3 SEPTEMBER 1993 ------------------------------ 3 EX-10.16(E) 18 AMENDMENT DTD 1/23/96 RE: 9/26/89 & 3/4/91 AGREE Exhibit 10.16(e) PLAYBOY ENTERPRISES, INC. January 23, 1996 Mr. John Chan Chun Tung Chaifa Holdings Ltd. Unit 1, 17th floor, Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong Dear Mr. Chan: This letter, when the enclosed copy has been signed, dated and returned by you, will evidence our mutual agreement to further amend the Product License Agreements between Playboy Enterprises, Inc. ("Licensor") and Chaifa Holdings Ltd. ("Licensee") dated as of September 26, 1989 (the "Hong Kong Agreement") and March 4, 1991 (the "PRC Agreement") (collectively referred to as the "Agreements"). Our agreement is as follows: 1. Effective July 1, 1995, the advertising and promotion pool contribution as described in Paragraph 2.p.(i) of the PRC Agreement and 2.q.(i) of the Hong Kong Agreement will be changed to one-half percent (1/2%) in the Agreements. This rate will remain in effect through December 31, 1999. 2. Except as modified above, all of the other terms and conditions of the Agreements, 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. ACCEPTED and AGREED to: Very truly yours, CHAIFA HOLDINGS LTD. PLAYBOY ENTERPRISES, INC. By: /s/ John Chan Chun Tung By: /s/ Lisa L. Weaver --------------------------- ---------------------------- Title: CHAIRMAN Lisa L. Weaver ------------------------ Vice President Date: 29-1-96 International Product Licensing ------------------------ 1 680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611/312/751-8000 EX-10.17(C) 19 SECOND AMENDMENT TO 2/10/95 CREDIT AGREEMENT Exhibit 10.17(c) PLAYBOY ENTERPRISES, INC. SECOND AMENDMENT TO CREDIT AGREEMENT Harris Trust and Savings Bank Chicago, Illinois LaSalle National Bank Chicago, Illinois Ladies and Gentlemen: Reference is hereby made to the Credit Agreement dated as of February 10, 1995, as amended by the First Amendment to Credit Agreement dated as of March 31, 1995 (said Credit Agreement as so amended being referred to herein as the "Credit Agreement") currently in effect by and among, Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and you (the "Lenders"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Company hereby applies to the Lenders to increase the amount of the Revolving Credit Commitments to $35,000,000, extend the availability of the Revolving Credit, amend certain of the financial covenants contained therein and make certain other amendments to the Credit Agreement, and the Lenders are willing to do so under the terms and conditions set forth in this Amendment. 1. AMENDMENTS. Upon the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement shall be and hereby is amended as follows: 1.01. Loans in Excess of $30,000,000. The third sentence of Section 1.2 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "Each advance made by a Lender of its pro rata share of a Loan shall be made against and evidenced by a Revolving Credit Note of the Company (individually an "A-Note" and collectively the "A-Notes") payable to the order of such Lender in the amount of its Revolving Credit Commitment, with each A-Note to be in the form (with appropriate insertions) attached hereto as Exhibit A. Notwithstanding anything herein to the contrary, each advance made by a Lender of its pro rata share of a Loan, to the extent that after giving effect thereto the amount of the Revolving Credit Commitments then in use would then exceed $30,000,000, shall be made against and evidenced by promissory notes of the Company in the form (with appropriate insertions) annexed hereto as Exhibit A-1 (individually a "B-Note" and collectively the "B-Notes") (the A-Notes and the B-Notes being hereinafter referred to collectively as the "Notes" and individually as a "Note")." 1.02. Letter of Credit Sub-Limit. Section 1.3(a) of the Credit Agreement is hereby amended by deleting the amount "$7,500,000" appearing therein and substituting therefor the amount "$10,000,000". 1.03. Termination Fee. Section 3.4 of the Credit Agreement is hereby amended by adding the following sentence immediately at the end thereof: "If the Company terminates the Revolving Credit Commitments in whole at any time prior to September 5, 1997, the Company shall pay to the Administrative Agent, for the ratable benefit of the Lenders, a termination fee in the amount of $100,000." 1.04. Deletion of Mandatory Partial Termination Requirement. Section 3.5 of the Credit Agreement is hereby amended by deleting such Section in its entirety. 1.05. Application of Payments. The seventh sentence of the first paragraph of Section 3.6 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "Unless the Company otherwise directs, principal payments on the Notes shall be first applied to the Domestic Rate Portion evidenced by the B-Notes until payment in full thereof, then to the Domestic Rate Portion evidenced by the A-Notes until payment in full thereof, with any balance applied to the LIBOR Portions of the Notes in the order in which their Interest Periods expire." 1.06. Collateral Generally. Section 4.1 of the Credit Agreement is hereby amended by adding the following sentence immediately after the first sentence thereof: "The foregoing to the contrary notwithstanding and notwithstanding anything in the Collateral Documents to the contrary, (i) the Company and its Material Subsidiaries each shall have the right, without the consent of the Administrative Agent or the Lenders to enter into bona fide licensing arrangements at arm's length with unaffiliated third parties for their use of the Collateral consisting of intellectual property (copies of which shall be promptly provided by the Company to the Administrative Agent) so long as the Administrative Agent has a valid and perfected first priority Lien on such Collateral and the proceeds thereof and the terms of such licensing arrangements expressly permit such Lien and recognize the Administrative Agent's right to collect any sums due the Company or such Material Subsidiary, as the case may be, -2- in accordance with the terms of such arrangements, (ii) whether or not the Administrative Agent has foreclosed or exercised any other rights to enforce its Lien on such Collateral, licensees under licensing arrangements described in the foregoing clause (i) shall be afforded the use of such Collateral in accordance with the terms of such licensing arrangements for the duration set forth therein and (iii) at the request of the Company, the Administrative Agent shall (with the consent of the Required Lenders, which consent shall not be unreasonably withheld) execute a nondisturbance agreement in favor of such licensees to provide for the purposes set forth in the foregoing clause (ii)." 1.07. Movie Rights. Section 4.2 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "Section 4.2. Movie Rights. Notwithstanding anything herein or in any other Loan Document to the contrary, the Collateral shall in no event include certain film and video-related mediums and related rights to the extent set forth in that certain Supplement to Collateral Documents dated as of March 5, 1996 by and among the Agent, the Company and certain of its Subsidiaries." The parties hereto agree that the Supplement attached hereto as Exhibit C shall, when properly completed and executed, constitute the Supplement referred to in Section 4.2 hereof as amended hereby. 1.08. Changes in Applicable Margins. The definition of "Applicable Margin" appearing in Section 5.1 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "'Applicable Margin' means 0% with respect to the Domestic Rate Portion of the Notes and 2.25% with respect to each LIBOR Portion of the Notes; provided, however, with respect to each LIBOR Portion of the Notes, such Applicable Margin shall be decreased to 2.00% on October 1st of any calendar year (commencing October 1, 1996) if the Company's Net Income Before Extraordinary Items for the fiscal year ending on June 30th of such calendar year is equal to or greater than $1,500,000; provided further, however, that such Applicable Margin shall return to 2.25% on October 1st of any calendar year thereafter if the Company's Net Income Before Extraordinary Items for any fiscal year ending on or after June 30th of such calendar year is less than $1." -3- 1.09. Extension of Termination Date. The definition of "Termination Date appearing in Section 5.1 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: " 'Termination Date' means March 5, 1999, or such earlier date on which the Revolving Credit Commitments are terminated in whole pursuant to Section 3.4, 3.5, 9.2 or 9.3 hereof or such later date to which the Revolving Credit Commitments are extended pursuant to Section 11.20 hereof. THE COMPANY ACKNOWLEDGES AND AGREES THAT THE LENDERS HAVE ABSOLUTELY NO OBLIGATION WHATSOEVER TO EXTEND THE TERMINATION DATE BEYOND MARCH 5, 1999." 1.10. New Definitions. Section 5.1 of the Credit Agreement is hereby amended by adding the following new definitions in the appropriate alphabetical order: "Deferments" means sums in fixed amounts (other than Participations or Residuals) payable by the Company or any of its Subsidiaries in accordance with customary industry practice to a Person who is not an Affiliate of the Company or any of its Subsidiaries in connection with such Person's furnishing rights or personal services in connection with the development or production of any item of Product, the payment of which is contingent upon (a) the receipt of revenues from the exploitation of such item of Product, and/or (b) the occurrence of certain conditions and/or (c) the passage of time; provided, however, that the term "Deferments" does not include supplemental market payments or sums included in the budgeted cost of production for the applicable item of Product. "EBITDA" means, with reference to any period, Net Income Before Extraordinary Items for such period plus all amounts deducted in arriving at such Net Income Before Extraordinary Items amount in respect of (i) Interest Expense for such period, plus (ii) federal, state and local income taxes for such period, plus (iii) all amounts properly charged for depreciation of fixed assets and amortization of intangible assets (including without limitation the amortization of investments in entertainment programming) during such period on the books of the Company and its Subsidiaries. "Net Income After Extraordinary Items" means, with reference to any period, the net income (or net loss) of the Company and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP, and, without limiting the foregoing, after deduction from gross income of all expenses and reserves, -4- including reserves for all taxes on or measured by income, and in any event including any extraordinary profits and losses and also in any event including any taxes on such profits and any tax credits on account of such losses. "Net Income Before Extraordinary Items" means, with reference to any period, the net income (or net loss) of the Company and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP, and, without limiting the foregoing, after deduction from gross income of all expenses and reserves, including reserves for all taxes on or measured by income, but in any event excluding any extraordinary profits and losses and also in any event excluding any taxes on such profits and any tax credits on account of such losses. "Participation" means all obligations (other than Deferments and Residuals) payable by the Company or any of its Subsidiaries in accordance with customary industry practice to Persons other than Persons who are Affiliates of the Company or any of its Subsidiaries in connection with the development, acquisition, production, distribution or exploitation of an item of Product or rights in Product, the payment of which is contingent upon and payable only to the extent of the receipt by the obligor of revenues from the exploitation of such item of Product or rights in Product. "Product" means any motion pictures, films, video or movies or similar audio or visual medium of communication in use now or in the future or any elements thereof in which the Company or any Subsidiary has any proprietary interest. "Residuals" means all obligations (other than Participations and Deferments) payable by the Company or any of its Subsidiaries in accordance with customary industry practice pursuant to guild agreements or collective bargaining agreements in connection with the development, acquisition, production, distribution or exploitation of an item of Product or rights in Product." 1.11. Unnecessary Definitions. Section 5.1 of the Credit Agreement is hereby further amended by deleting from such Section the definition of the term "Rights Offering" appearing therein. 1.12. Net Worth Requirement. Section 8.7 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "Section 8.7. Net Worth. The Company will at all times maintain Net Worth of not less than the sum of (i) $43,000,000 and -5- (ii) 50% of Net Income After Extraordinary Items for the immediately preceding fiscal year (only if positive for such year), commencing with the fiscal year ending June 30, 1996." 1.13. EBITDA Requirement. Section 8.9 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "Section 8.9. EBITDA. The Company will, as of the last day of each fiscal quarter ending during each of the periods specified below, maintain EBITDA for the four fiscal quarters then ended of not less than:
From and To and EBITDA shall Including Including not be less than --------- --------- ---------------- The date hereof 9/30/96 $23,500,000 10/1/96 3/31/97 $26,000,000 4/1/97 9/30/97 $28,500,000 10/1/97 3/31/98 $30,750,000 4/1/98 all times thereafter $33,000,000
1.14. Additional Permitted Liens. Section 8.11 of the Credit Agreement is hereby amended by adding the following new subsections (g), (h), (i), (j) and (k) immediately after subsection (f) thereof: "(g) Liens on items of Product and rights in Product to the extent securing Residuals, Deferments and Participations owed by the Company and its Subsidiaries relating exclusively to such Product; (h) rights of licensees which are not Affiliates of the Company or any of its Subsidiaries under access agreements pursuant to which such licensees have access to duplicating material for the purpose of making prints or other copies of items of Product licensed to them, and rights of distributors, exhibitors, licensees and other Persons which are not Affiliates of the Company or any of its Subsidiaries in items of Product created in connection with the distribution and exploitation of such items of Product in the ordinary course of business pursuant to arms-length agreements in accordance with customary industry practice; (i) Liens on any asset relating to any item of Product or rights in Product acquired by the Company or any of its Subsidiaries granted in accordance with customary industry practice in favor of any lender financing the production costs of such item of Product, provided such Lien is and will remain confined to the same Products or rights in Product so acquired; -6- (j) Liens granted in accordance with customary industry practice to distributors or licensees which are not Affiliates of the Company or any of its Subsidiaries to secure the exploitation rights in items of Product licensed or leased to such distributors or licensees, provided that the collateral subject to any such Lien shall be limited to the exploitation rights licensed or leased to such distributor or licensee, the Product and proceeds of such exploitation rights and a non-exclusive right of access to necessary duplicating materials to exercise such exploitation rights; and (k) Liens of film laboratories and sound studios which are not Affiliates of the Company or any of its Subsidiaries incurred in the ordinary course of business for sums not yet due or being contested in good faith." 1.15. Various Investments. Subsections (e), (g), (i) and (k) of Section 8.12 of the Credit Agreement are each hereby amended and as so amended shall be restated in their entirety to read, respectively, as follows: "(e) investments outstanding as of March 5, 1996 in present Subsidiaries;" "(g) the currently existing guaranty by the Company of the 10% Subordinated Note of Lifestyle Brands, Ltd. dated June 28, 1993 payable to Seaward & Co. (the "Sarah Coventry Note") provided the aggregate principal amount so guaranteed does not at any time exceed $750,000;" "(i) investments in Playboy Gaming Greece, Ltd. provided the amount so invested aggregates not more than $2,100,000 at any one time outstanding;" "(k) investments, loans, advances and guaranties not otherwise permitted by this Section 8.12 provided the aggregate amount of such investments, loans, advances and guaranties made in each fiscal year of the Company does not exceed $6,000,000 and no single such investment, loan, advance or guaranty (with a series of related investments, loans, advances or guaranties comprising a single transaction to be deemed a single investment, loan, advance or guaranty, as the case may be, for the purposes of this Section) is in an amount greater than $1,500,000." 1.16. Extension of Revolving Credit Commitments. Section 11 of the Credit Agreement is hereby amended by inserting the following new Section 11.20 immediately after Section 11.19 thereof: -7- "Section 11.20. Extensions of the Revolving Credit Commitments. Not less than thirty (30) or more than ninety (90) days prior to the date occurring two years prior to the Termination Date (as the same may have been extended pursuant to this Section 11.20), the Company may advise the Administrative Agent in writing of its desire to extend the Termination Date for an additional twelve (12) months and the Administrative Agent shall promptly notify the Lenders of each such request. In the event that the Lenders are agreeable to such extension (it being understood that the Lenders may accept or decline such a request in their sole discretion), the Administrative Agent shall so notify the Company and the Company and the Lenders shall enter into such documents as the Administrative Agent may reasonably deem necessary or appropriate to reflect such extension and to assure that all extensions of credit pursuant to the Revolving Credit Commitments as so extended are secured by the liens of the Collateral Documents and the Administrative Agent may call for financing statement searches or endorsements to its mortgagee's policy of title insurance to assure that such is the case, all costs and expenses incurred by the Administrative Agent in connection therewith to be paid by the Company." 1.17. Increase in Revolving Credit Commitments. The amount of each Lender's Revolving Credit Commitment set forth opposite its name on its signature page to the Credit Agreement shall be amended and as so amended shall be restated as follows: AMOUNT OF REVOLVING LENDER CREDIT COMMITMENT Harris Trust and Savings Bank $17,500,000 LaSalle National Bank $17,500,000 1.18. Exhibit A-1. The Credit Agreement shall be amended by adding thereto an Exhibit A-1 in the form annexed to this Amendment as Exhibit A-1. 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.01. The Company, the Agent and the Lenders shall have executed and delivered this Amendment. 2.02. The Company shall have executed a Second Supplemental Deed of Trust, Fixture Filing and Security Agreement in the form of Exhibit B hereto (the "First -8- Supplement") supplementing the California Mortgage so that the same shall secure the Revolving Credit as extended hereby. 2.03. The Company shall have paid to the Administrative Agent for the ratable benefit of the Lenders a transaction fee in the amount $155,000. 2.04. No Default or Event of Default shall have occurred and be continuing as of the date this Amendment would otherwise take effect. 2.05. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Lenders and their counsel; and the Lenders shall have received the favorable written opinion of counsel for the Company in form and substance satisfactory to the Lenders and their counsel. 3. CALIFORNIA MORTGAGE. Within fifteen Business Days of the recordation of the Second Supplement, the Company shall at its expense furnish the Agent with an endorsement to the Agent's February 16, 1995 title insurance policy issued by Chicago Title Insurance Company under its number 9428314, the effect of which is to insure the validity and priority of the California Mortgage as security for the Revolving Credit as extended hereby, which endorsement shall bring the effective date of coverage thereunder down to the date of such recordation and show no exceptions to title or coverage other than those shown on the February 8, 1995 commitment for such policy (provided that the mortgage identified at Section E of Schedule B to such commitment shall not show as an exception). The failure to furnish such endorsement shall constitute an Event of Default. 4. REPRESENTATIONS. In order to induce the Lenders to execute and deliver this Amendment, the Company hereby represents to the Lenders that as of the date hereof, the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct (except that for purposes of this paragraph, (i) the representations contained in Section 6.3 shall be deemed to include this Amendment as and when it refers to Loan Documents and (ii) the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Company delivered to the Lenders) and the Company is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. 5. MISCELLANEOUS. 5.01. The Company acknowledges and agrees that all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Revolving Credit as modified hereby. The Company further acknowledges and agrees that all references in such Collateral Documents to the Revolving Credit shall be -9- deemed a reference to the Revolving Credit as so modified. The Company further agrees to execute and deliver any and all instruments or documents as may be required by the Agent or Required Lenders to confirm any of the foregoing. 5.02. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 5.03. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. -10- Dated as of March 5, 1996. PLAYBOY ENTERPRISES INC. By /s/ Rebecca S. Maskey -------------------------------- Its Senior V.P. ----------------------------- Each of the undersigned acknowledges and agrees that while the following is not required, each confirms that: (i) all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Revolving Credit as modified hereby; (ii) all references in such Collateral Documents to the Credit Agreement shall be deemed a reference to the Credit Agreement as amended hereby; (iii) each of the undersigned will continue to execute and deliver any and all instruments or documents as may be required by the Agent or Required Lenders to confirm any of the foregoing. PLAYBOY ENTERTAINMENT GROUP, INC. By /s/ Robert D. Campell -------------------------------- Its Treasurer ----------------------------- CRITICS' CHOICE VIDEO, INC. By /s/ Robert D. Campell -------------------------------- Its Treasurer ----------------------------- LIFESTYLE BRANDS, LTD. By /s/ Robert D. Campell -------------------------------- Its Treasurer ----------------------------- Accepted and agreed to in Chicago, Illinois as of the date and year last above written. HARRIS TRUST AND SAVINGS BANK By /s/ R.L. Dell'Artino -------------------------------- Its Vice President LASALLE NATIONAL BANK By /s/ Robert Kastenholz -------------------------------- Its Senior Vice President ----------------------------- -11- EXHIBIT A-1 B-NOTE Chicago, Illinois $2,500,000 March 5, 1996 On the Termination Date, for value received, the undersigned, PLAYBOY ENTERPRISES, INC., a Delaware corporation (the "Company"), hereby promises to pay to the order of Harris Trust and Savings Bank (the "Lender"), at the principal office of Harris Trust and Savings Bank in Chicago, Illinois, the principal sum of (i) Two Million Five Hundred Thousand and no/100 Dollars ($2,500,000), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Loans owing from the Company to the Lender under the Revolving Credit provided for in the Credit Agreement hereinafter mentioned. This Note evidences loans constituting part of a "Domestic Rate Portion" and "LIBOR Portions" as such terms are defined in that certain Credit Agreement dated as of February 10, 1995, as amended, between the Company, Harris Trust and Savings Bank, individually and as Administrative Agent thereunder, and the other Lenders which are now or may from time to time hereafter become parties thereto (said Credit Agreement, as the same may be amended, modified or restated from time to time, being referred to herein as the "Credit Agreement") made and to be made to the Company by the Lender under the Revolving Credit provided for under the Credit Agreement, and the Company hereby promises to pay interest at the office described above on each loan evidenced hereby at the rates and at the times and in the manner specified therefor in the Credit Agreement. Each loan made under the Revolving Credit provided for in the Credit Agreement by the Lender to the Company against this Note, any repayment of principal hereon, the status of each such loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion, the interest rate and Interest Period applicable thereto shall be endorsed by the holder hereof on a schedule to this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on a schedule to this Note prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries so endorsed on a schedule to this Note or recorded on the books and records of the holder hereof shall be prima facie evidence of the unpaid principal balance of this Note, the status of each such loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion, and, in the case of any LIBOR Portion, the interest rate and Interest Period applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement and is secured by, among other things, the Collateral Documents, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in the Credit Agreement. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby promises to pay all costs and expenses (including reasonable attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. PLAYBOY ENTERPRISES, INC. /s/ Rebecca S. Maskey By -------------------------------------- Rebecca S. Maskey Name: -------------------------------- Senior V. P. Title: ------------------------------- -2- B-NOTE Chicago, Illinois $2,500,000 March 5, 1996 On the Termination Date, for value received, the undersigned, PLAYBOY ENTERPRISES, INC., a Delaware corporation (the "Company"), hereby promises to pay to the order of LaSalle National Bank (the "Lender"), at the principal office of Harris Trust and Savings Bank in Chicago, Illinois, the principal sum of (i) Two Million Five Hundred Thousand and no/100 Dollars ($2,500,000), or (ii) such lesser amount as may at the time of the maturity hereof, whether by acceleration or otherwise, be the aggregate unpaid principal amount of all Loans owing from the Company to the Lender under the Revolving Credit provided for in the Credit Agreement hereinafter mentioned. This Note evidences loans constituting part of a "Domestic Rate Portion" and "LIBOR Portions" as such terms are defined in that certain Credit Agreement dated as of February 10, 1995, as amended, between the Company, Harris Trust and Savings Bank, individually and as Administrative Agent thereunder, and the other Lenders which are now or may from time to time hereafter become parties thereto (said Credit Agreement, as the same may be amended, modified or restated from time to time, being referred to herein as the "Credit Agreement") made and to be made to the Company by the Lender under the Revolving Credit provided for under the Credit Agreement, and the Company hereby promises to pay interest at the office described above on each loan evidenced hereby at the rates and at the times and in the manner specified therefor in the Credit Agreement. Each loan made under the Revolving Credit provided for in the Credit Agreement by the Lender to the Company against this Note, any repayment of principal hereon, the status of each such loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion and, in the case of any LIBOR Portion, the interest rate and Interest Period applicable thereto shall be endorsed by the holder hereof on a schedule to this Note or recorded on the books and records of the holder hereof (provided that such entries shall be endorsed on a schedule to this Note prior to any negotiation hereof). The Company agrees that in any action or proceeding instituted to collect or enforce collection of this Note, the entries so endorsed on a schedule to this Note or recorded on the books and records of the holder hereof shall be prima facie evidence of the unpaid principal balance of this Note, the status of each such loan from time to time as part of the Domestic Rate Portion or a LIBOR Portion, and, in the case of any LIBOR Portion, the interest rate and Interest Period applicable thereto. This Note is issued by the Company under the terms and provisions of the Credit Agreement and is secured by, among other things, the Collateral Documents, and this Note and the holder hereof are entitled to all of the benefits and security provided for thereby or referred to therein, to which reference is hereby made for a statement thereof. This Note may be declared to be, or be and become, due prior to its expressed maturity, voluntary prepayments may be made hereon, and certain prepayments are required to be made hereon, all in the events, on the terms and with the effects provided in the Credit Agreement. All capitalized terms used herein without definition shall have the same meanings herein as such terms are defined in the Credit Agreement. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF ILLINOIS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby promises to pay all costs and expenses (including reasonable attorneys' fees) suffered or incurred by the holder hereof in collecting this Note or enforcing any rights in any collateral therefor. The Company hereby waives presentment for payment and demand. PLAYBOY ENTERPRISES, INC. By /s/ Rebecca S. Maskey -------------------------------------- Rebecca S. Maskey Name: -------------------------------- Senior V. P. Title: ------------------------------- -2- EXHIBIT B | Recording Requested By: | COPY of Document Recorded James E. Basta | ......................... | Mar 07 1996 When Recorded Mail To: | Has not been compared with James E. Basta | original. Original will be Chapman and Cutler | returned when processing 111 West Monroe Street | has been completed. Chicago, Illinois 60603 | LOS ANGELES COUNTY REGISTRAR- | RECORDER | |SPACE ABOVE THIS LINE RESERVED FOR |RECORDER'S USE ONLY - --------------------------------------------------------------------------- SECOND SUPPLEMENT TO DEED OF TRUST, FIXTURE FILING AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS Dated as of March 5, 1996 FROM PLAYBOY ENTERPRISES, INC. ("Grantor") to CHICAGO TITLE INSURANCE COMPANY, AS TRUSTEE ("Trustee") in Trust for the Benefit of HARRIS TRUST AND SAVINGS BANK, AS ADMINISTRATIVE AGENT FOR THE LENDERS ("Beneficiary") - --------------------------------------------------------------------------- THE OBLIGATION THE PERFORMANCE OF WHICH IS SECURED BY THIS SUPPLEMENTAL DEED OF TRUST PROVIDES FOR A VARIABLE INTEREST RATE AND A REVOLVING LINE OF CREDIT. PLAYBOY ENTERPRISES, INC. SECOND SUPPLEMENT TO DEED OF TRUST, FIXTURE FILING AND SECURITY AGREEMENT WITH ASSIGNMENT OF RENTS This Second Supplement to Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents dated as of March 5, 1996 (the "Supplement") from PLAYBOY ENTERPRISES, INC., a Delaware corporation 680 North Lake Shore Drive, Chicago, Illinois 60611 (the "Grantor" ), to CHICAGO TITLE INSURANCE COMPANY, a Missouri corporation, as Trustee, having an office at 700 South Flower, Suite 900, Los Angeles, California 90017 (the "Trustee"), and in trust for the benefit of HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation whose post office address is 111 West Monroe Street, Chicago, Illinois 60690 (hereinafter referred to individually as "Harris"), as Administrative Agent hereunder for the Lenders hereinafter defined (Harris acting as such agent and any successor or successors to Harris in such capacity being hereinafter referred to as the "Beneficiary"); WITNESSETH THAT: WHEREAS, the Grantor did heretofore execute and deliver to the Beneficiary that certain Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents dated as of February 10, 1995 and recorded in the Recorder's Office of Los Angeles County, California on February 16, 1995 as Document No. 95-263308, as amended by that certain First Supplement to Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents dated as of March 31, 1995 and recorded in the Recorder's Office of Los Angeles County, California on April 6, 1995 as Document No. 95-483045 (said Deed of Trust, Fixture Filing and Security Agreement with Assignment of Rents, as so amended, being hereinafter referred to as the "Deed of Trust") to mortgage, among other things, the real estate described in Schedule I attached hereto; and WHEREAS, the Deed of Trust currently secures, among other things, loans (the "Revolving Loans") and letters of credit (the "Letters of Credit") extended and to be extended from time to time by the Lenders (as hereinafter defined) on a revolving basis under a revolving credit facility (the "Revolving Credit") in a principal amount not to exceed $30,000,000 at any one time outstanding provided for by that certain Credit Agreement dated as of February 10, 1995, as heretofore amended, by and among the Grantor, Harris and LaSalle National Bank, a national banking association (hereinafter referred to individually as "LaSalle"), individually and as Co-Agent for the Lenders hereinafter defined (LaSalle acting as such agent and any successor or successors to LaSalle This Instrument Prepared By: James E. Basta Chapman and Cutler 111 West Monroe Street Chicago, Illinois 60603 in such capacity being hereinafter referred to as "Co-Agent"), and such other lenders which may from time to time hereafter become parties thereto (Harris, LaSalle and such other lenders hereafter party to the Credit Agreement being herein referred to collectively as the "Lenders" and individually a "Lender"; and such Credit Agreement as so amended and as the same may from time to time be further modified or amended being hereinafter referred to as the "Credit Agreement"); and WHEREAS, the Revolving Loans are evidenced by those certain Revolving Credit Notes of the Grantor dated February 10, 1995 payable to the order of the respective Lenders in the aggregate face principal amount of $30,000,000 (such Revolving Credit Notes and any and all notes issued in substitution or replacement therefor or in extension or renewal thereof in whole or in part, together with any and all modifications and amendments of any of the foregoing, being hereinafter referred to collectively as the "Notes"); and WHEREAS, the Grantor has entered into a Second Amendment to Credit Agreement with the Lenders bearing even date herewith (the "Second Amendment"), pursuant to which the Grantor and the Lenders have agreed to, among other things, extend to March 5, 1999 (the "New Termination Date") (i) the availability of the Revolving Credit so as to continue through the New Termination Date the availability to the Grantor under the Revolving Credit on a revolving basis of new Revolving Loans, Letters of Credit and other financial accommodations, (ii) the deadline by which Letters of Credit must expire and thus the date by which drawings thereunder must be made and (iii) the final maturity of the Notes, Reimbursement Obligations and all other obligations under the Credit Agreement; and WHEREAS, as a condition precedent to extending the period of availability of their respective commitments under the Revolving Credit as provided by the Second Amendment, the Lenders require the Grantor, and to accommodate that requirement the Grantor desires by this Supplement, to confirm and assure that all the real estate and other properties, rights, interests and privileges of the Grantor which are currently subject to the lien of the Deed of Trust be and constitute collateral security not only for the indebtedness currently secured thereby but also for the additional credit which may from time to time be extended under the Revolving Credit as so modified; and WHEREAS, the Deed of Trust is to continue to secure all the indebtedness now secured thereby, and this Supplement is being executed and delivered to confirm and assure the foregoing; NOW, THEREFORE, for and in consideration of the execution and delivery by the Lenders of the Second Amendment and other good and valuable consideration, receipt whereof is hereby acknowledged, the Deed of Trust shall be and hereby is supplemented as follows, to wit: NOW, THEREFORE, to secure (i) the payment of the principal and premium, if any, of and interest on the Notes (as amended by, without limitation, the Second Amendment) as and when the same become due and payable (whether by lapse of time, acceleration or otherwise) and all Revolving Loans now or hereafter evidenced thereby, (ii) the payment of -2- all sums owing in connection with the Letters of Credit issued under the Revolving Credit as extended by the Second Amendment (collectively, the "Reimbursement Obligations") as and when the same become due and payable, including without limitation the obligation to reimburse the issuer for each drawing on each Letter of Credit issued by it, (iii) the payment of all sums due or owing with respect to the Hedging Liability (as defined in the Deed of Trust), (iv) the obligation of Grantor to pay Beneficiary, Co-Agent and the Lenders certain fees, costs, expenses, indemnities and other amounts pursuant to the Credit Agreement (as amended by, without limitation, the Second Amendment) and the applications and agreements for the Letters of Credit, (v) the payment of all other indebtedness, obligations and liabilities which the Deed of Trust as supplemented secures pursuant to any of its terms and (vi) the observance and performance of all covenants and agreements contained herein or in the Notes, the Credit Agreement or in any other instrument or document at any time evidencing or securing any of the foregoing or setting forth terms and conditions applicable thereto (all of such indebtedness, obligations and liabilities described in clauses (i), (ii), (iii), (iv), (v) and (vi) above being hereinafter collectively referred to as the "indebtedness hereby secured"), GRANTOR DOES HEREBY IRREVOCABLY GRANT, TRANSFER, BARGAIN, SELL, CONVEY, MORTGAGE, WARRANT, ASSIGN AND PLEDGE UNTO TRUSTEE IN TRUST WITH POWER OF SALE AND RIGHT OF ENTRY AND POSSESSION, all and singular the properties, rights, interests and privileges described in Granting Clauses I, II, III, IV, V and VI below, all of the same being collectively referred to herein as the "Mortgaged Premises", and does hereby grant to Beneficiary, Beneficiary's successors and assigns, a security interest in that portion of the Mortgaged Premises constituting personal property described in Granting Clause II, III, IV and V below: GRANTING CLAUSE I That certain real estate lying and being in Los Angeles, County of Los Angeles and State of California more particularly described in Schedule I attached hereto and made a part hereof. GRANTING CLAUSE II All buildings and improvements of every kind and description heretofore or hereafter erected or placed on the property described in Granting Clause I and all materials intended for construction, reconstruction, alteration and repairs of the buildings and improvements now or hereafter erected thereon, all of which materials shall be deemed to be included within the premises immediately upon the delivery thereof to the said real estate, and all fixtures, machinery, apparatus, equipment, fittings and articles of personal property of every kind and nature whatsoever now or hereafter attached to or contained in or used or useful in connection with said real estate and the buildings and improvements now or hereafter located thereon and the operation, maintenance and protection thereof, including but not limited to all machinery, motors, fittings, radiators, awnings, shades, screens, all gas, coal, steam, electric, oil and other heating, cooking, power and lighting apparatus and fixtures, all fire prevention and extinguishing equipment and apparatus, all cooling and ventilating apparatus and systems, all plumbing, incinerating, and sprinkler equipment and -3- fixtures, all elevators and escalators, all communication and electronic monitoring equipment, all window and structural cleaning rigs and all other machinery and equipment of every nature and fixtures and appurtenances thereto and all items of furniture, appliances, draperies, carpets, other furnishings, equipment and personal property used or useful in the operation, maintenance and protection of the said real estate and the buildings and improvements now or hereafter located thereon and all renewals or replacements thereof or articles in substitution therefor, whether or not the same are or shall be attached to said real estate, buildings or improvements in any manner, and all proceeds of any of the foregoing; it being mutually agreed, intended and declared that all the aforesaid property shall, so far as permitted by law, be deemed to form a part and parcel of the real estate and for the purpose of the Deed of Trust as supplemented to be real estate and covered by the Deed of Trust as supplemented. GRANTING CLAUSE III All right, title and interest of Grantor now owned or hereafter acquired in and to all and singular the estates, tenements, hereditaments, privileges, easements, licenses, franchises, appurtenances and royalties, mineral, oil, and water rights belonging or in any wise appertaining to the property described in the preceding Granting Clause I and the buildings and improvements now or hereafter located thereon and the reversions, rents, issues, revenues and profits thereof, including all interest of Grantor in all rents, issues and profits of the aforementioned property and all rents, issues, profits, revenues, royalties, bonuses, rights and benefits due, payable or accruing (including all deposits of money as advanced rent or for security) under any and all leases or subleases and renewals thereof of, or under any contracts or options for the sale of all or any part of, said property (including during any period allowed by law for the redemption of said property after any foreclosure or other sale), together with the right, but not the obligation, to collect, receive and receipt for all such rents and other sums and apply them to the indebtedness hereby secured and to demand, sue for and recover the same when due or payable; provided that the assignments made hereby shall not impair or diminish the obligations of Grantor under the provisions of such leases or other agreements nor shall such obligations be imposed upon Trustee, Beneficiary, Co-Agent or any Lender. GRANTING CLAUSE IV All judgments, awards of damages, settlements and other compensation heretofore or hereafter made resulting from condemnation proceedings or the taking of the property described in Granting Clause I or any part thereof or any building or other improvement now or at any time hereafter located thereon or any easement or other appurtenance thereto under the power of eminent domain, or any similar power or right (including any award from the United States Government at any time after the allowance of the claim therefor, the ascertainment of the amount thereof and the issuance of the warrant for the payment thereof), whether permanent or temporary, or for any damage (whether caused by such taking or otherwise) to said property or any part thereof or the improvements thereon or any part thereof, or to any rights appurtenant thereto, including severance and consequential -4- damage, and any award for change of grade of streets (collectively, "Condemnation Awards") and all insurance policies required hereunder and the proceeds thereof. GRANTING CLAUSE V All property and rights, if any, which are by the express provisions of this instrument required to be subjected to the lien hereof and any additional property and rights that may from time to time hereafter, by installation or writing of any kind, be subjected by Grantor or by anyone in Grantor's behalf to the lien of the Deed of Trust as supplemented. GRANTING CLAUSE VI All rights in and to common areas and access roads on adjacent properties heretofore or hereafter granted to Grantor and any after-acquired title or reversion in and to the beds of any ways, roads, streets, avenues and alleys adjoining the property described in Granting Clause I or any part thereof. TO HAVE AND TO HOLD the Mortgaged Premises and the properties, rights and privileges hereby granted, transferred, bargained, sold, conveyed, mortgaged, warranted, assigned and pledged, and in which a security interest is granted, or intended so to be, unto Trustee, and to Trustee's successors and assigns, forever. BUT IN TRUST NEVERTHELESS, upon the terms and trust herein set forth, for the equal and proportionate benefit, security and protection of all present and future holders of the Notes and the other indebtedness hereby secured; provided, however, that this instrument is made by Grantor and accepted by Trustee and Beneficiary upon the express condition that if the principal of and interest on the Notes and all sums from time to time advanced thereon shall be paid in full and all other indebtedness hereby secured shall be fully paid and performed (including all sums payable under or according to the provisions of the Applications), all Letters of Credit shall have expired and any commitment contained in the Credit Agreement as amended by, without limitation, the Second Amendment to extend credit thereunder shall have terminated, then this instrument and the estate and rights hereby shall cease, terminate and be void and this instrument shall be released by Trustee upon written request and at the expense of Grantor, otherwise to remain in full force and effect. In order to induce the Lenders to enter the Second Amendment and to induce the Beneficiary to accept this Supplement, the Grantor hereby further covenants and agrees with, and represents and warrants to, the Beneficiary as follows: 1. The foregoing Granting Clauses are in addition to and supplemental of and not in substitution for the granting clauses contained in the Deed of Trust. Nothing herein contained shall in any manner affect or impair the priority of the lien of the Deed of Trust as to the indebtedness which would be secured thereby prior to giving effect to this Supplement. -5- 2. Grantor hereby represents and warrants to Beneficiary that as of the date hereof each of the representations and warranties set forth in the Deed of Trust as supplemented hereby are true and correct and that no event of default (as such term is defined in the Deed of Trust), or any other event which with the lapse of time, the giving of notice, or both, would constitute such an event of default, has occurred and is continuing or shall result after giving effect to this Supplement. The Grantor hereby repeats and reaffirms all covenants and warranties contained in the Deed of Trust, each and all of which shall be applicable to all of the indebtedness secured by the Deed of Trust as supplemented hereby. The Grantor repeats and reaffirms its covenant that all the indebtedness secured by the Deed of Trust as supplemented hereby will be promptly paid as and when the same becomes due and payable. 3. All capitalized terms used herein without definition shall have the same meanings herein as they have in the Credit Agreement as amended by, without limitation, the Second Amendment. The definitions provided herein of any capitalized terms shall apply to such capitalized terms as the same appear in the Deed of Trust as supplemented hereby, all to the end that any such capitalized terms defined herein and used in the Deed of Trust as supplemented hereby shall now have the meaning given to such capitalized terms herein. Without limiting the foregoing, all references in the Deed of Trust to the term "Termination Date" or the date "September 30, 1997" shall be deemed references to the New Termination Date; all references in the Deed of Trust to the term "indebtedness hereby secured" shall be deemed references to all the indebtedness, obligations and liabilities secured by the Deed of Trust as supplemented hereby; and all references in the Deed of Trust to the Credit Agreement shall be deemed references to the Credit Agreement as amended by the Second Amendment and as the same may from time to time be further modified or amended. 4. All of the provisions, stipulations, powers and covenants contained in the Deed of Trust shall stand and remain unchanged and in full force and effect except to the extent specifically modified hereby and shall be applicable to all of the indebtedness secured by the Deed of Trust as supplemented hereby. 5. The Deed of Trust as hereby supplemented is given to secure, among other things, loans and letters of credit extended on a revolving basis and shall secure not only presently existing indebtedness under the Credit Agreement as amended by the Second Amendment but also future advances, whether such advances are obligatory or to be made at the option of Beneficiary, or otherwise, as are made within ten (10) years from the date hereof, to the same extent as if such future advances were made on the date of the execution of the Deed of Trust, although there may be no advance made at the time of execution of this Supplement and although there may be no indebtedness hereby secured outstanding at the time any advance is made. The lien of the Deed of Trust as hereby supplemented shall be valid as to all indebtedness hereby secured, including future advances, from the time of its filing for record in the recorder's or registrar's office in the county in which the Mortgaged Premises are located. The total amount of indebtedness hereby secured may increase or decrease from time to time, but the total unpaid balance of indebtedness secured -6- (including disbursements which Beneficiary may make under the Deed of Trust as hereby supplemented, the Credit Agreement as amended by the Second Amendment or any other documents related thereto) at any one time outstanding shall not exceed a maximum principal amount of Sixty Million Dollars ($60,000,000) plus interest thereon and any disbursements made for payment of taxes, special assessments or insurance on the Mortgaged Premises and interest on such disbursements (all such indebtedness being hereinafter referred to as the "maximum amount secured hereby"). The Deed of Trust as hereby supplemented shall be valid and have priority over all subsequent liens and encumbrances, including statutory liens, excepting solely taxes and assessments levied on the Mortgaged Premises, to the extent of the maximum amount secured hereby. 6. This Supplement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be an original but all of which to constitute one and the same instrument. 7. No reference to this Supplement need be made in any note, instrument or other document making reference to the Deed of Trust, any reference to the Deed of Trust in any of such to be deemed to be a reference to the Deed of Trust as supplemented hereby. 8. Wherever herein any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all the covenants, promises and agreements by or on behalf of the Grantor, or by or on behalf of the Beneficiary, or by or on behalf of the holder or holders of the indebtedness hereby secured contained in the Deed of Trust as supplemented hereby shall bind and inure to the benefit of the respective successors and assigns of such parties, whether so expressed or not. -7- IN WITNESS WHEREOF, the Grantor has caused these presents to be duly executed the day and year first above written. PLAYBOY ENTERPRISES, INC. By /s/ Rebecca S. Maskey ----------------------------------------- Its Senior V.P. ---------------------------------------- R. Maskey ---------------------------------------- (Type or Print Name) Accepted and agreed to in Chicago, Illinois as of the day and date first above written. HARRIS TRUST AND SAVINGS BANK, as Beneficiary and Administrative Agent for the Lenders as aforesaid By /s/ R. L. Dell'Artino ----------------------------------------- Its Vice President RONALD L. DELL'ARTINO ----------------------------------------- (Type or Print Name) -8- STATE OF ILLINOIS ) )SS. COUNTY OF COOK ) On this 5th day of March, 1996, before me, the undersigned, a Notary Public of said State, duly commissioned and sworn, personally appeared Rebecca Maskey personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument as the Senior Vice President of Playboy Enterprises, Inc., the corporation therein named, and acknowledged to me that said corporation executed the within instrument pursuant to its by-laws or resolution of its board of directors. WITNESS my hand and official seal. /s/ Kathleen L. Burde ---------------------------------------- Notary Public (SEAL) MY COMMISSION EXPIRES: 11-16-98 - ------------------------------------ STATE OF ILLINOIS ) )SS. COUNTY OF COOK ) On this 5th day of March, 1996, before me, the undersigned, a Notary Public of said State, duly commissioned and sworn, personally appeared Ronald Dellartino, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed the within instrument as the Vice President of Harris Trust and Savings Bank, the banking corporation therein named, and acknowledged to me that said corporation executed the within instrument pursuant to its by-laws or resolution of its board of directors. WITNESS my hand and official seal. /s/ Kathleen L. Burde --------------------------------------- Notary Public (SEAL) MY COMMISSION EXPIRES: 11-16-98 - --------------------------------- SCHEDULE I LEGAL DESCRIPTION PARCEL 1: ALL THAT PORTION OF LOT 33 OF TRACT NO. 9061, IN THE CITY OF LOS ANGELES, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 121 PAGES 64 TO 66 INCLUSIVE OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY, LYING SOUTHEASTERLY OF A LINE PARALLEL WITH AND DISTANT 40 FEET NORTHWESTERLY, MEASURED AT RIGHT ANGLES FROM THE SOUTHEASTERLY LINE OF SAID LOT 33. PARCEL 2: LOT 34 OF TRACT NO. 9061, IN THE CITY OF LOS ANGELES, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 121 PAGES 64, 65 AND 66 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. EXHIBIT C PLAYBOY ENTERPRISES, INC. SUPPLEMENT TO COLLATERAL DOCUMENTS This Supplement to Collateral Documents dated as of March 5, 1996 by and among Playboy Enterprises, Inc., a Delaware corporation (the "Company"), Playboy Entertainment Group, Inc., a Delaware corporation ("PEG"), Critics' Choice Video, Inc., an Illinois corporation ("Critics' Choice"), and Lifestyle Brands, Ltd., a Delaware corporation ("Lifestyle") (the Company, PEG, Critics' Choice and Lifestyle being hereinafter referred to as the "Pledgors"), and Harris Trust and Savings Bank, an Illinois banking corporation, not in its individual capacity, but solely in its capacity as agent under the Credit Agreement and Collateral Documents hereinafter identified and defined (such banking corporation in such capacity being hereinafter referred to as the "Agent"): WITNESSETH THAT: WHEREAS, the Company has entered into a Credit Agreement dated as of February 10, 1995 with the Agent and the various lenders (such Credit Agreement as the same has been and may from time to time hereafter be modified or amended being hereinafter referred to as the "Credit Agreement"), under which the lenders party thereto have extended and from time to time will extend credit to the Company; WHEREAS, the Pledgors have executed and delivered to the Agent various security agreements, mortgages, assignments, financing statements and other documents to secure, among other things, the credit extended under the Credit Agreement (such security agreements, mortgages, assignments, financing statements and other documents as from time to time amended, modified or otherwise supplemented being hereinafter referred to as the "Collateral Documents"); WHEREAS, the Pledgors have requested that the Agent release certain collateral subject to the Collateral Documents and otherwise confirm that such collateral is not subject to the Collateral Documents, and the Agent is willing to do so on the terms and conditions set forth in this Supplement; NOW, THEREFORE, in consideration of the credit arrangements created and provided for by the Credit Agreement, the Agent and the Pledgors hereby agree as follows: 1. The Agent hereby releases from the liens and security interests granted and provided for by the Collateral Documents, and hereby agrees that such liens and security interests do not encumber, each motion picture, film, video or movie or similar audio or visual medium of communication in use now or in the future in which any Pledgor has any proprietary interest (each such motion picture, film, video or other medium being hereinafter referred to as a "Playboy film"), and all rights incident to such Playboy film (such as the right to distribute and otherwise exploit the same), in each case to the extent rights to distribute or otherwise exploit such Playboy film have been contracted by any Pledgor to an unaffiliated third party in a bona fide, arm's-length transaction prior to the acceleration pursuant to the terms of the Credit Agreement or nonpayment at final maturity of the Company's obligations for such consideration to such Pledgor (such as royalties) which such Pledgor in good faith deems adequate and the terms of such contractual arrangements either prohibit the Agent's lien on such Playboy film or require the Agent enter into a specific non-disturbance agreement with such party to assure such party's use of such Playboy film; provided, however, that the Agent has and shall at all times retain a security interest in the Pledgor's right to the consideration due and to become due to such Pledgor under such contractual arrangements (including the proceeds of such consideration). 2. All the provisions, stipulations, powers and covenants contained in the Collateral Documents shall stand and remain unchanged and in full force and effect except to the extent specifically modified hereby. This Supplement shall in no way affect or impair the validity or priority of any liens or security interests on the Collateral not specifically released hereby. All references in any instrument or document delivered in connection with the Credit Agreement to any Collateral Document shall be deemed a reference to such Collateral Document as modified hereby. 3. Notwithstanding anything to the contrary contained in the Credit Agreement or any Collateral Document, the terms and conditions of this Supplement shall control the subject matter hereof in the event of any conflict with the Credit Agreement or any Collateral Document. 4. This Supplement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed to be an original but all of which are to constitute one and the same instrument. Except as specifically modified hereby, all of the terms and conditions of the Collateral Documents shall stand and remain unchanged and in full force and effect. No reference to this Supplement need be made in any note, instrument or other document taking reference to any Collateral Document, any reference to a Collateral Document in any of such to be deemed to be a reference to such Collateral Document as modified hereby. This instrument shall be construed and governed by and in accordance with the laws of the State of Illinois. Dated as of the date first above written HARRIS TRUST AND SAVINGS BANK, as Agent By: /s/ R. L. Dell'Artino ------------------------------------ Its: Vice President --------------------------------- PLAYBOY ENTERPRISES, INC. By: /s/ Rebecca S. Maskey ------------------------------------ Its: Senior V.P. --------------------------------- PLAYBOY ENTERTAINMENT GROUP, INC. By: /s/ Robert D. Campell ------------------------------------ Its: Treasurer --------------------------------- CRITIC'S CHOICE VIDEO, INC. By: /s/ Robert D. Campell ------------------------------------ Its: Treasurer --------------------------------- LIFESTYLE BRANDS, LTD. By /s/ Robert D. Campell ------------------------------------ Its: Treasurer --------------------------------- EX-10.19(B) 20 AMENDMENT TO 7/25/91 LEASE DTD 6/26/96 Exhibit 10.19(b) PLAYBOY ENTERPRISES, INC. June 26, 1996 VIA FAX 310/271-4597 Mr. Ross Gilbert Beverly Mercedes Place 9242 Beverly Boulevard Beverly Hills, California 90210 Dear Mr. Gilbert: As we discussed, to give us all more time and to determine Capella's needs for the 1st floor vacant space, we would like to extend our expansion option on the 1,241.8 rentable square feet on the 2nd floor from June 30, 1996 until September 15, 1996 on the same terms and conditions as covered under Paragraph 76(a) of our lease dated July 25, 1991. If this meets with your approval, please sign below and fax back to me at 312/ 751-2818 prior to June 30, 1996. We really do appreciate your cooperation in this matter. Best regards, PLAYBOY ENTERPRISES, INC. /s/ Sue Shoemaker - ------------------------------------------ Sue Shoemaker Director-Corporate Administrative Services Accepted And Agreed To /s/ Ross Gilbert - ----------------------------------------- Ross Gilbert Beverly Mercedes Place, Ltd. a California Limited Partnership 6-26-96 - ------------------------------------------ Date 680 NORTH LAKE SHORE DRIVE / CHICAGO, ILLINOIS 60611 / 312 751-6000 EX-10.19(C) 21 AMENDMENT TO 7/25/91 LEASE DTD 9/12/96 Exhibit 10.19(c) FIRST AMENDMENT TO OFFICE LEASE THIS FIRST AMENDMENT TO OFFICE LEASE ("First Amendment") is made and entered into as of the 12th day of September, 1996, by and between Beverly Mercedes Place, Ltd., a California Limited Partnership ("Landlord"), and Playboy Enterprises, Inc., a Delaware corporation ("Tenant"). R E C I T A L S --------------- A. Landlord and Tenant have executed that certain Office Lease dated July 25, 1991 ("Lease"). B. Tenant and Landlord desire to modify the Lease in accordance with the terms and conditions contained in this First Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Option to Expand. ---------------- (a) The phrase "not later than nine (9) months prior to the end of the sixtieth (60th) month of the Lease Term" in the 12th and 13th lines of Paragraph 76(a) of the Lease is hereby deleted and the following phrase is inserted in its place "not later than June 30, 2000". (b) Paragraph 76(b)(v) of the Lease is hereby deleted. (c) Paragraph 76(d) is hereby inserted into the Lease: "(d) In the event that the Expansion Space becomes available prior to June 30, 2000, then the Expansion Option shall terminate and, in lieu thereof, Landlord hereby grants Tenant the right ("Expansion First Right") to Lease the Expansion Space upon the terms and conditions set forth in Paragraphs 76(a) and 76(b). Landlord shall give Tenant written notice of the Expansion Space becoming available. Within thirty (30) days after receipt of such notice, Tenant must give Landlord written notice pursuant to which Tenant shall elect to: (i) lease the Expansion Space upon the terms and conditions set forth in Paragraphs 76(a) and 76(b); or (ii) refuse to lease the Expansion Space. In the event that Tenant does not so respond in writing to Landlord's notice within said period, Tenant shall be deemed to have elected clause (ii) above. Notwithstanding anything to the contrary contained herein, upon a refusal by Tenant to lease the Expansion Space offered to Tenant as provided for above, Tenant shall no longer have any right to lease the Expansion Space." 2. Definitions. Except as otherwise set forth herein, all defined terms shall have the same meaning as set forth in the Lease. 3. No Other Modification. Except as expressly stated herein, the Lease, together with any and all exhibits thereto, shall remain unmodified and in full force and effect. The parties hereto have executed this First Amendment and made it effective as of the day and year first above written. Landlord: -------- Beverly Mercedes Place, Ltd., a California Limited Partnership By: Silver Star, Inc., a California corporation By: /s/ Ross S. Gilbert --------------------- Title: President ------------------- Tenant: ------ Playboy Enterprise, Inc., a Delaware corporation By: /s/ Howard Shapiro --------------------- Title: Executive V.P. ------------------ -2- [PLAT OF CONSOLIDATION APPEARS HERE] [BLUEPRINT OF FIRST FLOOR PLAN APPEARS HERE] [BLUEPRINT OF SECOND FLOOR PLAN APPEARS HERE] EX-10.20(E) 22 FOURTH AMENDMENT TO 4/7/88 LEASE DTD 8/6/96 Exhibit 10.20(e) FOURTH AMENDMENT TO LEASE ------------------------- THIS FOURTH AMENDMENT TO LEASE (this "Amendment") entered into in Chicago, Illinois, as of the 6th day of August, 1996, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not personally, but solely as Trustee under a Trust Agreement dated May 2, 1989, and known as Trust No. 108237-06 ("Lessor"), and PLAYBOY ENTERPRISES, INC., a Delaware corporation ("Lessee"). WITNESSETH: ---------- A. LaSalle National Bank, not personally, but solely as Trustee under a Trust Agreement dated December 21, 1987, and known as Trust No. 112912 ("LaSalle"), and Lessee have heretofore entered into that certain Office Lease dated as of April 7, 1988 (the "Original Lease"), whereby LaSalle leased to Lessee certain premises (the "Original Premises") known as Suites 1500 and 1600, consisting of 95,523.05 rentable square feet and comprising the entire 15th and 16th floors of the "Office Area" (as defined in the Original Lease) of that certain building (the "Building") located at 680 North Lake Shore Drive, Chicago, Illinois, for a lease term expiring on August 31, 2004. B. LaSalle has heretofore assigned its interest under the Lease to Lessor's predecessor in interest. C. Lessor and Lessee have heretofore entered into that certain Amendment to Lease dated as of October 26, 1989 (the "First Amendment"), which amended certain provisions of the Original Lease, including the leasing to Lessee of certain additional space in the basement of the Building (the "Additional Premises; the Original Premises and the Additional Premises are collectively referred to herein as the "Premises"). D. Lessor and Lessee have heretofore entered into that certain Second Amendment to Lease dated as of June 1, 1992 (the "Second Amendment"), which clarified certain provisions of the Lease relating to Taxes and Expenses payable by Lessee. E. Lessor and Lessee have heretofore entered into that certain Third Amendment to Lease ("Third Amendment") dated as of August 30, 1993, which granted to Lessee certain additional expansion rights in the Building and amended certain other provisions contained in the Original Lease. The Original Lease, the First Amendment, the Second Amendment and the Third Amendment are collectively referred to herein as the "Lease". F. Lessor and Lessee now desire to amend the Lease to grant to Lessee certain additional expansion rights in the Building and amend certain other provisions contained in the Lease, all upon the terms and provisions hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as follows: 1. Definitions. Each capitalized term used in this Amendment shall have the same meaning as is ascribed to such capitalized term in the Lease, unless otherwise provided for herein. 2. Extension of Term. The Term of the Lease is hereby extended to and including August 31, 2007 (the "Expiration Date"). 3. Base Rent. (a) Premises. Section 1 of the Lease notwithstanding, effective as of September 1, 1999, Base Rent per rentable square foot for the Premises other than for any Primary ROFR Space, Secondary ROFR Space and/or ROFR Space #3 (all as hereinafter defined and, collectively, sometimes referred to herein as "ROFR Space") leased by Lessee pursuant to this Fourth Amendment and other than for the Additional Premises, but including any and all Option Space (as hereinafter defined) leased by Lessee pursuant to this Fourth Amendment, shall be as set forth below during the remainder of the Term as extended by this Fourth Amendment:
Period Base Rent Per Rentable Square Foot ------ ---------------------------------- 9/1/99 - 8/31/00 $12.75 9/1/00 - 8/31/01 $13.01 9/1/01 - 8/31/02 $13.27 9/1/02 - 8/31/03 $13.53 9/1/03 - 8/31/04 $13.80 9/1/04 - 8/31/05 $14.08 9/1/05 - 8/31/06 $14.36 9/1/06 - 8/31/07 $14.65
(b) ROFR Space. Base Rent for any ROFR Space leased by Lessee pursuant to this Fourth Amendment shall be calculated as hereinafter provided in this Fourth Amendment. (c) Additional Premises. Paragraph 3 of the First Amendment notwithstanding, effective as of September 1, 1999, Base Rent for the Additional Premises shall be as follows:
Period Monthly Base Rent ------ ----------------- 9/1/99 - 8/31/00 $728.15 9/1/00 - 8/31/01 $742.71 9/1/01 - 8/31/02 $757.56
2 9/1/02 - 8/31/03 $772.71 9/1/03 - 8/31/04 $788.17 9/1/04 - 8/31/05 $803.93 9/1/05 - 8/31/06 $820.01 9/1/06 - 8/31/07 $836.41
4. Expansion Option. Section 2 of the Third Amendment is hereby deleted in its entirety and the following is substituted in its place and stead: (a) For purposes of this Section 4, "Expansion Option" shall mean either Option #1 (as hereinafter defined) or Option #2 (as hereinafter defined) as the case may be or the context requires and "Option Space" shall mean either Option Space #1 (as hereinafter defined) or Option Space #2 (as hereinafter defined) as the case may be or the context requires. (b) Option #1. Lessee shall have an option ("Option #1") to lease all (but not less than all) of that certain office space on the fourteenth (14th) floor of the Building ("Option Space #1") consisting of approximately 7,765 rentable square feet and designated as "Option #1" on Exhibit A attached hereto and by this reference made a part hereof. Option #1 may be exercised at any time on or before March 31, 1998, by written notice from Lessee to Lessor ("Lessee's Notice"). If Option #1 is exercised on or before December 31, 1997, the lease term for Option Space #1 shall commence on the earlier to occur of (1) the date Lessee first occupies all or any portion of Option Space #1 for any use or purpose other than Lessee's construction of leasehold improvements therein, (2) one hundred twenty (120) days after the date Lessor delivers possession of Option Space #1 to Lessee, unless Lessee's Notice specifies an earlier date, or (3) April 1, 1998, and Lessor shall deliver possession of Option Space #1 to Lessee, for the purpose of Lessee's construction of leasehold improvements therein, on the later to occur of (x) one hundred twenty (120) days after the date Lessee's Notice is delivered to Lessor (but in no event later than April 1, 1998) or (y) one hundred twenty (120) days prior to the date specified in Lessee's Notice, if any, as the commencement date for the lease term for Option Space #1, or if no such date is specified, December 1, 1997. If Option #1 is exercised after December 31, 1997, the lease term for Option Space #1 shall commence on the earlier to occur of (i) the date Lessee first occupies all or any portion of Option Space #1 for any use or purpose other than Lessee's construction of leasehold improvements therein, (ii) the date of commencement of such term as specified in Lessee's Notice or (iii) April 1, 1999. (c) Option #2. If (but only if) Lessee exercises Option #1 on or before December 31, 1997, Lessee shall have an option ("Option #2") to lease all (but not less than all) of that certain office space ("Option Space #2") on the fourteenth (14th) floor of the Building consisting of approximately 8,428 rentable square feet and designated as "Option #2" on Exhibit A hereto. Option #2 may be exercised at any time on or before March 31, 1998, by Lessee delivering Lessee's Notice to Lessor. If Option #2 is exercised as aforesaid, the lease term for Option Space #2 shall commence on the earlier to occur of (i) the date Lessee first occupies all 3 or any portion of Option Space #2 for any use or purpose other than Lessee's construction of leasehold improvements therein, (ii) the date of commencement of such term as specified in Lessee's Notice or (iii) April 1, 1999. (d) Any Option Space as to which Lessee fails to timely exercise an Expansion Option as provided herein shall be deemed to be Primary ROFR Space (as hereinafter defined in Section 5(a)), effective on the day after the last date upon which such Expansion Option could be timely exercised by Lessee hereunder. If Lessee does not exercise Option #1 on or before December 31, 1997, Option Space #2 shall be deemed to be Primary ROFR Space effective on January 1, 1998. (e) Lessee's right to exercise an Expansion Option shall be contingent upon Lessee not being in Default under the Lease, as amended hereby, either on the date that Lessee exercises such Expansion Option or, unless waived in writing by Lessor for purposes of the Expansion Option, on the date that otherwise would have been the commencement date of the lease term for the applicable Option Space. If Lessee is not in Default under the Lease, as amended hereby, on the date Lessee exercises such Expansion Option but is so in Default on the date that otherwise would have been the commencement date of the lease term for the applicable Option Space and Lessor does not waive in writing such Default for purposes of the Expansion Option, then, notwithstanding Lessee's timely exercise of the Expansion Option, Lessee shall have no right to lease such Option Space as a result of Lessee's exercise of such Expansion Option. (f) If Lessee exercises an Expansion Option, the following terms and provisions shall apply: (i) For purposes of this Section 4(f), "Option Space" shall mean the space as to which an Expansion Option has been exercised; (ii) The lease term for the Option Space shall expire on the last day of the term of the Lease, as amended hereby; (iii) The annual rate of Base Rent per rentable square foot payable for the Option Space shall at all times during the lease term for the Option Space be equal to the annual rate of Base Rent per rentable square foot then payable for the Original Premises under the Lease, as amended by Section 3(a) of this Fourth Amendment. Lessee shall pay the Rent Adjustment for the Option Space, as provided in Section 2B of the Original Lease, commencing immediately upon the commencement date of the lease term for the Option Space, and "Lessee's Proportionate Share" as used in clause (iii) of Section 2A of the Original Lease shall mean the percentage determined by dividing the aggregate rentable area of the entire Premises (excluding the Additional Premises) including the Option Space by 424,052.32 rentable square feet. For purposes of this Section 4, the 4 rentable area of the Option Space shall be as determined by Lessor or, at Lessor's option, Lessor's architect, in accordance with Lessor's then current space measurement standards for comparable space in the Building; (iv) Lessee shall not be entitled to any rental abatement for the Option Space; (v) Lessee shall accept the Option Space in an "as-is", "where-is" physical condition from Lessor, without any agreement, representation, credit or allowance from Lessor with respect to the improvement or condition thereof except as set forth in this Section 4(f)(v). Lessee shall pay for any and all costs or expenses associated with any leasehold improvement work in the Option Space, which work shall be performed by Lessee in accordance with the terms of Section 13 of the Original Lease, except that upon completion of such work and Lessee's delivery of contractors affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used for such work, Lessor shall pay to Lessee, as Lessor's contribution toward the payment of the cost and expense of improving the Option Space ("Lessor's Option Space Contribution"), a sum equal to the dollar amount per rentable square foot of the Option Space, as set forth in the column entitled "Adjusted Allowance Per Square Foot" on the schedule attached hereto as Exhibit C and made a part hereof ("Lessor's Contribution Schedule") corresponding to the calendar month in which Lessee first occupies the Option Space, multiplied by the number of rentable square feet contained in the Option Space. In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's Option Space Contribution and Lessor fails to pay Lessor's Option Space Contribution to Lessee within ninety (90) days after Lessee notifies Lessor in writing that all such conditions and requirements have been satisfied and that such payment is due and owing to Lessee hereunder, and further provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be entitled to offset the amount of Lessor's Option Space Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's Option Space Contribution has been paid or offset as provided herein; and (vi) All of the terms and provisions of the Lease, as hereby amended, shall apply with respect to the Option Space, except as otherwise provided in this Section 4 or except as same may be inconsistent with the provisions of this Section 4, and the Option Space shall be deemed to be a part of the Premises effective as of the first day of the lease term for such Option Space. 5 (g) If Lessee exercises an Expansion Option, Lessor and Lessee shall execute and deliver an amendment to the Lease reflecting the lease by Lessor to Lessee of the Option Space on the terms provided above, which amendment shall be executed and delivered promptly after Lessee delivers Lessee's Notice to Lessor. (h) Each Expansion Option shall automatically terminate and become null and void and of no force or effect upon the earlier to occur of (1) the expiration or termination of the Lease, (2) the termination of Lessee's right to possession of the Premises, (3) the assignment of the Lease by Lessee, in whole or in part, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, (4) the sublease of the Premises, or any part thereof, which is not in accordance with Section 14 of the original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, or (5) the failure of Lessee to timely or properly exercise such Expansion Option. Without limiting the foregoing, no Expansion Option shall be assignable by Lessee separately from the Lease nor shall any Expansion Option be exercisable by any party other than Lessee except for Lessee's assignee pursuant to an assignment of the Lease in accordance with Section 14 of the Original Lease which assignee (or any affiliate thereof) is not, at the effective date of the assignment, or was not for the six (6) months preceding the effective date of the assignment, a tenant in, or otherwise an occupant of, the Building. For purposes of this Fourth Amendment, an "affiliate" of a party or assignee shall mean any one or more partners, principals or shareholders of any such party or assignee, or any other person or entity which controls, is controlled by or is under common control with such party or assignee. 5. RIGHT OF FIRST REFUSAL - PRIMARY ROFR SPACE. Section 3 of the Third Amendment is hereby deleted in its entirety and the following is substituted in its place and stead. (a) For purposes of this Lease, the term "Primary ROFR Space" shall mean all leasable space located on the 14th floor of the Building within the area designated as "Primary ROFR Space" on Exhibit A-1 attached hereto and made a part hereof, excluding therefrom (i) Option Space (except as provided in Section 4(d) above) and (ii) any space leased to a third (3rd) party as of the date of execution of this Amendment, including any subsequent renewals or extensions thereof, until such time as such lease expires or is terminated. (b) With respect to any lease for all or any portion of the Primary ROFR Space which Lessor hereafter intends to enter into with a third (3rd) party, Lessor shall deliver written notice of such intent to Lessee ("Lessor's Primary ROFR Notice") prior to Lessor entering into any such lease. Lessor's Primary ROFR Notice shall state (i) the location and rentable area of the portion of the Primary ROFR Space which Lessor desires to lease, (ii) the proposed lease term for such portion of the Primary ROFR Space, (iii) the date upon which such portion of the Primary ROFR Space shall be available for occupancy, (iv) the annual rate of Base Rent per 6 square foot of rentable area which Lessor desires to charge for such portion of the Primary ROFR Space, (v) the amount of all rent adjustments which Lessor desires to charge for such portion of the Primary ROFR Space including, without limitation, all fixed and/or indexed adjustments to such rate and rent adjustments for operating expenses and real estate taxes for the Building and (vi) all of the tenant concessions (e.g., without limitation, rent abatements and tenant improvement allowances), if any, which Lessor would be willing to provide to lease such Primary ROFR Space (all of which concessions, other than tenant improvement allowances, are hereinafter referred to as "Tenant Concessions"). Lessee shall thereupon have a right of first refusal (a "Primary ROFR Refusal Right") to lease all (but not less than all) of the portion of the Primary ROFR Space described in said Lessor's Primary ROFR Notice, subject to the following terms and conditions: (i) Lessee shall deliver a written notice of such intent to Lessor exercising the Primary ROFR Refusal Right ("Lessee's Primary ROFR Exercise Notice") within ten (10) business days after Lessor delivers Lessor's Primary ROFR Notice for such Primary ROFR Refusal Right to Lessee. For purposes of this Fourth Amendment, "business day" shall mean any day other than a Saturday, a Sunday or any state or federal holiday on which the United States Postal Service does not make regularly scheduled delivery of first class mail; and (ii) Lessee's right to exercise the Primary ROFR Refusal Right shall be contingent upon Lessee not being in Default under the Lease, as hereby amended, either on the date Lessee exercises such Primary ROFR Refusal Right or, unless waived in writing by Lessor for purposes of such Primary ROFR Refusal Right, on the availability date specified in the applicable Lessor's Primary ROFR Notice for such portion of the Primary ROFR Space. If Lessee is not in Default under the Lease, as amended hereby, on the date Lessee exercises such Primary ROFR Refusal Right but is so in Default on the availability date specified in the applicable Lessor's Primary ROFR Notice and Lessor does not waive in writing such Default for purposes of such Primary ROFR Refusal Right, then, notwithstanding Lessee's exercise of such Primary ROFR Refusal Right, Lessee shall have no right to lease the Primary ROFR Space as a result of Lessee's exercise of such Primary ROFR Right. In the event that Lessee does not timely or properly exercise a Primary ROFR Refusal Right, Lessor may at any time thereafter lease the applicable portion of the Primary ROFR Space to any third (3rd) party tenant on substantially the same economic terms as set forth in Lessor's Primary ROFR Notice applicable thereto without any further rights of Lessee to lease such space, provided that Lessee's failure to timely or properly exercise such Primary ROFR Refusal Right shall not act as a waiver of or otherwise affect the Expansion Options granted to Lessee pursuant to Section 4 hereof nor act as a waiver of or otherwise affect any Primary ROFR Refusal Right as to any other portion of the Primary ROFR Space, any Secondary ROFR Refusal 7 Right (as hereinafter defined) or any ROFR Space #3 Refusal Right (as hereinafter defined) and further provided that in the event that Lessor thereafter intends to enter into a lease with a third (3rd) party for the applicable portion of the Primary ROFR Space upon economic terms materially more favorable to such tenant than those set forth in the most recent Lessor's Primary ROFR Notice applicable thereto, such Primary ROFR Space shall again become subject to Lessee's Primary ROFR Refusal Right as set forth in this Section 5. (c) If Lessee exercises a Primary ROFR Refusal Right, the following terms and provisions shall apply: (i) Notwithstanding the location of any Primary ROFR Space for which a Primary ROFR Refusal Right has been exercised as heretofore provided in this Section, in the event Lessee exercises a Primary ROFR Refusal Right as aforesaid, the Primary ROFR Space actually to be leased to Lessee shall consist of the space within the area comprising the Primary ROFR Space and any Option Space which is subject to an unexercised Expansion Option which is located closest to the west end of the Building and is not then leased to a third (3rd) party, under option to be leased to a third (3rd) party, subject to a right of first refusal to a third (3rd) party or otherwise committed to be leased or occupied by a third (3rd) party (the "Available Primary ROFR Space"). In the event any Primary ROFR Space is relocated as aforesaid, then (1) Landlord shall have the right, in its sole discretion and upon notice to Lessee, to increase or decrease the size of such relocated Primary ROFR Space by an amount not to exceed ten percent (10%) of the rentable area thereof as set forth in Lessor's Primary ROFR Notice, to the reasonably minimal extent necessary to accommodate the actual configuration of the Available Primary ROFR Space and Lessor's then current space demising and measurement standards for comparable space in the Building, in which event all terms contained in Lessor's Primary ROFR Notice for such Primary ROFR Space (including, without limitation, any Tenant Concessions) and the rent payable therefor shall be deemed automatically adjusted pro rata to such increase or decrease and (2) any Option Space which remains subject to a valid and existing but unexercised Expansion Option shall be automatically relocated to the next most westerly Available Primary ROFR Space which is contiguous to the relocated Primary ROFR Space in which event Landlord shall have the right, in its sole discretion and upon notice to Lessee, to increase or decrease the size of such relocated Option Space by an amount not to exceed ten percent (10%) of the rentable area thereof prior to such relocation, to the reasonably minimal extent necessary to accommodate the actual configuration of the Available Primary ROFR Space and Lessor's then current space demising and measurement standards for comparable space in the Building; 8 (ii) The lease term for such Primary ROFR Space shall commence on the availability date specified in the applicable Lessor's Primary ROFR Notice and shall expire on the last day of the term of the Lease, as amended hereby; (iii) The Base Rent and rental adjustments payable for such Primary ROFR Space shall be as set forth in the applicable Lessor's Primary ROFR Notice (as the same may be adjusted in the manner provided in Section 5(c)(i) above) and Lessee shall be entitled to receive, with respect to such Primary ROFR Space, any and all Tenant Concessions set forth in such Notice (as the same may be adjusted in the manner provided in Section 5(c)(i) above), except that the amount of each such Tenant Concession shall be further adjusted by multiplying such amount by a fraction (the "Primary ROFR Term Adjustment") whose numerator is the number of calendar months in the period commencing with the calendar month in which Lessee first occupies such Primary ROFR Space and continuing to and including the calendar month in which the Expiration Date occurs, and whose denominator is the number of calendar months contained in the proposed lease term as set forth in such Lessor's Primary ROFR Notice; (iv) For purposes of paying the rental adjustments set forth in Section 5(c)(iii) above with respect to any Primary ROFR Space actually leased by Lessee, Lessee's Proportionate Share shall be increased effective as of the commencement date of the lease term for such Primary ROFR Space by adding to such then effective Lessee's Proportionate Share the percentage determined by dividing the rentable area of such Primary ROFR Space by 424,052.32 rentable square feet. For purposes of this Section 5, the rentable area of any Primary ROFR Space actually leased by Lessee (whether or not relocated) shall be as determined by Lessor or, at Lessor's option, Lessor's architect, in accordance with Lessor's then current space measurement standards for comparable space in the Building; (v) Lessee shall not be entitled to any rental abatement for any portion of the Primary ROFR Space except as provided in Section 5(c)(iii) above; (vi) Lessee shall accept the applicable portion of the Primary ROFR Space in an "as-is", "where-is" physical condition from Lessor, without any agreement, representation, credit or allowance from Lessor with respect to the improvement or condition thereof except as set forth in this Section 5(c)(vi). Lessee shall pay for any and all costs or expenses associated with any leasehold improvement work in such Primary ROFR Space, which work shall be performed by Lessee in accordance with the terms of Section 13 of the Original Lease, except that upon completion of such work and Lessee's delivery of contractors affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used for such work, Lessor shall pay to Lessee, as 9 Lessor's contribution toward the payment of the cost and expense of improving such Primary ROFR Space ("Lessor's Primary ROFR Space Contribution"), a sum equal to the dollar amount of tenant improvement allowance per rentable square foot of the original Primary ROFR Space, as set forth in the applicable Lessor's Primary ROFR Notice, multiplied by the number of rentable square feet contained in the Primary ROFR Space which is actually leased to Lessee, and, and further multiplied by the Primary ROFR Term Adjustment. In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's Primary ROFR Space Contribution and Lessor fails to pay in full Lessor's Primary ROFR Space Contribution to Lessee within ninety (90) days after Lessee notifies Lessor in writing that all such conditions and requirements have been satisfied and that such payment is due and owing to Lessee hereunder, and further provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be entitled to offset the unpaid amount of Lessor's Primary ROFR Space Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's Primary ROFR Space Contribution has been paid or offset as provided herein; and (vii) All of the terms and provisions of the Lease, as hereby amended, shall apply with respect to the applicable portion of the Primary ROFR Space, except as otherwise provided in this Section 5 or except as same may be inconsistent with the provisions of this Section 5, and such portion of the Primary ROFR Space shall be deemed to be a part of the Premises effective as of the first day of the lease term for such space. (d) If Lessee exercises a Primary ROFR Refusal Right, Lessor and Lessee shall execute and deliver an amendment of the Lease reflecting the lease of the applicable portion of the Primary ROFR Space by Lessor to Lessee on the terms and provisions set forth in this Section 5, which amendment shall be executed and delivered within thirty (30) days after Lessee exercises the Primary ROFR Refusal Right. (e) The Primary ROFR Refusal Right shall automatically terminate and become null and void upon the earlier to occur of (1) the expiration or termination of the Lease, (2) the termination of Lessee's right to possession of the Premises, (3) the assignment of the Lease by Lessee, in whole or in part, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, (4) the sublease by Lessee of the Premises, or any part thereof, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or an affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, or (5) the failure of Lessee to timely or properly exercise a primary ROFR Refusal Right. Without limiting the foregoing, no 10 Primary ROFR Refusal Right shall be assignable by Lessee separately from the Lease nor shall any Primary ROFR Refusal Right be exercisable by any party other than Lessee except for Lessee's assignee pursuant to an assignment of the Lease in accordance with Section 14 of the Original Lease which assignee (or any affiliate thereof) is not, at the effective date of the assignment, or was not for the six (6) months preceding the effective date of the assignment, a tenant in, or otherwise an occupant of, the Building. 6. RIGHT OF FIRST REFUSAL - SECONDARY ROFR SPACE. --------------------------------------------- (a) For purposes of this Lease, the term "Secondary ROFR Space" shall mean all leasable space located on the fourteenth (14th) floor of the Building within the area designated as "Secondary ROFR Space" on Exhibit A-1 attached hereto and made a part hereof, excluding therefrom (i) the space denoted as "ROFR #3" on Exhibit A attached hereto and (ii) any space leased to a third (3rd) party as of the date of execution of this Amendment, including any subsequent renewals or extensions thereof, until such time as such lease expires or is terminated. (b) With respect to any lease for all or any portion of the Secondary ROFR Space which Lessor hereafter intends to enter into with a third (3rd) party, Lessor shall deliver written notice of such intent to Lessee ("Lessor's Secondary ROFR Notice") prior to Lessor entering into any such lease. Lessor's Secondary ROFR Notice shall state (i) the location and rentable area of the portion of the Secondary ROFR Space which Lessor desires to lease, (ii) the proposed lease term for such portion of the Secondary ROFR Space, (iii) the date upon which such portion of the Secondary ROFR Space shall be available for occupancy, (iv) the annual rate of Base Rent per square foot of rentable area which Lessor desires to charge for such portion of the Secondary ROFR Space, (v) the amount of all rent adjustments which Lessor desires to charge for such portion of the Secondary ROFR Space including, without limitation, all fixed and/or indexed adjustments to such rate and rent adjustments for operating expenses and real estate taxes for the Building and (vi) the tenant improvement allowances and Tenant Concessions, if any, which Lessor would be willing to provide to lease such Secondary ROFR Space. Lessee shall thereupon have a right of first refusal (a "Secondary ROFR Refusal Right") to lease all (but not less than all) of the portion of the Secondary ROFR Space described in said Lessor's Secondary ROFR Notice, subject to the following terms and conditions: (i) Lessee shall deliver a written notice of such intent to Lessor exercising the Secondary ROFR Refusal Right ("Lessee's Secondary ROFR Exercise Notice") within ten (10) business days after Lessor delivers Lessor's Secondary ROFR Notice for such Secondary ROFR Refusal Right to Lessee; and (ii) Lessee's right to exercise the Secondary ROFR Refusal Right shall be contingent upon Lessee not being in Default under the Lease, as hereby amended, either on the date Lessee exercises such Secondary ROFR Refusal Right or, unless waived in writing by Lessor for purposes of such Secondary ROFR Refusal Right, on the availability date specified in the applicable Lessor's 11 Secondary ROFR Notice for such portion of the Secondary ROFR Space. If Lessee is not in Default under the Lease, as amended hereby, on the date Lessee exercises such Secondary ROFR Refusal Right but is so in Default on the availability date specified in the applicable Lessor's Secondary ROFR Notice and Lessor does not waive in writing such Default for purposes of such Secondary ROFR Right, then, notwithstanding Lessee's exercise of such Secondary ROFR Right, Lessee shall have no right to lease the Secondary ROFR Space as a result of Lessee's exercise of such Secondary ROFR Refusal Right. In the event that Lessee does not timely or properly exercise a Secondary ROFR Refusal Right, Lessor may at any time thereafter lease the applicable portion of the Secondary ROFR Space to any third (3rd) party tenant on substantially the same economic terms as set forth in Lessor's Secondary ROFR Notice applicable thereto without any further rights of Lessee to lease such space, provided that Lessee's failure to timely or properly exercise such Secondary ROFR Refusal Right shall not act as a waiver of or otherwise affect the Expansion Options granted to Lessee pursuant to Section 4 hereof nor act as a waiver of or otherwise affect any Secondary ROFR Refusal Right as to any other portion of the Secondary ROFR Space, any Primary ROFR Refusal Right or any ROFR Space #3 Refusal Right and further provided that in the event that Lessor thereafter intends to enter into a lease with a third (3rd) party for the applicable portion of the Secondary ROFR Space upon economic terms materially more favorable to such tenant than those set forth in the most recent Lessor's Secondary ROFR Notice applicable thereto, such Secondary ROFR Space shall again become subject to Lessee's Secondary ROFR Refusal Right as set forth in this Section 6. (c) If Lessee exercises a Secondary ROFR Refusal Right, the following terms and provisions shall apply: (i) The lease term for such Secondary ROFR Space shall commence on the availability date specified in the applicable Lessor's Secondary ROFR Notice and shall expire on the last day of the term of the Lease, as amended hereby; (ii) The Base Rent and rental adjustments payable for such Secondary ROFR Space shall be as set forth in the applicable Lessor's Secondary ROFR Notice and Lessee shall be entitled to receive, with respect to such Secondary ROFR Space, any and all Tenant Concessions set forth in such notice, except that the amount of each such Tenant Concession shall be adjusted by multiplying such amount by a fraction (the "Secondary ROFR Term Adjustment") whose numerator is the number of calendar months in the period commencing in the calendar month in which Lessee first occupies such Secondary ROFR Space and continuing to and including the calendar month in which the Expiration Date occurs, and whose denominator is the number of calendar months contained in the proposed lease term as set forth in such Lessor's Secondary ROFR Notice; 12 (iii) For purposes of paying the rental adjustments set forth in Section 6(c)(ii) above with respect to such Secondary ROFR Space, Lessee's Proportionate Share shall be increased effective as of the commencement date of the lease term for such Secondary ROFR Space by adding to such then effective Lessee's Proportionate Share the percentage determined by dividing the rentable area of such Secondary ROFR Space by 424,052.32 rentable square feet. For purposes of this Section 6, the rentable area of any Secondary ROFR Space actually leased by Lessee shall be as determined by Lessor or, at Lessor's option, Lessor's architect, in accordance with Lessor's then current space measurement standards for comparable space in the Building; (iv) Lessee shall not be entitled to any rental abatement for any portion of the Secondary ROFR Space except as provided in Section 6(c)(ii) above; (v) Lessee shall accept the applicable portion of the Secondary ROFR Space in an "as-is", "where-is" physical condition from Lessor, without any agreement, representation, credit or allowance from Lessor with respect to the improvement or condition thereof except as otherwise set forth in the applicable Lessor's Secondary ROFR Notice adjusted by multiplying such amount by the Secondary ROFR Term Adjustment ("Lessor's Secondary ROFR Space Contribution"). Lessee shall pay for any and all costs or expenses associated with any leasehold improvement work in such Secondary ROFR Space, which work shall be performed by Lessee in accordance with the terms of Section 13 of the Original Lease, except that upon completion of such work and Lessee's delivery of contractors affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used for such work, Lessor shall pay to Lessee, as Lessor's contribution toward the payment of the cost and expense of improving such Secondary ROFR Space, the amount of Lessor's Secondary ROFR Space Contribution, if any. In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's Secondary ROFR Space Contribution, if any, and Lessor fails to pay in full Lessor's Secondary ROFR Space Contribution to Lessee within ninety (90) days after Lessee notifies Lessor in writing that all such conditions and requirements have been satisfied and that such payment is due and owing to Lessee hereunder, and further provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be entitled to offset the unpaid amount of Lessor's Secondary ROFR Space Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's Secondary ROFR Space Contribution has been paid or offset as provided herein; and 13 (vi) All of the terms and provisions of the Lease, as hereby amended, shall apply with respect to the applicable portion of the Secondary ROFR Space, except as otherwise provided in this Section 6 or except as same may be inconsistent with the provisions of this Section 6, and such portion of the Secondary ROFR Space shall be deemed to be a part of the Premises effective as of the first day of the lease term for such space. (d) If Lessee exercises a Secondary ROFR Refusal Right, Lessor and Lessee shall execute and deliver an amendment of the Lease reflecting the lease of the applicable portion of the Secondary ROFR Space by Lessor to Lessee on the terms and provisions set forth in this Section 6, which amendment shall be executed and delivered within thirty (30) days after Lessee exercises the Secondary ROFR Refusal Right. (e) The Secondary ROFR Refusal Right shall automatically terminate and become null and void upon the earlier to occur of (1) the expiration or termination of the Lease, (2) the termination of Lessee's right to possession of the Premises, (3) the assignment of the Lease by Lessee, in whole or in part, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, (4) the sublease by Lessee of the Premises, or any part thereof, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, or (5) the failure of Lessee to timely or properly exercise a Secondary ROFR Refusal Right. Without limiting the foregoing, no Secondary ROFR Refusal Right shall be assignable by Lessee separately from the Lease nor shall any Secondary ROFR Refusal Right be exercisable by any party other than Lessee except for Lessee's assignee pursuant to an assignment of the Lease in accordance with Section 14 of the Original Lease which assignee (or any affiliate thereof) is not, at the effective date of the assignment, or was not for the six (6) months preceding the effective date of the assignment, a tenant in, or otherwise an occupant of, the Building. 7. RIGHT OF FIRST REFUSAL - ROFR SPACE #3. -------------------------------------- (a) For purposes of this Lease, the term "ROFR Space #3" shall mean that portion of the space denoted as "ROFR #3" on Exhibit A attached hereto, if any, that has not been leased to a third (3rd) party on or before December 31, 1997. This Amendment does not grant to Lessee any rights of first refusal to lease (i) all or any portion of the space so denoted as "ROFR Space #3" on said Exhibit A prior to January 1, 1998, or (ii) all or any portion of such space which is subject to a lease to a third (3rd) party as of December 31, 1997. (b) Commencing effective January 1, 1998, with respect to any lease for all or any portion of ROFR Space #3 which Lessor hereafter intends to enter into with a third (3rd) party, Lessor shall deliver written notice of such intent to Lessee ("Lessor's ROFR Space #3 Notice") prior to Lessor entering into any such lease. Lessor's ROFR Space #3 Notice shall state (i) the 14 location and rentable area of the portion of ROFR Space #3 which Lessor desires to lease, (ii) the proposed lease term for such portion of ROFR Space #3, (iii) the date upon which such portion of ROFR Space #3 shall be available for occupancy, (iv) the annual rate of Base Rent per square foot of rentable area which Lessor desires to charge for such portion of ROFR Space #3, (v) the amount of all rent adjustments which Lessor desires to charge for such portion of ROFR Space #3 including, without limitation, all fixed and/or indexed adjustments to such rate and rent adjustments for operating expenses and real estate taxes for the Building and (vi) the tenant improvement allowances and Tenant Concessions, if any, which Lessor would be willing to provide to lease such portion of ROFR Space #3. Lessee shall thereupon have a right of first refusal (a "ROFR Space #3 Refusal Right") to lease all (but not less than all) of the portion of ROFR Space #3 described in said Lessor's ROFR Space #3 Notice, subject to the following terms and conditions: (i) Lessee shall deliver a written notice of such intent to Lessor exercising the ROFR Space #3 Refusal Right ("Lessee's ROFR Space #3 Exercise Notice") within ten (10) business days after Lessor delivers Lessor's ROFR Space #3 Notice for such ROFR Space #3 Refusal Right to Lessee; and (ii) Lessee's right to exercise the ROFR Space #3 Refusal Right shall be contingent upon Lessee not being in Default under the Lease, as hereby amended, either on the date Lessee exercises such ROFR Space #3 Refusal Right or, unless waived in writing by Lessor for purposes of such ROFR Space #3 Refusal Right, on the availability date specified in the applicable Lessor's ROFR Space #3 Notice for such portion of ROFR Space #3. If Lessee is not in Default under the Lease, as amended hereby, on the date Lessee exercises such ROFR Space #3 Refusal Right but is so in Default on the availability date specified in the applicable Lessor's ROFR Space #3 Notice and Lessor does not waive in writing such Default for purposes of such ROFR Space #3 Refusal Right, then, notwithstanding Lessee's exercise of such ROFR Space #3 Refusal Right, Lessee shall have no right to lease the ROFR Space #3 as a result of Lessee's exercise of such ROFR Space #3 Refusal Right. In the event that Lessee does not timely or properly exercise a ROFR Space #3 Refusal Right, Lessor may at any time thereafter lease the applicable portion of ROFR Space #3 to any third (3rd) party tenant on substantially the same economic terms as set forth in Lessor's ROFR Space #3 Notice applicable thereto without any further rights of Lessee to lease such space, provided that Lessee's failure to timely or properly exercise such ROFR Space #3 Refusal Right shall not act as a waiver of or otherwise affect the Expansion Options granted to Lessee pursuant to Section 4 hereof nor act as a waiver of or otherwise affect any ROFR Space #3 Refusal Right as to any other portion of ROFR Space #3, any Primary ROFR Refusal Right or any Secondary ROFR Refusal Right and further provided that in the event that Lessor thereafter intends to enter into a lease with a third (3rd) party for the applicable portion of ROFR Space #3 upon economic terms materially more favorable to such tenant than those set forth in the most recent Lessor's 15 ROFR Space #3 Notice applicable thereto, such ROFR Space shall again become subject to Lessee's ROFR Space #3 Refusal Right as set forth in this Section 7. (c) If Lessee exercises a ROFR Space #3 Refusal Right, then at Lessee's option, exercised by notice to Lessor contained in Lessee's ROFR Space #3 Exercise Notice with respect to ROFR Space #3, the space actually to be leased to Lessee pursuant to Lessee's exercise of its ROFR Space #3 Refusal Right shall be relocated to Available Primary ROFR Space (as defined in Section 5(c)(i) above) located closest to the west end of the Building. (d) If Lessee's exercises a ROFR Space #3 Refusal Right and elects, as provided in Section 7(c) above, that the space actually to be leased to Lessee pursuant to Lessee's exercise of its ROFR #3 Refusal Right shall consist of the Available Primary ROFR Space located closest to the west end of the Building, then, in such event, the following terms and provisions shall apply: (i) Lessee's ROFR Space #3 Refusal Right as to the actual ROFR Space #3 itself, on the terms stated in the applicable Lessor's ROFR Space #3 Notice, shall be deemed waived and Lessor may at any time thereafter lease all or any portion of ROFR Space #3 to any third (3rd) party tenant on substantially the same economic terms as set forth in such Lessor's ROFR Space #3 Notice without any further rights of Lessee to lease ROFR Space #3, provided that in the event that Lessor thereafter intends to enter into a lease with a third (3rd) party tenant for all or any portion of ROFR Space #3 upon economic terms materially more favorable to such tenant than those set forth in such Lessor's ROFR Space #3 Notice, ROFR Space #3 shall again become subject to Lessee's ROFR Space #3 Refusal Right as set forth in this Section 7; (ii) Lessor shall have the right, in its sole discretion and upon notice to Lessee, to increase or decrease the size of such relocated ROFR Space #3 by an amount not to exceed ten percent (10%) of the rentable area thereof as set forth in Lessor's ROFR Space #3 Notice, to the reasonably minimal extent necessary to accommodate the actual configuration of the Available Primary ROFR Space and Lessor's then current space demising standards for comparable space in the Building, in which event all terms contained in Lessor's ROFR Space #3 Notice (including, without limitation, any Tenant Concessions) and the rent payable therefor shall be deemed automatically adjusted pro rata to such increase or decrease (except that Lessor's contribution toward the cost and expense of improving such relocated ROFR Space #3 shall be determined in accordance with Section 7(d)(vii) below) and any Option Space which remains subject to a valid and existing but unexercised Expansion Option shall be automatically relocated to the next most westerly Available Primary ROFR Space which is contiguous to the relocated ROFR Space #3. In the event that any Option Space is relocated as aforesaid, then Lessor shall have the right, in its sole discretion and upon 16 notice to Lessee, to increase or decrease the size of such relocated Option Space by an amount not to exceed ten percent (10%) of the rentable area thereof, to the reasonably minimal extent necessary to accommodate the actual configuration of the Available Primary ROFR Space and Lessor's then current space demising and measurement standards for comparable space in the Building; (iii) The lease term for such applicable portion of ROFR Space #3 (as relocated to Primary ROFR Space) shall commence on the availability date specified in the applicable Lessor's ROFR Space #3 Notice and shall expire on the last day of the term of the Lease, as hereby amended; (iv) The Base Rent and rental adjustments payable for such Primary ROFR Space shall be determined by Lessor in its sole discretion to be at rates equal to either (A) the Base Rent and rental adjustments payable for ROFR Space #3 as set forth in the applicable Lessor's ROFR Space #3 Notice or (B) the Base Rent and rental adjustments payable under the Lease for the Original Premises for the corresponding portion of the Term. In the case where the Base Rent and rental adjustments payable for such Primary ROFR Space are determined to be as set forth in the applicable Lessor's ROFR Space #3 Notice as provided in clause (A) above, Lessee shall be entitled to receive, with respect to such Primary ROFR Space, any and all Tenant Concessions set forth in such Lessor's ROFR Space #3 Notice, except that the amount of each such Tenant Concession shall be adjusted to a sum equal to the dollar amount of such Tenant Concession per rentable square foot of ROFR Space #3, as set forth in such Lessor's ROFR Space #3 Notice, multiplied by the number of rentable square feet contained in such Primary ROFR Space, and further multiplied by a fraction (the "ROFR Space #3 Term Adjustment") whose numerator is the number of calendar months in the period commencing with the calendar month in which Lessee first occupies such Primary ROFR Space and continuing to and including the calendar month in which the Expiration Date of Term of the Lease, as amended hereby, occurs, and whose denominator is the number of calendar months contained in the proposed lease term as set forth in such Lessor's ROFR Space #3 Notice. In the case where Base Rent and rental adjustments payable for such Primary ROFR Space are determined to be as payable under the Lease for the Original Premises for the corresponding portion of the Term as provided in clause (B) above, Lessee shall not be entitled to receive any Tenant Concessions including, without limitation, any Tenant Concessions set forth in such Lessor's ROFR Space #3 Notice; (v) For purposes of paying the rental adjustments set forth in Section 7(d)(iv) above as to any ROFR Space actually leased by Lessee pursuant to this Section 7(d), Lessee's Proportionate Share shall be increased effective as of the commencement date of the lease term for such ROFR Space by adding to such 17 then effective Lessee's Proportionate Share the percentage determined by dividing the rentable area of such ROFR Space by 424,052.32 rentable square feet. For purposes of this Section 7(d), the rentable area of any ROFR Space actually leased by Lessee shall be as determined by Lessor or, at Lessor's option, Lessor's architect, in accordance with Lessor's then current space measurement standards for comparable space in the Building; (vi) Lessee shall not be entitled to any rental abatement for any portion of the relocated ROFR Space #3 except in the case where the Base Rent and rental adjustments payable for such relocated ROFR Space #3 are to be the same as set forth in the applicable Lessor's ROFR Space #3 Notice pursuant to Section 7(d)(iv)(A) above in which event Lessee shall be entitled to the rental abatement, if any, set forth in such Lessor's ROFR Space #3 Notice; (vii) Lessee shall accept the applicable portion of ROFR Space #3, as relocated, in an "as-is", "where-is" physical condition from Lessor, without any agreement, representation, credit or allowance from Lessor with respect to the improvement or condition thereof, except as set forth below in this Section 7(d)(vii). Lessee shall pay for any and all costs or expenses associated with any leasehold improvement work in such ROFR Space which shall be performed by Lessee in accordance with the terms of Section 13 of the Original Lease and upon completion of such work and Lessee's delivery of contractors affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used for such work, Lessor shall pay to Lessee, as Lessor's contribution toward the payment of the cost and expense of improving such ROFR Space ("Lessor's ROFR Space #3 Contribution"), an amount which shall be determined as follows: A. in the case where the Base Rent and rental adjustments payable for such Primary ROFR Space pursuant to Section 7(d)(iv)(A) above are to be the same as set forth in the applicable Lessor's ROFR Space #3 Notice, Lessor's ROFR Space #3 Contribution shall be a sum equal to the dollar amount of tenant improvement allowance per rentable square foot of ROFR Space #3, as set forth in such Lessor's ROFR Space #3 Notice, multiplied by the number of rentable square feet contained in such Primary ROFR Space, and further multiplied by the ROFR Space #3 Term Adjustment; or B. in the case where the Base Rent and rental adjustments payable for such Primary ROFR Space pursuant to Section 7(d)(iv)(B) above are to be the same as for the Original Premises for the corresponding portion of the Term, Lessor's ROFR Space #3 Contribution shall be a sum equal to the dollar amount per rentable square foot of such 18 Primary ROFR Space, as set forth in the column entitled "Adjusted Allowance Per Square Foot" on Lessor's Contribution Schedule corresponding to the calendar month in which Lessee first occupies such Primary ROFR Space, multiplied by the number of rentable square feet contained in such Primary ROFR Space; or In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's ROFR Space #3 Contribution and Lessor fails to pay in full Lessor's ROFR Space #3 Contribution to Lessee within ninety (90) days after Lessee notifies Lessor in writing that all such conditions and requirements have been satisfied and that such payment is due and owing to Lessee hereunder, and further provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be entitled to offset the unpaid amount of Lessor's ROFR Space #3 Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's ROFR Space #3 Contribution has been paid or offset as provided herein; and (viii) All of the terms and provisions of the Lease, as amended hereby, shall apply with respect to the applicable portion of ROFR Space #3, except as otherwise provided in this Section 7 or except as same may be inconsistent with the provisions of this Section 7, and such portion of ROFR Space #3 shall be deemed to be a part of the Premises effective as of the first day of the lease term for such space. (e) If Lessee exercises a ROFR Space #3 Refusal Right and Lessee does not elect, as provided in Section 7(c) above, that the space actually to be leased to Lessee pursuant to Lessee's exercise of its ROFR Space #3 Refusal Right shall consist of the Available Primary ROFR Space located closest to the west end of the Building, then, in such event, the following terms and provisions shall apply: (i) The lease term for such applicable portion of ROFR Space #3 shall commence on the availability date specified in the applicable Lessor's ROFR Space #3 Notice and shall expire on the last day of the term of the Lease, as amended hereby; (ii) The Base Rent and rental adjustments payable for the applicable portion of ROFR Space #3 shall be equal to the Base Rent and rental adjustments payable for ROFR Space #3 as set forth in the applicable Lessor's ROFR Space #3 Notice and Lessee shall be entitled to receive, with respect to such portion of ROFR Space #3, any and all Tenant Concessions set forth in such Lessor's ROFR Space #3 Notice except that the amount of each such Tenant Concession shall be 19 adjusted by a sum equal to the dollar amount of such Tenant Concession set forth in such Lessor's ROFR Space #3 Notice multiplied by the ROFR Space #3 Term Adjustment (as defined in Section 7(d)(iv) above); (iii) For purposes of paying the rental adjustments set forth in Section 7(e)(ii) above with respect to any ROFR Space actually leased by Lessee pursuant to this Section 7(e), Lessee's Proportionate Share shall be increased effective as of the commencement date of the lease term for such ROFR Space by adding to such then effective Lessee's Proportionate Share the percentage determined by dividing the rentable area of such ROFR Space by 424,052.32 rentable square feet. For purposes of this Section 7(e), the rentable area of any ROFR Space actually leased by Lessee shall be as determined by Lessor or, at Lessor's option, Lessor's architect, in accordance with Lessor's then current space measurement standards for comparable space in the Building; (iv) Lessee shall not be entitled to any rental abatement for any portion of ROFR Space #3 except as otherwise set forth in the applicable Lessor's ROFR Space #3 Notice; (v) Lessee shall accept the applicable portion of ROFR Space #3 in an "as-is", "where-is" physical condition from Lessor, without any agreement, representation, credit or allowance from Lessor with respect to the improvement or condition thereof, except as otherwise set forth in the applicable Lessor's ROFR Space #3 Notice. Lessee shall pay for any and all costs or expenses associated with any leasehold improvement work in such ROFR Space which shall be performed by Lessee in accordance with the terms of Section 13 of the Original Lease and upon completion of such work and Lessee's delivery of contractors affidavits and full and final waivers of lien and receipted bills covering all labor and materials expended and used for such work, Lessor shall pay to Lessee, as Lessor's contribution toward the payment of the cost and expense of improving such ROFR Space ("Lessor's ROFR Space #3 Contribution"), a sum equal to the dollar amount of tenant improvement allowance per rentable square foot of ROFR Space #3, as set forth in the applicable Lessor's ROFR Space #3 Notice, multiplied by the number of rentable square feet contained in such ROFR Space #3, and further multiplied by the ROFR Space #3 Term Adjustment. In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's ROFR Space #3 Contribution and Lessor fails to pay in full Lessor's ROFR Space #3 Contribution to Lessee within ninety (90) days after Lessee notifies Lessor in writing that all such conditions and requirements have been satisfied and that such payment is due and owing to Lessee hereunder, and further provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be 20 entitled to offset the unpaid amount of Lessor's ROFR Space #3 Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's ROFR Space #3 Contribution has been paid or offset as provided herein; and (vi) All of the terms and provisions of the Lease, as amended hereby, shall apply with respect to the applicable portion of ROFR Space #3, except as otherwise provided in this Section 7 or except as same may be inconsistent with the provisions of this Section 7, and such portion of ROFR Space #3 shall be deemed to be a part of the Premises effective as of the first day of the lease term for such space. (f) If Lessee exercises a ROFR Space #3 Refusal Right, Lessor and Lessee shall execute and deliver an amendment of the Lease reflecting the lease of the applicable portion of ROFR Space #3 by Lessor to Lessee on the terms and provisions set forth in this Section, which amendment shall be executed and delivered within thirty (30) days after Lessee exercises the ROFR Space #3 Refusal Right. (g) The ROFR Space #3 Refusal Right shall automatically terminate and become null and void upon the earlier to occur of (1) the expiration or termination of the Lease, (2) the termination of Lessee's right to possession of the Premises, (3) the assignment of the Lease by Lessee, in whole or in part, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, (4) the sublease by Lessee of the Premises, or any part thereof, which is not in accordance with Section 14 of the Original Lease, or which is to a party (or any affiliate thereof) who is then, or was within the preceding six (6) months, a tenant in, or otherwise an occupant of, the Building, or (5) the failure of Lessee to timely or properly exercise a ROFR Space #3 Refusal Right. Without limiting the foregoing, no ROFR Space #3 Refusal Right shall be assignable by Lessee separately from the Lease nor shall any ROFR Space #3 Refusal Right be exercisable by any party other than Lessee except for Lessee's assignee pursuant to an assignment of the Lease in accordance with Section 14 of the Original Lease which assignee (or any affiliate thereof) is not, at the effective date of the assignment, or was not for the six (6) months preceding the effective date of the assignment, a tenant in, or otherwise an occupant of, the Building. 8. Extension Option. Section 37 of the Lease is hereby deleted in its entirety and the following is substituted in its place and stead: (a) Subject to the terms, conditions and limitations set forth in this Section 8, Lessee is hereby granted the option to extend (the "Option to Extend") the Term of the Lease for one (1) renewal term of five (5) years commencing September 1, 2007 (the "Extension Term Commencement Date"), and expiring August 31, 2012 (the "Extension Term"), on the same terms and conditions as are contained in the Lease, as amended hereby, except as follows: 21 (i) Lessor shall be under no obligation to make or pay for any further improvements to the Premises; (ii) Lessee shall have no further rights under this Section 8; and (iii) Commencing as of the first day of the Extension Term, Base Rent and Rent Adjustments for the first Lease Year of the Extension Term shall be equal to the greater of: A. Ninety percent (90%) of the then current Fair Market Base Rental (as hereinafter defined) plus Lessee's Proportionate Share of Taxes and Expenses allocable to the Premises; or B. the then current escalated Base Rent plus Lessee's Proportionate Share of Taxes and Expenses allocable to the Premises. If the Base Rent for the first Lease Year of the Extension Term is determined to be equal to ninety percent (90%) of the then current Fair Market Base Rental pursuant to Section 8(a)(iii)A above, then such Base Rent shall be increased by the Fair Market Escalation Rate (as hereinafter defined), compounded, on each September 1 thereafter during the remainder of the Extension Term. If the Base Rent for the first Lease Year of the Extension Term is determined to be equal to the then current escalated Base Rent pursuant to Section 8(a)(iii)B above, then the Base Rent shall be increased by two percent (2%), compounded, on each September 1 thereafter during the remainder of the Extension Term. For the purposes of this Section 8(a), "Fair Market Base Rental" shall be deemed to mean the market base rental, net of all concessions, tax and expense "stops", construction or other allowances or abatements, for comparable office space in comparable first-class office buildings in the North Michigan Avenue market of Chicago, Illinois, for lease terms equivalent to the Extension Term, in effect on the Extension Term Commencement Date, as reasonably determined by Lessor; the "Fair Market Base Rental Escalation Rate" shall be deemed to mean the annual compounded escalation percentage rate being applied to such Fair Market Base Rental for comparable office space in comparable first-class offices buildings in the North Michigan Avenue market of Chicago, Illinois, for lease terms equivalent to the Extension Term, in effect on the Extension Term Commencement Date, as reasonably determined by Lessor; and the "North Michigan Avenue market of Chicago, Illinois" shall be deemed to mean the area bounded by Lake Shore Drive to the east, the Chicago River to the south, State Street to the west and Oak Street to the north, together with the area bounded by Columbus Drive to the east, Randolph Street to the south, Michigan Avenue to the west and the Chicago River to the north. In the event that a dispute arises as to the reasonableness of Lessor's determination of Fair Market Base Rental or Fair Market Base Rental Escalation Rate, or both, (which, for purposes of ascertaining whether Lessor's determination was reasonable, shall be deemed to have been made on the date Lessor 22 delivered notice of such determination to Lessee) and such dispute is not resolved, either by agreement of the parties or by the issuance of a final, unappealable order of a court of competent jurisdiction, prior to the Extension Term Commencement Date, then for the period commencing on the Extension Term Commencement Date and continuing to and including the date such dispute is resolved, either by agreement of the parties or by the issuance of a final, unappealable order of a court of competent jurisdiction, the Base Rent and the annual increases thereof payable by Lessee during such period shall be as determined by Lessor as provided above. In the event such resolution of such dispute results in an agreement by the parties or a determination in such court order that the Fair Market Base Rental or the Fair Market Base Rental Escalation Rate, or both, are lower than as determined by Lessor as provided above, such lower rate or rates shall be used to determine the Base Rent and the annual increases thereof payable by Lessee during the Extension Term as provided above, retroactive to the Extension Term Commencement Date, and, provided that Lessee is not then in Default under the Lease, as amended hereby, Lessee shall be entitled to offset the amount of any Base Rent overpaid by Lessee during such period against the then next due installments of Base Rent payable by Lessee hereunder until the full amount of such overpayment has been offset as provided herein. In the event such resolution of such dispute results in an agreement by the parties or a determination in such court order that neither the Fair Market Base Rental nor the Fair Market Base Rental Escalation Rate are lower than as determined by Lessor as provided above, the Base Rent and the annual increases thereof payable by Lessee during the Extension Term shall be as determined by Lessor as provided above. (b) Notwithstanding anything to the contrary contained in this Section 8, Lessee's right to exercise the Option to Extend shall be contingent upon Lessee not being in Default under the Lease, as amended hereby, either on the date that Lessee exercises the Option to Extend or, unless waived in writing by Lessor for purposes of the Option to Extend, on the Extension Term Commencement Date. If Lessee is not in Default under the Lease, as amended hereby on the date that Lessee exercises the Option to Extend but is so in Default on the Extension Term Commencement Date and Lessor does not waive in writing such Default for purposes of the Option to Extend, then, notwithstanding Lessee's exercise of the Option to Extend, the Option to Extend shall be deemed to be terminated and of no force and effect and the Term of the Lease shall expire or be terminated in accordance with terms of the Lease as if Lessee had not been granted the Option to Extend pursuant to this Section 8. (c) In order to exercise the Option to Extend, Lessee shall deliver to Lessor written notice of such exercise ("Lessee's Extension Option Exercise Notice") prior to March 1, 2006 (the "Extension Option Deadline"), and otherwise satisfy the terms and conditions of this Section 8, or the Option to Extend shall lapse and be of no further force or effect. (d) Lessee may, by notice given to Lessor not later than December 1, 2005, request Lessor to provide Lessee with an estimate of the Fair Market Base Rental and Fair Market Base Rental Escalation Rate that Lessor then believes in good faith is likely to be in effect on the 23 Extension Term Commencement Date and, in such case, (i) Lessor shall provide Lessee with such estimate on or before February 15, 2006, and (ii) except as otherwise expressly provided herein, such estimate shall be deemed to be the then current Fair Market Base Rental and Fair Market Base Rental Escalation Rate for purposes of determining Base Rent and the annual increases thereof during the Extension Term pursuant to Section 8(a)(iii)A above. (e) The provisions of this Section shall apply to the entire Premises leased by Tenant hereunder as of the day immediately preceding the Extension Term Commencement Date including, without limitation, any and all Option Space, Primary ROFR Space, Secondary ROFR Space and ROFR Space #3 actually leased by Lessee pursuant to the Fourth Amendment. (f) In consideration of Lessor agreeing to provide that the lease term for any and all ROFR Space leased pursuant to Lessee's exercise of any Primary ROFR Refusal Right, any Secondary ROFR Refusal Right and/or any ROFR Space #3 Refusal Right (individually and collectively, any "Refusal Right") shall expire on the last day of the Term of the Lease, as amended hereby, it is agreed that in the event that (i) Lessee shall have actually leased any ROFR Space as a result of exercising any such Refusal Right, (ii) the Term of the Lease, as amended hereby, is terminated prior to the Expiration Date or is not extended pursuant to the Option to Extend and (iii) the expiration date of the lease term for such ROFR Space as set forth in the applicable Lessor's Notice exercising such Refusal Right was later than the last day of the Term of the Lease, as amended hereby, Lessee shall pay to Lessee a sum (the "Termination Fee") equal to the aggregate amount of Base Rent and the Rent Adjustment due and payable under the Lease, as amended hereby, for the last twelve (12) full calendar months immediately preceding the Expiration Date with respect to any and all such leased ROFR Space for which the applicable Lessor's Notice specified a termination date later than the last day of the Term of the Lease, as amended hereby, but not with respect to any other portion of the Premises, provided that for purposes of calculating the Termination Fee in the event the Lease is terminated prior to the Expiration Date, the aggregate amount of Base Rent and Rent Adjustment due and payable for such twelve (12) month period shall be determined as if the Lease had not been so terminated. If the Lease is not extended pursuant to the Extension Option because Lessee does not properly exercise the Option to Extend prior to the Extension Option Deadline, the Termination Fee, if any, shall be due and payable on or before April 1, 2006. If the Term of the Lease is not extended pursuant to the Extension Option as a result of a Default being in existence on the Extension Term Commencement Date or if the Lease is terminated prior to the Expiration Date as a result of the existence of a Default, the Termination Fee, if any, shall be due and payable within seven (7) days after Lessee receives notice from Lessor of the termination of either the Extension Option or the Lease, as the case may be. The Termination Fee, if any, payable by Lessee pursuant to this Section 8(f) shall be in addition to, and not in lieu of, any other amounts payable by Lessee under the Lease, as amended hereby, including, without limitation, Base Rent, Rent Adjustment and damages (liquidated or otherwise) payable by reason of Lessor's exercise of its remedies upon Default by Lessee. 24 9. TERMINATION OPTION. Any and all rights of Lessee to terminate the Lease as set forth in Section 43 of the Original Lease, Section 6 of the First Amendment and Section 5 of the Third Amendment are hereby deleted and shall be of no further force and effect. 10. TENANT IMPROVEMENT ALLOWANCE. In consideration for entering into this Fourth Amendment, and subject to the terms, conditions and limitation set forth in this Section 10, Lessor shall make a contribution in the amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) ("Lessor's Contribution") toward payment of the cost and expense of Lessee refurbishing the Premises (or any portion thereof) within ninety (90) days after Lessee's written request for such contribution is delivered to Lessor, provided such request is delivered not earlier than September 1, 1999, and not later than August 31, 2001. Lessee's right to receive payment of Lessor's Contribution shall be contingent upon (a) Lessee not being in default or breach under the Lease, as amended hereby, at the time Lessee so requests payment and (b) Lessee, at such time, having completed the work for which Lessor's Contribution is being so requested in accordance with the terms of Section 13 of the Original Lease and having submitted to Lessor contractors affidavits and full and final waivers of lien and receipted bills for labor and materials expended and used for such work. In the event that Lessee has satisfied all conditions and requirements as set forth herein and in the Lease for the payment of Lessor's Contribution and Lessor fails to pay in full Lessor's Contribution to Lessee within ninety (90) days after Lessee's request therefor as aforesaid and provided that Lessee is not then in breach or default under the Lease, as amended hereby, Lessee shall, upon the expiration of said ninety (90) day period, be entitled to offset the unpaid amount of Lessor's Contribution from the then next due installments of Base Rent thereafter payable by Lessee under the Lease, as amended hereby, until the full amount of Lessor's Contribution has been paid or offset as provided herein. In the event Lessee fails to deliver such request for Lessor's Contribution as required hereby on or before August 31, 2001, Lessee's right to request Lessor's Contribution shall be deemed waived and of no further force and effect and Lessor shall be relieved of any obligation to make Lessor's Contribution. 11. BROKER. Lessee represents to Lessor that Lessee has not dealt with any real estate broker, salesperson or finder in connection with this Amendment other than Golub & Company (the "Broker"), and no other such person initiated or participated in the negotiation of this Amendment or is entitled to any commission in connection herewith. Lessee hereby agrees to indemnify, defend and hold Lessor, its property manager and their respective employees harmless from and against any and all liabilities, claims, demands, actions, damages, costs and expenses (including attorneys' fees) arising from a claim for a fee or commission made by any broker (other than the Broker), claiming to have acted by or on behalf of Lessee in connection with this Amendment. 12. SUBMISSION. Submission of this Amendment by Lessor or Lessor's agent, or their respective agents or representatives, to Lessee for examination and/or execution shall not in any manner bind Lessor and no obligations on Lessor shall arise under this Amendment unless and 25 until this Amendment is fully signed and delivered by Lessor and Lessee; provided, however, the execution and delivery by Lessee of this Amendment to Lessor or Lessor's agent, or their respective agents or representatives, shall constitute an irrevocable offer by Lessee on the terms and conditions herein contained, which offer may not be revoked for fifteen (15) days after such delivery. 13. EFFECT OF AMENDMENT. As amended by this Amendment, the Lease shall remain in full force and effect. 14. EXCULPATORY PROVISIONS. It is expressly understood and agreed by and between the parties hereto, anything herein to the contrary notwithstanding, that each and all of the representations, warranties, covenants, undertakings and agreements herein made on the part of Lessor while in form purporting to be the representations, warranties, covenants, undertakings and agreements of Lessor are nevertheless each and every one of them made and intended, not as personal representations, warranties, covenants, undertakings and agreements by Lessor or for the purpose of or with the intention of binding Lessor personally, but are made and intended for the purpose only of subjecting Lessor's interest in the Office Area and the Premises to the terms of this Amendment and for no other purposes whatsoever, and in case of default hereunder by Lessor (or default through, under or by any of its beneficiaries, or agents or representatives of said beneficiaries), Lessee shall look solely to the interest of Lessor in said Office Area, and this Amendment is executed and delivered by Lessor not in its own right, but solely in the exercise of the powers conferred upon it as such Trustee; that the Lessor shall have no personal liability to pay any indebtedness accruing hereunder or to perform any covenant, either express or implied, herein contained and no liability or duty shall rest upon Lessor to sequester the trust estate or the rent, issues and profits arising therefrom, or the proceeds arising from any sale or other responsibility of any sort is assumed by, nor shall at any time be asserted or enforceable against, said Lessor, American National Bank and Trust Company of Chicago, a national banking association, individually or personally, but only as Trustee under the provisions of a Trust Agreement dated May 2, 1989 and known as Trust No. 108237- 06, on account of this Amendment or on account of any representation, warranty, covenant, undertaking or agreement of Lessor in this Amendment contained, either express or implied, all such personal liability, if any, being expressly waived and released by Lessee and by all persons claiming by, through or under Lessee. 15. RECORDING. The parties will expeditiously execute and record the Memorandum of Amendment in the form attached hereto as Exhibit B and made a part hereof. 16. SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT. Lessor shall cause to be executed and delivered to Lessee, a subordination, nondisturbance and attornment agreement from the current holder of the First Mortgage, in the form attached hereto as Exhibit D and made a part hereof, and Lessee agrees to execute and deliver such agreement to such holder. It is agreed by Lessor and Lessee that in the event of a conflict between the provisions 26 of the second (2nd) sentence of the first (lst) paragraph of Section 19 of the Original Lease and the provisions of the third (3rd) paragraph of said Section 19, the provisions of said third (3rd) paragraph shall prevail and control. IN WITNESS WHEREOF, this Amendment is executed as of the day and year aforesaid. LESSEE: LESSOR: - ------ ------ PLAYBOY ENTERPRISES, INC., AMERICAN NATIONAL BANK AND a Delaware corporation TRUST COMPANY OF CHICAGO, not personally, but solely as Trustee under as aforesaid By: /s/ Howard Shapiro By: /s/ Gregory S. Kasprzyk -------------------------------- -------------------------------- Title: Executive V.P. Title: Assistant Vice President ------------------------- -------------------------- 27 EXHIBIT A --------- FLOOR PLAN OF 14TH FLOOR ------------------------ SHOWING OPTION SPACE AND ROFR SPACE #3 -------------------------------------- A-1 [FLOOR PLAN OF LAKE SHORE PLACE] [LOGO OF GOLUB] EXHIBIT A-1 ----------- FLOOR PLAN OF 14TH FLOOR ------------------------ SHOWING PRIMARY AND SECONDARY ROFR SPACE ---------------------------------------- A-1-1 PRIMARY ROFR SPACE (HATCHED AREA) [FLOOR PLAN OF LAKE SHORE PLACE] [LOGO OF GOLUB] SECONDARY ROFR SPACE (HATCHED AREA) [FLOOR PLAN OF LAKE SHORE PLACE] [LOGO OF GOLUB] This space reserved for Recorder's use only. -------------------------------------------------- MEMORANDUM OF FOURTH AMENDMENT ------------------------------ THIS MEMORANDUM OF FOURTH AMENDMENT ("Memorandum") is made as of this 6th day of August, 1996, between AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee under Trust Agreement dated May 2, 1989 and known as Trust No. 108237-06 (herein called the "Lessor") and PLAYBOY ENTERPRISES, INC., a Delaware corporation (herein called the "Lessee"). Capitalized terms used herein shall have the same meaning as set forth in the Lease (defined below) unless expressly defined herein or the context clearly indicates to the contrary. W I T N E S S E T H: - - - - - - - - - - Lessor is the owner of a certain mixed used building located in Cook County, Illinois, of which one or more of four components as are legally described in Exhibit A attached hereto, as may be affected by this Memorandum. The components are defined in Exhibit A as the Office Parcel, the Lot 1 Parcel, the Skylight Parcel and the Garage Parcel. The building containing the four components is now commonly known as 680 North Lake Shore Drive, Chicago, Illinois. Lessor has leased to Lessee a portion of the Office Parcel consisting of the entire fifteenth (15th) and sixteenth (16th) floors (the "Premises") together with certain rights and privileges with respect to the Skylight Parcel, the Garage Parcel and the Lot 1 Parcel for the Term and upon and subject to the covenants, provisions and conditions contained in that certain Office Lease dated as of April 7, 1988 entered into between the parties hereto, or their predecessors-in-interest, (the "Lease") and as such document has been amended by those certain Amendments dated October 26, 1989, June 1, 1992, August 30, 1993 and August 6, 1996 (the "Amendments") between Lessor and Lessee. The Amendments and all of their respective covenants, provisions and conditions are by this reference expressly incorporated herein and made a part of this Memorandum of Amendment and all shall take notice thereof whether or not hereinafter more particularly described. The Amendments' covenants and provisions affecting all Parcels are binding on the Lessor and its successors and assigns as owners of any said Parcels. Without limitation, it is hereby disclosed that the Fourth Amendment includes terms and provisions which (among other things) (a) provided that Lessor grants to Lessee certain expansion rights and rights of first refusal on certain office space on the 14th floor of the Building, and (b) contemplate that the existence of this Fourth Amendment be disclosed and reference made to its terms and provisions by means of this Memorandum. Lessee hereby appoints Lessor as its attorney-in-fact to record a Release of this Memorandum executed by Lessor for itself and on Lessee's behalf, upon the occurrence of any one of the following: I. Expiration of the Lease at either August 31, 2007, or August 31, 2012, or otherwise according to its terms; or II. Termination of the Lease; or III. Issuance of a nonappealable final order of any court with jurisdiction over the Premises granting possession of the Premises to Lessor; or IV. Ninety (90) days after written notice from Lessor to Lessee that Lessor intends to record such Release, because Lessee has voluntarily abandoned the Premises, it being acknowledged that, for the purposes of this paragraph "abandoned" does not include an approved subletting or assignment. In addition, Lessee hereby appoints Lessor as its attorney-in-fact to record a Release of this Memorandum as to the Garage Parcel in the event Lessor or its successors or assigns exercises its option under the Lease to purchase such parking rights from Lessee. This Memorandum and the Fourth Amendment are expressly subject to an subordinate to the Easements (as defined in the Lease) and to any and all mortgages now or hereafter encumbering the Office Parcel, and Lot 1 Parcel, the Garage Parcel or the Skylight Parcel. Lessor and Lessee have entered into this Memorandum of Fourth Amendment-in order that third parties may have notice of the existence of the Amendment and some of its specific provisions. This Memorandum of Amendment is not intended to amend, modify or otherwise change the terms and conditions of the Lease or the Fourth Amendment nor shall provisions of this Memorandum of Fourth Amendment be used in interpreting the provisions of the Lease or the Fourth Amendment. In the event of a conflict between this Memorandum of Fourth Amendment and the Fourth Amendment, the Fourth Amendment shall control. IN WITNESS WHEREOF, the parties have executed this Memorandum of Fourth Amendment as of the date and year first above written. AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, not individually, but solely as Trustee as aforesaid Attest: /s/ Gregory S. Kasprzyk By: /s/ Michael Whelan ------------------------- --------------------------- Name: Gregory S. Kasprzyk Name: Michael Whelan ------------------------ ------------------------- Title: Assistant Secretary Title: VP ------------------------ ------------------------ PLAYBOY ENTERPRISES, INC., a Delaware corporation Attest: /s/ Robert D. Campbell By: /s/ Howard Shapiro ------------------------- --------------------------- Name: Robert D. Campbell Name: Howard Shapiro ------------------------ ------------------------- Title: Asst. Secretary Title: Exec. V.P. ------------------------ ------------------------ THIS DOCUMENT PREPARED BY AND AFTER RECORDING RETURN TO: Elizabeth H. Belkin, Esq. Rudnick & Wolfe 203 North LaSalle Street Suite 1800 Chicago, Illinois 60601 Box 416 This instrument is executed by the undersigned Land Trustee, not personally but solely as Trustee in the exercise of the power and authority conferred upon and vested in it as such Trustee. It is expressly understood and agreed that all the warranties, indemnities, representations, covenants, undertakings and agreements herein made on the part of the Trustee are undertaken by it solely in its capacity as Trustee and not personally. No personal liability or personal responsibility is assumed by or shall at any time be asserted or enforceable against the Trustee on account of any warranty, indemnity, representation, covenant, undertaking or agreement of the Trustee in this instrument. B-3 STATE OF ILLINOIS) ) ss. COUNTY OF COOK ) I, JENIFER Y. CHESSE, a Notary Public in and for said County in the State aforesaid, do hereby certify that GREGORY S. KASPRZYK, the ASSISTANT SECRETARY of AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a national banking association, as Trustee as aforesaid, MICHAEL WHELAN the VICE PRESIDENT of said Bank, who are personally known to me to be the same persons whose names are subscribed to the foregoing instrument as such respective officers appeared before me this day in person and acknowledged that they signed and delivered the said instrument as their own free and voluntary act and as the free and voluntary act of said Bank, as Trustee, for the uses and purposes therein set forth; and the said ______________ then and there did acknowledge that (s)he, as custodian of the seal of sale Bank, did affix the seal of said Bank to said instrument as his/her free and voluntary act and as the free and voluntary act of said Bank, as Trustee, for the uses and purposes therein set forth. Given under my hand and notarial seal this LAND TRUST day of AUGUST on the 8th 1996. OFFICIAL SEAL JENIFER Y. CHESSE NOTARY PUBLIC STATE OF ILLINOIS /s/ Jenifer Y. Chesse My Commission Expires 11/01/99 ---------------------------------- Notary Public My Commission Expires: - --------------------------- B-4 STATE OF ILLINOIS ) ) ss. COUNTY OF COOK ) I, Sue Ann Dickey, a Notary Public in and for said County, in the State aforesaid, do hereby certify that Howard Shapiro and Robert D. Campbell, Assistant Secretary of PLAYBOY ENTERPRISES, INC., a Delaware corporation, both personally known to me to be the same persons whose names are subscribed to the foregoing instrument as such respective officer, appeared before me this day in person and acknowledged that they signed and delivered the said instrument as their own free and voluntary act and as the free and voluntary act of said corporation, for the uses and purposes therein set forth therein; and the latter office also then and there did acknowledge that (s)he, as custodian of the corporate seal of said corporation, affixed the same to the foregoing instrument as his/her free and voluntary act and as the free and voluntary act of said corporation, for the uses and purposes set forth therein. Given under my hand and notarial seal this 7th day of August, 1996. /s/ Sue Ann Dickey ------------------------------------- Notary Public "OFFICIAL SEAL" Sue Ann Dickey My Commission Expires: Notary Public, State of Illinois November 1, 1996 My Commission Expires 11/1/96 - -------------------------------- B-5 EXHIBIT A TO MEMORANDUM OF FOURTH AMENDMENT ------------------------------------------- LEGAL DESCRIPTION ----------------- THE "OFFICE PARCEL" - ------------------ LOTS 5, 10, 12, 13, 14, 16 AND 17 IN PAUL'S SUBDIVISION OF THE LAND, PROPERTY AND SPACE IN PART OF LOTS 5 AND 6 AND THE TRACT MARKED ALLEY LYING BETWEEN SAID LOTS 5 AND 6 OF COUNTY CLERK'S DIVISION OF THE UNSUBDIVIDED ACCRETIONS LYING EAST OF AND ADJOINING THE SUBDIVIDED PARTS OF BLOCKS 43, 44 AND 54 WITH OTHER LANDS IN KINZIE'S ADDITION TO CHICAGO IN THE NORTH 1/2 OF SECTION 10, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN (EXCEPTING FROM LOT 12 THAT PART TAKEN FOR 666 PRIVATE GARAGE CONDOMINIUM RECORDED AS DOCUMENT 26827972 IN COOK COUNTY, ILLINOIS). PIN 17-10-202-064 THE "LOT 1 PARCEL" - ----------------- LOT 1 IN PAUL'S SUBDIVISION OF THE LAND, PROPERTY AND SPACE IN PART OF LOTS 5 AND 6 AND THE TRACT MARKED ALLEY LYING BETWEEN SAID LOTS 5 AND 6 OF COUNTY CLERK'S DIVISION OF THE UNSUBDIVIDED ACCRETIONS LYING EAST OF AND ADJOINING THE SUBDIVIDED PARTS OF BLOCKS 43, 44 AND 54 WITH OTHER LANDS IN KINZIE'S ADDITION TO CHICAGO IN THE NORTH 1/2 OF SECTION 10, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN (EXCEPTING FROM THE ABOVE DESCRIBED THAT PART OF LOT 1 DESCRIBED ON EXHIBIT C TO THE FIRST AMENDMENT TO THE GRANT, DECLARATION AND RESERVATION OF EASEMENTS RECORDED NOVEMBER 10, 1982 AS DOCUMENT 26407240). PIN: 17-10-202-060 THE "SKYLIGHT PARCEL" - -------------------- THAT PORTION OF LOT 22 IN PAUL'S SUBDIVISION OF THE LAND, PROPERTY AND SPACE IN PART OF LOTS 5 AND 6 AND THE TRACT MARKED ALLEY LYING BETWEEN SAID LOTS 5 AND 6 OF COUNTY CLERK'S DIVISION OF THE UNSUBDIVIDED ACCRETIONS LYING EAST OF AND ADJOINING THE SUBDIVIDED PARTS OF BLOCKS 43, 44 AND 54 WITH OTHER LANDS IN KINZIE'S ADDITION TO CHICAGO IN THE NORTH 1/2 OF SECTION 10, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN, DEPICTED AS THE "RESTRICTED ZONE", ON SHEET 17 OF THE PLAT OF SUBDIVISION OF SUCH LOT 22. PART OF PIN: 17-10-202-081 B-A-1 THE "GARAGE PARCEL" - ------------------- LOT 6 IN PAUL'S SUBDIVISION OF THE LAND, PROPERTY AND SPACE IN PART OF LOTS 5 AND 6 AND THE TRACT MARKED ALLEY LYING BETWEEN SAID LOTS 5 AND 6 OF COUNTY CLERK'S DIVISION OF THE UNSUBDIVIDED ACCRETIONS LYING EAST OF AND ADJOINING THE SUBDIVIDED PARTS OF BLOCKS 43, 44 AND 54 WITH OTHER LANDS IN KINZIE'S ADDITION TO CHICAGO IN THE NORTH 1/2 OF SECTION 10, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN, AND EXCEPTING FROM LOT 6 THAT PART TAKEN FOR 666 PRIVATE GARAGE CONDOMINIUM RECORDED AS DOCUMENT 26827972, IN COOK COUNTY, ILLINOIS. PIN: 17-10-202-084 COMMONLY KNOWN AS 680 NORTH LAKE SHORE DRIVE, CHICAGO, ILLINOIS. B-A-2 EXHIBIT C --------- SCHEDULE OF LESSOR'S CONTRIBUTION (PER SOUARE FOOT) --------------------------------------------------- TOWARD IMPROVEMENTS TO OPTION AND ROFR SPACE ----------------------------------------------- C-1
PERIOD ADJUSTED PERIOD ADJUSTED ALLOWANCE ALLOWANCE PER SQUARE FOOT PER SQUARE FOOT SEPTEMBER 1996 $ 40.00 OCTOBER 1996 $ 40.00 NOVEMBER 1996 $ 40.00 DECEMBER 1996 $ 40.00 JANUARY 1997 $ 40.80 JANUARY 2002 $ 27.11 FEBRUARY 1997 $ 40.80 FEBRUARY 2002 $ 26.71 MARCH 1997 $ 40.80 MARCH 2002 $ 26.31 APRIL 1997 $ 40.80 APRIL 2002 $ 25.91 MAY 1997 $ 40.80 MAY 2002 $ 25.51 JUNE 1997 $ 40.80 JUNE 2002 $ 25.11 JULY 1997 $ 40.80 JULY 2002 $ 24.72 AUGUST 1997 $ 40.80 AUGUST 2002 $ 24.32 SEPTEMBER 1997 $ 40.80 SEPTEMBER 2002 $ 23.92 OCTOBER 1997 $ 40.80 OCTOBER 2002 $ 23.52 NOVEMBER 1997 $ 40.80 NOVEMBER 2002 $ 23.12 DECEMBER 1997 $ 40.80 DECEMBER 2002 $ 22.72 JANUARY 1998 $ 41.62 JANUARY 2003 $ 22.77 FEBRUARY 1998 $ 41.62 FEBRUARY 2003 $ 22.36 MARCH 1998 $ 41.62 MARCH 2003 $ 21.96 APRIL 1998 $ 41.62 APRIL 2003 $ 21.55 MAY 1998 $ 41.25 MAY 2003 $ 21.14 JUNE 1998 $ 40.88 JUNE 2003 $ 20.74 JULY 1998 $ 40.51 JULY 2003 $ 20.33 AUGUST 1998 $ 40.14 AUGUST 2003 $ 19.92 SEPTEMBER 1998 $ 39.77 SEPTEMBER 2003 $ 19.52 OCTOBER 1998 $ 39.41 OCTOBER 2003 $ 19.11 NOVEMBER 1998 $ 39.04 NOVEMBER 2003 $ 18.70 DECEMBER 1998 $ 38.67 DECEMBER 2003 $ 18.30 JANUARY 1999 $ 39.07 JANUARY 2004 $ 18.25 FEBRUARY 1999 $ 38.69 FEBRUARY 2004 $ 17.83 MARCH 1999 $ 38.32 MARCH 2004 $ 17.42 APRIL 1999 $ 37.94 APRIL 2004 $ 17.00 MAY 1999 $ 37.56 MAY 2004 $ 16.59 JUNE 1999 $ 37.19 JUNE 2004 $ 16.18 JULY 1999 $ 36.81 JULY 2004 $ 15.76 AUGUST 1999 $ 36.44 AUGUST 2004 $ 15.35 SEPTEMBER 1999 $ 36.06 SEPTEMBER 2004 $ 14.93 OCTOBER 1999 $ 35.63 OCTOBER 2004 $ 14.52 NOVEMBER 1999 $ 35.31 NOVEMBER 2004 $ 14.10 DECEMBER 1999 $ 34.94 DECEMBER 2004 $ 13.69 JANUARY 2000 $ 35.25 JANUARY 2005 $ 13.54 FEBRUARY 2000 $ 34.87 FEBRUARY 2005 $ 13.11 MARCH 2000 $ 34.48 MARCH 2005 $ 12.69 APRIL 2000 $ 34.10 APRIL 2005 $ 12.27 MAY 2000 $ 33.72 MAY 2005 $ 11.85 JUNE 2000 $ 33.34 JUNE 2005 $ 11.42 JULY 2000 $ 32.95 JULY 2005 $ 11.00 AUGUST 2000 $ 32.57 AUGUST 2005 $ 10.58 SEPTEMBER 2000 $ 32.19 SEPTEMBER 2005 $ 10.15 OCTOBER 2000 $ 31.80 OCTOBER 2005 $ 9.73 NOVEMBER 2000 $ 31.42 NOVEMBER 2005 $ 9.31 DECEMBER 2000 $ 31.04 DECEMBER 2005 $ 8.88 JANUARY 2001 $ 31.27 JANUARY 2006 $ 8.63 FEBRUARY 2001 $ 30.88 FEBRUARY 2006 $ 8.20 MARCH 2001 $ 30.48 MARCH 2006 $ 7.77 APRIL 2001 $ 30.09 APRIL 2006 $ 7.34 MAY 2001 $ 29.70 MAY 2006 $ 6.90 JUNE 2001 $ 29.31 JUNE 2006 $ 6.47 JULY 2001 $ 28.92 JULY 20O6 $ 6.04 AUGUST 2001 $ 28.53 AUGUST 2006 $ 5.61 SEPTEMBER 2001 $ 28.14 SEPTEMBER 2006 $ 5.18 OCTOBER 2001 $ 27.75 OCTOBER 2006 $ 4.76 NOVEMBER 2001 $ 27.36 NOVEMBER 2006 $ 4.32 DECEMBER 2001 $ 26.97 DECEMBER 2006 $ 3.88 JANUARY 2007 $ 3.52 FEBRUARY 2007 $ 3.08 MARCH 2007 $ 2.64 APRIL 2007 $ 2.20 MAY 2007 $ 1.76 JUNE 2007 $ 1.32 JULY 2007 $ 0.88 AUGUST 2007 $ 0.44
EXHIBIT D --------- FORM OF SUBORDINATION, NON-DISTURBANCE -------------------------------------- AND ATTORNMENT AGREEMENT ------------------------ D-1 July 29, 1996 11:26am ANBCORE.SUB PREPARED BY: STEPHEN H. MALATO, ESQ. Address: Hinshaw & Culbertson -------------------------- 222 North LaSalle Street -------------------------- Chicago, Illinois 60601 -------------------------- SUBORDINATION, NON-DISTURBANCE AND ---------------------------------- ATTORNMENT AGREEMENT -------------------- THIS Subordination, Non-Disturbance and Attornment Agreement made this ___ day of ____________, 19__ between AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, a national banking association ("Mortgagee") and ______________________ _______________, a ______________________ Corporation ("Tenant"). RECITALS -------- A. Pursuant to the terms and conditions of lease agreement dated _________, 19__ between _______________, as landlord ("Landlord") and Tenant, as tenant, ("Lease Agreement"), Tenant leased from Landlord the premises legally described on Exhibit "A" attached hereto and made a part hereof ("Leased Premises"). B. To evidence a loan made by Mortgagee to ________________________________ ("Mortagor") in the principal amount of ______________________ DOLLARS ($______) ("Loan"), Mortgagor executed its note dated ______________, 19__, payable to the order of Mortgagee, and as security, its mortgage encumbering the premises legally described on Exhibit "B" attached hereto and made a part hereof ("Mortgaged Premises"), in favor of Mortgagee, recorded in the Office of the Recorder of Deeds of _______ County, Illinois as Document Number ___________ ("Mortgage"). The Leased Premises is a part of the Mortgaged Premises. C. It is a condition of the documents which evidence and secure the Loan ("Loan Documents") that all leases and other occupancy agreements for space in the Mortgaged Premises are and shall be subordinated to the lien of the Mortgage. D. Tenant has requested that Mortgagee agree that upon Tenant's performance of all of the terms, covenants, conditions and agreements required of it pursuant to the Lease Agreement, Tenant's possession of the Leased Premises will not be disturbed. NOW, THEREFORE, in consideration of the mutual covenants, agreements and promises herein contained, the sufficiency of which is hereby acknowledged, IT IS HEREBY AGREED AS FOLLOWS: 1. The Lease Agreement is and shall continue hereafter to be subject and subordinate to the lien of the Mortgage and the other Loan Documents, subject, however, to the provisions of this agreement. 2. In the event that Mortgagee or its successors, assigns, nominees or any other party claiming by, through or under Mortgagee (collectively "Successors") shall take possession of the Leased Premises by foreclosure, deed in lieu of foreclosure or otherwise and Tenant is not then in default (beyond any grace period set forth in the Lease Agreement for curing the same) of any covenant or condition of the Lease Agreement to be performed by Tenant, Tenant shall peaceably hold and enjoy the Leased Premises for the remainder of the unexpired term (including any extensions thereof), which possession shall be without hinderance or interruption. 3. Tenant shall not be joined as a party-defendant in any action or proceeding which may be instituted or taken by Mortgagee by reason of any default under the Loan Document. 4. In the event Mortgagee or Successors shall succeed to the rights of Landlord pursuant to the Lease Agreement: a). Tenant will attorn to Mortgagee or Successors and will perform, for the benefit of Mortgagee or Successors, all of the terms, covenants and conditions contained in the Lease Agreement to be kept and performed by it and shall, at the request of Mortgagee or Successors, execute and deliver a written agreement of attornment; and b). Mortgagee or Successors shall not be (i) liable for any act or omission of any prior landlord (including Landlord); (ii) subject to any offsets or defenses which Tenant may have against Landlord or any prior landlord; (iii) bound by any prepayment of rent or additional rent which Tenant may have paid for more than the current month to Landlord or any prior landlord, or (iv), bound by any amendment or change in any material term of the Lease Agreement or by any waiver of any material obligation under the Lease Agreement unless the Mortgagee has, by written instrument, agreed to such amendment or change of waiver. 5. The term "Mortgagee" shall mean the holder of Mortgagee (as the same may be assigned from time to time) and the term "Mortgage" shall mean Mortgage (as the same may be renewed, modified, replaced, extended or consolidated with mortgages placed on Entire Premises, dated subsequent to the date of Lease Agreement). 6. Any and all notices to be given pursuant hereto shall be sufficient if in writing and delivered personally or mailed by United States certified or registered mail, postage prepaid, addressed to Mortgagee and Tenant as follows: If to Mortgagee, at: 33 North LaSalle Street, Chicago, Illinois 60602, with a copy to Hinshaw & Culberton, 222 North LaSalle Street, Chicago, Illinois 60601, Attention: Stephen A. Malato; and If to Tenant, at: _________________________________, with a copy thereof to ___________________________. All notices served by mail shall be deemed to have been received three (3) days following the postmark dates thereof. 7. This agreement and the covenants conditions and promises herein contained shall inure to the benefit of and be binding Mortgagee and Tenant, and their respective successors, assigns, grantees and legal representatives. IN WITNESS WHEREOF, Mortgagee and Tenant have caused this agreement to be executed by their duly authorized officers and their respective corporate seals to be affixed hereto, as of the day and year first above written. Mortgagee: - --------- AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, a national banking association By____________________________________ Title: ATTEST: _____________________________ Title: Tenant: - ------ ________________________ By:_____________________ Title: STATE OF _______________ ) ) SS. COUNTY OF ______________ ) The undersigned, a Notary Public in and for said County, in the State aforesaid, DOES HEREBY CERTIFY that ____________________, of AMERICAN NATIONAL BANK & TRUST COMPANY OF CHICAGO, a national banking association ("Mortgagee"), personally known to me to be the same person whose name is subscribed to the foregoing instrument respectively, appeared before me this day in person and acknowledged that he signed and delivered the said instrument as his own free and voluntary act, and as the free and voluntary act of Mortgagee, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this _____ day of ____________, 1991. --------------------------------------- NOTARY PUBLIC My Commission Expires_______________. STATE OF _______________ ) ) SS. COUNTY OF ______________ ) The undersigned, a Notary Public in and for said County, in the State aforesaid, DOES HEREBY CERTIFY that ______________, of ________________________ ("Tenant"), personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered the said instrument as his own free and voluntary act, and as the free and voluntary act of Tenant, for the uses and purposes therein set forth. GIVEN under my hand and Notarial Seal this _____ day of ____________, 1991. --------------------------------------- NOTARY PUBLIC My Commission Expires_______________. DESCRIPTION OF LEASED PREMISES EXHIBIT "A" LEGAL DESCRIPTION OF ENTIRE PREMISES EXHIBIT "B" EX-10.23 23 ITASCA WAREHOUSE LEASE AGREEMENT DTD 9/6/96 Exhibit 10.23 INDUSTRIAL BUILDING LEASE LANDLORD: CENTERPOINT PROPERTIES CORPORATION, a Maryland corporation TENANT: PLAYBOY ENTERPRISES, INC. a Delaware corporation
TABLE OF CONTENTS ----------------- ARTICLE I Lease Terms............................................... 1 Section 1.1. Definitions............................................... 1 Section 1.2. Significance of Definitions............................... 4 Section 1.3. Enumeration of Exhibits................................... 4 ARTICLE II Premises.................................................. 4 Section 2.1. Lease..................................................... 4 Section 2.2. Common Areas.............................................. 4 ARTICLE III Term...................................................... 5 Section 3.1. Term...................................................... 5 Section 3.2. Memorandum of Lease Term.................................. 5 ARTICLE IV Construction of Improvements.............................. 5 Section 4.1. Landlord's Construction Obligation........................ 5 Section 4.2. Plans Approval............................................ 5 Section 4.3. Completion................................................ 6 Section 4.4. Tenant's Inspection Rights................................ 6 Section 4.5. Changes................................................... 6 Section 4.6. Punchlist................................................. 7 Section 4.7. Representatives........................................... 7 Section 4.8. Warranty.................................................. 7 Section 4.9. Damages for Late Completion............................... 8 ARTICLE V Rent...................................................... 8 Section 5.1. Base Rent................................................. 8 Section 5.2. Base Rent Adjustment...................................... 8 Section 5.3. Interest and Late Charges on Late Payments................ 11 ARTICLE VI Utilities................................................. 11 Section 6.1. Utilities................................................. 11 ARTICLE VII Use....................................................... 11 Section 7.1. Use....................................................... 11 Section 7.2. Prohibited Uses........................................... 12 Section 7.3. No Implied Permission..................................... 12 Section 7.4. Rules and Regulations..................................... 12 ARTICLE VIII Maintenance of Premises................................... 12 Section 8.1. Maintenance............................................... 12 Section 8.2. Governmental Requirements................................. 13 Section 8.3. Tenant's Responsibilities................................. 13 ARTICLE IX Insurance................................................. 13 Section 9.1. Coverage Required......................................... 13 Section 9.2. Policies.................................................. 14 Section 9.3. Subrogation............................................... 15 Section 9.4. Miscellaneous Insurance Provisions........................ 15 Section 9.5. Landlord's Insurance...................................... 16
i
ARTICLE X Damage or Destruction.................................... 17 Section 10.1. Total Destruction........................................ 17 Section 10.2. Partial Destruction...................................... 17 Section 10.3. Lease Termination........................................ 17 ARTICLE XI Liens.................................................... 17 Section 11.1. Lien Claims.............................................. 17 Section 11.2. Landlord's Right to Cure................................. 18 ARTICLE XII Tenant Alterations....................................... 18 Section 12.1. Alterations.............................................. 18 Section 12.2. Ownership of Alterations................................. 19 Section 12.3. Tenant Signs............................................. 19 Section 12.4. Environmental Impact..................................... 19 ARTICLE XIII Condemnation............................................. 19 Section 13.1. Taking: Lease to Terminate............................... 19 Section 13.2. Taking: Lease to Continue................................ 19 Section 13.3. Tenant's Claim........................................... 20 ARTICLE XIV Assignment - Subletting by Tenant........................ 20 Section 14.1. No Assignment, Subletting or Other Transfer.............. 20 Section 14.2. Operation of Law......................................... 20 Section 14.3. Excess Rental............................................ 20 Section 14.4. Merger or Consolidation.................................. 20 Section 14.5. Unpermitted Transaction.................................. 21 ARTICLE XV Financial Statements..................................... 21 Section 15.1. Financial Statements..................................... 21 ARTICLE XVI Indemnity for Litigation................................. 21 Section 16.1. Indemnity for Litigation................................. 21 Section 16.2. Landlord's Indemnity..................................... 22 ARTICLE XVII Estoppel Certificates.................................... 22 Section 17.1. Estoppel Certificate..................................... 22 ARTICLE XVIII Inspection of Premises................................... 22 Section 18.1. Inspections.............................................. 22 Section 18.2. Landlord Signs........................................... 22 ARTICLE XIX Fixtures................................................. 22 Section 19.1. Building Fixtures........................................ 22 Section 19.2. Tenant's Equipment....................................... 23 Section 19.3. Removal of Tenant's Equipment............................ 23 ARTICLE XX Default.................................................. 23 Section 20.1. Event of Default......................................... 23 Section 20.2. Bankruptcy............................................... 25 Section 20.3. Re-entry................................................. 26 ARTICLE XXI Landlord's Performance of Tenant's Covenants............. 26
ii
SECTION 21.1. Landlord's Right to Perform Tenant's Obligations......... 26 ARTICLE XXII Exercise of Remedies..................................... 26 Section 22.1. Cumulative Remedies...................................... 26 Section 22.2. No Waiver................................................ 26 Section 22.3. Equitable Relief......................................... 26 ARTICLE XXIII Subordination to Mortgages............................... 27 Section 23.1. Subordination............................................ 27 Section 23.2. Mortgage Protection...................................... 27 ARTICLE XXIV Indemnity and Waiver..................................... 28 Section 24.1. Tenant Indemnity......................................... 28 Section 24.2. Waiver of Claims......................................... 29 Section 24.3. Landlord's Indemnity..................................... 29 ARTICLE XXV Surrender................................................ 29 Section 25.1. Condition................................................ 29 Section 25.2. Removal of Tenant's Equipment............................ 30 Section 25.3. Holdover................................................. 30 ARTICLE XXVI Covenant of Quiet Enjoyment.............................. 30 Section 26.1. Covenant of Quiet Enjoyment.............................. 30 ARTICLE XXVII No Recording............................................. 30 Section 27.1. No Recording............................................. 30 ARTICLE XXVIII Notices.................................................. 31 Section 28.1. Notices.................................................. 31 ARTICLE XXIX Covenants Run with Land.................................. 31 Section 29.1. Covenants................................................ 31 Section 29.2. Release of Landlord...................................... 31 ARTICLE XXX Environmental Matters.................................... 32 Section 30.1. Defined Terms............................................ 32 Section 30.2. Tenant's Covenants with Respect to Environmental Matters. 33 Section 30.3. Conduct of Tenant........................................ 33 Section 30.4. Exacerbation............................................. 34 Section 30.5. Rights of Inspection..................................... 34 Section 30.6. Copies of Notices........................................ 34 Section 30.7. Tests and Reports........................................ 35 Section 30.8. Indemnification.......................................... 35 Section 30.9. Tenant Representations with respect to Environmental Matters................................................ 36 ARTICLE XXXI Expansion Option for Expansion Space..................... 37 Section 31.1. Expansion Option......................................... 37 ARTICLE XXXII Right of First Offer for Expansion Space................. 37 Section 32.1. Right of First Offer..................................... 37 ARTICLE XXXIII Renewal Option........................................... 38
iii Section 33.1. Renewal Option........................................... 38 Section 33.2. "As Is" Condition........................................ 39 Section 33.3. Amendment................................................ 39 Section 33.4. Termination.............................................. 39 Section 33.5. No Commissions........................................... 39 ARTICLE XXXIV Security Deposit......................................... 39 Section 34.1. Security Deposit......................................... 39 ARTICLE XXXV Miscellaneous............................................ 40 Section 35.1. Captions................................................. 40 Section 35.2. Severability............................................. 40 Section 35.3. Applicable Law........................................... 40 Section 35.4. Amendments in Writing.................................... 40 Section 35.5. Relationship of Parties.................................. 40 Section 35.6. Brokerage................................................ 40 Section 35.7. No Accord and Satisfaction............................... 41 Section 35.8. Joint Effort............................................. 41 Section 35.9. Waiver of Jury Trial..................................... 41 Section 35.10. Time..................................................... 41 Section 35.11. Landlord's Consent....................................... 41 Section 35.12. No Partnership........................................... 41 Section 35.13. Landlord's Liability..................................... 41 Section 35.14. Landlord Rights.......................................... 41 Section 35.15. Rent Absolute............................................ 41 Section 35.16. Tenant Authority......................................... 42 Section 35.17. Purchase Contingency..................................... 42
iv INDUSTRIAL BUILDING LEASE ------------------------- THIS LEASE, made as of this 6th day of September, 1996 between CENTERPOINT PROPERTIES CORPORATION, a Maryland corporation (hereinafter referred to as "LANDLORD"), and PLAYBOY ENTERPRISES, INC., a Delaware corporation (hereinafter referred to as "TENANT"). ARTICLE I --------- LEASE TERMS ----------- Section 1.1. Definitions. In addition to the other terms, which are elsewhere defined in this Lease, the following terms and phrases, whenever used in this Lease shall have the meanings set forth in this Subsection, and only such meanings, unless such meanings are expressly contradicted, limited or expanded elsewhere herein. A. Area of the Building: 128,867 square feet of space. B. Area of the Premises: 106,038 square feet of space. C. Area of the Warehouse within the Premises: 70,908 square feet of space. D. Base Rent Schedule: Period Annual Base Rent ------ ---------------- Commencing on the Warehouse Commencement Date and ending on the day preceding the Office Commencement Date $403,466.52 Commencing on the Office Commencement Date and ending on the last day of Lease Year 5 $698,790.48 Commencing on the first day of Lease Year 6 and ending on the last day of Lease Year 10 $802,707.72 E. Estimated Office Commencement Date: December 1, 1997. F. Estimated Warehouse Commencement Date: June 1, 1997. G. Estimated Termination Date: November 30, 2007. H. Force Majeure: any event or circumstance which is beyond the control of Landlord including, without limitation, acts of God or the public enemy, governmental restrictions or actions, fire or other casualty, accidents, unavailability of fuel, power, supplies or materials, unusually adverse weather conditions, or the passage or application of any Legal Requirements or moratorium of any Governmental Authority which is not now in effect which has the effect of preventing or delaying progress on the Initial Improvements and Tenant Delay. I. Force Majeure Delay: any interruption or delay in the progress of the Initial Improvements which is the result of Force Majeure. Any delay which is the result of Force Majeure shall be deemed to be a Force Majeure Delay notwithstanding that Landlord or its contractor with respect to the time period for which the Force Majeure Delay is being claimed is concurrently delayed by events within its control. J. Governmental Authority: any federal, regional, state, county or municipal government (including, without limitation, any agency, authority, subdivision, department or bureau thereof. K. Initial Improvements: collectively, the improvements contemplated in the Plans, consisting of (i) the portion of the Building containing approximately 106,038 square feet of space, of which approximately 35,130 square feet will be office space, and (ii) a parking lot providing for the parking of not less than 275 automobiles, to be constructed on the Land approximately as depicted on the site plan attached hereto as Exhibit "A" and by this reference incorporated herein. L. Initial Monthly Rent Adjustment Deposit: $1,200.00 or such amount as determined by expense review prior to Warehouse Commencement Date. M. Initial Term: The period commencing as of the Office Commencement Date and ending on the last day of the tenth (10th) Lease Year thereafter. N. Landlord's Broker: None. O. Landlord's Mailing Address: c/o 401 North Michigan Avenue Chicago, Illinois 60611 Attn: Mr. Michael M. Mullen P. Legal Requirements: (i) any and all laws, codes, ordinances, requirements, standards, plats, plans, criteria, orders, directives, rules and regulations of any Governmental Authority affecting the improvement, alteration, use, maintenance, operation, occupancy, security, health, safety and environmental condition of the Project or any part thereof (or any occupants therein, as the context requires) including, without limitation any Environmental Laws (as hereinafter defined), and (ii) any and all covenants, restrictions, conditions, easements and other agreements of record affecting the Project and the Reciprocal Easement Agreement, as amended from time to time, and any documents, rules, regulations, standards or criteria set forth or referenced therein or promulgated by the Landlord or any governing body or entity exercising jurisdiction over the Project, in any case, whether in force at the Commencement Date or passed, enacted or imposed at some time in the future, and shall include all permits, licenses, certificates, authorizations and approvals required in connection with any of the foregoing. Q. Plans: the plans and specifications to be prepared by the Project Architect for the construction of the Building. R. Preliminary Plans: the plans and specifications described on Exhibit "C" attached hereto and by this reference made a part hereof. 2 S Project Architect: Cornerstone Architects, Inc. T. Reciprocal Easement Agreement: such easements over, upon and across the Project as are reasonably required to provide for ingress, egress, drainage, detention, access to utilities and services, maintenance of secured common elements and services and the sharing of expenses thereof, existence of immaterial encroachment and similar rights customary among several parcels comprising a single commercial development. U. Security Deposit: one monthly Rent payment. V. Substantial Completion or Substantial Completion Date: the earlier to occur of (i) the date on which Landlord receives a permanent, temporary or conditional certificate of occupancy from the Village to occupy the warehouse portion of the Premises or the warehouse and office portion of the Premises, as applicable; provided, however, if such certificate is not issued due to the failure to complete any work expressly excluded in the Plans or not required by any Governmental Authority as of the time the building permit is issued, such certificate shall be deemed to have issued, (ii) the date the Project Architect states in writing that the Initial Improvements are substantially completed in accordance with the Plans (as such Plans may be revised from time to time in accordance with the terms of this Lease), or (iii) the date on which Tenant occupies the Premises or any portion thereof. In the event there is a dispute as to Substantial Completion, the Project Architect shall determine, in the exercise of its reasonable judgment, whether or not the Initial Improvements are substantially completed as required herein, and the parties hereto agree to be bound by such decision. W. Tenant Delay: any interruption or delay in the progress of the Initial Improvements which is the result of: (i) the failure of Tenant to approve the Plans or any portion thereof; (ii) changes in construction requested by Tenant or any member of the Tenant Group; (iii) the performance or non-performance of any work at, or services with respect to, the Premises by Tenant or any member of the Tenant Group; or (iv) any other act or omission of Tenant, any member of the Tenant Group or any person, firm or entity claiming by, through or under any of them. X. Tenant Group: any or all of Tenant's agent, employees, representatives, contractors, workmen, mechanics, suppliers, customers, guests, licensees, invitees, sublessees, assignees and all of their respective successors and assigns or any party claiming by, through or under any of them. Y. Tenant's Broker: Paine/Wetzel Associates, Inc. Z. Tenant's Mailing Address: 680 North Lake Shore Drive Chicago, Illinois 60611 Attention: General Counsel AA. Tenant's Proportion or Proportionate Share: The percentage obtained by dividing the Area of the Warehouse within the Premises by the Area of the Building until the Office Commencement Date, and from and after the Office Commencement Date, the percentage obtained by dividing the Area of the Premises by the Area of the Building. AB. Term: The Initial Term as same may be extended or sooner terminated. 3 AC. Use: Any use permitted by all Legal Requirements. AD. Village: Village of Itasca. Section 1.2. Significance of Definitions. Each reference in this Lease to any of the Definitions contained in Section 1.1 of this Article shall be deemed and construed to incorporate all of the terms provided under each such Definition. Section 1.3. Enumeration of Exhibits. The exhibits in this Section and attached to this Lease are incorporated in this Lease by this reference and are to be construed as a part of this Lease. Exhibit "A" - Site Plan Exhibit "B" - Legal Description of Land Exhibit "C" - Preliminary Plans and Specifications Exhibit "D" - Form of Estoppel Certificate ARTICLE II ---------- Premises -------- Section 2.1. Lease. Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of Tenant to be kept, observed and performed, does by these presents, lease to Tenant, and Tenant hereby leases from Landlord, the demised premises ("Premises"), being depicted in the site plan attached hereto as Exhibit "A" in the building to be constructed on Old Thorndale Road in the Village of Itasca, DuPage County, Illinois (hereinafter referred to as the "Building"), on a portion of the real estate legally described on Exhibit "B" attached hereto and by this reference incorporated herein (all of said real estate is hereinafter referred to as the "Land"). The Premises shall consist of the portion thereof designated on the site plan as warehouse space ("Warehouse Space") and the portion thereof designated on the site plan as office space ("Office Space"). The demise of the Premises is subject to the Legal Requirements. The Land, Common Areas (defined in Section 2.2 below), Building and other buildings and improvements now or hereafter constructed on the Land are hereinafter collectively referred to as the "Project". Section 2.2. Common Areas. A. Tenant has the nonexclusive right to use in common with Landlord and other tenants in the Project, subject to reasonable rules from time to time made by Landlord of which Tenant is given notice, the following areas now or hereafter a part of the Project (collectively, "Common Areas"): (i) Building Common Area. The roof, common stairways, accessways, loading docks, platforms and passageways thereto, if any; (ii) Floor Common Area. If the Premises includes less than the entire rentable area of any floor, the common lobbies, hallways, toilets and other common facilities located on such floor, if any; and (iii) Land Common Area. Common walkways, sidewalks and driveways necessary for access to the Building, utilities, landscaping and lawn areas and parking spaces or areas from time to time maintained on the portion of the Land intended to be used by the tenants in the Building and not the parking spaces or areas from time to time maintained on the Land but intended to be used by tenants in other buildings in the Project. B. Landlord reserves the right from time to time, without unreasonable interference with Tenant's use: To install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service to other parts of the Building and Project above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas, and to relocate any pipe, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are so located or located elsewhere outside the Premises; to change 4 the boundary lines of the Land; to establish and enforce such reasonable rules and regulations as Landlord deems necessary or desirable in the operation of the Project; and to alter, relocate, close or temporarily suspend the use of any Common Area. Landlord reserves the right to grant easements on the Land, to allow third parties to use all internal roadways constructed on the Project, to make boundary adjustments to the Land, to use the Land for such purposes as Landlord deems necessary or desirable, including, but not limited to the installation of cellular dishes or other similar communication devices or towers on any Common Area with the consent of Tenant, which consent shall not be unreasonably withheld or delayed, except that Tenant's consent shall not be required if any such dishes, devices or towers are installed or constructed on the roof (but in no event shall any installation on the roof exceed 20 feet above the height of the roof), and to dedicate for public use portions of the Land, including without limitation any public streets or any other improvements, without Tenant's consent, provided that no such grant or dedication shall materially interfere with Tenant's use of the Premises or otherwise cause Tenant to incur any additional cost or expense in excess of $100.00. ARTICLE III ----------- Term ---- Section 3.1. Term. The initial Term of this Lease shall commence with respect to the Warehouse Space on the date (hereinafter referred to as the "Warehouse Commencement Date") which is the Substantial Completion Date of the Warehouse Space, which date is estimated to be the Estimated Warehouse Commencement Date. The Initial Term of this Lease shall commence with respect to the Office Space on the date (hereinafter referred to as the "Office Commencement Date") which is the Substantial Completion Date of the Office Space, which date is estimated to be the Estimated Office Commencement Date. The Initial Term shall end on the last day of the tenth (10th) Lease Year after the Office Commencement Date unless sooner terminated as herein set forth. The term "Lease Year" when used in this Lease shall mean a twelve (12) month period commencing (i) as to the first Lease Year, on the date (hereinafter referred to as the "First Lease Year Commencement Date") which is the Office Commencement Date if same is the first (1st) day of a calendar month or the first (1st) day of the next full calendar month after the Office Commencement Date if same does not occur on the first (1st) day of a calendar month, and (ii) as to subsequent Lease Years, on the annual anniversary date of the First Lease Year Commencement Date. Concurrent with the actual Office Commencement Date and Warehouse Commencement Date of this Lease, Tenant shall deliver to Landlord an estoppel certificate in accordance with Article XVII hereof. Section 3.2. Memorandum of Lease Term. Landlord and Tenant shall execute an instrument fixing the actual Commencement Date and termination of the Initial Term of this Lease at the request of either Landlord or Tenant. ARTICLE IV ---------- Construction of Improvements ---------------------------- Section 4.1. Landlord's Construction Obligation. Subject to the terms and conditions of this Article IV, Landlord shall, at its sole cost and expense, construct or cause to be constructed the Initial Improvements on the Land in accordance with the Plans. Landlord agrees that all services and work performed in connection with the Initial Improvements shall be done in a good and workmanlike manner using only new material, and shall be performed substantially in accordance with applicable Legal Requirements. Section 4.2. Plans Approval. Tenant hereby approves the Preliminary Plans. Landlord shall cause the Project Architect to prepare Plans consistent with the Preliminary Plans and otherwise acceptable to 5 Landlord. The Plans are subject to Tenant's approval (which shall not be unreasonably withheld or delayed), and if Tenant does not approve same, Tenant shall advise Landlord in reasonable detail of the reasons for such disapproval. Tenant shall comment on the Plans (or any component thereof submitted to Tenant) and each revision thereof within five (5) business days after receipt from Landlord. In the event that Tenant does not disapprove of the Plans (or any component thereof submitted to Tenant) within said five (5)-day business period, the Plans (or applicable component thereof) shall be deemed approved. Tenant may not object to any changes as may be incorporated in the Plans necessary to obtain the approval of the Village; provided, however, Tenant's review of the Plans is for the limited purpose of reviewing office layouts, floor plans, location of electrical and phone outlets and the like. In no event shall Tenant's review and approval of the Plans be deemed an approval or acceptance of Landlord's construction specifications. Prior to Tenant's approval for the Plans, Tenant may change the space plan and Tenant shall not pay the cost of redrafting the space plan, however any changes resulting in an increase in the cost of construction shall be paid by Tenant as provided in Section 4.5 below. Section 4.3. Completion. Landlord shall diligently proceed with the construction of the Initial Improvements upon approval of Landlord, Tenant and the Village. Landlord shall use its best efforts to substantially complete the Warehouse Space and parking for approximately 75 automobiles and deliver possession thereof to Tenant on or before the Estimated Warehouse Commencement Date and complete the Office Space and the remaining parking spaces and deliver possession thereof to Tenant on or before the Estimated Office Commencement Date: provided, however, with respect to the Warehouse Space and the Office Space, if construction is delayed because of any Force Majeure Delays, then the time of completion of such construction shall be extended for the additional time caused by such Force Majeure Delays without liability on the part of Landlord, except as set forth in Section 4.9 below. Section 4.4. Tenant's Inspection Rights. Landlord shall exercise reasonable efforts to keep Tenant advised with respect to the progress of the construction of the Initial Improvements and the estimated dated of Substantial Completion, and Landlord shall notify Tenant in writing as soon as Substantial Completion occurs as provided herein. During the construction of the Initial Improvements, Tenant shall have the right to inspect to Premises to monitor the progress of construction of the Initial Improvements; provided, however, that such right may not be exercised unless Tenant has: (i) given Landlord at least one (1) business days' prior written notice of the date and time Tenant intends to exercise such inspection right; and (ii) Tenant and/or Tenant's architect are accompanied at all times during the course of said inspection by Landlord and Landlord's representative or the Project Architect. Section 4.5. Changes. If any material or equipment specified in the Plans cannot be obtained, Landlord shall have the right to specify a similar alternative, subject to Tenant's approval, which approval shall not be unreasonably withheld or delayed. Tenant may propose one or more changes to the Plans to Landlord any time before the Substantial Completion Date, subject to the approval of Landlord (which approval will not be unreasonably withheld or delayed) and the Village. As promptly as reasonably practicable after the receipt and approval thereof, Landlord shall provide Tenant with a written estimate of the Tenant Delay in the Substantial Completion Date and the amount of the additional cost to complete the Initial Improvements which will result from such change, which costs shall be: (i) the cost of all materials, supplies and labor used or supplied in making the proposed change, including general conditions and any contractor's fees (which general conditions and contractor's fees shall be fifteen percent (15%) of such costs); (ii) any architect and engineer fees; (iii) soft costs; and (iv) fees and expenses of architects, engineers and other third party consultants in connection with review or approval of changes in Plans. If Tenant fails to approve of the revised Plans and associated estimate within five (5) business days after delivery of the same, Tenant shall be deemed to have abandoned its request for such change, and the Initial Improvements shall be constructed in accordance with the then existing Plans. If Tenant approves the revised Plans and associated estimate within said five (5)-day business period by signing and returning a copy of Landlord's estimate, Landlord shall cause the Initial Improvements to be constructed in accordance with the Plans as so revised. Tenant shall pay Landlord the amount of such additional costs within thirty (30) days after Landlord submits to Tenant a bill for such additional costs as are then due and payable from time to time. In no event shall Landlord have any obligation to continue any work relating to such changes unless Tenant has paid Landlord the amount billed to Tenant in full within said thirty (30) day period. Further, in the event that the additional costs are not paid within said thirty (30) 6 day period, Tenant shall be deemed to have abandoned its request for such changes and the Initial Improvements shall be constructed in accordance with the then existing Plans, but Tenant shall not be relieved of its obligation to pay for the portion of the work performed to the date such request is abandoned. Unless requested in writing by Tenant to the contrary, Landlord shall continue with construction of the Initial Improvements according to the then existing Plans during the pendency of any proposed change in the Plans until such change and cost estimate are approved by Landlord and Tenant as provided above. Any halt in construction requested in writing by Tenant shall constitute a Tenant Delay hereunder. If Tenant requests a change to the Plans pursuant to this Section 4.5, and Tenant does not ultimately approve of the resulting revised Plans or cost estimates, Tenant shall promptly reimburse Landlord, as Additional Rent, for any reasonable costs and expenses resulting from such requested changes incurred by Landlord. Landlord may make changes to the Plans without Tenant's consent, provided that: (i) such changes (a) will not create any additional monetary obligation for Tenant under this Lease, (b) are in material conformity with the Plans (as may have been previously revised by permissible Tenant and/or Landlord changes thereto), and (c) will not decrease the quality of any component of the Initial Improvements; or (ii) such changes are required by any applicable Legal Requirements. SECTION 4.6. PUNCHLIST. Before Tenant takes occupancy of the Premises but no later than thirty (30) business days after the Substantial Completion Date, Landlord, Project Architect and Tenant shall conduct an inspection of the Premises, and work in good faith to jointly prepare a punchlist (hereinafter referred to as the "PRE-OCCUPANCY PUNCHLIST"). Within sixty (60) days following the date Tenant first occupies all or any portion of the Premises, Landlord, the Project Architect and Tenant shall conduct an additional inspection of the Premises, and work in good faith to jointly prepare a supplement to the Pre- Occupancy Punchlist containing such items as may be difficult to discover or ascertain prior to Tenant's occupancy, but excluding: (i) any items theretofore corrected by Landlord; and (ii) any damage caused by any act or omission of Tenant or any member of the Tenant Group or any party claiming by, through or under any of them (the Pre-Occupancy Punchlist, as so supplemented is collectively referred to as the "FINAL PUNCHLIST"). Except as otherwise expressly provided in this Lease, any items not on the Final Punchlist shall be deemed accepted by Tenant, excluding latent defects with respect to the Initial Improvements that become definite and ascertainable, and to which landlord is notified of in writing, within one (1) year following the Substantial Completion Date. Tenant shall provide reasonable access to Landlord, its employees, agents and contractors for purposes of the repair and correction of any punchlist items. Landlord shall complete all Final Punchlist items as soon as is reasonably practicable after such Final Punchlist items are finally determined, not to exceed thirty (30) days, subject to extension due to any Force Majeure Delays; provided, however, in the absence of Force Majeure Delays, with respect to any Final Punchlist items that are not reasonably capable of being completed within said thirty (30)-day period, Landlord shall be deemed in compliance with Section 4.6 as long as Landlord commences the correction of the applicable Final Punchlist items within said thirty (30)-day period and thereafter diligently prosecutes such items to completion. SECTION 4.7. REPRESENTATIVES. Landlord designates Fred Reynolds or Michael M. Mullen as its representative for all purposes of this Article IV. Tenant designates Sue Shoemaker and Robert J. Terry as its representative(s) for all purposes of this Article IV. Wherever the terms of this Article IV require any notice to be given to or by a party, or any determination or action to be made or taken by a party, the representative(s) of each party shall act for and on behalf of such party, and the other party shall be entitled to rely thereon. Either party may designate one or more substitute representatives for all or a specified portion of the provisions of this Article IV, subject to notice to the other party of the identity of such substitute representative(s). SECTION 4.8. WARRANTY. Landlord represents that it shall obtain (i) a warranty against defective materials and workmanship with respect to the Initial Improvements from FCL Builders, Inc., for a period of one (1) year from Substantial Completion of the Initial Improvements; and (ii) a warranty against defects in the roof for a period of fifteen (15) years from Substantial Completion thereof from the roof manufacturer. Subject to Section 4.6 hereof, Tenant shall notify Landlord in writing of any defective condition occurring with respect to the Initial Improvements promptly following Tenant's discovery thereof and Landlord shall request that the party issuing the warranty perform any remedial work required to be performed under such warranty. 7 SECTION 4.9. DAMAGES FOR LATE COMPLETION. --------------------------- A. In the event that the Warehouse Commencement Date does not occur on or before August 1, 1997, Landlord shall reimburse Tenant for actual damages incurred by Tenant which damages are hereby agreed by the parties to be (i) $50,000.00 on August 1, 1997, plus (ii) $8,000.00 per week thereafter until the Warehouse Commencement Date, and (iii) the amount of rent that Tenant is required to pay under its existing lease ("EXISTING LEASE") at 800 West Thorndale, Itasca, Illinois, less the Rent that would have been due under this Lease commencing on August 1, 1997 and ending on the Warehouse Commencement Date. The date of August 1, 1997 set forth above shall be extended from time to time by the number of days of Force Majeure Delays. B. In the event that the Office Commencement Date does not occur on or before December 1, 1997, Landlord shall reimburse Tenant for (i) actual damages incurred by Tenant up to $100,000.00 for each month after December 1, 1997 until the Office Commencement Date, and (ii) the amount of rent that Tenant is required to pay under its Existing Lease, less the Rent that would have been due under this Lease commencing on December 1, 1997 and ending on the Office Commencement Date. The date of December 1, 1997 set forth above shall be extended from time to time by the number of days of Force Majeure Delays. C. In the event that the Office Commencement Date does not occur on or before June 1, 1998, Tenant may terminate this Lease upon notice to Landlord at any time prior to the Office Commencement Date. ARTICLE V --------- RENT ---- SECTION 5.1. BASE RENT. In consideration of the leasing aforesaid, Tenant agrees to pay Landlord, without offset or deduction, base rent for the Initial Term ("BASE RENT") in the amount of the Annual Base Rent set forth in the Base Rent Schedule. The Annual Base Rent shall be paid in advance, in twelve (12) equal monthly installments, commencing on the Warehouse Commencement Date (prorated for any partial month) and continuing on the first (1st) day of each month thereafter for the balance of the Term of this Lease, and in addition thereto, Tenant shall pay such charges as are herein described as "ADDITIONAL RENT". The term "RENT" when used in this Lease shall include all Base Rent payable under this Section 5.1, as well as the charges herein described as Additional Rent, and all other sums due from Tenant to Landlord hereunder. All Rent payable hereunder shall be payable to Landlord at Landlord's Mailing Address, or as Landlord may otherwise from time to time designate in writing. SECTION 5.2. BASE RENT ADJUSTMENT. In addition to the Base Rent payable by Tenant hereunder, Tenant shall pay to Landlord, as Additional Rent, the Rent Adjustments described in this Section 5.2 commencing on the Commencement Date, without set off or deduction. Until such time as Tenant receives the first Adjustment Statement provided for in clause (iii) of this Section 5.2, Tenant shall, commencing on the Commencement Date and on the first (1st) day of each and every month thereafter, make the Initial Monthly Rent Adjustment Deposit specified in Article I hereof. A. For the purposes of this Lease: (1) The term "CALENDAR YEAR" shall mean each calendar year or a portion thereof during the Term. (2) The term "EXPENSES" shall mean and include all expenses paid or incurred by Landlord or its beneficiaries for owning, maintaining, managing, operating, insuring, replacing and repairing the Project or any portion thereof, and all appurtenances and personal property used in 8 conjunction therewith and complying with all Legal Requirements. Expenses shall not include (i) depreciation charges, (ii) interest and principal payments on mortgages, (iii) ground rental payments, (iv) costs of roof maintenance or structural repairs which are Landlord's obligation pursuant to Section 8.1 B below, (v) costs incurred as a result of the negligent act or omission of Landlord, (vi) expenses in connection with services which are not offered to Tenant but are offered to other tenants in the Building and (vii) real estate brokerage and leasing commissions. If any building in the Project is not fully occupied during all or a portion of any Calendar Year, then Landlord may elect to make an appropriate adjustment of the Expenses which vary due to occupancy for such Calendar Year employing sound accounting and management principles, to determine the amount of Expenses that would have been paid or incurred by Landlord had said building been fully occupied and the amount so determined shall be the amount of Expenses attributable to such Calendar Year. (3) The term "RENT ADJUSTMENTS" shall mean all amounts owed by Tenant as Additional Rent resulting from Expenses and Taxes, or both. (4) The term "RENT ADJUSTMENT DEPOSIT" shall mean an amount equal to Landlord's estimate of Rent Adjustments due for any Calendar Year made from year to year during the Term. (5) The term "TAXES" shall mean real estate taxes, assessments, sewer rents, rates and charges, transit taxes, taxes based upon the receipt of rent, and any other federal, state or local government charge, general, special, ordinary or extraordinary, which may now or hereafter be assessed against the Project or any portion thereof in any Calendar Year during the Term and any tax in substitution of any of the foregoing; provided, however, in determining the income of Landlord with respect to any such substituted tax, only the income derived from the Project shall be included. In case of special taxes or assessments which may be payable in installments, only the amount of each installment and interest paid thereon paid during a Calendar Year shall be included in Taxes for that Calendar Year. Taxes shall also include any personal property taxes (attributable to the year in which paid) imposed upon the furniture, fixtures, machinery, equipment, apparatus, systems and appurtenances used in connection with the operation of the Project. Taxes also include Landlord's reasonable costs and expenses (including reasonable attorneys' fees) in contesting or attempting to reduce any taxes provided that the Landlord's efforts result in a reduction in any such taxes in an amount greater than the fees incurred in obtaining such reduction. Taxes shall be reduced by any recovery or refund received of taxes previously paid by the Landlord, provided such refund relates to taxes paid during the Term of this Lease. "Taxes" as used hereunder shall exclude (i) franchise, corporate, estate, inheritance, succession or transfer taxes of Landlord, or any income, profit or revenue tax upon the collection of Rent except to the extent any such tax replaces any other tax expressly set forth above and (ii) the portion of the real estate Taxes attributable to the portion of the Village of Itasca Old Thorndale Avenue Special Service Area Unlimited ad valorem property tax bonds, series 1996 relating to the widening of Old Thorndale Road. B. Subject to Section 5.2 H below, commencing on the Commencement Date, Tenant shall pay to the Landlord as Additional Rent the amount equal to Tenant's Proportion of Expenses and Taxes attributable to each Calendar Year of the Term. The amount of Taxes attributable to a Calendar Year shall be the amount assessed for such Calendar Year, even though the assessment for such Taxes may be payable in the following Calendar Year. C. As soon as reasonably feasible after the expiration of each Calendar Year, Landlord will furnish Tenant a statement ("ADJUSTMENT STATEMENT") showing the following: 9 (1) Expenses and Taxes for Calendar Year last ended and the amount of Expenses and Taxes payable by Tenant for such Calendar Year; (2) The amount of Rent Adjustments due Landlord for the Calendar Year last ended, less credits for Rent Adjustment Deposits paid, if any; and (3) The Rent Adjustment Deposit due in the current Calendar Year. D. Within thirty (30) days after Tenant's receipt of each Adjustment Statement, Tenant shall pay to Landlord: (1) The amount of Rent Adjustment shown on said statement to be due Landlord for the Calendar Year last ended; plus (2) The amount, which when added to the Rent Adjustment Deposit theretofore paid in the current Calendar Year would provide that Landlord has then received such portion of the Rent Adjustment Deposit as would have theretofore been paid to Landlord had Tenant paid one twelfth (1/12) of the Rent Adjustment Deposit for the current Calendar Year, to Landlord monthly on the first day of each month of such Calendar Year. Commencing on the first day of the first month after Tenant's receipt of each Adjustment Statement, and on the first day of each month thereafter until Tenant receives a more current Adjustment Statement, Tenant shall pay to Landlord one twelfth (1/12) of the Rent Adjustment Deposit shown on said statement. During the last complete Calendar Year, Landlord may include in the Rent Adjustment Deposit its estimate of the Rent Adjustment which may not be finally determined until after the expiration of the Term. The Tenant's obligation to pay the Rent Adjustment shall survive the Term. E. Tenant's payment of the Rent Adjustment Deposit for each Calendar Year shall be credited against the Rent Adjustments for such Calendar Year. All Rent Adjustment Deposits may be co-mingled and no interest shall be paid to Tenant thereon. If the Rent Adjustment Deposit paid by Tenant for any Calendar Year exceeds the Rent Adjustments for such Calendar Year, then Landlord shall give a credit to Tenant in an amount equal to such excess against the Rent Adjustments due for the next succeeding Calendar Year, except that if any such excess relates to the last Calendar Year of the Term, then, provided that no default of Tenant exists hereunder, Landlord shall refund such excess to Tenant. F. Tenant or its representative shall have the right to examine Landlord's books and records with respect to the items in the Adjustment Statement during normal business hours at any time within ninety (90) days following the furnishing by Landlord to Tenant of such Adjustment Statement. Unless Tenant shall take written exception to any item within ninety (90) days after furnishing of the foregoing statement, such statement shall be considered as final and accepted by Tenant. Any amount due to Landlord as shown on any such statement, whether or not written exception is taken thereto, shall be paid by Tenant within thirty (30) days after Landlord shall have submitted the statement, without prejudice to Tenant's rights to the exception to the Adjustment Statement as provided above. G. If the Commencement Date is on any day other than the first day of January, or if the Termination Date is on any day other than the last day of December, any Rent Adjustments due Landlord shall be prorated. H. Notwithstanding the foregoing, Tenant shall not be obligated to pay its Proportionate Share of real estate Taxes monthly, but shall make such payment to Landlord within ten (10) business days after the delivery by Landlord to Tenant of any invoice for Taxes along with a copy of the bill for the applicable real estate Taxes, or make such payment directly to the DuPage County Treasurer within said time period 10 in the event Tenant's Proportionate Share is one hundred percent (100%) at any time during the Term. Upon the occurrence of any Event of Default, Tenant's rights under this Section 5.2 H shall terminate and monthly Tax Deposits shall be paid as provided above. In the event that Tenant fails to pay the real estate Taxes when due, Tenant shall pay the full amount due, including, but not limited to, interest and penalties. I. In the event that Tenant is not reasonably satisfied with the landscaping and snow removal service being performed pursuant to this Lease, Tenant shall, upon notice to Landlord, but subject to any contract previously entered into between Landlord and the applicable service provider, cause the landscaping and snow removal service for the Project to be performed in a manner, by contractors and at a cost reasonably acceptable to Landlord. Thereafter, Landlord shall have no further obligation to provide landscaping or snow removal service at the Project. Section 5.3. Interest and Late Charges on Late Payments. Tenant acknowledges that its late payment of any Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which is extremely difficult or impracticable to fix. Such costs and expenses will include, without limitation, loss of use of money, administrative and collection costs and processing and accounting expenses. Therefore, if any installment of monthly Base Rent is not received by Landlord within ten (10) days of the date when due or any other sum due hereunder is not paid within ten (10) days of the date when due, Tenant shall immediately pay to Landlord a late charge equal to three percent (3%) of the unpaid amount. In the event Tenant does not pay any sums due hereunder within one (1) month of the due date thereof, an additional late charge equal to one and one-half percent (1 1/2%) of the amount due shall be immediately paid to Landlord, and Landlord may charge an additional one and one-half percent (1 1/2%) of the amount due for each additional month or fraction thereof, during which any amount due remains outstanding. Landlord and Tenant agree that this late charge represents a reasonable estimate of costs and expenses incurred by Landlord from, and is fair compensation to Landlord for, its loss suffered, by such non-payment by Tenant. Acceptance of the late charge shall not constitute a waiver of Tenant's default with respect to such non-payment by Tenant or prevent Landlord from exercising any other rights and remedies available to Landlord under this Lease. Failure to pay the late charge shall constitute a default under this Lease. ARTICLE VI ---------- Utilities --------- Section 6.1. Utilities. Tenant shall pay, directly to the appropriate supplier, all costs of natural gas, electricity, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. Landlord shall, at Landlord's sole cost and expense, separately meter the units in the Building. If, however, at any time, any services or utilities are not separately metered, Landlord shall make a reasonable determination of Tenant's share thereof and the cost thereof shall be included in Expenses. Landlord shall not in any way be liable or responsible to Tenant for any cost or damage or expense which Tenant may sustain or incur if either the quality or character of such service is changed or is no longer available or suitable for Tenant's requirements. ARTICLE VII ----------- Use --- Section 7.1. Use. The Premises shall be used for the Use only, and for no other purpose. Section 7.2. Prohibited Uses. Tenant shall not permit the Premises, or any other portion of the Project, to be used in such manner which impairs Landlord's right, title or interest in the Project or any portion 1l thereof, or in such manner which gives rise to a claim or claims of adverse possession or of a dedication of the Project or any portion thereof for public use. Tenant shall not use or occupy the Premises or permit the Project, in whole or in part, to be used or occupied, or do or permit anything to be done in or on the Project, in whole or in part, in a manner which would in any way violate any certificate of occupancy affecting the Project, or make void or voidable any insurance then in force with respect thereto, or which may make it impossible to obtain fire or other insurance thereon or which would render the insurance risk more hazardous, or which will cause or be apt to cause the structural injury to the Project or any part thereof, or which would cause the value of the Project or any part thereof to diminish, and shall not use or occupy or permit the Project to be used or occupied, in whole or in part, in a manner which may violate and shall comply with any present or future, ordinary or extraordinary, foreseen or unforeseen, Legal Requirements, whether or not Landlord also is liable for compliance. Tenant will not do or permit or suffer any public or private waste, damage, impairment or injury to or upon the Project or any part thereof. Section 7.3. No Implied Permission. Except as otherwise expressly provided herein, nothing in this Lease contained shall authorize Tenant to do or permit or suffer any act which shall in any way encumber the fee title of Landlord in and to the Project or any interest therein. The title, interest or estate of Landlord in the Project shall not be in any way subject to any claim by way of lien or encumbrance, whether arising by operation of law or by virtue of an express or implied contract by Tenant. Any claim to a lien or encumbrance upon the Project arising from any act of omission of Tenant shall accrue only against the Tenant's leasehold estate and shall in all respects be subject and subordinate to the paramount title and right of Landlord in and to the Premises and the Project. Every person furnishing, manufacturing or preparing any material, fixtures, apparatus or machinery for, or on account of, the Premises or any other improvements now or hereafter erected, or the appurtenances or furnishings therein, or performing any labor or services in, upon or about the Premises, or the improvements or appurtenances, or dealing in any way with Tenant or anyone claiming by, through or under Tenant shall take and be held charged with notice of this condition, and shall have and acquire no lien upon Landlord's estate or interest through the furnishing of such material, fixtures, apparatus, machinery, labor or services. Section 7.4. Rules and Regulations. In amplification and not in limitation of the foregoing provisions of Article VII, Tenant shall not permit any portion of the Premises to be used by any person or persons or by the public, as such, at any time or times during the Term in such manner as might reasonably tend to impair title to the Project or any portion thereof, or in such manner as might reasonably make possible a claim or claims of adverse use, adverse possession, prescription, dedication or other similar claims of, in, to or with respect to the Premises or any part thereof or estate therein. The Landlord may from time to time impose upon Tenant, such reasonable rules or regulations not inconsistent with the provisions of this Lease. ARTICLE VIII ------------ Maintenance of Premises ----------------------- Section 8.1. Maintenance. A. Tenant's Maintenance. Except for the Landlord's maintenance obligations set forth in Section 8.1 B hereof, Tenant agrees, at Tenant's sole cost and expense, to take good care of the Premises and keep and maintain same and all parts thereof, including, but not limited to, all floors, floor coverings, windows, glass, plate glass, ceilings, interior and demising walls, doors, electrical systems, lighting fixtures and equipment, plumbing systems and fixtures, sprinkler systems, heating, ventilating and air conditioning systems, loading docks, areas and doors, rail space areas, fences and signs, and all other pipes, mains, water, sewer and gas connections and all other fixtures, machinery, apparatus, equipment and appurtenances now or hereafter belonging to, connected with or used in conjunction with the Premises together with any and all alterations and additions thereto, in good order, condition and repair, suffering no waste or injury. Tenant shall, at its sole cost and expense, promptly make all necessary repairs and replacements, ordinary as well as extraordinary, foreseen as well as unforeseen, in and to any equipment 12 now or hereafter located in the Premises, including, but not limited to, all floors, floor coverings, windows, glass, plate glass, ceilings, interior and demising walls, doors, electrical systems, lighting fixtures and equipment, plumbing systems and fixture, sprinkler systems, heating, ventilating and air conditioning systems, loading docks, areas and doors, rail space areas, fences and signs, connections, pipes, mains, water, sewer and connections, and all other fixtures, machinery, apparatus equipment and appurtenances now or hereafter belonging to, connected with or used in conjunction with the Premises. All such maintenance, repairs and replacements shall be of first class quality and sufficient for the proper maintenance and operation of the Premises. Tenant shall keep and maintain the Premises safe, secure and clean, specifically including, but not by way of limitation, removal of waste and refuse matter. Tenant shall not permit anything to be done upon the Premises (and shall perform all maintenance and repairs thereto so as not) to invalidate, in whole or in part, or prevent the procurement of any insurance policies which may, at any time, be required under the provisions of this Lease. Tenant shall not obstruct or permit the obstruction of any parking area, adjoining street or sidewalk. B. Landlord's Maintenance. Landlord shall make, or cause to be made, all maintenance, repairs and necessary replacements to the Common Areas. The cost of such maintenance, repairs and replacements shall be a part of Expenses. Landlord shall also make, or cause to be made, all repairs and necessary replacements to the "structural components" (as hereinafter defined) of the Building. For purposes of this lease, the phrase "structural components" shall mean the roof, skylights, structural components of the exterior walls (excluding windows, doors and overhead doors, but including window frames and door frames) and foundation of the Building. The cost of such repairs and replacements shall be the sole responsibility of Landlord except to the extent such costs arise as a result of any act or omission of Tenant or any person, firm or entity claiming by, through or under any of them, in which event, the cost therefor shall be paid by Tenant as Additional Rent within thirty (30) days after Landlord bills Tenant therefor from time to time. Section 8.2. Governmental Requirements. Tenant at its own cost and expense also shall promptly comply with any and all requirements of any Governmental Authority to or affecting the Premises or any part thereof, irrespective of the nature of the work required to be done, extraordinary as well as ordinary, whether or not the same involve or require any structural changes or additions in or to the Building and irrespective of whether or not such changes or additions be required on account of any particular use to which the Premises or any part thereof are being put. Included in the obligations set forth above, but not in limitation thereof, Tenant, at its own cost and expense, shall promptly comply with OSHA regulations relating to overhead cranes (CFR 1910-179(j)(2) and 184(d), CFR 1910-179(j)(3), CFR 1910-179(e)(1) through (4) and CFR 1910- 179(b)(5)), if applicable. Notwithstanding the foregoing, Landlord shall cause the Initial Improvements to be constructed in compliance with all applicable Legal Requirements. Section 8.3. Tenant's Responsibilities. Except as set forth in Section 8.1.B. hereof, Landlord shall not be required to furnish any services or facilities whatsoever to the Premises. ARTICLE IX ---------- Insurance --------- Section 9.1. Coverage Required. Tenant shall procure and maintain, or cause to be maintained, at all times during the term of this Lease, at Tenant's sole cost and expense, and until each and every obligation of Tenant contained in the Lease has been fully performed, the types of insurance specified below, with insurance companies authorized to do business in the State of Illinois covering all operations under this Lease, whether performed by Tenant or by Contractors hired by Tenant. 13 A. IN GENERAL. Upon the Warehouse Commencement Date, tenant shall procure and maintain the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts. Employer's liability coverage with limits of not less than $100,000 each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined single limit, for bodily injury, personal injury, and property damage liability. Products/completed operation, independent contractors, broad form property damage and contractual liability coverages are to be included. Landlord is to be named as additional insureds on a primary, non-contributory basis for any liability, arising directly or indirectly from this Lease. (iii) CONTENTS INSURANCE. Insurance against fire, sprinkler leakage, vandalism, and the extended coverage perils for the full insurable value of all contents of Tenant within the Premises, and of all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises. B. CONSTRUCTION. During any construction performed by or at the direction of Tenant, Tenant shall procure and maintain, or cause to be maintained, the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts. Employer's liability coverage with limits of not less than $500,000 for each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined single limit, for bodily injury, personal injury, and property liability. Products/completed operations, explosion, collapse, underground, independent contractors, broad form property damage and contractual liability coverages are to be included. Landlord is to be named as an additional insured on a primary non- contributory basis for any liability arising directly or indirectly from the Lease. (iii) ALL RISK BUILDERS RISK INSURANCE. Tenant shall provide All Risk Blanket Builder's Risk Insurance to cover the materials, supplies, equipment, machinery and fixtures that are or will be part of the Project. Coverage extensions shall include the following: right to partial occupancy, material stored off-site and in-transit, boiler and machinery, earthquake, flood (including surface water backup), collapse, water damage, debris removal, faulty workmanship or materials, testing, mechanical- electrical breakdown and failure, deletion of freezing and temperature exclusions, business interruption, extra expense, loss of revenue, loss of rents and loss of use of property, as applicable, Landlord shall be named as loss payee. (iv) PROFESSIONAL LIABILITY. When any architects, engineers, or consulting firms perform work in connection with this Lease costing in excess of $25,000.00, Professional Liability Insurance shall be maintained with limits of $1,000,000. When policies are renewed or replaced, the policy retroactive date must coincide with, or precede, start of work. Section 9.2. POLICIES. All insurance policies shall be written with insurance companies and shall be in form reasonably satisfactory to Landlord. All insurance policies (except for worker's compensation) shall name Landlord as an additional insured and loss payee as their respective interests may appear and shall provide that 14 they may not be terminated or modified without thirty (30) days' advance written notice to Landlord. All policies shall also contain an endorsement that Landlord, although named as additional insured, shall nevertheless be entitled to recover for damages caused by the negligence of Tenant. The minimum limits of insurance specified in this Section shall in no way limit or diminish Tenant's liability under this Lease. Tenant shall furnish to Landlord, on or prior to the Warehouse Commencement Date such insurance required to be carried by Tenant, and thereafter prior to the expiration of each such policy, true and correct photocopies of all insurance policies required under this Section, together with any amendments and endorsements to such policies, certificates of insurance, and such other evidence of coverages as Landlord may reasonably request, and evidence of payment of all premiums and other expenses owed in connection therewith. Upon Tenant's default in obtaining or delivering the policy for any such insurance or Tenant's failure to pay the charges therefor, Landlord may, at its option, on or after the tenth (lOth) day after written notice thereof is given to Tenant, procure or pay the charges for any such policy or policies and the total cost and expense (including attorneys' fees) thereof shall be immediately paid by Tenant to Landlord as Additional Rent upon receipt of a bill therefor. Section 9.3. Subrogation. Landlord and Tenant agree to have all fire and extended coverage which may be carried by either of them endorsed with a clause providing that any release from liability of or waiver of claim for recovery from the other party or any of the parties named in Section 9.2 above entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of said policy or the right of the insured to recover thereunder, and providing further that the insurer waives all rights of subrogation which such insurer might have against the other party or any of the parties named in Section 9.2 above. Without limiting any release or waiver of liability or recovery contained in any other Section of this Lease but rather in confirmation and furtherance thereof. Landlord and any beneficiaries of Landlord waive all claims for recovery from Tenant, and Tenant waives all claims for recovery from Landlord, any beneficiaries of Landlord and the managing agent for the Project and their respective agents, partners and employees, for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance policies. Notwithstanding the foregoing or anything contained in this Lease to the contrary, any release or any waiver of claims shall not be operative, nor shall the foregoing endorsements be required, in any case where the effect of such release or waiver is to invalidate insurance coverage or invalidate the right of the insured to recover thereunder or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within ten (10) days following written notice, to pay such increased cost, thereby keeping such release or waiver in full force and effect). Section 9.4 Miscellaneous Insurance Provisions. Landlord and Tenant agree as follows: A. Both parties hereto expressly understand and agree that any insurance coverages furnished by them and the limits of any such insurance coverage shall in no way limit the liabilities and responsibilities of the parties specified under the Lease, or contracts executed relating to the Project, or by law. B. The failure of either party to obtain evidence of insurance from the other party shall not be deemed to be a waiver by either party, and both parties shall remain under their respective continuing obligation to maintain the insurance coverage required under this Lease. C. Any and all deductibles on insurance coverages referenced in this Article IX shall be borne by Tenant. The deductible under Landlord's property insurance shall in no event exceed $25,000.00. D. Tenant expressly understands and agrees that any insurance maintained by Landlord shall apply in excess of and not contribute with insurance provided by the Tenant under the Lease. E. If Tenant desires additional coverage, higher limits of liability, or other modifications for their own protection, Tenant shall be responsible for the acquisition and cost of such additional protection. 15 F. Neither party shall violate nor permit to be violated any of the conditions or provisions of any of their respective insurance policies, and both parties shall so perform and satisfy or cause to be performed and satisfied the requirements of the companies writing such policies so that at all times companies of good standing, and in the case of Tenant's insurance, companies satisfactory to Landlord shall be willing to write and continue such insurance. G. Landlord shall not be limited in the proof of any damages which Landlord may claim against Tenant arising out of or by reason of Tenant's failure to provide and keep in force insurance, as aforesaid, to the amount of the insurance premium or premiums not paid or incurred by Tenant and which would have been payable under such insurance, but Landlord shall also be entitled to recover as damages for such breach the uninsured amount of any loss, to the extent of any deficiency in the insurance required by the provisions of this Lease, and damages, costs and expenses of suit suffered or incurred by reason of damage to, or destruction of, the Project or the Premises occurring during any period when Tenant or Contractors shall have failed or neglected to provide insurance as aforesaid. H. The insurance required by this Lease, at the option of Landlord or Tenant with respect to the insurance policies they obtain, may be effected by blanket or umbrella policies issued covering the Premises and other properties owned or leased by Landlord or Tenant, as applicable, provided that the policies otherwise comply with the provisions of this Lease and allocate to the Premises the specified coverage, without possibility of reduction or coinsurance by reason of, or damage to, any other premises covered therein. I. All insurance companies shall have a Best rating of not less than A/VII, or an equivalent ratio in the event Best ceases to exist or provide a rating. J. Tenant shall provide and keep in force such other insurance in such amounts as may from time to time be reasonably required by Landlord or a holder of a Mortgage (defined in Section 23.1 hereof) against such other insurable hazards as at the time are commonly insured against in the case of prudent owners of properties similar to the Project and the Premises, and in that connection Landlord may require changes in the forms, types and amounts of insurance required pursuant to this Section or add to, modify or delete other requirements; and in any event, if under applicable law, rule, regulation or ordinance of any governmental authority, state or federal, having jurisdiction in the Premises, liability may be imposed upon Landlord on account of the use or operation of the Premises or the Project or other improvements, insurance within limits reasonably satisfactory to Landlord shall be maintained by Tenant against any such liability. K. The required insurance to be carried by Landlord and Tenant hereunder shall not be limited by any limitations expressed in the indemnification language herein or any limitation placed on the indemnity therein given as a matter of law. Section 9.5. Landlord's Insurance. Landlord shall maintain, at all times during the term of the Lease, property, rent loss and liability insurance and such other insurance required of Landlord in the amounts and under the terms customarily carried by Landlord for similar buildings owned by it in the Chicago metropolitan area. The cost of all such insurance shall be an Expense. Landlord shall provide evidence of such insurance to Tenant upon the written request of Tenant, but in no event on more than one occasion during any calendar year. 16 ARTICLE X --------- Damage or Destruction --------------------- Section 10.1. Total Destruction. In the event that in excess of fifty percent (50%) of the Premises or Building are made untenantable by fire or other casualty and Landlord shall decide not to restore or repair same, then, in any of such events, Landlord shall have the right to terminate this Lease by notice to Tenant given within thirty (30) days after the date of such fire or other casualty and the Rent shall be apportioned on a per diem basis and paid to the date of such fire or other casualty. In the event the Premises are made untenantable by fire or other casualty and Landlord shall decide to rebuild and restore the same or, to the extent Section 10.3 is applicable and neither Landlord nor Tenant elects to terminate this Lease pursuant to said Section 10.3, this Lease shall not terminate and Landlord shall repair and restore the Premises at Landlord's expense and with due diligence within one hundred eighty (180) days of the date of the fire or other casualty, subject, however to extension for Force Majeure Delays. In the event that the repair or restoration is not substantially complete within the required time period, Tenant may terminate this Lease upon notice to Landlord within five (5) business days after the expiration of said required time period. Section 10.2. Partial Destruction. In the event that fifty percent (50%) or less of the Premises or Building are damaged by fire or other casualty, then Landlord shall proceed with all due diligence to repair and restore the Premises within one hundred eighty (180) days of the date of the fire or other casualty, subject, however, to extension for Force Majeure Delays. In such event, Rent shall abate in proportion to the non-useability of the Premises during the period while repairs are in progress unless such partial damages are due to the fault or neglect of Tenant. If the partial damage is the result of the fault or neglect of Tenant, Rent shall not abate during said period. Section 10.3. Lease Termination. If in excess of fifty percent (50%) of the Premises are damaged by fire or other casualty as aforesaid during the last eighteen (18) months of the Term hereof, Landlord and Tenant shall each have the right to terminate this Lease upon notice to the other within thirty (30) days of the date of fire or other casualty, in which event, Rent shall be apportioned on a per diem basis and paid to the date of such fire or other casualty. ARTICLE XI ---------- Liens ----- Section 11.1. Lien Claims. Tenant shall not do any act which shall in any way encumber the interest or estate of Landlord in and to the Project or any portion thereof, nor shall any interest or estate of Landlord in the Project or any portion thereof be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant, and any claim to or lien upon the Project or any portion thereof arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall in all respects be subject and subordinate to the paramount title and rights of Landlord in and to the Project or any portion thereof. Tenant will not permit the Project or any portion thereof to become subject to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of sufferance of Tenant; provided, however that Tenant shall have the right to contest in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall first give to Landlord a surety bond or title endorsement reasonably acceptable to Landlord or an amount equal to one hundred twenty percent (120%) of the amount of the lien or claimed lien which, together with interest earned thereon, shall be held by Landlord as security to insure payment thereof and to prevent any sale, foreclosure or forfeiture of the Premises by reason of non-payment thereof. If a cash deposit is made, the amount so deposited with 17 Landlord shall be held by Landlord in an account established at a federally insured banking institution until satisfactory removal of said lien or claim of lien. On any final determination of the lien or claim for lien, Tenant will immediately pay any judgment rendered, with all proper costs and charges, and will, at its own expense, have the lien released and any judgment satisfied. Should Tenant fail to diligently contest and pursue such lien contest, Landlord may, at its option, file a claim against any surety or title company or use the sums so deposited to discharge any such lien upon the renewal of such lien or encumbrance Landlord shall pay all such sums remaining on deposit to Tenant. Section 11.2. Landlord's Right to Cure. If Tenant shall fail to contest the validity of any lien or claimed lien or fail to give security to Landlord to insure payment thereof, or shall fail to prosecute such contest with diligence, or shall fail to have the same released and satisfy any judgment rendered thereon, then Landlord may, at its election (but shal1 not be so required) remove or discharge such lien or claim for lien (with the right, in its discretion, to settle or compromise the same), and any amounts advanced by Landlord, including reasonable attorneys' fees, for such purposes shall be so much additional rent due from Tenant to Landlord at the next rent date after any such payment, with interest thereon at the Lease Interest Rate from the date so advanced. ARTICLE XII ----------- TENANT ALTERATIONS ------------------ Section 12.1. Alterations. Tenant shall not at any time during the Term of this Lease (i) make any openings in or other alteration or improvement to the roof or exterior walls of the Building, (ii) make any alteration, addition or improvement to the Premises or any portion thereof without in each instance, the prior written consent of Landlord which affect any Building system, or exceed TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00) in costs in the aggregate in any twelve (12)-month period (hereinafter collectively referred to as "Alterations"). Subject to compliance with all of the provisions of this Lease, Landlord consents to the installation of a floor mounted conveyor and a racking system in the warehouse portion of the Premises. Landlord shall not unreasonably withhold or delay its consent to other Alterations made by Tenant. No Alterations to the Premises for which Landlord's consent is required shall be commenced by Tenant until Tenant has furnished Landlord with a satisfactory certificate or certificates from an insurance company acceptable to Landlord, evidencing insurance coverage required under Section 9.1 hereof. Any Alterations by Tenant hereunder shall be done in a good and workmanlike manner in compliance with any Legal Requirements applicable governmental law, statute, ordinance or regulation. Upon completion of any Alteration by Tenant hereunder, Tenant shall furnish Landlord with a copy of the "as built" plans covering such construction. Tenant, at its sole cost and expense, will make all Alterations on the Premises which may be necessary by the act or neglect of any other person or corporation (public or private), except Landlord, its agents, employees or contractors. Before commencing any Alterations, involving an estimated cost of more than TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00): (a) plans and specifications therefor, prepared by a licensed architect, shall be submitted to and approved by Landlord within ten (10) business days after submission to Landlord (such approval shall not be unreasonably withheld or delayed); (b) Tenant shall furnish to Landlord an estimate of the cost of the proposed work; (c) all contracts for any proposed work shall be submitted to and approved by Landlord; (d) evidence of insurance as required by Article IX hereof; and (e) such other requirements as Landlord may reasonably require to be satisfied. Prior to the commencement of any construction activity for which Landlord's consent shall be required, certificates of such insurance coverages shall be provided to Landlord and renewal certificates shall be delivered to Landlord prior to the expiration date of the respective policies. It shall be reasonable for Landlord to disapprove an Alteration if such Alterations would (i) change the general design or structure of the Project or any part thereof; (ii) decrease the size of the Project or any part thereof; (iii) reduce or impair, to any material extent, the value, rentability of the Premises or constitute waste; or 18 (iv) give to any owner, lessee or occupant of any other property or to any other person or corporation any easement, right-of-way or any other right over the Premises. Any Alteration shall be made with reasonable dispatch and in a good and workmanlike manner and in compliance with all applicable permits and authorizations and buildings and zoning laws and with all other Legal Requirements. If any work does not comply with the provisions of this Lease, Landlord may, by notice to Tenant, require that Tenant stop the work and take steps necessary to cause corrections to be made, or Landlord may, itself, perform the work, at Tenant's cost. Section 12.2. Ownership of Alterations. All Alterations (except Tenant's Equipment, as defined in Section 19.2 hereof), put in at the expense of Tenant shall become the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease, or at Landlord's option, provided Landlord shall have advised Tenant in writing at the time of its consent to said Alteration is sought that same must be removed and the Premises restored to its original condition. Section 12.3. Tenant Signs. Tenant shall not place any signs on any part of the Building or Land without the prior written consent of Landlord. Upon notice to and with the consent of Landlord, which consent shall not be unreasonably withheld, Tenant may place the signs located on the exterior of its current building (or a similar signs) on the exterior wall of the Premises and install a monument sign at the Rohlwing Road entrance to the Project, provided that (i) the installation and dimensions of said signs are in strict accordance with Legal Requirements; (ii) Tenant continually maintains said signs in a first-class manner and (iii) Tenant, at Tenant's sole cost and expense, pays the costs associated with the installation and maintenance of the signs and removes said signs at the expiration of the Term and restores the area in which said signs are placed to its condition prior to the installation of said signs, ordinary wear and tear excepted. If Landlord installs a monument sign at the Thorndale Road entrance to the Project to be shared by all tenants in the Building, Tenant's name shall be listed on the monument sign. Notwithstanding the foregoing, no signage shall be permitted on the roof of the Building and no advertising shall be permitted (except within the interior of the Premises). Section 12.4. Environmental Impact. Notwithstanding any other term, covenant or condition contained in this Lease, in the event that any Alteration has any environmental impact on the Premises, Landlord may deny the Tenant the right to proceed in Landlord's sole and absolute discretion. ARTICLE XIII ------------ Condemnation ------------ Section 13.1. Taking: Lease to Terminate. If a portion of the Building or the Premises shall be lawfully taken or condemned for any public or quasi-public use or purpose, or conveyed under threat of such condemnation and as a result thereof the Premises cannot be used for the same purpose and with the same utility as before such taking or conveyance, the Term of this Lease shall end upon, and not before, the date of the taking of possession by the condemning authority, and without apportionment of the award. Tenant hereby assigns to Landlord, Tenant's interest in such award, if any. Current Rent shall be apportioned as of the date of such termination. If any part of the Building shall be so taken or condemned, or if the grade of any street or alley adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to demolish, substantially remodel, or restore the Building, the Landlord shall have the right to cancel this Lease upon not less than ninety (90) days' prior notice to the date of cancellation designed in the notice. Section 13.2. Taking: Lease to Continue. In the event only a part of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or 19 purpose by any competent authority or sold to the condemning authority under threat of condemnation, and as a result thereof the balance of the Premises can be used for the same purpose as before such taking, sale or condemnation, this Lease shall not terminate and Landlord, at its sole cost and expense up to the amount of any condemnation award, shall promptly repair and restore the Premises, subject to Force Majeure Delay. Any award paid as a consequence of such taking, sale or condemnation, shall be paid to Landlord. Any sums not so disbursed shall be retained by Landlord. SECTION 13.3 Tenant's Claim. To the extent permitted by law and subject to the rights of any lender with respect to the Premises, Tenant shall be allowed to pursue a claim against the condemning authority (hereinafter referred to as the "Tenant's Claim") that shall be independent of and wholly separate from any action, suit or proceeding relating to any award to Landlord for reimbursement of relocation expenses or for Tenant's Equipment and personal property, provided: (i) Tenant's Claim shall in no way limit, affect, alter or diminish in any kind or way whatsoever Landlord's award as a result of such taking, sale or condemnation; (ii) Tenant's Claim shall in no event include any claim for any interest in real property, it being expressly understood and agreed that all sums paid with respect to the real property interests taken, sold or condemned shall be the sole property of Landlord; and (iii) Tenant's Claim shall in no event be joined with Landlord's proceeding or argued or heard concurrently therewith and if the tribunal hearing Tenant's Claim orders such joinder, Tenant agrees to voluntarily dismiss Tenant's Claim without prejudice until such time as Landlord has received its award for such taking, sale or condemnation. ARTICLE XIV ----------- Assignment -- Subletting by Tenant ---------------------------------- SECTION 14.1. No ASSIGNMENT, SUBLETTING OR OTHER TRANSFER. Tenant shall not assign this Lease or any interest hereunder, nor shall Tenant sublet or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, without the express prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. No assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made, unless specifically provided to the contrary in Landlord's consent. Consent by Landlord pursuant to this Article shall not be deemed, construed or held to be consent to any additional assignment or subletting, but each successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses incurred pursuant to any request by Tenant for consent to any such assignment or subletting. In the consideration of the granting or denying of consent, Landlord may, at its option, take into consideration: (i) the business reputation and credit worthiness of the proposed subtenant or assignee; (ii) any required alteration of the Premises; (iii) the intended use of the Premises by the proposed subtenant or assignee; and (iv) any other factors which Landlord shall deem relevant. SECTION 14.2. OPERATION OF LAW. Tenant shall not allow or permit any transfer of this Lease, or any interest hereunder, by operation of law, or convey, mortgage, pledge or encumber this Lease or any interest hereunder. SECTION 14.3. EXCESS RENTAL. If Tenant shall, with Landlord's prior consent as herein required, sublet the Premises, an amount equal to fifty percent (50%) of the rental in excess of the Base Rent and any additional rent herein provided to be paid shall be for benefit of Landlord and shall be paid to Landlord promptly when due under any such subletting as additional rent due hereunder. SECTION 14.4. MERGER OR CONSOLIDATION. If Tenant is a corporation whose stock is not publicly traded, any transaction or series of transactions (including, without limitation, any dissolution, merger, consolidation or other reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of any capital stock of Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) 20 resulting in the transfer of control of Tenant, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this Article XIV. If Tenant is a partnership or limited liability company, any transaction or series of transactions (including without limitation any withdrawal or admittance of a partner or member or a change in any partner's or member's interest in Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) resulting in the transfer of control of Tenant, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this assignment of this Lease by Tenant subject to the provisions of this Article XIV. If Tenant is a corporation whose stock is not publically traded, a change or series of changes in ownership of stock which would result in direct or indirect change in ownership by the stockholders or an affiliated group of stockholders of less than twenty-five percent (25%) of the outstanding stock as of the date of the execution and delivery of this Lease shall not be considered a change of control. Notwithstanding the immediately foregoing, Tenant may, upon notice to, but without Landlord's consent, assign this Lease to any corporation resulting from a merger or consolidation of Tenant, provided that the total assets and the total net worth of such assignee after such consolidation or merger shall be in excess of the greater of (i) the net worth of Tenant immediately prior to such consolidation or merger, or (ii) the net worth of Tenant as of the date hereof, determined by generally accepted accounting principles and provided that Tenant is not at such time in default hereunder, and provided further that such successor shall execute an instrument in writing, acceptable to Landlord in its reasonable discretion, fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and deliver the same to Landlord. Tenant shall provide in its notice to Landlord such information as may be reasonably required by Landlord to determine that the requirements of this Section 14.4 have been satisfied. As used in this Section 14.4, the term "control" means possession of the power to vote not less than a majority interest of any class of voting securities and partnership or limited liability company interests or to direct or cause the direction of the management or policies of a corporation, or partnership or limited liability company through the ownership of voting securities, partnership interests or limited liability company interests, respectively. Section 14.5. Unpermitted Transaction. Except as expressly otherwise provided in this Lease, any assignment, subletting, use, occupancy, transfer or encumbrance of this Lease or the Premises without Landlord's prior written consent shall be of no effect and shall, at the option of Landlord, constitute a default under this Lease. ARTICLE XV ---------- Financial Statements -------------------- Section 15.1. Financial Statements. Tenant agrees to furnish Landlord annually, within ninety (90) days of the end of such fiscal year with a copy of its annual report. ARTICLE XVI ------------ Indemnity for Litigation ------------------------ Section 16.1. Indemnity for Litigation. Tenant agrees to pay, and to indemnify and defend Landlord against, all costs and expenses (including reasonable attorneys' fees) incurred by or imposed upon Landlord by or in connection with any litigation to which Landlord becomes or is made a party due to the act or omission of Tenant or any member of the Tenant Group, whether commenced by or against Tenant, or any other person or entity or that may be incurred by Landlord in enforcing any of the covenants and agreements of this Lease with or without the institution of any action or proceeding relating to the Premises or this Lease, or in obtaining possession of the Premises after an Event of Default hereunder or upon expiration or earlier termination of this Lease. The foregoing notwithstanding, Tenant's responsibility under this Section 16.1 to pay Landlord's costs and expenses (including reasonable attorneys' fees) shall not extend to such costs and expenses incurred in defending an action brought by Tenant to enforce the terms of this Lease in which there is a court determination that Landlord failed to perform its 21 obligations under this Lease. The provisions of this Section 16.1 shall survive the expiration or earlier termination of this Lease. Section 16.2. Landlord's Indemnity. Landlord agrees to pay, and to indemnify and defend Tenant against all costs and expenses (including reasonable attorney's fees) incurred by or imposed upon Tenant by or in connection with any litigation to which Tenant becomes or is made a party due to the act or omission of Landlord, whether commenced by or against Landlord, or any other person or entity or that may be incurred by Tenant in enforcing any of the Landlord's covenants and agreements of this Lease with or without the institution of any action or proceeding relating to the Premises or this Lease. The foregoing notwithstanding, Landlord's responsibility under this Section 16.2 to pay Tenant's costs and expenses (including reasonable attorneys' fees) shall not extend to such costs and expenses incurred in defending an action brought by Landlord to enforce the terms of this Lease in which there is a court determination that Tenant failed to perform its obligations under this Lease. The provisions of this Section 16.2 shall survive the expiration or earlier termination of this Lease. ARTICLE XVII ------------ Estoppel Certificates --------------------- Section 17.1. Estoppel Certificate. Tenant agrees that on the Commencement and at any time and from time to time thereafter, upon not less than ten (10) days' prior written request by Landlord, it will execute, acknowledge and deliver to Landlord, or Landlord's mortgagee to the extent factually accurate, a statement in writing in the form of Exhibit "D" attached hereto and by this reference incorporated herein; provided, however, Tenant agrees to certify to any prospective purchaser or mortgagee any other reasonable information specifically requested by such prospective purchaser or mortgagee. ARTICLE XVIII ------------- Inspection of Premises ---------------------- Section 18.1. Inspections. Tenant agrees to permit Landlord and any authorized representatives of Landlord, to enter the Premises at all reasonable times on reasonable advance notice, except in the case of emergency, for the purpose of inspecting the same. Any such inspections shall be solely for Landlord's purposes and may not be relied upon by Tenant or any other person. Section 18.2. Landlord Signs. Tenant agrees to permit Landlord and any authorized representative of Landlord to enter the Premises at all reasonable times during business hours on reasonable advance notice to exhibit the same for the purpose of sale, mortgage or lease. Landlord may display on the Premises customary "For Sale" signs and during the final year of the Term hereof or any extension thereof, Landlord may display on the Premises customary for "For Rent" signs. ARTICLE XIX ----------- Fixtures -------- Section 19.1. Building Fixtures. All improvements and all plumbing, heating, lighting, electrical and air-conditioning fixtures and equipment, and other articles of personal property used in the operation of the Premises (as distinguished from operations incident to the business of Tenant), whether or not attached or 22 affixed to the Premises (hereinafter referred to as "Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Landlord. SECTION 19.2. Tenant's Equipment. All of Tenant's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises, other than Building Fixtures, as shall be and remain the personal property of Tenant, and the same are herein referred to as "Tenant's Equipment." SECTION 19.3. Removal of Tenant's Equipment. Tenant's Equipment may be removed from time to time by Tenant; provided, however, that if such removal shall injure or damage the Premises, Tenant shall repair the damage and place the Premises in the same condition as it would have been if such Tenant's Equipment had not been installed. ARTICLE XX ---------- Default ------- SECTION 20.1. Events of Default. Tenant agrees that any one or more of the following events shall be considered "Events of Default" as said term is used herein: A. If an order, judgment or decree shall be entered by any court adjudicating Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of Tenant or appointing a receiver, trustee or liquidator of Tenant, or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days; or B. Tenant shall file an answer admitting the material allegations of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding or under any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; or C. Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Tenant, or any of the assets of Tenant; or D. Tenant shall file a voluntary petition in bankruptcy, or shall admit in writing its inability to pay its debts as they come due, or shall file a petition or an answer seeking reorganization or arrangement with creditors or take advantage of any insolvency law; or E. A decree or order appointing a receiver of the property of Tenant shall be made and such decree or order shall not have been vacated within sixty (60) days from the date of entry or granting thereof; or F. Tenant shall vacate the Premises or abandon same during the Term hereof; or G. Tenant shall default in making any payment of Rent or other payment required to be made by Tenant hereunder when due as herein provided; or H. If Tenant shall suffer or permit any lien or encumbrance (subject to Tenant's right to contest liens as provided in Section 11.1 hereof) to attach to the Premises or the Project, and Tenant shall not discharge said lien or encumbrance within thirty (30) days or within ten (10) days prior to any sale or disposition or forfeiture pursuant to such execution, whichever date shall first occur, or 23 I. If Tenant shall fail to carry all required insurance under this Lease; or J. Any material misrepresentation (including by omission) made by Tenant in this Lease; or K. If Tenant shall fail to comply with an order of a court of competent jurisdiction or proper order of a Governmental Authority within the required time period which order directly relates to Tenant and the Project; or L. Failure to pay Taxes as provided in Section 5.2 H hereof. M. If Tenant shall default in the performance of any covenant, promise or agreement on the part of Tenant contained in this Lease not otherwise specified in this Section 20.1 and such default shall continue for thirty (30) days after notice thereof in writing by Landlord to Tenant, or if such default or condition which gives rise thereto cannot with due diligence and good faith be cured within such thirty (30)-day period, if Tenant shall not in good faith and within the period of thirty (30) days commence the curing of such default and pursue the curing of such default continuously and diligently and in good faith to the end that such default shall be cured within such minimum period in excess of thirty (30) days as may be reasonably necessary to cure such default through pursuing such cure promptly, diligently, continuously and in good faith; provided, however, that such additional period beyond thirty (30) days shall not apply to a default that creates a clear and present danger to persons or property or materially adversely affects the Premises or the Project or if the failure or default by Tenant is one for which Landlord (or any officer or other agent or beneficial or other owner thereof) may be subject to fine or imprisonment. Upon the occurrence of any one or more of such Events of Default, Landlord may at its election terminate this Lease or terminate Tenant's right to possession only, without terminating this Lease. Upon termination of this Lease or of Tenant's right to possession, Tenant shall immediately surrender possession and vacate the Premises, and deliver possession thereof to Landlord. Upon termination of this Lease, Landlord shall be entitled to recover as liquidated damages because the parties hereto recognize that as of the date hereof actual damages are not ascertainable and are of imprecise calculation and not as a penalty, all Rent and other sums due and payable by Tenant through the date of termination plus (i) an amount equal to sixty percent (60%) of the Rent and other sums provided herein to be paid by Tenant for the residue of the Term, and (ii) the costs of performing any other covenants to be performed by Tenant. If Landlord elects to terminate Tenant's right to possession only, without terminating this Lease, Landlord may, at Landlord's option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof as hereinabove provided, without such entry and possession terminating this Lease or releasing Tenant, in whole or in part from Tenant's obligations to pay the Rent hereunder for the full Term or from any other obligations of Tenant under this Lease. Landlord shall use commercially reasonably efforts to relet all or any part of the Premises for such rent and upon terms as are commercially reasonable (including the right to relet the Premises for a term greater or lesser than that remaining of the Term of premises and the right to relet the Premises as a part of a larger area, the right to change the character or use made of the Premises and the right to grant concessions of free rent). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations, or additions in or to the Premises that may be necessary or desirable. If Landlord is unable to relet the Premises after using such commercially reasonably efforts to do so, Landlord shall have the right to terminate this Lease, in which event, Tenant shall pay to Landlord liquidated damages as provided in the immediately preceding grammatical paragraph. If the Premises are relet and sufficient sums shall not be realized from such reletting after payment of all expenses of such decorations, repairs, changes, alterations, additions and the expenses of repossession and such reletting, and the collection of the Rent herein provided and other payments required to be made by Tenant under the provisions of this Lease for the remainder of the Term of this Lease then, in such event, Tenant shall pay to Landlord on demand any such deficiency and Tenant agrees that Landlord may file suit to 24 recover any sums falling due under the terms of this Section from time to time, and all costs and expenses of Landlord, including reasonable attorneys' fees, incurred in connection with any such suit shall be paid by Tenant. SECTION 20.2. Bankruptcy. If Landlord shall not be permitted to terminate this Lease, as provided in this Article XX because of the provisions of the United States Code relating to Bankruptcy, as amended (hereinafter referred to as the "Bankruptcy Code"), then Tenant as a debtor-in-possession or any trustee for Tenant agrees promptly, within no more than sixty (60) days after the filing of the bankruptcy petition, to assume or reject this Lease. In such event, Tenant or any trustee for Tenant may only assume this Lease if: (a) it cures or provides adequate assurance that the trustee will promptly cure any default hereunder; (b) compensates or provides adequate assurance that Tenant will promptly compensate Landlord of any actual pecuniary loss to Landlord resulting from Tenant's default; and (c) provides adequate assurance of performance during the fully stated term hereof of all of the terms, covenants, and provisions of this Lease to be performed by Tenant. In no event after the assumption of this Lease shall any then-existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth herein. Adequate assurance of performance of this Lease, as set forth hereinabove, shall include, without limitation, adequate assurance: (i) of the source of rent reserved hereunder; and (ii) that the assumption of this Lease will not breach any provision hereunder. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth: (i) the name and address of such person; (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to Landlord by the Tenant no later than twenty (20) days after receipt by the Tenant but in any event no later than ten (10) days prior to the date that the Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to the Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code any and all monies or other considerations payable or otherwise to be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting the Landlord's property under the preceding sentence not paid or delivered to the Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to the Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be conclusively deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. Any such assignee shall be permitted to use the Leased Premises only for the Use. Nothing contained in this Section shall, in any way, constitute a waiver of the provisions of Article XIV of this Lease relating to alienation. Tenant shall not, by virtue of this Section, have any further rights relating to assignment other than those granted in the Bankruptcy Code. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purpose of Section 501(b)(6) or any successive section of the Bankruptcy Code. 25 SECTION 20.3. RE-ENTRY. Tenant agrees, upon receipt of notice of termination, to at once surrender possession of the Premises, the Project and related improvements to Landlord. Tenant expressly waives (to the full extent permitted by law) the service of any other notice of intention to terminate this Lease or of intention to re-enter which may be presently provided for by any statute or other law or any future amendment or similar statute or law (so long as, in the case of a future amendment or statute or law, the remedies to be exercised by Landlord are not substantially different than remedies presently available to Landlord), and agrees that the occurrence of any Event of Default shall of itself, upon service of the notice above provided for, constitute a forcible detainer by Tenant of the Premises within the meaning of the statutes of the State of Illinois. No receipt of money by Landlord from Tenant after any termination, howsoever occurring, of this Lease shall reinstate, continue or extend the Term of this Lease. ARTICLE XXI ----------- Landlord's Performance of Tenant's Covenant ------------------------------------------- SECTION 21.1. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. In the event Tenant shall fail to maintain any insurance required to be paid by it under the terms hereof, or in an Emergency Situation or upon occurrence of an Event of Default, Landlord may (but shall not be obligated so to do), and without waiving or releasing Tenant from any obligation of Tenant hereunder, make any payment or perform any other act which Tenant is obligated to make or perform under this Lease in such manner and to such extent as Landlord may deem desirable; and in so doing Landlord shall also have the right to enter upon the Premises for any purpose reasonably necessary in connection therewith and to pay or incur any other necessary and incidental costs and expenses, including reasonable attorneys' fees. All sums so paid and all liabilities so incurred by Landlord, together with interest thereon at the rate per annum which is the lesser of (i) the Lease Interest Rate or (ii) the highest rate permitted by law shall be deemed Additional Rent hereunder and shall be payable to Landlord upon demand as Additional Rent. Landlord shall use reasonable efforts to give prior notice (which may be oral) of its performance, if reasonably feasible under the circumstances. The performance of any such obligation by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Inaction of Landlord shall never be considered as a waiver of any right accruing to it pursuant to this Lease. Landlord, in making any payment hereby authorized: (a) relating to Taxes, may do so according to any bill, statement or estimate, without inquiry into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof; (b) for the discharge, compromise or settlement of any lien, may do so without inquiry as to the validity or amount of any claim for lien which may be asserted; or (c) in connection with the completion of construction of improvements to the Premises or the repair, maintenance or the payment of operating costs thereof, may do so in such amounts and to such persons as Landlord reasonably may deem appropriate. Nothing contained herein shall be construed to require Landlord to advance monies for any purpose. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant or any other occupant of the premises or the Project or any part thereof, by reason of making repairs or the performance of any work on the Premises or the Project or on account of bringing materials, supplies and equipment into or through the Premises or the Project during the course thereof and the obligations of Tenant under this Lease shall not thereby be affected in any manner. In doing so, however, Landlord shall use reasonable efforts not to interfere with the normal operation of the Project. The term "Emergency Situation" shall mean a situation which has caused or is likely to cause bodily injury to persons, contamination of or physical damage to the Premises or adjoining property or economic liability or criminal jeopardy to Landlord. 26 ARTICLE XXII ------------- Exercise of Remedies -------------------- SECTION 22.1. CUMULATIVE REMEDIES. No remedy contained herein or otherwise conferred upon or reserved to Landlord, shall be considered exclusive of any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given herein, now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein. SECTION 22.2. NO WAIVER. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach, or a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. The acceptance by Landlord of any payment of Rent or other sums payable hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not, in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's right to possession hereunder, as the case may be, but shall be construed as a payment on account and not in satisfaction of damages due from Tenant to Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this Lease by Tenant or of any default by Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any provision of this Lease. SECTION 22.3. EQUITABLE RELIEF. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were not provided for in this Lease. ARTICLE XXIII ------------- Subordination to Mortgages -------------------------- SECTION 23.1. SUBORDINATION. Landlord may execute and deliver a mortgage or trust deed in the nature of a mortgage ("Mortgage") against its interest in the Project or any portion thereof. This Lease and all of the rights of Tenant hereunder, shall automatically, and without the requirement of the execution of any further documents, be and are hereby made expressly subject and subordinate at all times to the lien of any Mortgage and to all advances made or hereafter to be made upon the security thereof. Provided the holder of said Mortgage agrees in writing not to disturb the rights of Tenant under this Lease so long as Tenant is not in default hereunder, Tenant agrees to execute and deliver such instruments subordinating this Lease to the lien of any such Mortgage as may be requested in writing by Landlord from time to time. Notwithstanding anything to the contrary contained herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant, subordinate its Mortgage to this Lease. SECTION 23.2. MORTGAGE PROTECTION. Tenant agrees to give the holder of any Mortgage, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such mortgagee and containing a request therefor. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then said mortgagee shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if, within such thirty (30) days, any mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not 27 limited to commencement of foreclosure proceedings, if necessary to effect such cure). Until the time allowed as aforesaid for said mortgagee to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default. This Lease may not be modified or amended so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord or Tenant, without the prior written consent, in each instance, of the mortgagee. ARTICLE XXIV ------------ INDEMNITY AND WAIVER -------------------- SECTION 24.1. TENANT INDEMNITY. Tenant shall not do or permit any act or thing to be done or omit to do any act or thing upon the Premises or Project which may subject Landlord to any liability or responsibility for injury, damage to persons or property, or to any liability by reason of any violation of Legal Requirements and shall exercise such control over the Premises so as to fully protect Landlord against any such liability. Tenant shall defend, indemnify and save Landlord, and any official, agent, beneficiary, contractor, director, employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee of Landlord (each an "INDEMNIFIED PARTY") representatives, successors and assigns harmless from and against any and all liabilities, suits, judgments, settlements, obligations, fines, damages, penalties, claims, costs, charges and expenses, including, without limitation, engineers', architects' and attorneys' fees, court costs and disbursements, which may be imposed upon or incurred by or asserted against any Indemnified Party by reason of any of the following occurring during or after (but attributable to a period of time falling within) the Term: A. any demolition or razing or construction of any improvements or any other work or thing done in, on or about the Premises or any part thereof by Tenant or any member of the Tenant Group, including any claim that such work constitutes "public works"; B. any use, nonuse, possession, occupation, alteration, repair, condition, operation, maintenance or management of the Premises or any part thereof or of any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto by Tenant or any member of the Tenant Group; C. any act or failure to act on the part of Tenant or any member of the Tenant Group; D. any accident, injury (including death) or damage to any person or property occurring in, on or about the Premises or any part thereof or in, on or about any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto as a result of the act or neglect of Tenant or any member of the Tenant Group; E. any failure to perform or comply with any of the covenants, agreements, terms or conditions in this Lease on Tenant's part to be performed or complied with (other than the payment of money); F. any lien or claim which may be alleged to have arisen against or on the Premises, or any lien or claim which may be alleged to have arisen out of this Lease and created or permitted to be created by Tenant or any member of the Tenant Group against any assets of Landlord, or any liability which may be asserted against Landlord with respect thereto; G. any failure on the part of Tenant to keep, observe and perform any of the terms, covenants, agreements, provisions, conditions or limitations contained in the contracts and agreements affecting the Premises on Tenant's part to be kept, observed, or performed; and 28 H. any contest permitted pursuant to the provisions of this Lease. No agreement or covenant of Tenant in this Section 24.1 shall be deemed to exempt Landlord from, and Tenant's obligations under this Section 24.1 shall not include liability or damages for injury to persons or damage to property caused by or resulting from the negligence of Landlord, its agents or employees, in the construction, operation or maintenance of the Premises. The obligations of Tenant under this Section 24.1 shall not be affected in any way by the absence in any case of covering insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part under insurance policies affecting the Premises or any part thereof. Section 24.2. Waiver of Claims. Tenant waives all claims it may have against Landlord and Landlord's agents for damage or injury to person or property sustained by Tenant or any member of the Tenant Group or by any occupant of the Premises, or by any other person, resulting from any part of the Premises becoming out of repair, or resulting from any accident on or about the Premises or resulting directly or indirectly from any act or neglect of any person (excluding Landlord). This Section 24.2 shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors, or noise, or caused by bursting or leaking pipes or plumbing fixtures, and shall apply equally whether any such damage results from the act or neglect of Tenant or of any other person (excluding Landlord), and whether such damage be caused or result from anything or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of a wholly different nature. All Tenant's Equipment and other personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Premises shall be there at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. Section 24.3. Landlord's Indemnity. Landlord will protect, indemnify and save Tenant, its officers, directors and their respective successors and assigns harmless from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by or asserted against Tenant by reason of any accident, injury to or death of persons or loss of or damage to property occurring on or about the Premises or any part thereof resulting from the negligent act or omission of Landlord or anyone claiming by, through or under Landlord. ARTICLE XXV ----------- Surrender --------- Section 25.1. Condition. Upon the termination of this Lease whether by forfeiture, lapse of time or otherwise/upon, or upon the termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver up the Premises to Landlord, broom clean, in good order, condition and repair, reasonable wear and tear excepted. "Broom clean" means free from all debris, dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or other substances, inside of the Premises. Any damage caused by removal of Tenant from the Premises, including any damages caused by removal of Tenant's Equipment, as herein defined, shall be repaired and paid for by Tenant prior to the expiration of the Term. All Alterations temporary or permanent, excluding Tenant's Equipment, in or upon the Premises placed there by Tenant, shall become Landlord's property and shall remain upon the Premises upon such termination of this Lease by lapse of time or otherwise, without compensation or allowance or credit to Tenant, unless Landlord requests their removal. If Landlord so requests removal of said additions, hardware, alterations or improvements and Tenant does not make such removal by the termination of this Lease, or within ten (10) days after such request, whichever is later, Landlord may remove the same and deliver the same to any other place of business of Tenant 29 or warehouse same, and Tenant shall pay the cost of such removal, delivery and warehousing to Landlord on demand. SECTION 25.2. REMOVAL OF TENANT'S EQUIPMENT. Upon the termination of this Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment provided, however, that Tenant shall repair any injury or damage to the Premises which may result from such removal. If Tenant does not remove Tenant's Equipment from the Premises prior to the end of the Term, however ended, Landlord may, at its option, remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal (including the repair of any injury or damage to the Premises resulting from such removal), delivery and warehousing to Landlord on demand, or Landlord may treat tenant's equipment as having been conveyed to Landlord with this Lease as a Bill of Sale, without further payment or credit by Landlord to Tenant. SECTION 25.3. HOLDOVER. If Tenant retains possession of the Premises or any part thereof after the termination of the Term, by lapse of time and otherwise, then Tenant shall pay to Landlord monthly rent, at one hundred fifty percent (150%) the rate payable for the month immediately preceding said holding over (including increases for additional rent which Landlord may reasonably estimate), computed on a per-month basis, for each month or part thereof (without reduction for any such partial month) that Tenant thus remains in possession, and in addition thereto, Tenant shall pay Landlord all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. Alternatively, at the election of Landlord expressed in a written notice to Tenant and not otherwise, if Tenant holds over for more than forty- five (45) days such retention of possession shall constitute a renewal of this Lease for six (6) months, at a monthly rental equal to one hundred twenty percent (120%) of the monthly Base Rent payable in the last month of the Term. The provisions of this paragraph do not exclude the Landlord's rights of re-entry or any other right hereunder. Any such extension or renewal shall be subject to all other terms and conditions herein contained. ARTICLE XXVI ------------ COVENANT OF QUIET ENJOYMENT --------------------------- SECTION 26.1. COVENANT OF QUIET ENVIRONMENT. Landlord covenants that Tenant, on paying the Rent and all other charges payable by Tenant hereunder, and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed. all of which obligations of Tenant are independent of Landlord's obligations hereunder, shall, during the Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreement hereof free from hindrance by Landlord or any person claiming by, through or under Landlord. ARTICLE XXVII ------------- No Recording ------------ SECTION 27.1. NO RECORDING. Neither this Lease nor any memorandum or other short form hereof shall be recorded. 30 ART1CLE XXVIII -------------- NOTICES ------- SECTION 28.1. NOTICES. All notices, consents, approvals to or demands upon or by Landlord or Tenant desired or required to be given under the provisions hereof, shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently given if a copy thereof has been personally served, forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Tenant at Tenant's Mailing Address, or at such other address as Tenant may theretofore have furnished by written notice to Landlord, with a copy to Donald F. Engel Schwartz & Freeman, 401 North Michigan Avenue, Suite 1900, Chicago, Illinois 60611. Any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Landlord at Landlord's Mailing Address, with a copy to Mark S. Richmond Katz Randall & Weinberg, 333 West Wacker Drive, Suite 1800, Chicago, Illinois 60606, or at such other address as Landlord may theretofore have furnished by written notice to Tenant. The effective date of any such notice shall be the date of actual delivery, except that if delivery is refused, the effective date of notice shall be the date delivery is refused. ARTICLE XXIX ------------ COVENANTS RUN WITH LAND ----------------------- SECTION 29.1. COVENANTS. All of the covenants, agreements, conditions and undertakings in this Lease contained shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named and shall be construed as covenants running with the Land, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. SECTION 29.2. RELEASE OF LANDLORD. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of fee title to the Premises, and in the event of any transfer or transfers of the title, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all personal liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, shall be paid to Tenant. 31 ARTICLE XXX ----------- Environmental Matters --------------------- Section 30.1. Defined Terms. A. The term "HAZARDOUS MATERIALS", when used herein, shall include, but shall not be limited to, any substances, materials or wastes that are regulated by any local governmental authority, the state where the Premises or the Project is located, or the United States of America because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, including without limitation, above or underground storage tanks, flammables, explosives, radioactive materials, radon, petroleum and petroleum products, petroleum products (other than petroleum products that are normally contained in motor vehicles to the extent such products are not released), urea formaldehyde foam insulation, methane, lead-based paint, polychlorinated biphenyl compounds, hydrocarbons or like substances and their additives or constituents, pesticides and any other special, toxic or hazardous materials, wastes, substances or materials of any kind, including without limitation, those now or hereafter defined, determined or identified as "hazardous substances," "hazardous materials," "toxic substances" or "hazardous wastes" in any Environmental Law. B. "ENVIRONMENTAL LAW" shall mean any Federal, state or local law, statute, ordinance, code, rule, regulation, policy, common law, license, authorization, decision, order, injunction, which pertains to health, safety, any Hazardous Material, or the environment (including but not limited to ground or air or water or noise pollution or contamination, and underground or above- ground tanks) and shall include, without limitation, the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. (S)6901 et seq., as amended by the Hazardous and Solid Waste Amendments of 1984; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. (S)9601 et seq. ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"); the Hazardous Materials Transportation Act, 49 U.S.C. (S)1801 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. (S)1251 et seq.; the Clean Air Act, 42 U.S.C. (S)7401 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)2601 et seq.; the Safe Drinking Water Act, 42 U.S.C. (S)300f et seq.; the Illinois Environmental Protective Act, 415 ILSC 4/1 et seq.; the Municipal Code of the City of Chicago; the Clean Air Act (42 U.S.C. (S)7401 et seq., "CAA"); the Rivers and Harbors Act, (33 U.S.C. (S)401 et seq., "RHA"); the Emergency Planning and Community Right-to-Know Act of 1986 (41 U.S.C. 11001 et seq.. "EPCRA"), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C. 136 to 136y); the Oil Pollution Act of 1990 (33 U.S.C. 2701 et seq., "OPA"); and the Occupational Safety and Health Act (29 U.S.C. 651 et seq., "OHSA"); and any other local, state or federal environmental statutes, and all rules, regulations, orders and decrees now or hereafter promulgated under any of the foregoing, as any of the foregoing now exist or may be changed or amended or come into effect in the future. C. "ENVIRONMENTAL CLAIM" shall mean and include any demand, notice of violation, inquiry, cause of action, proceeding or suit for damages (including reasonable attorneys' and experts' fees), losses, injuries to person or property, damages to natural resources, fines, penalties, interest, cost recovery, compensation, or contribution resulting from or in any way arising in connection with any Hazardous Material or any Environmental Law. D. "PRE-EXISTING CONDITION" shall mean the presence of any Hazardous Material on the Premises, to the extent such Hazardous Material was not introduced onto the Premises after the Commencement Date. E. "ENVIRONMENTAL CONDITION" shall mean the existence of any Hazardous Material on the Premises other than a Pre-Existing Condition, (i) in violation of, or requiring cleanup under, any Environmental Law or the provisions of this Article XXX; or (ii) which subjects Landlord to liability for any Environmental Claim or which must be remediated to prevent Landlord from incurring liability as a result of such Environmental Claim. 32 F. "Environmental Remediation" shall mean any investigative, cleanup, removal, containment, remedial or other action relating to an Environmental Condition (i) required pursuant to any Environmental Law, or (ii) necessary to prevent Landlord from incurring, or relieve Landlord from, liability as a result of an Environmental Claim. G. "Remediating Party" shall mean that party which has elected (or is deemed to have elected) to perform any Environmental Remediation. Section 30.2. Tenant's Covenants with Respect to Environmental Matters. During the Term, Tenant, at its sole cost and expense, shall: A. comply with all Environmental Laws relating to the use and operation of the Premises; B. keep the Premises free of Hazardous Materials not used in the ordinary course of Tenant's business as of the date hereof; C. not exacerbate a Pre-Existing Condition of which Tenant becomes aware; D. in the case of an Environmental Condition promptly, but not later than three (3) business days after the discovery of an Environmental Condition, notify Landlord of the Environmental Condition; E. not install or operate any above or below ground tank, sump, pit, pond, lagoon or other storage or treatment vessel or device on the Premises without first obtaining Landlord's prior written consent; F. not handle, use, generate, treat, dispose of or permit the use, handling, generation, treatment, storage or disposal of any Hazardous Materials in, on, under, around or above the Premises or Project at any time during the Term. Section 30.3. Conduct of Tenant. If Tenant, with the prior written authorization of Landlord, which authorization may be granted or denied by Landlord in its sole and absolute discretion generates, uses, transports, stores, treats or disposes of any Hazardous Materials: A. Tenant shall, at its own cost and expense, comply with all Environmental Laws relating to Hazardous Materials; B. Tenant shall (i) not dispose of any Hazardous Materials in dumpsters or trash containers or at any other location at the Project; (ii) not discharge any Hazardous Materials into drains or sewers; (iii) not cause or allow the release, discharge, emission or run-off of any Hazardous Materials to air, to surface waters, to the land, to ground water, whether directly or indirectly; (iv) at Tenant's own cost and expense, arrange for the lawful transportation and off-site disposal of all Hazardous Materials generated by Tenant; (v) provide secondary containment around all Hazardous Materials storage containers, storage facilities and above ground storage tanks; (vi) conduct all necessary environmental inspections, such as, but not limited to, asbestos inspections prior to any renovation or demolition, as required by 40 CFR Part 61 and provide copies of all such reports to the Landlord; (vii) comply with all reporting requirements under any local, state or federal ordinance, statute or regulation, such as, but not limited to, toxics inventory reporting under the Emergency Planning and Community Right-to-Know Act, the provisions under 40 CFR Part 61, or various regulations controlling the emissions into the atmosphere of volatile organic compounds and provide copies of all such reports and notifications to Landlord; and (viii) use only highly skilled people to address all environmental issues associated with the leasehold, that such people and all employees of the Tenant shall receive all required training or certification under any local, state or federal law specifically mentioned or alluded to in Section 30.1 of this Lease; 33 C. Tenant shall promptly provide Landlord with copies of all communications, permits or agreements with any governmental authority or agency (federal, state or local) or any private entity relating in any way to the violation or alleged violation of any Environmental Laws or to any violation of Tenant's obligations under subparagraph (B) above; D. Upon the written request of Landlord no more frequently than once every year, or on any other occasion in the event that Landlord has reason to believe an environmental problem exists at the Premises, Tenant shall provide Landlord the results of appropriate tests of air, water and soil to demonstrate (i) that Tenant is in compliance with all applicable laws, rules or permits relating in any way to the presence of any Hazardous Materials on the Premises or the Project and (ii) the lack of any releases, discharges or emissions. If the presence, release, threat of release, placement on or in the Premises and/or the Project of any Hazardous Materials occurs or is caused in whole or in part during the Term of this Lease as a result of any act or omission of Tenant or any member of the Tenant Group, or the generation, transportation, storage, treatment, or disposal at the Premises and/or the Project of any Hazardous Materials occurs or is caused in whole or in part by Tenant or any member of the Tenant Group during the Term of this Lease gives rise to liability (including, but not limited to, a response action, remedial action, or removal action) under any Environmental Laws or common law theory, including, but not limited to nuisance, strict liability, negligence and trespass, tenant shall promptly complete all Environmental Remediation necessary and mitigate exposure to liability arising from the Hazardous Materials, whether or not required by law. SECTION 30.4. EXACERBATION. If Tenant exacerbates a Pre-Existing Condition of which Tenant is aware (including as a result of Tenant's investigative or remediation activities) during the Lease term, that the provisions of this Article XXX shall apply to such exacerbation of the Pre- Existing Condition, and Tenant shall perform Environmental Remediation as to such exacerbation. Tenant shall be responsible for all fines and penalties caused by Tenant or to the extent Tenant exacerbates a Pre-Existing Condition of which it becomes aware (including Tenants environmental investigation or remediation activities) at any time during the Lease Term. SECTION 30.5. RIGHTS OF INSPECTION. Upon reasonable prior notice, Landlord and their respective agents and representatives shall have a right of entry and access to the Premises at any time in Landlord's discretion for the purposes of (i) inspection of the documentation relating to Hazardous Materials or environmental matters maintained by Tenant or occupant of the Premises; (ii) ascertaining the nature of the activities being conducted on the Premises and investigating whether Tenant is in compliance with its obligations under Article XXX of this Lease; and (iii) determining the type, kind and quantity of all materials and substances brought onto the Premises, or made or produced thereon. Landlord and its agents and representatives shall have the right to take samples in quantities sufficient for analysis of all materials and substances present on the Premises including but not limited to, samples, materials or substances brought onto or made or produced on the Premises by Tenant or occupant of the Premises or their respective agents, employees, contractors or invitees and shall also have the right to conduct other tests and studies as may be reasonably determined by Landlord to be appropriate in order to investigate whether Tenant is in compliance with its obligations under Article XXX. SECTION 30.6. COPIES OF NOTICES. During the term of this Lease, Tenant and Landlord shall each provide the other promptly with copies of all summons, citations, directives, information inquiries or requests, notices of potential responsibility, notices of violation or deficiency, orders or decrees, Environmental Claims, complaints, investigations, judgments, letters, notices of environmental liens or response actions in progress, and other communications, written or oral, actual or threatened, received in the case of Tenant, by Tenant or occupant of the Premises, or in the case of Landlord, by Landlord, from the United States Environmental Protection Agency, Occupational Safety and Health Administration, Illinois Environmental Protection Agency, or other federal, state or local agency or authority, or any other entity or individual (including both governmental and non-governmental entities and individuals), concerning (a) any actual or alleged release of a Hazardous Material on, to or from the Premises; (b) the imposition of any lien on the Premises relating to any Hazardous Material; (c) any actual or alleged 34 violation of or responsibility under Environmental Laws; or (d) any actual or alleged liability under any theory of common law tort or toxic tort, including without limitation, negligence, trespass nuisance, strict liability or ultrahazardous activity. Section 30.7. Tests and Reports. A. Upon written request by Landlord. Tenant shall provide Landlord, at Tenant's expense, with (i) copies of all environmental reports and tests prepared or obtained by or for Tenant; (ii) copies of transportation and disposal contracts (and related manifests, schedules, reports and other information) entered into or obtained by Tenant with respect to any Hazardous Materials; (iii) copies of any permits issued to Tenant under Environmental Laws with respect to the Premises; (iv) prior to filing, copies of any and all reports, notifications and other filings to be made by Tenant or occupant of the Premises to any federal, state or local environmental authorities or agencies and after filing, copies of such filings; and (v) any other applicable documents and information with respect to environmental matters relating to the Premises. Tenant shall be obligated to provide such documentation only to the extent within Tenant's possession or control. B. In addition, if Landlord shall ever reasonably believe that there exists any breach by Tenant of the terms of this Article XXX, or if any Environmental Claim is made or threatened, or if a default shall have occurred under the Lease, or at Landlord's discretion, one (1) time per Lease Year, Landlord shall have the right, but not the duty, to enter upon the Premises and conduct an environmental assessment of the Premises, including, but not limited to, a visual site inspection, review of records pertaining to the site and interviews of Tenant's representatives or others concerning the site use and history and other matters. The investigation may also include reasonable subsurface or other invasive investigation of the Premises including, but not limited to, soil borings and sampling of site soil and ground or surface water for laboratory analysis, as may be recommended by the consultant as part of its inspection of the Premises or based upon such other reasonable evidence of Environmental Conditions warranting such subsurface or other invasive investigation. Landlord shall have the right, but not the duty, to retain any independent professional consultant to conduct any such environmental assessment; provided, however, that Landlord agrees to limit, in the absence of an Environmental Claim or default under this Article XXX, the number of such environmental assessments to one (1) per Lease Year for the Lease Term. Tenant will cooperate with the Landlord's consultant and will supply to the consultant, promptly upon request, any information reasonably requested by Landlord to facilitate the completion of the environmental assessment. Landlord and its designees are hereby granted access to the Premises at any time or times, upon reasonable notice (which may be written or oral) to perform such environmental assessment. In exercising its right, Landlord shall use its reasonable efforts to minimize disruption of operations at the Premises. Any costs associated with performance of the environmental assessment, including, but not limited to, the consultant fees and restoration of any property damaged by such environmental assessment, shall be paid by Landlord, unless such investigation discloses an Environmental Condition caused by Tenant or any member of the Tenant Group, in which case Tenant shall pay such costs. Section 30.8. Indemnification. Tenant shall reimburse, defend, indemnify and hold Landlord and any other Indemnified Party free and harmless from and against any and all Environmental Claims, response costs, losses, liabilities, damages, costs and expenses, including, without limitation, loss of rental income, loss due to business interruption, and reasonable attorneys' fees and costs, arising out of or in any way connected with any or all of the following: A. any Hazardous Materials (other than a Pre-Existing Condition) which, at any time during the Term, are or were actually or allegedly generated, stored, treated, released, disposed of or otherwise located on or at the Premises as a result of the act or omission of Tenant or any member of the Tenant Group (regardless of the location at which such Hazardous Materials are now or may in the future be located or disposed of), including, but not limited to any and all (i) liabilities under any common law theory of tort, nuisance, strict liability, ultrahazardous activity, negligence or otherwise based upon, resulting from or in connection with any Hazardous Material; (ii) obligations to take response, cleanup or corrective action pursuant to any Environmental Laws; and (iii) the costs and expenses of investigation or remediation in 35 connection with the decontamination, removal, transportation, incineration or disposal of any of the foregoing; and B. any actual or alleged illness, disability, injury or death of any person, in any manner arising out of or allegedly arising out of exposure to Hazardous Materials or other substances or conditions present at the Premises as a result of the act or omission of Tenant or any member of the Tenant Group (including, but not limited to, ownership, operation and disposal of any equipment which generates, creates or uses electromagnetic files, x-rays, other forms of radiation and radioactive materials), regardless of when any such illness, disability, injury or death shall have occurred or been incurred or manifested itself; and C. any actual or alleged failure of Tenant or any member of the Tenant Group at any time and from time to time to comply with all applicable Environmental Laws; D. any failure by Tenant to comply with its obligations under this Article XXX relating to an Environmental Condition for which Tenant is Remediating Party; E. Tenant's failure to provide all information, make all submissions, and take all steps required by all applicable governmental authorities; F. the imposition of any lien for damages caused by, or the recovery of any costs for, the remediation cleanup of Hazardous Material as a result of events that took place during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; G. costs of removal of any and all Hazardous Material from all or any portion of the Premises, which Hazardous Material were placed on the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; H. costs incurred to comply, in connection with all or any portion of the Premises, with all governmental regulations with respect to Hazardous Materials on, in, under or affecting the Premises, which Hazardous Materials were placed on the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; I. any spills, discharges, leaks, escapes, releases, dumping, transportation, storage, treatment or disposal of any Hazardous Materials which occur during the Term of this Lease, but only to the extent that such Hazardous Materials originated from or were or are located on the Premises as a result of the act or omission of Tenant or any member of the Tenant Group. The foregoing indemnification shall not apply to any loss incurred by Landlord as a result of a Pre-Existing Condition except to the extent any such Pre-Existing Condition of which Tenant becomes aware is exacerbated by Tenant or any member of the Tenant Group. The obligations of Tenant under this Section 30.8 shall survive any termination or expiration of this Lease. Section 30.9. Tenant Acknowledgement with respect to Environmental Matters. Tenant acknowledges that Landlord has made no representation whatsoever regarding Hazardous Materials on or about the Premises. 36 ARTICLE XXXI ------------ Expansion Option for Expansion Space ------------------------------------ SECTION 31.1. Expansion Option. Provided Tenant is not in default under the terms and conditions of this Lease on the date the Availability Notice or Expansion Notice (as such terms are hereinafter defined) are delivered to Landlord or Tenant, as applicable, Tenant shall have the option (hereinafter referred to as the "Expansion Option") to lease the portion of the Building containing approximately 26,195 square feet of space not leased to Tenant hereunder (hereinafter referred to as the "Expansion Space") subject to the terms and conditions hereinafter provided. Landlord shall deliver a written notice (herein referred to as the "Availability Notice") of the effective date on which Tenant may lease the Expansion Space (said effective date is hereinafter referred to as the "Expansion Date"). The Expansion Date shall be a date during Lease Year 6 or Lease Year 7. The Availability Notice shall be sent to Tenant at least one (1) year prior to the Expansion Date. To the extent Tenant desires to exercise the Expansion Option, Tenant shall deliver written notice (herein referred to as the "Expansion Notice") to Landlord at least one hundred eighty (180) days prior to the Expansion Date. To the extent Tenant fails to deliver to Landlord the Expansion Notice exercising the Expansion Option at least one hundred eighty (180) days prior to the Expansion Date, Tenant shall be deemed to have forever waived its Expansion Option. If Tenant exercises the Expansion Option in a timely fashion, Tenant shall lease the Expansion Space on the terms and conditions as contained in this Lease, except (i) Tenant shall be obligated to commence paying Rent for the Expansion Space on the Expansion Date, (ii) as of the Expansion Date (a) Annual Base Rent for the Expansion Space shall be $137,523.75, (b) the term "Premises", as used in this Lease, shall include the Expansion Space, and (c) the Tenant's Proportionate Share shall be one hundred percent (100%). Tenant hereby acknowledges and agrees the Expansion Space shall be tendered to Tenant by Landlord in its then "as-is" condition. If any lessee then in possession of the Expansion Space refuses or fails to deliver possession thereof before the Expansion Date, Landlord shall use reasonable efforts to cause such lessee to so deliver possession by prosecution of court process and the date for such Expansion Space to be added to the Premises shall be delayed until possession of the Expansion Space is delivered to Tenant; however, such failure of Landlord to deliver possession of the Expansion Space to Tenant due to the failure of the lessee then in possession to vacate or to appropriately deliver possession of such Expansion Space to Landlord shall not be a default of this Lease by Landlord. The Expansion Option herein granted shall automatically terminate upon the earliest to occur of (i) the termination of this Lease, (ii) the termination of Tenant's rights to possession of the Premises, (iii) the assignment of this Lease or subletting of in excess of fifty percent (50%) of the premises by Tenant, or (iv) the failure of Tenant to timely or properly exercise the Expansion Option as provided herein. ARTICLE XXXII ------------- Right of First Offer for Expansion Space ---------------------------------------- SECTION 32.1. Right of First Offer. Landlord agrees that on one (1) occasion during the Initial Term, in the event Tenant fails to timely or properly exercise the Expansion Option if (i) Tenant is in possession of the Premises not having either assigned this Lease or sublet fifty percent (50%) or more of the Premises and (ii) no Event of Default exists under the terms of this Lease, Landlord will, before entering into any new lease for any portion of the Expansion Space notify Tenant of the effective date (the date Landlord sends such notice to Tenant is hereinafter referred to as the "ROFO Date") on which Tenant may commence to lease the Expansion Space (hereinafter referred to as the "ROFO Occupancy Date"). If Tenant exercises its rights to lease the Expansion 37 Space pursuant to this Section 32.1, Tenant shall lease the Expansion Space on the terms and conditions as contained in this Lease, except (i) Tenant shall be obligated to commence paying Rent for the Expansion Space on the ROFO Occupancy Date, (ii) as of the ROFO Occupancy Date (a) Annual Base Rent for the Expansion Space shall be $137,523.75, (b) the term "Premises", as used in this Lease, shall include the Expansion Space, and (c) the Tenant's Proportionate Share shall be one hundred percent (100%). Tenant hereby acknowledges and agrees the Expansion Space shall be tendered to Tenant by Landlord in its then "as-is" condition. If Tenant does not accept the lease terms referenced above offered by Landlord within ten (10) business days of the ROFO Date and execute an amendment to this Lease incorporating the Expansion Space as part of the Premises for the remaining Term and the terms set forth above within twenty (20) business days of the ROFO Date, then Landlord will be able to lease the Expansion Space to any person or entity on such terms and conditions as may be acceptable to Landlord, and Tenant's right to lease such Expansion Space shall terminate. The provisions of this paragraph shall not include any portion of the Expansion Space leased to a tenant of the Building pursuant to an option or right granted to such tenant as part of its lease of space in the Building. ARTICLE XXXIII -------------- Renewal Option -------------- Section 33.1. Renewal Option. Tenant shall have the option (hereinafter referred to as the "Renewal Option") to renew the Initial Term for all of the Premises as of the expiration date of the Initial Term, for one (1) additional period of five (5) years (a "Renewal Term") upon the following terms and conditions: A. Tenant gives Landlord written notice of its exercise of the Renewal Option at least twelve (12) months prior to the expiration of the Initial Term. B. Tenant is not in default under this Lease either on the date Tenant delivers the notice required under (A) above or at any time thereafter prior to the commencement of the Renewal Term. C. All of the terms and provisions of this Lease (except this Article XXXII) shall be applicable to the Renewal Term, except that Annual Base Rent for the Renewal Term shall be an amount equal to the lesser of (i) the sum of EIGHT HUNDRED SEVENTY-NINE THOUSAND SEVENTY-FIVE AND NO/100 DOLLARS ($879,075.00), plus one hundred fifteen percent (115%) of the Base Rent then being paid for the Expansion Space, or (ii) the Fair Value as defined below. The term "Fair Value" as used herein shall mean Landlord's determination, utilizing its reasonable judgment, of an annual amount per rentable square foot for each year of the applicable Renewal Term for which Fair Value is being determined beginning with the first (lst) day of the subject period that a willing, creditworthy, new non-equity tenant leasing comparable space to Tenant's would pay and a willing, comparable landlord of an industrial building comparable to the Building in the Chicago metropolitan area ("Market") would accept at arm's length, giving appropriate consideration to annual rental rate per rentable square foot, rental escalations, length of lease term, size and location of the premises being leased, and other generally applicable terms and conditions prevailing for comparable space in comparable buildings located in the Market. In the event Tenant notifies Landlord within ten (10) days after receipt of notice of Landlord's determination of Fair Value that Tenant disagrees with Landlord's determination, then, Landlord and Tenant shall institute an appraisal procedure to determine the Fair Value by jointly nominating and appointing, within ten (10) days after receipt of notice from the other party, one appraiser who shall make a determination of the Fair Value of the Premises. If Landlord and Tenant fail to jointly agree on the nomination and appointment of one appraiser within said ten (10) day period, each party shall then each nominate and appoint one appraiser within fifteen (15) days after the end of the initial ten (10) day period and give notice of such appointment to the other party. Upon the appointment of the two appraisers as aforesaid, the two appraisers so appointed 38 shall jointly make a determination of the Fair Value of the Premises. If either party fails to appoint an appraiser within said fifteen (15) day period, the appraiser appointed by the other party shall make the determination of the Fair Value. If the two appraisers are unable to agree upon a determination of the Fair Value of the Premises within fifteen (15) days after the appointment of the second appraiser, the two appraisers shall jointly nominate and appoint a third appraiser within fifteen (15) days after the expiration of said fifteen (15) day period and give written notice of such appointment to both parties. In the event the two appraisers fail to appoint such third appraiser within said fifteen (15) day period, either party may thereafter apply to the United States District Court for the Northern District of Illinois for the appointment of such third appraiser. The third appraiser shall make a determination of the Fair Value. In the event the three appraisers are unable to agree upon a determination of the Fair Value of the Premises within fifteen (15) days after the appointment of the third appraiser, then the Fair Value shall be an amount equal to the average of the three values contained in the respective written appraisals submitted by the appraisers. The appraisers shall make their determination in writing and give notice thereof to both parties. Each appraiser shall afford both parties a hearing and the right to submit evidence, with the privilege of cross-examination in connection with its determination of the Fair Value. In the event any appraiser appointed as aforesaid shall die or become unable or unwilling to act before completion of the appraisal, such appraiser's successor shall be appointed in the same manner as provided above. Any appraiser appointed hereunder shall (x) be independent of both parties (and of all persons and entities with interest in either party); (y) have not less than five (5) years' experience in the appraisal of real property; and (z) hold the professional designation M.A.I., or if the M.A.I. ceases to exist, a comparable designation from an equivalent professional appraiser organization. All appraisal fees and expenses shall be borne equally by the parties. Section 33.2. "As Is" Condition. Except as otherwise expressly provided to the contrary in this Lease, Tenant agrees to accept the Premises to be covered by this Lease during the Renewal Term in an "as is" physical condition and Tenant shall not be entitled to receive any allowance, credit, concession or payment from Landlord for the improvement thereof. Section 33.3. Amendment. In the event Tenant exercises the Renewal Option, Landlord and Tenant shall mutually execute and deliver an amendment to this Lease reflecting the renewal of the Term on the terms herein provided, which amendment shall be executed and delivered promptly after the determination of Rent to be applicable to the Renewal Term as hereinabove provided. Section 33.4. Termination. The Renewal Options herein granted shall automatically terminate upon the earliest to occur of (i) the expiration or termination of this Lease, (ii) the termination of Tenant's right to possession of the Premises, (iii) any assignment of the Lease or subletting by Tenant of in excess of fifty percent (50%) of the Premises, or (iv) the failure of Tenant to timely or properly exercise the Renewal Option. Section 33.5. No Commissions. Landlord and Tenant acknowledge and agree that no real estate brokerage commission or finder's fee shall be payable by Landlord in connection with any exercise by Tenant of the Renewal Option herein contained except as may be provided in any written agreement between Landlord and Tenant's Broker. ARTICLE XXXIV ------------- Security Deposit ---------------- Section 34.1. Security Deposit. Tenant agrees to deposit with Landlord, upon the execution of this Lease, the Security Deposit as security for the full and faithful performance by Tenant of each and every term, provision, covenant and condition of this Lease. To the extent that the Rent increases or decreases during the Term the Security Deposit shall increase or decrease accordingly. If Tenant defaults beyond any applicable grace and/or 39 cure period in respect to any of the terms, provisions, covenants and conditions of this Lease including, but not limited to, payment of all rental and other sums required to be paid by Tenant hereunder, Landlord may use, apply or retain the whole or any part of the Security Deposit for the payment of such rent in default, for any sum which Landlord may expend or be required to expend by reason of Tenant's default including, without limitation, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency shall have accrued before or after re-entry by Landlord. If any of the Security Deposit shall be so used, applied or retained by Landlord at any time or from time to time, Tenant shall promptly, in each such instance, within five (5) days of written demand therefor by Landlord, pay to Landlord such additional sums as may be necessary to restore the Security Deposit to the original amount set forth in the first Section of this Lease. If Tenant shall fully and faithfully comply with all the terms, provisions, covenants and conditions of this Lease, the Security Deposit, or the balance thereof, shall be returned to Tenant after the following: (a) the time fixed as the expiration of the Term of this Lease; (b) the removal of Tenant from the Premises; (c) the surrender of the Premises by Tenant to Landlord in accordance with this Lease; and (d) final determination of all amounts payable by Tenant hereunder and payment of same. Tenant shall earn interest on the aforesaid Security Deposit at a passbook interest rate. Interest shall be paid to Tenant upon Tenant's written request, but not more than once during any calendar year. In the absence of evidence satisfactory to Landlord of an assignment of the right to receive the Security Deposit or the remaining balance thereof, Landlord may return the security deposit to the original Tenant, regardless of one or more assignments of this Lease. ARTICLE XXXV ------------ Miscellaneous ------------- Section 35.1. Captions. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. Section 35.2. Severability. If any covenant, agreement or condition of this Lease or the application thereof to any person, firm or corporation or to any circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement or condition to persons, firms or corporations or to circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Each covenant, agreement or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 35.3. Applicable Law. This Lease shall be construed and enforced in accordance with the laws of the state where the Premises are located. Section 35.4. Amendments in Writing. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned, except by a written instrument, duly signed, acknowledged and delivered by the other party. Section 35.5. Relationship of Parties. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. Section 35.6. Brokerage. Tenant warrants that it has no dealings with any real estate broker or agent in connection with this lease other than Landlord's Broker and Tenant's Broker, and Tenant covenants to pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any 40 compensation, commissions and charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof arising out of any acts of Tenant. Section 35.7. No Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated and additional rent shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed as accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. Section 35.8. Joint Effort. The preparation of this Lease has been a joint effort of the parties hereto and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. Section 35.9. Waiver of Jury Trial. Landlord and Tenant hereby waive a jury trial in action brought by the other hereunder. Section 35.10. Time. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. Section 35.11. Landlord's Consent. Landlord's granting of any consent under this Lease, or Landlord's failure to object to any action taken by Tenant without Landlord's consent required under this Lease, shall not be deemed a waiver by Landlord of its rights to require such consent for any further similar act by Tenant. No waiver by either party of any other breach on the part of the other of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or to be a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. None of the Landlord's or Tenant's covenants under this Lease, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by Landlord and Tenant. Section 35.12. No Partnership. Landlord is not, and shall not be deemed to be, in any way or for any purpose, the partner, employer, principal, master or agent of or with Tenant. Section 35.13. Landlord's Liability. Notwithstanding anything to the contrary herein contained, there shall be absolutely no personal liability asserted or enforceable against Landlord or on any persons, firms or entities who constitute Landlord with respect to any of the terms, covenants, conditions and provisions of this Lease except as provided in Section 4.9 hereof, and Tenant shall, subject to the rights of any mortgagee, look solely to the interest of Landlord, its successors and assigns in the Premises for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder; such exculpation of personal liability is absolute and without any exception whatsoever. If the entity constituting Landlord is a partnership, Tenant agrees that the deficit capital account of any such partner shall not be deemed an asset or property of said partnership. Section 35.14. Landlord Rights. This Lease does not grant any rights to light or air over or about the Premises. Landlord specifically excepts and reserves to itself the use of the Common Areas, any roofs, the exterior and structural components of the Building, all rights to the Land and improvements below and adjacent to the improved floor level of the Building, to the improvements and air rights above the Building and to the improvements and air rights located outside the demising walls of the Building and to such areas within the Building required for installation of utility lines and other installations, and no rights with respect thereto are conferred upon Tenant. Section 35.15. Rent Absolute. Except as otherwise expressly provided herein, this Lease shall be deemed and construed to be a "net lease" and Tenant agrees to pay all costs and expenses of every kind and nature whatsoever, ordinary and extraordinary, arising out of or in connection with the ownership, maintenance, 41 repair, replacement, use and occupancy of the Premises during the Term of this Lease, which, except for the execution and delivery hereof, would otherwise have been payable by Landlord. SECTION 35.16. TENANT AUTHORITY. Simultaneously with the execution and delivery of this Lease by Tenant, Tenant shall deliver to Landlord: A. Certified resolutions of its board of directors of Tenant executing this Lease on behalf of Tenant authorizing the execution and delivery of this Lease. B. A certificate of incumbency executed by the secretary of any corporate partner of Tenant executing this Lease on behalf of Tenant identifying by name, office and facsimile signature the officers of Tenant. C. A current certificate of good standing issued by the Secretary of State of the state of incorporation of Tenant and the State of Illinois. SECTION 35.17. PURCHASE CONTINGENCY. Landlord and Tenant acknowledge and agree that Landlord's obligations under this Lease are expressly contingent upon Landlord's purchase of the Land and the closing of such purchase by which Landlord obtains fee simple title to the Land. In the event that said events have not occurred on or before September 30, 1996, either party may terminate this Lease upon notice to the other at any time prior to the closing of such purchase. IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. LANDLORD: CENTERPOINT PROPERTIES CORPORATION, a Maryland - -------- corporation By: /s/ Michael M. Mullen ------------------------------------------- Its: CIO By: /s/ Fred D. Reynolds ------------------------------------------- Its: VP of Development TENANT: PLAYBOY ENTERPRISES, INC., a Delaware corporation - ------ By: /s/ Howard Shapiro ------------------------------------------- Its: Ex. V.P. By: /s/ Robert D. Campbell ------------------------------------------- Its: Asst. Secretary 42 EXHIBIT "A" SITE PLAN --------- EXHIBIT "B" LEGAL DESCRIPTION OF LAND ------------------------- PARCEL 1 LOT 10 IN BLOOMINGDALE TOWNSHIP SUPERVISOR'S ASSESSMENT PLAT NO. 1, BEING AN ASSESSMENT PLAT OF THE NORTH 1/2 OF THE SOUTHEAST 1/4 OF SECTION 1, TOWNSHIP 40 NORTH, RANGE 10 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN DU PAGE COUNTY, ILLINOIS. PARCEL 2 THE EAST 69.49 FEET OF THE NORTH LINE THEREOF OF LOT 11 IN BLOOMINGDALE TOWNSHIP SUPERVISOR'S ASSESSMENT PLAT NO. 1 OF THE NORTH 1/2 OF THE SOUTHEAST 1/4 OF SECTION 1, TOWNSHIP 40 NORTH, RANGE 10 EAST OF THE THIRD PRINCIPAL MERIDIAN IN DU PAGE COUNTY, ILLINOIS. PARCEL 3 LOT 3 IN ROHLWING/THORNDALE SUBDIVISION, BEING A SUBDIVISION IN THE SOUTHEAST 1/4 OF SECTION 1, TOWNSHIP 40 NORTH, RANGE 10 EAST OF THE THIRD PRINCIPAL MERIDIAN, ACCORDING TO THE PLAT THEREOF RECORDED MAY 30, 1996 AS DOCUMENT NUMBER R96-090148, IN DU PAGE COUNTY, ILLINOIS. EXHIBIT "C" PRELIMINARY PLANS AND SPECIFICATIONS ------------------------------------ EXHIBIT "D" TENANT ESTOPPEL CERTIFICATE --------------------------- Property Name: __________________________________ ("Property") Tenant: To: ________________________________________________ DEFINITIONS: - ----------- Lease Date: Landlord: Tenant: Security Deposit ________________________________________________ Date of Possession: Rent Commencement Date: Monthly Base Rent Annual Base Rental Amount: Monthly Deposits: Term: Termination Date: Renewal Option(s): Square Footage: Use: Tenants Address For Notices: ["Purchaser"] ["Lender"] proposes to [purchase the Property] [finance the Property] and this Tenant Estoppel Certificate is to be made and delivered in connection with that [purchase] [financing]. The undersigned Tenant under the above-referenced lease dated as of the Lease Date between Landlord and Tenant ("Lease"), certifies, represents, confirms and agrees in favor of [Purchaser] [Lender] the following: l. The above-described Lease has not been cancelled, modified, assigned, extended or amended and contains the entire agreement between Landlord and Tenant except as follows: 2. Rent has been paid to ____________. There is no Prepaid Rent. The amount of the Security Deposit is as set forth above, which is currently being held by Landlord. 3. Tenant took possession of the leased premises on the Date of Possession, and commenced to pay rent on the Rent Commencement Date, in the amount of the Monthly Base Rent, each payable in advance. Our current Annual Base Rental Amount is as set forth above, payable in equal monthly installments, subject to percentage rental, common area maintenance charges, escalation charges and other charges in accordance with the terms and provisions of the Lease, which as of the date hereof total the Monthly Deposit Amount, each payable in equal monthly installments in advance. We are currently in occupancy of the leased premises. No "discounts", "free rent", "discounted rent" or "abatements of rent" have been agreed to or are in effect. 4. The Lease is for the Term set forth above and ending on the Termination Date, and we have the Renewal Option(s) set forth above. 5. All space and improvements covered by the Lease have been completed and furnished to the satisfaction of Tenant, all conditions required under the Lease have been met, and Tenant has accepted and taken possession of the leased premises on the Date of Possession as set forth above and presently occupies the leased premises, presently consisting of the Square Footage as set forth above. 6. The Lease is (a) in full force and effect, and (b) free from default by both Landlord and Tenant; and we have no claims, liens, charges or credits against Landlord or offsets against rent. 7. The undersigned has not assigned or sublet the Lease, nor does the undersigned hold the Property under assignment or sublease. 8. There are no other agreements written or oral, between the undersigned and Landlord with respect to the Lease and/or the leased premises and building. Landlord has satisfied all commitments, arrangements or understandings made to induce Tenant to enter into the Lease, and Landlord is not in any respect in default in the performance of the terms and provisions of the Lease, nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default. 9. The leased premises are currently being used for the Use set forth above. 10. Tenant is maintaining (free of default) all insurance policies that the Lease requires Tenant to maintain. 11. Neither Landlord nor [Purchaser] [Lender] nor any of their respective successor or assigns, has or will have any personal liability of any kind or nature under or in connection with the Lease; and, in the event of a default by Landlord or [Purchaser] [Lender] under the Lease, Tenant shall look solely to Landlord's or [Purchaser's] [Lender's] interest in the building in which the leased premises are located. 12. Tenant is not in any respect in default under the terms and provisions of the Lease (nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default), and Tenant has not assigned, transferred or hypothecated its interest under the Lease. 13. Tenant (i) does not have any option or preferential right to purchase all or any part of the leased premises or all or any part of the building of which the leased premises are a part; and (ii) does not have any right, title or interest with respect to the leased premises other than as lessee under the Lease. 2 14. We understand that [Purchaser] [Lenderl is planning to [purchase] [finance] the Property on which the leased premises is located to Purchaser, and we agree to make all payments required under the Lease to [Purchaser] [Lender] upon our receipt of notice from Landlord and/or [Purchaser] [Lender]. Further, upon receipt of such notice, we will thereafter look to [Purchaser] [Lender] and not Landlord as the landlord under the Lease. We agree to give all notices required to be given by us to Landlord under the Lease to [Purchaser] [Lender] upon our receipt of said notice. 15. The statements contained herein may be relied upon by [Purchaser] [Lender] and by any prospective purchaser or lender of the Property. 16. If Tenant is a Corporation, the undersigned is a duly appointed officer of the corporation signing this Agreement, and is the incumbent in the office indicated under his or her name. If Tenant is a partnership or joint venture, the undersigned is a duly appointed partner or officer of the partnership or joint venture signing this certificate. In any event, the undersigned individual is duly authorized to execute this Agreement on behalf of Tenant. 17. Tenant (a) executes this certificate with the understanding that [Purchaser] [Lender] is contemplating [purchasing] [financing] the Property, and that if [Purchaser] [Lender] [purchases] [finances] the Property, [Purchaser] [Lender] will do so in material reliance on this certificate; and (b) agrees that the certifications and representations made herein shall survive such acquisition. 18. The current address to which all notices to Tenant as required under the Lease should be sent is the Tenant's Address for Notices. 19. [Purchaser's] [Lender's] rights hereunder shall inure to its successors and assigns. IN WITNESS WHEREOF, Tenant has executed this estoppel certificate as of this ___ day of ______, 199_. a --------------------------------- ----------------- By: ------------------------------- Its: 3 [LETTERHEAD OF FCL BUILDERS, INC.] REVISED PRELIMINARY SPECIFICATIONS OF A BUILDING FOR PLAYBOY ENTERPRISES, INC. SEPTEMBER 4, 1996 This outline specification, along with the attached preliminary site plan A100, dated September 4, 1996, composite floor plan A101, dated September 4, 1996, first floor plan A102, dated September 4, 1996, second floor plan A103, dated September 4, 1996, exterior elevation A105, dated September 4, 1996 and landscape plan L100, dated September 4, 1996 prepared by Cornerstone Architects, Inc. Job No. 96020, shall define the scope of a new facility for Playboy Enterprises, Inc. TABLE OF CONTENTS -----------------
General Description.................................Section 1.00 Design..............................................Section 2.00 Site Work...........................................Section 3.00 Building Shell......................................Section 4.00 Interior Improvements...............................Section 5.00 H V.A.C. System.....................................Section 6.00 Plumbing............................................Section 7.00 Fire Protection.....................................Section 8.00 Electrical .........................................Section 9 00 Miscellaneous.......................................Section 10.00
-2- 1.00 GENERAL DESCRIPTION ------------------- 1.10 Size of Building and Tract: The total facility will be approximately 128,867 square feet, located on an 8.3521 acre parcel (363,819.51 square feet) on in the southwest quadrant of Rohlwing Road and Old Thorndale Road, Itasca, Illinois. 1.20 SIZE OF BUILDING (BY UNIT): Playboy Enterprises, Inc. 106,038 Square Feet Expansion Space 22,829 Square Feet ------- Total...................... 128,867 Square Feet ======= 1.30 SIZE OF PLAYBOY ENTERPRISES, INC. (BY USE): Office - 2 story 35,130 Square Feet Warehouse 70,908 Square Feet ------- Total...................... 106,038 Square Feet ======= Please note that warehouse square footage includes: Warehouse Office & Washrooms 700 Square Feet Art Storage 2,000 Square Feet Retail 1,300 Square Feet 1.40 EXPANSION AREA: There will be additional parking expansion (beyond the initial 275 cars) for one hundred twenty-five (125) cars as per site plan totaling 400 car capacity. 2.00 DESIGN ------ The design of the facility will be completed by registered architects and engineers. The design will include architectural, structural, civil, mechanical, plumbing, fire protection, electrical and landscaping plans. The plans will be in sufficient detail to allow issuance of a building permit by local authorities. All building permit and tap-on fees are included. 3.00 SITE WORK --------- 3.10 Grading: All work necessary to clear, strip, excavate, backfill and grade the site for the proposed building construction in accordance with recommendations of an independent soils engineer. -3- 3.20 PAVED AREAS: 3.21 AUTOMOBILE PARKING - Two hundred seventy-five (275) initial stalls to be provided, handicap as required. Paving to be 2 1/2" asphalt over 9" stone. Striping and concrete bumpers (where needed) provided. Handicap signage is included. 3.22 TRUCK DRIVE - Paving to be 3" asphalt over 12" stone. 3.23 TRUCK DOCK - Paving be 8" concrete reinforced with 6" x 6" x 6/6 gauge steel mesh, on 3" compacted stone, extending 60' from building at all depressed docks and drive-in door. 3.30 Exterior patio lunch areas, sidewalks, plazas, stoops and pads - To be 5" concrete. broom finished over compacted stone. 3.40 Exterior Lighting - Install two (2) bollard lights to illuminate the entry walk, 400 watt wall mounted high pressure sodium light fixtures to illuminate car parking and truck dock areas and 400 watt pole-mounted high pressure sodium light fixtures to illuminate remote car parking areas in accordance with local code requirement. 3.50 LANDSCAPING: Provide landscaping including sodding, seeding, fine grading, plantings, lawn irrigation, retaining wall and fence around detention area and patio area as shown on drawings. 3.60 All necessary storm, sanitary and water connections to existing municipal lines located at property line. All plumbing materials to conform with local code. 3.70 Provide a fire loop around building with fire hydrants located as required by the Village of Itasca. 3.80 Exterior electrical lines servicing adjoining building to the northwest to be removed and rerouted as per Commonwealth Edison design. 4.00 BUILDING SHELL -------------- 4.10 EXTERIOR WALLS: All elevations of building to receive load bearing insulated precast concrete wall panels. Panels to have an R value of 10. Wall panels and accent reveals to be stained to Playboy Enterprises, Inc.'s choice of color. Prefinished aluminum coping to be installed on all elevations of the building. Coping to be painted to Playboy Enterprises, Inc.'s choice of standard color. -4- 4.20 Windows: Provide two sections of full height, curtain wall glazing system with two (2) 3' x 7' glass doors and sidelights with 1" tinted insulated glass in aluminum thermal break frames on office elevations as per elevation study. Exterior aluminum mullions to be shop painted to Playboy Enterprises, Inc.'s choice of standard color. Frames to be manufactured by Kawneer or equal. 4.30 Main Office and Retail Entry Plazas: Entry plazas to receive 5" poured in place concrete sidewalk leading from parking lot to office entry and retail entry as shown on enclosed plans. Entrance canopy to be supported by architectural columns. Soffit to receive a skin coat of synthetic plaster, dryvit or equal, painted. One (1) glass door and metal canopy in lieu of hollow metal door at Retail Area entrance. Also two (2) 6' x 6' tinted insulated windows to the exterior wall of the Retail Area. 4.40 Steel Structure: Steel structure to be a combination of long span steel bar joists, beams and wide flange columns or truss girders and tube columns. Roof deck to be 22 gauge, prime painted off-white, standard ribbed deck. Columns to be spaced approximately 43.4' x 50' on center, as per floor plan. Bottom of joists to be 28' clear from top of slab. 4.41 Provide a 125# live load mezzanine totaling 17,565 square feet (less open air Lobby Area) constructed of structural steel, corrugated deck, 3" concrete topping and one (1) metal pan stairway with concrete filled treads, one (1) exposed ornamental stairway at main reception and one (1) exposed pre-fabricated metal stairway and landing with removable handrail for loading into second story Computer/Phone Room. 4.42 Provide a two (2) stop passenger elevator at an allowance of $35,000. 4.50 Roof: 4.51 Roof System: Roof to be a single ply, 45 mil, ballasted EPDM membrane roofing system, Firestone, Carlisle or equal with isocyanurate insulation (R value equal to 14). This system is to be applied in accordance with manufacturer's specifications, and shall carry a manufacturer's fifteen (15) year full system warranty. -5- 4.52 STORM PIPING AND DRAINS: All roof drainage via interior PVC downspouts with insulated horizontal offsets. 4.53 SKYLIGHTS: Install ten (10) 4' x 8' double dome insulated skylights in warehouse area. Location to be determined by Playboy Enterprises, Inc. (SEE ALTERNATE, LAST PAGE). 4.60 FLOOR SLABS: Concrete floor slabs to be 6" (3,500 p.s.i.), reinforced with fibermesh, steel trowel finish on 3" compacted stone in warehouse area. Floor tolerances to be F/F/=35 and F/L/=20 in warehouse area. 4" concrete with 6" x 6" x 10/10 gauge steel mesh, steel trowel finish on 3" compacted stone in first floor office areas. Concrete floor to be sawcut in both directions, no greater than 14.5' on center. 4.70 TRUCK DOCKS AND OVERHEAD DOORS: 4.71 TRUCK LOADING DOORS: Exterior truck docks to receive four (4) 9' x 10' manually operated insulated metal overhead doors with two (2) vision lites per door at shipping docks and four (4) 9' x 10' electrically operated insulated metal overhead doors with two (2) vision lites per door at receiving docks. Grade level truck/van entrance to receive one (1) - 12' x 14' electrically operated, insulated metal overhead door. 4.72 TRUCK DOCK ACCESSORIES: Provide eight (8) 30,000# capacity 6' x 8' mechanical levelers. Provide eight (8) dock seals with bumpers. Provide one (1) Phoenix type light at each of four (4) shipping truck dock locations. 5.00 INTERIOR IMPROVEMENTS: ---------------------- 5.10 WALLS 5.11 Demising wall separating Playboy Warehouse from Tenant B Warehouse to be full height concrete block. Demising walls separating office and warehouse to be full height concrete block. Demising walls separating Art Storage from Warehouse/Office and separating Retail Area from Warehouse/Office to be concrete block to a height of 12' with two sided drywall and metal stud partition above to bottom of deck. -6- 5.12 Interior office partition walls to be 5/8" gypsum wallboard over 3-5/8" metal studs - 2.0' on center, located per plan. Wallboard to be taped, sanded, and painted with two (2) coats of flat latex paint. Wet walls in washrooms to receive wainscot of ceramic tile over moisture resistant wallboard. Walls around washrooms, and conference rooms shall be insulated. All interior office walls shall penetrate ceiling grid. 5.13 Perimeter Walls - Perimeter walls in office areas shall be 5/8" gypsum board over 1-1/2" furring strips over masonry or precast walls. Finish to match other gypsum board walls. 5.14 Interior of warehouse walls to be field painted. 5.20 FLOORING: 5.21 Reception & Vestibule - Install quarry tile and base. Office Area - Install carpet at $16.00 per square yard installed with 5' quarry tile main walkways in customer service. Retail - Install carpet at $16.00 per square yard installed, and 30 square feet of quarry tile at the Retail Area entrance. Art Room Warehouse Offices & Warehouse Washrooms - Apply two (2) coats of lapidolith floor sealer. Office Washrooms - Install ceramic tile and base. Lunchrooms & Janitor Closets - Install VCT tile with vinyl base. 5.22 Warehouse Area - Exposed concrete to be treated with two (2) coats of lapidolith floor sealer. 5.30 CEILING: 5/8" x 24" x 24" Armstrong Glacier or equal acoustical ceiling board in Chicago Metallic or equal suspended grid system throughout the office area. Ceiling height to be 9' in main Office Areas and Retail Areas except for full height reception area and (PLUS/MINUS SIGN) 11' in Lunch Room and Customer Service Areas. Standard 2' x 4' ceiling tiles to be installed in Warehouse Offices. Art Storage Area to be exposed off-white deck. 5.40 DOORS, FRAMES, HARDWARE: Doors in metal stud and sheetrock partitions to be full height (8' 10") 1-3/4" solid core "A" grade oak. Stain finish to be selected by Playboy Enterprises, Inc. Doors in concrete block partitions and precast panels are to be 1-3/4" hollow metal doors, painted to match the walls. -7- 5.50 Provide a 2,000 square foot, air conditioned art storage room within the warehouse area as per plan. 6.00 H.V.A.C. SYSTEMS ---------------- 6.10 OFFICE AREA, RETAIL AREA, ART STORAGE ROOM AND WAREHOUSE OFFICES (EXCLUDING WAREHOUSE WASHROOM) - A combination heating and cooling system furnished by a nationally known supplier such as Carrier, Trane or equal. This equipment to be designed to maintain 75 (degrees) F. when outside temperature is 95 (degrees) F. in summer, and to maintain 75 (degrees) F. when outside temperature is -10 (degrees) F. in winter. Exhaust fans are included for all washrooms, conference rooms and the lunchroom areas to conform with local code. Provide 1,200 CFM exhaust fan with speed control for Smokers' Lounge. Computer Room to receive a separate zone. 6.20 WAREHOUSE: Roof mounted 1800 MBH, 40,000 CFM air pressurization system achieving one (1) air change per hour, RAPID AIR or equal. System to provide 65 (degrees) F. at -10 (degrees) F. outside temperature. 7.00 PLUMBING -------- 7.10 Provide complete plumbing system with separate rest room facilities for first and second floor Office men and women as well as warehouse/truckers men's room plumbing to consist of. . .
- -------------------------------------------------------------------------------------------- FIXTURE TOTAL 1ST FLOOR 1ST FLOOR 2ND FLOOR 2ND FLOOR WAREHOUSE WAREHOUSE - ------- ----- --------- --------- --------- --------- --------- --------- WOMEN MEN WOMEN MEN WOMEN MEN ----- --- ----- --- ----- --- - -------------------------------------------------------------------------------------------- Toilet 16 5 3 3 2 2 1 - -------------------------------------------------------------------------------------------- Urinals 5 2 2 1 - -------------------------------------------------------------------------------------------- Drop in 12 3 3 3 3 Lavatories - -------------------------------------------------------------------------------------------- Wall Mounted 2 1 1 Lavatory - -------------------------------------------------------------------------------------------- Hot Water 3 Heaters - -------------------------------------------------------------------------------------------- Lunch Room 1 Sink - -------------------------------------------------------------------------------------------- Electric 3 Watercooler - -------------------------------------------------------------------------------------------- Coffee Area l Sink - -------------------------------------------------------------------------------------------- Janitor Sink 2 - -------------------------------------------------------------------------------------------- Total Plumbing Fixtures 45
-8- 8.00 FIRE PROTECTION Install an light Hazard Fire Protection System throughout first and second floor office and retail areas. Install an ESFR sprinkler system throughout warehouse and art storage areas. Heads to be located above bar joists. Fire pump and pump room are included as required by code. Install five (5) 1-1/2" hose stations throughout the Warehouse Area. Provide fire alarm system in accordance with code requirements. 9.00 ELECTRICAL SERVICE, OUTLETS AND LIGHTING 9.10 ELECTRICAL SERVICE: Install a 2,000 ampere, 277/480 volt, 3 phase, 4 wire main electrical service. Service to be separately metered for Unit A and Unit B. Also install Office and Warehouse subpanels as required for building loads only. 9.20 ELECTRICAL AND TELEPHONE OUTLETS: Install 110 volt outlets throughout the Office and Retail Areas as shown on drawing numbers 102 and 103 dated, September 9, 1996. Install telephone/data conduit stub-outs, located as shown on drawing number 102 and 103, dated September 9, 1996. All first floor Customer Service workstations to receive electrical, phone and data from wall mounted connection points with the exception of raised General Office Area and the adjoining twenty (20) workstations which will be fed via floor slab conduit. -9- 9.30 Lighting Office and Retail Areas - Office and Retail Areas to receive 2' x 4' lay- in, four tube fluorescent fixtures, located to provide an initial 70 footcandles throughout. Art Storage Area - Art Storage Area to receive 400 watt metal halide light fixtures to provide an initial 30 footcandles. Warehouse Areas - Warehouse areas to receive 400 watt metal halide light fixtures located to provide an initial 30 footcandles throughout (PLUS/MINUS SIGN)40,000 square feet (60%) of warehouse and 40 footcandles throughout (PLUS/MINUS SIGN)26,800 square feet (40%) of warehouse area. Assuming general warehouse conditions (no racking, process equipment or other obstructions). Upon receipt of an approved rack and/or process layout, additional lighting, if any, will be provided and installed at tenant's expense. Emergency lighting to be installed throughout building to conform to local code assuming general warehouse conditions (no racking, process equipment or other obstructions). Upon receipt of an approved rack and/or process layout, additional emergency lighting, if any, will be provided and installed at tenant's expense. 10.00 MISCELLANEOUS Inclusions: -- Scheduled construction time is seven (7) months for initial building shell (warehouse) and an additional three (3) months for office finish-out from the issuance of a complete building permit. -- Builders' Risk insurance. -- Architectural plans and specifications. -- Surveys and soil borings. -- Construction guarantee for one (1) year. Exclusions: -- Air conditioning of warehouse rest rooms. -- Electronic security systems and automated H.V.A.C. shut down systems. -- Field painting of steel or piping. -- Winter conditions. -- Utility companies' excess facility charges. -- Task lighting and process related installations. -- Fire extinguishers and additional hose stations. -10- ALTERNATES: NOTE: All prices are quoted as initial year rent per square foot. 1. Provide a UPS System for portions of Office Area. (Cost to be determined after specification is established.) 2. Provide an additional ten (10) 4' x 8' double dome insulated skylights, totaling twenty (20). Location to be determined by Playboy Enterprises, Inc. ADD $ .01 Decision required by October 15, 1996. 3. Add exterior stair and exterior door to south side of Warehouse Offices (at Receiving Area). ADD $.005 Decision required by October 1, 1996. -11- [BLUEPRINT OF FINAL LANDSCAPE PLAN APPEARS HERE] [BLUEPRINT OF FINAL SITE PLAN APPEARS HERE] [BLUEPRINT OF COMPOSITE PLAN APPEARS HERE] [BLUEPRINT OF FIRST FLOOR PLAN APPEARS HERE] [BLUEPRINT OF SECOND FLOOR PLAN APPEARS HERE] [BLUEPRINT OF EXTERIOR ELEVATIONS APPEARS HERE] [PLAT OF CONSOLIDATION AND BLUEPRINT APPEARS HERE] [BLUEPRINT OF FIRST FLOOR PLANS APPEARS HERE] [BLUEPRINT OF SECOND FLOOR PLAN APPEARS HERE] EX-10.24(G) 24 SECOND AMENDMENT TO DEFERRED COMPENSATION PLAN Exhibit 10.24(g) SECOND AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. DEFERRED COMPENSATION PLAN -------------------------- This Second Amendment is made on this 25th day of April, 1996, to be effective as of April 1, 1996. WHEREAS, Playboy Enterprises, Inc. (the "Company") sponsors the Deferred Compensation Plan, as previously amended, for certain highly compensated employees (the "Employees' Plan"), and a Board of Directors' Deferred Compensation Plan (the "Directors' Plan") for outside directors of the Company; and WHEREAS, the Company wishes to clarify the eligibility provisions of the Employees' Plan to reflect the limitations on eligibility that have been in effect, pursuant to the determination of the plan administrative committee, since July 1, 1993, which limitations serve to ensure the continued status of such plan as a "top hat" plan; and WHEREAS, the Company wishes to clarify the terms of the Employees' Plan to provide that: (i) a participant in the Employees' Plan shall not be entitled to a benefit distribution in the normal course unless such participant shall have ceased all service with the Company in all eligible classes covered under the Employees' Plan; and (ii) the account balance of a participant who shall become a director of the Company no later than 90 days after his or her separation from service shall be transferred directly to an account established for such individual under the Directors' Plan (and such individual shall not have the opportunity to receive a distribution of such amount under the Employees' Plan). NOW, THEREFORE, the Employee's Plan is hereby amended in the following respect: 1. Section 3.01 of the plan is hereby amended and restated in its entirety to read as follows, effective as of July 1, 1993: "3.01 Participation. Participation in the Plan for any Plan Year shall be limited to Employees of the Company (including any Employee serving as a director of the Company) who satisfy either of the minimum compensation requirements set forth below: (a) The Participant is expected to receive Salary for the Plan Year of not less than $90,000; or (b) The Participant's actual earnings as reported on his or her Form W-2, plus any amounts deferred by the Participant under Section 125 and/or Section 401(k) of the Internal Revenue Code of 1986 and/or pursuant to the terms of this Plan for the immediately preceding complete calendar year equalled or exceeded $90,000. For all Plan Years beginning on or after July 1, 1994, the foregoing dollar limitation shall be increased for each Plan Year by multiplying such dollar amount by a fraction, the numerator of which shall be the national Employment Cost Index issued in the month of March immediately preceding such Plan Year and the denominator of which is the Employment Cost Index issued in the month of March of the prior calendar year." 2. The following sentence is hereby added at the end of Section 4.09 of the plan, effective as of April 1, 1996: "Notwithstanding any Plan provisions to the contrary: (i) no Participant shall be entitled to receive a benefit distribution under any of Sections 4.01 through 4.04 in the normal course unless such participant shall have ceased all service with the Company in all eligible classes covered under Section 3.01 of this Plan (without regard to the compensation requirements for eligibility to participate in that Section); and (ii) in the case of any Participant who shall separate from service but shall no later than 90 days thereafter become a director of the Company, the full amount standing to the credit of such Participant under this Plan shall be transferred to an account established for him or her under the Company's Board of Directors Deferred Compensation Plan (and such Participant shall not be eligible to receive a distribution of that amount under this Plan)." EX-10.24(H) 25 FIRST AMENDMENT TO DEFERRED COMPENSATION PLAN Exhibit 10.24(h) FIRST AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN This First Amendment is made on this 25th day of April, 1996, to be effective as of April 1, 1996. WHEREAS, Playboy Enterprises, Inc. (the "Company") sponsors a Deferred Compensation Plan, as previously amended, for certain highly compensated employees (the "Employees' Plan"), and the Board of Directors' Deferred Compensation Plan (the "Directors' Plan") for outside directors of the Company; and WHEREAS, the Company wishes to clarify the terms of the Directors' Plan to: (i) allow such plan to accept a direct transfer of any amounts standing to the credit of an eligible director under the Employees' Plan (attributable to periods during which such individual had been a participant in such plan); and (ii) provide that certain elections made by the eligible director under the Employees' plan with respect to the transferred amounts shall be preserved as to such amounts under the Directors' Plan. NOW, THEREFORE, the Directors' Plan is hereby amended in the following respect: 1. The following sentence shall be added at the end of Section 3.01 of the plan, effective as of April 1, 1996: "Notwithstanding the foregoing, any Director who was previously a participant in the Company's Deferred Compensation Plan shall contribute to this Plan the full amount standing to his or her credit under such Deferred Compensation Plan, as and to the extent permitted or required under the terms of such plan, whether or not such Director shall otherwise elect make deferral contributions hereunder." 2. A new Section 4.08 shall be added to Article IV of the plan to read as follows: "4.08 Preservation of Interim Distribution Benefit Elections. If a Participant who had been a participant in the Company's Deferred Compensation Plan, and whose account balance under such plan shall have been transferred to this Plan under Section 3.01 hereof, shall have made a valid election or elections with respect to all or a portion of the amounts so transferred under Section 4.05 (Interim Distribution Benefit) of such Deferred Compensation Plan, such election(s) shall be preserved and given effect by the Administrative Committee. For purposes of applying this provision: (a) the Administrative Committee shall refer to Section 4.05 of the Deferred Compensation Plan, a copy of which Section shall be attached as an exhibit to this Plan; and (b) references in such Section to the "Administrative Committee" shall be deemed to refer to this Plan's Administrative Committee. Nothing in this Section 4.08 shall be interpreted so as to permit any Participant, including a former participant in the Company's Deferred Compensation Plan, to make any similar election with respect to any amounts subject to deferral under this Plan." EX-10.25(I) 26 AMENDMENT DTD 8/15/96 RE: AGREEMENT DTD 5/21/92 Exhibit 10.25(i) [LOGO OF RABBIT HEAD] PLAYBOY ENTERPRISES INC. INTEROFFICE CORRESPONDENCE DATE: August 15, 1996 PRIVILEGED AND CONFIDENTIAL - -------------------------------------------------------------------------------- TO: Tony Lynn - -------------------------------------------------------------------------------- FROM: Christie Hefner - -------------------------------------------------------------------------------- SUBJECT: Employment Agreement - -------------------------------------------------------------------------------- ================================================================================ . Tony, this will confirm our agreement to amend your employment agreement dated May 21, 1992 as follows: 1. The Employment Term will be extended through June 30, 2000. 2. Your Basic Compensation will be $525,000 for the period July 1, 1996 through June 30, 1997 and $550,000 for each year of your Employment Term thereafter. 3. The Profits Base on which your Contingent Compensation will be computed will continue to be $2.35 million. 4. The Contingent Compensation payable to you will continue to be 5% of the amount by which the pre-tax profit of the Playboy Entertainment Group for each fiscal year during the Employment Term exceeds the Profits Base. However, once the sum of Basic Compensation plus Contingent Compensation equals $2 million in any fiscal year, any additional Contingent Compensation payable to you in such fiscal year will be reduced to 2.5% of the amount by which the pre-tax profit of the Playboy Entertainment Group in such fiscal year exceeds the Profits Base. 5. Paragraph 3.D. under your Employment Agreement will be deleted in its entirety and the following will be substituted in lieu thereof: D. Equity Bonus: ------------ (i) In the event that Company directly or indirectly sells, transfers or otherwise disposes of an equity interest in the Playboy Entertainment Group (or all or substantially all of the assets comprising the Playboy Enter- PRIVILEGED AND CONFIDENTIAL - --------------------------- August 15, 1996 To: Tony Lynn Re: Employment Agreement Page Two tainment Group operations) to a third party (including a sale to the public) during the Employment Term or within three (3) months following the end of the Employment Term (an "Equity Disposition Transaction"), then Employee shall be entitled to a one-time Equity Bonus that will be computed by multiplying the Contingent Compensation payable to Employee in the fiscal year immediately preceding the fiscal year in which the Equity Disposition Transaction takes place by the number of fiscal years remaining in the Employment Term. The Equity Bonus will be paid to Employee in cash promptly following the closing date of the Equity Disposition Transaction. (ii) It is the express intent of the parties hereto that the Equity Bonus shall only be payable in connection with an Equity Disposition Transaction which constitutes a bona fide transfer of an equity interest in the Playboy Entertainment Group 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 Company structure a transaction which would otherwise constitute a sale or disposition of an equity interest in the Playboy Entertainment Group as a financing transaction for the purpose of frustrating the provisions of this Paragraph 3.D. (iii) The payment of the Equity Bonus, if any, will be in addition to any Contingent Compensation payable to you. 6. If your employment is terminated by the Company without cause, you will be entitled to: PRIVILEGED AND CONFIDENTIAL - --------------------------- August 15, 1996 To: Tony Lynn Re: Employment Agreement Page Three (i) a one-time severance payment equal to your Basic Compensation in the fiscal year in which such termination occurs; plus (ii) 100% of the Contingent Compensation to which you would have been entitled for, and only for, the fiscal year in which such termination occurs (based on the actual pre-tax profits of the Playboy Entertainment Group for such fiscal year). Any amounts paid to you under this Paragraph 6. will be reduced by any amounts paid to you pursuant to your Change in Control Severance Agreement dated as of June 1, 1992. Except as modified above, all of the other terms and conditions of your employment agreement will remain as is. ACCEPTED AND AGREED TO: /s/ Anthony L. Lynn - ----------------------- Date August 16, 1996 - ----------------------- EX-10.25(J) 27 LETTER AGREEMENT DTD 2/26/93 RE: H. LANEY Exhibit 10.25(j) PLAYBOY MICHAEL S. PERLIS PRESIDENT AND PUBLISHER February 26, 1993 CONFIDENTIAL Mr. Herb Laney 540 Jefferson Street Hinsdale, IL 60521 Dear Herb: It is my great pleasure to formally confirm the deal we have discussed relating to your continuing employment by PEI. First, effective with the new fiscal, you will carry the title of President, Catalogs. Your salary will be $200,000 per year. Your participation in PEI's incentive compensation program will be at the 50% level. You will receive 5% on all profits over '93 levels times three years, i.e., if '93 profits are 4.5MM, you will be paid 5% on cumulative profits over 13.5MM at the end of fiscal '96 (4.5MM for '93 is the lowest multiple we will use). You must be employed through fiscal '96 to receive payment. If your employment is terminated for any reason other than cause, you will receive a full years' severance. Herb, you've done really fine work. It is a pleasure to work with you. I know you'll accomplish even greater things in the next several years. Sincerely, MSP/ck cc: Christie Hefner David Chemerow /s/ MS Perlis Howard Shapiro EX-10.25(K) 28 MEMORANDUM DTD 5/1/96 RE: PLAN DTD 2/26/93 Exhibit 10.25(k) INTEROFFICE CORRESPONDENCE PLAYBOY ENTERPRISES, INC. DATE: MAY 1, 1996 --------------------------------------------------- TO: HERB LANEY ---------------------------------------------------- FROM: CHRISTIE HEFNER -------------------------------------------------- SUBJECT: SPECIAL INCENTIVE COMPENSATION PLAN ------------------------------------------------ I'M VERY PLEASED TO EXTEND YOUR SPECIAL INCENTIVE COMPENSATION PLAN FOR AN ADDITIONAL THREE YEARS. UNDER THIS EXTENSION, AND IN ADDITION TO YOUR PARTICIPATION IN THE INCENTIVE COMPENSATION PLAN FOR SENIOR EXECUTIVES, THE COMPANY WILL PAY YOU 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. (BY WAY OF EXAMPLE, IF FISCAL YEAR 1996 OPERATING PROFITS FOR THE GROUP ARE $5,521,000, YOU WOULD BE ENTITLED TO 5% OF THE CUMULATIVE PROFITS IN EXCESS OF $16,563,000.) YOUR PAYOUT IS CONDITIONED UPON YOUR BEING EMPLOYED BY PEI THROUGH FISCAL 1999. EX-11 29 COMPUTATION OF NET INCOME (LOSS) PER SHARE Exhibit 11 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE FOR THE YEARS ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ---------- ---------- ----------- Primary: - -------- Earnings: Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 4,252 $ 629 $ (16,364) Loss on disposal of discontinued operations - - (620) --------- --------- ----------- Income (loss) before cumulative effect of change in accounting principle 4,252 629 (16,984) Cumulative effect of change in accounting principle - - 7,500 --------- --------- ----------- Net income (loss) $ 4,252 $ 629 $ (9,484) ========= ========= =========== Shares: Weighted average number of common shares outstanding 20,014 19,984 19,928 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 361 218 286 --------- --------- ----------- Weighted average number of common shares outstanding as adjusted 20,375 20,202 20,214 ========= ========= =========== Primary earnings per common share: Income (loss) before cumulative effect of change in accounting principle: From continuing operations $ 0.21 $ 0.03 $ (0.81) From discontinued operations - - (0.03) --------- --------- ----------- Total 0.21 0.03 (0.84) Cumulative effect of change in accounting principle - - 0.37 --------- --------- ----------- Net income (loss) $ 0.21/1/ $ 0.03/1/ $ (0.47)/2/ ========= ========= ===========
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (CONTINUED) FOR THE YEARS ENDED JUNE 30 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ------ ------ ------- Fully diluted: - -------------- Earnings: Income (loss) from continuing operations before cumulative effect of change in accounting principle $ 4,252 $ 629 $(16,364) Loss on disposal of discontinued operations - - (620) ------- ------- -------- Income (loss) before cumulative effect of change in accounting principle 4,252 629 (16,984) Cumulative effect of change in accounting principle - - 7,500 ------- ------- -------- Net income (loss) $ 4,252 $ 629 $ (9,484) ======= ======= ======== Shares: Weighted average number of common shares outstanding 20,014 19,984 19,928 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 426 268 330 ------- ------- --------- Weighted average number of common shares outstanding as adjusted 20,440 20,252 20,258 ======= ======= ========= Earnings per common share assuming full dilution: Income (loss) before cumulative effect of change in accounting principle: From continuing operations $ 0.21 $ 0.03 $ (0.81) From discontinued operations - - (0.03) ------- -------- --------- Total 0.21 0.03 (0.84) Cumulative effect of change in accounting principle - - 0.37 ------- -------- --------- Net income (loss) $ 0.21 /1/ $ 0.03 /1/ $ (0.47) /2/ ======= ======== =========
/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%. /2/ This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result. EX-13 30 ANNUAL REPORT TO SECURITY HOLDERS Exhibit 13 SELECTED FINANCIAL AND OPERATING DATA FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------- Net Revenues Publishing Playboy magazine Subscription $ 49,379 $ 48,556 $ 46,389 Newsstand 24,408 24,876 25,946 Advertising 27,431 27,588 27,978 Other 4,111 3,362 3,654 - --------------------------------------------------------------------------------------------------- Total Playboy magazine 105,329 104,382 103,967 Playboy-related businesses 27,591 22,891 19,401 - --------------------------------------------------------------------------------------------------- Total Publishing 132,920 127,273 123,368 - --------------------------------------------------------------------------------------------------- Entertainment Playboy Television Cable pay-per-view 14,293 11,934 8,989 Cable monthly subscription 6,856 7,004 7,397 Satellite direct-to-home and other 18,129 10,022 6,511 - --------------------------------------------------------------------------------------------------- Total Playboy Television 39,278 28,960 22,897 Domestic home video 9,370 9,517 7,019 International television and home video 11,955 11,160 9,891 - --------------------------------------------------------------------------------------------------- Total Playboy Businesses 60,603 49,637 39,807 AdulTVision 1,907 -- -- Movies and other 2,316 2,060 282 - --------------------------------------------------------------------------------------------------- Total Entertainment 64,826 51,697 40,089 - --------------------------------------------------------------------------------------------------- Product Marketing 7,125 6,844 6,974 - --------------------------------------------------------------------------------------------------- Catalog 71,716 61,435 48,556 - --------------------------------------------------------------------------------------------------- Total Net Revenues $276,587 $247,249 $218,987 - --------------------------------------------------------------------------------------------------- Operating Income (Loss) Publishing Playboy magazine $ 3,558 $ 7,168 $ 3,546 Playboy-related businesses 10,356 7,572 5,188 Administrative expenses and other (4,679) (4,031) (5,041) - --------------------------------------------------------------------------------------------------- Total Publishing 9,235 10,709 3,693 - --------------------------------------------------------------------------------------------------- Entertainment Before programming expense 30,467 21,097 10,870 Programming expense (21,263) (20,130) (18,174) - --------------------------------------------------------------------------------------------------- Total Entertainment 9,204 967 (7,304) - --------------------------------------------------------------------------------------------------- Product Marketing 3,692 3,428 2,518 - --------------------------------------------------------------------------------------------------- Catalog 5,244 5,209 4,148 - --------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (17,882) (17,256) (17,278) - --------------------------------------------------------------------------------------------------- Total Operating Income (Loss) $ 9,493 $ 3,057 $(14,223) - ---------------------------------------------------------------------------------------------------
22 SELECTED FINANCIAL AND OPERATING DATA FOR THE YEARS ENDED JUNE 30
(in thousands, except per share amounts, number of employees and ad pages) 1996 1995* 1994* 1993* 1992* 1991* - ------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA Net revenues $276,587 $247,249 $218,987 $214,875 $193,749 $174,042 Interest income (expense), net (592) (569) (779) (131) 1,828 3,224 Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 4,252 629 (16,364) 365 1,822 2,411 Net income (loss) 4,252 629 (9,484) 365 3,510 4,510 Per common share Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 0.21 0.03 (0.83) 0.02 0.10 0.13 Net income (loss) 0.21 0.03 (0.48) 0.02 0.19 0.24 Cash dividends declared -- -- -- -- -- -- Before one-time and unusual items and nonrecurring expenses/(1)/ Operating income (loss) 9,493 3,057 (9,610) 3,291 3,548 2,290 Net income (loss) 4,252 629 (12,371) 925 4,069 3,147 Net income (loss) per common share 0.21 0.03 (0.62) 0.05 0.22 0.17 Adjusted EBITDA/(2)/ $ 9,921 $ 6,311 $ (9,333) $ (3,709) $ 316 $ 963 - ------------------------------------------------------------------------------------------------------------------------------- AT YEAR END Total assets $150,869 $137,835 $131,921 $127,767 $121,211 $115,464 Long-term financing obligations $ 347 $ 687 $ 1,020 $ 1,347 $ 1,669 $ 1,987 Shareholders' equity $ 52,283 $ 47,090 $ 46,311 $ 55,381 $ 43,256 $ 39,588 Long-term financing obligations as a percentage of total capitalization 0.7% 1.4% 2.2% 2.4% 3.7% 4.8% Number of shares outstanding Class A 4,749 4,714 4,709 4,701 4,701 4,697 Class B 15,437 15,276 15,255 15,192 13,830 13,813 Number of employees 621 600 578 624 637 599 - ------------------------------------------------------------------------------------------------------------------------------- OPERATING DATA Playboy magazine ad pages 569 595 595 660 648 724 Investments in Company-produced and licensed entertainment programming $ 25,549 $ 21,313 $ 17,185 $ 23,033 $ 16,615 $ 15,876 Amortization of investments in Company-produced and licensed entertainment programming $ 21,263 $ 20,130 $ 18,174 $ 14,076 $ 8,972 $ 7,931 Playboy Television (at year end) Cable pay-per-view homes 11,300 10,600 9,600 9,100 7,300 4,700 Cable monthly subscribing households 192 201 205 232 281 314 Satellite direct-to-home households 4,867 3,282 1,926 197 106 N/A/(3)/ Percentage of total U.S. cable pay-per-view homes with access to Playboy Television/(4)/ 42.8% 45.2% 43.2% 50.1% 43.6% 31.1% - -------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of operations and accounting policies, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto, beginning on page 25. * Certain reclassifications have been made to conform to the fiscal 1996 presentation. Notes to Selected Financial and Operating Data /(1)/ One-time and unusual items and nonrecurring expenses consist of the following: 1994: Restructuring expenses of $2,875, unusual items of $1,676, primarily due to write-offs of entertainment programming, and nonrecurring expenses of $62. Fiscal 1994 results also included a one- time tax benefit of $7,500 that resulted from the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which required a change in the method of accounting for income taxes. 1993: Expenses of $1,379 incurred in connection with the relocations of the Entertainment Group's headquarters, the Publishing Group's headquarters and the Catalog Group's operations facility, a $1,000 tax benefit resulting from the settlement of a tax dispute for an amount less than the related reserve and a gain of $665 resulting from the sale of the Catalog Group's former operations facility. Fiscal 1993 results also included nonrecurring expenses of $886, consisting primarily of operating losses and restructuring charges related to the events business. 1992: Expenses of $1,064 incurred in connection with the relocation of the Entertainment Group's headquarters and a gain of $505 resulting from the sale of a note related to the disposition of one of the Company's former properties. 1991: Interest income of $1,363, which resulted from a state income tax refund pursuant to a settlement agreement with the state of Illinois. /(2)/ Represents earnings before income taxes plus interest expense, depreciation and amortization less cash investments in programming. /(3)/ The Company began to focus on the emerging satellite direct-to-home market in fiscal 1992. /(4)/ Based on projections by Paul Kagan Associates, Inc. 23 FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Net Revenues/(1)(2)/ Publishing $132,920 $127,273 $123,368 Entertainment 64,826 51,697 40,089 Product Marketing 7,125 6,844 6,974 Catalog 71,716 61,435 48,556 - ---------------------------------------------------------------------------------------------------- Total $276,587 $247,249 $218,987 ==================================================================================================== Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle/(2)/ Publishing $ 9,235 $ 10,709 $ 3,693 Entertainment 9,204 967 (7,304) Product Marketing 3,692 3,428 2,518 Catalog 5,244 5,209 4,148 Corporate Administration and Promotion/(3)/ (17,882) (17,256) (17,278) Investment income (expense), net 88 139 (128) Interest expense (680) (708) (651) Other, net (452) (52) (239) - ---------------------------------------------------------------------------------------------------- Total $ 8,449 $ 2,436 $(15,241) ==================================================================================================== Identifiable Assets Publishing $ 45,661 $ 38,433 $ 39,645 Entertainment 60,336 53,229 49,737 Product Marketing 5,484 5,964 6,133 Catalog 12,966 14,807 12,184 Corporate Administration and Promotion/(4)/ 26,422 25,402 24,222 - ---------------------------------------------------------------------------------------------------- Total $150,869 $137,835 $131,921 ==================================================================================================== Depreciation and Amortization/(5)/ Publishing $ 967 $ 909 $ 1,024 Entertainment 21,836 20,606 18,573 Product Marketing 217 194 182 Catalog 639 673 792 Corporate Administration and Promotion 2,682 2,098 1,871 - ---------------------------------------------------------------------------------------------------- Total $ 26,341 $ 24,480 $ 22,442 ==================================================================================================== Capital Expenditures Publishing $ 213 $ 101 $ 367 Entertainment 74 22 151 Product Marketing 20 2 7 Catalog 77 10 21 Corporate Administration and Promotion 376 247 275 - ---------------------------------------------------------------------------------------------------- Total $ 760 $ 382 $ 821 ====================================================================================================
The accompanying notes are an integral part of these tables. Notes to Financial Information Relating to Industry Segments /(1)/ Net revenues include export sales of $36,571, $30,858 and $26,709 in fiscal 1996, 1995 and 1994, respectively. /(2)/ Intercompany transactions have been eliminated. /(3)/ Corporate Administration and Promotion expenses together with segment selling and administrative expenses make up the Company's selling and administrative expenses. /(4)/ Corporate assets consist principally of property and equipment, trademarks and net deferred tax assets. /(5)/ Amounts include depreciation of property and equipment, amortization of intangible assets, expenses related to the 1995 Stock Incentive Plan and amortization of investments in entertainment programming. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995 The Company's revenues were $276.6 for the fiscal year ended June 30, 1996, a 12% increase over revenues of $247.2 for the fiscal year ended June 30, 1995. This increase was due to higher revenues from all of the Company's Groups, primarily driven by increases from Playboy Television, the Critics' Choice Video and Collectors' Choice Music catalogs and Playboy-related publishing businesses. The Company reported operating income of $9.5 for the year ended June 30, 1996 compared to $3.1 for the year ended June 30, 1995. This increase was primarily due to significant growth in operating income of the Entertainment Group, principally as a result of substantial growth of Playboy Television. Net income for the year ended June 30, 1996 was $4.3, or $0.21 per share, compared to $0.6, or $0.03 per share, for the prior year. 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 the timing of new multiyear agreements to both program and supply programming for exclusive Playboy-branded time slots on overseas pay television services. 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. PUBLISHING GROUP Fiscal 1996 Publishing Group revenues of $132.9 increased $5.6, or 4%, compared to fiscal 1995. Operating income of $9.2 declined $1.5, or 14%, compared to prior year operating income of $10.7. Playboy Magazine Playboy magazine circulation revenues increased $0.4 for the year ended June 30, 1996 compared to the prior year. Subscription revenues were 2% higher. Newsstand revenues were down slightly as favorable newsstand sales adjustments in the prior year related to fiscal 1994 issues and 1% fewer U.S. and Canadian newsstand copies sold in the current year were mostly offset by a higher average newsstand price in the current year primarily due to especially strong sales of the December issue, which featured Farrah Fawcett, at a higher cover price. Although the Company is always looking for celebrity pictorials, there is no certainty that they will occur in any fiscal year. Additionally, the current year benefited from higher revenues from the rental of Playboy magazine's subscriber list. Advertising revenues declined 1%, or $0.2, for the year ended June 30, 1996 compared to the prior year primarily as a result of 4% fewer advertising pages in the current year, mostly offset by higher average net revenue per page, principally due to rate increases effective with the January 1996 and 1995 issues. Advertising sales for the fiscal 1997 first quarter issues of the magazine are closed, and the Company expects to report an 18% decrease in the number of advertising pages compared to the fiscal 1996 first quarter. Playboy magazine operating income decreased $3.6, or 50%, for the year ended June 30, 1996 compared to the prior year due to a significant increase in paper costs partially offset by a decrease in direct costs and operating expenses and the net increase in revenues discussed above. Manufacturing costs for the year ended June 30, 1996 increased 26% compared to the prior year principally due to higher paper prices which began impacting the Company in the second half of fiscal 1995. For the year ended June 30, 1996, average paper prices were 46%, or $7.9, higher than the prior year. Paper prices have begun to decline, and the Company expects average paper prices to be lower in fiscal 1997 beginning in the second quarter compared to fiscal 1996. Direct costs and operating expenses decreased 5% for the year ended June 30, 1996 largely due to lower subscription acquisition amortization, primarily as a result of improving efficiencies by lowering the advertising rate base in the current year, and advertising sales expenses in the current year combined with a legal settlement in the prior year with the Company's former distributor of Playboy magazine. Partially offsetting the above were expenses in the current year related to a new advertising campaign. Playboy-related Businesses Operating income from Playboy-related businesses increased $2.8, or 37%, on a $4.7, or 21%, increase in revenues for the year ended June 30, 1996 compared to the prior year. These increases were primarily due to higher revenues from newsstand specials and Playboy foreign editions. The higher revenues related to newsstand specials were primarily a result of the favorable impact of a $1.00 increase in the cover price to $6.95 in most of the country in the fourth quarter of fiscal 1995, combined with the publication of three additional newsstand specials in fiscal 1996. Also contributing to the favorable variances was a significant increase in revenues related to developing new media businesses due in part to the Company's free Web site on the Internet which generated advertising revenues in fiscal 1996. Partially offsetting the above were lower revenues from ancillary businesses. Administrative Expenses The Publishing Group's administrative expenses increased 16% for the year ended June 30, 1996 compared to the prior year. The increase was primarily due to higher variable compensation expense related to performance combined with higher employee medical benefit expenses in the current year. ENTERTAINMENT GROUP Fiscal 1996 Entertainment Group revenues of $64.8 increased $13.1, or 25%, compared to fiscal 1995. Operating income of $9.2 increased $8.2 compared to prior year operating income of $1.0. The following discussion focuses on the profit contribution of each business before programming expense ("profit contribution"). 25 Playboy Television For the year ended June 30, 1996, revenues of the Company's branded domestic pay television service, Playboy Television, were $10.3, or 36%, higher compared to the prior year. Cable pay-per-view revenues increased 20%, attributable to an increase in the number of cable addressable homes to which Playboy Television was available, higher average buy rates, and higher average revenue per buy in the current year. At June 30, 1996, Playboy Television was available to 11.3 million cable addressable homes, a 7% increase compared to June 30, 1995. Of the 11.3 million cable addressable homes, 3.9 million could receive Playboy Television on a 24-hour basis, a 30% increase compared to June 30, 1995. The average annual increase in the number of total cable addressable homes to which Playboy Television was available over the last five complete fiscal years was 20%. Cable monthly subscription revenues declined 2% for the year ended June 30, 1996 compared to the prior year due in part to a decline in the average number of subscribing households. Management believes that the growth in cable access for the Company's domestic pay television business has 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. Competition for channel space has been the primary factor in the slower growth as cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions. Additionally, the delay of new technology, primarily digital set-top converters which would dramatically increase channel capacity, has contributed to the problem. 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. Management believes that the slower growth in cable access has also been impacted by the Telecommunications Act of 1996 (the "Act") discussed below. However, as addressable technology becomes more widely available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable homes. In February 1996, Congress passed the Act, and President Clinton signed it into law. Certain provisions of the 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" and is not a widespread problem. Section 505 of the Act requires cable systems to install 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. Section 505 further provides that until a cable operator complies with the Act, it must restrict the period during which the programming is transmitted. Penalties for violation of the Act are significant and include fines and imprisonment. The Company believes that Section 505 is unconstitutional and unnecessary and fully supports Section 504 of the Act, which mandates that cable operators place full audio and video blocks on any channel, at no charge, at a customer's request. On February 26, 1996, one of the Company's subsidiaries filed a civil suit challenging Section 505. Fifteen organizations representing a wide range of influential media, free speech and entertainment organizations filed friend of the court briefs supporting the Company's litigation. 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 is likely to succeed on the merits of its claim that Section 505 is unconstitutional. The TRO will remain in place until a special three-judge panel in the United States District Court for the District of Delaware decides the Company's motion for a preliminary injunction. The Company believes that if Section 505 were to be enforced, the Company's revenues attributable to its domestic pay television services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. Satellite direct-to-home and other revenues were 81% higher for the year ended June 30, 1996 compared to the prior year. The increase was primarily due to higher DirecTV revenues, as a result of a 158% increase in the subscriber universe and the Company's change to 24-hour programming in August 1995, and higher revenues from PrimeStar, which launched Playboy Television in the fourth quarter of fiscal 1995, slightly offset by lower revenues from TVRO, or the big- dish market. Playboy Television was available to 16.2 million cable addressable and satellite direct-to-home households, including 375,000 monthly subscribers, at June 30, 1996. The current year also included revenues from licensing episodes of one of the Company's series to Showtime Networks Inc. Profit contribution for Playboy Television increased $8.1, or 65%, compared to the prior year, in spite of higher marketing costs and expenses related to the civil suit discussed above in the current year, due to the significant increase in revenues. Domestic Home Video Domestic home video revenues decreased $0.1 for the year ended June 30, 1996 compared to the prior year primarily due to recording a higher net guarantee in the prior year from a three-year distribution agreement with Uni Distribution Corp. related to backlist titles effective in the fourth quarter of fiscal 1995, and subject to certain earn-out provisions in the final year. The current year included the second year of the guarantee as well as a reserve established related to the first year of the guarantee recorded in the prior year in the event that the earn-out provisions will not be met in the final year. The prior year also included sales and returns of backlist titles prior to the inception of the distribution agreement. Partially offsetting the above were higher sales of new releases in the current year, in part due to extraordinary sales of The Best of Pamela Anderson. Although the Company is always looking for releases that feature celebrities, there is no certainty that they will occur in any fiscal year. Additionally, there were higher revenues from a direct-response continuity series deal with Time Life Inc. In fiscal 1996, Time Life Inc. replaced Warner Music Enterprises, Inc., both divisions of Time Warner Inc., as the distributor of this series. Profit contribution increased $0.5 for the year ended June 30, 1996 compared to the prior year principally due to the timing of costs related to an industry convention. International Television and Home Video For the year ended June 30, 1996, revenues and profit contribution from the international television and home video business increased $0.8 and $2.2, respectively, compared to the prior year. Revenues and profit contribution from the international home video business both increased $1.4 due in part to higher sales to South Korea. An increase in the profit contribution of the international television business of $0.8 is primarily due to a write-off of $1.3 recorded in the prior year related to sales to a distributor in fiscal 1994, partially offset by lower revenues in the current year, primarily due to revenues in the prior year associated with multiyear agreements. Variations in 26 quarterly performance are caused by revenues and profit contribution from multiyear agreements 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. 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. Programming Expense Programming amortization expense associated with the Entertainment Group's Playboy businesses discussed above increased $1.1 for the year ended June 30, 1996 compared to the prior year. The increase was principally due to higher international home video amortization combined with increased investments in entertainment programming, partially offset by lower international television amortization. Cash investments in entertainment programming for all of the Entertainment Group's businesses, including those businesses discussed below, were $21.3 in fiscal 1995 and $25.5 in fiscal 1996, and are planned for approximately $29.0 in fiscal 1997. These amounts include expenditures for Playboy-branded programming, AdulTVision and feature-length films. As a result of these higher levels of cash investments, management anticipates that programming amortization expense in fiscal 1997 will be approximately $25.0, or approximately $3.8 higher than in fiscal 1996. AdulTVision In July 1995, the Company launched a second pay television channel, AdulTVision, as a flanker channel to Playboy Television to enhance the Company's position against competitive pressures from adult movie channels and to drive cable access for Playboy Television. AdulTVision is principally offered on a pay-per- view basis and is primarily sold in combination with Playboy Television through cable operators, and to the direct-to-home market. For the year ended June 30, 1996, revenues for the new channel were $1.9. The channel reported an operating loss for fiscal 1996 but the Company expects that it will be profitable in fiscal 1997. Movies and Other For the year ended June 30, 1996, revenues from the Entertainment Group's movies and other businesses increased $0.3 primarily due to higher revenues related to feature-length films in the current year. Operating income increased $0.2 compared to the prior year. The Entertainment Group's administrative expenses for the year ended June 30, 1996 increased $0.9 compared to the prior year primarily due to higher variable compensation expense related to performance and higher employee medical benefit expenses in the current year. PRODUCT MARKETING GROUP Product Marketing Group revenues of $7.1 for the year ended June 30, 1996 increased $0.3, or 4%, compared to the prior year primarily due to 19% higher international product licensing royalties, primarily due to strong sales from Asia. Partially offsetting the above were lower revenues in the current year from Special Editions, Ltd., as the Company's art publishing and art products business continues to move from direct sales to licensing, combined with no royalties in the current year from a Sarah Coventry licensee that experienced financial difficulties and was terminated in the second quarter of the prior year. Operating income of $3.7 increased $0.3, or 8%, for the year ended June 30, 1996 compared to the prior year principally due to an increase in operating income of international product licensing, primarily due to the higher revenues. Partially offsetting the favorable variance was lower operating income from Sarah Coventry product licensing, principally due to the lower revenues, combined with higher variable compensation expense related to performance and higher employee medical benefit expenses in the current year. CATALOG GROUP Fiscal 1996 Catalog Group revenues of $71.7 increased $10.3, or 17%, compared to fiscal 1995. The revenue increase was a result of higher sales volume from all of the Company's catalogs, Critics' Choice Video, Collectors' Choice Music and Playboy. The increase was primarily attributable to higher circulation for all three catalogs combined with a strong response to the Critics' Choice Video catalog's implementation of a competitive pricing strategy in the second quarter of fiscal 1996. This strategy was in reaction to lower response rates in the two prior quarters which the Company believes were due in part to competition from mass marketers which offer popular videos at deeply-discounted prices. Additionally, the higher Collectors' Choice Music revenues were also due in part to a new promotion. Fiscal 1996 Catalog Group operating income of $5.2 remained stable compared to fiscal 1995 as incremental profit generated from the higher revenues was sufficient to absorb higher expenses related to paper price and postal rate increases. There were also higher expenses in fiscal 1996 relative to the higher revenues from expanded mailings to prospective customers of the catalogs. In fiscal 1997, the Company plans to continue to increase the circulation for all three catalogs. The Company anticipates that paper costs will be lower in fiscal 1997 compared to fiscal 1996 as prices have begun to decline, and the Critics' Choice Video and Collectors' Choice Music catalogs have changed to a different type of paper, similar in quality, but lower in price. In fiscal 1998, the catalog operations will move from its current facility to a larger facility under terms of a build-to-suit lease. The new facility will be built in fiscal 1997 in the same Chicago suburb. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expense of $17.9 for the year ended June 30, 1996 increased $0.6, or 4%, compared to the prior year. Expenses were higher in the current year primarily due to higher variable compensation expense related to performance and higher employee medical benefit expenses, partially offset by lower marketing expenses in the current year. CASINO GAMING In fiscal 1996 the Company announced plans to re-enter the casino gaming business. The Company's image, international appeal and successful history in gaming makes this a logical extension into the fast growing field of adult entertainment. In June 1995 the Company, with a consortium of Greek investors, bid for an exclusive gaming license on the island of Rhodes, Greece and in November 1995 the Greek government officially notified the Company's consortium that it had won the competitive bid for this license. The Company's consortium expects to complete negotiations with the 27 government for its contract to operate the casino in calendar 1996 and expects the casino to open in calendar 1997. The Company will receive licensing royalties on revenues of the hotel/casino and owns less than 20% of its equity. The Company is continuing to explore other gaming opportunities with a strategy to enter into, with strong local partners, joint-venture agreements under which the Company would receive license fees for the use of the Playboy name and trademarks and consider taking equity positions. FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994 The Company's revenues were $247.2 for the fiscal year ended June 30, 1995, a 13% increase over revenues of $219.0 for the fiscal year ended June 30, 1994. This increase was primarily due to higher revenues from the Catalog and Entertainment Groups, and Playboy-related publishing businesses. The Company reported operating income of $3.1 for the year ended June 30, 1995 compared to an operating loss of $14.2 for the year ended June 30, 1994 largely due to a significant improvement in operating income of the Publishing Group combined with operating income reported for the Entertainment Group in fiscal 1995 compared to an operating loss in the prior year. In addition, fiscal 1994 included a $2.9 restructuring charge, a $1.7 net charge for unusual items, the establishment of various reserves totaling $1.5, and a $1.0 reduction in carrying value of inventories. Net income for the year ended June 30, 1995 was $0.6, or $0.03 per share, compared to a net loss of $9.5, or $0.48 per share, for the prior year. A $0.6 loss on disposal of discontinued operations in fiscal 1994 resulted from increasing the reserve related to the environmental cleanup of a site in Lake Geneva, Wisconsin, formerly owned by a subsidiary of the Company. The net loss for the year ended June 30, 1994 also included a one-time tax benefit of $7.5 that resulted from the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which required a change in the method of accounting for income taxes. The Company's operating income of $3.1 and net income of $0.6, or $0.03 per share, for the year ended June 30, 1995 compared to an operating loss of $9.6 and a net loss of $12.4, or $0.62 per share, for the year ended June 30, 1994, excluding the impact of the $2.9 restructuring charge, the $1.7 net charge related to unusual items and the $7.5 one-time tax benefit in fiscal 1994. PUBLISHING GROUP Fiscal 1995 Publishing Group revenues of $127.3 increased $3.9, or 3%, compared to fiscal 1994. Operating income of $10.7 increased $7.0 compared to prior year operating income of $3.7, which was impacted by restructuring expenses of $1.1, a charge for unusual items of $0.4, and charges totaling $1.5 related to the establishment of reserves and reductions in carrying value of inventories. Playboy Magazine Playboy magazine circulation revenues increased 2%, or $1.1, for the year ended June 30, 1995 primarily due to 5% higher subscription revenues and favorable newsstand sales adjustments related to prior years' issues in fiscal 1995, partially offset by 9% fewer U.S. and Canadian newsstand copies sold in fiscal 1995. Advertising revenues declined 1%, or $0.4, for the year ended June 30, 1995 compared to the prior year as a result of slightly lower average net revenue per page, despite a 5% rate increase effective with the January 1995 issue, as a result of higher frequency discounts and special pricing in fiscal 1995 and a change in the mix of advertising pages sold. Advertising pages for fiscal 1995 were flat compared to fiscal 1994, which included the January 1994 40th anniversary issue that contained a higher than normal number of advertising pages. Playboy magazine operating income more than doubled for the year ended June 30, 1995 compared to the prior year principally due to decreases in manufacturing costs and direct costs and operating expenses. Manufacturing costs for the year ended June 30, 1995 decreased 5% compared to the prior year principally due to the increased size of the January 1994 40th anniversary issue of the magazine in the prior year, partially offset by slightly higher paper prices in fiscal 1995. These higher paper prices began impacting the Company in the second half of fiscal 1995, though most dramatically in the fourth quarter as average paper prices increased 18% compared to the fourth quarter of the prior year. For the year ended June 30, 1995 average paper prices were 1% higher than the prior year. Direct costs and operating expenses decreased 2% for the year ended June 30, 1995 largely due to fiscal 1994 charges totaling $2.1 related to the establishment of reserves, reduction in carrying value and write- off of editorial inventory and restructuring. Also contributing to the decrease in direct costs and operating expenses were lower advertising promotion expenses, lower costs related to the new photo studio in California in fiscal 1995 and expenses in the prior year associated with the 40th anniversary issue, partially offset by an increase in subscription acquisition amortization expense and higher costs related to a postal rate increase that was effective on January 1, 1995. Playboy-related Businesses Operating income from Playboy-related businesses increased $2.4, or 46%, on a $3.5, or 18%, increase in revenues for the year ended June 30, 1995 compared to the prior year. These increases were primarily due to higher revenues from newsstand specials as a result of the publication of two additional newsstand specials in fiscal 1995 and higher revenues from Playboy foreign editions and ancillary businesses. Partially offsetting these increases were higher expenses in fiscal 1995 related to the anticipated growth of the new media business. Administrative Expenses and Other The Publishing Group's administrative expenses and other costs decreased 20% for the year ended June 30, 1995 compared to the prior year. The decrease was primarily due to lower salary expenses and lower employee medical benefit expenses in fiscal 1995, partially offset by higher variable compensation expense related to performance in fiscal 1995 and the receipt of a management fee from duPont Publishing, Inc. in fiscal 1994. ENTERTAINMENT GROUP Fiscal 1995 Entertainment Group revenues of $51.7 increased $11.6, or 29%, compared to fiscal 1994. The Entertainment Group reported fiscal 1995 operating income of $1.0 compared to a prior year operating loss of $7.3, which included restructuring expenses of $0.6 and a charge for unusual items of $1.6. The following discussion focuses on the profit contribution of each business before programming expense ("profit contribution"). 28 Playboy Television For the year ended June 30, 1995, revenues of the Company's branded domestic pay television service, Playboy Television, were 26% higher compared to the prior year. Cable pay-per-view revenues increased 33%, attributable to an increase in the number of cable addressable homes to which Playboy Television was available, higher average buy rates, and higher average revenue per buy in fiscal 1995. At June 30, 1995, Playboy Television was available to 10.6 million cable addressable homes, a 10% increase compared to June 30, 1994. Cable monthly subscription revenues declined 5% for the year ended June 30, 1995 compared to the prior year due to a decline in the average number of subscribing households. The number of monthly subscribers at June 30, 1995 was relatively flat compared to June 30, 1994. Satellite direct-to-home and other revenues were 54% higher for the year ended June 30, 1995 compared to the prior year. The increase was primarily due to new revenues from the launch of Playboy Television on DirecTV and PrimeStar, and growth in selling directly to the backyard dish market, distribution by commercial retailers of satellite programming and increased emphasis on consumer marketing. Playboy Television was available to 13.9 million cable and satellite direct-to-home households, including 337,000 monthly subscribers, at June 30, 1995. Profit contribution for Playboy Television increased $3.9, or 46%, compared to fiscal 1994 as the net increase in revenues more than offset higher expenses in fiscal 1995 related to selling directly to the backyard satellite dish market and the absence of sublease income from the Company's satellite transponder in fiscal 1995. As a result of the Company's move in May 1994 to 24-hour availability for Playboy Television, it no longer receives monthly sublease income of approximately $0.1, the cumulative loss of which was more than offset in fiscal 1995 by the higher profit contribution resulting from increased revenues due to 24-hour availability in additional homes. At June 30, 1995, Playboy Television was available in 3.0 million cable homes on a 24-hour basis compared to 1.2 million cable homes at June 30, 1994. Domestic Home Video Domestic home video revenues rebounded $2.5 for the year ended June 30, 1995 compared to the prior year primarily due to revenues related to a guarantee from a distribution agreement entered into in the fourth quarter of fiscal 1995 with Uni related to backlist titles. Additionally, domestic home video launched two new product lines, a direct-response continuity series to sell Playboy titles, and The Eros Collection, a small-budget Playboy-produced line of movies. Also contributing to the increase in revenues were adjustments in fiscal 1994 attributable to weak sales of fiscal 1993 titles, partially offset by sales in fiscal 1994 of higher-priced rental titles. Profit contribution increased $3.7 for the year ended June 30, 1995 compared to the prior year primarily due to the increase in revenues in fiscal 1995 combined with higher marketing expenses in the prior year largely attributable to fiscal 1993 releases. International Television and Home Video For the year ended June 30, 1995, revenues and profit contribution from the international television and home video business increased $1.3 and $0.1, respectively, compared to the prior year. Profit contribution from the international home video business increased $0.7 on a $0.6 increase in revenues. A decrease in the profit contribution of the international television business of $0.6 is primarily due to a write-off of $1.3 in fiscal 1995 related to sales to a distributor in fiscal 1994, partially offset by an increase in revenues of $0.7, in part due to the launch of a Playboy Television channel in the United Kingdom late in fiscal 1995. Variations in quarterly performance are caused by revenues and profit contribution from multiyear agreements being recognized depending upon the timing of program delivery, license periods and other factors. Programming Expense Programming amortization expense associated with the Entertainment Group's Playboy businesses discussed above increased $2.0 for the year ended June 30, 1995 compared to the prior year. The increase was principally due to increased investments in entertainment programming combined with the higher international television and home video revenues. Partially offsetting the increase was a $0.4 unusual charge in fiscal 1994 related to the establishment of a reserve for programming of O.J. Simpson: Minimum Maintenance Fitness for Men ("Minimum Maintenance"), and a $0.9 favorable effect of a change in accounting estimate. In the second quarter of fiscal 1995, the distribution rights and the remaining inventory of Minimum Maintenance were sold, which resulted in an immaterial profit contribution. The Company revised its amortization method for licensed film costs during the fourth quarter of fiscal 1994 because of its decision to offer Playboy Television on a 24-hour basis, which resulted in a change in the scheduling of licensed films. Licensed films are being aired throughout the term of the license period, and related costs are primarily being amortized over such period, generally three years. Movies and Other For the year ended June 30, 1995, revenues from the Entertainment Group's movies and other businesses increased $1.8 compared to the prior year primarily due to revenues in fiscal 1995 related to three new feature-length films, combined with adjustments in the prior year related to the documentary film Hugh Hefner: Once Upon a Time. Operating performance for the year ended June 30, 1995 increased $2.1 primarily due to the increase in revenues combined with the favorable impact in fiscal 1995 of a $1.2 market value adjustment for the documentary film in the prior year, partially offset by fiscal 1995 programming amortization expense related to the feature-length films. The Entertainment Group's administrative expenses and other costs for the year ended June 30, 1995 decreased $0.6 compared to the prior year. This decrease was primarily due to costs in fiscal 1994 of $0.6 associated with restructuring. Additionally, higher variable compensation expense related to performance was mostly offset by lower employee medical benefit expenses in fiscal 1995. PRODUCT MARKETING GROUP Product Marketing Group revenues of $6.8 for the year ended June 30, 1995 decreased $0.1, or 2%, compared to the prior year primarily due to lower royalties from a Sarah Coventry licensee that experienced financial difficulties and was terminated, combined with lower revenues from Special Editions, Ltd., as the Company's art publishing and art products business moves from direct sales to licensing. Mitigating the above were 16% higher international product licensing royalties in fiscal 1995 primarily due to strong sales from Asia. Operating income of $3.4 increased $0.9, or 36%, for the year ended June 30, 1995 compared to the prior year principally due to increases in the operating performances of international product licensing, primarily due to the higher revenues, and Special Editions, Ltd., principally 29 due to a $0.5 reduction in carrying value of art publishing inventory in fiscal 1994, partially offset by the lower revenues. Partially offsetting the above was a decrease in Sarah Coventry operating income primarily due to the decrease in revenues partially offset by lower bad debt expense in fiscal 1995. CATALOG GROUP Fiscal 1995 Catalog Group revenues of $61.4 increased $12.9, or 27%, compared to fiscal 1994. The revenue increase was a result of higher sales volume from all of the Company's catalogs, Critics' Choice Video, Collectors' Choice Music, which was first mailed to prospective customers in October 1993, and Playboy. Fiscal 1995 Catalog Group operating income of $5.2 increased $1.1, or 26%, compared to fiscal 1994 due to higher operating income from all three of the catalogs. The Critics' Choice Video catalog reported higher operating income partially attributable to a licensing agreement entered into in February 1994 that allows the Company to purchase inventory at a lower cost. However, expenses were higher due to increased mailings to prospective customers, and paper price and postal rate increases. The Collectors' Choice Music catalog generated a meaningful profit in fiscal 1995, its first full year of operation, despite higher expenses related to significantly expanding circulation, and paper price and postal rate increases. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expense of $17.3 for the year ended June 30, 1995 was stable compared to the prior year. Higher variable compensation expense related to performance in fiscal 1995 was offset by net one-time expenses in fiscal 1994 associated with charges related to restructuring and a real estate tax obligation related to the Company's former office space in Los Angeles, California, partially offset by a benefit related to an insurance settlement. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1996, the Company had $2.4 in cash and cash equivalents and $5.0 in short-term borrowings, compared to $1.5 in cash and cash equivalents and $5.0 in short-term borrowings at June 30, 1995. The Company expects to meet its short- term and long-term cash requirements through its revolving credit agreement and cash generated from operations. See Cash Flows From Financing Activities below. Cash Flows From Operating Activities Net cash provided by operating activities was $4.5 for the year ended June 30, 1996 compared to $3.2 for the prior year. This increase was primarily due to the Company's improved operating performance in the current year. Additionally, there was an increase in cash provided by accrued salaries, wages and employee benefits during fiscal 1996 primarily due to the timing of payrolls combined with higher accruals at June 30, 1996 related to the 1995 Stock Incentive Plan and employee benefits. Partially offsetting these increases was lower cash provided by accounts payable in fiscal 1996, primarily due to the timing of inventory purchases for the Critics' Choice Video catalog, principally as the result of lower liabilities recorded at June 30, 1996 due to a later mailing date for the July 1996 catalog combined with higher liabilities recorded at June 30, 1995 to support higher circulation for the July 1995 catalog. The Company invested $25.5 in Company-produced and licensed entertainment programming during fiscal 1996 compared to $21.3 in the prior year, and expects to invest approximately $29.0 in such programming in fiscal 1997. Net cash provided by operating activities was $3.2 for the year ended June 30, 1995 compared to net cash used for operating activities of $4.4 for the prior year. This increase was primarily due to the Company's improved operating performance in fiscal 1995. Additionally, there was cash provided by accounts payable during fiscal 1995 compared to cash used for accounts payable in the prior year, principally in the Entertainment and Catalog Groups. There also was cash provided by deferred subscription acquisition costs in fiscal 1995 compared to cash used in the prior year, primarily due to higher spending in fiscal 1994. Partially offsetting these increases were lower cash provided from deferred revenues, principally due to higher subscription mailings in fiscal 1994, and a higher use of cash in fiscal 1995 related to receivables, principally in the Entertainment Group. Cash used for inventories in fiscal 1995 was primarily due to higher paper inventory at June 30, 1995, whereas cash provided by inventories in fiscal 1994 was principally attributable to an increase of inventory related to the Critics' Choice Video catalog in fiscal 1993. The Company invested $21.3 in Company-produced and licensed entertainment programming during fiscal 1995 compared to $17.2 in the prior year. Net cash provided by discontinued operations in fiscal 1994 of $0.5 primarily resulted from a United Kingdom tax refund in connection with the settlement in fiscal 1993 of litigation related to the Company's discontinued United Kingdom gaming operations. Cash Flows From Investing Activities Net cash used for investing activities was $4.2 for the year ended June 30, 1996 compared to $0.3 for the prior year. The current year period included investments in equity interests of $3.6 in the first overseas Playboy Television channels 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 Poland Sp. z o.o., which publishes the Polish edition of Playboy magazine. Capital expenditures for the year ended June 30, 1996 were $0.4 higher than in the prior year. The Company also leased $1.7 of furniture and equipment in fiscal 1996, compared to $1.4 in fiscal 1995. The Company expects to make capital expenditures of approximately $0.7 and to lease assets totaling approximately $3.5 in fiscal 1997. The expected increase in leased assets in fiscal 1997 is largely related to the catalog operations move previously discussed. Net cash used for investing activities was $0.3 for the year ended June 30, 1995 compared to $2.3 for the prior year. Under the terms of its July 1988 purchase of an 80% interest in Critics' Choice Video, Inc., effective July 1, 1993, the Company acquired the remaining 20% interest in Critics' Choice Video, Inc. for $3.0, which consisted of $1.5 in cash and one-year promissory notes totaling $1.5, which were paid July 1, 1994. Capital expenditures for the year ended June 30, 1995 were $0.4 lower than in the prior year. The Company also leased $1.4 of furniture and equipment in fiscal 1995, compared to $0.9 in fiscal 1994. Cash Flows From Financing Activities Net cash provided by financing activities was $0.6 for the year ended June 30, 1996 compared to net cash used for financing activities of $2.7 in the prior year. This increase was principally due to the payment on July 1, 1994 of the $1.5 promissory notes referred to above, combined with a reduction in short-term borrowings under the Company's revolving line of credit of $1.0 in fiscal 1995. 30 In March 1996, the Company and its banks amended the Company's revolving credit agreement. The amendment increased the line of credit from $19.5 to $35.0 and extended the maturity date of the line to March 1999. The credit agreement remains collateralized by substantially all of the Company's assets and requires the Company to maintain financial covenants pertaining to net worth, leverage and cash flow. Net cash used for financing activities was $2.7 for the year ended June 30, 1995 compared to net cash provided by financing activities of $6.0 in the prior year. The decrease was principally due to a reduction in short-term borrowings under the Company's revolving line of credit of $1.0 in fiscal 1995 compared to an increase in short-term borrowings of $6.0 in fiscal 1994. Also contributing to the decrease was the payment on July 1, 1994 of the promissory notes referred to above. Income Taxes Effective July 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109"). When tax effected at the presently enacted tax rates, the Company's deductible temporary differences, tax credit carryforwards and net operating loss carryforwards ("NOLs") at July 1, 1993 resulted in a total potential gross deferred tax asset for federal income tax purposes of $25.1. Management, after analyzing available facts, concluded that it was prudent to establish a valuation allowance of $12.1, which, combined with $5.5 of gross deferred tax liabilities, resulted in the Company's recognition of a net deferred tax asset of $7.5. In fiscal 1996, the Company realized $2.4 of the $6.9 net deferred tax asset recorded at June 30, 1995 by utilizing a portion of the NOLs against fiscal 1996 income. Management believes that the net deferred tax asset of $4.5 at June 30, 1996 is an amount that will more likely than not be realized in future periods. Based on current tax law, the Company must generate approximately $13.2 of future taxable income prior to the expiration of the Company's NOLs for full realization of the net deferred tax asset. At June 30, 1996, the Company had NOLs of $37.5 for tax purposes, with $0.8 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 in years subsequent to fiscal 1996 and prior to the expiration of the Company's NOLs to realize the $4.5 net deferred tax asset recorded at June 30, 1996. Following is a summary of the bases for management's belief that a valuation allowance of $28.0 is adequate, and that it is more likely than not that the net deferred tax asset of $4.5 will be realized: . 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. . The Publishing, Product Marketing and Catalog Groups continue to generate 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. The reconciliation of the Company's income (loss) before income taxes for financial statement purposes to taxable income (loss) for the years ended June 30 is as follows:
1996 1995 1994 - ----------------------------------------------------------------------- Income (loss) before income taxes for financial statement purposes $ 8.4 $ 2.4 $(15.9) Exclusion of permanent differences 0.4 0.8 0.5 State taxes (0.1) (0.1) (0.1) Temporary differences Programming cost amortization (0.2) (1.3) (2.1) Deferred subscription acquisition costs (1.0) 0.7 (3.6) Other 4.0 2.9 4.8 - ----------------------------------------------------------------------- Taxable income (loss) $11.5 $ 5.4 $(16.4) =======================================================================
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 June 30, 1996, 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 adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of in fiscal 1996, which adoption had no effect on the financial statements. 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. 31 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30
(in thousands, except per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Net revenues $ 276,587 $ 247,249 $ 218,987 - ---------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales (234,247) (214,327) (196,817) Selling and administrative expenses (32,847) (29,865) (31,842) Restructuring expenses -- -- (2,875) Unusual items -- -- (1,676) - ---------------------------------------------------------------------------------------------------------------------------- Total costs and expenses (267,094) (244,192) (233,210) - ---------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 9,493 3,057 (14,223) - ---------------------------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income (expense), net 88 139 (128) Interest expense (680) (708) (651) Other, net (452) (52) (239) - ---------------------------------------------------------------------------------------------------------------------------- Total nonoperating expense (1,044) (621) (1,018) - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle 8,449 2,436 (15,241) Income tax expense (4,197) (1,807) (1,123) - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of change in accounting principle 4,252 629 (16,364) Loss on disposal of discontinued operations -- -- (620) - ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle 4,252 629 (16,984) Cumulative effect of change in accounting principle -- -- 7,500 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 4,252 $ 629 $ (9,484) ============================================================================================================================ Weighted average number of common shares outstanding 20,014 19,984 19,928 ============================================================================================================================ Income (loss) per common share Income (loss) before cumulative effect of change in accounting principle From continuing operations $0.21 $0.03 $ (0.83) From discontinued operations -- -- (0.03) - ---------------------------------------------------------------------------------------------------------------------------- Total 0.21 0.03 (0.86) Cumulative effect of change in accounting principle -- -- 0.38 - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) $0.21 $0.03 $ (0.48) ============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 32 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30
(in thousands, except share data) 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 2,438 $ 1,471 Receivables, net of allowance for doubtful accounts of $3,009 and $4,837 29,110 24,151 Inventories 23,499 21,428 Programming costs 33,873 29,740 Deferred subscription acquisition costs 9,569 9,176 Other current assets 10,420 10,190 - ---------------------------------------------------------------------------------------------------------------- Total current assets 108,909 96,156 - ---------------------------------------------------------------------------------------------------------------- Property and equipment Land 292 292 Buildings and improvements 8,333 8,245 Furniture and equipment 20,352 19,839 Leasehold improvements 8,427 8,200 - ---------------------------------------------------------------------------------------------------------------- Total property and equipment 37,404 36,576 Accumulated depreciation (25,510) (23,100) - ---------------------------------------------------------------------------------------------------------------- Property and equipment, net 11,894 13,476 - ---------------------------------------------------------------------------------------------------------------- Programming costs--noncurrent 3,362 3,209 Trademarks 11,887 11,046 Net deferred tax assets 4,191 6,493 Other noncurrent assets 10,626 7,455 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 150,869 $ 137,835 - ---------------------------------------------------------------------------------------------------------------- Liabilities Short-term borrowings $ 5,000 $ 5,000 Current financing obligations 340 333 Accounts payable 22,745 19,549 Accrued salaries, wages and employee benefits 6,941 4,088 Reserves for losses on disposals of discontinued operations 707 766 Income taxes payable 970 875 Deferred revenues 44,378 42,905 Other liabilities and accrued expenses 8,940 8,621 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 90,021 82,137 - ---------------------------------------------------------------------------------------------------------------- Long-term financing obligations 347 687 Other noncurrent liabilities 8,218 7,921 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 98,586 90,745 - ---------------------------------------------------------------------------------------------------------------- Commitments and contingencies 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; 16,477,143 issued 165 165 Capital in excess of par value 36,323 36,398 Retained earnings 22,798 18,546 Foreign currency translation adjustment (17) -- Less cost of 293,427 and 328,427 Class A common shares and 1,040,045 and 1,201,294 Class B common shares in treasury (7,036) (8,069) - ---------------------------------------------------------------------------------------------------------------- Total shareholders' equity 52,283 47,090 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 150,869 $ 137,835 - ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Class A Class B Capital in Common Common Excess of Retained Treasury (in thousands of dollars) Stock Stock Par Value Earnings Other Stock Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1993 $ 50 $ 165 $36,344 $ 27,401 $ -- $ (8,579) $ 55,381 Net loss -- -- -- (9,484) -- -- (9,484) Exercise of 8,400 Class A and 62,500 Class B stock options -- -- 35 -- -- 372 407 Issuance of 889 Class B common shares to employees as service awards -- -- 2 -- -- 5 7 - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 50 165 36,381 17,917 -- (8,202) 46,311 Net income -- -- -- 629 -- -- 629 Exercise of 4,500 Class A and 20,000 Class B stock options -- -- 14 -- -- 128 142 Issuance of 960 Class B common shares to employees as service awards -- -- 3 -- -- 5 8 - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 50 165 36,398 18,546 -- (8,069) 47,090 Net income -- -- -- 4,252 -- -- 4,252 Exercise of 35,000 Class A and 159,750 Class B stock options -- -- (81) -- -- 1,025 944 Issuance of 1,499 Class B common shares to employees as service awards -- -- 6 -- -- 8 14 Foreign currency translation adjustment -- -- -- -- (17) -- (17) - -------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 $ 50 $ 165 $36,323 $22,798 $ (17) $ (7,036) $ 52,283 ================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 34 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30
(in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income (loss) $ 4,252 $ 629 $ (9,484) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities Depreciation of property and equipment 2,383 2,531 2,752 Amortization of intangible assets 1,783 1,590 1,516 Amortization of investments in entertainment programming 21,263 20,130 18,174 Investments in entertainment programming (25,549) (21,313) (17,185) Cumulative effect of change in accounting principle -- -- (7,500) Changes in current assets and liabilities Receivables (4,574) (3,498) 1,609 Inventories (2,061) (2,160) 2,398 Deferred subscription acquisition costs (393) 910 (2,478) Other current assets (426) (1,586) (683) Accounts payable 2,931 5,869 (1,287) Accrued salaries, wages and employee benefits 2,853 277 (327) Income taxes payable 27 92 (36) Deferred revenues 1,468 1,171 5,416 Other liabilities and accrued expenses 224 581 366 -------- -------- -------- Net change in current assets and liabilities 49 1,656 4,978 -------- -------- -------- Increase in trademarks (1,766) (1,856) (1,492) Decrease in net deferred tax assets 2,399 629 -- (Increase) decrease in other noncurrent assets (487) (832) 318 Increase in other noncurrent liabilities 258 96 2,371 Net cash provided by (used for) discontinued operations (59) (124) 531 Increase in reserve for loss on disposal of discontinued operations -- -- 620 Other, net 15 44 33 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 4,541 3,180 (4,368) - --------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Additions to property and equipment (760) (382) (821) Acquisitions of equity interests in international ventures (3,619) -- -- Acquisition of Critics' Choice Video, Inc. minority interest -- -- (1,510) Other, net 211 67 54 - --------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (4,168) (315) (2,277) - --------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Increase (decrease) in short-term borrowings -- (1,000) 6,000 Repayment of debt (350) (1,850) (350) Proceeds from exercise of stock options 944 198 350 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 594 (2,652) 6,000 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 967 213 (645) Cash and cash equivalents at beginning of year 1,471 1,258 1,903 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,438 $ 1,471 $ 1,258 =====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1996 (A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition: Revenues from the sale of magazine subscriptions are recognized over the terms of the subscriptions. Sales of magazines and newsstand specials (net of estimated returns), and revenues from the sale of advertisements, are recorded when each issue goes on sale. Revenues from the sale of catalog products are recognized when the items are shipped. Pay television revenues are recognized based on pay-per-view buys and monthly subscriber counts reported each month by the system operators. Domestic home video revenues are recognized based on unit sales reported for new releases each month by the Company's distributor and a distribution agreement for backlist titles. International television revenues are recognized either upon identification of programming scheduled for networks, delivery of programming to customers and/or upon the commencement of the license term. Cash Equivalents: Cash equivalents are temporary cash investments with an original maturity of three months or less at date of purchase and are stated at cost, which approximates market value. Inventories: Inventories are stated at the lower of cost (average cost, specific cost and first-in, first-out) or market. Property and Equipment: Property and equipment is stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the terms of the related leases. Repair and maintenance costs are expensed as incurred, and major betterments are capitalized. Sales and retirements of depreciable property and equipment are recorded by removing the related cost and accumulated depreciation from the accounts. Gains or losses on sales and retirements of property and equipment are included in income. Deferred Subscription Acquisition Costs: Costs associated with the promotion of magazine subscriptions, which consist primarily of postage, costs to produce direct-mail solicitation materials and other costs to attract and renew subscribers, are deferred and amortized over the period during which the future benefits are expected to be received. This is consistent with the provisions of Statement of Position 93-7, Reporting on Advertising Costs, which the Company adopted in fiscal 1995. See Note I. Programming Costs and Amortization: Programming costs include original programming and film acquisition costs, which are capitalized and amortized. The portion of original programming costs assigned to the domestic pay television market is amortized on the straight-line method over three years. The portion of original programming costs assigned to each of the worldwide home video and international television markets are amortized using the individual-film- forecast-computation method. Film acquisition costs are assigned to the domestic pay television market and are principally amortized on the straight-line method over the license term, generally three years. Management believes that this method provides a reasonable matching of expenses with total estimated revenues over the periods that revenues associated with films and programs are expected to be realized. Film and program amortization is adjusted periodically to reflect changes in the estimates of amounts of related future revenues. Film and program costs are stated at the lower of unamortized cost or estimated net realizable value as determined on a specific identification basis. Based on management's estimate of future total gross revenues as of June 30, 1996, substantially all unamortized programming costs applicable to released programs are expected to be amortized during the next three years. See Note H. Intangible Assets: Trademark acquisition costs are capitalized and amortized on the straight-line method over 40 years. Trademark defense, registration and renewal costs are capitalized and amortized on the straight-line method over 15 years. Other intangible assets are comprised substantially of goodwill, which is amortized generally over 40 years. Accumulated amortization of intangible assets was $10,062,000 and $8,279,000 at June 30, 1996 and 1995, respectively. Income (Loss) per Common Share: Income (loss) per common share was computed on the basis of the weighted average number of shares of both Class A and Class B common stock outstanding during each period. Foreign Exchange Forward Contracts: The Company utilizes forward contracts to minimize the impact of currency movements on royalties received denominated in Japanese yen and German marks. The terms of these contracts are generally one year or less. Gains and losses related to these agreements are recorded in income as part of, and concurrent with, the transaction. As of June 30, 1996 and 1995, the Company had approximately $2,300,000 and $2,450,000, respectively, in outstanding contracts. The difference between these contracts' values and the fair market value of these instruments at June 30, 1996 and 1995 in the aggregate was not material. Minority Interest: The Company owns a 90% interest in VIPress Poland Sp. z o.o. ("VIPress"), which publishes the Polish edition of Playboy magazine. The financial statements of VIPress are included in the Company's financial statements. The minority interest in the results of operations is included in nonoperating expense in the Consolidated Statements of Operations and the minority interest in the equity of VIPress is included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. Foreign Currency Translation: Assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rate existing at the balance sheet date. The net exchange differences resulting from these translations are recorded as a separate component of shareholders' equity. Revenues and expenses are translated at average rates for the period. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. (B) RESTRUCTURING EXPENSES A $2,450,000 charge was recorded in the first quarter of fiscal 1994 related to a reduction in the Company's workforce of approximately 10%. This 36 charge primarily related to employee termination payments associated with approximately 60 positions that were eliminated through a combination of early retirement, attrition and layoffs. An additional $425,000 charge, primarily related to employee termination payments, was recorded in the third quarter of fiscal 1994 due to further reductions in overhead costs. Employee termination payments of approximately $50,000, $615,000 and $2,140,000, respectively, were made in fiscal 1996, 1995 and 1994 related to the restructurings. (C) UNUSUAL ITEMS The $1,676,000 net charge for unusual items in fiscal 1994 consisted of a $1,199,000 market value adjustment for a documentary film, Hugh Hefner: Once Upon a Time; the establishment of a $372,000 reserve related to programming of O.J. Simpson: Minimum Maintenance Fitness for Men; a $355,000 write-off of photo inventory that would not be published in Playboy magazine; and a $200,000 real estate tax obligation related to the Company's former office space in Los Angeles, California; partially offset by a $450,000 benefit related to an insurance settlement. (D) INVESTMENT INCOME (EXPENSE), NET Investment expense, net for the year ended June 30, 1994 included a net loss of $150,000 related to the maturity of options on four offsetting interest rate swap agreements entered into late in fiscal 1993. These agreements each had a notional principal amount of $200 million and expired on July 13, 1993. (E) INCOME TAXES The income tax provision consisted of the following for the years ended June 30 (in thousands):
1996 1995 1994 - ------------------------------------------------------------------------------- Current: Federal $ 241 $ 115 $ -- State 67 65 68 Foreign 1,490 998 1,055 - ------------------------------------------------------------------------------- Total current 1,798 1,178 1,123 - ------------------------------------------------------------------------------- Deferred: Federal 2,399 629 -- State -- -- -- Foreign -- -- -- - ------------------------------------------------------------------------------- Total deferred 2,399 629 -- - ------------------------------------------------------------------------------- Total income tax provision $4,197 $1,807 $1,123 ===============================================================================
The income tax provision differed from a provision computed at the U.S. statutory tax rate as follows for the years ended June 30 (in thousands):
1996 1995 1994 - ------------------------------------------------------------------------------- Statutory rate tax provision $2,871 $ 828 $(5,182) Increase (decrease) in taxes resulting from: Foreign withholding tax on licensing income 1,448 998 1,055 State income taxes 67 65 68 Nondeductible expenses 129 341 238 Tax benefit of domestic losses not recognized -- -- 4,944 Tax benefit of foreign taxes paid or accrued (356) (339) -- Other 38 (86) -- - ------------------------------------------------------------------------------- Total income tax provision $4,197 $1,807 $ 1,123 ===============================================================================
The U.S. statutory tax rate for fiscal 1994 through 1996 was 34%. Effective July 1, 1993, the Company changed its method of accounting for income taxes by adopting the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("Statement 109"). Statement 109 required a change from the deferred method of accounting for income taxes under APB Opinion No. 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply in the years in which the temporary differences are expected to reverse. The adoption of Statement 109 resulted in the recognition of $7.5 million, or $0.38 per share, of deferred federal tax benefits. This amount is included in the net loss for the fiscal year ended June 30, 1994 as "Cumulative effect of change in accounting principle." In the Consolidated Balance Sheet at June 30, 1995, $0.4 million of the $6.9 million net deferred tax asset is included in "Other current assets" and $6.5 million is segregated as "Net deferred tax assets." In the Consolidated Balance Sheet at June 30, 1996, $0.3 million of the $4.5 million net deferred tax asset is included in "Other current assets" and $4.2 million is segregated as "Net deferred tax assets." The significant components of the Company's deferred tax assets and deferred tax liabilities as of June 30, 1995 and 1996 are presented below (in thousands):
June 30, Net June 30, 1995 Change 1996 - ------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 16,248 $(3,514) $ 12,734 Capital loss carryforwards 10,512 -- 10,512 Tax credit carryforwards 6,310 (459) 5,851 Other deductible temporary differences 8,888 967 9,855 - ------------------------------------------------------------------------------- Total gross deferred tax assets 41,958 (3,006) 38,952 Valuation allowance (28,573) 602 (27,971) - ------------------------------------------------------------------------------- Gross deferred tax assets 13,385 (2,404) 10,981 - ------------------------------------------------------------------------------- Deferred tax liabilities: Deferred subscription acquisition costs (3,708) 23 (3,685) Other taxable temporary differences (2,806) (18) (2,824) - ------------------------------------------------------------------------------- Gross deferred tax liabilities (6,514) 5 (6,509) - ------------------------------------------------------------------------------- Net deferred tax assets $ 6,871 $(2,399) $ 4,472 ===============================================================================
In addition to the federal tax benefits in the table above, the Company has net operating loss carryforwards available in various states, none of which are reflected in the net deferred tax assets in the Consolidated Balance Sheets at June 30, 1996 and 1995. 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 at June 30, 1996, the Company will need to generate future taxable income of approximately $13.2 million. Management believes that it is more likely than not that the required amount of 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. At June 30, 1996, the Company had operating loss carryforwards of $37.5 million with $0.8 million expiring in 2001, $8.9 million expiring in 2003, $8.2 million expiring in 2004, $2.1 million expiring in 2007, $1.1 million expiring in 2008 and $16.4 million expiring in 2009. The Company had capital loss carryforwards of $30.9 million with $1.0 million expiring in 37 1998 and $29.9 million expiring in 1999. The Company had operating loss carryforwards of $25.8 million for alternative minimum tax purposes, with $1.9 million expiring in 2003, $5.7 million expiring in 2004, $1.5 million expiring in 2007, $0.7 million expiring in 2008 and $16.0 million expiring in 2009. In addition, foreign tax credit carryforwards of $3.3 million and investment tax credit carryforwards of $2.0 million are available to reduce future U.S. federal income taxes. The foreign tax credit carryforwards expire in 1998 through 2001, and the investment tax credit carryforwards expire in 1997 through 2001. (F) DISCONTINUED OPERATIONS During fiscal 1982, the Company discontinued its resort hotel operations. The net current liabilities related to these discontinued operations have been segregated in the Consolidated Balance Sheets at June 30, 1996 and 1995 as "Reserves for losses on disposals of discontinued operations." Changes in management's estimates of the Company's remaining liabilities in connection with these discontinued operations resulted in a loss on disposal of discontinued operations of $620,000 in fiscal 1994. There was no income tax effect as the benefit was offset by a corresponding change in the valuation allowance related to the net deferred tax asset established with the adoption of Statement 109. 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. As a result, the Company increased its reserve for this matter, which resulted in the previously discussed $620,000 loss on disposal of discontinued operations in fiscal 1994. The Company believes that it has established adequate reserves, which totaled $707,000 at June 30, 1996, 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. A claim had been made against the Company for indemnity arising out of the contract under which the Company sold its United Kingdom gaming operations in fiscal 1982. The extent of the indemnity was in dispute and was being litigated. In May 1993, the Company settled the dispute for $1,173,000. The Company was entitled to a United Kingdom tax refund equal to 30% of the amount paid, and, in July 1993, received $630,000 representing such taxes and related interest. The net settlement amount of $543,000 was previously reserved. (G) INVENTORIES Inventories consisted of the following at June 30 (in thousands):
1996 1995 - ------------------------------------------------------------------------------- Paper $10,771 $ 7,342 Editorial and other prepublication costs 6,566 6,193 Merchandise finished goods 6,162 7,893 - ------------------------------------------------------------------------------- Total inventories $23,499 $21,428 ===============================================================================
(H) PROGRAMMING COSTS Current programming costs consisted of the following at June 30 (in thousands):
1996 1995 - ------------------------------------------------------------------------------- Released, less amortization $24,040 $23,898 Completed, not yet released 9,833 5,842 - ------------------------------------------------------------------------------- Total current programming costs $33,873 $29,740 ===============================================================================
Noncurrent programming costs consist of programs in the process of production. The Company revised its amortization method for licensed film costs during the fourth quarter of fiscal 1994 as a result of its decision to offer Playboy Television on a 24-hour basis, which resulted in a change in the scheduling of licensed films. Licensed films are aired throughout the term of the license period, and related costs are primarily amortized over such period, generally three years. This change in accounting estimate resulted in a decrease in programming expense of $870,000 for the fiscal year ended June 30, 1995. This change in accounting estimate resulted in a net increase in the Company's net income of $574,000, or $0.03 per share (net of related taxes of $296,000), for the fiscal year ended June 30, 1995. (I) ADVERTISING COSTS Effective July 1, 1994, the Company adopted the provisions of Statement of Position 93-7, Reporting on Advertising Costs. The Company expenses advertising costs as incurred, except for direct- response advertising. Direct-response advertising consists primarily of costs associated with the promotion of magazine subscriptions and the distribution of catalogs for use in the Company's Catalog Group. The capitalized direct-response advertising costs are amortized over the period during which the future benefits are expected to be received, principally six to 12 months. At June 30, 1996 and 1995, advertising costs of $6.9 million and $6.4 million, respectively, were deferred and included in "Deferred subscription acquisition costs" and "Other current assets" in the Consolidated Balance Sheets. For the fiscal years ended June 30, 1996, 1995 and 1994, the Company's advertising expense was $44.4 million, $43.5 million and $43.2 million, respectively. (J) LONG-TERM FINANCING OBLIGATIONS Long-term financing obligations consisted of the following at June 30 (in thousands):
1996 1995 - ------------------------------------------------------------------------------- 10% note due in installments through 1997, net of unamortized discount of $13 and $30, respectively, based upon imputed interest rate of 13% $ 687 $1,020 Less current maturities, net of unamortized discount of $10 and $17, respectively (340) (333) - ------------------------------------------------------------------------------- Total long-term financing obligations $ 347 $ 687 ===============================================================================
The amount of scheduled annual maturities of long-term debt for each of fiscal 1997 and 1998 is $350,000. The carrying value of this debt approximates the fair market value. 38 Under the terms of the Company's revolving credit agreement with two domestic banks, the line of credit decreased from $30.0 million to $19.5 million in December 1995. In March 1996, the Company and its banks amended the agreement which increased the line of credit from $19.5 million to $35.0 million and extended the maturity date of the line to March 1999. The credit agreement provides for interest based on fixed spreads over specified index rates and for commitment fees based on a combination of the unused portion of the total line of credit and cash balances. The credit agreement, which covers short-term borrowings and the issuance of letters of credit, remains collateralized by substantially all of the Company's assets and requires the Company to maintain financial covenants pertaining to net worth, leverage and cash flow. Additionally, there are limitations on other indebtedness and investments and cash dividends are prohibited. The carrying value of these borrowings approximates the fair market value of the debt. At June 30, 1996, short-term borrowings of $5.0 million and letters of credit of $5.4 million were outstanding compared to short-term borrowings and letters of credit outstanding at June 30, 1995 of $5.0 million and $5.5 million, respectively. The weighted average interest rates on the short-term borrowings outstanding at June 30, 1996 and 1995 were 7.77% and 8.70%, respectively. (K) STOCK PLANS The Company has two plans under which stock options or shares may be granted: the 1991 Non-Qualified Stock Option Plan for Non-Employee Directors (the "Directors' Plan") and the 1995 Stock Incentive Plan, which was approved by stockholders of the Company on November 14, 1995. Previously, stock options were also granted under the 1989 Stock Option Plan (the "1989 Option Plan"). However, at this time, there are no shares available for future grant under this plan. The 1989 Option Plan authorized the grant of nonqualified stock options to key employees to purchase up to 342,500 shares of Class A stock and 1,027,500 shares of Class B stock at a price that was equal to the fair market value at date of grant. The remaining 103,000 Class B options available for future grants under the 1989 Option Plan were transferred into the 1995 Stock Incentive Plan and the remaining 175,100 Class A options were cancelled. The Directors' Plan provides for the grant of nonqualified stock options to each nonemployee director to purchase shares of Class B stock at a price that is equal to the fair market value at date of grant. Options to purchase an aggregate of 80,000 shares of Class B stock may be granted under the Directors' Plan. The 1995 Stock Incentive Plan, which currently provides for Non-Qualified Stock Option, Incentive Stock Option and Restricted Stock Agreements, authorizes the issuance of a total of 1,803,000 shares of Class B stock, which includes the previously mentioned 103,000 shares that were transferred from the 1989 Option Plan and an additional 600,000 shares authorized in June 1996, which are subject to stockholder approval. The Non-Qualified and Incentive Stock Option Agreements authorize the grant of options to key employees to purchase shares of Class B stock at a price that is not less than the fair market value at date of grant. Options under the three plans are generally for a term of ten years and are generally exercisable in cumulative annual installments of 25% each year, beginning on the first anniversary of the date such options were initially granted. The Restricted Stock Agreement provides for the issuance of Class B stock to key employees subject to certain restrictions that lapse upon the Company meeting specified operating income objectives pertaining to a fiscal year. Such operating income objectives are set at $7.5 million, $10.0 million, $15.0 million and $20.0 million. However, all vesting requirements will lapse automatically and any remaining restricted stock will vest on June 30, 2005. The first operating income objective of $7.5 million was met in fiscal 1996, and 121,564 shares of restricted stock vested in August 1996. Compensation expense recognized in fiscal 1996 and 1995 in connection with the 1995 Stock Incentive Plan was $972,000 and $228,000, respectively. At June 30, 1996, options to purchase 115,000 shares of Class A stock and 617,752 shares of Class B stock were exercisable under the 1989 Option Plan, options to purchase 30,000 shares of Class B stock were exercisable under the Directors' Plan, and options to purchase 99,375 shares of Class B stock were exercisable under the 1995 Stock Incentive Plan. The Board of Directors has reserved treasury shares for issuance upon exercise of options under the 1989 Option Plan. Shares issued upon exercise of options granted or shares awarded under the Directors' Plan or the 1995 Stock Incentive Plan may be either treasury shares or newly issued shares. At June 30, 1996, 906,750 shares of Class B stock were available for future grants of options under the Directors' Plan and the 1995 Stock Incentive Plan. Transactions under such plans are summarized as follows:
- -------------------------------------------------------------------------------- Stock Options Outstanding - -------------------------------------------------------------------------------- Shares Price Range -------------------------------------------------- Class A Class B Class A Class B - -------------------------------------------------------------------------------- Outstanding at June 30, 1993 185,000 977,500 4.88-7.38 4.00-8.50 Granted - 100,000 - 6.88-9.38 Exercised (8,400) (62,500) 6.69 5.38-6.13 Canceled - (21,250) - 5.50-7.63 - -------------------------------------------------- Outstanding at June 30, 1994 176,600 993,750 4.88-7.38 4.00-9.38 Granted - 496,250 - 8.25-10.04 Exercised (4,500) (20,000) 6.69 5.38-6.13 Canceled (22,100) (161,250) 6.69 5.38-9.38 - -------------------------------------------------- Outstanding at June 30, 1995 150,000 1,308,750 4.88-7.38 4.00-10.04 Granted - 40,000 - 8.88-10.63 Exercised (35,000) (159,750) 4.88 4.00-9.13 Canceled - (42,500) - 9.13 - -------------------------------------------------- Outstanding at June 30, 1996 115,000 1,146,500 6.69-7.38 4.38-10.63 ================================================================================ - -------------------------------------------------------------------------------- Restricted Stock Awards Outstanding - -------------------------------------------------------------------------------- Class B - -------------------------------------------------------------------------------- Outstanding at June 30, 1994 - Awarded 516,250 Vested - Canceled - - -------------------------------------------------------------------------------- Outstanding at June 30, 1995 516,250 Awarded 20,000 Vested - Canceled (50,000) - -------------------------------------------------------------------------------- Outstanding at June 30, 1996 486,250 ================================================================================
Certain incentive stock options granted in fiscal 1995 have been determined to carry an option price of 110%, and not 100%, of the fair market value on the date of grant. 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. (L) ACQUISITIONS On March 29, 1996 the Company acquired an additional 45% interest in VIPress for approximately $315,000, including approximately $85,000 in acquisition costs. Subsequent to this purchase, the Company owns 90% of the capital stock of VIPress, which publishes the Polish edition of Playboy magazine.The acquisition was accounted for under the purchase method and, accordingly, the results of VIPress since the date of acquisition have been included in the Company's Consolidated Statements of Operations. 39 Prior to acquiring the additional 45% interest, the investment was accounted for under the equity method and as such, the Company's proportionate share of net income from VIPress prior to the acquisition is included in nonoperating expense. The acquisition resulted in goodwill of approximately $106,000 which will be amortized over five years. The Company's 90% interest may be reduced to a minimum of 80% by the end of fiscal year 2000 as a result of shares that may be sold for a nominal amount to two managing minority partners generally pursuant to an incentive plan that requires certain performance objectives to be met. Pro forma results reflecting this acquisition, assuming it had been made at the beginning of each period presented, would not be materially different from the results reported. The Company has an option to acquire the remaining 80% interest in duPont Publishing, Inc. ("duPont") at a price based on fair market value as of December 31, 1999. duPont is the publisher of two magazines, duPont Registry, A Buyers Gallery of Fine Automobiles and A Buyers Gallery of Fine Homes. Previously, the Company was required to make loans to duPont to fund its working capital requirements. These loans, which bear interest at a rate of 1% over the prime rate, amounted to $125,000 and $295,000 at June 30, 1996 and 1995, respectively. In July 1988, the Company acquired 80% of the common stock of Critics' Choice Video, Inc., a national direct marketer of theatrical and special- interest videocassettes, for $125,000. The Company purchased the remaining 20% of Critics' Choice Video, Inc. common stock effective July 1, 1993 for $3.0 million, which consisted of $1.5 million in cash and one-year promissory notes totaling $1.5 million, which were paid July 1, 1994. The acquisition was accounted for using the purchase method. The excess cost of $2.4 million is being amortized over 40 years. (M) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest and income taxes was as follows during the years ended June 30 (in thousands):
1996 1995 1994 - -------------------------------------------------------------------------------- Interest $ 610 $ 774 $ 566 Income taxes 1,851 1,064 510 - --------------------------------------------------------------------------------
The Company was entitled to a United Kingdom tax refund equal to 30% of the amount paid pursuant to the settlement in May 1993 of litigation related to its discontinued United Kingdom gaming operations. Cash paid for income taxes in fiscal 1994 was net of $630,000 representing such refund and related interest. See Note F. During the fiscal year ended June 30, 1994, the Company had noncash investing and financing activities related to its July 1988 purchase of an 80% interest in Critics' Choice Video, Inc. See Note L. (N) LEASE COMMITMENTS The Company's principal lease commitments are for office space, the satellite transponder used in its pay television operations, and furniture and equipment. The office leases provide for the Company's payment of its proportionate share of operating expenses and real estate taxes in addition to monthly base rent. The Company's corporate headquarters is under terms of a 15-year lease, which commenced September 1, 1989. In fiscal 1992, the Entertainment Group relocated its Los Angeles office under terms of a ten-year lease, which commenced April 1, 1992. In fiscal 1993, the Publishing Group relocated its New York office under a lease with a term of approximately 11 years, which commenced April 1, 1993. In fiscal 1994, the Publishing Group relocated its Los Angeles photo studio under terms of a ten-year lease, which commenced January 1, 1994. These leases provide for base rent abatements; however, rent expense is being charged to operations on a straight-line basis over the terms of the leases. This resulted in liabilities of $5.7 million at both June 30, 1996 and 1995, which are included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. In addition, during fiscal 1993, the Company entered into a five-year lease, which includes a purchase option, for the Catalog Group's current suburban Chicago operations facility. Due to the growth of the catalog business, in fiscal 1998 the Company will be leasing a larger facility in the same Chicago suburb to replace the existing facility. In December 1992, the Company executed a lease for its current satellite transponder that became effective January 1, 1993. This operating lease is for a term of approximately nine years and includes a purchase option. A $5.0 million letter of credit was issued under the Company's revolving line of credit for the benefit of the lessor to secure the Company's obligations under this lease. This letter of credit can be irrevocably released based upon achievement of certain criteria related to annual financial data. During fiscal 1993, the Company began to lease certain furniture and equipment for use in its operations. The leases are for terms of two to five years and include end-of-lease purchase options. Rent expense was as follows for the years ended June 30 (in thousands):
1996 1995 1994 - -------------------------------------------------------------------------------- Minimum rent expense $9,177 $8,854 $8,841 Contingent rent expense - - 344 - -------------------------------------------------------------------------------- Total 9,177 8,854 9,185 Sublease income - - (1,364) - -------------------------------------------------------------------------------- Net rent expense $9,177 $8,854 $7,821 ================================================================================
The minimum commitment at June 30, 1996, under operating leases with noncancelable terms in excess of one year, was as follows (in thousands):
Operating Year ending June 30 Leases - -------------------------------------------------------------------------------- 1997 $ 8,825 1998 8,244 1999 7,195 2000 7,428 2001 7,656 Later years 13,237 - -------------------------------------------------------------------------------- Total minimum lease payments $52,585 ================================================================================
(O) CABLE TELEVISION Effective April 1, 1986, the Company assumed marketing and distribution responsibilities for The Playboy Channel and other North American Playboy pay television products (the "Service") from its former distributor, Rainbow Programming Services Company ("Rainbow"). The termination agreement provided for the assignment to the Company of all distribution contracts with cable system operators and others that carried the Service. Under the termination agreement, Rainbow was to receive a monthly royalty of 5% of revenues received by the Company for the Service, subject to a minimum royalty based on number of subscribers, as long as the Service is in operation. These royalty payments were discontinued April 30, 1996, when the agreement ended. The agreement provided for noncompetition in the North American distribution and production of an adult-oriented pay television service by Rainbow as long as royalty payments were being made. 40 (P) SEGMENT INFORMATION The four industry segments in which the Company currently operates are as follows: Publishing, Entertainment, Product Marketing and Catalog. Publishing Group operations include the publication of Playboy magazine; Playboy-related businesses, including newsstand specials and calendars, foreign editions of Playboy magazine, and new media and ancillary businesses; and the production of the Playboy Jazz Festival. Entertainment Group operations include the production and marketing of programming through Playboy Television, other domestic television, international television and worldwide home video businesses as well as the co-production of feature-length movies. Product Marketing Group operations include licensing the manufacture, sale and distribution of consumer products carrying one or more of the Company's trademarks and the licensing of artwork owned by the Company. Catalog Group operations include the direct marketing of three catalogs: Critics' Choice Video, Collectors' Choice Music and Playboy. Financial information relating to industry segments for fiscal 1996, 1995 and 1994 is presented on page 24 and is an integral part of these consolidated financial statements. (Q) EMPLOYEE BENEFIT PLAN The Company's Employees Investment Savings Plan (the "Savings Plan"), a defined contribution plan, covers all employees who have completed a full year of service of at least 1,000 hours. The Company's discretionary contribution to the Savings Plan is distributed to each eligible employee's account in an amount equal to the ratio of each eligible employee's compensation to the total compensation paid to all such employees. The fiscal 1996 and 1995 contributions were approximately $620,000 and $200,000, respectively. No such contribution was made in fiscal 1994. During fiscal 1996, 1995 and 1994, the Company matched employee contributions to the Savings Plan to a maximum of 2 3/4% of each participating employee's eligible compensation, subject to Internal Revenue Service limitations. For fiscal 1997, the maximum match will be 3 1/2% of such compensation. The Company's matching contributions in fiscal 1996, 1995 and 1994 related to this program were approximately $630,000, $630,000 and $670,000, respectively. Effective October 1, 1992, the Company established a Deferred Compensation Plan, which permits certain employees and directors to annually elect to defer a portion of their compensation. The Deferred Compensation Plan is available to approximately 60 of the Company's most highly compensated employees and all nonemployee directors. Employee participants may defer between 5% and 15% (in 1% increments) of salary, and up to 50% (in 10% increments) of payments due under Executive Incentive Compensation Plans or sales commissions. Directors may defer between 25% and 100% (in 25% increments) of their annual retainer and meeting fees. Amounts deferred under this plan are credited with interest each quarter at a rate equal to the preceding quarter's average composite yield on corporate bonds as published by Moody's Investor's Service, Inc. All amounts deferred and interest credited are 100% vested immediately and are general unsecured obligations of the Company. Such obligations totaled $1,186,000 and $797,000 at June 30, 1996 and 1995, respectively, and are included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. Effective July 1, 1996 the Company established an Employee Stock Purchase Plan, which is subject to stockholder approval, to provide substantially all regular full and part-time employees an opportunity to purchase shares of its Class B common stock through payroll deductions up to the lower of 10% of base salary, or $25,000 of fair market value of Class B common stock per calendar year (as required by the Internal Revenue Service). The funds will be withheld and then used to acquire stock on the last trading day of each quarter, based on the closing price less a 15% discount. (R) CONTINGENCIES Playboy Television's programming is delivered primarily through a communications satellite transponder. The Company's current transponder lease, effective January 1, 1993, contains protections typical in the industry against transponder failure, including access to spare transponders on the same satellite as well as transponders on another satellite currently in operation. Access to the transponder may be denied under certain narrowly defined circumstances relating to violations of law or threats to revoke the license of the satellite owner to operate the satellite based on programming content. However, the Company has the right to challenge any such denial and believes that the transponder will continue to be available to it through the end of the expected life of the satellite (currently estimated to be in 2004). The Company believes that if Section 505 of the Telecommunications Act of 1996 were to be enforced, the Company's revenues attributable to its domestic pay television services could be materially adversely affected due to reduced cable carriage and/or reduced buy rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company believes that it has established adequate reserves in connection with the General Notice received from the EPA in January 1993 related to its discontinued resort hotel operations. See Note F. (S) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended June 30, 1996 and 1995 (in thousands, except per share amounts):
Quarters Ended ------------------------------------------ 1996 Sept. 30 Dec. 31 Mar. 31 June 30 Year - -------------------------------------------------------------------------------- Net revenues $62,263 $71,618 $66,257 $76,449 $276,587 Gross profit 8,579 11,120 9,555 13,086 42,340 Operating income 1,440 2,854 1,835 3,364 9,493 Income before extraordinary item and cumulative effect of change in ac- counting principle 1,012 1,138 676 1,426 4,252 Net income 1,012 1,138 676 1,426 4,252 Income before extraordinary item and cumulative effect of change in ac- counting principle per common share 0.05 0.06 0.03 0.07 0.21 Net income per common share 0.05 0.06 0.03 0.07 0.21 Common stock price Class A high 9 5/8 9 1/2 11 15 3/4 Class A low 7 7/8 8 5/8 8 3/8 10 Class B high 9 3/8 9 1/4 11 1/8 16 1/2 Class B low $ 7 3/8 $ 7 1/2 $ 7 1/2 $ 9 7/8
41
Quarters Ended -------------------------------------- 1995 Sept. 30 Dec. 31 Mar. 31 June 30 Year - -------------------------------------------------------------------------------- Net revenues $57,218 $64,663 $58,025 $67,343 $247,249 Gross profit* 6,489 8,227 6,912 11,294 32,922 Operating income (loss) (864) 1,291 236 2,394 3,057 Income (loss) before extraordinary item and cumulative effect of change in ac- counting principle (1,228) 1,001 (347) 1,203 629 Net income (loss) (1,228) 1,001 (347) 1,203 629 Income (loss) before extraordinary item and cumulative effect of change in ac- counting principle per common share (0.06) 0.05 (0.02) 0.06 0.03 Net income (loss) per common share (0.06) 0.05 (0.02) 0.06 0.03 Common stock price Class A high 8 7/8 9 7/8 9 1/2 8 3/8 Class A low 6 1/8 7 1/2 8 1/8 7 5/8 Class B high 9 1/8 10 3/4 10 5/8 8 1/4 Class B low $ 6 1/8 $ 7 1/4 $ 7 5/8 $ 7 3/8
*Amounts cannot be calculated from the Company's respective Quarterly Reports on Form 10-Q filed in fiscal 1995 as a result of certain reclassifications between "Cost of sales" and "Selling and administrative expenses" in the Consolidated Statements of Operations. The operating loss for the first quarter of fiscal 1995 and operating income for the second, third and fourth quarters of fiscal 1995 included reductions in programming expense of $220,000, or $0.02 per share; $281,000, or $0.01 per share; $200,000, or $0.01 per share; and $169,000, or $0.00 per share, respectively, resulting from a change in accounting estimate. See Note H. 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Playboy Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Playboy Enterprises, Inc. and its Subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playboy Enterprises, Inc. and its Subsidiaries as of June 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Chicago, Illinois August 1, 1996 - -------------------------------------------------------------------------------- REPORT OF MANAGEMENT The consolidated financial statements and all related financial information herein are the responsibility of the Company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements. The Company maintains a system of internal controls that it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and are properly recorded, that assets are safeguarded and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and internal audits. Coopers & Lybrand L.L.P., independent accountants, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of four nonmanagement directors, meets periodically with Coopers & Lybrand L.L.P., management representatives and the Company's internal auditor to review internal accounting control and auditing and financial reporting matters. Both Coopers & Lybrand L.L.P. and the internal auditor have unrestricted access to the Audit Committee and may meet with it without management representatives being present. /s/ Christie Hefner Christie Hefner Chairman and Chief Executive Officer /s/ Rebecca S. Maskey Rebecca S. Maskey Senior Vice President, Finance 43 EX-21 31 PARENT AND SUBSIDIARIES Exhibit 21 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 21 PARENT AND SUBSIDIARIES Hugh M. Hefner is a "parent" of the Company, as defined under the Securities Exchange Act of 1934, as amended, by virtue of his stock ownership. Mr. Hefner beneficially owned 69.95% of the outstanding voting stock of the Company as of August 31, 1996. The accounts of all of the subsidiaries are included in the Company's Consolidated Financial Statements. Set forth below are the names of certain active corporate subsidiaries of the Company as of June 30, 1996. Certain subsidiaries are omitted because such subsidiaries considered individually or in the aggregate would not constitute a significant subsidiary. Indented names are subsidiaries of the company under which they are indented:
Percent Jurisdiction in Ownership which Incorporated By Immediate Name of Company or Organized Parent - --------------- ------------------ ------------- Playboy Enterprises, Inc. (parent) Delaware Lake Shore Press, Inc. Delaware 100% Lifestyle Brands, Ltd. Delaware 100% Playboy Models, Inc. Illinois 100% Playboy Products and Services International, B.V. The Netherlands 100% Playboy Entertainment Group, Inc. Delaware 100% After Dark Video, Inc. Delaware 100% Alta Loma Productions, Inc. Delaware 100% Cameo Films, Inc. Illinois 100% Impulse Productions, Inc. Delaware 100% Precious Films, Inc. California 100% AdulTVision Communications, Inc. Delaware 100% Mystique Films, Inc. California 100% Women Productions, Inc. California 100% Playboy Clubs International, Inc. Delaware 100% Playboy Preferred, Inc. Illinois 100% Critics' Choice Video, Inc. Illinois 100% Special Editions, Ltd. Delaware 100% Playboy Shows, Inc. Delaware 100% Telecom International, Inc. Florida 100% Playboy Gaming International, Ltd. Delaware 100% Playboy Gaming Greece, Ltd. Delaware 100% Playboy Properties, Inc. Delaware 100% VIPress Poland Sp. z o.o Poland 90%
EX-23 32 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements on Form S-8 (File Nos. 33-37666, 33-46113, 33-58145, 33-60631 and 333-06843) of our report dated August 1, 1996, on our audits of the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc. as of June 30, 1996 and 1995, and for the years ended June 30, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Chicago, Illinois September 27, 1996 EX-27 33 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 2,438 0 32,119 3,009 23,499 108,909 37,404 25,510 150,869 90,021 347 215 0 0 52,068 150,869 276,587 276,587 234,247 267,094 0 0 680 8,449 4,197 4,252 0 0 0 4,252 .21 .21
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