-----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, O+6e3KfK8pJEHzQyt1N4Zn7HFtJNl7DwCPse/qiGxHgl7k+MRi3v9ClEpAzONZu2 DYq3ON82k+IvPGS0ND8KBg== 0001169232-09-001548.txt : 20090313 0001169232-09-001548.hdr.sgml : 20090313 20090313171619 ACCESSION NUMBER: 0001169232-09-001548 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090313 DATE AS OF CHANGE: 20090313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0001072341 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 364249478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14790 FILM NUMBER: 09681158 BUSINESS ADDRESS: STREET 1: 680 NORTH LAKE SHORE DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 MAIL ADDRESS: STREET 1: 680 NORTH LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NEW PLAYBOY INC DATE OF NAME CHANGE: 19981020 10-K 1 d76389_10-k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ______ Commission file number 001-14790 Playboy Enterprises, Inc. (Exact name of registrant as specified in its charter) Delaware 36-4249478 (State of incorporation) (I.R.S. Employer Identification Number) 680 North Lake Shore Drive, Chicago, IL 60611 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 751-8000 - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ----------------------------------------------- ------------------------------ Class A Common Stock, par value $0.01 per share New York Stock Exchange Class B Common Stock, par value $0.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark 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. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of Class A Common Stock held by nonaffiliates on June 30, 2008 (based upon the closing sale price on the New York Stock Exchange) was $7,308,922. The aggregate market value of Class B Common Stock held by nonaffiliates on June 30, 2008 (based upon the closing sale price on the New York Stock Exchange) was $100,430,884. At February 27, 2009, there were 4,864,102 shares of Class A Common Stock and 28,539,827 shares of Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required for Part II. Item 5 and Part III. Items 10-14 of this report is incorporated herein by reference to the Notice of Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains "forward-looking statements," including statements in Part I. Item 1. "Business," Part I. Item 1A. "Risk Factors" and Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," among other places, as to expectations, beliefs, plans, objectives and future financial performance, and assumptions underlying or concerning the foregoing. We use words such as "may," "will," "would," "could," "should," "believes," "estimates," "projects," "potential," "expects," "plans," "anticipates," "intends," "continues" and other similar terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which could cause our actual results, performance or outcomes to differ materially from those expressed or implied in the forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The following are some of the important factors that could cause our actual results, performance or outcomes to differ materially from those discussed in the forward-looking statements: (1) Foreign, national, state and local government regulations, actions or initiatives, including: (a) attempts to limit or otherwise regulate the sale, distribution or transmission of adult-oriented materials, including print, television, video, Internet and wireless materials; (b) limitations on the advertisement of tobacco, alcohol and other products which are important sources of advertising revenue for us; or (c) substantive changes in postal regulations which could increase our postage and distribution costs; (2) Risks associated with our foreign operations, including market acceptance and demand for our products and the products of our licensees and partners; (3) Our ability to manage the risk associated with our exposure to foreign currency exchange rate fluctuations; (4) Further changes in general economic conditions, consumer spending habits, viewing patterns, fashion trends or the retail sales environment, which, in each case, could reduce demand for our programming and products and impact our advertising and licensing revenues; (5) Our ability to protect our trademarks, copyrights and other intellectual property; (6) Risks as a distributor of media content, including our becoming subject to claims for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials we distribute; (7) The risk our outstanding litigation could result in settlements or judgments which are material to us; (8) Dilution from any potential issuance of common stock or convertible debt in connection with financings or acquisition activities; (9) Further competition for advertisers from other publications, media or online providers or any decrease in spending by advertisers, either generally or with respect to the adult male market; (10) Competition in the television, men's magazine, Internet, wireless, new electronic media and product licensing markets; (11) Attempts by consumers, distributors, merchants or private advocacy groups to exclude our programming or other products from distribution; (12) Our television, Internet and wireless businesses' reliance on third parties for technology and distribution, and any changes in that technology, distribution and/or unforeseen delays in implementation which might affect our financial results, plans and assumptions; (13) Risks associated with losing access to transponders or technical failure of transponders or other transmitting or playback equipment that is beyond our control; (14) Competition for channel space on linear television or video-on-demand platforms; (15) Failure to maintain our agreements with multiple system operators, or MSOs, and direct-to-home, or DTH, operators on favorable terms, as well as any decline in our access to and acceptance by DTH and/or cable systems and the possible resulting deterioration in the terms, cancellation of fee arrangements, pressure on splits or adverse changes in certain minimum revenue amounts with operators of these systems; (16) Risks that we may not realize the expected increased sales and profits and other benefits from acquisitions; (17) Any charges or costs we incur in connection with restructuring measures we may take in the future; (18) Risks associated with the financial condition of Claxson Interactive Group, Inc., our Playboy TV-Latin America, LLC, joint venture partner; (19) Increases in paper, printing or postage costs; (20) Effects of the national consolidation of the single-copy magazine distribution system and risks associated with the financial stability of major magazine wholesalers; 2 (21) Effects of the national consolidation of television distribution companies (e.g., cable MSOs, satellite platforms and telecommunications companies); (22) Risks associated with the viability of our subscription, on-demand, ad-supported and e-commerce Internet models; and (23) Risks that adverse market and economic conditions may result in a decrease in the value of our investments in marketable securities and risks that adverse market conditions in the securities and credit markets may significantly affect our ability to access the capital and credit markets. For a detailed discussion of these and other factors that might affect our performance, see Part I. Item 1A. "Risk Factors" of this Annual Report on Form 10-K. 3 PLAYBOY ENTERPRISES, INC. 2008 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page ---- PART I Item 1. Business 5 Item 1A. Risk Factors 13 Item 1B. Unresolved Staff Comments 21 Item 2. Properties 21 Item 3. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 23 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24 Item 6. Selected Financial Data 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42 Item 8. Financial Statements and Supplementary Data 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 70 Item 9A. Controls and Procedures 70 Item 9B. Other Information 72 PART III Item 10. Directors, Executive Officers and Corporate Governance 73 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 73 Item 13. Certain Relationships and Related Transactions, and Director Independence 73 Item 14. Principal Accounting Fees and Services 73 PART IV Item 15. Exhibits and Financial Statement Schedules 74 4 PART I Item 1. Business - ---------------- Playboy Enterprises, Inc., together with its subsidiaries and predecessors, is referred to in this Annual Report on Form 10-K by terms such as "we," "us," "our," "Playboy" and the "Company," unless the context requires otherwise. We were organized in 1953 to publish Playboy magazine and are now a media and lifestyle company marketing the Playboy brand through a wide range of multimedia properties and licensing initiatives. The Playboy brand is one of the most widely recognized and popular brands in the world. The strength of our brand drives the financial performance of our media and licensing businesses. Our programming and content are available worldwide on television networks, websites, mobile platforms and radio. Playboy magazine is the best-selling monthly men's magazine in the world based on the combined circulation of the U.S. and international editions. Our licensing business leverages the Playboy name, the Rabbit Head Design and our other trademarks globally on a wide range of consumer products, Playboy-branded retail stores and entertainment venues. Our businesses are organized into the following three reportable segments: Entertainment, Publishing and Licensing. Net revenues, income and loss before income taxes, depreciation and amortization and identifiable assets of each reportable segment are set forth in Note (U), Segment Information, to the Notes to Consolidated Financial Statements. Our trademarks, copyrights and domain names are critical to the success and potential growth of all of our businesses. Our trademarks, which are renewable periodically and which can be renewed indefinitely, include Playboy, the Rabbit Head Design, Playmate and Spice. ENTERTAINMENT GROUP Our Entertainment Group operations include the production, marketing and sales of programming under the Playboy, Spice and other brand names, which are distributed through various channels, including domestic and international TV, Internet, wireless and satellite radio. Also included is e-commerce, a business we completed outsourcing in 2008. Programming Our Entertainment Group develops, produces, acquires and distributes a wide range of high-quality lifestyle and adult television programming for our domestic and international TV networks, pay-per-view, or PPV, subscription pay-per-month, or PPM, video-on-demand, or VOD, subscription video-on-demand, or SVOD, subscription package, or Tier, and has also historically produced and distributed content for worldwide DVD products. In late 2008, we made the strategic decision to exit the DVD business due to the rapid decline in that format and focus our distribution strategies on digital. Our proprietary productions include magazine-format shows, reality-based and dramatic series, documentaries, live events and celebrity and Playmate programs. Our programming is featured in a variety of formats, enabling us to leverage our programming costs over multiple distribution platforms. We have produced a number of shows that air on the domestic and international Playboy TV networks and are distributed internationally in countries where we do not have networks. Our original series programming includes Foursome, Money Talks, Naughty Amateur Home Videos, Search for the Perfect Girlfriend and 69 Sexy Things to Do Before You Die. Additionally, we develop, co-produce and/or license shows and series to air on third-party networks, including The Girls Next Door on E! Entertainment Television, and mainstream motion pictures, including The House Bunny and Miss March. We invest in the creation and acquisition of high-quality, adult-oriented programming to support our worldwide entertainment businesses. We invested $30.2 million, $34.4 million and $36.7 million in entertainment programming in 2008, 2007 and 2006, respectively, with the largest portion of the investment focused on Playboy TV. At December 31, 2008, our domestic library of primarily exclusive, Playboy-branded original programming for broadcasting on Playboy TV worldwide totaled approximately 3,500 hours. In addition to investing in original productions, we also acquire high-quality adult movies in various editing standards. A majority of the programming that airs on our Spice Digital Networks is licensed, on an exclusive basis, from third parties. We will continue to both produce and acquire original programming with a heavier emphasis on producing content for delivery on multiple electronic delivery platforms, including both long- and short-form programming. In addition to utilizing some of our proprietary programming for wireless and for our websites, we invested $7.0 million, $5.6 million and $5.0 million in content specifically for online and wireless initiatives in 2008, 2007 and 2006, respectively. 5 Our programming is delivered to direct-to-home, or DTH, and cable operators through satellite transponders and outside content processors. We have two international transponder service agreements, the terms of which extend through 2009. We are in active negotiations with several providers for these services when the current agreements expire and expect there to be no interruption of service. In April 2008, we entered into a services agreement with Broadcast Facilities, Inc., or BFI, under which BFI provides us with certain satellite transmission and other related services (including compression, uplink and playback) for our domestic cable channels. The agreement continues for an initial term of five years, after which we may renew the agreement for an additional three years. Domestic TV We currently operate the domestic TV networks Playboy TV, Playboy TV en Espanol and the Spice Digital Networks. Our flagship service is Playboy TV, with a programming mix that includes a variety of originally produced and exclusively licensed content. Playboy TV en Espanol is a Spanish language network. It shares some content with our domestic Playboy TV network and also includes locally produced, proprietary Spanish-language and other original Spanish-language content. Spice Digital Networks feature adult movies under exclusive licenses from leading adult studios and from our other original productions. These adult movie networks offer a distinct thematic focus and are available in a variety of editing standards. Our domestic TV content is distributed primarily through cable, e.g., Comcast and Time Warner Cable; DTH, e.g., DirecTV and EchoStar; and telephone companies, or Telcos, e.g., Verizon and AT&T, which distribute television via phone and/or fiber-optic lines. Each of the distributors controls the marketing and pricing to consumers. The following table sets forth our domestic and Canadian networks and distribution options:
- --------------------------------------------------------------------------------------- Network Domestic DTH Domestic Cable Domestic Telcos Canadian DTH - --------------------------------------------------------------------------------------- Playboy TV PPV/PPM PPV/PPM/VOD/ PPM/SVOD PPM SVOD - --------------------------------------------------------------------------------------- Playboy TV en Espanol Tier PPV/PPM/Tier PPM PPM - --------------------------------------------------------------------------------------- Spice Digital Networks PPV PPV/VOD VOD -- - ---------------------------------------------------------------------------------------
Our TV networks are available either as linear channels or as part of a VOD service. Our linear channels, offered on cable, DTH and Telco platforms, are television networks with regularly scheduled content distributed through a single network feed to all homes at the same time. VOD and SVOD, which are available on cable and Telco platforms, make content available to the consumer through a television interface at any time the consumer chooses to view it. In recent years, cable operators have shifted to digital technology and more recently begun moving away from linear PPV to VOD in an effort to conserve bandwidth and meet consumer needs for on-demand programming. We transmit exclusively in digital, and the vast majority of delivery to consumers is via digital technology. Playboy TV is the only adult television network available on all major DTH services in both the United States and Canada. As VOD supplants traditional linear networks, we are seeking to establish a differentiable position in this technology by leveraging the power of our brands, our large library of original programming and our relationships with leading adult studios, while at the same time recognizing that we are operating in a far more fragmented and competitive marketplace with lower costs of entry. 6 Our revenues generally reflect our contractual percentage of the retail price paid by consumers directly to the system operators. Channel space for our networks and VOD product is determined at each distributor's corporate level as part of our distributor negotiations; however, in some cases, we negotiate terms at the corporate level with distribution at the system level. Our agreements with cable and DTH operators are renewed or renegotiated from time to time in the ordinary course of business. In some cases, following the expiration of an agreement, the respective operator and we agree to continue to operate under the terms of the expired agreement until a new agreement is negotiated. In any event, our agreements with distributors generally may be terminated on short notice without penalty. International TV We currently own and operate or license Playboy-, Spice- and locally-branded TV networks in the United Kingdom, which are further distributed through DTH and cable throughout greater Europe. Additionally, we have branded TV networks in Australia, France, Germany, Hong Kong, New Zealand, South Korea and Turkey. Also, through joint ventures, we have minority equity interests in TV networks in Latin America, Iberia and Japan. These international networks, which are generally available on both a PPV and PPM basis, principally carry U.S.-originated content, which is subtitled or dubbed and complemented by local content. We also license individual programs from our extensive library to broadcasters internationally. We own a 19.0% interest in Playboy TV-Latin America, LLC, or PTVLA, a joint venture with Claxson Interactive Group, Inc., or Claxson, which operates Playboy TV networks as well as a local adult service called Venus, in Latin America and Iberia. PTVLA also operates Lifestyle TV, a male targeted, ad-supported basic cable channel with a mix of locally produced and acquired content with no nudity. In these markets, PTVLA has the exclusive right to use content from the Playboy library. PTVLA also has an agreement with Turner Broadcasting System Latin America, Inc., or Turner, to exclusively distribute all PTVLA owned and operated services and to sell advertising on Lifestyle TV. Turner bundles PTVLA channels with their existing services, including Cartoon Network, CNN and TNT. PTVLA pays Turner a distribution fee. In addition, PTVLA has a joint venture with Globomedia S.A., or GLOBO, to own and operate adult TV services in Brazil. PTVLA owns a 40% interest in the joint venture and GLOBO owns 60%. In addition, PTVLA has contributed non-branded adult content for use in DVD distribution and online and mobile markets in Brazil. While Claxson has management control, we have significant management influence on our joint venture. We provide both programming and the use of our trademarks directly to PTVLA in return for 17.5% of the venture's net revenues with a guaranteed annual minimum. The term of the program supply and trademark agreement for PTVLA expires in 2022, unless terminated earlier in accordance with the terms of the agreement. PTVLA provides the feed for Playboy TV en Espanol and we pay PTVLA a 20% distribution fee for that feed based on the network's net revenues in the U.S. We have an option to purchase up to an additional 30.9%, or buy-up option, of PTVLA at fair market value through December 23, 2022. In addition, we have the option to purchase the remaining 50.1% of PTVLA at fair market value, exercisable at any time during the period beginning December 23, 2012, and ending December 23, 2022, so long as we have previously or concurrently exercised the buy-up option. We have the option to pay the purchase price for the buy-up option in cash, shares of our Class B common stock, or Class B stock, or a combination of both. However, if we exercise both options concurrently, we must use cash to acquire the 81.0% of PTVLA that we do not own. We also own a 19.9% interest in Playboy Channel Japan, which operates Playboy Channel and Channel Ruby, a local adult service. We seek the most appropriate and profitable manner in which to build on the Playboy brand in each international market. In addition, we seek to build our Spice and other local brands as well as leverage our infrastructure and costs among our networks by combining operations where practicable, through innovative programming and scheduling, through joint programming acquisitions and by coordinating and sharing marketing activities and materials efficiently throughout the territories in which our programming is aired. We also look to develop and establish relationships with international production companies on a local level in order to create original international product for distribution to our various owned and licensed networks. Online/Mobile We operate various subscription-based and free websites under our Playboy and other brands. We outsource e-commerce businesses to third parties. 7 Our online websites are in the midst of a major infrastructure overhaul and redesign effort, which we anticipate to be substantially completed in the first half of 2009. Our free website, Playboy.com, offers original content leveraging Playboy magazine's editorial assets and opportunities to increase online advertising sales. Additionally, the free area of the website is designed with a goal of converting visitors to purchasers by directing them to our subscription offering. Our largest subscription website, Playboy Cyber Club, offers access to over 100,000 photos and videos and offers members the ability to see Playmates, an assortment of celebrity content and special "online only" features, including our franchises of "Cyber Girls" and "Coeds" and an extensive archive of Playboy magazine interviews. The other Playboy-branded clubs include broadband video-specific membership clubs, solely offering high-quality video, and a thematic, searchable pictorial and video club. We offer websites branded under the Playboy, Spice and other brands. These websites are available on a monthly, VOD and/or SVOD basis. We also distribute our branded content internationally via the Internet and wireless platforms. We have significant traffic from international users on our owned and operated websites, Playboy.com and Playboy.co.uk, that results in customers for our other products and services. Additionally, we have websites in other countries, some of which were created in conjunction with our international magazine partners that feature a blend of original, local-edition Playboy magazine and U.S. and U.K. websites' content. We also have licensees that distribute our content on the wireless platform internationally. Demand for wireless content is increasing as technology and consumer adoption continue to grow. Our current offerings include graphical images, video clips, mobile television, ringtones and games. We also create integrated cross-platform mobile marketing and promotions to leverage opportunities across our businesses. The Playboy-branded e-commerce websites, PlayboyStore.com and ShopTheBunny.com, combined with their respective Playboy and BUNNYshop Catalogs, offer customers the ability to purchase Playboy-branded fashions, calendars, DVDs, jewelry, collectibles, back issues of Playboy magazine and special editions, as well as select non-Playboy-branded products. We outsourced these businesses to a third party in early 2008 while retaining significant creative control. This outsourcing arrangement allows us to earn a high-margin and profitable royalty on sales with a minimum guarantee. Our Spice-branded e-commerce website, SpiceTVStore.com, and the Spice Catalog were outsourced in 2006 and we continue to earn a royalty on product sales. Other Businesses Playboy Radio is a 24-hour Playboy-branded radio channel available on SIRIUS Satellite Radio. The channel features new and exclusive Playboy content and leverages our entertainment assets by expanding our audience of Playboy consumers to the satellite radio platform. Alta Loma Entertainment functions as a mainstream production company. It leverages our assets, including editorial material and the Playboy brand, as well as icons such as the Playmates, the Playboy Mansion and Hugh M. Hefner, our Editor-In-Chief and Chief Creative Officer, or Mr. Hefner, to develop, co-produce and/or license original programming, such as the top-rated The Girls Next Door on E! Entertainment Television, and motion pictures, such as The House Bunny and Miss March. Competition Competition among television programming providers is intense for both channel space and viewer spending. Our competition varies in both the type and quality of programming offered, but consists primarily of other premium pay services, such as general-interest premium channels and other adult movie pay services. We compete with other pay services as we attempt to obtain or renew carriage with DTH operators and cable affiliates; negotiate fee arrangements; negotiate for VOD and SVOD rights; and market our programming to consumers through these operators. Over the past several years, all of the competitive factors described above have adversely impacted us, as has consolidation among cable systems, which has resulted in fewer, but larger, operators. The availability of, and price pressure from, more explicit content on the Internet and more pay television options, both mainstream and adult, also present a significant competitive challenge. 8 As a result of VOD's lower cost of entry for programmers compared to linear networks and capacity constraints disappearing, operators are focusing on VOD and eliminating linear networks. The market has therefore become significantly more competitive, resulting in a decrease in our overall shelf space. We encourage distributors to increase their efforts to market the full range of Playboy PPV, VOD, SVOD and PPM platforms to consumers with particular emphasis on the value of PPM. Our strategy with respect to Spice is to improve access to our content while being increasingly cost conscious. We also face competition in international markets from both the availability and prevalence of adult content on free television, specifically in Europe, as well as competitive pay services. As in the U.S., there are often low costs of entry, which yield increasing competition, especially from companies in Asia and parts of Europe providing local content as opposed to dubbed U.S. programming. Playboy's online business and the Internet in general are highly competitive. Playboy's online properties compete with other Internet sites for users and for advertisers, and in particular our premium online clubs compete for paying subscribers with other premium online providers. Factors that affect our ability to compete online include the quality of our content, the overall usability of our websites, the relative ranking of our websites in the major online search engines, the efficacy of our sales and marketing efforts, and the recognition, perception and consideration of our brands. Playboy develops new features, functionality and technology around these factors to remain competitive and to keep users engaged with Playboy's online properties. PUBLISHING GROUP Our Publishing Group operations include the publication of Playboy magazine, special editions and other domestic publishing businesses, including books and calendars, and the licensing of international editions of Playboy magazine. Domestic Magazine Founded by Mr. Hefner in 1953, Playboy magazine plays a key role in driving the continued popularity and recognition of the Playboy brand. Playboy magazine is the best-selling monthly men's magazine in the world based on the combined circulation of the U.S. and international editions. In 2008, circulation of the U.S. edition was approximately 2.6 million copies monthly, while the combined average circulation of the 26 licensed international editions was approximately 0.9 million copies monthly. According to fall 2008 data published by the independent market research firm of Mediamark Research, Inc., or MRI, approximately one in every 10 men in the United States aged 18 to 34 reads the U.S. edition of Playboy magazine. Playboy magazine is a general-interest magazine, targeted to men, with a reputation for excellence founded on its high-quality photography, entertainment, humor, cartoons and articles on current issues, interests and trends. Playboy magazine consistently includes in-depth, candid interviews with high-profile political, business, entertainment and sports figures, pictorials of famous women, content by leading authors, and the work of top photographers, writers and artists. Playboy magazine also features lifestyle articles on consumer electronics and other products, fashion and automobiles and covers the worlds of sports and entertainment. According to the independent audit agency Audit Bureau of Circulations, or ABC, for the six months ended December 31, 2008, Playboy magazine was the 17th highest-ranking U.S. consumer publication in terms of circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers). Playboy magazine's circulation rate base for the same period was greater than each of Maxim, GQ and Esquire. To better reflect changes in how and where media is consumed and in response to the economic challenges of the changing magazine landscape, we lowered our magazine circulation rate base effective with the January 2008 issue to 2.6 million from 3.0 million. Playboy magazine has historically generated approximately two-thirds of its revenues from subscription and newsstand circulation, with the remainder primarily from advertising. Subscription copies represent approximately 93% of total copies sold. According to MRI, the median age of male Playboy magazine readers is 35, with a median annual household income of approximately $59,000, a demographic that we believe is also attractive to advertisers. We also derive revenues from the rental of Playboy magazine's subscriber list. We attract new subscribers to Playboy magazine through our own direct mail advertising campaigns, subscription agent campaigns and the Internet, including Playboy.com. Subscription copies of the magazine are 9 delivered through the United States Postal Service as periodical mail. We attempt to contain these costs through presorting and other methods. Playboy magazine is also available as a digital edition. Digital copies are delivered to subscribers via the Internet. Digital copies may also be purchased on a single-issue basis. Playboy magazine is one of the highest priced magazines in the U.S. The basic U.S. newsstand cover price is $5.99 ($6.99 for the December 2008 and January 2009 holiday issues). We generally increase the newsstand cover price by $1.00 when there is a feature of special appeal, and we price test from time to time. Playboy magazine targets a wide range of advertisers. The following table sets forth advertising by category, as a percent of total advertising pages, and the total number of advertising pages: Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Category 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------- Retail/Direct response 26% 29% 28% Beer/Wine/Liquor 25 28 21 Tobacco 15 13 13 Automotive and automotive-related 12 6 8 Toiletries/Cosmetics 6 1 4 Other 16 23 26 - ------------------------------------------------------------------------------- Total 100% 100% 100% - ------------------------------------------------------------------------------- Total advertising pages 428 460 429 =============================================================================== We continue to focus on securing new advertisers, including expanding advertising in underserved categories. We publish the U.S. edition of Playboy magazine in 15 advertising editions: one upper income zip-coded, eight regional, two state and four metropolitan editions. All contain the same editorial material but provide targeting opportunities for advertisers. We implemented 4%, 4% and 5% cost per thousand increases in advertising rates effective with the January 2009, 2008 and 2007 issues, respectively. Playboy magazine subscriptions are serviced by Communications Data Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement, CDS performs a variety of services, including processing orders or transactions; receiving, verifying, balancing and depositing payments from subscribers; printing forms and promotional materials; maintaining master files on all subscribers; issuing bills and renewal notices to subscribers; generating labels; resolving customer service complaints as directed by us; and furnishing various reports that enable us to monitor and to account for all aspects of the subscription operations. The term of our subscription fulfillment agreement expires June 30, 2011. Either party may terminate the agreement prior to expiration in the event of material nonperformance by, or insolvency of, the other party. We pay CDS specified fees and charges based on the types and amounts of service performed under the agreement. The fees and charges increase annually based on the consumer price index to a maximum of 6% in one year. Domestic distribution of Playboy magazine and special editions to newsstands and other retail outlets is accomplished through Time/Warner Retail Sales and Marketing, or TWRSM. The copies are shipped in bulk to wholesalers, who are responsible for local retail distribution. We receive a substantial cash advance from TWRSM 30 days after the date each issue goes on sale. We recognize revenues from newsstand sales based on estimated copy sales at the time each issue goes on sale and adjust for actual sales upon settlement with TWRSM. Revenue adjustments have not been material. Retailers return unsold copies to wholesalers, who count and then shred the returned copies and report the returns by affidavit. The number of copies sold on newsstands varies from month to month, depending in part on consumer interest in the cover, the pictorials and the editorial features. Our current agreement with TWRSM expires in January 2012. Playboy magazine and special editions are printed by Quad/Graphics, Inc., or Quad, at a single site, which ships the products to subscribers and wholesalers. The print runs vary each month based on expected sales and are determined with input from TWRSM. Paper is the principal raw material used in the production of these publications. We use a variety of types of high-quality coated and uncoated papers that are purchased from a number of suppliers around the world. 10 International Magazine We license the right to publish international editions of Playboy magazine in the following 26 countries: Argentina, Brazil, Bulgaria, Colombia, Croatia, the Czech Republic, Estonia, France, Germany, Greece, Hungary, Italy, Lithuania, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Spain, Ukraine and Venezuela. Local publishing licensees tailor their international editions by mixing the work of their national writers and artists with editorial and pictorial content from the U.S. edition. We monitor the content of the international 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 license agreements vary, but in general are for terms of three to 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 based on both circulation and advertising revenues. The German and Brazilian editions accounted for approximately one-half of our total revenues from international editions in each of 2008, 2007 and 2006. Special Editions and Other We have created media extensions, such as special editions and calendars, which are primarily sold in newsstand outlets. We published 25 special editions in each of 2008, 2007 and 2006, and we expect to publish the same number in 2009. The U.S. newsstand cover price for special editions increased to $10.99 from $9.99 effective with the issues on newsstands in January 2009. We also license rights to third parties to publish books for which we receive royalties. Competition Magazine publishing companies face intense competition for readers, advertisers and retail shelf space. Magazines and Internet sites primarily aimed at men are Playboy magazine's principal competitors. Other types of media that carry advertising, particularly cable and broadcast television, also compete with Playboy magazine for advertising revenues. Levels of advertising revenues may be affected by, among other things, competition for and spending by advertisers, general economic activity and governmental regulation of advertising content, such as tobacco products. Since only approximately one-third of Playboy magazine's revenues and less than 10% of our total revenues are from Playboy magazine advertising, we are not overly dependent on this source of revenue. LICENSING GROUP Our Licensing Group operations include the licensing of consumer products carrying one or more of our trademarks and/or images, Playboy-branded retail stores, multifaceted location-based entertainment venues and certain revenue-generating marketing activities. We license the Playboy name, the Rabbit Head Design and other images, trademarks and artwork for the worldwide manufacture, sale and distribution of a multitude of consumer products. We work with our licensees to develop, market and distribute high-quality Playboy-branded merchandise. Our licensed product lines include men's and women's apparel, men's underwear and women's lingerie, accessories, collectibles, cigars, watches, jewelry, fragrances, shoes, luggage, bath and body products, small leather goods, stationery, music, eyewear, barware, home fashions and slot machines. We continually seek to license our brand name and images in new markets and retail categories. The group also licenses art-related products based on our extensive art collection, most of which was originally commissioned as illustrations for Playboy magazine. Occasionally, we sell small portions of our art and memorabilia collection. Playboy-branded merchandise is marketed primarily through retail outlets, including department and specialty stores, as well as through e-commerce websites and catalogs. In the fourth quarter of 2008, we acquired and now own and operate a Playboy-branded retail store in Las Vegas. We also license Playboy-branded retail stores with locations in Auckland, Bangkok, Hong Kong, Kuala Lumpur, Las Vegas, London and Melbourne. Our licensing activities also include multifaceted location-based entertainment venues. Our first such venue located at the Palms Casino Resort in Las Vegas opened in 2006. Our venture partner provided the funding for all of the Playboy elements, which include a 30-foot-tall Rabbit Head on the exterior of one of their towers, a nightclub, a boutique casino and lounge, a retail store and a sky villa hotel suite. We contributed the Playboy brand and trademarks as well as marketing support. In 2007, we announced a joint venture with Macao Studio City for a 11 Playboy-branded entertainment destination in Macao, which will include nightlife and entertainment options, dining, specialty retail elements and a Hugh M. Hefner Villa. This venue is expected to open in 2010. Company-wide marketing events, which promote brand awareness, are approximately break-even and include the Playboy Jazz Festival and Playmate Promotions. We have produced the Playboy Jazz Festival on an annual basis in Los Angeles at the Hollywood Bowl since 1979 and continue our sponsorship of related community events. Playmate Promotions represents the Playmates in advertising campaigns, trade shows, endorsements, commercials, motion pictures, television and videos. While our branded products are unique, the licensing business is intensely competitive and is extremely sensitive to economic conditions, shifts in consumer buying habits, fashion and lifestyle trends and changes in the global retail sales environment. PROMOTIONAL AND OTHER ACTIVITIES We believe that our sales of products and services are enhanced by public recognition of the Playboy brand as symbolic of a lifestyle. In order to establish public recognition, we, among other activities, purchased in 1971 the Playboy Mansion in Los Angeles, California, where Mr. Hefner lives. The Playboy Mansion is used for various corporate activities and serves as a valuable location for motion picture and television production, magazine photography and for online, advertising, marketing and sales events. It also enhances our image, as we host many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition, which increases public awareness of us and our products and services. The Playboy Foundation seeks to foster social change by providing support to nonprofit organizations that preserve and encourage open communication about human sexuality, reproductive health and rights, protecting civil rights and civil liberties in the United States for all people, people affected by HIV/AIDS, eliminating censorship and protecting freedom of expression and First Amendment rights. Our trademarks, copyrights and online domain names are critical to the success and growth potential of all of our businesses. We actively protect and defend them throughout the world and monitor the marketplace for counterfeit products, including by initiating legal proceedings, when warranted, to prevent their unauthorized use. EMPLOYEES We employed 626 full-time employees at February 27, 2009 compared to 789 at February 29, 2008. No employees are represented by collective bargaining agreements. We believe we maintain a satisfactory relationship with our employees. AVAILABLE INFORMATION We make available free of charge on our website, PlayboyEnterprises.com, our annual, quarterly and current reports, and, if applicable, amendments to those reports, filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Also posted on our website are the charters of the Audit Committee and Compensation Committee of our Board of Directors, our Code of Business Conduct and our Corporate Governance Guidelines. Copies of these documents are available free of charge by sending a request to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. As required under Section 302 of the Sarbanes-Oxley Act of 2002, the certifications of our Chief Executive Officer and Chief Financial Officer are filed as exhibits to this Annual Report on Form 10-K. In addition, we submitted to the New York Stock Exchange, or the Exchange, the required annual certifications of our Chief Executive Officer relating to compliance by us with the Exchange's corporate governance listing standards. Copies of these certifications are available to stockholders free of charge by sending a request to Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. 12 Item 1A. Risk Factors - --------------------- In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be carefully considered in evaluating our business and us. We may not be able to protect our intellectual property rights. We believe that our trademarks, particularly the Playboy name and Rabbit Head Design, and other proprietary rights are critical to our success, growth potential and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and other proprietary rights. Our actions to establish and protect our trademarks and other proprietary rights, however, may not prevent imitation of our products by others or prevent others from claiming violations of their trademarks and proprietary rights by us. Any infringement or related claims, even if not meritorious, may be costly and time-consuming to litigate, may distract management from other tasks of operating the business and may result in the loss of significant financial and managerial resources, which could harm our business, financial condition or operating results. These concerns are particularly relevant with regard to those international markets, such as China, in which it is especially difficult to enforce intellectual property rights. Failure to maintain our agreements with multiple system operators, or MSOs, and DTH operators on favorable terms could adversely affect our business, financial condition or results of operations. We currently have agreements with all of the largest MSOs in the United States. We also have agreements with the principal DTH operators in the United States and Canada. Our agreements with these operators may be terminated on short notice without penalty. If one or more MSOs or DTH operators terminate or do not renew these agreements, or do not renew them on terms as favorable as those of current agreements, our business, financial condition or results of operations could be materially adversely affected. In addition, competition among television programming providers is intense for both channel space and viewer spending. Our competition varies in both the type and quality of programming offered, but consists primarily of other premium pay services, such as general-interest premium channels, and other adult movie pay services. We compete with other pay services as we attempt to obtain or renew carriage with DTH operators and individual cable affiliates, negotiate fee arrangements with these operators, negotiate for VOD and SVOD rights and market our programming through these operators to consumers. The competition with programming providers has intensified as a result of consolidation in the DTH and cable systems industries, which has resulted in fewer, but larger, operators. Competition has also intensified with VOD's lower cost of entry for programmers compared to linear networks and with capacity constraints disappearing. The impact of industry consolidation, any decline in our access to and acceptance by DTH and/or cable systems and the possible resulting deterioration in the terms of agreements, cancellation of fee arrangements or pressure on margin splits with operators of these systems could adversely affect our business, financial condition or results of operations. Limits on our access to satellite transponders could adversely affect our business, financial condition or results of operations. Our cable television and DTH operations require continued access to satellite transponders to transmit programming to cable and DTH operators. Material limitations on our access to these systems or satellite transponder capacity could materially adversely affect our business, financial condition or results of operations. Our access to transponders may also be restricted or denied if: o we or the satellite transponder providers are indicted or otherwise charged as a defendant in a criminal proceeding; o the Federal Communications Commission issues an order initiating a proceeding to revoke the satellite owner's authorization to operate the satellite; o the satellite transponder providers are ordered by a court or governmental authority to deny us access to the transponder; o we are deemed by a governmental authority to have violated any obscenity law; or o the satellite transponder providers fail to provide the required services. In addition to the above, the access of Playboy TV, the Spice Digital Networks and our other networks to transponders may be restricted or denied if a governmental authority commences an investigation or makes an 13 adverse finding concerning the content of their transmissions. Technical failures may also affect our satellite transponder providers' ability to deliver transmission services. We are subject to risks resulting from our operations outside the United States, and we face additional risks and challenges as we continue to expand internationally. The international scope of our operations may contribute to volatile financial results and difficulties in managing our business. For the year ended December 31, 2008, we derived approximately 32% of our consolidated revenues from countries outside the United States. Our international operations expose us to numerous challenges and risks, including, but not limited to, the following: o adverse political, regulatory, legislative and economic conditions in various jurisdictions; o costs of complying with varying governmental regulations; o fluctuations in currency exchange rates; o difficulties in developing, acquiring or licensing programming and products that appeal to a variety of audiences and cultures; o scarcity of attractive licensing and joint venture partners; o the potential need for opening and managing distribution centers abroad; and o difficulties in protecting intellectual property rights in foreign countries. In addition, important elements of our business strategy, including capitalizing on advances in technology, expanding distribution of our products and content and leveraging cross-promotional marketing capabilities, involve a continued commitment to expanding our business internationally. This international expansion will require considerable management and financial resources. We cannot assure you that one or more of these factors or the demands on our management and financial resources would not harm any current or future international operations and our business as a whole. Any inability to identify, fund investment in and commercially exploit new technology could have a material adverse impact on our business, financial condition or results of operations. We are engaged in businesses that have experienced significant technological changes over the past several years and are continuing to undergo technological changes. Our ability to implement our business plan and to achieve the results projected by management will depend on management's ability to anticipate technological advances and implement strategies to take advantage of future technological changes. Any inability to identify, fund investment in and commercially exploit new technology or the commercial failure of any technology that we pursue, such as Internet and wireless, could result in our businesses becoming burdened by obsolete technology and could have a material adverse impact on our business, financial condition or results of operations. Our online operations are subject to security risks and systems failures. Online security breaches could materially adversely affect our business, financial condition or results of operations. Any well-publicized compromise of security could deter use of the Internet in general or use of the Internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials in particular. In offering online payment services, we may increasingly rely on technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information such as customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could compromise or breach the algorithms that we use to protect our customers' transaction data. If third parties are able to penetrate our network security or otherwise misappropriate confidential information, we could be subject to liability, which could result in litigation. In addition, experienced programmers or "hackers" may attempt to misappropriate proprietary information or cause interruptions in our services that could require us to expend significant capital and resources to protect against or remediate these problems. Increased scrutiny by regulatory agencies, such as the Federal Trade Commission and state agencies, of the use of customer information could also result in additional expenses if we are obligated to reengineer systems to comply with new regulations or to defend investigations of our privacy practices. The uninterrupted performance of our computer systems is critical to the operations of our websites. Our computer systems are located at external third-party sites, and, as such, may be vulnerable to fire, loss of power, 14 telecommunications failures and other similar catastrophes. In addition, we may have to restrict access to our websites to solve problems caused by computer viruses or other system failures. Our customers may become dissatisfied by any disruption or failure of our computer systems that interrupts our ability to provide our content. Repeated system failures could substantially reduce the attractiveness of our websites and/or interfere with commercial transactions, negatively affecting our ability to generate revenues. Our websites must accommodate a high volume of traffic and deliver regularly-updated content. Our sites have, on occasion, experienced slow response times and network failures. These types of occurrences in the future could cause users to perceive our websites as not functioning properly and therefore induce them to frequent websites other than ours. We are also subject to risks from failures in computer systems other than our own because our customers depend on their own Internet service providers for access to our sites. Our revenues could be negatively affected by outages or other difficulties customers experience in accessing our websites due to Internet service providers' system disruptions or similar failures unrelated to our systems. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our Internet systems or the systems of our customers' Internet service providers. Piracy of our television networks, programming and photographs could materially reduce our revenues and adversely affect our business, financial condition or results of operations. The distribution of our subscription programming by MSOs, DTH operators and Telcos requires the use of encryption technology to assure that only those who pay can receive programming. It is illegal to create, sell or otherwise distribute mechanisms or devices to circumvent that encryption. Nevertheless, theft of subscription television programming has been widely reported. Theft of our programming reduces future potential revenue. In addition, theft of our competitors' programming can also increase our churn rate. Although MSOs, DTH operators and Telcos continually review and update their conditional access technology, there can be no assurance that they will be successful in developing or acquiring the technology needed to effectively restrict or eliminate signal theft. Additionally, the development of emerging technologies, including the Internet and online services, poses the risk of making piracy of our intellectual property more prevalent. Digital formats, such as the ones we use to distribute our programming through MSOs, DTH operators, Telcos and the Internet, are easier to copy, download or intercept. As a result, users can download, duplicate and distribute unauthorized copies of copyrighted programming and photographs over the Internet or other media, including DVDs. As long as pirated content is available, consumers could choose to download or purchase pirated intellectual property rather than pay to subscribe to our services or purchase our products. National consolidation of the single-copy magazine distribution system may adversely affect our ability to obtain favorable terms on the distribution of Playboy magazine and special editions and may lead to declines in profitability and circulation. In the past decade, the single-copy magazine distribution system has undergone a dramatic consolidation from more than 180 independent distribution owners to just three large wholesalers that handle the majority of the single-copy distribution business. Currently, we rely on a single national distributor, TWRSM, for the distribution of Playboy magazine and special editions to newsstands and other retail outlets. As a result of this industry consolidation, we face increasing pressure to lower the prices we charge to wholesalers and increase our sell-through rates. If we are forced to lower the prices we charge wholesalers, we may experience declines in revenue. If we are unable to meet targeted sell-through rates, we may incur greater expenses in the distribution process. The combination of these factors could negatively impact the profitability and newsstand circulation for Playboy magazine and special editions. If we are unable to generate revenues from advertising and sponsorships, or if we were to lose our large advertisers or sponsors, our business would be harmed. If companies perceive Playboy magazine, Playboy.com or any of our other free websites to be limited or ineffective advertising mediums, they may be reluctant to advertise in our products or to be our sponsors. Our ability to generate significant advertising and sponsorship revenues depends upon several factors, including, among others, the following: o our ability to maintain a large, demographically attractive subscriber base for Playboy magazine and Playboy.com and any of our other free websites; o our ability to offer attractive advertising rates; o our ability to attract advertisers and sponsors; and 15 o our ability to provide effective advertising delivery and measurement systems. Our advertising revenues are also dependent on the level of spending by advertisers, which is impacted by a number of factors beyond our control, including general economic conditions, changes in consumer purchasing and viewing habits and changes in the retail sales environment. Our existing competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources than we do. These companies may be able to undertake more extensive marketing campaigns, adopt aggressive advertising pricing policies and devote substantially more resources to attracting advertising customers. We rely on third parties for domestic satellite transmission and other services, to service our Playboy magazine subscriptions and to print and distribute the magazine and special editions. We also rely on third parties to operate our e-commerce and catalog businesses. If these third parties fail to perform, our business could be harmed. We rely on BFI for satellite transmission services (including compression, uplink and playback) for our domestic cable channels. We rely on CDS to service Playboy magazine subscriptions. The magazine and special editions are printed by Quad at a single site, which ships the product to subscribers and wholesalers. We rely on a single national distributor, TWRSM, for the distribution of Playboy magazine and special editions to newsstands and other retail outlets. We rely on eFashion Solutions, LLC and other third parties to operate our e-commerce and catalog businesses. If any of these third parties is unable to or does not perform and we are unable to find alternative services in a timely fashion, our business could be adversely affected. Increases in paper prices or postal rates could adversely affect our operating performance. Paper costs are a substantial component of the manufacturing and direct marketing expenses of our publishing business. The market for paper has historically been cyclical, resulting in volatility in paper prices. An increase in paper prices could materially adversely affect our operating performance unless and until we can pass any increases through to the consumer. The cost of postage also affects the profitability of Playboy magazine. An increase in postage rates could materially adversely affect our operating performance unless and until we can pass the increase through to the consumer. If we experience a significant decline in our circulation rate base, our results could be adversely affected. According to ABC, Playboy magazine was the 17th highest-ranking U.S. consumer publication in terms of circulation rate base for the six months ended December 31, 2008. Our circulation is primarily subscription driven, with subscription copies comprising approximately 93% of total copies sold. If we either experience a significant decline in subscriptions because we lose existing subscribers or do not attract new subscribers, our results could be adversely affected. We may not be able to compete successfully with direct competitors or with other forms of entertainment. We derive a significant portion of our revenues from subscriber-based fees, advertising and licensing, for which we compete with various other media, including magazines, newspapers, television, radio, Internet websites and event or event sponsorships that offer customers information and services similar to those that we provide. We also compete with providers of alternative leisure-time activities and media. Competition could result in price reductions, reduced margins or loss of market share, any of which could have a material adverse effect on our business, financial condition or results of operations. We face competition on both country and regional levels. In addition, each of our businesses competes with companies that deliver content through the same platforms. Many of our competitors, including large entertainment and media enterprises, have greater financial and human resources than we do. We cannot assure you that we can remain competitive with companies that have greater resources or that offer alternative entertainment and information options. 16 Government regulations could adversely affect our business, financial condition or results of operations. Our businesses are regulated by governmental authorities in the countries in which we operate. Because of our international operations, we must comply with diverse and evolving regulations. Regulation relates to, among other things, licensing, access to satellite transponders, commercial advertising, subscription rates, foreign investment, Internet gaming, use of confidential customer information and content, including standards of decency/obscenity. Changes in the regulation of our operations or changes in interpretations of existing regulations by courts or regulators or our inability to comply with current or future regulations could adversely affect us by reducing our revenues, increasing our operating expenses and/or exposing us to significant liabilities. While we are not able to reliably predict particular regulatory developments that could affect us adversely, those regulations related to adult content, the Internet, privacy and commercial advertising illustrate some of the potential difficulties we face. o Adult content. Regulation of adult content could prevent us from making our content available in various jurisdictions or otherwise have a material adverse effect on our business, financial condition or results of operations. The governments of some countries, such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent foreign or "immoral" influences. Regulation aimed at limiting minors' access to adult content could also increase our cost of operations and introduce technological challenges, such as by requiring development and implementation of age verification systems. o Internet. Various governmental agencies are considering a number of legislative and regulatory proposals that may lead to laws or regulations concerning various aspects of the Internet, including online content, intellectual property rights, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. Regulation of the Internet could materially adversely affect our business, financial condition or results of operations by reducing the overall use of the Internet, reducing the demand for our services or increasing our cost of doing business. o Commercial advertising. We receive a significant portion of our advertising revenues from companies selling alcohol and tobacco products. For the year ended December 31, 2008, beer/wine/liquor and tobacco represented 25% and 15%, respectively, of the total advertising pages in Playboy magazine. Significant limitations on the ability of those companies to advertise in Playboy magazine or on our websites because of either legislative, regulatory or court action could materially adversely affect our business, financial condition or results of operations. In 1996, the Food and Drug Administration announced regulations that prohibited the publication of tobacco advertisements containing drawings, colors or pictures. While those regulations were later held unconstitutional by the Supreme Court of the United States, future attempts may be made by other federal agencies to impose similar or other types of advertising limitations. Our business involves risks of liability claims for media content, which could adversely affect our business, financial condition or results of operations. As a distributor of media content, we may face potential liability for: o defamation; o invasion of privacy; o negligence; o copyright or trademark infringement; and o other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against broadcasters, publishers, online services and other disseminators of media content. We could also be exposed to liability in connection with material available through our websites. Any imposition of liability that is not covered by insurance or is in excess of 17 insurance coverage could have a material adverse effect on us. In addition, measures to reduce our exposure to liability in connection with material available through our websites could require us to take steps that would substantially limit the attractiveness of our websites and/or their availability in various geographic areas, which would negatively affect their ability to generate revenues. Private advocacy group actions targeted at our content could result in limitations on our ability to distribute our products and programming and negatively impact our brand acceptance. Our ability to operate successfully depends on our ability to obtain and maintain distribution channels and outlets for our products. From time to time, private advocacy groups have sought to exclude our programming from local pay television distribution because of the adult-oriented content of the programming. In addition, from time to time, private advocacy groups have targeted Playboy magazine and its distribution outlets and advertisers, seeking to limit the magazine's availability because of its adult-oriented content. In addition to possibly limiting our ability to distribute our products and programming, negative publicity campaigns, lawsuits and boycotts could negatively affect our brand acceptance and cause additional financial harm by requiring that we incur significant expenditures to defend our business or by discouraging investors from investing in our securities. In pursuing selective acquisitions, we may incur various costs and liabilities and we may never realize the anticipated benefits of the acquisitions. If appropriate opportunities become available, we may acquire businesses, products or technologies that we believe are strategically advantageous to our business. Transactions of this sort could involve numerous risks, including: o unforeseen operating difficulties and expenditures arising from the process of integrating any acquired business, product or technology, including related personnel; o diversion of a significant amount of management's attention from the ongoing development of our business; o dilution of existing stockholders' ownership interest in us; o incurrence of additional debt; o exposure to additional operational risk and liability, including risks arising from the operating history of any acquired businesses; o entry into markets and geographic areas where we have limited or no experience; o loss of key employees of any acquired companies; o adverse effects on our relationships with suppliers and customers; and o adverse effects on the existing relationships of any acquired companies, including suppliers and customers. Furthermore, we may not be successful in identifying appropriate acquisition candidates or consummating acquisitions on terms favorable or acceptable to us or at all. When we acquire businesses, products or technologies, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. We may therefore fail to discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have responsibility as a successor to the seller or the target company. As a successor, we may be responsible for any past or continuing violations of law by the seller or the target company, including violations of decency laws. Although we generally attempt to seek contractual protections, such as representations and warranties and indemnities, we cannot be sure that we will obtain such provisions in our acquisitions or that such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the scope, duration or amount of the seller's indemnification obligations. Our significant debt could adversely affect our business, financial condition or results of operations. We have a significant amount of debt. At December 31, 2008, we had total financing obligations of $115.0 million, all of which consisted of our 3.00% convertible senior subordinated notes due 2025, or convertible notes. In addition, we had a $50.0 million revolving credit facility, which was reduced to $30.0 million in February 2009. At 18 February 27, 2009, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $29.2 million of available borrowings under this facility. The amount of our existing and future debt could adversely affect us in a number of ways, including the following: o we may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes; o debt-service requirements could reduce the amount of cash we have available for other purposes; and o we could be disadvantaged as compared to our competitors, such as in our ability to adjust to changing market conditions. Our ability to make payments of principal and interest on our debt depends upon our future performance, general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are not able to generate sufficient cash flow from operations in the future to service our debt, we may be required, among other things: o to seek additional financing in the debt or equity markets; o to refinance or restructure all or a portion of our debt; and/or o to sell assets. These measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms. The terms of our credit facility impose restrictions on us that may affect our ability to successfully operate our business. Our credit facility contains covenants that limit our actions. These covenants could materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities that may be in our best interests. The covenants restrict our ability to, among other things: o incur or guarantee additional indebtedness; o repurchase capital stock; o repurchase convertible notes; o make loans and investments; o enter into agreements restricting our subsidiaries' abilities to pay dividends; o create liens; o sell or otherwise dispose of assets; o enter new lines of business; o merge or consolidate with other entities; and o engage in transactions with affiliates. The credit facility also contains financial covenants requiring us to maintain specified minimum net worth and interest coverage ratios. Our ability to comply with these covenants and requirements may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations, and if such events occur, we cannot be sure that we will be able to comply. We depend on our key personnel. We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of some of our senior management team. If these members of the management team become unable or unwilling to continue in their present positions, our business, financial condition or results of operations could be materially adversely affected. 19 Ownership of Playboy Enterprises, Inc. is concentrated. As of December 31, 2008, Mr. Hefner beneficially owned 69.53% of our Class A common stock. As a result, given that our Class B stock is nonvoting, Mr. Hefner possesses influence on matters including the election of directors as well as transactions involving a potential change of control. Mr. Hefner may support, and cause us to pursue, strategies and directions with which holders of our securities disagree. The concentration of our share ownership may delay or prevent a change in control, impede a merger, consolidation, takeover or other transaction involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. Changes in economic conditions could adversely affect the profitability of our business. The global economy is currently experiencing a significant contraction, with an almost unprecedented lack of availability of commercial and consumer credit. This current decrease and any future decrease in economic activity in the U.S. or in other regions of the world in which we do business could significantly and adversely affect our results of operations and financial condition. This contraction could cause a decline in spending by consumers and advertisers, reduce demand for our products and have a material adverse impact on our business, financial condition or results of operations. In addition, we currently fulfill a portion of our liquidity requirements from operating cash flows. Our ability to generate cash flows to meet these requirements could be adversely affected by a continued decline in economic conditions. Adverse real estate market conditions could adversely affect our ability to sublease excess space. Our ability to sublet our excess space in New York City and Santa Monica, California may be negatively impacted by the market for commercial rental real estate and economic conditions in those cities as well as in the national and global economy generally. If we are unable to sublease our excess space, this could negatively impact our results of operations and cash flows. Adverse securities and credit market conditions may significantly affect our ability to access the capital and credit markets and could harm our financial position. The securities and credit markets have been experiencing extreme volatility and disruption. In some cases, the markets have limited the availability of funds and increased the costs associated with issuing debt instruments. Our access to additional financing will depend on a variety of factors, such as these market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to our industry and our credit ratings. If any of these events were to occur, our internal sources of liquidity may prove to be insufficient, and, in such case, we may not be able to obtain additional financing on favorable terms, which could have an impact on our ability to refinance credit facilities or maturing debt or to react to changing economic and business conditions. If we do not meet the continued listing requirements of the New York Stock Exchange, or NYSE, our common stock may be delisted. Our common stock is listed on the NYSE, which maintains continued listing requirements relating to, among other things, market capitalization and minimum stock price. The market capitalization requirements provide that the NYSE may take action to delist our common stock if our average global market capitalization for 30 consecutive trading days is less than $75.0 million and, at the same time, our total stockholders' equity is less than $75.0 million, in which case we would expect to have up to 18 months to take corrective action before our stock would be delisted. The market capitalization requirements further provide that the NYSE will promptly initiate suspension and delisting procedures with respect to our common stock if our global market capitalization for 30 consecutive trading days is less than $15.0 million (until June 30, 2009, when this requirement will increase to $25.0 million), in which case we would not be eligible to utilize the cure procedures provided by the NYSE in other circumstances. The minimum stock price requirements of the NYSE provide that the NYSE may take action to delist our common stock if the average closing price of our common stock is less than $1.00 for 30 consecutive trading days, in which case we would expect to have six months to take corrective action before our common stock would be delisted. The NYSE has temporarily suspended its $1.00 minimum stock price requirement until June 30, 2009. There can be no assurance that we will meet the NYSE's continued listing standards or that the NYSE will not act to suspend trading in our common stock and initiate delisting procedures. The suspension and delisting of our common stock by the NYSE and the movement of trading of our common stock to another securities exchange or 20 over-the-counter market could materially adversely impact our business and liquidity and the price of our common stock. It could, among other things, reduce our stockholders' ability to buy and sell our common stock, reduce the number of investors willing to hold or acquire our common stock, or inhibit our ability to arrange financing or access the public capital markets. Item 1B. Unresolved Staff Comments - ---------------------------------- None. Item 2. Properties - ------------------
Location Primary Use - -------- ----------- Office Space Leased: Chicago, Illinois This space serves as our corporate headquarters and is used by all of our operating groups and executive and administrative personnel. London, England This space is used by our Playboy TV U.K. executive and administrative personnel and as a programming facility. Los Angeles, California This space serves as our Entertainment Group's headquarters and is utilized by executive and administrative personnel. New York, New York This space serves as our Publishing and Licensing Groups' headquarters, and the Entertainment Group and executive and administrative personnel use a limited amount of space. We intend to vacate and sublease this space and relocate these functions primarily to our Chicago office. Operations Facilities Leased: Las Vegas, Nevada This space is used by our Licensing Group as a retail store for the sale of Playboy-branded merchandise. Los Angeles, California We began subleasing this production facility to BFI in 2008. This facility, under separate agreements with BFI, is used as a centralized digital, technical and programming facility in support of our Entertainment Group. This facility was formerly used by us in the same capacities. Santa Monica, California This space is used by our Publishing Group as a photography studio and offices. We intend to vacate and sublease this space and relocate these functions primarily to our Los Angeles office. Property Owned: Los Angeles, California The Playboy Mansion is used for various corporate activities and serves as a valuable location for motion picture and television production, magazine photography and for online, advertising and sales events. It also enhances our image as host for many charitable and civic functions.
21 Item 3. Legal Proceedings - ------------------------- On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state court in Hidalgo County, Texas, against Editorial Caballero SA de CV, or EC, Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants, and us. In the complaint, Gongora alleged that he was injured as a result of the termination of a publishing license agreement, or the License Agreement, between us and EC for the publication of a Mexican edition of Playboy magazine, or the Mexican Edition. We terminated the License Agreement on or about January 29, 1998, due to EC's failure to pay royalties and other amounts due us under the License Agreement. On February 18, 1998, the Editorial Defendants filed a cross-claim against us. Gongora alleged that in December 1996 he entered into an oral agreement with the Editorial Defendants to solicit advertising for the Mexican Edition to be distributed in the United States. The basis of GSI's cross-claim was that it was the assignee of EC's right to distribute the Mexican Edition in the United States and other Spanish-speaking Latin American countries outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI and EC were awarded $4.1 million in out-of-pocket expenses and approximately $0.3 million for lost profits, even though the jury found that EC had failed to comply with the terms of the License Agreement. On October 24, 2002, the trial court signed a judgment against us for $4.4 million plus pre- and post-judgment interest and costs. On November 22, 2002, we filed post-judgment motions challenging the judgment in the trial court. The trial court overruled those motions and we vigorously pursued an appeal with the State Appellate Court sitting in Corpus Christi challenging the verdict. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest, in connection with the appeal. On May 25, 2006, the State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of the plaintiffs' claims and remanded the remaining claims for a new trial. On July 14, 2006, the plaintiffs filed a motion for rehearing and en banc reconsideration, which we opposed. On October 12, 2006, the State Appellate Court denied plaintiffs' motion. On December 27, 2006, we filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims will be retried. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be obtained. In accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, or Statement 5, no liability has been accrued. On May 17, 2001, Logix Development Corporation, or Logix, D. Keith Howington and Anne Howington filed suit in state court in Los Angeles County Superior Court in California against Spice Entertainment Companies, Inc., or Spice, Emerald Media, Inc., or EMI, Directrix, Inc., or Directrix, Colorado Satellite Broadcasting, Inc., New Frontier Media, Inc., J. Roger Faherty, or Faherty, Donald McDonald, Jr., and Judy Savar. On February 8, 2002, plaintiffs amended the complaint and added as a defendant Playboy Enterprises, Inc., or Playboy, which acquired Spice in 1999. The complaint alleged 11 contract and tort causes of action arising principally out of a January 18, 1997, agreement between EMI and Logix in which EMI agreed to purchase certain explicit television channels broadcast over C-band satellite. The complaint further sought damages from Spice based on Spice's alleged failure to provide transponder and uplink services to Logix. Playboy and Spice filed a motion to dismiss the plaintiffs' complaint. After pre-trial motions, Playboy was dismissed from the case and a number of causes of action were dismissed against Spice. A trial date for the remaining breach of contract claims against Spice was set for December 10, 2003, and then continued, first to February 11, 2004, and then to March 17, 2004. Spice and the plaintiffs filed cross-motions for summary judgment or, in the alternative, for summary adjudication, on September 5, 2003. Those motions were heard on November 19, 2003, and were denied. In February 2004, prior to the trial, Spice and the plaintiffs agreed to a settlement in the amount of $8.5 million, which we recorded as a charge in 2003. We paid $1.0 million, $1.0 million and $6.5 million in 2006, 2005 and 2004, respectively. In 2004, we received a $5.6 million insurance recovery partially related to the prior year litigation settlement with Logix. On April 12, 2004, Faherty filed suit in the United States District Court for the Southern District of New York against Spice, Playboy, Playboy Enterprises International, Inc., or PEII, D. Keith Howington, Anne Howington and Logix. The complaint alleges that Faherty is entitled to statutory and contractual indemnification from Playboy, PEII and Spice with respect to defense costs and liabilities incurred by Faherty in the litigation described in the preceding paragraph, or the Logix litigation. The complaint further alleges that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix conspired to deprive Faherty of his alleged right to indemnification by excluding him from the settlement of the Logix litigation. On June 18, 2004, a jury entered a special verdict finding Faherty personally liable for $22.5 million in damages to the plaintiffs in the Logix litigation. A judgment was entered on the verdict on or around August 2, 2004. Faherty filed post-trial motions for a judgment notwithstanding the verdict and a new trial, but these motions were both denied on or about September 21, 2004. On October 20, 2004, Faherty filed 22 a notice of appeal from the verdict. As a result of rulings by the California Court of Appeal and the California Supreme Court as recently as February 13, 2008, Logix's recovery against Faherty has been reduced significantly, although certain portions of the case have been set for a retrial. In light of these rulings, however, when coupled with any offset as a result of the settlement of the Logix litigation, any ultimate net recovery by Logix against Faherty will be severely reduced and might be entirely eliminated. In consideration of this appeal, Faherty and Playboy have agreed to continue a temporary stay of the indemnification action filed in the United States District Court for the Southern District of New York through the end of December 2008. In late June 2008, plaintiffs in the Logix litigation filed a motion in the trial court seeking to amend a $40.0 million judgment previously entered on consent against defendant EMI seeking to add Faherty as a judgment debtor. In the event Faherty's indemnification and conspiracy claims go forward against us, we believe they are without merit and that we have good defenses against them. As such, based on the information known to us to date, we do not believe that it is probable that a material judgment against us will result. In accordance with Statement 5, no liability has been accrued. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None. 23 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and - -------------------------------------------------------------------------------- Issuer Purchases of Equity Securities - ------------------------------------- Stock price information, as reported in the New York Stock Exchange Composite Listing, is set forth in Note (W), Quarterly Results of Operations (Unaudited), to the Notes to Consolidated Financial Statements. Our securities are traded on the exchange listed on the cover page of this Annual Report on Form 10-K under the ticker symbols PLA A (Class A voting) and PLA (Class B nonvoting). At February 27, 2009, there were 3,293 and 10,788 holders of record of Class A common stock and Class B common stock, or Class B stock, respectively. There were no cash dividends declared during 2008, 2007 or 2006. The high and low sales prices for our common stock for each full quarterly period within the two most recent completed fiscal years are set forth in Note (W), Quarterly Results of Operations (Unaudited), to the Notes to Consolidated Financial Statements. As described in Note (P), Financing Obligations, to the Notes to Consolidated Financial Statements, in March 2005, we issued and sold in a private placement $115.0 million aggregate principal amount of our 3.00% convertible senior subordinated notes due 2025. The following graph sets forth the five-year cumulative total stockholder return on our Class B stock with the cumulative total stockholder return of the Russell 2000 Stock Index and with our peer group for the period from December 31, 2003, through December 31, 2008. The graph reflects $100 invested on December 31, 2003, in stock or index, including reinvestment of dividends. Our peer group is comprised of Meredith Corporation, MGM Mirage, Playboy Enterprises, Inc., Primedia Inc., Time Warner Inc., Viacom Inc., The Walt Disney Company and World Wrestling Entertainment, Inc. [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] - -------------------------------------------------------------------------------- 12/03 12/04 12/05 12/06 12/07 12/08 - -------------------------------------------------------------------------------- Playboy Enterprises, Inc. 100.00 76.05 85.95 70.92 56.44 13.37 Russell 2000 100.00 118.33 123.72 146.44 144.15 95.44 Peer Group 100.00 104.35 93.76 117.70 109.93 61.17 Other information required under this Item is contained in our Notice of Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference. 24 Item 6. Selected Financial Data - ------------------------------- (in thousands, except per share amounts and number of employees)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Ended Ended 12/31/08 12/31/07 12/31/06 12/31/05 12/31/04 - ----------------------------------------------------------------------------------------------------------------------------- Selected financial data (1) Net revenues $ 292,147 $ 339,840 $ 331,142 $ 338,153 $ 329,376 Interest expense, net (3,976) (2,363) (3,164) (4,769) (13,108) Net income (loss) (156,055) 4,925 2,285 (735) 9,989 Net income (loss) applicable to common shareholders (156,055) 4,925 2,285 (735) 9,561 Basic and diluted earnings (loss) per common share (4.69) 0.15 0.07 (0.02) 0.30 EBITDA: (2) Net income (loss) (156,055) 4,925 2,285 (735) 9,989 Adjusted for: Interest expense 4,455 4,874 5,611 6,986 13,687 Income tax expense (benefit) (9,850) 1,928 2,496 3,998 3,845 Depreciation and amortization 39,458 41,198 42,218 42,540 47,100 Amortization of deferred financing fees 356 490 535 635 1,266 Stock options and restricted stock awards 1,032 1,633 1,859 601 682 Equity (income) loss in operations of investments 126 (129) 94 383 71 Impairment charges 146,536 1,508 -- -- -- Impairment charge on investments 2,033 88 -- -- -- Deferred subscription cost write-off 4,820 -- -- -- -- Provisions for reserves 4,121 -- -- -- -- ------------------------------------------------------------------- EBITDA $ 37,032 $ 56,515 $ 55,098 $ 54,408 $ 76,640 ============================================================================================================================= At period end Cash and cash equivalents and marketable securities and short-term investments $ 31,331 $ 33,555 $ 35,748 $ 52,052 $ 50,720 Total assets 255,785 445,156 435,783 428,969 416,330 Long-term financing obligations 115,000 115,000 115,000 115,000 80,000 Total shareholders' equity $ 15,079 $ 171,317 $ 163,628 $ 157,247 $ 162,158 Long-term financing obligations as a percentage of total capitalization 88% 40% 41% 42% 33% Number of common shares outstanding Class A voting 4,864 4,864 4,864 4,864 4,864 Class B nonvoting 28,487 28,402 28,362 28,261 28,521 Number of full-time employees 678 801 789 709 645 - ----------------------------------------------------------------------------------------------------------------------------- Selected operating data Cash investments in Company-produced and licensed entertainment programming $ 30,200 $ 34,405 $ 36,675 $ 33,617 $ 41,457 Cash investments in online content 7,015 5,620 5,031 2,242 2,317 ------------------------------------------------------------------- Total cash investments in programming and content 37,215 40,025 41,916 36,243 43,774 Amortization of investments in Company-produced and licensed entertainment programming 32,483 33,935 36,564 37,450 41,695 Online content expense 7,015 5,620 5,241 2,626 2,317 ------------------------------------------------------------------- Total amortization of programming and content $ 39,498 $ 39,555 $ 41,805 $ 40,076 $ 44,012 - -----------------------------------------------------------------------------------------------------------------------------
For a more detailed description of our financial position, results of operations and accounting policies, please refer to Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II. Item 8. "Financial Statements and Supplementary Data." (1) 2008 included $6.8 million of restructuring expense, $146.5 million of impairment charges, a $4.8 million deferred subscription cost write-off, $4.1 million of provisions for reserves and a $2.0 million impairment charge on investments. 2007 included $0.5 million of restructuring expense, $1.5 million of impairment charges and a $0.1 million impairment charge on investments. 2006 included $2.0 million of restructuring expense. 2005 included $19.3 million of debt extinguishment expense related to the redemption of $80.0 million of 11.00% senior secured notes, or senior secured notes, issued by our subsidiary PEI Holdings, Inc. 2004 included $5.9 million of debt extinguishment expense related to the redemption of $35.0 million of the senior secured notes and a $5.6 million insurance recovery partially related to a litigation settlement recorded in the prior year. (2) EBITDA represents earnings from continuing operations before interest expense, income tax expense or benefit, depreciation of property and equipment, amortization of intangible assets, amortization of investments in entertainment programming, amortization of deferred financing fees, stock-based compensation related to stock options and restricted stock awards, equity 25 income or loss in operations of investments, impairment charges, deferred subscription cost write-off and provisions for reserves. We evaluate our operating results based on several factors, including EBITDA. We consider EBITDA an important indicator of the operational strength and performance of our ongoing businesses, including our ability to provide cash flows to pay interest, service debt and fund capital expenditures. EBITDA eliminates the effects of certain noncash items as they do not affect our ability to service debt or make capital expenditures. EBITDA also eliminates the impact of how we fund our businesses and the effects of impairment charges on investments and changes in interest rates, which we believe relate to general trends in global capital markets but are not necessarily indicative of our operating performance. EBITDA should not be considered an alternative to any measure of performance or liquidity under generally accepted accounting principles in the United States. Similarly, EBITDA should not be inferred as more meaningful than any of those measures. 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations - ------------- OVERVIEW Since our inception in 1953 as the publisher of Playboy magazine, we have become a media and lifestyle company marketing the Playboy brand through a wide range of multimedia properties and licensing initiatives. Today, our businesses are organized into three reportable segments: Entertainment, Publishing and Licensing. The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the financial statements and the accompanying notes. CURRENT ECONOMIC CONDITIONS We have previously reported on the challenges facing the media industry and us, including increased competition for consumers' attention, the migration of advertisers to other platforms and the increasing costs of paper, postage, ink and other expenses. Since that time, there has been a steady weakening of the economy, which has greatly exacerbated the existing challenges. The current global economic conditions and recent disruption in credit markets pose a risk to the overall economy that could continue to impact demand for our products and services. It is unclear the extent to which these conditions will persist and what overall impact they will have on future spending by consumers and advertisers as compared to our expectations. Throughout 2008, we have adjusted our business activities to address the changing economic environment and industry challenges by taking costs out of our mature TV and print businesses, developing a restructuring plan to reduce overhead costs, outsourcing our e-commerce and catalog businesses, selling our production facility, exiting the DVD market and focusing our strategies on Playboy-branded licensing and digital distribution. We will continue to adapt our business and strategic plans to increase shareholder value and profitability, including the integration of our publishing and online operations, subletting our New York office space and Santa Monica photography studio, eliminating additional overhead costs and reducing other expenses. Despite the current economic conditions, we believe we continue to have the liquidity to meet our needs for the foreseeable future. For the year ended December 31, 2008, we generated approximately $3.8 million of net cash from our operating activities. In addition, at December 31, 2008, we had $25.2 million in cash and cash equivalents, and there were no borrowings and $0.8 million in letters of credit outstanding under our $50.0 million revolving credit facility, resulting in $49.2 million of available borrowings under this facility. Our credit facility was reduced to $30.0 million in February 2009. At February 27, 2009, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $29.2 million of available borrowings under this facility. While we believe our net cash from operating activities in addition to our cash and committed capacity is sufficient to meet our needs, any new borrowings in the near term outside of our available borrowings would likely bear significantly higher interest rates than those of our current credit facility. REVENUES Entertainment Group revenues are generated principally from our domestic and international TV and online/mobile businesses. Television revenues are affected by factors including shelf space, retail price and marketing, which are controlled by our distribution partners, by revenue splits negotiated with distribution partners and by demand for our programming. Domestic TV revenues are generated primarily from our Playboy TV- and Spice-branded networks. Internationally, we own and operate or license Playboy-, Spice- and locally-branded television networks or blocks of programming. We have minority equity interests in additional international networks through joint ventures. We currently generate most of our online/mobile revenues from the sale of our premium content. These subscription-based revenues are derived from online clubs, which offer unique content under various brands, most notably Playboy. We also generate revenues from online advertising sales in conjunction with our magazine advertising sales efforts and on royalties from e-commerce, a business we completed outsourcing in 2008. Internationally, we receive licensing fees from Playboy- and other-branded websites and from content delivered via wireless devices. Entertainment Group revenues are also generated from developing, co-producing and/or licensing shows and series to air on third-party networks and mainstream motion pictures, from license fees for Playboy Radio and from the sale of DVDs, a business which we previously announced we are exiting to focus our distribution strategies on digital. Publishing Group revenues are primarily circulation driven for our domestic magazine and special editions and include both subscription and newsstand sales. Additionally, the group generates revenues from advertising 27 sales in Playboy magazine as well as from royalties on circulation and advertising sales from our 26 licensed international editions. Licensing Group revenues are generated primarily from royalties on the wholesale price of our branded products around the world as well as from multifaceted location-based entertainment venues. We also generate revenues from periodic sales of small portions of our art and memorabilia collections and from marketing events such as the annual Playboy Jazz Festival. COSTS AND OPERATING EXPENSES Entertainment Group expenses include television programming amortization, online content, network distribution, hosting, sales and marketing and administrative expenses. Programming amortization and content expenses are expenditures associated with the creation of Playboy TV programming, the licensing of third-party programming and the creation of content for our websites and wireless and satellite radio providers. Publishing Group expenses include subscription acquisition, manufacturing, editorial, shipping, advertising sales and marketing and administrative expenses. Licensing Group expenses include agency fees, promotion, development and administrative expenses. Corporate Administration and Promotion expenses include general corporate costs such as technology, legal, security, human resources, finance and investor relations, as well as expenses related to company-wide marketing and promotions, including the Playboy Mansion. 28 RESULTS OF OPERATIONS (1) The following table sets forth our results of operations (in millions, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - -------------------------------------------------------------------------------------------------------- Net revenues Entertainment Domestic TV $ 62.6 $ 75.8 $ 82.5 International TV 49.8 55.9 49.5 Online/mobile 48.4 64.0 62.3 Other 6.4 7.3 6.7 - -------------------------------------------------------------------------------------------------------- Total Entertainment 167.2 203.0 201.0 - -------------------------------------------------------------------------------------------------------- Publishing Domestic magazine 68.0 77.0 80.7 International magazine 8.0 7.4 6.6 Special editions and other 8.5 9.4 9.8 - -------------------------------------------------------------------------------------------------------- Total Publishing 84.5 93.8 97.1 - -------------------------------------------------------------------------------------------------------- Licensing Consumer products 33.1 34.0 28.2 Location-based entertainment 3.8 3.8 1.2 Marketing events 2.9 3.2 3.0 Other 0.6 2.0 0.6 - -------------------------------------------------------------------------------------------------------- Total Licensing 40.4 43.0 33.0 - -------------------------------------------------------------------------------------------------------- Total net revenues $ 292.1 $ 339.8 $ 331.1 ======================================================================================================== Net income (loss) Entertainment Before programming amortization and online content expenses $ 51.8 $ 60.9 $ 65.1 Programming amortization and online content expenses (39.5) (39.6) (41.8) - -------------------------------------------------------------------------------------------------------- Total Entertainment 12.3 21.3 23.3 - -------------------------------------------------------------------------------------------------------- Publishing (7.6) (7.6) (5.4) - -------------------------------------------------------------------------------------------------------- Licensing 23.7 26.4 18.9 - -------------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (23.9) (28.1) (25.7) - -------------------------------------------------------------------------------------------------------- Segment income 4.5 12.0 11.1 Restructuring expense (6.8) (0.5) (2.0) Impairment charges (146.5) (1.5) -- Deferred subscription cost write-off (4.8) -- -- Provisions for reserves (4.1) -- -- - -------------------------------------------------------------------------------------------------------- Operating income (loss) (157.7) 10.0 9.1 - -------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 0.5 2.5 2.4 Interest expense (4.5) (4.9) (5.6) Amortization of deferred financing fees (0.4) (0.5) (0.5) Impairment charge on investments (2.0) (0.1) -- Other, net (1.8) (0.2) (0.6) - -------------------------------------------------------------------------------------------------------- Total nonoperating expense (8.2) (3.2) (4.3) - -------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (165.9) 6.8 4.8 Income tax benefit (expense) 9.8 (1.9) (2.5) - -------------------------------------------------------------------------------------------------------- Net income (loss) $ (156.1) $ 4.9 $ 2.3 ======================================================================================================== Basic and diluted earnings (loss) per common share $ (4.69) $ 0.15 $ 0.07 ========================================================================================================
(1) Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. 29 2008 COMPARED TO 2007 Revenues decreased $47.7 million, or 14%, compared to 2007 due to lower revenues from our Entertainment, Publishing and Licensing Groups. Segment income decreased $7.5 million, or 62%, compared to 2007 due to the previously discussed revenue decline, partially offset by lower direct costs and Corporate Administration and Promotion expenses. Our operating loss was $157.7 million in 2008 compared to operating income of $10.0 million in 2007 primarily due to $146.5 million of impairment charges on goodwill and other intangible assets. In addition, lower segment income, restructuring charges of $6.8 million, a $4.8 million write-off of deferred subscription costs and provisions of $2.9 million for a receivable and $1.2 million for archival material during the current year contributed to the negative comparison. Net loss was $156.1 million in 2008 compared to net income of $4.9 million in 2007 primarily as a result of the operating results previously discussed. A decrease of $2.0 million in investment income, a $2.0 million impairment charge on investments and unfavorable foreign currency exchange rate fluctuations of $1.5 million, partially offset by an $11.7 million improvement in income taxes, contributed to the net income decrease. Entertainment Group The following discussion focuses on the revenues and profit contribution before programming amortization and online content expenses of each of our Entertainment Group businesses. While 2008 revenues from our domestic TV networks decreased $13.2 million, or 17%, profit contribution decreased only $5.9 million. Pay-per-view revenues were lower for the current year, reflecting consumers' continuing migration from linear networks to the more competitive video-on-demand platform, where we control less shelf space. Playboy TV monthly subscription revenues increased for the current year due to greater availability and growth in certain systems. The sale of our Los Angeles production facility assets in the second quarter of 2008 resulted, as expected, in lower revenues but increased profit contribution for the current year. International TV revenues decreased $6.1 million, or 11%, and profit contribution decreased $2.3 million in 2008. The current year reflected lower revenues from our U.K. networks, partially offset by lower volume-related costs, combined with the impact of cost-saving initiatives and growth in our other European networks. Foreign currency exchange rate fluctuations decreased both revenues and expenses, resulting in an overall unfavorable impact on profit contribution. Our online websites are in the midst of a major infrastructure overhaul and redesign effort, which we anticipate to be substantially completed in the first half of 2009. Online/mobile revenues decreased $15.6 million, or 24%, and profit contribution decreased $4.9 million in 2008. Additionally, our Playboy and BUNNYshop e-commerce and catalog businesses were outsourced to eFashion Solutions, LLC, in early 2008 resulting, as expected, in lower revenues but higher profit contribution for 2008. Revenues from other businesses decreased $0.9 million, or 12%, while profit contribution increased $1.5 million in 2008. Revenues and profit contribution from our production company, Alta Loma Entertainment, were favorable. As previously announced, we are exiting the DVD business and plan to focus on digital distribution. The expected decline in DVD revenues was more than offset by lower costs, leading to an increase in profit contribution. The group's administrative expenses decreased $2.6 million, or 14%, in 2008 primarily due to lower compensation-related and other benefits expense. Programming amortization and online content expenses totaling $39.5 million in 2008 were flat compared to 2007. Segment income for the group decreased $9.0 million, or 42%, in 2008 compared to 2007 due to the results previously discussed. 30 Publishing Group All of our domestic magazine revenue streams decreased in 2008 compared to 2007, reflecting weak industry dynamics. This resulted in lower revenues of $9.0 million, or 12%. Subscription revenues decreased $2.2 million, or 5%, primarily due to 5% fewer copies served. Newsstand revenues decreased $2.0 million, or 23%, on 25% fewer copies sold. Advertising revenues decreased $4.8 million, or 18%, primarily due to lowering our magazine circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) effective with the January 2008 issue. This rate base decrease resulted, as expected, in a 13% decrease in average net revenue per page. Additionally, due in part to the loss of a major advertiser, a 6% decrease in the number of advertising pages contributed to the 2008 advertising revenues decline. Advertising sales for the 2009 first quarter magazine issues are closed, and we expect to report approximately 28% lower advertising revenues and 32% fewer advertising pages compared to the 2008 first quarter. On a combined basis, Playboy print and online advertising revenues decreased $4.0 million, or 13%, for the year. International magazine revenues increased $0.6 million, or 8%, in 2008 primarily due to higher royalties from our Brazilian, Russian and German editions. Special editions and other revenues decreased $0.9 million, or 10%, in 2008. The decrease was due mainly to 14% fewer newsstand copies of special editions sold. The group's 2008 segment loss was flat compared to 2007 primarily due to lower editorial, manufacturing, subscription collection and advertising sales and marketing costs coupled with cost savings initiatives, offsetting the previously discussed revenue declines. Licensing Group Licensing Group revenues decreased $2.6 million, or 6%, and segment income decreased $2.7 million, or 10%, due to lower consumer products revenues, reflecting the global economic conditions, and $1.3 million less in original art sales than in 2007. Corporate Administration and Promotion Corporate Administration and Promotion expenses decreased $4.2 million, or 15%, in 2008 primarily due to lower compensation-related and other benefits and trademark defense expenses. Restructuring Expense In the fourth quarter of 2008, we developed a restructuring plan in our continued efforts to reduce costs, primarily related to several senior-level Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million related to workforce reduction costs of 21 employees, most of whose jobs will be eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and will be substantially completed by the end of 2009 with some payments continuing into 2010. In the first half of 2009, we will report additional restructuring charges as well as relocation and other expenses related to vacating our New York office space and other cost-saving initiatives. In the third quarter of 2008, we developed a restructuring plan in an effort to lower overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose jobs were eliminated in the fourth quarter of 2008. We also eliminated approximately 25 open positions. Payments under this plan began in the fourth quarter of 2008 and will be substantially completed by the end of 2009 with some payments continuing into 2010. In 2007, we implemented a plan to outsource our e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained in an acquisition. This restructuring plan resulted in the recording of a reserve of $0.4 million for costs associated with a workforce reduction of 28 employees. As part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses in 2008. 31 Impairment Charges In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or Statement 142, and FASB Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we conduct annual impairment testing of goodwill and other intangible assets as of October 1st of each year, or in between annual tests if events occur or circumstances change that would indicate impairment of our goodwill and/or other intangible assets. Based on the results of our 2008 impairment testing, we determined certain intangible assets and goodwill were impaired, necessitating a charge of $146.5 million. We expect to record additional impairment charges on goodwill of $5.6 million in the first quarter of 2009 as a result of integrating our publishing and online operations. Further downward pressure on our operating results and prolonged deterioration of economic conditions could result in additional future impairments of our long-lived assets including goodwill. Impairment tests performed in 2007 and 2006 indicated no impairment was necessary at those times. See Note (O), Intangible Assets, to the Notes to Consolidated Financial Statements for additional information. In 2007, we recorded a $1.5 million charge in connection with the potential sale of assets related to our Los Angeles production facility. The asset sale was completed in April 2008. See Note (C), Sale of Assets, to the Notes to Consolidated Financial Statements for additional information. Deferred Subscription Cost Write-Off In 2008, we recorded a $4.8 million charge related to the write-off of deferred subscription costs. These consisted primarily of costs associated with the promotion of Playboy magazine subscriptions, principally the production of direct mail solicitation materials and postage. In prior years, in accordance with the American Institute of Certified Public Accountants' Statement of Position 93-7, Reporting on Advertising Costs, these direct response advertising costs were capitalized and amortized over the period during which the future benefits were expected to be received, generally six to 12 months. Given the uncertainties of both the magazine environment as well as the economy in general, we began expensing these costs as incurred and wrote off the remaining capitalized amount. Nonoperating Income (Expense) Nonoperating expense increased $5.0 million in 2008, reflecting unfavorable foreign currency exchange rate fluctuations of $1.5 million related to the strengthening of the U.S. dollar against the pound sterling and euro. The increase also reflects a $2.0 million charge on certain investments deemed to be other-than-temporarily impaired as a result of adverse market conditions. We also recorded $2.0 million less in investment income as a result of sales of investments and lower interest rates during 2008. Income Tax Expense We account for income taxes in accordance with FASB Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, or Statement 109. Statement 109 requires, among other things, the separate recognition of deferred tax assets and deferred tax liabilities. Such deferred tax assets and deferred tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, or FIN 48, which requires that we recognize only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. We make judgments and estimates in determining income tax expense for financial statement purposes. These judgments and estimates occur in the calculation of tax credits, benefits and deductions and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. At December 31, 2008, we recorded an additional $13.6 million valuation allowance against deferred tax assets related primarily to current year federal and state net operating losses because we believe that it is more likely than not that we will not be able to use the net operating loss carryforwards before they expire. 32 The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on FIN 48. It is inherently difficult and subjective to estimate uncertain tax positions, because we have to determine the probability of various possible outcomes. We evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. At December 31, 2008, we had $8.0 million of unrecognized tax benefits, none of which would affect our effective tax rate if recognized nor accelerate the payment of cash to the taxing authority to an earlier period. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. In 2008, we had a net income tax benefit of $9.8 million compared to a net income tax expense of $1.9 million in 2007. This reduction was due primarily to the reversal of deferred tax liabilities associated with the impairment charges on goodwill and other intangible assets. In 2008, our effective tax rate differed from the U.S. statutory rate primarily as a result of the net operating loss, or NOL, carryforwards and the effect of the deferred tax treatment of certain indefinite-lived intangibles. In 2007, we recognized a tax benefit associated with the decrease of $2.4 million in the valuation allowance related to the realization of our U.K. NOLs and the effect of the deferred tax treatment of certain acquired intangibles. 2007 COMPARED TO 2006 Revenues increased $8.7 million, or 3%, compared to 2006 due to continued revenue growth in our Licensing Group, partially offset by lower revenues from our Publishing Group. Entertainment Group revenues were flat compared to the prior year. Segment income increased $0.9 million, or 8%, compared to 2006 due to increased profits from our Licensing Group, largely offset by lower results from our Publishing and Entertainment Groups and higher Corporate Administration and Promotion expenses. Operating income of $10.0 million improved $0.9 million, or 10%, compared to 2006 as a result of the segment results previously discussed. 2007 included a $1.5 million charge in connection with the sale of assets related to our Los Angeles production facility and a $0.5 million restructuring charge, compared to a $2.0 million restructuring charge in 2006. Net income of $4.9 million improved $2.6 million, or 116%, compared to 2006 primarily as a result of the improved operating results previously discussed, combined with decreases of $0.7 million and $0.6 million in interest and income tax expenses, respectively. Entertainment Group The following discussion focuses on the revenues and profit contribution before programming amortization and online content expenses of each of our Entertainment Group businesses. Revenues from our domestic TV networks decreased $6.7 million, or 8%, and profit contribution decreased $4.2 million in 2007. The decrease in revenues was primarily due to pressure on splits with operators and a reduction in the total number of households with access to our linear networks. The profit contribution decrease was primarily due to the lower revenues, partially offset by lower marketing expense and the impact of a $1.8 million legal settlement in 2006. International TV revenues increased $6.4 million, or 13%, and profit contribution increased $4.0 million in 2007 primarily due to growth in our U.K. and other European networks. Foreign currency exchange rate fluctuations increased both revenues and expenses, which resulted in an overall small favorable impact on profit contribution. Online/mobile revenues increased $1.7 million, or 3%, and profit contribution decreased $0.7 million in 2007. Online subscription revenues were flat for the year, while profit contribution increased slightly. E-commerce revenues and profit contribution increased from the launch in the fourth quarter of 2006 of the BUNNYshop combined with improved sales from our Playboy e-commerce and catalog business. Licensing our Spice 33 e-commerce and catalog business in the third quarter of 2006 also favorably impacted 2007 profit contribution. Advertising revenues grew 43% due to the redesign of Playboy.com, largely offset by increased related costs. Mobile results decreased primarily due to lower royalties from a licensee in Europe. Revenues from other businesses increased $0.6 million, or 8%, in 2007 primarily due to recording license fees for our production company, Alta Loma Entertainment. A $1.7 million decrease in profit contribution was impacted by an acquisition in the second quarter of 2006 and a legal settlement recorded in 2007. The group's administrative expenses increased $1.6 million, or 10%, in 2007 primarily due to higher compensation-related and other benefits expense. Programming amortization and online content expenses decreased $2.2 million, or 5%, in 2007. Segment income for the group decreased $2.0 million, or 9%, in 2007 compared to 2006 due to the results previously discussed. Publishing Group Domestic magazine revenues decreased $3.7 million, or 5%, in 2007. Subscription revenues decreased $3.5 million, or 8%, primarily due to 7% fewer copies served in 2007. Newsstand revenues decreased $1.0 million, or 10%, primarily due to 10% fewer copies sold in 2007. Print advertising revenues increased $0.8 million, or 3%, primarily due to a 6% increase in advertising pages, partially offset by a 3% decrease in average net revenue per page. On a combined basis, our Playboy print and online advertising revenues increased $2.8 million, or 10%, for the year, reflecting growth in online advertising, driven by the redesign of Playboy.com, which has attracted new advertisers. International magazine revenues increased $0.8 million, or 12%, in 2007 due in part to higher royalties as a result of strong performance from our Brazilian and Russian editions. Special editions and other revenues decreased $0.4 million, or 4%, in 2007. Special editions revenues decreased $0.7 million primarily due to 16% fewer newsstand copies sold, partially offset by the impact of a $1.00 cover price increase effective with the July 2007 issues. The group's segment loss increased $2.2 million, or 41%, in 2007 primarily due to the decrease in revenues discussed above combined with higher expenses related to celebrity pictorials, partially offset by lower manufacturing costs due to printing fewer copies and fewer editorial pages per issue. The segment loss included additional expense for subscription collection costs and actual allocated post-employment benefit costs related to senior editorial employees. Licensing Group Licensing Group revenues increased $10.0 million, or 30%, in 2007 primarily due to higher consumer products revenues, principally from Western Europe and Southeast Asia, and a full year of royalties from our location-based entertainment venue at the Palms Casino Resort in Las Vegas, which opened in the fourth quarter of 2006. The year also reflected an increase of $1.4 million related to sales of original artwork. The group's segment income increased $7.5 million, or 40%, in 2007 primarily due to the increased revenues previously discussed, partially offset by higher growth-related costs and compensation-related and other benefits expense. Corporate Administration and Promotion Corporate Administration and Promotion expenses increased $2.4 million, or 9%, in 2007 in part due to additional expense related to certain trademark costs that we began expensing in the fourth quarter of 2006 and higher compensation-related and other benefits expense. The previously mentioned allocation of actual post-employment benefit costs to the Publishing Group partially offset the unfavorable variance. 34 Restructuring Expense In 2007, we recorded a charge of $0.4 million related to costs associated with a workforce reduction of 28 employees. In 2006, we recorded a charge of $2.1 million related to reducing overhead costs and annual programming and editorial expenses. Impairment Charges In 2007, we recorded a $1.5 million charge in connection with the potential sale of assets related to our Los Angeles production facility. See Note (C), Sale of Assets, to the Notes to Consolidated Financial Statements for additional information. Nonoperating Income (Expense) Nonoperating expense was $1.1 million, or 26%, lower in 2007 primarily due to a $0.7 million decrease in interest expense primarily due to payments made on acquisition liabilities and a $0.2 million increase in equity income from Playboy TV-Latin America, LLC. Income Tax Expense In 2007, we recognized a tax benefit associated with the decrease of $2.4 million in the valuation allowance related to the realization of our U.K. NOLs and the effect of the deferred tax treatment of certain acquired intangibles. In 2007, our effective tax rate differed from the U.S. statutory rate primarily as a result of the NOL carryforwards and the effect of the deferred tax treatment of certain indefinite-lived intangibles. In 2006, we modified the assumptions related to the useful lives of certain distribution agreements that previously were classified as indefinite-lived. As these distribution agreements are now being amortized, the deferred tax liability related to the distribution agreements that is expected to be realized within the NOL carryforward period may be netted against our deferred tax asset. In 2006, we recorded an income tax benefit for $2.6 million of the $3.9 million deferred tax liability related to the distribution agreement modification. In 2007, we recognized an additional income tax benefit of $0.5 million related to the distribution agreements. In 2006, our effective income tax rate differed from the U.S. statutory rate primarily as a result of foreign income and withholding taxes, for which no current U.S. income tax benefit is recognized, and the effect of the deferred tax treatment of certain indefinite-lived intangibles. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2008, we had $25.2 million in cash and cash equivalents and $6.1 million of marketable securities and short-term investments compared to $20.6 million in cash and cash equivalents and $13.0 million of marketable securities and short-term investments at December 31, 2007. During 2008, we sold at par all of our $6.0 million of auction rate securities which were included in marketable securities and short-term investments at December 31, 2007. Total financing obligations were $115.0 million at both December 31, 2008 and December 31, 2007. At December 31, 2008, cash generated from our operating activities, existing cash and cash equivalents and marketable securities and short-term investments were fulfilling our liquidity requirements. At December 31, 2008, we also had a $50.0 million credit facility, which was reduced to $30.0 million in February 2009. This facility can be used for revolving borrowings, issuing letters of credit or a combination of both. As of February 27, 2009, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $29.2 million of available borrowings under this facility. We believe that cash on hand and operating cash flows, together with funds available under our credit facility and potential access to credit and capital markets, will be sufficient to meet our operating expenses, capital expenditures and other contractual obligations as they become due. 35 DEBT FINANCING In March 2005, we issued and sold $115.0 million aggregate principal amount of our 3.00% convertible senior subordinated notes due 2025, or convertible notes, which included $15.0 million due to the initial purchasers' exercise of the over-allotment option. The convertible notes bear interest at a rate of 3.00% per annum on the principal amount of the notes, payable in arrears on March 15 and September 15 of each year, payment of which began on September 15, 2005. In addition, under certain circumstances beginning in 2012, if the trading price of the convertible notes exceeds a specified threshold during a prescribed measurement period prior to any semiannual interest period, contingent interest will become payable on the convertible notes for that semiannual interest period at an annual rate of 0.25% per annum. The convertible notes are convertible into cash and, if applicable, shares of our Class B common stock, or Class B stock, based on an initial conversion rate, subject to adjustment, of 58.7648 shares per $1,000 principal amount of the convertible notes (which represents an initial conversion price of approximately $17.02 per share) only under the following circumstances: (a) during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the closing sale price of our Class B stock for each of 20 or more consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on that trading day; (b) during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 principal amount of convertible notes over that five consecutive trading day period was equal to or less than 95% of the average conversion value of the convertible notes during that period; (c) upon the occurrence of specified corporate transactions, as set forth in the indenture governing the convertible notes; or (d) if we have called the convertible notes for redemption. Upon conversion of a convertible note, a holder will receive cash in an amount equal to the lesser of the aggregate conversion value of the note being converted and the aggregate principal amount of the note being converted. If the aggregate conversion value of the convertible note being converted is greater than the cash amount received by the holder, the holder will also receive an amount in whole shares of Class B stock equal to the aggregate conversion value less the cash amount received by the holder. A holder will receive cash in lieu of any fractional shares of Class B stock. The maximum conversion rate, subject to adjustment, is 76.3942 shares per $1,000 principal amount of convertible notes. The convertible notes mature on March 15, 2025. On or after March 15, 2010, if the closing price of our Class B stock exceeds a specified threshold, we may redeem any of the convertible notes at a redemption price in cash equal to 100% of the principal amount of the convertible notes plus any accrued and unpaid interest up to, but excluding, the redemption date. On or after March 15, 2012, we may at any time redeem any of the convertible notes at the same redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the occurrence of a fundamental change, as specified in the indenture governing the convertible notes, holders may require us to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest up to, but excluding, the purchase date. The convertible notes are unsecured senior subordinated obligations of Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt, including its guarantee of our subsidiary PEI Holdings, Inc., or Holdings, borrowings under our credit facility; equally with all of the issuer's future senior subordinated debt; and, senior to all of the issuer's future subordinated debt. In addition, the assets of the issuer's subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries. CREDIT FACILITY At December 31, 2008, our $50.0 million credit facility provided for revolving borrowings, the issuance of letters of credit or a combination of both of up to $50.0 million outstanding at any time. In February 2009, we amended the terms of our credit facility to, among other things, reduce the size of the facility to $30.0 million. Borrowings under the credit facility bear interest at a variable rate, equal to a specified LIBOR or base rate plus a specified borrowing margin based on our Adjusted EBITDA, as defined in the credit agreement. We pay fees on the outstanding amount of letters of credit based on the margin that applies to borrowings that bear interest at a rate based on LIBOR. All amounts outstanding under the credit facility will mature on January 31, 2011. The obligations of Holdings as borrower under the credit facility are guaranteed by us and each of our other U.S. subsidiaries. The obligations of the borrower and nearly all of the guarantors under the credit facility are secured by a first-priority lien on substantially all of the borrower's and the guarantors' assets. 36 CALIFA ACQUISITION In 2008, we made cash payments totaling $1.0 million in accordance with The Califa Entertainment Group, Inc., or Califa, acquisition agreement. At December 31, 2008, our remaining acquisition payment obligations, which include interest, to Califa were $2.8 million, which are payable in cash in quarterly installments ending in 2011. We have the option of accelerating these remaining acquisition payments. See the Contractual Obligations table for the future cash obligations related to our acquisitions. See Note (B), Acquisition, to the Notes to Consolidated Financial Statements for additional information relating to the Califa acquisition. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities decreased $20.4 million to $3.8 million in 2008 compared to 2007 primarily due to the operating and nonoperating results previously discussed combined with decreases in accounts payable and deferred tax liabilities from 2007. CASH FLOWS FROM INVESTING ACTIVITIES Net cash provided by investing activities was $4.3 million for 2008 compared to net cash used for investing activities of $19.0 million in 2007. 2008 reflected $10.3 million of net proceeds of marketable securities and investments and $5.1 million in net proceeds from the sale of our Los Angeles production facility, offset by $11.0 million of capital expenditures. 2007 reflected $10.5 million of net purchases of marketable securities and investments and $8.5 million of capital expenditures. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used for financing activities of $2.6 million for 2008 and $11.7 million for 2007 were primarily due to payments in connection with acquisition liabilities. EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS The negative effect of foreign currency exchange rates on cash and cash equivalents during 2008 of $1.0 million was due to the strengthening of the U.S. dollar against foreign currencies, primarily the pound sterling, compared with the positive effect of foreign currency exchange rates on cash and cash equivalents during 2007 of $0.3 million, which was due to the weakening of the U.S. dollar against foreign currencies. 37 CONTRACTUAL OBLIGATIONS The following table sets forth a summary of our contractual obligations and commercial commitments at December 31, 2008, as further discussed in the Notes to Consolidated Financial Statements (in thousands):
2009 2010 2011 2012 2013 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------- Long-term financing obligations (1) $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 3,450 $ 154,675 $ 171,925 Operating leases (2) 6,351 6,569 6,616 6,414 5,396 36,400 67,746 Purchasing obligations: Licensed programming commitments (3) 4,754 5,000 3,333 -- -- -- 13,087 Other: Deferred compensation plans 5,428 -- -- -- -- -- 5,428 Acquisition liabilities (1), (4) 3,300 5,300 750 -- -- -- 9,350 Transponder service and other agreements (5) $ 7,560 $ 5,803 $ 4,919 $ 4,667 $ 1,171 $ -- $ 24,120 - ----------------------------------------------------------------------------------------------------------------------
(1) Includes interest and principal commitments. (2) Net of sublease income. (3) Represents our noncancelable obligations to license programming from other studios. Typically, the licensing of the programming allows us access to specific titles or in some cases the studio's entire library over an extended period of time. We broadcast this programming on our networks throughout the world, as appropriate. (4) Includes interest and principal related to the acquisitions of Califa and Club Jenna, Inc. and related companies. (5) Represents our obligations under a services agreement under which Broadcast Facilities, Inc., or BFI, is providing us with certain satellite transmission and other related services. Also reflects our obligations under two international transponder agreements. We have excluded from the table above uncertain tax liabilities as defined in FIN 48 due to the uncertainty of the amount and period of payment. At December 31, 2008, our expected payment for significant contractual obligations includes approximately $8.0 million for unrecognized tax benefits associated with the adoption of FIN 48. We cannot make a reasonably reliable estimate as to if or when such amounts may be settled. CRITICAL ACCOUNTING POLICIES Our financial statements are prepared in conformity with generally accepted accounting principles in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We believe that of our significant accounting policies, the following are the more complex and critical areas. For additional information about our accounting policies, see Note (A), Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements. REVENUE RECOGNITION Domestic Television Our domestic television revenues were $62.6 million and $75.8 million for the years ended December 31, 2008 and 2007, respectively. In order to record our revenues, we estimate the number of PPV and VOD buys and monthly subscriptions using a number of factors including, but not exclusively, the average number of buys and subscriptions in the prior three months based on actual payments received and historical data by geographic location. Upon recording the revenue, we also record the related receivable. We have reserves for uncollectible receivables based on our experience and monitor and adjust these reserves on a quarterly basis. At December 31, 2008 and 2007, we had receivables of $12.8 million and $14.8 million, respectively, related to domestic television. We record adjustments to revenue on a monthly basis as we obtain actual payments from the providers. Actual subscriber information and payment are generally received within three months. Historically, our adjustments have not been material. At any point, our exposure to a material adjustment to revenue is mitigated because, generally, only the most recent two to three months would not have been fully adjusted to actual based on payments received. 38 International Television Our international television revenues were $49.8 million and $55.9 million for the years ended December 31, 2008 and 2007, respectively. In order to record our revenues, we estimate the number of PPV and VOD buys and monthly subscriptions using a number of factors including, but not exclusively, the average number of buys and subscriptions in the prior month based on subscription and billing reports provided by platform operators. Upon recording the revenue, we also record the related receivable. We have reserves for uncollectible receivables based on our experience and monitor and adjust these reserves on a monthly basis. At December 31, 2008 and 2007, we had receivables of $6.8 million and $9.1 million, respectively, related to international television. We record adjustments to revenue on a monthly basis as we obtain subscription and billing reports from the platform operators. Actual subscriber information is generally received within one month. Historically, our adjustments have not been material. At any point, our exposure to a material adjustment to revenue is mitigated because, generally, only the most recent month would not have been fully adjusted to actual based on the prior month's reports. Domestic Magazine Our Playboy magazine revenues were $68.0 million and $77.0 million for the years ended December 31, 2008 and 2007, respectively, of which 10.0% and 11.5% were derived from newsstand sales in the respective years. Our print run, which is developed with input from Time/Warner Retail Sales and Marketing, our national distributor, varies each month based on expected sales. Our expected sales are based on analyses of historical demand based on a number of variables, including content, time of year and the cover price. We record our revenues for each month's issue utilizing our expected sales. Our revenues are recorded net of a provision for estimated returns. Substantially all of the magazines to be returned are returned within 90 days of the date that the subsequent issue goes on sale. We adjust our provision for returns based on actual returns of the magazine. Historically, our annual adjustments to Playboy magazine newsstand revenues have not been material and are driven by differences in actual consumer demand as compared to expected sales. At any point, our exposure to a material adjustment to revenue is mitigated because, generally, only the most recent two to three issues would not have been fully adjusted to actual based on actual returns received. Consumer Products Licensing Our consumer products licensing revenues were $33.1 million and $34.0 million for the years ended December 31, 2008 and 2007, respectively. Our license agreements vary but, in general, carry a guaranteed minimum royalty as well as a formula for computing earned royalties in excess of the minimum. Guaranteed minimum royalties are recognized on a straight-line basis over the terms of the related agreements. Royalties in excess of the minimum guarantees are estimated and recorded based upon historical results and current expectations of each licensee's sales. Our license agreements, in general, require our licensees to report their actual sales results to us on a quarterly basis. We record adjustments to revenue on a monthly basis as we obtain sales reports from our licensees. Historically, our adjustments have not been material. At any point, our exposure to a material adjustment to revenue is mitigated because, generally, we receive actual sales reports from our licensees for the most recent quarter within 45 days of the end of the quarter. DEFERRED REVENUES We had deferred revenues related to Playboy magazine subscriptions and online subscriptions of $27.5 million and $3.2 million, respectively, at December 31, 2008 and $32.6 million and $4.1 million, respectively, at December 31, 2007. Sales of Playboy magazine and online subscriptions, less estimated cancellations, are deferred and recognized as revenues proportionately over the subscription periods. Our estimates of cancellations are based on historical experience and current marketplace conditions and are adjusted monthly on the basis of actual results. We have not experienced significant deviations between estimated and actual results. STOCK-BASED COMPENSATION Our stock-based compensation expense related to stock options was $1.4 million and $1.1 million for the years ended December 31, 2008 and 2007, respectively. On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or Statement 123(R), which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, under the modified prospective method. We estimate the value of stock options on the date of grant using the Lattice Binomial model, or Lattice model. The Lattice model requires extensive analysis of actual exercise behavior data 39 and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and option cancellations. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We measure stock-based compensation cost at the grant date based on the value of the award and recognize the expense over the vesting period. Compensation expense, as recognized under Statement 123(R), for all stock-based compensation awards is recognized using the straight-line attribution method. RELATED PARTY TRANSACTIONS HUGH M. HEFNER We own a 29-room mansion located on five and one-half acres in Los Angeles, California. The Playboy Mansion is used for various corporate activities and serves as a valuable location for motion picture and television production, magazine photography and for online, advertising, marketing and sales events. It also enhances our image as host for many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition, which increases public awareness of us and our products and services. Its facilities include a tennis court, swimming pool, gymnasium and other recreational facilities as well as extensive film, video, sound and security systems. The Playboy Mansion also includes accommodations for guests and serves as an office and residence for Hugh M. Hefner, our Editor-in-Chief and Chief Creative Officer, or Mr. Hefner. It has a full-time staff that performs maintenance, serves in various capacities at the functions held at the Playboy Mansion and provides our and Mr. Hefner's guests with meals, beverages and other services. Under a 1979 lease entered into with Mr. Hefner, the annual rent Mr. Hefner pays to us for his use of the Playboy Mansion is determined by independent experts who appraise the value of Mr. Hefner's basic accommodations and access to the Playboy Mansion's facilities, utilities and attendant services based on comparable hotel accommodations. In addition, Mr. Hefner is required to pay the sum of the per-unit value of non-business meals, beverages and other benefits he and his personal guests receive. These standard food and beverage per-unit values are determined by independent expert appraisals based on fair market values. Valuations for both basic accommodations and standard food and beverage units are reappraised every three years and are annually adjusted between appraisals based on appropriate consumer price indexes. Mr. Hefner is also responsible for the cost of all improvements in any Hefner residence accommodations, including capital expenditures, that are in excess of normal maintenance for those areas. Mr. Hefner's usage of Playboy Mansion services and benefits is recorded through a system initially developed by the professional services firm of PricewaterhouseCoopers LLP, and now administered by us, with appropriate modifications approved by the Audit and Compensation Committees of the Board of Directors. The lease dated June 1, 1979, as amended, between Mr. Hefner and us renews automatically at December 31st each year and will continue to renew unless either Mr. Hefner or we terminate it. The rent charged to Mr. Hefner during 2008 included the appraised rent and the appraised per-unit value of other benefits, as described above. Within 120 days after the end of our fiscal year, the actual charge for all benefits for that year is finally determined. Mr. Hefner pays or receives credit for any difference between the amount finally determined and the amount he paid over the course of the year. We estimated the sum of the rent and other benefits payable for 2008 to be $0.7 million, and Mr. Hefner paid that amount during 2008. The actual rent and other benefits paid for 2007 and 2006 were $0.7 million and $0.8 million, respectively. We purchased the Playboy Mansion in 1971 for $1.1 million and in the intervening years have made substantial capital improvements at a cost of $14.3 million through 2008 (including $2.7 million to bring the Hefner residence accommodations to a standard similar to the Playboy Mansion's common areas). The Playboy Mansion is included in our Consolidated Balance Sheets at December 31, 2008 and 2007, at a net book value of $1.3 million and $1.4 million, respectively, including all improvements and after accumulated depreciation. We incur all operating expenses of the Playboy Mansion, including depreciation and taxes, which were $1.9 million, $2.8 million and $2.1 million for 2008, 2007 and 2006, respectively, net of rent received from Mr. Hefner. Holly Madison, Bridget Marquardt and Kendra Wilkinson, the stars of The Girls Next Door on E! Entertainment Television, resided in the mansion with Mr. Hefner in 2008 and 2007. The value of rent, food and beverage and other personal benefits for the use of the Playboy Mansion by Ms. Madison, Ms. Marquardt and Ms. Wilkinson was charged to Alta Loma Entertainment, our production company. The aggregate amount of these charges was $0.4 million in each of 2008 and 2007. In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receive payments for services rendered on our behalf, including appearance fees. 40 RECENTLY ISSUED ACCOUNTING STANDARDS In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles, or Statement 162. Statement 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. Statement 162 becomes effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of Statement 162 to impact our future results of operations or financial condition. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1. FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adopt FSP APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all periods presented. We are currently evaluating the impact of adopting FSP APB 14-1 on our results of operations and financial condition. In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. We are required to adopt FSP FAS 142-3 prospectively for intangible assets acquired on or after January 1, 2009. Intangible assets acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS 142-3. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling interest. We are required to adopt Statement 160 at the beginning of 2009. We do not expect the adoption of Statement 160 to have a significant impact on our future results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We adopted Statement 157 on January 1, 2008 for our financial assets and liabilities. However, FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or 41 disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of Statement 157 to have a significant impact on our future results of operations or financial condition. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- We are exposed to certain market risks, including changes in foreign currency exchange rates. In order to manage the risk associated with our exposure to such fluctuations, we enter into hedging transactions pursuant to our policies and procedures. We have derivative instruments that have been designated and qualify as cash flow hedges, which are entered into in order to hedge the variability of cash flows to be received related to forecasted royalty payments denominated in the yen and the euro. We hedge these royalties with forward contracts for periods not exceeding 12 months. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking various hedge transactions. We link all hedges that are designated as cash flow hedges to forecasted transactions. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives used in hedging transactions are effective in offsetting changes in cash flows of the hedged items. Any hedge ineffectiveness is recorded in earnings. We do not use financial instruments for trading purposes. We prepared sensitivity analyses to determine the impact of a hypothetical 10% devaluation of the U.S. dollar relative to the foreign currencies of the countries to which we have exposure, primarily Japan and Germany. Based on our sensitivity analyses at December 31, 2008 and 2007, such a change in foreign currency exchange rates would affect our annual consolidated operating results, financial position and cash flows by approximately $0.1 million and $0.5 million, respectively. At December 31, 2008 and 2007, we did not have any floating interest rate exposure. All of our outstanding debt as of those dates consisted of our convertible notes, which are fixed-rate obligations. The fair value of the $115.0 million aggregate principal amount of the convertible notes will be influenced by changes in market interest rates, the share price of our Class B stock and our credit quality. At December 31, 2008, the convertible notes had an implied fair value of $51.8 million, but the convertible notes had not traded since September 2008. The fair value does not necessarily represent the purchase price for the entire convertible note portfolio. Item 8. Financial Statements and Supplementary Data - --------------------------------------------------- The following consolidated financial statements and supplementary data are set forth in this Annual Report on Form 10-K as follows:
Page ---- Consolidated Statements of Operations - Fiscal Years Ended December 31, 2008, 2007 and 2006 43 Consolidated Balance Sheets - December 31, 2008 and 2007 44 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2008, 2007 and 2006 45 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2008, 2007 and 2006 46 Notes to Consolidated Financial Statements 47 Report of Independent Registered Public Accounting Firm 69
The supplementary data regarding quarterly results of operations are set forth in Note (W), Quarterly Results of Operations (Unaudited), to the Notes to Consolidated Financial Statements. 42 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - -------------------------------------------------------------------------------------------------------- Net revenues $ 292,147 $ 339,840 $ 331,142 - -------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales (236,328) (268,243) (265,032) Selling and administrative expenses (51,294) (59,601) (55,026) Restructuring expense (6,783) (445) (1,998) Impairment charges (146,536) (1,508) -- Deferred subscription cost write-off (4,820) -- -- Provisions for reserves (4,121) -- -- - -------------------------------------------------------------------------------------------------------- Total costs and expenses (449,882) (329,797) (322,056) - -------------------------------------------------------------------------------------------------------- Gain on disposal -- -- 29 - -------------------------------------------------------------------------------------------------------- Operating income (loss) (157,735) 10,043 9,115 - -------------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 479 2,511 2,447 Interest expense (4,455) (4,874) (5,611) Amortization of deferred financing fees (356) (490) (535) Impairment charge on investments (2,033) (88) -- Other, net (1,805) (249) (635) - -------------------------------------------------------------------------------------------------------- Total nonoperating expense (8,170) (3,190) (4,334) - -------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (165,905) 6,853 4,781 Income tax benefit (expense) 9,850 (1,928) (2,496) - -------------------------------------------------------------------------------------------------------- Net income (loss) $ (156,055) $ 4,925 $ 2,285 ======================================================================================================== Weighted average number of common shares outstanding Basic 33,307 33,246 33,171 ======================================================================================================== Diluted 33,307 33,281 33,276 ======================================================================================================== Basic and diluted earnings (loss) per common share $ (4.69) $ 0.15 $ 0.07 ========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 43 PLAYBOY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Dec. 31, Dec. 31, 2008 2007 - ----------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 25,192 $ 20,603 Marketable securities and short-term investments 6,139 12,952 Receivables, net of allowance for doubtful accounts of $4,084 and $3,627, respectively 40,428 51,139 Receivables from related parties 2,061 1,704 Inventories 7,341 11,363 Deferred subscription acquisition costs -- 7,102 Deferred tax asset 2,268 1,320 Assets held for sale -- 4,706 Prepaid expenses and other current assets 9,127 14,986 - ----------------------------------------------------------------------------------------------------- Total current assets 92,556 125,875 - ----------------------------------------------------------------------------------------------------- Long-term investments -- 6,556 Property and equipment, net 20,319 14,665 Long-term receivables, net of allowance for doubtful accounts of $2,795 and $0, respectively -- 2,795 Programming costs, net 52,056 54,926 Goodwill 27,758 133,570 Trademarks 42,503 65,437 Distribution agreements, net of accumulated amortization of $6,126 and $4,803, respectively 12,138 28,337 Deferred tax asset 180 1,206 Other noncurrent assets 8,275 11,789 - ----------------------------------------------------------------------------------------------------- Total assets $ 255,785 $ 445,156 ===================================================================================================== Liabilities Acquisition liabilities $ 2,785 $ 2,134 Accounts payable 24,816 37,842 Accrued salaries, wages and employee benefits 9,159 8,304 Deferred revenues 36,402 43,955 Deferred tax liability -- 1,490 Other current liabilities and accrued expenses 19,557 14,269 - ----------------------------------------------------------------------------------------------------- Total current liabilities 92,719 107,994 - ----------------------------------------------------------------------------------------------------- Financing obligations 115,000 115,000 Acquisition liabilities 5,419 7,936 Deferred tax liability 7,783 18,604 Other noncurrent liabilities 19,785 24,305 - ----------------------------------------------------------------------------------------------------- Total liabilities 240,706 273,839 - ----------------------------------------------------------------------------------------------------- Shareholders' equity Common stock, $0.01 par value Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49 Class B nonvoting - 75,000,000 shares authorized; 28,868,900 and 28,784,079 issued, respectively 288 288 Capital in excess of par value 231,335 229,833 Accumulated deficit (208,821) (52,766) Treasury stock, at cost - 381,971 shares (5,000) (5,000) Accumulated other comprehensive loss (2,772) (1,087) - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 15,079 171,317 - ----------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 255,785 $ 445,156 =====================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 44 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Accum. Class A Class B Capital in Other Common Common Excess of Accum. Treasury Comp. Stock Stock Par Value Deficit Stock Loss(1) Total - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2005 $ 49 $ 286 $ 223,537 $ (59,976) $ (5,000) $ (1,649) $ 157,247 Net income -- -- -- 2,285 -- -- 2,285 Shares issued or vested under stock plans, net -- 1 4,238 -- -- -- 4,239 Adjustment to initially apply FASB Statement 158 -- -- -- -- -- (1,396) (1,396) Other comprehensive income -- -- -- -- -- 1,253 1,253 - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2006 49 287 227,775 (57,691) (5,000) (1,792) 163,628 Net income -- -- -- 4,925 -- -- 4,925 Shares issued or vested under stock plans, net -- 1 2,058 -- -- -- 2,059 Other comprehensive income -- -- -- -- -- 705 705 - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2007 49 288 229,833 (52,766) (5,000) (1,087) 171,317 Net loss -- -- -- (156,055) -- -- (156,055) Shares issued or vested under stock plans, net -- -- 1,502 -- -- -- 1,502 Other comprehensive loss -- -- -- -- -- (1,685) (1,685) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2008 $ 49 $ 288 $ 231,335 $ (208,821) $ (5,000) $ (2,772) $ 15,079 =================================================================================================================================
(1) Accumulated other comprehensive loss consisted of the following: Dec. 31, Dec. 31, 2008 2007 - ---------------------------------------------------------------------------- Unrealized gain (loss) on marketable securities $ (46) $ 197 Derivative loss -- (78) Actuarial liability adjustment (1,374) (576) Foreign currency translation loss (1,352) (630) - ---------------------------------------------------------------------------- Accumulated other comprehensive loss $ (2,772) $ (1,087) ============================================================================ Comprehensive income (loss) was as follows:
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------------------- Net income (loss) $ (156,055) $ 4,925 $ 2,285 - ------------------------------------------------------------------------------------------- Unrealized gain (loss) on marketable securities (243) (50) 113 Derivative gain (loss) 78 (183) 98 Actuarial gain (loss) on liability (798) 975 186 Foreign currency translation gain (loss) (722) (37) 856 - ------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (1,685) 705 1,253 - ------------------------------------------------------------------------------------------- Comprehensive income (loss) $ (157,740) $ 5,630 $ 3,538 ===========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 45 PLAYBOY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income (loss) $ (156,055) $ 4,925 $ 2,285 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of property and equipment 4,692 4,963 3,971 Amortization of intangible assets 2,283 2,300 1,683 Amortization of investments in entertainment programming 32,483 33,935 36,564 Stock-based compensation 1,245 1,856 2,326 Impairment charges 146,536 1,508 -- Impairment charge on investments 2,033 -- -- Provision for reserves 4,121 -- -- Deferred subscription cost write-off 4,820 -- -- Amortization of deferred financing fees 356 490 535 Equity (income) loss in operations of investments 126 (129) 94 Deferred income taxes (12,863) (854) 867 Changes in current assets and liabilities: Receivables 11,034 (2,342) (103) Receivables from related parties (357) 87 137 Inventories 4,022 1,236 247 Deferred subscription acquisition costs (91) 1,234 170 Prepaid expenses and other current assets 5,550 (3,565) (1,109) Accounts payable (12,167) 8,746 3,771 Accrued salaries, wages and employee benefits 989 3,443 (3,796) Deferred revenues (5,180) (1,095) (937) Acquisition liability interest 834 1,274 459 Accrued litigation settlements -- (1,800) 800 Other current liabilities and accrued expenses 4,906 93 (2,145) - -------------------------------------------------------------------------------------------------------------- Net change in current assets and liabilities 9,540 7,311 (2,506) - -------------------------------------------------------------------------------------------------------------- Investments in entertainment programming (30,200) (34,405) (36,675) Increase in trademarks (1,656) (1,704) (2,734) (Increase) decrease in other noncurrent assets (330) 3,511 (52) Increase (decrease) in other noncurrent liabilities (5,691) 1,234 2,690 Other, net 2,360 (712) (53) - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,800 24,229 8,995 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Payments for acquisitions (60) (105) (7,761) Purchases of investments (1,066) (36,846) (574) Proceeds from sales of investments 11,355 26,377 18,000 Purchases of assets held for sale (6,895) -- -- Proceeds from assets held for sale 12,000 -- -- Additions to property and equipment (10,985) (8,493) (7,546) Other, net -- 88 -- - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 4,349 (18,979) 2,119 - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Payment of acquisition liabilities (2,700) (11,669) (11,628) Payment of deferred financing fees -- (212) -- Proceeds from stock-based compensation 118 163 494 - -------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (2,582) (11,718) (11,134) - -------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (978) 323 679 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,589 (6,145) 659 Cash and cash equivalents at beginning of year 20,603 26,748 26,089 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 25,192 $ 20,603 $ 26,748 ==============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Playboy Enterprises, Inc., together with its subsidiaries through which we conduct business, is a media and lifestyle company marketing the Playboy brand through a wide range of multimedia properties and licensing initiatives with operations in the following business segments: Entertainment, Publishing and Licensing. Principles of Consolidation: The consolidated financial statements include our accounts and all majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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. Reclassifications: Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation. New Accounting Pronouncements: In May 2008, the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles, or Statement 162. Statement 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles. Statement 162 becomes effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not expect the adoption of Statement 162 to impact our future results of operations or financial condition. In May 2008, the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1. FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We are required to adopt FSP APB 14-1 at the beginning of 2009 and apply FSP APB 14-1 retrospectively to all periods presented. We are currently evaluating the impact of adopting FSP APB 14-1 on our results of operations and financial condition. In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets, or FSP FAS 142-3. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or Statement 142. We are required to adopt FSP FAS 142-3 prospectively for intangible assets acquired on or after January 1, 2009. Intangible assets acquired prior to January 1, 2009 are not affected by the adoption of FSP FAS 142-3. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133, or Statement 161. Statement 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or Statement 133, and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. We are required to adopt Statement 161 at the beginning of 2009. Since Statement 161 impacts our disclosure but not our accounting treatment for derivative instruments and related hedged items, our adoption of Statement 161 will not impact our results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51, or Statement 160. Statement 160 clarifies that a noncontrolling interest (previously referred to as minority interest) in a subsidiary is an ownership interest in a consolidated entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and the noncontrolling 47 interest. We are required to adopt Statement 160 at the beginning of 2009. We do not expect the adoption of Statement 160 to have a significant impact on our future results of operations or financial condition. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, or Statement 141(R). Statement 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. Statement 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. Statement 141(R) also requires, among other things, that acquisition-related costs be recognized separately from the acquisition. We are required to adopt Statement 141(R) prospectively for business combinations on or after January 1, 2009. Assets and liabilities that arose from business combinations prior to January 1, 2009 are not affected by the adoption of Statement 141(R). In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or Statement 157. Statement 157 provides enhanced guidance for using fair value to measure assets and liabilities. We adopted Statement 157 on January 1, 2008 for our financial assets and liabilities. However, FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, delayed the effective date of Statement 157 to the beginning of 2009 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of Statement 157 to have a significant impact on our future results of operations or financial condition. Revenue Recognition: Domestic and international TV direct-to-home, or DTH, and cable revenues are recognized based on estimates of pay-per-view and video-on-demand buys and monthly subscriber counts reported each month by the system operators and adjusted to actual. The net adjustments to actual have not been material. International TV third-party revenues are recognized upon identification of programming scheduled for networks, delivery of programming to customers and/or upon the commencement of the license term. Revenues from the sale of Playboy magazine and online subscriptions are recognized over the terms of the subscriptions. Revenues from newsstand sales of Playboy magazine and special editions (net of estimated returns) and revenues from the sale of Playboy magazine advertisements are recorded when each issue goes on sale. Royalties from licensing our trademarks in our international magazine, consumer products licensing and location-based entertainment businesses are generally recognized on a straight-line basis over the terms of the related agreements. Stock-Based Compensation: On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or Statement 123(R), which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or Statement 123, under the modified prospective method. Statement 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends Statement of Financial Accounting Standards No. 95, Statement of Cash Flows. Statement 123(R) requires that all stock-based compensation to employees, including grants of employee stock options, be recognized in the income statement based on its fair value. Stock-based compensation expense is based on awards ultimately expected to vest, reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. Under the fair value recognition provisions of Statement 123(R), we measure stock-based compensation cost at the grant date based on the value of the award and recognize the expense over the vesting period. Compensation expense, as recognized under Statement 123(R), for all stock-based compensation awards is recognized using the straight-line attribution method. Stock-based compensation expense is reflected in "Selling and administrative expenses" on our Consolidated Statements of Operations and the proceeds are reflected in "Proceeds from stock-based compensation" on our Consolidated Statements of Cash Flows. See Note (S), Stock-Based Compensation. Cash Equivalents: Cash equivalents are temporary cash investments with an original maturity of three months or less at the date of purchase and are stated at cost, which approximates fair value. Marketable Securities and Short-Term Investments: Marketable securities and short-term investments are classified as available-for-sale securities, stated at fair value and accounted for under the specific identification method. Net unrealized holding gains and losses are included in "Accumulated other comprehensive loss." 48 Accounts Receivable and Allowance for Doubtful Accounts: Trade receivables are reported at their outstanding unpaid balances less an allowance for doubtful accounts. The allowance for doubtful accounts is increased by charges to income and decreased by chargeoffs (net of recoveries) or by reversals to income. We perform periodic evaluations of the adequacy of the allowance based on our past loss experience and adverse situations that may affect a customer's ability to pay. A receivable balance is written off when we deem the balance to be uncollectible. Inventories: Inventories are stated at the lower of cost (specific cost and average cost) or fair value. Assets Held for Sale: Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. See Note (C), Sale of Assets. Property and Equipment: Property and equipment are stated at cost. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and are immediately expensed for preliminary project activities or post-implementation activities. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. The useful life for building improvements is 10 years; furniture and equipment ranges from one to 10 years; and software ranges from one to five years. Leasehold improvements are depreciated using the straight-line method 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 property and equipment are recorded by removing the related cost and accumulated depreciation from the accounts, after which any related gains or losses are recognized. Advertising Costs: We expense advertising costs as incurred. In 2007 and 2006, direct response advertising costs, which consist primarily of costs associated with the promotion of Playboy magazine subscriptions, principally the production of direct mail solicitation materials and postage, and the distribution of direct- and e-commerce catalog mailings, were capitalized in accordance with the American Institute of Certified Public Accountants' Statement of Position 93-7, Reporting on Advertising Costs. These capitalized direct response advertising costs were amortized over the period during which the future benefits were expected to be received, generally six to 12 months. In 2008, given the uncertainties of both the magazine environment as well as the economy in general, we began expensing these costs as incurred and wrote off the remaining capitalized amount. Programming Amortization and Online Content Costs: Original programming and film acquisition costs are primarily assigned to the domestic and international networks and are capitalized and amortized utilizing the straight-line method, generally over three years. Online content expenditures are generally expensed as incurred. We believe that these methods provide a reasonable matching of expenses with total estimated revenues over the periods that revenues associated with films, programs and online content are expected to be realized. Film and program costs are stated at the lower of unamortized cost or estimated net realizable value as determined on a specific identification basis and are classified on our Consolidated Balance Sheets as noncurrent assets. See Note (N), Programming Costs, Net. Intangible Assets: In accordance with Statement 142, we do not amortize goodwill and trademarks with indefinite lives, but subject them to annual impairment tests. Capitalized trademark costs include costs associated with the acquisition, registration and/or renewal of our trademarks. In 2006, we began expensing certain costs associated with the defense of such trademarks. Our non-Playboy trademarks with finite lives are being amortized using the straight-line method over the lives of the trademarks, either 10 or 20 and one-quarter years. Copyright costs are being amortized using the straight-line method over 15 years. Noncompete agreements are being amortized using the straight-line method over the lives of the agreements, either five or 10 years. Distribution agreements are being amortized using the straight-line method over the lives of the agreements, which were determined to be 27 and one-half years. A program supply agreement is being amortized using the straight-line method over the 10-year life of the agreement. Other intangible assets continue to be amortized over their useful lives. The noncompete agreements, program supply agreement and copyright costs are all included in "Other noncurrent assets" on our Consolidated Balance Sheets. In 2006, we modified the assumptions related to the useful lives of certain distribution agreements that previously were classified as indefinite-lived. As these distribution agreements are now being amortized, the deferred tax liability related to the distribution agreements that is expected to be realized within the net operating loss, or NOL, carryforward period may be netted against our deferred tax asset. In each of 2008 and 2007, we recorded an income tax benefit for $0.5 million of the $3.9 million deferred tax liability related to the modification to the lives of these distribution agreements. 49 As a result of the restructuring of the ownership of Playboy TV International, LLC, or PTVI, in 2002, we acquired distribution agreements of $3.4 million with a weighted average life of approximately four years and a program supply agreement of $3.2 million with a life of 10 years. The weighted average life of the aggregate of the definite-lived intangible assets acquired was approximately seven years. We also acquired distribution agreements of $9.0 million, which were previously determined to be indefinite-lived. In 2006, we modified the lives to 27 and one-half years, which did not materially impact our results of operations. We conduct our annual impairment testing of goodwill and indefinite-lived intangible assets as of every October 1st. If the carrying amount of the asset is not recoverable based on an analysis using a combined weighted forecasted-discounted cash flow and market multiple approach, such asset would be reduced by the estimated shortfall of fair value to recorded value. We must make assumptions regarding forecasted-discounted cash flows and market multiples to determine a reporting unit's estimated fair value. Based on the annual impairment testing as of October 1, 2008, we concluded goodwill required an impairment charge of $105.8 million, while indefinite-lived trademarks required an impairment charge of $24.6 million. These non-Playboy trademarks have also been determined to have a finite life and are now being amortized. If any estimates or related assumptions change in the future, we may be required to record an additional impairment charge. See Note (O), Intangible Assets. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement 144, we evaluate the potential impairment of finite-lived acquired intangible assets when appropriate. If the carrying amount of the asset is not recoverable based on a forecasted-undiscounted cash flow analysis, such asset would be reduced by the estimated shortfall of fair value to recorded value. Based on the results of an impairment analysis on finite-lived intangible assets performed as of October 1, 2008, we recorded an impairment charge of $16.1 million on certain assets. See Note (O), Intangible Assets. Derivative Financial Instruments: We account for derivative instruments in accordance with Statement 133, as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which requires all derivative instruments to be recognized as either assets or liabilities in the balance sheet at fair value regardless of the purpose or intent for holding the derivative instrument. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated as and qualifies as part of a hedging relationship and, further, on the type of relationship. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategies for undertaking various hedge transactions. When derivative instruments are designated and qualify as cash flow or fair value hedges, the effective portion of the gain or loss on the derivative instruments is deferred and reported as a component of "Accumulated other comprehensive loss" and is reclassified into earnings upon execution of the hedged transaction. At December 31, 2008, we had derivative instruments that have been designated as and qualify for hedge accounting but were deemed to be ineffective. We had no unrealized gain or loss at December 31, 2008 and a net unrealized loss of $0.1 million at December 31, 2007 included in "Accumulated other comprehensive loss," which represents the effective portion of changes in fair value of the cash flow hedges. Earnings per Common Share: We compute basic and diluted earnings per share, or EPS, in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. Basic EPS is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the dilutive effects of stock options and other potentially dilutive financial instruments. See Note (G), Earnings per Common Share. Equity Investments: The equity method is used to account for our 19.0% investment in Playboy TV-Latin America, LLC, or PTVLA, since we have the ability to exercise influence over PTVLA. Foreign Currency Translation: Assets and liabilities in foreign currencies related to our international TV foreign operations were translated into U.S. dollars at the exchange rate existing at the balance sheet date. The net exchange differences resulting from these translations were included in "Accumulated other comprehensive loss" on our Consolidated Statements of Shareholders' Equity. Revenues and expenses were translated at average rates for the period. Transaction gains and losses that arise from foreign exchange rate fluctuations on transactions denominated in a currency other than U.S. dollars, except those transactions that operate as a hedge transaction, are included in 50 "Other, net" on our Consolidated Statements of Operations. Foreign currency transaction loss was $1.2 million in 2008, and foreign currency transaction gains were $0.3 million and $0.1 million in 2007 and 2006, respectively. (B) ACQUISITION In July 2001, we acquired The Hot Network and The Hot Zone networks, together with the related television assets of Califa Entertainment Group, Inc., or Califa. In addition, we acquired the Vivid TV network and the related television assets of V.O.D., Inc., or VODI, a separate entity owned by the sellers. We collectively refer to Califa and VODI as the Califa acquisition. These networks now operate as the Spice Digital Networks. The addition of these networks into our movie networks portfolio enabled us to offer consumers a wider range of adult programming. We accounted for the acquisition under the purchase method of accounting. Accordingly, the results of these networks since the acquisition date have been included in our Consolidated Statements of Operations. In connection with the acquisition and purchase price allocations, the Entertainment Group recorded goodwill of $27.4 million, which is deductible over 15 years for income tax purposes. Future obligations were recorded at their net present value and are reported on our Consolidated Balance Sheets as a component of current and noncurrent "Acquisition liabilities." In 2008, we recorded an impairment charge on Califa goodwill of $11.7 million. See Note (O), Intangible Assets. We recorded $30.8 million of intangible assets separate from goodwill consisting of $28.5 million for distribution agreements and $2.3 million for noncompete agreements. All of the noncompete agreements are being amortized over approximately eight years, which are the weighted average lives of these agreements. Distribution agreements of $7.5 million were amortized over approximately two years, which were the weighted average lives of these agreements. In 2008, we recorded an impairment charge on distribution agreements of $14.9 million. See Note (O), Intangible Assets. Distribution agreements of $21.0 million, which were previously determined to be indefinite-lived, are now being amortized over their modified useful lives of 27 and one-half years. The total consideration for the acquisition was $70.0 million and is required to be paid in installments over a 10-year period ending in 2011. The nominal consideration for Califa's assets was $28.3 million. We also assumed the obligations of Califa related to a note payable and noncompete liability. The nominal consideration for VODI's assets was $41.7 million. We were obligated to pay up to an additional $12.0 million in consideration upon the achievement of specified financial performance targets, $5.0 million of which we paid in 2003 and $7.0 million of which we paid in 2004. The amounts were recorded at the acquisition date as part of acquisition liabilities. We may accelerate all or any portion of the remaining unpaid purchase price, but only by making the accelerated payments in cash, at a discount rate to be mutually agreed upon by the parties in good-faith negotiations. However, if the parties are unable to agree on the discount rate, we may, at our sole discretion, elect to accelerate the payment at a 12% discount rate. The Califa acquisition agreement gave us the option of paying up to $71.0 million of the scheduled payments in cash or our Class B common stock, or Class B stock. The number of shares, if any, we issue in connection with a particular payment or particular payments is based on the trading prices of the Class B stock surrounding the applicable payment dates. Prior to each scheduled payment of consideration, we were to provide the sellers with written notice specifying the portion of the purchase price payment that we intend to pay in cash and the portion in Class B stock. In 2008, 2007 and 2006, we paid the sellers $1.0 million, $8.0 million and $8.0 million, respectively, in cash. The remaining payments of $1.0 million, $1.0 million and $0.8 million due in 2009, 2010 and 2011, respectively, must also be made in cash. See Note (R), Commitments and Contingencies, for additional information on other future acquisition payments. (C) SALE OF ASSETS In April 2008, we completed the sale of assets related to our Los Angeles production facility to Broadcast Facilities, Inc., or BFI, for $12.0 million. Our use of the facility for productions had significantly decreased since its inception, and we believe that linear networks and our need for their transmission capacity will decrease over the next several years. We recorded a $0.1 million unfavorable adjustment in 2008, related to the $1.5 million charge on assets held for sale recorded in the prior year. In connection with the sale of these assets, we entered into an agreement to sublet the entirety of the leased production facility to BFI for a period equal to the remaining term of our lease. BFI assumed all of our liabilities and 51 obligations under the existing facility lease as a part of the sublease and provided a letter of credit in the amount of $5.0 million to secure the performance of its obligations under the sublease. Also in connection with the sale of these assets, we assigned our rights and obligations under our domestic transponder agreements to BFI and entered into a services agreement under which BFI is providing us with certain satellite transmission and other related services (including compression, uplink and playback) for our standard definition cable channels. If we launch high definition cable channels during the term of the services agreement, BFI will also provide such services for these channels. We also have a dedicated radio studio and office space at the BFI facility. The agreement includes other terms and conditions which are standard for an agreement of this nature and continues for an initial term of five years, after which we may renew the agreement for an additional three years on substantially the same terms and conditions. (D) RESTRUCTURING EXPENSE In the fourth quarter of 2008, we developed a restructuring plan in our continued efforts to reduce costs, primarily related to several senior level Corporate and Entertainment Group positions. As a result of this plan, we recorded a charge of $4.0 million related to workforce reduction costs of 21 employees, most of whose jobs will be eliminated in the first quarter of 2009. Payments under this plan began in the fourth quarter of 2008 and will be substantially completed by the end of 2009 with some payments continuing into 2010. In the first half of 2009, we will report additional restructuring charges as well as relocation and other expenses related to vacating our New York office space and other cost-saving initiatives. In the third quarter of 2008, we developed a restructuring plan in an effort to lower overhead costs. As a result of this plan, we recorded a charge of $2.2 million related to costs associated with a workforce reduction of 55 employees, most of whose jobs were eliminated in the fourth quarter of 2008. We also eliminated approximately 25 open positions. Payments under this plan began in the fourth quarter of 2008 and will be substantially completed by the end of 2009 with some payments continuing into 2010. In 2007, we implemented a plan to outsource our e-commerce and catalog businesses, to sell the assets related to our Los Angeles production facility and to eliminate office space obtained in an acquisition. This restructuring plan resulted in the recording of a reserve of $0.4 million for costs associated with a workforce reduction of 28 employees. As part of this restructuring plan, we recorded an additional reserve of $0.6 million for contract termination fees and expenses in 2008. The following table sets forth the activity and balances of our restructuring reserves, which are included in "Accrued salaries, wages and employee benefits" and "Other current liabilities and accrued expenses" on our Consolidated Balance Sheets, for the years ended December 31, 2008 and 2007 (in thousands): Consolidation Workforce of Facilities Reduction and Operations Total - ---------------------------------------------------------------------------- Balance at December 31, 2006 $ 430 $ 268 $ 698 Reserve recorded 429 -- 429 Adjustments to previous estimates 43 (27) 16 Cash payments (473) (127) (600) - ---------------------------------------------------------------------------- Balance at December 31, 2007 429 114 543 Reserve recorded 6,357 -- 6,357 Additional reserve recorded 150 445 595 Adjustments to previous estimates (128) (41) (169) Cash payments (1,633) (518) (2,151) - ---------------------------------------------------------------------------- Balance at December 31, 2008 $ 5,175 $ -- $ 5,175 ============================================================================ (E) PROVISIONS FOR RESERVES In 2008, we recorded provisions of $2.9 million for a receivable and $1.2 million for archival material. 52 (F) INCOME TAXES The following table sets forth the income tax provision (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ---------------------------------------------------------------------------------------------------- Current: Federal $ -- $ (153) $ -- State 143 90 120 Foreign 2,870 2,845 1,509 - ---------------------------------------------------------------------------------------------------- Total current 3,013 2,782 1,629 - ---------------------------------------------------------------------------------------------------- Deferred: Federal (11,866) 1,463 160 State (1,695) 209 707 Foreign 698 (2,526) -- - ---------------------------------------------------------------------------------------------------- Total deferred (12,863) (854) 867 - ---------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ (9,850) $ 1,928 $ 2,496 ====================================================================================================
The U.S. statutory tax rate applicable to us for each of 2008, 2007 and 2006 was 35%. The following table sets forth the reconciliation of the income tax expense (benefit) computed at the U.S. federal statutory tax rate to the actual income tax expense (benefit) (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ---------------------------------------------------------------------------------------------------- Statutory rate tax expense (benefit) $ (58,067) $ 2,399 $ 1,673 Increase (decrease) in taxes resulting from: Foreign income and withholding tax on licensing income 2,870 2,845 1,509 State income tax expense (benefit) (1,790) 194 158 Nondeductible expenses 30,564 218 175 Increase (decrease) in valuation allowance 13,582 (2,075) 1,327 Tax benefit of foreign taxes paid or accrued (2,735) (2,541) (2,503) (Increase) decrease in state/foreign NOLs (1,264) 1,749 (181) Expired NOL/capital loss carryovers 7,460 1,217 -- Refund from amended federal return -- (2,150) -- Tax audit adjustment -- -- 281 Other expense (benefit) (470) 72 57 - ---------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ (9,850) $ 1,928 $ 2,496 ====================================================================================================
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. In 2008, we had a net income tax benefit of $9.8 million compared to a net income tax expense of $1.9 million in 2007. This reduction was due primarily to the reversal of deferred tax liabilities associated with the impairment charges on goodwill and other intangible assets. In 2007, the valuation allowance decreased by $2.4 million as a result of the realization of our U.K. NOLs and the effect of the deferred tax treatment of certain acquired intangibles. In 2006, the valuation allowance increased by $1.9 million related to the realization of the deferred tax benefit of our NOLs and foreign tax credits and the effect of the deferred tax treatment of certain acquired intangibles. In 2006, we modified the assumptions related to the useful lives of certain distribution agreements that previously were classified as indefinite-lived. As these distribution agreements are now being amortized, the deferred tax liability related to the distribution agreements that is expected to be realized within the NOL carryforward period may be netted against our deferred tax asset. In 2006, we recorded an income tax benefit for $2.6 million of the $3.9 million deferred tax liability related to the distribution agreement modification. In each of 53 2008 and 2007, we recognized an additional income tax benefit of $0.5 million related to the distribution agreements. The following table sets forth the significant components of our deferred tax assets and liabilities (in thousands): Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Deferred tax assets: NOL carryforwards $ 51,754 $ 48,513 Tax credit carryforwards 18,781 16,046 Temporary difference related to PTVI 4,830 5,720 Other deductible temporary differences 45,832 36,931 - ------------------------------------------------------------------------------- Total deferred tax assets 121,197 107,210 Valuation allowance (88,400) (74,818) - ------------------------------------------------------------------------------- Deferred tax assets 32,797 32,392 - ------------------------------------------------------------------------------- Deferred tax liabilities: Deferred subscription acquisition costs (1,487) (4,620) Intangible assets (19,144) (31,004) Other taxable temporary differences (17,501) (14,336) - ------------------------------------------------------------------------------- Deferred tax liabilities (38,132) (49,960) - ------------------------------------------------------------------------------- Deferred tax liabilities, net $ (5,335) $ (17,568) =============================================================================== At December 31, 2008, we had federal NOLs of $118.1 million expiring at various intervals between the years 2009 through 2028, state and local NOLs of $106.7 million expiring at various intervals between the years 2009 through 2028 and foreign NOLs of $6.9 million that have no expiration date. In addition, foreign tax credit carryforwards of $17.7 million and minimum tax credit carryforwards of $1.1 million are available to reduce future U.S. federal income taxes. The foreign tax credit carryforwards expire in 2015 through 2018 and the minimum tax credit carryforwards have no expiration date. On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, or FIN 48. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability for unrecognized income tax benefits. Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The following table sets forth a reconciliation of the beginning and ending amount of unrecognized tax benefits (in thousands): Fiscal Year Fiscal Year Ended Ended 12/31/08 12/31/07 - ------------------------------------------------------------------------------- Unrecognized tax benefits at beginning of year $ 7,978 $ 7,978 Increase (decrease) for prior year tax positions -- -- Increase (decrease) for current year tax positions -- -- Increase (decrease) related to settlements -- -- Increase (decrease) related to statute lapse -- -- - ------------------------------------------------------------------------------- Unrecognized tax benefits at end of year $ 7,978 $ 7,978 =============================================================================== At December 31, 2008, we had unrecognized tax benefits of $8.0 million; we do not expect this amount to change significantly over the next 12 months. Because of the impact of deferred income tax accounting, the disallowance would not affect the effective income tax rate nor would it accelerate the payment of cash to the taxing authority to an earlier period. The statute of limitations for tax years 2005 through 2008 remains open to examination by the major U.S. taxing jurisdictions to which we are subject. In addition, for all tax years prior to 2005 generating an NOL, tax authorities can adjust the amount of NOL. In our international tax jurisdictions, numerous tax years remain subject 54 to examination by tax authorities, including tax returns for at least 2003 and subsequent years in all of our major international tax jurisdictions. (G) EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted EPS (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ---------------------------------------------------------------------------------------- Numerator: For basic and diluted EPS - net income (loss) $ (156,055) $ 4,925 $ 2,285 ======================================================================================== Denominator: For basic EPS - weighted average shares 33,307 33,246 33,171 Effect of dilutive potential common shares: Employee stock options and other -- 35 105 - ---------------------------------------------------------------------------------------- Dilutive potential common shares -- 35 105 - ---------------------------------------------------------------------------------------- For diluted EPS - weighted average shares 33,307 33,281 33,276 ======================================================================================== Basic and diluted EPS $ (4.69) $ 0.15 $ 0.07 ========================================================================================
The following table sets forth the number of shares related to outstanding options to purchase our Class B stock and the potential shares of Class B stock contingently issuable under our 3.00% convertible senior subordinated notes due 2025, or convertible notes. These shares were not included in the computations of diluted EPS for the years presented, as their inclusion would have been antidilutive (in thousands):
Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ---------------------------------------------------------------------------------------- Stock options 3,627 3,133 3,387 Convertible notes 6,758 6,758 6,758 - ---------------------------------------------------------------------------------------- Total 10,385 9,891 10,145 ========================================================================================
(H) FINANCIAL INSTRUMENTS Fair Value: The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. For cash and cash equivalents, receivables and certain other current assets, the amounts reported approximated fair value due to their short-term nature. As described in Note (P), Financing Obligations, in March 2005, we issued and sold in a private placement $115.0 million aggregate principal amount of our convertible notes. As of December 31, 2008 and 2007, the fair value of the convertible notes was determined to be $51.8 million and $103.9 million, respectively. The convertible notes had not traded since September 2008. The fair value does not necessarily represent the purchase price for the entire convertible note portfolio. Concentrations of Credit Risk: Concentration of credit risk with respect to accounts receivable is limited due to the wide variety of customers to whom and segments from which our products are sold and/or licensed. 55 (I) MARKETABLE SECURITIES AND INVESTMENTS The following table sets forth marketable securities and investments (in thousands):
Dec. 31, Dec. 31, 2008 2007 - --------------------------------------------------------------------------------------------- Marketable securities and short-term investments: Cost of marketable securities $ 890 $ 6,927 Cost of short-term investments 5,249 6,000 Gross unrealized holding gains -- 25 - --------------------------------------------------------------------------------------------- Fair value of marketable securities and short-term investments 6,139 12,952 - --------------------------------------------------------------------------------------------- Long-term investments: Cost of long-term investments -- 6,384 Gross unrealized holding gains -- 290 Gross unrealized holding losses -- (118) - --------------------------------------------------------------------------------------------- Fair value of long-term investments -- 6,556 - --------------------------------------------------------------------------------------------- Total marketable securities and investments $ 6,139 $ 19,508 =============================================================================================
We purchased $1.1 million of investments and received proceeds of $11.4 million from the sales of investments in 2008. We had realized losses of $0.8 million in 2008 compared to realized gains of $0.2 million and $31,000 in 2007 and 2006, respectively. Included in "Comprehensive income (loss)" were net unrealized holding losses of $0.2 million and $0.1 million for 2008 and 2007, respectively, and a net unrealized holding gain of $0.1 million for 2006. We recognized interest income of $0.5 million, $2.5 million and $2.4 million during 2008, 2007 and 2006, respectively. At December 31, 2008 and December 31, 2007, due to adverse market conditions, we determined that the market value of our investment in an enhanced cash portfolio was other-than-temporarily impaired, and we recorded impairment charges of $0.8 million and $0.1 million on our Consolidated Statements of Operations in 2008 and 2007, respectively. In addition, at December 31, 2008, we recorded an impairment charge of $1.2 million on certain investments related to our nonqualified deferred compensation plans. These investments were deemed to be other-than-temporarily impaired as a result of adverse market conditions. (J) FAIR VALUE MEASUREMENT As discussed in Note (A), Summary of Significant Account Policies, we adopted Statement 157 on January 1, 2008 for our financial assets and liabilities. Our financial assets primarily relate to marketable securities and investments, while financial liabilities primarily relate to derivative instruments to hedge the variability of forecasted cash receipts related to royalty payments denominated in yen and euro. We utilize the market approach to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Statement 157 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of three levels: Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities; Level 2 - Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data; and Level 3 - Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. 56 The following table sets forth our financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at December 31, 2008 (in thousands):
Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Total Fair Value Assets Inputs Inputs Measurement (Level 1) (Level 2) (Level 3) - ------------------------------------------------------------------------------------------------------------ Marketable securities and investments $ 6,139 $ 5,249 $ 890(1) $ -- Derivative assets $ 42 $ -- $ 42 $ -- - ------------------------------------------------------------------------------------------------------------
(1) At December 31, 2008 and December 31, 2007, we had $0.9 million and $6.9 million, respectively, in an enhanced cash portfolio included in "Marketable securities and short-term investments" on our Consolidated Balance Sheets. Due to adverse market conditions, we determined that the market value of this investment was other-than-temporarily impaired, and during the fiscal years ended December 31, 2008 and December 31, 2007, we recorded impairment charges of $0.8 million and $0.1 million, respectively. Through December 31, 2008, we have received 10 distributions from the investment, which is being liquidated, at an average net asset value of 96.61%, resulting in a cumulative realized loss of $1.1 million, which includes $0.9 million of impairment charges. (K) INVENTORIES In January 2008, we signed an agreement to outsource our Playboy and BUNNYshop e-commerce and catalog businesses to eFashion Solutions, LLC, or eFashion. As part of this agreement, we sold all remaining inventory related to those businesses to eFashion. The following table sets forth inventories, which are stated at the lower of cost (specific cost and average cost) or fair value (in thousands): Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Paper $ 2,371 $ 2,948 Editorial and other prepublication costs 4,759 5,518 Merchandise finished goods 211 2,897 - ------------------------------------------------------------------------------- Total inventories $ 7,341 $ 11,363 =============================================================================== (L) ADVERTISING COSTS At December 31, 2008 and 2007, advertising costs of $0 and $7.2 million, respectively, were deferred and included in "Deferred subscription acquisition costs" and "Prepaid expenses and other current assets" on our Consolidated Balance Sheets. For 2008, 2007 and 2006, our advertising expense was $22.9 million, $28.0 million and $27.7 million, respectively. (M) PROPERTY AND EQUIPMENT, NET The following table sets forth property and equipment, net (in thousands): Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Land $ 292 $ 292 Buildings and improvements 8,872 8,775 Furniture and equipment 23,544 22,019 Leasehold improvements 17,181 13,002 Software 16,389 12,895 - ------------------------------------------------------------------------------- Total property and equipment 66,278 56,983 Accumulated depreciation (45,959) (42,318) - ------------------------------------------------------------------------------- Total property and equipment, net $ 20,319 $ 14,665 =============================================================================== 57 (N) PROGRAMMING COSTS, NET The following table sets forth programming costs, net (in thousands): Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Released, less amortization $ 35,290 $ 31,531 Completed, not yet released 7,903 8,149 In-process 8,863 15,246 - ------------------------------------------------------------------------------- Total programming costs, net $ 52,056 $ 54,926 =============================================================================== (O) INTANGIBLE ASSETS In accordance with Statement 142, we do not amortize goodwill and trademarks with indefinite lives, but subject them to annual impairment tests. As of October 1, 2008, we evaluated goodwill and other indefinite lived assets for impairment using a combined weighted forecasted-discounted cash flow method and a market multiple approach and concluded goodwill required an impairment charge of $105.8 million, while certain indefinite-lived non-Playboy trademarks required an impairment charge of $24.6 million. These trademarks have also been determined to have a finite life and are now being amortized. This analysis was based in part upon our financial results during the year and our current expectation of future performance. At December 31, 2008 and 2007, our indefinite-lived intangible assets that are not amortized but subject to our annual impairment test included goodwill, reflected entirely in the Entertainment Group, of $27.8 million and $133.6 million, respectively, and trademarks of $42.5 million and $65.4 million, respectively. For the years ended December 31, 2008 and 2007, the aggregate amount of goodwill acquired was $35 thousand and $0.6 million, respectively. In accordance with Statement 144, we evaluate the potential impairment of finite-lived acquired intangible assets when appropriate. If the carrying amount of the asset is not recoverable based on a forecasted-undiscounted cash flow analysis, such asset would be reduced by the estimated shortfall of fair value to recorded value. Based on the results of an impairment analysis on finite-lived intangible assets performed as of October 1, 2008, we recorded an impairment charge of $16.1 million. The following table sets forth our amortizable intangible assets (in thousands):
Gross Carrying Accumulated Net Carrying December 31, 2008 Amount Amortization Impairment Amount - -------------------------------------------------------------------------------------------------- Noncompete agreements $ 14,050 $ (13,688) $ -- $ 362 Distribution agreements 33,140 (6,126) (14,876) 12,138 Non-Playboy trademarks 29,303 (1,913) (24,580) 2,810 Program supply agreement 3,226 (1,936) -- 1,290 Trademark license agreement 2,530 (845) (1,175) 510 Copyrights 2,194 (1,427) -- 767 Other 621 (542) -- 79 - -------------------------------------------------------------------------------------------------- Total amortizable intangible assets $ 85,064 $ (26,477) $ (40,631) $ 17,956 ==================================================================================================
Gross Carrying Accumulated Net Carrying December 31, 2007 Amount Amortization Impairment Amount - -------------------------------------------------------------------------------------------------- Noncompete agreements $ 14,000 $ (13,545) $ -- $ 455 Distribution agreements 33,140 (4,803) -- 28,337 Program supply agreement 3,226 (1,613) -- 1,613 Trademark license agreement 2,530 (542) -- 1,988 Copyrights 2,064 (1,281) -- 783 Other 665 (535) -- 130 - -------------------------------------------------------------------------------------------------- Total amortizable intangible assets $ 55,625 $ (22,319) $ -- $ 33,306 ==================================================================================================
The aggregate amortization expense for intangible assets with definite lives for 2008, 2007 and 2006 was $2.3 million, $2.3 million and $1.7 million, respectively. The aggregate amortization expense for intangible assets with definite lives is expected to total approximately $1.6 million, $1.5 million, $1.4 million, $1.3 million and $0.9 million for 2009, 2010, 2011, 2012 and 2013, respectively. 58 (P) FINANCING OBLIGATIONS The following table sets forth financing obligations (in thousands): Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Convertible senior subordinated notes, interest of 3.00% $ 115,000 $ 115,000 - ------------------------------------------------------------------------------- Total financing obligations $ 115,000 $ 115,000 =============================================================================== Debt Financing In March 2005, we issued and sold $115.0 million aggregate principal amount of our convertible notes, which included $15.0 million due to the initial purchasers' exercise of the over-allotment option. The net proceeds of approximately $110.3 million from the issuance and sale of the convertible notes, after deducting the initial purchasers' discount and offering expenses, were used, together with available cash, (a) to complete a tender offer and consent solicitation for, and to purchase and retire all of the $80.0 million outstanding principal amount of the 11.00% senior secured notes issued by our subsidiary PEI Holdings, Inc., or Holdings, for a total of approximately $95.2 million, including the bond tender premium and consent fee of $14.9 million and other expenses of $0.3 million, (b) to purchase 381,971 shares of our Class B stock for an aggregate purchase price of $5.0 million concurrently with the sale of the convertible notes and (c) for working capital and general corporate purposes. The convertible notes bear interest at a rate of 3.00% per annum on the principal amount of the notes, payable in arrears on March 15th and September 15th of each year, payment of which began on September 15, 2005. In addition, under certain circumstances beginning in 2012, if the trading price of the convertible notes exceeds a specified threshold during a prescribed measurement period prior to any semiannual interest period, contingent interest will become payable on the convertible notes for that semiannual interest period at an annual rate of 0.25% per annum. The convertible notes are convertible into cash and, if applicable, shares of our Class B stock based on an initial conversion rate, subject to adjustment, of 58.7648 shares per $1,000 principal amount of the convertible notes (which represents an initial conversion price of approximately $17.02 per share) only under the following circumstances: (a) during any fiscal quarter after the fiscal quarter ending March 31, 2005, if the closing sale price of our Class B stock for each of 20 or more consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on that trading day; (b) during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 principal amount of convertible notes over that five consecutive trading day period was equal to or less than 95% of the average conversion value of the convertible notes during that period; (c) upon the occurrence of specified corporate transactions, as set forth in the indenture governing the convertible notes; or (d) if we have called the convertible notes for redemption. Upon conversion of a convertible note, a holder will receive cash in an amount equal to the lesser of the aggregate conversion value of the note being converted and the aggregate principal amount of the note being converted. If the aggregate conversion value of the convertible note being converted is greater than the cash amount received by the holder, the holder will also receive an amount in whole shares of Class B stock equal to the aggregate conversion value less the cash amount received by the holder. A holder will receive cash in lieu of any fractional shares of Class B stock. The maximum conversion rate, subject to adjustment, is 76.3942 shares per $1,000 principal amount of the convertible notes. The convertible notes mature on March 15, 2025. On or after March 15, 2010, if the closing price of our Class B stock exceeds a specified threshold, we may redeem any of the convertible notes at a redemption price in cash equal to 100% of the principal amount of the convertible notes, plus any accrued and unpaid interest up to, but excluding, the redemption date. On or after March 15, 2012, we may at any time redeem any of the convertible notes at the same redemption price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the occurrence of a fundamental change, as specified in the indenture governing the convertible notes, holders may require us to purchase all or a portion of their convertible notes at a purchase price in cash equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest up to, but excluding, the purchase date. The convertible notes are unsecured senior subordinated obligations of Playboy Enterprises, Inc. and rank junior to all of the issuer's senior debt, including its guarantee of Holdings' borrowings under our credit facility; equally with all of the issuer's future senior subordinated debt; and, senior to all of the issuer's future subordinated 59 debt. In addition, the assets of the issuer's subsidiaries are subject to the prior claims of all creditors, including trade creditors, of those subsidiaries. Credit Facility At December 31, 2008, our $50.0 million credit facility provided for revolving borrowings, the issuance of letters of credit or a combination of both of up to $50.0 million outstanding at any time. In February 2009, we amended the terms of our credit facility to, among other things, reduce the size of the facility to $30.0 million. Borrowings under the credit facility bear interest at a variable rate, equal to a specified LIBOR or base rate plus a specified borrowing margin based on our Adjusted EBITDA, as defined in the credit agreement. We pay fees on the outstanding amount of letters of credit based on the margin that applies to borrowings that bear interest at a rate based on LIBOR. All amounts outstanding under the credit facility will mature on January 31, 2011. The obligations of Holdings as borrower under the credit facility are guaranteed by us and each of our other U.S. subsidiaries. The obligations of the borrower and nearly all of the guarantors under the credit facility are secured by a first-priority lien on substantially all of the borrower's and the guarantors' assets. At December 31, 2008, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $49.2 million of available borrowings under this facility. At February 27, 2009, there were no borrowings and $0.8 million in letters of credit outstanding under this facility, resulting in $29.2 million of available borrowings under this facility. (Q) BENEFIT PLANS Our Employees Investment Savings Plan is a defined contribution plan consisting of two components: a profit sharing plan and a 401(k) plan. The profit sharing plan covers all employees who have completed 12 months of service of at least 1,000 hours. Our discretionary contribution to the profit sharing plan is distributed to each eligible employee's account in an amount equal to the ratio of each eligible employee's compensation, subject to Internal Revenue Service limitations, to the total compensation paid to all such employees. We did not make any contributions to the plan in 2008. Total contributions for 2007 and 2006 related to this plan were $0.5 million and $0.3 million, respectively. Eligible employees may participate in our 401(k) plan upon their date of hire. Our 401(k) plan offers several mutual fund investment options. The purchase of our stock has never been an option. We make matching contributions to our 401(k) plan based on each participating employee's contributions and eligible compensation. Our matching contribution expense for 2008, 2007 and 2006 related to this plan were $1.6 million, $1.4 million and $1.4 million, respectively. We had two nonqualified deferred compensation plans during 2008, which permitted certain employees and all nonemployee directors to annually elect to defer a portion of their compensation. A match was provided to employees who participated in the deferred compensation plan, at a certain specified minimum level, and whose annual eligible earnings exceeded the salary limitation contained in the 401(k) plan. All amounts contributed and earnings credited under these plans were general unsecured obligations. Such obligations totaled $5.4 million and $6.7 million at December 31, 2008 and December 31, 2007, respectively, and are included in "Other current liabilities and accrued expenses" and "Other noncurrent liabilities," respectively, on our Consolidated Balance Sheets. In December 2008, participants chose, in accordance with transition rules in effect in connection with a change to the tax laws governing deferred compensation, to receive their account balances in full. Assets from both plans will be fully distributed in 2009. We currently maintain a practice of paying a separation allowance under our salary continuation policy to employees with at least five years of continuous service who voluntarily terminate employment with us and are at age 60 or thereafter, which is not funded. Payments in 2008, 2007 and 2006 under this policy were $0.9 million, $0.6 million and $0.3 million, respectively. In 2008, 2007 and 2006 we recorded expense, based on actuarial estimates, of $0.5 million, $0.5 million and $0.6 million, respectively. We adopted the recognition and related disclosure provisions of Statement 158 effective December 31, 2006, with the projected benefit obligation reflected in "Other current liabilities and accrued expenses" and "Other noncurrent liabilities" on our Consolidated Balance Sheets. At December 31, 2008 and 2007, the accumulated benefit obligation was $3.3 million and $3.0 million, respectively. At December 31, 2008 and 2007, the projected benefit obligation was $4.4 million and $4.0 million, respectively. Our estimated future benefit payments are $0.5 million, $0.5 million, $0.5 million, $0.4 million and $0.5 million for 2009, 2010, 2011, 2012 and 2013, respectively, 60 and $2.2 million for the five-year period ending December 31, 2018. The assumptions used to compute the 2008 projected benefit obligation included a discount rate of 6.00% and a rate of compensation increase of 4.00%. (R) COMMITMENTS AND CONTINGENCIES Our principal lease commitments are for office space, operations facilities and furniture and equipment. Some of these leases contain renewal options. In connection with the sale of assets related to our Los Angeles production facility, we entered into an agreement to sublet the entirety of the leased production facility to BFI for a period equal to the remaining term of our lease. BFI assumed all of our liabilities and obligations under the existing facility lease as a part of the sublease. See Note (C), Sale of Assets. The following table sets forth rent expense, net (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------- Minimum rent expense $ 12,503 $ 15,147 $ 15,437 Sublease income (2,148) -- -- - ------------------------------------------------------------------------------- Rent expense, net $ 10,355 $ 15,147 $ 15,437 =============================================================================== There was no contingent rent expense in 2008, 2007 and 2006. The following table sets forth the minimum future commitments and total minimum future sublease income at December 31, 2008, under operating leases with initial or remaining noncancelable terms in excess of one year (in thousands): Minimum Lease Sublease Commitments Income - ------------------------------------------------------------------------------- 2009 $ 8,928 $ (2,577) 2010 9,220 (2,651) 2011 9,344 (2,728) 2012 9,277 (2,863) 2013 8,451 (3,054) Later years 47,726 (11,327) - ------------------------------------------------------------------------------- Total $ 92,946 $ (25,200) =============================================================================== We entered into a services agreement with BFI to provide us with certain satellite transmission and other related services, the terms of which extend through 2013. At December 31, 2008, the future commitments related to this agreement were $5.7 million, $5.8 million, $4.9 million, $4.7 million, and $1.2 million for 2009, 2010, 2011, 2012 and 2013, respectively. We had two international transponder service agreements, the terms of which extend through 2009. At December 31, 2008, the future commitment related to these two agreements was $1.9 million. We had noncancelable obligations to license programming from other studios of $4.8 million, $5.0 million and $3.3 million for 2009, 2010 and 2011, respectively. In 2006, we acquired Club Jenna, Inc. and related companies, for which we paid $7.7 million at closing, $1.6 million in 2007 and $1.7 million in 2008 with additional purchase price payments of $2.3 million and $4.3 million due in 2009 and 2010, respectively. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments based primarily on DVD sales of existing content of the acquired business over a 10-year period and on content produced by the acquired business during the five-year period after the closing of the acquisition. No earnout payments have been made through December 31, 2008, and no future earnouts are expected as we are exiting the DVD business. In 2005, we acquired an affiliate network of websites. We paid $8.0 million at closing and $2.0 million in each of 2006 and 2007. Pursuant to the acquisition agreement, we are also obligated to make future contingent earnout payments over the five-year period commencing January 1, 2005, based primarily on the 61 financial performance of the acquired business. If the required performance benchmarks are achieved, any contingent earnout payments will be recorded as additional purchase price and/or compensation expense. During each of 2008, 2007 and 2006, earnout payments of $0.1 million were made and recorded as additional purchase price. In 2002, a $4.4 million verdict was entered against us by a state trial court in Texas in a lawsuit with a former publishing licensee. We terminated the license in 1998 due to the licensee's failure to pay royalties and other amounts due us under the license agreement. We posted a bond in the amount of approximately $9.4 million, which represented the amount of the judgment, costs and estimated pre- and post-judgment interest. We appealed and the Texas State Appellate Court reversed the judgment by the trial court, rendered judgment for us on the majority of plaintiffs' claims and remanded the remaining claims for a new trial. We filed a petition for review with the Texas Supreme Court. On January 25, 2008, the Texas Supreme Court denied our petition for review. On February 8, 2008, we filed a petition for rehearing with the Texas Supreme Court. On May 16, 2008, the Texas Supreme Court denied our motion for rehearing. The posted bond has been canceled and the remaining claims will be retried. We, on advice of legal counsel, believe that it is not probable that a material judgment against us will be obtained and have not recorded a liability for this case in accordance with FASB Statement of Financial Accounting Standards No. 5, Accounting for Contingencies. (S) STOCK-BASED COMPENSATION We have stock plans for key employees and nonemployee directors, which provide for the grant of nonqualified and incentive stock options and/or shares of restricted stock units and other equity awards in our Class B stock. The Compensation Committee of the Board of Directors, which is composed entirely of independent nonemployee directors, administers all the plans. These plans are designed to further our growth, development and financial success by providing key employees with strong additional incentives to maximize long-term stockholder value. The Compensation Committee believes that this objective can be best achieved through assisting key employees to become owners of our stock, which aligns their interests with our interests. As stockholders, key employees will benefit directly from our growth, development and financial success. These plans also enable us to attract and retain the services of those executives whom we consider essential to our long-range success by providing these executives with a competitive compensation package and an opportunity to become owners of our stock. At December 31, 2008, we had 2,826,120 shares of our Class B stock available for grant under these plans. Stock options, exercisable for shares of our Class B stock, generally vest ratably over a three- to four-year period from the grant date and expire 10 years from the grant date. In 2008, we awarded restricted stock units, which provided for the issuance of our Class B stock if certain performance-based goals were met. As of December 31, 2008, the performance goals were not formally approved by the Board of Directors. Pursuant to the requirements of Statement 123(R), we have measured the fair value expense to be recognized during 2008 based upon the December 31, 2008 closing price of our Class B stock, resulting in expense of $0.1 million. In the first quarter of 2009, the Board of Directors replaced the performance-based criteria for the vesting of these grants with a time-based vesting schedule. We completed the final measurement of fair value for the 2008 grants awarded and will record expense prospectively on this basis. The 2006 grants of restricted stock units provide for the issuance of our Class B stock if three-year cumulative operating income target thresholds are met. The 2007 restricted stock unit grants provide for the issuance of our Class B stock if two-year cumulative operating income target thresholds are met; the 2007 grants are also subject to an additional one-year service requirement for the units to vest. The operating income minimum thresholds established for each grant were not achieved, and the restricted stock units for those grants were forfeited in 2009. We also have an Employee Stock Purchase Plan, or ESPP, that provides substantially all regular full- and part-time employees an opportunity to purchase shares of our Class B stock through payroll deductions. The funds are withheld and then used to acquire stock on the last trading day of each quarter, based on that day's closing price less a 15% discount. ESPP expense is reflected in "Selling and administrative expenses" on our Consolidated Statements of Operations and the proceeds are reflected in "Proceeds from stock-based compensation" on our Consolidated Statements of Cash Flows. At December 31, 2008, we had 37,750 shares of our Class B stock available for purchase under this plan. One of our stock plans pertaining to nonemployee directors also allows for the issuance of our Class B stock as awards and payments for retainer, committee and meeting fees. 62 Stock-Based Compensation Expense The following table sets forth stock-based compensation expense related to stock options, restricted stock units, our ESPP and other equity awards for 2008, 2007 and 2006 (in thousands, except per share amounts): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------- Stock options $ 1,439 $ 1,131 $ 3,141 Restricted stock units (407) 502 (1,282) ESPP 21 29 29 Other equity awards 192 194 438 - ------------------------------------------------------------------------------- Total $ 1,245 $ 1,856 $ 2,326 =============================================================================== Stock option and restricted stock option expense for 2008, 2007 and 2006 include adjustments reflecting actual versus estimated forfeitures. At December 31, 2008, there was $0.8 million of unrecognized stock-based compensation expense related to nonvested stock options, which will be recognized over a weighted average period of 1.3 years. At December 31, 2008, performance goals associated with the 2008 restricted stock unit grants were not yet established. Pursuant to the requirements of Statement 123(R), we recorded $0.1 million of compensation expense in 2008 related to these grants based on the fair value of the underlying stock. Also, in 2008, we determined it was unlikely that the minimum threshold associated with the 2007 grants would be met. Therefore, we reversed $0.5 million of stock-based compensation expense that was recorded in 2007 related to these restricted stock unit grants. As of December 31, 2008, there was $0.3 million of unrecognized stock-based compensation expense related to nonvested restricted stock units, which will be recognized over 2.2 years. In 2006, we determined that it was unlikely that the minimum threshold associated with the 2004 restricted stock unit grants would be met. Therefore, in 2006 we reversed $0.6 million and $0.7 million of stock-based compensation expense that was recorded in 2005 and 2004, respectively, related to the 2004 grants. Stock Options We estimate the value of stock options on the date of grant using the Lattice Binomial model, or Lattice model. The Lattice model requires extensive analysis of actual exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate, expected dividends and option cancellations. The following table sets forth the assumptions used for the Lattice model: Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------- Expected volatility 31% - 41% 25% - 41% 29% - 43% Weighted average volatility 35% 34% 38% Risk-free interest rate 1.95% - 5.10% 4.67% - 5.04% 4.32% - 5.16% Expected dividends -- -- -- - ------------------------------------------------------------------------------- The expected life of stock options represents the weighted average period the stock options are expected to remain outstanding and is a derived output of the Lattice model. The expected life of stock options is impacted by all of the underlying assumptions and calibration of the Lattice model. The Lattice model assumes that exercise behavior is a function of the option's remaining contractual life and the extent to which the option's fair market value exceeds the exercise price. The Lattice model estimates the probability of exercise as a function of these two variables based upon the entire history of exercises and vested cancellations on all past option grants. The weighted average expected life for options granted during 2008, 2007 and 2006 using the Lattice model was 6.7 years, 6.3 years and 5.9 years, respectively. The weighted average fair value per share for stock options granted during 2008, 2007 and 2006 using the Lattice model was $2.45, $4.64 and $6.03, respectively. 63 The following table sets forth stock option activity for the year ended December 31, 2008: Weighted Average Number of Exercise Shares Price - -------------------------------------------------------------------------------- Outstanding at December 31, 2007 3,546,250 $ 15.60 Granted 171,000 5.72 Canceled (138,666) 13.27 - ------------------------------------------------------------------- Outstanding at December 31, 2008 3,578,584 $ 15.22 ================================================================================ During 2008 and 2007, there were no exercises of stock options. The aggregate intrinsic value for options exercised during 2006 was $0.1 million. At December 31, 2008, the weighted average remaining contractual lives of options outstanding and options exercisable were 4.0 years and 3.4 years, respectively. At December 31, 2008, the number of options exercisable was 3,105,759 and the weighted average exercise price per share of options exercisable was $15.97. There were no aggregate intrinsic values related to options outstanding and options exercisable at December 31, 2008. The following table sets forth the activity and balances of our stock options not yet vested for the year ended December 31, 2008: Weighted Average Number of Grant-Date Shares Fair Value - -------------------------------------------------------------------------------- Outstanding at December 31, 2007 707,833 $ 5.61 Granted 171,000 2.45 Vested (365,509) 5.71 Canceled (40,499) 4.66 - ------------------------------------------------------------------- Outstanding at December 31, 2008 472,825 $ 4.47 ================================================================================ The total fair value of options vested in 2008, 2007 and 2006 was $2.1 million, $2.7 million and $3.0 million, respectively. Restricted Stock Units At December 31, 2008, we had 632,750 restricted stock units outstanding, none of which were vested. 64 The following table sets forth the activity and balances of our restricted stock units for the years ended December 31, 2008, 2007 and 2006: Weighted Average Number of Grant-Date Shares Fair Value - -------------------------------------------------------------------------------- Outstanding at December 31, 2005 319,000 $ 12.91 Granted 233,500 13.51 Forfeited (112,000) 14.23 Canceled (107,500) 13.34 - ------------------------------------------------------------------ Outstanding at December 31, 2006 333,000 12.75 Granted 250,625 10.61 Forfeited (121,000) 11.86 Canceled (28,750) 13.25 - ------------------------------------------------------------------ Outstanding at December 31, 2007 433,875 11.73 Granted 270,625 2.16 Canceled (71,750) 8.37 - ------------------------------------------------------------------ Outstanding at December 31, 2008 632,750 $ 8.02 ================================================================================ In 2008, we issued 270,625 shares of restricted stock units at a weighted average fair value per share of $2.16, and 25,000 of these shares were canceled during the year. Employee Stock Purchase Plan Stock-based compensation expense related to our ESPP was $21,000 for 2008 and $29,000 for each of 2007 and 2006. Other Equity Awards We issued 33,674 shares of our Class B stock during 2008 related to other equity awards. Stock-based compensation expense related to other equity awards was $0.2 million, $0.2 million and $0.4 million for 2008, 2007 and 2006, respectively. Income Taxes On November 10, 2005, the FASB issued Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, or FSP FAS 123(R)-3. We have elected to adopt the alternative transition method provided in FSP FAS 123(R)-3 for calculating the tax effects of stock-based compensation pursuant to Statement 123(R). The alternative transition method simplifies the calculation of the beginning balance of the additional paid-in capital pool, or APIC pool, related to the tax effect of employee stock-based compensation. This method also has subsequent impact on the APIC pool and Consolidated Statements of Cash Flows relating to the tax effects of employee stock-based compensation awards that are outstanding upon adoption of Statement 123(R). Under Statement 123(R), the income tax effects of share-based payments are recognized for financial reporting purposes only if such awards would result in deductions on our income tax returns. The settlement of share-based payments to date that would have resulted in an excess tax benefit would have increased our existing NOL carryforward. Under Statement 123(R), no excess tax benefits resulting from the settlement of a share-based payment can result in a tax deduction before realization of the tax benefit; i.e., the recognition of excess tax benefits cannot be recorded until the excess benefit reduces current income taxes payable. Additionally, as a result of our existing NOL carryforward position, no excess tax benefits relating to share-based payments have been recorded for the years ended December 31, 2008 and 2007. 65 (T) CONSOLIDATED STATEMENTS OF CASH FLOWS The following table sets forth cash paid for interest and income taxes (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - -------------------------------------------------------------------------------- Interest $ 4,864 $ 5,042 $ 5,308 Income taxes $ 2,343 $ 2,166 $ 1,976 - -------------------------------------------------------------------------------- (U) SEGMENT INFORMATION Our businesses are currently organized into the following three reportable segments: Entertainment, Publishing and Licensing. Entertainment Group operations include the production, marketing and sales of programming under the Playboy, Spice and other brand names, which are distributed through various channels, including domestic and international TV, Internet, wireless and satellite radio. Also included is e-commerce, a business we completed outsourcing in 2008. Publishing Group operations include the publication of Playboy magazine, special editions and other domestic publishing businesses, including books and calendars, and the licensing of international editions of Playboy magazine. Licensing Group operations include the licensing of consumer products carrying one or more of our trademarks and/or images, Playboy-branded retail stores, multifaceted location-based entertainment venues and certain revenue-generating marketing activities. These reportable segments are based on the nature of the products offered. Our chief operating decision maker evaluates performance and allocates resources based on several factors, of which the primary financial measure is segment operating results. The accounting policies of the reportable segments are the same as those described in Note (A), Summary of Significant Accounting Policies. 66 The following table sets forth financial information by reportable segment (in thousands): Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended 12/31/08 12/31/07 12/31/06 - ------------------------------------------------------------------------------- Net revenues (1) Entertainment $ 167,263 $ 203,065 $ 201,068 Publishing 84,467 93,774 97,078 Licensing 40,417 43,001 32,996 - ------------------------------------------------------------------------------- Total $ 292,147 $ 339,840 $ 331,142 =============================================================================== Income (loss) before income taxes (2) Entertainment $ 12,301 $ 21,291 $ 23,299 Publishing (7,580) (7,568) (5,374) Licensing 23,676 26,432 18,927 Corporate Administration and Promotion (23,872) (28,159) (25,768) Restructuring expense (6,783) (445) (1,998) Impairment charges (146,536) (1,508) -- Deferred subscription cost write-off (4,820) -- -- Provision for reserves (4,121) -- -- Gain on disposal -- -- 29 Nonoperating expenses (8,170) (3,190) (4,334) - ------------------------------------------------------------------------------- Total $ (165,905) $ 6,853 $ 4,781 =============================================================================== Depreciation and amortization (3), (4) Entertainment $ 37,430 $ 39,453 $ 41,056 Publishing 368 297 190 Licensing 183 94 28 Corporate Administration and Promotion 1,477 1,354 944 - ------------------------------------------------------------------------------- Total $ 39,458 $ 41,198 $ 42,218 =============================================================================== Dec. 31, Dec. 31, 2008 2007 - ------------------------------------------------------------------------------- Identifiable assets (3), (5) Entertainment $ 129,701 $ 287,940 Publishing 22,403 35,320 Licensing 7,601 11,560 Corporate Administration and Promotion 96,080 110,336 - ------------------------------------------------------------------------------- Total $ 255,785 $ 445,156 =============================================================================== (1) Net revenues include revenues attributable to foreign countries of approximately $94,003, $113,139 and $96,238 in 2008, 2007 and 2006, respectively. Revenues from the U.K. were $26,373, $39,066 and $39,330 in 2008, 2007 and 2006, respectively. No other individual foreign country's revenue was material. Revenues are generally attributed to countries based on the location of customers, except licensing royalties for which revenues are attributed based upon the location of licensees. (2) Income before income taxes includes income attributable to foreign countries of approximately $4,628, $6,617 and $3,664 in 2008, 2007 and 2006, respectively. (3) The majority of our property and equipment and capital expenditures are reflected in Corporate Administration and Promotion; depreciation, however, is partially allocated to the reportable segments. (4) Amounts include depreciation of property and equipment, amortization of intangible assets and amortization of investments in entertainment programming. (5) Our long-lived assets located in foreign countries were not material. (V) RELATED PARTY TRANSACTIONS In 1971, we purchased the Playboy Mansion in Los Angeles, California, where Hugh M. Hefner, our Editor-In-Chief and Chief Creative Officer, or Mr. Hefner, lives. The Playboy Mansion is used for various corporate activities and serves as a valuable location for motion picture and television production, magazine photography and for online, advertising and sales events. It also enhances our image, as we host many charitable and civic functions. The Playboy Mansion generates substantial publicity and recognition, which increase public awareness of us and our 67 products and services. Mr. Hefner pays us rent for that portion of the Playboy Mansion used exclusively for his and his personal guests' residence as well as the per-unit value of non-business meals, beverages and other benefits received by him and his personal guests. The Playboy Mansion is included in our Consolidated Balance Sheets at December 31, 2008 and 2007 at a net book value, including all improvements and after accumulated depreciation, of $1.3 million and $1.4 million, respectively. The operating expenses of the Playboy Mansion, including depreciation and taxes, were $1.9 million, $2.8 million and $2.1 million for 2008, 2007 and 2006, respectively, net of rent received from Mr. Hefner. We estimated the sum of the rent and other benefits payable for 2008 to be $0.7 million, and Mr. Hefner paid that amount during 2008. The actual rent and other benefits paid for 2007 and 2006 were $0.7 million and $0.8 million, respectively. Holly Madison, Bridget Marquardt and Kendra Wilkinson, the stars of The Girls Next Door on E! Entertainment Television, resided in the mansion with Mr. Hefner in 2008 and 2007. The value of rent, food and beverage and other personal benefits for the use of the Playboy Mansion by Ms. Madison, Ms. Marquardt and Ms. Wilkinson was charged to Alta Loma Entertainment, our production company. The aggregate amount of these charges was $0.4 million in each of 2008 and 2007. In addition, Ms. Madison, Ms. Marquardt and Ms. Wilkinson each receive payments for services rendered on our behalf, including appearance fees. (W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth a summary of the unaudited quarterly results of operations for 2008 and 2007 (in thousands, except share amounts):
Quarters Ended ------------------------------------------- 2008 Mar. 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------- Net revenues $ 78,536 $ 73,378 $ 70,342 $ 69,891 Operating loss (519) (336) (2,739) (154,141) Net loss (3,135) (2,108) (5,150) (145,662) Basic and diluted loss per common share (1) (0.09) (0.06) (0.15) (4.37) Common stock price: Class A high 9.66 10.35 5.57 4.20 Class A low 7.56 5.20 4.00 1.72 Class B high 9.16 8.88 5.44 3.96 Class B low $ 7.76 $ 4.88 $ 3.56 $ 1.03 - ----------------------------------------------------------------------------------------------------
Quarters Ended ------------------------------------------- 2007 Mar. 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------- Net revenues $ 85,415 $ 85,652 $ 82,858 $ 85,915 Operating income (loss) 3,885 3,853 4,137 (1,832) Net income (loss) 1,474 1,911 2,595 (1,055) Basic and diluted earnings (loss) per common share (1) 0.04 0.06 0.08 (0.03) Common stock price: Class A high 12.30 12.10 11.91 11.93 Class A low 9.80 9.46 8.92 8.33 Class B high 11.79 11.69 11.94 12.00 Class B low $ 9.90 $ 9.72 $ 10.15 $ 8.87 - ----------------------------------------------------------------------------------------------------
(1) Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the years. The quarters ended March 31, 2008, September 30, 2008, December 31, 2008, June 30, 2007 and December 31, 2007 included restructuring expense of $0.6 million, $2.2 million, $4.0 million, $0.1 million and $0.4 million, respectively (see Note (D), Restructuring Expense). The quarters ended December 31, 2008, June 30, 2008 and December 31, 2007 included $146.4 million ($131.2 million after tax), $0.1 million and $1.5 million, respectively, of impairment charges (see Note (C), Sale of Assets, and Note (O), Intangible Assets). The quarter ended December 31, 2008 included a $4.8 million write-off of deferred subscription costs. The quarter ended September 30, 2008 included provisions of $2.9 million for a receivable and $1.2 million for archival material (see Note (E), Provision for Reserves). The quarters ended December 31, 2008 and December 31, 2007 included impairment charges on investments of $2.0 million and $0.1 million, respectively. 68 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Playboy Enterprises, Inc. We have audited the accompanying Consolidated Balance Sheets of Playboy Enterprises, Inc. and subsidiaries, or the Company, as of December 31, 2008 and 2007, and the related Consolidated Statements of Operations, Consolidated Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the index of Part IV, Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the Company at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described in Note (F) to the Notes to Consolidated Financial Statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 effective January 1, 2007. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2009, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois March 12, 2009 69 Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- None. Item 9A. Controls and Procedures - -------------------------------- (a) Evaluation of Disclosure Controls and Procedures Our management, under the supervision and with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2008. Based on that evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2008, our disclosure controls and procedures are effective. (b) Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision of and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this evaluation, management used the criteria set forth in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management believes that our internal control over financial reporting is effective as of December 31, 2008. Ernst & Young LLP, an independent registered public accounting firm, who audited and reported on the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as stated in their report which is included herein. 70 (c) Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting To the Board of Directors and Shareholders of Playboy Enterprises, Inc. We have audited Playboy Enterprises, Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Playboy Enterprises, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Playboy Enterprises, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Playboy Enterprises, Inc. as of December 31, 2008 and 2007, and the related Consolidated Statements of Operations, Consolidated Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2008 of Playboy Enterprises, Inc. and our report dated March 12, 2009 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Chicago, Illinois March 12, 2009 71 (d) Change in Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information - -------------------------- None. 72 PART III Item 10. Directors, Executive Officers and Corporate Governance - --------------------------------------------------------------- The information required by Item 10 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference, pursuant to General Instruction G(3). We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Corporate Controller. That code is part of our Code of Business Conduct, which is available free of charge through our website, PlayboyEnterprises.com, and is available in print to any shareholder who sends a request for a paper copy to: Investor Relations, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. We intend to include on our website any amendment to, or waiver from, a provision of the Code of Business Conduct that applies to our Chief Executive Officer, Chief Financial Officer and Corporate Controller that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K. Item 11. Executive Compensation - ------------------------------- The information required by Item 11 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference (excluding the Report of the Compensation Committee and the Performance Graph), pursuant to General Instruction G(3). Item 12. Security Ownership of Certain Beneficial Owners and Management and - -------------------------------------------------------------------------------- Related Stockholder Matters - --------------------------- The following table sets forth information regarding outstanding options and shares reserved for future issuance as of December 31, 2008:
Class B Common Stock ------------------------------------------------------- Weighted Average Exercise Number of Shares Number of Options Price of Options Remaining for Outstanding Outstanding Future Issuance - ----------------------------------------------------------------------------------------------------------- Total equity compensation plans approved by security holders 3,578,584 $ 15.22 2,826,120 ===========================================================================================================
The other information required by Item 12 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference, pursuant to General Instruction G(3). Item 13. Certain Relationships and Related Transactions, and Director - -------------------------------------------------------------------------------- Independence - ------------ The information required by Item 13 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference, pursuant to General Instruction G(3). Item 14. Principal Accounting Fees and Services - ----------------------------------------------- The information required by Item 14 is included in our Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to be held in May 2009, which will be filed within 120 days after the close of our fiscal year ended December 31, 2008, and is incorporated herein by reference, pursuant to General Instruction G(3). 73 PART IV Item 15. Exhibits and Financial Statement Schedules - --------------------------------------------------- FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
Page ---- (1) Financial Statements Our Financial Statements and Supplementary Data following are as set forth under Part II. Item 8. of this Annual Report on Form 10-K: Consolidated Statements of Operations - Fiscal Years Ended December 31, 2008, 2007 and 2006 43 Consolidated Balance Sheets - December 31, 2008 and 2007 44 Consolidated Statements of Shareholders' Equity - Fiscal Years Ended December 31, 2008, 2007 and 2006 45 Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2008, 2007 and 2006 46 Notes to Consolidated Financial Statements 47 Report of Independent Registered Public Accounting Firm 69 (2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 75 All other schedules have been omitted because they are not required or applicable or because the required information is shown in the Consolidated Financial Statements or notes thereto. (3) Exhibits See Exhibit Index, which appears at the end of this document and which is incorporated herein by reference.
74 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (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: Fiscal Year Ended December 31, 2008: Allowance for doubtful accounts $ 3,627 $ 1,195 $ 703(1) $ 1,441(2) $ 4,084 ============= ============= ============ ============ ============= Allowance for returns $ 21,898 $ -- $ 29,362(3) $ 31,427(4) $ 19,833 ============= ============= ============ ============ ============= Deferred tax asset valuation allowance $ 74,818 $ 13,582(5) $ -- $ -- $ 88,400 ============= ============= ============ ============ ============= Fiscal Year Ended December 31, 2007: Allowance for doubtful accounts $ 3,688 $ 1,465 $ 823(1) $ 2,349(2) $ 3,627 ============= ============= ============ ============ ============= Allowance for returns $ 24,652 $ -- $ 35,167(3) $ 37,921(4) $ 21,898 ============= ============= ============ ============ ============= Deferred tax asset valuation allowance $ 77,180 $ -- $ -- $ 2,362(6) $ 74,818 ============= ============= ============ ============ ============= Fiscal Year Ended December 31, 2006: Allowance for doubtful accounts $ 3,883 $ 592 $ 144(1) $ 931(2) $ 3,688 ============= ============= ============ ============ ============= Allowance for returns $ 27,777 $ 242 $ 41,322(3) $ 44,689(4) $ 24,652 ============= ============= ============ ============ ============= Deferred tax asset valuation allowance $ 75,295 $ 1,327(5) $ 558(7) $ -- $ 77,180 ============= ============= ============ ============ =============
Notes: (1) Primarily represents provisions for unpaid subscriptions charged to net revenues. (2) Primarily represents uncollectible accounts written off less recoveries. (3) Represents provisions charged to net revenues for estimated returns of Playboy magazine, other domestic publishing products and domestic DVD products. (4) Represents settlements on provisions previously recorded. (5) Represents noncash federal income tax expense related to increasing the valuation allowance. (6) Primarily represents noncash foreign income tax benefit related to decreasing the valuation allowance. (7) Represents noncash federal tax adjustment related to the adoption of FASB Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R). 75 EXHIBIT INDEX ------------- 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 our reasonable expenses incurred in furnishing these documents. Exhibit Number Description - ------- ----------- #2.1 Asset Purchase Agreement, dated June 29, 2001, by and among Playboy Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D., Inc., Steven Hirsch, Dewi James and William Asher (incorporated by reference to Exhibit 2.1 from the Current Report on Form 8-K dated July 6, 2001) 3.1 Certificate of Incorporation of Playboy Enterprises, Inc. (incorporated by reference to Exhibit 3 from our quarterly report on Form 10-Q for the quarter ended March 31, 2003) 3.2 Amended and Restated Bylaws of Playboy Enterprises, Inc. (incorporated by reference to Exhibit 3.1 from the Current Report on Form 8-K dated December 16, 2008) 3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Playboy Enterprises, Inc. (incorporated by reference to Exhibit 3.2 from our quarterly report on Form 10-Q for the quarter ended June 30, 2004, or the June 30, 2004 Form 10-Q) 4.1 Indenture, dated March 15, 2005, between Playboy Enterprises, Inc. and LaSalle Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 from the Current Report on Form 8-K dated March 9, 2005, or the March 9, 2005 Form 8-K) 4.2 Form of 3.00% Convertible Senior Subordinated Notes due 2025 (included in Exhibit 4.1) 4.3 Registration Rights Agreement, dated March 15, 2005, among Playboy Enterprises, Inc. and the Initial Purchasers named therein (incorporated by reference to Exhibit 4.2 from the March 9, 2005 Form 8-K) 10.1 Playboy Magazine Printing and Binding Agreement #a Printing and Binding Agreement, dated October 22, 1997, between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.4 from our transition period report on Form 10-K for the six months ended December 31, 1997, or the Transition Period Form 10-K) #b Amendment, dated March 3, 2000, to Printing and Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended March 31, 2000) c Second Amendment, dated March 2, 2004, to Printing and Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.1 from our annual report on Form 10-K for the year ended December 31, 2003) d Third Amendment, dated July 30, 2007, to Printing and Binding Agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (incorporated by reference to Exhibit 10.2 from our quarterly report on Form 10-Q for the quarter ended September 30, 2007) 10.2 Playboy Magazine Distribution Agreement a Distribution Agreement, dated January 1, 2006, between Time/Warner Retail Sales & Marketing Inc. (f/k/a Warner Publisher Services, Inc.) and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.10 from the March 31, 2006 Form 10-Q) @#b Amendment, effective as of January 20, 2009, to Distribution Agreement between Time/Warner Retail Sales & Marketing Inc. (f/k/a Warner Publisher Services, Inc.) and Playboy Enterprises, Inc. 10.3 Playboy Magazine Subscription Fulfillment Agreement a Fulfillment Agreement, dated July 1, 1987, between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.12(a) from our annual report on Form 10-K for the year ended June 30, 1992, or the 1992 Form 10-K) 76 b Amendment, dated June 1, 1988, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.12(b) from our annual report on Form 10-K for the year ended June 30, 1993, or the 1993 Form 10-K) c Amendment, dated July 1, 1990, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.12(c) from our annual report on Form 10-K for the year ended June 30, 1991, or the 1991 Form 10-K) d Amendment, dated July 1, 1996, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.5(d) from our annual report on Form 10-K for the year ended June 30, 1996, or the 1996 Form 10-K) #e Amendment, dated July 7, 1997, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.6(e) from the Transition Period Form 10-K) #f Amendment, dated July 1, 2001, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended September 30, 2001, or the September 30, 2001 Form 10-Q) #g Amendment, dated March 9, 2006, to Fulfillment Agreement between Communications Data Services, Inc. and Playboy Enterprises International, Inc. (incorporated by reference to Exhibit 10.9 from our quarterly report on Form 10-Q for the quarter ended March 31, 2006, or the March 31, 2006 Form 10-Q) 10.4 Playboy TV UK Limited and UK/BENELUX Limited a Transponder Service Agreement, dated August 12, 1999, between British Sky Broadcasting Limited and The Home Video Channel Limited (incorporated by reference to Exhibit 10.4(e) from our annual report on Form 10-K for the year ended December 31, 2002, or the 2002 Form 10-K) #b Contract for a Combined Compressed Uplink and Eurobird Space Segment Service, dated May 12, 2003, between British Telecommunications plc and Playboy TV UK Limited c Contract Amendment Agreement (No. 1), dated May 12, 2003, between British Telecommunications plc and Playboy TV UK Limited #d Contract for a Combined Compressed Uplink and Eurobird Space Segment Service, dated May 12, 2004, between British Telecommunications plc and Playboy TV UK/BENELUX Limited #e Contract Amendment Agreement (No. 1), dated November 30, 2004, between British Telecommunications plc and Playboy TV UK/BENELUX Limited (items (b) through (e) incorporated by reference to Exhibits 10.6.1 through 10.7.2, respectively, from the March 31, 2006 Form 10-Q) #10.5 Playboy TV-Latin America, LLC Agreements a Third Amended and Restated Operating Agreement for Playboy TV-Latin America, LLC, effective as of November 10, 2006, by and between Playboy Entertainment Group, Inc. and Lifford International Co. Ltd. (BVI) b Amended and Restated Program Supply and Trademark License Agreement, dated November 10, 2006, between Playboy Entertainment Group, Inc. and Playboy TV-Latin America, LLC (items (a) and (b) incorporated by reference to Exhibits 10.7(c) and (d), respectively, from our annual report on Form 10-K for the year ended December 31, 2006) 10.6 Transfer Agreement, dated December 23, 2002, by and among Playboy Enterprises, Inc., Playboy Entertainment Group, Inc., Playboy Enterprises International, Inc., Claxson Interactive Group Inc., Carlyle Investments LLC (in its own right and as a successor in interest to Victoria Springs Investments Ltd.), Carlton Investments LLC (in its own right and as a successor in interest to Victoria Springs Investments Ltd.), Lifford International Co. Ltd. (BVI) and Playboy TV International, LLC (incorporated by reference to Exhibit 2.1 from Current Report on Form 8-K dated December 23, 2002) 77 #10.7 Amended and Restated Affiliation and License Agreement regarding DBS Satellite Exhibition of Programming, dated May 17, 2002, between DirecTV, Inc. and Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc. and Spice Platinum Entertainment, Inc. (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended June 30, 2002, or the June 30, 2002 Form 10-Q) #10.8 Affiliation Agreement with Time Warner Cable Inc. a Affiliation Agreement, dated July 8, 2004, between Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended September 30, 2004, or the September 30, 2004 Form 10-Q) b Amendment to Affiliation Agreement, effective as of March 31, 2008, between Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Spice Hot Entertainment, Inc., and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.1 from Amendment No. 1 to our quarterly report on Form 10-Q for the quarter ended March 31, 2008, filed with the SEC on February 20, 2009, or the March 31, 2008 Form 10-Q/A) 10.9 Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. a Affiliation Agreement, dated November 1, 1992, between Spice, Inc., and Satellite Services, Inc. b Amendment No. 1 to Affiliation Agreement, dated September 29, 1994, between Spice, Inc., and Satellite Services, Inc. c Letter Agreement, dated July 18, 1997, amending the Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. d Letter Agreement, dated December 18, 1997, amending the Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. e Amendment, effective as of September 26, 2005, to Affiliation Agreement between Spice, Inc., and Satellite Services, Inc. (items (a) through (e) incorporated by reference to Exhibits 10.1.1 through 10.1.5, respectively, from our quarterly report on Form 10-Q for the quarter ended September 30, 2005, or the September 30, 2005 Form 10-Q) 10.10 Affiliation Agreement between Playboy Entertainment Group, Inc., and Satellite Services, Inc. a Affiliation Agreement, dated February 10, 1993, between Playboy Entertainment Group, Inc., and Satellite Services, Inc. b Amendment to Affiliation Agreement, effective as of September 26, 2005, between Playboy Entertainment Group, Inc., and Satellite Services, Inc. (items (a) and (b) incorporated by reference to Exhibits 10.2.1 and 10.2.2, respectively, from the September 30, 2005 Form 10-Q) #10.11 Amended and Restated Agreement, dated August 1, 2007, by and between Playboy Entertainment Group, Inc. and Spice Hot Entertainment, Inc., and DirecTV, Inc. (incorporated by reference to Exhibit 10.3 from Amendment No. 1 to our quarterly report on Form 10-Q for the quarter ended September 30, 2007 Form 10-Q, filed with the SEC on February 20, 2009, or the September 30, 2007 Form 10-Q/A) #10.12 Services Agreement, dated April 1, 2008 between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. (incorporated by reference to Exhibit 10.2 from Amendment No. 1 to our quarterly report on Form 10-Q for the quarter ended June 30, 2008, filed with the SEC on February 20, 2009) 10.13 Content License, Marketing and Sales Agreement #a Content License, Marketing and Sales Agreement, dated January 15, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC (incorporated by reference to Exhibit 10.2 to the March 31, 2008 Form 10-Q/A) @#b First Amendment to the Content License, Marketing and Sales Agreement, effective as of March 1, 2008, between Playboy.com, Inc. and eFashion Solutions, LLC 78 #10.14 Agreement dated October 4, 2004, between Playboy Enterprises International, Inc., Fiesta Palms LLC, N-M Ventures II, LLC and Nine Group LLC (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended June 30, 2007, or the June 30, 2007 Form 10-Q) 10.15 Amended and Restated Credit Agreement, effective as of April 1, 2005, or the Credit Agreement, among PEI Holdings, Inc., as borrower, and Bank of America, N.A., as Agent and the other lenders from time to time party thereto a Credit Agreement (incorporated by reference to Exhibit 10.1 to our quarterly report on Form 10-Q for the quarter ended March 31, 2005) b First Amendment to the Credit Agreement, dated March 10, 2006, among PEI Holding, Inc., as borrower, Bank of America, N.A., as Agent, and the other Lenders Party thereto (incorporated by reference to Exhibit 10.15(b) from the 2005 Form 10-K) c Master Corporate Guaranty, dated March 11, 2003 d Security Agreement, dated March 11, 2003, between PEI Holdings, Inc. and Bank of America, N.A., as Agent under the Credit Agreement e Security Agreement, dated March 11, 2003, among Playboy Enterprises, Inc. and each of the domestic subsidiaries of PEI Holdings, Inc. set forth on the signature pages thereto and Bank of America, N.A., as Agent under the Credit Agreement f Pledge Agreement, dated March 11, 2003, between PEI Holdings, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement g Pledge Agreement, dated March 11, 2003, among Chelsea Court Holdings LLC, as the limited partner in 1945/1947 Cedar River C.V., Candlelight Management LLC, as the general partner in 1945/1947 Cedar River C.V., and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement h Pledge Agreement, dated March 11, 2003, between Claridge Organization LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement i Pledge Agreement, dated March 11, 2003, between Playboy Clubs International, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement j Pledge Agreement, dated March 11, 2003, between CPV Productions, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement k Pledge Agreement, dated March 11, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement l Pledge Agreement, dated March 11, 2003, between Playboy Gaming International, Ltd. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement m Pledge Agreement, dated March 11, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement n Pledge Agreement, dated March 11, 2003, between Playboy Enterprises, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement o Pledge Agreement, dated March 11, 2003, between Playboy Enterprises International, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement p Pledge Agreement, dated March 11, 2003, between Planet Playboy, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement q Pledge Agreement, dated March 11, 2003, between Spice Entertainment, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement r Pledge Agreement, dated March 11, 2003, between Playboy TV International, LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement 79 s Pledge Agreement, dated March 11, 2003, between Playboy TV International, LLC and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement t Trademark Security Agreement, dated March 11, 2003, by AdulTVision Communications, Inc., Alta Loma Entertainment, Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group, Inc., Spice Entertainment, Inc., Playboy Enterprises International, Inc. and Spice Hot Entertainment, Inc. in favor of Bank of America, N.A., as Agent under the Credit Agreement u Copyright Security Agreement, dated March 11, 2003, by After Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma Entertainment, Inc., Impulse Productions, Inc., Indigo Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc., Playboy Entertainment Group, Inc., Precious Films, Inc. and Women Productions, Inc. in favor of Bank of America, N.A., as Agent under the Credit Agreement v Lease Subordination Agreement, dated March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank of America, N.A., as Agent for various lenders w Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated March 11, 2003, made and executed by Playboy Enterprises International, Inc. in favor of Fidelity National Title Insurance Company for the benefit of Bank of America, N.A., as Agent for Lenders under the Credit Agreement (items (c) through (w) incorporated by reference to Exhibits 10.9(b) through (u), respectively, from the 2002 Form 10-K) x Pledge Amendment, dated July 22, 2003, between Playboy Entertainment Group, Inc. and Bank of America, N.A., as agent for the various financial institutions from time to time parties to the Credit Agreement (incorporated by reference to Exhibit 10.9(i)-1 from our May 19, 2003 Form S-4) y First Amendment to Deed of Trust With Assignment of Rents, Security Agreement and Fixture Filing, dated September 15, 2004, made and executed between Playboy Enterprises International, Inc. and Bank of America, N.A., as Agent (incorporated by reference to Exhibit 10.4 from the September 30, 2004 Form 10-Q) z Second Amendment to the Credit Agreement, or the Second Amendment, dated April 27, 2006 aa Reaffirmation of Guaranty, dated April 27, 2006, to the Credit Agreement, by each of the Guarantors, pursuant to the Second Amendment bb Third Amendment to the Credit Agreement, dated May 15, 2006 cc Pledge Amendment, dated May 15, 2006, from Playboy Enterprises International, Inc. dd Pledge Amendment, dated May 15, 2006, from Playboy Entertainment Group, Inc. ee Joinder to the Master Corporate Guaranty, dated May 15, 2006, by Playboy.com, Inc., Playboy.com Internet Gaming, Inc., Playboy.com Racing, Inc., SpiceTV.com, Inc., and CJI Holdings, Inc., and accepted by Bank of America, N.A., as agent for Lenders ff Joinder to Security Agreement, dated May 15, 2006, by Playboy.com, Inc., Playboy.com Internet Gaming, Inc., Playboy.com Racing, Inc., SpiceTV.com, Inc. and CJI Holdings, Inc., and accepted by Bank of America, N.A., as agent for the Lenders gg Pledge Agreement, dated May 15, 2006, between Playboy.com, Inc. and Bank of America, N.A., as agent for the Lenders hh Pledge Agreement, dated May 15, 2006, between Playboy.com Internet Gaming Inc. and Bank of America, N.A., as agent for the Lenders ii Trademark Security Agreement, dated May 15, 2006, by Playboy.com, Inc. in favor of Bank of America, N.A., as agent for the Lenders jj Copyright Security Agreement, dated May 15, 2006, by Playboy.com, Inc. in favor of Bank of America, N.A., as agent for the Lenders (items (z) through (jj) incorporated by reference to Exhibits 10.1.1 through 10.2.9, respectively, from our quarterly report on Form 10-Q for the quarter ended June 30, 2006) kk Fourth Amendment to the Credit Agreement, or the Fourth Amendment, dated July 21, 2006 ll Reaffirmation of Guaranty, dated July 21, 2006, by each of the Guarantors, pursuant to the Fourth Amendment mm Fifth Amendment to the Credit Agreement, or the Fifth Amendment, dated September 28, 2006 80 nn Reaffirmation of Guaranty, dated September 28, 2006, by each of the Guarantors, pursuant to the Fifth Amendment oo Joinder and Amendment No. 1 to Master Corporate Guaranty, dated September 28, 2006, by Playboy Enterprises, Inc., Playboy Enterprises International, Inc., Spice Hot Entertainment, Inc. and Spice Platinum Entertainment, Inc., and accepted by Bank of America, N.A., as agent for the Lenders (items (kk) through (oo) incorporated by reference to Exhibits 10.1.1 through 10.2.3, respectively, from the September 30, 2006 Form 10-Q) pp Sixth Amendment to the Credit Agreement, dated September 28, 2007 (incorporated by reference to Exhibit 10.1 to the September 30, 2007 Form 10-Q/A) @qq Seventh Amendment to the Credit Agreement, dated February 17, 2009 10.16 Exchange Agreement, dated March 11, 2003, among Hugh M. Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 4.2 from the 2002 Form 10-K) 10.17 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) c Amendment to Lease Agreement, dated January 12, 1998 (incorporated by reference to Exhibit 10.2 from our quarterly report on Form 10-Q for the quarter ended March 31, 1998, or the March 31, 1998 Form 10-Q) d Lease Subordination Agreement, dated March 11, 2003, by and among Hugh M. Hefner, Playboy Enterprises International, Inc. and Bank of America, N.A., as Agent for various lenders (see Exhibit 10.22(v)) (incorporated by reference to Exhibit 10.9(t) from the 2002 Form 10-K) 10.18 Los Angeles Office Lease Documents a Agreement of Lease, dated April 23, 2002, between Los Angeles Media Tech Center, LLC and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the June 30, 2002 Form 10-Q) b First Amendment to Agreement of Lease, dated June 28, 2002 (incorporated by reference to Exhibit 10.4 from our quarterly report on Form 10-Q for the quarter ended September 30, 2002, or the September 30, 2002 Form 10-Q) c Second Amendment to Agreement of Lease, dated September 23, 2004 (incorporated by reference to Exhibit 10.2 from the September 30, 2004 Form 10-Q) 10.19 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 Office Lease, dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from our annual report on Form 10-K for the year ended June 30, 1995, or the 1995 Form 10-K) c Second Amendment to Office Lease, dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended December 31, 1992) d Third Amendment to Office Lease, dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) e Fourth Amendment to Office Lease, dated August 6, 1996 (incorporated by reference to Exhibit 10.20(e) from the 1996 Form 10-K) f Fifth Amendment to Office Lease, dated March 19, 1998 (incorporated by reference to Exhibit 10.3 from the March 31, 1998 Form 10-Q) 81 g Sixth Amendment to Office Lease, effective as of May 1, 2006 (incorporated by reference to Exhibit 10.9.1 from the September 30, 2006 Form 10-Q) 10.20 New York Office Lease Documents a Agreement of Lease, 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) b Second Amendment to Agreement of Lease, dated June 28, 2004 (incorporated by reference to Exhibit 10.4 from the June 30, 2004 Form 10-Q) 10.21 Los Angeles Studio Facility Lease Documents a Agreement of Lease, dated September 20, 2001, between Kingston Andrita LLC and Playboy Entertainment Group, Inc. (incorporated by reference to Exhibit 10.3(a) from the September 30, 2001 Form 10-Q) b First Amendment to Agreement of Lease, dated May 15, 2002 (incorporated by reference to Exhibit 10.3 from the June 30, 2002 Form 10-Q) c Second Amendment to Agreement of Lease, dated July 23, 2002 (incorporated by reference to Exhibit 10.6 from the September 30, 2002 Form 10-Q) d Third Amendment to Agreement of Lease, dated October 31, 2002 e Fourth Amendment to Agreement of Lease, dated December 2, 2002 f Fifth Amendment to Agreement of Lease, dated December 31, 2002 g Sixth Amendment to Agreement of Lease, dated January 31, 2003 (items (d) through (g) incorporated by reference to Exhibits 10.17(d) through (g), respectively, from the 2002 Form 10-K) h Guaranty, dated September 20, 2001, by Playboy Entertainment Group, Inc. in favor of Kingston Andrita LLC (incorporated by reference to Exhibit 10.3(c) from the September 30, 2001 Form 10-Q) i Seventh Amendment to Agreement of Lease, dated July 23, 2003 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended September 30, 2003) #j Sublease Agreement, dated April 1, 2008, between Broadcast Facilities, Inc. and Playboy Entertainment Group, Inc. (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended June 30, 2008) *10.22 Selected Company Remunerative Plans a Executive Protection Program, dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) b Amended and Restated Playboy Enterprises, Inc. Deferred Compensation Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2(a) from our quarterly report on Form 10-Q for the quarter ended June 30, 1998, or the June 30, 1998 Form 10-Q) c First Amendment to the Playboy Enterprises, Inc. Deferred Compensation Plan, as amended and restated January 1, 2005 (incorporated by reference to Exhibit 10.1 from our quarterly report on Form 10-Q for the quarter ended September 30, 2008, or the September 30, 2008 Form 10-Q) @d Second Amendment to the Playboy Enterprises, Inc. Deferred Compensation Plan, as amended and restated January 1, 2005 @e Third Amendment to the Playboy Enterprises, Inc. Deferred Compensation Plan, as amended and restated January 1, 2005 f Amended and Restated Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2(b) from the June 30, 1998 Form 10-Q) g First Amendment to the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated January 1, 2005 (incorporated by reference to Exhibit 10.2 from the September 30, 2008 Form 10-Q) @h Second Amendment to the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated January 1, 2005 @i Third Amendment to the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated January 1, 2005 82 @j Amended and Restated Playboy Enterprises, Inc. Employee Investment Savings Plan *10.23 1991 Directors' Plan a First Amended and Restated Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors, effective as of September 17, 2008 (incorporated by reference to Exhibit 10.3 from the September 30, 2008 Form 10-Q) b Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.4(nn) from the 1991 Form 10-K) *10.24 1995 Stock Incentive Plan a Third Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan, as amended and restated as of September 17, 2008 (incorporated by reference to Exhibit 10.4 from the September 30, 2008 Form 10-Q) 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 Options which may be granted under the Plan d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (items (b), (c) and (d) incorporated by reference to Exhibits 4.3, 4.4 and 4.5, respectively, from our Registration Statement No. 33-58145 on Form S-8 dated March 20, 1995) e Form of Section 162(m) Restricted Stock Agreement for Section 162(m) Restricted Stock issued under the Plan (incorporated by reference to Exhibit 10.1(e) from our annual report on Form 10-K for the year ended June 30, 1997) *10.25 1997 Directors' Plan a Second Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc., as amended and restated as of September 17, 2008 (incorporated by reference to Exhibit 10.5 from the September 30, 2008 Form 10-Q) b Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (incorporated by reference to Exhibit 10.1(b) from our quarterly report on Form 10-Q for the quarter ended September 30, 1997) @c First Amendment to the Second Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc., as amended and restated as of September 17, 2008 *10.26 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.4 from the June 30, 2007 Form 10-Q) *10.27 Selected Employment, Termination and Other Agreements @a Form of Severance Agreement, dated September 1, 2008, between Playboy Enterprises, Inc. and each of Linda Havard and Alex Vaickus @b Form of Severance Agreement, dated September 1, 2008, between Playboy Enterprises, Inc. and each of Martha Lindeman, Richard Rosenzweig and Howard Shapiro @c Amended and Restated Employment Agreement, dated September 1, 2008, between Playboy Enterprises, Inc. and Robert Meyers @#d Separation Agreement, dated February 9, 2009, between Playboy Enterprises, Inc. and Christie Hefner @21 Subsidiaries @23 Consent of Ernst & Young LLP @31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 83 @31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 @32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ---------- * Indicates management compensation plan # Certain information omitted pursuant to a request for confidential treatment filed separately with and granted by the SEC @ Filed herewith 84 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. March 13, 2009 By /s/ Linda Havard ----------------------------- Linda G. Havard Executive Vice President and Chief Financial Officer (Authorized Officer) 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/ Jerome Kern March 13, 2009 - ---------------------------------------- Jerome Kern Interim Chairman of the Board, Interim Chief Executive Officer and Director (Principal Executive Officer) /s/ Richard S. Rosenzweig March 13, 2009 - ---------------------------------------- Richard S. Rosenzweig Executive Vice President and Director /s/ Dennis S. Bookshester March 13, 2009 - ---------------------------------------- Dennis S. Bookshester Director /s/ David I. Chemerow March 13, 2009 - ---------------------------------------- David I. Chemerow Director /s/ Christie Hefner March 13, 2009 - ---------------------------------------- Christie Hefner Director /s/ Charles Hirschhorn March 13, 2009 - ---------------------------------------- Charles Hirschhorn Director /s/ Russell I. Pillar March 13, 2009 - ---------------------------------------- Russell I. Pillar Director /s/ Sol Rosenthal March 13, 2009 - ---------------------------------------- Sol Rosenthal Director /s/ Linda Havard March 13, 2009 - ---------------------------------------- Linda G. Havard Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 85
EX-10.2(B) 2 d76389_ex102-b.txt AMENDMENT, EFFECTIVE AS OF JANUARY 20, 2009, TO DISTRIBUTION AGREEMENT Exhibit 10.2(b) Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. Time/Warner Retail Sales & Marketing 260 Cherry Hill Road, Parsippany, NJ 07054 AMENDMENT This Amendment, dated as of January 9, 2008, and to be effective as of January 20, 2009 (the "Effective Date"), shall confirm the understanding between Time/Warner Retail Sales & Marketing Inc. (f/k/a Warner Publisher Services Inc.), a New York corporation ("Warner"), and Playboy Enterprises, Inc., a Delaware corporation ("Publisher"), that the distribution agreement dated January 1, 2006 and amended as of January 31, 2006 (as amended, the "Agreement") is hereby amended as follows: Sub-Paragraph 1(f): "Warner's Commission" Sub-Paragraph 1(f) of the Agreement shall be deleted in its entirety and replaced with the following sentence: ""Warner's Commission" shall mean a sum equal to ***** of the Cover Price of the Net Sales." Sub-Paragraph 1(g): "Minimum Fee" Sub-Paragraph 1(g) of the Agreement shall be deleted in its entirety and replaced with the following: "[INTENTIONALLY LEFT BLANK]". Sub-Paragraph 1(m): "Term" Sub-Paragraph 1(m)(i) of the Agreement shall be deleted in its entirety and replaced with the following: ""Term" shall mean the three (3) year period commencing on January 20, 2009 and terminating on January 20, 2012; provided, however, that either party may terminate this agreement at any time, for any reason, effective on or after January 20, 2010 (such effective date of the termination, the "Termination Date"), provided that such terminating party provides written notice to the other party at least ninety (90) days prior to the Termination Date." The phrase "1(m)(i)," shall be added immediately after the word "subparagraphs" and immediately before the phrase "14.b.," on the fourth line of clause 1(m)(v) of the Agreement. Sub-Paragraph 1(m)(iv) of the Agreement shall be deleted in its entirety and replaced with the following: "[INTENTIONALLY LEFT BLANK]". Sub-Paragraph 3(g): "The Publisher Agrees" The following words shall be added immediately after the word "arrangements" and immediately before the "," on the second line of Sub-Paragraph 3(g) of the Agreement: "that may impact Warner's billing and collection under this agreement". Sub-Paragraph 6(b): "Credit to Wholesale Distributors" The word "Customer" on the second line of Sub-Paragraph 6(b) of the Agreement shall be deleted in its entirety and replaced with the word "Wholesaler". Paragraph 7: "Warner Agrees" Sub-Paragraph 7(e) shall be deleted in its entirety and replaced with the following: "To designate an employee as a non-exclusive marketing manager for Publisher's Publication(s) and to designate such employee of Warner to coordinate all distribution relating to Publisher's Publication(s); it being understood that such designated employee shall perform such services under Warner's direction and control, that the designation of such employee shall be in Warner's sole and absolute discretion, that Warner shall have the sole right to change the employee so designated and that such employee shall be subject to Publisher's reasonable right of approval." 2 Sub-Paragraph 7(i) of the Agreement shall be deleted in its entirety and replaced with the following: "[INTENTIONALLY LEFT BLANK]". Sub-Paragraph 7(j) of the Agreement shall be deleted in its entirety and replaced with the following: "That neither Warner nor any subsidiary of Warner shall, during the Term hereof, distribute the publication entitled Hustler, Penthouse, Club, Swank, Score, High Society, Gallery or Genesis and/or any Hustler, Penthouse, Club, Swank, Score, High Society, Gallery or Genesis denominated products. For purposes of this paragraph 7.j., any publication published by the publisher of any of the aforementioned magazines which bears the name of such magazine on its cover shall he deemed to be a denominated publication of such title." The words "sub-paragraphs 7.i. and 7.k." on the second and sixth lines of Sub-Paragraph 7(l) shall he deleted in their entirety and replaced with the words "Sub-paragraph 7.k." The last sentence of Sub-Paragraph 7(l) shall he deleted in its entirety. Paragraph 10: "New Titles" Paragraph 10 of the Agreement shall be deleted in its entirety and replaced with the following: "[INTENTIONALLY LEFT BLANK]". Paragraph 13: "Wholesaler/Customer Bankruptcy - Computation of Net Sales" The following sentence shall be added immediately after the existing last sentence of Paragraph 13 of the Agreement: "Notwithstanding the foregoing, if a new wholesaler(s) agrees to service the retail locations previously serviced by the wholesaler that ceased returning its unsold copies, then Warner shall use such new wholesaler's actual store level return data for such retail locations in order to calculate Publisher's Net Sales and Warner's Commission for such retail locations under the terms of this agreement." Paragraph 15: "Notices" 3 The addresses in Paragraph 15 of the Agreement shall be deleted in their entirety and replaced with the following: To Warner: Time/Warner Retail Sales & Marketing Inc. Attention: President 260 Cherry Hill Road Parsippany, NJ 07054 With a copy to: Time Inc. Attention: General Counsel 1271 Avenue of the Americas, 34th Floor New York, NY 10020 To Publisher: Playboy Enterprises, Inc. Attention: Lou Mohn 730 Fifth Avenue, 3rd Floor New York, NY 10019 With a copy to: Playboy Enterprises, Inc. Attention: General Counsel 680 North Lake Shore Drive Chicago, IL 60611 Annex A: "Warner's "Terms For Access to Information Services"" The phrase "MSA data" on the fourth line of Paragraph 2 of Annex A of the Agreement shall he deleted in its entirety and replaced with the phrase "store level data (to the extent available to Warner)". Annex B: "Circulation Action Plan" The phrase "MSA data" shall, in all places on Annex B of the Agreement, be deleted in its entirety and replaced with the phrase "store level data (to the extent available to Warner)". The phrase "via MSA" in the "DISTRIBUTION PLAN" section of Annex B of the Agreement shall, in all places on Annex B, be deleted in its entirety. The first paragraph under "MARKETING PLAN" on Annex B of the Agreement shall be deleted in its entirety and replaced with the following: "o "A" list retailers: 3-6 accounts quarterly agreed to by PEI and Warner to be called on by PEI and/or a mutually agreed upon member of the Warner Sales Team in order to attempt to obtain authorization for PLAYBOY magazine. Based on mutual agreement, a quarterly review of accounts can change the targeted chain list. An initial list of PEI recommended accounts are as follows: 4 1. 7 Eleven Inc. HQ 2. Aliment Couche Tard/US HQ 3. BP Plc HQ 4. Casey's General Stores Inc. 5. CVS 6. Duane Reade 7. Exxon Mobil Corp 8. Holiday Cos Inc./HQ 9. Krause Gentle Corp 10. Marathon Oil Company 11. Pantry Inc./HQ 12. Sheetz Inc. 13. Valero Energy Corp/HQ 14. Village Pantry Inc. 15. Wawa Inc. 16. Wilson Farms" All other terms and conditions shall remain as stated in the Agreement. AGREED TO AND ACCEPTED: PLAYBOY ENTERPRISES, INC. TIME/WARNER RETAIL SALES & MARKETING INC. By: /s/ Lou Mohn By: /s/ Robert J.Bedor ------------------------------- ------------------------------------ Lou Mohn Robert J. Bedor S. Vice President & Publisher EVP, Client Marketing & New Business 5 EX-10.13(B) 3 d76389_ex1013-b.txt FIRST AMENDMENT TO THE CONTENT LICENSE, MARKETING AND SALES AGREEMENT Exhibit 10.13(b) Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. FIRST AMENDMENT TO THE CONTENT LICENSE, MARKETING AND SALES AGREEMENT This First Amendment (this "First Amendment") effective as of March 1, 2008 ("First Amendment Effective Date"), by and between Playboy.com, Inc. ("Client") and eFashion Solutions, LLC ("EFS"), hereby amends that certain Content License, Marketing and Sales Agreement entered into by the parties and effective as of January 15, 2008 (the "Agreement"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Agreement. This First Amendment is hereby incorporated into the Agreement by reference. WHEREAS, pursuant to Section 14.5 of the Agreement, the parties wish to amend the Agreement as set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants herein and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Client and EFS agree as follows: 1. Operation of the Playboy Commerce Business. 1.1. Notwithstanding anything to the contrary in Section 1.1(j) of the Agreement, the parties agree and acknowledge that EFS shall no longer be required to employ those individuals previously hired from Client and may terminate the employment of such individuals at the discretion of EFS. 1.2. The following shall be added as Section 1.1(n) of the Agreement: 1.1(n) Client-Requested Merchandise & Creative Services. In the event Client requests that EFS assist in the production of certain Merchandise (e.g., customized calendars), EFS will invoice Client, and Client will reimburse EFS, for such creative services at an hourly rate of *****. The parties agree that this hourly rate is calculated based upon the applicable EFS staff member's salary plus *****, and is therefore subject to change. 2. Merchandise Supplied to Client and Employees. Section 2.12 of the Agreement is hereby revised such that employees of Client and EFS shall be permitted to purchase Merchandise through the Playboy Commerce Business and shall receive a ***** discount on posted prices. In addition, EFS hereby grants Client, at no cost, an annual Merchandise allowance ("Allowance") of ***** for wholesale Merchandise acquisitions from EFS by Client for its own use, *****. In the event that Client does not use its entire Allowance for any Year of the Term, any remaining amount shall roll over for use in the next Year. EFS shall also provide and honor coupons granting a ***** discount off of Merchandise purchased through the Playboy Commerce Business to models participating in Client casting calls. 3. Advertising Commitments. 3.1. Section 4.1 of the Agreement is hereby deleted in its entirety and replaced with the following: 4.1. Marketing Commitment. EFS agrees it will spend on a monthly basis not less than ***** of the actual Net Merchandise Sales (as defined in Section 6.1) during the immediately preceding month on marketing the Playboy Commerce Business in order to maximize both Website and Catalog sales (the "Marketing Budget"). The Marketing Budget will be used by the EFS marketing team to promote the PLAYBOY and BUNNY SHOP brands, increase Catalog circulation, drive traffic to and sales on the Websites, purchase search engine placement, drive affiliate sales and to participate in other online marketing initiatives. In addition, EFS commits to continuous SEO efforts during the Term to maximize discovery of, and algorithmic search results for, the Websites. EFS will submit to Client a written marketing plan not less than sixty (60) days prior to the end of each calendar year for Client's review and approval and shall revise such plan as reasonably requested by Client. 3.2. Section 4.2 of the Agreement is hereby deleted in its entirety and replaced with the following: 4.2 This Section is intentionally left blank. 4. Payments and Fees. 4.1. Sections 6.1 and 6.2 of the Agreement are hereby replaced in their entirety with the following: 6.1 Royalties. EFS shall pay a royalty ("Royalty") to Client equal to ***** of the Net Merchandise Sales (as defined below) for the applicable Calendar Quarter (each as defined below). The Royalty calculation period shall begin upon the first order received by EFS via any order channel (e.g., on a Website, via mail, fax or telephone) and shall be paid to Client as set forth in Section 6.2(a). For purposes of this Agreement, "Net Merchandise Sales" shall be defined as total Merchandise sales derived through the Playboy Commerce Business via any order channel, including but not limited to international sales, less applicable, actual Merchandise returns, if any, during the applicable calendar quarter ("Calendar Quarter"). 6.2 Minimum Royalty. Notwithstanding revenue actually generated by EFS in connection with the Playboy Commerce Business hereunder, during each calendar year ("Year") of the Term, EFS shall pay to Client an annual minimum 2 guaranteed royalty in the amounts set forth in Exhibit 10 (the "Minimum Royalty"), payable in equal quarterly installments and due within fifteen (15) days of the end of each Calendar Quarter for the proceeding Calendar Quarter. (a) Within fifteen (15) days following the end of each Year of the Term, the parties will perform a true-up based upon the Minimum Royalty paid for the applicable Year and the Royalties payable to Client, whereby: (i) In the event that Royalties payable to Client are in excess of the Minimum Royalty paid in any applicable Year, (A) EFS shall pay Client the amount above the applicable Minimum Royalty for such Year within thirty (30) days of the end of the applicable Year; (B) EFS shall not be permitted to carry over any overages into the next Year and (C) EFS will not be eligible for any refund from any Minimum Royalty or Royalty previously owed or paid to Client. (ii) In the event Royalties payable to Client are less than the Minimum Royalty paid for an applicable Year, no additional payment will be required; provided however that EFS will not be permitted to offset the shortfall with any overages from any previous or subsequent Year, and a new Minimum Royalty will be due as set forth in this Section 6.2. For the avoidance of doubt, the Minimum Royalty is a minimum net sum from which no taxes or charges of any sort may be deducted. 4.2. Exhibit 10 of the Agreement is hereby replaced in its entirety as set forth in Attachment 1, attached hereto and hereby incorporated by reference. 4.3. ***** 5. Term and Termination. 5.1. Termination for Revenue Shortfall. In addition to Client's rights of termination pursuant to Section 10 of the Agreement, within forty-five (45) days following the end of each Year of the Term, Client will have the option to terminate the Agreement upon not less than ***** written notice in the event that EFS has not achieved a minimum of ***** of projected Net Merchandise Sales for such Year as set forth in Attachment 2, attached hereto and hereby incorporated by reference. 5.2. Effects of Termination. In addition to those effects of termination set forth in Section 10.4 of the Agreement, upon expiration or any termination of the Agreement by Client, including termination under Section 5.1 (except in the event of termination by Client for any breach by EFS): (a) Client will repurchase the remaining amount of the identified reimbursable Client Inventory as set forth in Attachment 3, attached hereto and hereby incorporated by 3 reference, at the full price paid for such Client Inventory by EFS (inventory transfer costs to be paid by EFS); and (b) In order to allow EFS to recoup its wholesale cost for any remaining Merchandise not repurchased by Client as set forth above, unless otherwise agreed by the parties in writing, for a maximum period of eighteen (18) months after termination, the remaining inventory may be sold by EFS via a Client website, as chosen by Client, and/or other third party online mechanism(s) that is approved in advance in writing by Client (e.g., sale/clearance webpages); provided however that any such third party online mechanism must include a direct link to the PlayboyStore.com Website home page. Any amounts received in connection with the sale of such Merchandise shall be included in Net Merchandise Sales and subject to the Royalty. (c) Provided however, that Subsections 5.2(a) and (b) above shall be conditioned upon demonstration by EFS, to Client's reasonable satisfaction, of commercially reasonable efforts by EFS to sell all applicable Client Inventory and other Merchandise via the Playboy Commerce Business immediately prior to expiration or termination of the Agreement and during the Term of the Agreement. 6. Miscellaneous. 6.1. No Replacement. Except as expressly set forth herein, no provision of this First Amendment shall be interpreted to replace or delete any provision of the Agreement. All provisions of the Agreement which are not expressly replaced or deleted by this First Amendment shall remain in full force and effect and shall, where appropriate, apply to the terms of this First Amendment. In the event of any conflict between the Agreement and this First Amendment, the terms of this First Amendment shall control. 6.2. Counterparts. This First Amendment may be executed in any number of counterparts. Any counterpart may be executed by facsimile, unless notarization is required under applicable law. All counterparts shall collectively constitute one and the same agreement. 6.3. Entire Agreement. The terms and conditions contained in this First Amendment and the Agreement (including the exhibits and/or schedules attached thereto) constitute the entire agreement between the parties relating to the subject matter and shall supersede all previous communications between the parties with respect to the subject matter of this First Amendment or of the Agreement. The remainder of this page is intentionally left blank. 4 IN WITNESS WHEREOF, the parties hereto, intending this First Amendment to be effective as of the First Amendment Effective Date, have caused this First Amendment to be executed by their respective duly authorized officers. EFASHION SOLUTIONS, LLC PLAYBOY.COM, INC. By: By: ------------------------- ---------------------------- Name: Name: ------------------------- ---------------------------- Title: Title: ------------------------- ---------------------------- Date: Date: ------------------------- ---------------------------- 5 ATTACHMENT 1 Exhibit 10 Minimum Royalty ----------------------------------- Minimum Year Royalty ----------------------------------- 2008 ***** ----------------------------------- 2009 ***** ----------------------------------- 2010 ***** ----------------------------------- 2011 ***** ----------------------------------- 2012 ***** ----------------------------------- 2013 ***** ----------------------------------- 6 ATTACHMENT 2 Projected Net Merchandise Sales by Year ---------------------------------------- Year Projected Net Merchandise Sales ---------------------------------------- 2008 ***** ---------------------------------------- 2009 ***** ---------------------------------------- 2010 ***** ---------------------------------------- 2011 ***** ---------------------------------------- 2012 ***** ---------------------------------------- 2013 ***** ---------------------------------------- 7 ATTACHMENT 3 Reimbursable Client Inventory Style Selling Report
Unit Wholesale cost Style Description Category price Units value - ------------------------------------------------------------------------------------------------------------------------------- PB-15070 Classic Bowler Bag Accessories Bags Bowling ***** ***** ***** PB-13199 Gotham Monogram Bag Accessories Bags Duffle ***** ***** ***** PB-18101 Signature Rolling Du Accessories Bags Duffle ***** ***** ***** PB-18102 Signature Large Carr Accessories Bags Duffle ***** ***** ***** PB-13340 Glam Chic Handbag Accessories Bags Handbags ***** ***** ***** PB-18105 Playboy Hobo Bag Accessories Bags Handbags ***** ***** ***** PB-18106 Bunny Heart Signature Accessories Bags Handbags ***** ***** ***** PB-10830 Face Bunny Spinning Accessories Belts ***** ***** ***** PB-11076 Medallion Rabbit Head Accessories Belts ***** ***** ***** PB-11100 Spinner Belt Accessories Belts ***** ***** ***** PB-12688 Black Lip Gloss Belt Accessories Belts ***** ***** ***** PB-13291 Heart Pull Through B Accessories Belts ***** ***** ***** PB-13341 Romantic Crest Buckle Accessories Belts ***** ***** ***** PB-13358 Leather Logo Buckle Accessories Belts ***** ***** ***** PB-15059 Rhinestone Encrusted Accessories Belts ***** ***** ***** PB-15061 Sexy Rhinestone Belt Accessories Belts ***** ***** ***** PB-15041 Angora Beanie Accessories Hats Beanies ***** ***** ***** PB-13353 Rugged Playboy Cap Accessories Hats Caps ***** ***** ***** PB-15039 Fitted Baseball Cap Accessories Hats Caps ***** ***** ***** PB-12906 Playboy Brand Key Chain Accessories Keychains ***** ***** ***** PB-13363 Heart Key Ring Accessories Keychains ***** ***** ***** PB-15086 Bottle Opener Key Chain Accessories Keychains ***** ***** ***** PB-15097 Gold Tone Pimp Cup K Accessories Keychains ***** ***** ***** PB-13201 Snap On Razr Case Accessories Phone Cases ***** ***** ***** PB-10462 Black Rabbit Head Scarf Accessories Scarves ***** ***** ***** PB-10463 Pink Rabbit Head Scarf Accessories Scarves ***** ***** ***** PB-10511 Playboy Bandana Accessories Scarves ***** ***** ***** PB-13345 Ski Bunny Gift Set C Accessories Sets ***** ***** ***** PB-14601 Sunglasses-New Yorke Accessories Sunglasses ***** ***** ***** PB-14605 Sunglasses-Ursula Accessories Sunglasses ***** ***** ***** PB-14608 Sweetheart Sunglasses Accessories Sunglasses ***** ***** ***** PB-14610 Sunglasses-Eve Accessories Sunglasses ***** ***** ***** PB-14613 Sunglasses-Ana Accessories Sunglasses ***** ***** ***** PB-14615B Sunglasses-Cartney Accessories Sunglasses ***** ***** ***** PB-14618 Angie Sunglasses Accessories Sunglasses ***** ***** ***** PB-13354 Printed Lady Wallet Accessories Wallets ***** ***** ***** PB-13355 Denim Poker Chip Wallet Accessories Wallets ***** ***** ***** PB-6741 Rabbit Head Metal St Accessories Wallets ***** ***** *****
8
- ------------------------------------------------------------------------------------------------------------------------------- ACCESSORIES ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12984 Shimmer Bricks Beauty Playboy ***** ***** ***** PB-12974 Twice the Pleasure L Beauty Playboy ***** ***** ***** PB-12977 Stiletto Lip Shine Beauty Playboy ***** ***** ***** PB-12968 First Blush Beauty Playboy ***** ***** ***** PB-12972 Pick Up Liners Beauty Playboy ***** ***** ***** PB-12969 Liquid Luxe Eye Colo Beauty Playboy ***** ***** ***** PB-12967 Liquid Luxe Blush Beauty Playboy ***** ***** ***** PB-12978 Red Carpet Lipstick Beauty Playboy ***** ***** ***** PB-12966 Fantasy Finishing Po Beauty Playboy ***** ***** ***** PB-12979 Calendar Girl Lipstick Beauty Playboy ***** ***** ***** PB-12965 Hidden Agenda Concealer Beauty Playboy ***** ***** ***** PB-12970 Hollywood Nights Eye Beauty Playboy ***** ***** ***** PB-12017 Kissing Gloss Duo Beauty Playboy ***** ***** ***** PB-12981 Liquid Luxe Lipstick Beauty Playboy ***** ***** ***** PB-12980 Hefs Favorite Lip Gloss Beauty Playboy ***** ***** ***** PB-12983 Playmate of the Year Beauty Playboy ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- BEAUTY ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-10706 Mr. Playboy Bobblehead Collectibles Bobble Heads ***** ***** ***** PB-14721 Club Bunny Playboy B Collectibles Bobble Heads ***** ***** ***** PB-11058 Girls Next Door Bobblehead Collectibles Bobble Heads ***** ***** ***** PB-11057 Girls Next Door Bobblehead Collectibles Bobble Heads ***** ***** ***** PB-15144 Cigar Gift Collection Collectibles Cigars ***** ***** ***** PB-5500 Centerfold Collector Collectibles Collector Cards ***** ***** ***** PB-10707 Special Editions Lin Collectibles Collector Cards ***** ***** ***** PB-12535 Housexy Sounds of Pl Collectibles Guitar Accessories ***** ***** ***** PB-12547 Shimmer Guitar Strap Collectibles Guitar Accessories ***** ***** ***** PB-X0001 50th Anniversary Sta Collectibles Wall hangings ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- COLLECTIBLES ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-13313 Boss Kitty Costume Costumes ***** ***** ***** PB-11061 Devilish Hottie Costumes ***** ***** ***** PB-12339 Hefs Nice Angel Costumes ***** ***** ***** PB-12341 Buccaneer Beauty Costumes ***** ***** ***** PB-12253 Hister Witch Costume Costumes ***** ***** ***** PB-13010 Superpower Girl Cost Costumes ***** ***** ***** PB-13047 Kitty Cat Costume Costumes ***** ***** ***** PB-12252 Racy Referee Costumes ***** ***** ***** PB-12340 Wicked Fairy Costume Costumes ***** ***** ***** PB-13337 Bootcamp Babe Costumes ***** ***** ***** PB-11071 Naughty Sexy Santa H Costumes ***** ***** ***** PB-13078 Captive Cave Girl Co Costumes ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- COSTUMES ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12058 Actiongirls 2- DVD DVD Action Girls ***** ***** ***** PB-12884 Actiongirls 3- DVD DVD Action Girls ***** ***** *****
9 PB-10779 Nina Hartley Guide t DVD Instructional ***** ***** ***** PB-10780 Nina Hartleys Guide DVD Instructional ***** ***** ***** PB-12161 Nina Hartley Making DVD Instructional ***** ***** ***** PB-12417 Nina Hartley Guide t DVD Instructional ***** ***** ***** PB-7993 Nina Hartleys Advanc DVD Instructional ***** ***** ***** PB-11152 Maximum Orgasm: Tant DVD Instructional For Couples ***** ***** ***** PB-12160 Nina Hartleys Making DVD Instructional For Her ***** ***** ***** PB-11154 Maximum Performance- DVD Instructional For Him ***** ***** ***** PB-8492 What Women Love- DVD DVD Instructional For Him ***** ***** ***** PB-8827 Women Loving Women DVD Instructional For Him ***** ***** ***** PB-8496 Ultimate Massage DVD DVD Instructional Massage ***** ***** ***** PB-9374 An Intimate Guide to DVD Instructional Massage ***** ***** ***** PB-10782 Extreme Fellation- D DVD Instructional Oral ***** ***** ***** PB-12156 The Complete Guide t DVD Instructional Oral ***** ***** ***** PB-7992 Nina Hartleys Guide DVD Instructional Oral ***** ***** ***** PB-10753 Ultimate Guide to Ma DVD Instructional Orgasm ***** ***** ***** PB-14729 How to Reach the Ult DVD Instructional Orgasm ***** ***** ***** PB-8817 DVD Incredible Orgas DVD Instructional Orgasm ***** ***** ***** PB-8819 Big O:An Erotic Guid DVD Instructional Orgasm ***** ***** ***** PB-9375 The Lovers Guide to DVD Instructional Orgasm ***** ***** ***** PB-14732 Erotic Sex Positions DVD Instructional Positions ***** ***** ***** PB-11153 Solo Sex- DVD DVD Instructional Solo ***** ***** ***** PB-12168 Uranus Self Anal Mas DVD Instructional Solo ***** ***** ***** PB-12157 The Complete Guide t DVD Instructional Toys ***** ***** ***** PB-12415 Nina Hartleys Guide DVD Instructional Toys ***** ***** ***** PB-7995 Nina Hartleys Guide DVD Instructional Toys ***** ***** ***** PB-8136 Nina Hartley Advance DVD Instructional Toys ***** ***** ***** PB-13178 100 Girls by Bunny Y DVD Playboy ***** ***** ***** PB-2063D Playboy at the Beach DVD Playboy ***** ***** ***** PB-2071D Party at the Palms 2 DVD Playboy ***** ***** ***** PB-1956D The Complete Anna Ni DVD Playboy Playmate ***** ***** ***** PB-2053D Playmate of the Year DVD Playboy Playmate ***** ***** ***** PB-2057D Playmate of the Year DVD Playboy Playmate ***** ***** ***** PB-10997 Hugh Hefner Once Upo DVD Playboy TV ***** ***** ***** PB-12002 Playboy After Dark: DVD Playboy TV ***** ***** ***** PB-12537 Playboy After Dark: DVD Playboy TV ***** ***** ***** PB-1765D Eden- The Complete S DVD Playboy TV ***** ***** ***** PB-2110D Foursome Season 1 Pt DVD Playboy TV ***** ***** ***** PB-1769D Women of Fear Factor DVD Playboy Women of ***** ***** ***** PB-2076D Women of Media 4-Dis DVD Playboy Women of ***** ***** ***** PB-2079D Naughty Wives/Housew DVD Playboy Women of ***** ***** ***** PB-9096 Real Hidden Video 8- DVD Real Hidden ***** ***** ***** PB-9098 Real Hidden Video 9- DVD Real Hidden ***** ***** ***** PB-9100 Real Hidden Video 10 DVD Real Hidden ***** ***** ***** PB-9318 Real Hidden Secretar DVD Real Hidden ***** ***** ***** PB-9513 Real Hidden Panties DVD Real Hidden ***** ***** *****
10 PB-9515 Real Hidden Panties DVD Real Hidden ***** ***** ***** PB-10754 Sappho Femme-A-Femme DVD Sex in Cinema ***** ***** ***** PB-12140 Sao Paolo Black & Br DVD Sex in Cinema ***** ***** ***** PB-12142 Rio De Janeiro: Top DVD Sex in Cinema ***** ***** ***** PB-12483 Billy Bathgate- DVD DVD Sex in Cinema ***** ***** ***** PB-12486 Havoc- DVD DVD Sex in Cinema ***** ***** ***** PB-12487 Killing Me Softly- D DVD Sex in Cinema ***** ***** ***** PB-12489 Stealing Beauty- DVD DVD Sex in Cinema ***** ***** ***** PB-13188 Cheeky-DVD DVD Sex in Cinema ***** ***** ***** PB-2085D Maise Undercover Sha DVD Sex in Cinema ***** ***** ***** PB-10775 The Bridal Shower- D DVD Sex in Cinema Candida ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- DVD ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-10664 Rhinestone Flip Flop Footwear Flip Flops ***** ***** ***** PB-11078 Glitz Bunny Heels Footwear High Heel Pumps ***** ***** ***** PB-15047 Carla Heel Footwear High Heel Pumps ***** ***** ***** PB-11086 Glitz Bunny Heels Footwear High Heel Pumps ***** ***** ***** PB-15045B Greta Heel Footwear High Heel Pumps ***** ***** ***** PB-15045S Greta Heel Footwear High Heel Pumps ***** ***** ***** PB-11112 Glitz Bunny Heels Footwear High Heel Pumps ***** ***** ***** PB-15049P Spotted Bunny Slippers Footwear Slippers ***** ***** ***** PB-15049B Spotted Bunny Slippers Footwear Slippers ***** ***** ***** PB-12107 Bunny Bag Slippers Footwear Slippers ***** ***** ***** PB-14547 Abstract Bunny Leather Footwear Sneakers ***** ***** ***** PB-14547S Abstract Bunny Leather Footwear Sneakers ***** ***** ***** PB-14547P Abstract Bunny Leather Footwear Sneakers ***** ***** ***** PB-12451 Leopard Wedges Footwear Wedges ***** ***** ***** PB-10994 Rabbit Head Clogs Footwear Wedges ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- FOOTWEAR ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-13375 Black & White Putter Games Golf Accessories ***** ***** ***** PB-13372 Iron Wood Grip Games Golf Accessories ***** ***** ***** PB-13371 Putter Grip Games Golf Accessories ***** ***** ***** PB-13380 Set of 3 Golf Balls Games Golf Accessories ***** ***** ***** PB-13376 Black & Pink Putter Games Golf Accessories ***** ***** ***** PB-13370 25 Pack Golf Tees Games Golf Accessories ***** ***** ***** PB-13377 Rabbit Head Cover Games Golf Accessories ***** ***** ***** PB-13378 Rabbit Head Cover Games Golf Accessories ***** ***** ***** PB-13379 Rabbit Head Cover Games Golf Accessories ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- GAMES ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12959 Gift Bag-Medium Gift Bags ***** ***** ***** PB-12960 Gift Bag-Medium Gift Bags ***** ***** ***** PB-12957 Gift Bag- Large Gift Bags ***** ***** ***** PB-12958 Gift Bag- Large Gift Bags ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- GIFT ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-15078 Rubber Coaster Set Home Barware ***** ***** ***** PB-13247 Barware Set Magenta Home Barware ***** ***** ***** PB-15091 Classic Waste Basket Home Bath ***** ***** *****
11 PB-15082 Retro Table Clock Home Clocks ***** ***** ***** PB-13194 Rabbit Head High Bal Home Glassware Highball ***** ***** ***** PB-15081 Rabbit Head Shooter Home Glassware Shots ***** ***** ***** PB-14728 Rabbit Head String L Home Lamps ***** ***** ***** PB-15423 Playboy Logo Beach T Home Towel Beach ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- HOME ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12103 Mens Stainless Steel Jewelry Bracelets ***** ***** ***** PB-12930 Multi Mesh Rabbit He Jewelry Bracelets ***** ***** ***** PB-12932 Steel Playboy ID Bra Jewelry Bracelets ***** ***** ***** PB-14702 Beaded Rabbit Head B Jewelry Bracelets ***** ***** ***** PB-14705 Rhinestone Heart Lin Jewelry Bracelets ***** ***** ***** PB-15105 Playboy Image Bracelet Jewelry Bracelets ***** ***** ***** PB-15113 Playboy Bracelet Jewelry Bracelets ***** ***** ***** PB-9261 Rabbit Head Toggle B Jewelry Bracelets ***** ***** ***** PB-12936 Steel Cuff Links Jewelry Cuff Links ***** ***** ***** PB-12937 Steel Rabbit Head Cu Jewelry Cuff Links ***** ***** ***** PB-4030 Classic Playboy Cuff Jewelry Cuff Links ***** ***** ***** PB-10439 14K Gold Rabbit Head Jewelry Earrings ***** ***** ***** PB-12445 Locked Love Rhinestone Jewelry Earrings ***** ***** ***** PB-12692 Rhinestone Stud Earrings Jewelry Earrings ***** ***** ***** PB-12928 Rhinestone Eye Stud Jewelry Earrings ***** ***** ***** PB-13294 Mudflap Girl Stud Ea Jewelry Earrings ***** ***** ***** PB-15098 Tiered Rabbit Head E Jewelry Earrings ***** ***** ***** PB-15099 Multi Hoop Rabbit He Jewelry Earrings ***** ***** ***** PB-15101 Rhinestone Heart Dan Jewelry Earrings ***** ***** ***** PB-15102 Beaded Chandelier Ea Jewelry Earrings ***** ***** ***** PB-15107 Hollywood Bunny Earr Jewelry Earrings ***** ***** ***** PB-1510801 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510802 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510803 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510804 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510807 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510810 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510811 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-1510812 Playmate of the Month Jewelry Earrings ***** ***** ***** PB-15118 Rabbit Head Mini Hoo Jewelry Earrings ***** ***** ***** PB-15123 Silver Rhinestone Mi Jewelry Earrings ***** ***** ***** PB-9140 Rhinestone Rabbit He Jewelry Earrings ***** ***** ***** PB-12669 Rhinestone Heart Nav Jewelry Navel Rings ***** ***** ***** PB-15111 Rhinestone Heart Nav Jewelry Navel Rings ***** ***** ***** PB-15116 Rabbit Head Navel Ring Jewelry Navel Rings ***** ***** ***** PB-15117 Rhinestone Drop Nave Jewelry Navel Rings ***** ***** ***** PB-9567 Rhinestone Rabbit He Jewelry Navel Rings ***** ***** ***** PB-12180 Playmate of the Mont Jewelry Necklaces ***** ***** ***** PB-12181 Playmate Of The Mont Jewelry Necklaces ***** ***** ***** PB-12182 Playmate Of The Mont Jewelry Necklaces ***** ***** *****
12 PB-12184 Playmate of the Mont Jewelry Necklaces ***** ***** ***** PB-12185 Playmate of the Mont Jewelry Necklaces ***** ***** ***** PB-12195 Playmate Of The Year Jewelry Necklaces ***** ***** ***** PB-12444 Locked Love Rhinestone Jewelry Necklaces ***** ***** ***** PB-12926 Rabbit Head Heart Ou Jewelry Necklaces ***** ***** ***** PB-12927 Small Rhinestone Eye Jewelry Necklaces ***** ***** ***** PB-12935 Steel Dog Tag Jewelry Necklaces ***** ***** ***** PB-13305 Gradient Rhinestone Jewelry Necklaces ***** ***** ***** PB-13332 Playboy Double Dog T Jewelry Necklaces ***** ***** ***** PB-14701 Multi Beaded Rabbit Jewelry Necklaces ***** ***** ***** PB-14706 Four Tier Playboy Ch Jewelry Necklaces ***** ***** ***** PB-14727 14K Gold Miss Month Jewelry Necklaces ***** ***** ***** PB-15100 Multi Hoop Rabbit He Jewelry Necklaces ***** ***** ***** PB-15103 Beaded Rabbit Head C Jewelry Necklaces ***** ***** ***** PB-15124 Silver Rhinestone Ra Jewelry Necklaces ***** ***** ***** PB-15125 Silver Rabbit Head N Jewelry Necklaces ***** ***** ***** PB-6005 Rabbit Head Necklace Jewelry Necklaces ***** ***** ***** PB-6557 Diamond Rabbit Head Jewelry Necklaces ***** ***** ***** PB-6690 Diamond Rabbit Head Jewelry Necklaces ***** ***** ***** PB-7451 Rhinestone Rabbit He Jewelry Necklaces ***** ***** ***** PB-9214 Cybergirl Necklace Jewelry Necklaces ***** ***** ***** PB-9428 Rhinestone Choker an Jewelry Rhinestone Lingerie ***** ***** ***** PB-10344 Pink Rabbit Head Lin Jewelry Watches ***** ***** ***** PB-12506 Mens Steel Watch Jewelry Watches ***** ***** ***** PB-13033 Pretty in Pink Watch Jewelry Watches ***** ***** ***** PB-13360 Rabbit Head Link Wat Jewelry Watches ***** ***** ***** PB-13361 Floral Rabbit Head W Jewelry Watches ***** ***** ***** PB-13362 Rabbit Head Watch Jewelry Watches ***** ***** ***** PB-15071 Bunny Link Watch Jewelry Watches ***** ***** ***** PB-15072 Womens Charm Watch Jewelry Watches ***** ***** ***** PB-15073 Studded Strap Watch Jewelry Watches ***** ***** ***** PB-15074 Bling Watch Jewelry Watches ***** ***** ***** PB-15075 Mens Steel Watch Jewelry Watches ***** ***** ***** PB-15076 Mens Square Playboy Jewelry Watches ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- JEWELRY ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-13263 Silk & Lace Babydoll Lingerie Baby Doll Sets ***** ***** ***** PB-15164 Mesh & Lace Demi Bab Lingerie Baby Doll Sets ***** ***** ***** PB-15181B Satin Sheer Heart Cu Lingerie Baby Doll Sets ***** ***** ***** PB-15184B Sheer Open Back Baby Lingerie Baby Doll Sets ***** ***** ***** PB-9620 Lavish Lace V-string Lingerie Baby Doll Sets ***** ***** ***** PB-12024 Lusty Fishnet Bodysu Lingerie Bodystocking ***** ***** ***** PB-15155 Fishnet Tube Top & T Lingerie Bodystocking ***** ***** ***** PB-13035 Stretch Lace Demi Br Lingerie Bra & Panty Set ***** ***** ***** PB-13267 Sheer Lace Bra & Pan Lingerie Bra & Panty Set ***** ***** ***** PB-10820 Lace & Mesh Dress wi Lingerie Bra & Thong Sets ***** ***** ***** PB-12585 Silk Animal Print Br Lingerie Bra & Thong Sets ***** ***** *****
13 PB-13170 Stretch Satin Sleepw Lingerie Bra & Thong Sets ***** ***** ***** PB-14599 Foral Lace Embroider Lingerie Bra & Thong Sets ***** ***** ***** PB-14710 Florenza Underwire B Lingerie Bra & Thong Sets ***** ***** ***** PB-15152 Fishnet Halter & Hot Lingerie Bra & Thong Sets ***** ***** ***** PB-15312B Queens Court Bra and Lingerie Bra & Thong Sets ***** ***** ***** PB-15312R Queens Court Bra and Lingerie Bra & Thong Sets ***** ***** ***** PB-15320 Lace-Up Bra & Thong Lingerie Bra & Thong Sets ***** ***** ***** PB-17041 Industrial Fishnet T Lingerie Bra & Thong Sets ***** ***** ***** PB-17046 Confetti Mesh Bralet Lingerie Bra & Thong Sets ***** ***** ***** PB-12096 Diamond Bunny Bralet Lingerie Bras ***** ***** ***** PB-12354 Victorian Velvet Bus Lingerie Bustier & Hot Short Set ***** ***** ***** PB-10503 2Pc. Velvet and Plus Lingerie Bustier/Thong Sets ***** ***** ***** PB-12350 Wild At Heart Bustie Lingerie Bustier/Thong Sets ***** ***** ***** PB-13140 Crop Lace Bustier an Lingerie Bustier/Thong Sets ***** ***** ***** PB-13256 Lace Mesh Bustier an Lingerie Bustier/Thong Sets ***** ***** ***** PB-14537 Leopard Lace Up Bust Lingerie Bustier/Thong Sets ***** ***** ***** PB-15159 Sugar & Spice Bustie Lingerie Bustier/Thong Sets ***** ***** ***** PB-17030 Criss Cross Sides Ja Lingerie Bustier/Thong Sets ***** ***** ***** PB-17052 Floral Criss Cross B Lingerie Bustier/Thong Sets ***** ***** ***** PB-12119 Bunny Heart Underwir Lingerie Bustiers ***** ***** ***** PB-13320 Fascination Cami Lingerie Cami ***** ***** ***** PB-12583 Long Sleeve Fishnet Lingerie Cami Sets ***** ***** ***** PB-13169 Pink Leopard Crop Ca Lingerie Cami Sets ***** ***** ***** PB-14717 Sheer Mesh Playboy C Lingerie Cami Sets ***** ***** ***** PB-15160 Heart Mesh Cami and Lingerie Cami Sets ***** ***** ***** PB-15206 Cami & Thong Set Lingerie Cami Sets ***** ***** ***** PB-16031 Sweetest Hearts Unde Lingerie Cami Sets ***** ***** ***** PB-16032 Bejewled Hearts Cami Lingerie Cami Sets ***** ***** ***** PB-17042 Flirty Fishnet Shirt Lingerie Cami Sets ***** ***** ***** PB-10933 Flirty Cheeky Lingerie Chemise ***** ***** ***** PB-11025 Sexy Sheer Chemise Lingerie Chemise ***** ***** ***** PB-11048 Sheer Silk Chemise Lingerie Chemise ***** ***** ***** PB-12913 Flirty Femme Chemise Lingerie Chemise ***** ***** ***** PB-13082 Super Sheer Stretch Lingerie Chemise ***** ***** ***** PB-14539 Belted Beauty Chemis Lingerie Chemise ***** ***** ***** PB-14622 Silk Charmeuse Chemi Lingerie Chemise ***** ***** ***** PB-15154 Fishnet Chemise Lingerie Chemise ***** ***** ***** PB-17027 Rosace Lace Silk and Lingerie Chemise ***** ***** ***** PB-17028 Rosace Sheer Silk Ch Lingerie Chemise ***** ***** ***** PB-17031 Sheer Rhinestone Hea Lingerie Chemise ***** ***** ***** PB-17036 Medallion Chiffon Ch Lingerie Chemise ***** ***** ***** PB-8876 Sheer Silk Chemise Lingerie Chemise ***** ***** ***** PB-12011 Glam Rock Corset Lingerie Corsets ***** ***** ***** PB-12007 Blue Signature Push Lingerie Garter ***** ***** ***** PB-12015 Sin City Garter Lingerie Garter ***** ***** ***** PB-12171 Striped Gown Lingerie Gown ***** ***** *****
14 PB-12623 Sheer Panel Gown & T Lingerie Gown ***** ***** ***** PB-10505 Sheer Thigh High Sto Lingerie Hosiery ***** ***** ***** PB-15216 Rabbit Head Tights Lingerie Hosiery ***** ***** ***** PB-10765 Wild One Boy Brief Lingerie Pants Boy Brief ***** ***** ***** PB-11180 Loved Brief Lingerie Pants Boy Brief ***** ***** ***** PB-11181 Loved Brief Lingerie Pants Boy Brief ***** ***** ***** PB-13319R Sexy Sequin Boyleg Lingerie Pants Boy Brief ***** ***** ***** PB-10934 Flirty Bunny Short Lingerie Pants Boyshorts ***** ***** ***** PB-10937 Glitter Rabbit Head Lingerie Pants Boyshorts ***** ***** ***** PB-12097 Diamond Bunny Boysho Lingerie Pants Boyshorts ***** ***** ***** PB-13312 Rouched Boy Short Lingerie Pants Boyshorts ***** ***** ***** PB-13319P Sexy Sequin Boyleg Lingerie Pants Boyshorts ***** ***** ***** PB-13328B Cupids Arrow Boyleg Lingerie Pants Boyshorts ***** ***** ***** PB-13328P Cupids Arrow Boyleg Lingerie Pants Boyshorts ***** ***** ***** PB-14569 Basic Cotton Hip Hug Lingerie Pants Boyshorts ***** ***** ***** PB-13055 Lovin Leopard Boy Br Lingerie Pants Panties ***** ***** ***** PB-10274 Flirty Bunny Thong Lingerie Pants Thongs ***** ***** ***** PB-10771 Bunny Love Thong Lingerie Pants Thongs ***** ***** ***** PB-10772 Bunny Love Thong Lingerie Pants Thongs ***** ***** ***** PB-10879 Bunny G-Thong Lingerie Pants Thongs ***** ***** ***** PB-10924 Color Block Thong Lingerie Pants Thongs ***** ***** ***** PB-10929 Flirty Bunny Thong Lingerie Pants Thongs ***** ***** ***** PB-10936 Glitter Rabbit Head Lingerie Pants Thongs ***** ***** ***** PB-10940 Glitter Rabbit Head Lingerie Pants Thongs ***** ***** ***** PB-10941 Glitter Bunny G-Thon Lingerie Pants Thongs ***** ***** ***** PB-10944 Glitter Rabbit Head Lingerie Pants Thongs ***** ***** ***** PB-10945 Glitter G-Thong Lingerie Pants Thongs ***** ***** ***** PB-10950 Glitter G-Thong Lingerie Pants Thongs ***** ***** ***** PB-10951 Glitter String Thong Lingerie Pants Thongs ***** ***** ***** PB-12012 Glam Rock Thong Lingerie Pants Thongs ***** ***** ***** PB-12014 Sin City Bikini Thon Lingerie Pants Thongs ***** ***** ***** PB-12095 Sweet Dreams Bunny T Lingerie Pants Thongs ***** ***** ***** PB-12215 Rabbit Head Rhinesto Lingerie Pants Thongs ***** ***** ***** PB-12216 Rabbit Head Rhinesto Lingerie Pants Thongs ***** ***** ***** PB-12217 Rhinestone Rabbit He Lingerie Pants Thongs ***** ***** ***** PB-12218 Rabbit Head Rhinesto Lingerie Pants Thongs ***** ***** ***** PB-12223 Rabbit Head Rhinesto Lingerie Pants Thongs ***** ***** ***** PB-12225 Rhinestone Rabbit He Lingerie Pants Thongs ***** ***** ***** PB-12226 Rhinestone Thong Lingerie Pants Thongs ***** ***** ***** PB-12231 Rabbit Head Print St Lingerie Pants Thongs ***** ***** ***** PB-12232 Rhinestone Rabbit He Lingerie Pants Thongs ***** ***** ***** PB-12463 Shadow Stripe Thong Lingerie Pants Thongs ***** ***** ***** PB-12516 Wild Thong Lingerie Pants Thongs ***** ***** ***** PB-12684 Cotton Thong Lingerie Pants Thongs ***** ***** ***** PB-12720 Silk Panel Thong Lingerie Pants Thongs ***** ***** ***** PB-12723 Silk Panel Thong Lingerie Pants Thongs ***** ***** *****
15 PB-12804 Signature Bunny Thon Lingerie Pants Thongs ***** ***** ***** PB-12808 Pretty Lace Thong Lingerie Pants Thongs ***** ***** ***** PB-12810 Signature Thong Lingerie Pants Thongs ***** ***** ***** PB-12812 Signature Thong Lingerie Pants Thongs ***** ***** ***** PB-12814 Shadow Stripe Thong Lingerie Pants Thongs ***** ***** ***** PB-12816 Retro Girl Thong Lingerie Pants Thongs ***** ***** ***** PB-12956 Bunny Basic Thong Lingerie Pants Thongs ***** ***** ***** PB-13030 Olde English Thong Lingerie Pants Thongs ***** ***** ***** PB-13203 Basic Cotton String Lingerie Pants Thongs ***** ***** ***** PB-13239B Olde English Thong Lingerie Pants Thongs ***** ***** ***** PB-13316 Tis the Season G-Str Lingerie Pants Thongs ***** ***** ***** PB-13321 Fascination G-String Lingerie Pants Thongs ***** ***** ***** PB-13324R Mesh Lace Thong Lingerie Pants Thongs ***** ***** ***** PB-15178 Heart Thong with Gif Lingerie Pants Thongs ***** ***** ***** PB-10812 Open Front Mesh Tedd Lingerie Teddy ***** ***** ***** PB-11026 Temptations Teddy Lingerie Teddy ***** ***** ***** PB-12360 Strap Happy Teddy Lingerie Teddy ***** ***** ***** PB-12862 Flirty Teddy Lingerie Teddy ***** ***** ***** PB-13039 Lace-Up Front Teddy Lingerie Teddy ***** ***** ***** PB-13086 Eyelash Lace Thong T Lingerie Teddy ***** ***** ***** PB-13339 Eyelash Lace Thong T Lingerie Teddy ***** ***** ***** PB-14533 Dressed to Thrill Te Lingerie Teddy ***** ***** ***** PB-14570 Sheer Desire Teddy Lingerie Teddy ***** ***** ***** PB-15158 Heart Teddy Lingerie Teddy ***** ***** ***** PB-15186 Rose Lace Up Teddy Lingerie Teddy ***** ***** ***** PB-15311 Rhinestone Rhapsody Lingerie Teddy ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- LINGERIE ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12871 Plaid Boxer Loungewear Boxers ***** ***** ***** PB-12868 Cotton Boxer Loungewear Boxers ***** ***** ***** PB-13107 Argyle Knit Boxer Loungewear Boxers ***** ***** ***** PB-17056 Satin Rabbit Head Mo Loungewear Boxers ***** ***** ***** PB-12866 Camouflage Boxer Loungewear Boxers ***** ***** ***** PB-13108 Neon Rabbit Head Box Loungewear Boxers ***** ***** ***** PB-13104 Signature Knit Boxer Loungewear Boxers ***** ***** ***** PB-12870 Plaid Rabbit Loungep Loungewear Loungepants ***** ***** ***** PB-15145G Cotton Loungeshort Loungewear Loungepants ***** ***** ***** PB-15145C Cotton Loungeshort Loungewear Loungepants ***** ***** ***** PB-13109 Classic Sleep Tee an Loungewear PJ Set ***** ***** ***** PB-13106 Classic Sleep Tee & Loungewear PJ Set ***** ***** ***** PB-9393 Mens Terrycloth Robe Loungewear Robes ***** ***** ***** PB-15209 Cotton Waffle Knit R Loungewear Robes ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- LOUNGEWEAR ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-10284 Helmut Newton Hardco Media Books ***** ***** ***** PB-10375 The Playboy Book: 50 Media Books ***** ***** ***** PB-10487 Helmut Newton Hardco Media Books ***** ***** ***** PB-10494 Playboy: Brunettes B Media Books ***** ***** *****
16 PB-11055 The Bedside Playboy Media Books ***** ***** ***** PB-11056 Playboy Sexual Book Media Books ***** ***** ***** PB-12196 Playboy Interviews: Media Books ***** ***** ***** PB-12208 The Playboy Intervie Media Books ***** ***** ***** PB-12286 The Playboy Intervie Media Books ***** ***** ***** PB-12411 Playboy Book Of True Media Books ***** ***** ***** PB-12536 The Playboy Intervie Media Books ***** ***** ***** PB-12963 Bunny Years Hardcove Media Books ***** ***** ***** PB-12964 Bunny Years Soft Cov Media Books ***** ***** ***** PB-13366 LeRoy Neiman Femlin Media Books ***** ***** ***** PB-13367 LeRoy Neiman Femlin Media Books ***** ***** ***** PB-13388 Femlin Book Ultra Li Media Books ***** ***** ***** PB-14999 Around the World By Media Books ***** ***** ***** PB-15210 Playboys College Fic Media Books ***** ***** ***** PB-4010 Playboy: 50 Years: T Media Books ***** ***** ***** PB-4012 Entertainment 101 bo Media Books ***** ***** ***** PB-4015 Inside the Playboy M Media Books ***** ***** ***** PB-8212 Mantrack Book Media Books ***** ***** ***** PB-8466 Bernard of Hollywood Media Books ***** ***** ***** PB-12376 Modern Kama Sutra Wo Media CD ***** ***** ***** PB-12377 Modern Kama Sutra Pa Media CD ***** ***** ***** PB-8681 Mel Torme Live at th Media CD ***** ***** ***** PB-9644 PB Jazz In a Smooth Media CD ***** ***** ***** PB-CF196005 May 1960 Centerfold Media Centerfold ***** ***** ***** PB-CF196007 July 1960 Centerfold Media Centerfold ***** ***** ***** PB-CF196009 September 1960 Cente Media Centerfold ***** ***** ***** PB-CF196010 October 1960 Centerf Media Centerfold ***** ***** ***** PB-CF196011 November 1960 Center Media Centerfold ***** ***** ***** PB-CF196012 December 1960 Center Media Centerfold ***** ***** ***** PB-CF196101 January 1961 Centerf Media Centerfold ***** ***** ***** PB-CF196102 February 1961 Center Media Centerfold ***** ***** ***** PB-CF196103 March 1961 Centerfol Media Centerfold ***** ***** ***** PB-CF196104 April 1961 Centerfol Media Centerfold ***** ***** ***** PB-CF196105 May 1961 Centerfold Media Centerfold ***** ***** ***** PB-CF196106 June 1961 Centerfold Media Centerfold ***** ***** ***** PB-CF196107 July 1961 Centerfold Media Centerfold ***** ***** ***** PB-CF196108 August 1961 Centerfo Media Centerfold ***** ***** ***** PB-CF196110 October 1961 Centerf Media Centerfold ***** ***** ***** PB-CF196111 November 1961 Center Media Centerfold ***** ***** ***** PB-CF196112 December 1961 Center Media Centerfold ***** ***** ***** PB-CF196201 January 1962 Centerf Media Centerfold ***** ***** ***** PB-CF196202 February 1962 Center Media Centerfold ***** ***** ***** PB-CF196203 March 1962 Centerfol Media Centerfold ***** ***** ***** PB-CF196204 April 1962 Centerfol Media Centerfold ***** ***** ***** PB-CF196206 June 1962 Centerfold Media Centerfold ***** ***** ***** PB-CF196207 July 1962 Centerfold Media Centerfold ***** ***** *****
17 PB-CF196208 August 1962 Centerfo Media Centerfold ***** ***** ***** PB-CF196209 September 1962 Cente Media Centerfold ***** ***** ***** PB-CF196210 October 1962 Centerf Media Centerfold ***** ***** ***** PB-CF196211 November 1962 Center Media Centerfold ***** ***** ***** PB-CF196212 December 1962 Center Media Centerfold ***** ***** ***** PB-CF196301 January 1963 Centerf Media Centerfold ***** ***** ***** PB-CF196302 February 1963 Center Media Centerfold ***** ***** ***** PB-CF196303 March 1963 Centerfol Media Centerfold ***** ***** ***** PB-CF196304 April 1963 Centerfol Media Centerfold ***** ***** ***** PB-CF196305 May 1963 Centerfold Media Centerfold ***** ***** ***** PB-CF196306 June 1963 Centerfold Media Centerfold ***** ***** ***** PB-CF196307 July 1963 Centerfold Media Centerfold ***** ***** ***** PB-CF196308 August 1963 Centerfo Media Centerfold ***** ***** ***** PB-CF196309 September 1963 Cente Media Centerfold ***** ***** ***** PB-CF196310 October 1963 Centerf Media Centerfold ***** ***** ***** PB-CF196401 January 1964 Centerf Media Centerfold ***** ***** ***** PB-CF196402 February 1964 Center Media Centerfold ***** ***** ***** PB-CF196403 March 1964 Centerfol Media Centerfold ***** ***** ***** PB-CF196404 April 1964 Centerfol Media Centerfold ***** ***** ***** PB-CF196405 May 1964 Centerfold Media Centerfold ***** ***** ***** PB-CF196406 June 1964 Centerfold Media Centerfold ***** ***** ***** PB-CF196407 July 1964 Centerfold Media Centerfold ***** ***** ***** PB-CF196409 September 1964 Cente Media Centerfold ***** ***** ***** PB-CF196410 October 1964 Centerf Media Centerfold ***** ***** ***** PB-CF196411 November 1964 Center Media Centerfold ***** ***** ***** PB-CF196501 January 1965 Centerf Media Centerfold ***** ***** ***** PB-CF196502 February 1965 Center Media Centerfold ***** ***** ***** PB-CF196503 March 1965 Centerfol Media Centerfold ***** ***** ***** PB-CF196504 April 1965 Centerfol Media Centerfold ***** ***** ***** PB-CF196505 May 1965 Centerfold Media Centerfold ***** ***** ***** PB-CF196506 June 1965 Centerfold Media Centerfold ***** ***** ***** PB-CF196507 July 1965 Centerfold Media Centerfold ***** ***** ***** PB-CF196508 August 1965 Centerfo Media Centerfold ***** ***** ***** PB-CF196509 September 1965 Cente Media Centerfold ***** ***** ***** PB-CF196510 October 1965 Centerf Media Centerfold ***** ***** ***** PB-CF196512 December 1965 Center Media Centerfold ***** ***** ***** PB-CF196601 January 1966 Centerf Media Centerfold ***** ***** ***** PB-CF196603 March 1966 Centerfol Media Centerfold ***** ***** ***** PB-CF196604 April 1966 Centerfol Media Centerfold ***** ***** ***** PB-CF196605 May 1966 Centerfold Media Centerfold ***** ***** ***** PB-CF196606 June 1966 Centerfold Media Centerfold ***** ***** ***** PB-CF196607 July 1966 Centerfold Media Centerfold ***** ***** ***** PB-CF196608 August 1966 Centerfo Media Centerfold ***** ***** ***** PB-CF196609 September 1966 Cente Media Centerfold ***** ***** ***** PB-CF196610 October 1966 Centerf Media Centerfold ***** ***** ***** PB-CF196611 November 1966 Center Media Centerfold ***** ***** *****
18 PB-CF196702 February 1967 Center Media Centerfold ***** ***** ***** PB-CF196704 April 1967 Centerfol Media Centerfold ***** ***** ***** PB-CF196705 May 1967 Centerfold Media Centerfold ***** ***** ***** PB-CF196706 June 1967 Centerfold Media Centerfold ***** ***** ***** PB-CF196707 July 1967 Centerfold Media Centerfold ***** ***** ***** PB-CF196709 September 1967 Cente Media Centerfold ***** ***** ***** PB-CF196710 October 1967 Centerf Media Centerfold ***** ***** ***** PB-CF196711 November 1967 Center Media Centerfold ***** ***** ***** PB-CF196712 December 1967 Center Media Centerfold ***** ***** ***** PB-CF196802 February 1968 Center Media Centerfold ***** ***** ***** PB-CF196803 March 1968 Centerfol Media Centerfold ***** ***** ***** PB-CF196804 April 1968 Centerfol Media Centerfold ***** ***** ***** PB-CF196805 May 1968 Centerfold Media Centerfold ***** ***** ***** PB-CF196806 June 1968 Centerfold Media Centerfold ***** ***** ***** PB-CF196807 July 1968 Centerfold Media Centerfold ***** ***** ***** PB-CF196808 August 1968 Centerfo Media Centerfold ***** ***** ***** PB-CF196809 September 1968 Cente Media Centerfold ***** ***** ***** PB-CF196810 October 1968 Centerf Media Centerfold ***** ***** ***** PB-CF196811 November 1968 Center Media Centerfold ***** ***** ***** PB-CF196901 January 1969 Centerf Media Centerfold ***** ***** ***** PB-CF196903 March 1969 Centerfol Media Centerfold ***** ***** ***** PB-CF196904 April 1969 Centerfol Media Centerfold ***** ***** ***** PB-CF196906 June 1969 Centerfold Media Centerfold ***** ***** ***** PB-CF196908 August 1969 Centerfo Media Centerfold ***** ***** ***** PB-CF196909 September 1969 Cente Media Centerfold ***** ***** ***** PB-CF196910 October 1969 Centerf Media Centerfold ***** ***** ***** PB-CF196911 November 1969 Center Media Centerfold ***** ***** ***** PB-CF196912 December 1969 Center Media Centerfold ***** ***** ***** PB-CF197001 January 1970 Centerf Media Centerfold ***** ***** ***** PB-CF197002 January 1970 Centerf Media Centerfold ***** ***** ***** PB-CF197003 March 1970 Centerfol Media Centerfold ***** ***** ***** PB-CF197004 April 1969 Centerfol Media Centerfold ***** ***** ***** PB-CF197005 May 1969 Centerfold Media Centerfold ***** ***** ***** PB-CF197006 June 1970 Centerfold Media Centerfold ***** ***** ***** PB-CF197007 July 1970 Centerfold Media Centerfold ***** ***** ***** PB-CF197008 August 1970 Centerfo Media Centerfold ***** ***** ***** PB-CF197009 September 1970 Cente Media Centerfold ***** ***** ***** PB-CF197010 January 1970 Centerf Media Centerfold ***** ***** ***** PB-CF197011 November 1969 Center Media Centerfold ***** ***** ***** PB-CF197012 December 1969 Center Media Centerfold ***** ***** ***** PB-CF197103 March 1971 Centerfol Media Centerfold ***** ***** ***** PB-CF197104 April 1971 Centerfol Media Centerfold ***** ***** ***** PB-CF197106 June 1971 Centerfold Media Centerfold ***** ***** ***** PB-CF197107 July 1971 Centerfold Media Centerfold ***** ***** ***** PB-CF197108 August 1971 Centerfo Media Centerfold ***** ***** ***** PB-CF197109 September 1971 Cente Media Centerfold ***** ***** *****
19 PB-CF197110 October 1971 Centerf Media Centerfold ***** ***** ***** PB-CF197111 November 1971 Center Media Centerfold ***** ***** ***** PB-CF197112 December 1971 Center Media Centerfold ***** ***** ***** PB-CF197308 August 1973 Centerfo Media Centerfold ***** ***** ***** PB-CF197309 September 1973 Cente Media Centerfold ***** ***** ***** PB-4702 Vinyl Library Case Media Storage ***** ***** ***** PB-4901 Leather Bonded Libra Media Storage ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- MEDIA ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12400 Tattoo Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-12830 Go Go Girl Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-12831 Mansion Logo Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-12832 Finest Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-12833 Bunnytime Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-12908 Your Vegas Mens Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-13152 Since 1953 Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-13153 I Read the Articles Mens Knit Tops Novelty Tee ***** ***** ***** PB-13155 Mansion Bouncer Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-14707 Original Playboy Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-14708 Lady Luck Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-15130 Playboy Green Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-15131 Frame Me Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-15137 Playboy Spin Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-15138 Playboy Cover Girl Mens Knit Tops Novelty Tee ***** ***** ***** PB-15139 Royal Player Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-15427 Rock The Rabbit - Di Mens Knit Tops Novelty Tee ***** ***** ***** PB-15430 Rock The Rabbit - Th Mens Knit Tops Novelty Tee ***** ***** ***** PB-16033 NYC Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-16035 Playboy Palm Stripe Mens Knit Tops Novelty Tee ***** ***** ***** PB-16036 Feelin It Tee Mens Knit Tops Novelty Tee ***** ***** ***** PB-13154 Argyle Print Polo Mens Knit Tops Polo ***** ***** ***** PB-12147 Rabbit Head Sweater Mens Sweaters Crewneck ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- MENS ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-14008 Young and Loaded Mil Novelty Chocolate ***** ***** ***** PB-14011 Good Life Dark Choco Novelty Chocolate ***** ***** ***** PB-14006 I Love Playboy Milk Novelty Chocolate ***** ***** ***** PB-10987 I Read the Articles Novelty Lighters ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- NOVELTY ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-13384 Pimp Cup Dog Bowl Pets Accessories ***** ***** ***** PB-15054 Heart Dog Bowl Pets Accessories ***** ***** ***** PB-15055 Dog Bowl Pets Accessories ***** ***** ***** PB-15057 Dog Bed Pets Accessories ***** ***** ***** PB-1338102 Dog Miss Month Tee- Pets Apparel ***** ***** ***** PB-1338103 Dog Miss Month Tee- Pets Apparel ***** ***** ***** PB-1338106 Dog Miss Month Tee- Pets Apparel ***** ***** ***** PB-1338107 Dog Miss Month Tee- Pets Apparel ***** ***** ***** PB-15051 Dog Chain Link Hoodi Pets Apparel ***** ***** *****
20 PB-15052 Dog Stripe Fur Hoodi Pets Apparel ***** ***** ***** PB-15053 Foil Print Hoodie Pets Apparel ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PETS ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-888888888 Playboy Miscellaneou Playboy Miscellaneous ***** ***** ***** PB-888888887 Playboy Miscellaneou Playboy Miscellaneous ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- MISC ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-11166 Sexual Enhancement P Sensual Female Supplements ***** ***** ***** PB-13282 Advanced Sex Techniq Sensual Games for Lovers ***** ***** ***** PB-10867 Aroma Mist Sheets Sc Sensual Intimacy Accessories ***** ***** ***** PB-10868 Aroma Mist Sheets Sc Sensual Intimacy Accessories ***** ***** ***** PB-10996 Lovers Gift Collecti Sensual Intimacy Accessories ***** ***** ***** PB-11173 Naughty Bubbles Sensual Intimacy Accessories ***** ***** ***** PB-12844 Oral Sensations Gel Sensual Intimacy Accessories ***** ***** ***** PB-14722 Strawberry Kissable Sensual Intimacy Accessories ***** ***** ***** PB-14723 Fruit Slices Caressi Sensual Intimacy Accessories ***** ***** ***** PB-9129 Magna RX+ Penis Enla Sensual Magna RX ***** ***** ***** PB-12370 Prolonging Delay Spr Sensual Male Performance ***** ***** ***** PB-12192 Lavender Massage Oil Sensual Massage Accessories ***** ***** ***** PB-12200 Pheromone Massage Oi Sensual Massage Accessories ***** ***** ***** PB-12201 Pheromone Massage Oi Sensual Massage Accessories ***** ***** ***** PB-12202 Pheromone Massage Oi Sensual Massage Accessories ***** ***** ***** PB-12840 Seduce Me Coconut Ma Sensual Massage Accessories ***** ***** ***** PB-12841 Love Me Cherry Flavo Sensual Massage Accessories ***** ***** ***** PB-12838 Xplorer Ultimate Mas Sensual Massagers ***** ***** ***** PB-12839 Ideal Cordless Body Sensual Massagers ***** ***** ***** PB-12846 Magic Massager Pleas Sensual Massagers ***** ***** ***** PB-15305 Better Sex Sensual M Sensual Massagers ***** ***** ***** PB-9596 I-Vibe Pocket Rocket Sensual Massagers ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- SENSUAL ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-10905 Golden Bunny Pant Sleepwear PJ Pants ***** ***** ***** PB-12529 Signature Sleep Pant Sleepwear PJ Pants ***** ***** ***** PB-12572 Signature Sleep Pant Sleepwear PJ Pants ***** ***** ***** PB-13226 Bunny Thermal Sleep Sleepwear PJ Pants ***** ***** ***** PB-13234 Signature Sleep Pant Sleepwear PJ Pants ***** ***** ***** PB-14505 Everyone Loves a Pla Sleepwear PJ Pants ***** ***** ***** PB-14515 Yoga Pant Sleepwear PJ Pants ***** ***** ***** PB-14517 Floral Print Sleep P Sleepwear PJ Pants ***** ***** ***** PB-14563 Polka Dot Sleep Pant Sleepwear PJ Pants ***** ***** ***** PB-14565 Plaid Sleep Pant Sleepwear PJ Pants ***** ***** ***** PB-14578 Eclipsed Heart Sleep Sleepwear PJ Pants ***** ***** ***** PB-14584 Honey Bunny Sleep Pa Sleepwear PJ Pants ***** ***** ***** PB-15147 Bunny Time Sleep Pan Sleepwear PJ Pants ***** ***** ***** PB-15147P Bunny Time Sleep Pan Sleepwear PJ Pants ***** ***** ***** PB-15147R Bunny Time Sleep Pan Sleepwear PJ Pants ***** ***** ***** PB-15177 Bunny Stripes Sleep Sleepwear PJ Pants ***** ***** ***** PB-16014 Love Bunny Sleep Pan Sleepwear PJ Pants ***** ***** *****
21 PB-11194 Rabbit Head Onesie Sleepwear PJ Sets ***** ***** ***** PB-12041 Silk Charmeuse Pajam Sleepwear PJ Sets ***** ***** ***** PB-12297 Allover Pajama Set Sleepwear PJ Sets ***** ***** ***** PB-13089 Silk Charmeuse Pajam Sleepwear PJ Sets ***** ***** ***** PB-14553 Wild Cat Charmeuse P Sleepwear PJ Sets ***** ***** ***** PB-14560 Signature Yoga Pant Sleepwear PJ Sets ***** ***** ***** PB-14568 Rabbit Head Onesie Sleepwear PJ Sets ***** ***** ***** PB-14568P Rabbit Head Onesie Sleepwear PJ Sets ***** ***** ***** PB-12942 Rabbit Head Hot Shor Sleepwear PJ Shorts ***** ***** ***** PB-12943 Rabbit Head Hot Shor Sleepwear PJ Shorts ***** ***** ***** PB-12946 Rhinestone Rabbit He Sleepwear PJ Shorts ***** ***** ***** PB-12948 Rhinestone Rabbit He Sleepwear PJ Shorts ***** ***** ***** PB-13032 Olde English Boy Bri Sleepwear PJ Shorts ***** ***** ***** PB-13237 Olde English Bikini Sleepwear PJ Shorts ***** ***** ***** PB-14503 Pinstripe Sleep Shor Sleepwear PJ Shorts ***** ***** ***** PB-14507 Polka Dot Sleep Shor Sleepwear PJ Shorts ***** ***** ***** PB-14518 Floral Print Sleep S Sleepwear PJ Shorts ***** ***** ***** PB-1454901 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454904 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454905 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454906 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454908 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454910 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-1454911 Playmate of the Mont Sleepwear PJ Shorts ***** ***** ***** PB-14580 Eclipsed Heart Playb Sleepwear PJ Shorts ***** ***** ***** PB-14586 Honey Bunny Sleep Sh Sleepwear PJ Shorts ***** ***** ***** PB-15003 Pinstripe Ditzy Bunn Sleepwear PJ Shorts ***** ***** ***** PB-15167 Love Bunny Shorts Sleepwear PJ Shorts ***** ***** ***** PB-15175 Bunny Stripe Short Sleepwear PJ Shorts ***** ***** ***** PB-10034 Monogram Pajama Top Sleepwear PJ Tops ***** ***** ***** PB-10415 Cutout Tank Sleepwear PJ Tops ***** ***** ***** PB-10421 Dazzle Bunny Cami To Sleepwear PJ Tops ***** ***** ***** PB-11013 All-Over Print Rabbi Sleepwear PJ Tops ***** ***** ***** PB-11178 Striped Cami Sleepwear PJ Tops ***** ***** ***** PB-11188 Treasure Chest Tank Sleepwear PJ Tops ***** ***** ***** PB-12003 Bunny Love Cami Top Sleepwear PJ Tops ***** ***** ***** PB-12094 Sweet Dreams Bunny C Sleepwear PJ Tops ***** ***** ***** PB-12462 Shadow Stripe Cami T Sleepwear PJ Tops ***** ***** ***** PB-12805 Bunny Basics Camisol Sleepwear PJ Tops ***** ***** ***** PB-12807 Pretty Lace Babydoll Sleepwear PJ Tops ***** ***** ***** PB-12809 Cotton Cami Sleepwear PJ Tops ***** ***** ***** PB-13029 Olde English Sleep T Sleepwear PJ Tops ***** ***** ***** PB-13031 Olde English Cami Sleepwear PJ Tops ***** ***** ***** PB-13202 Basic Cotton Cami Sleepwear PJ Tops ***** ***** ***** PB-13231B Olde English Sleep T Sleepwear PJ Tops ***** ***** ***** PB-13231W Olde English Sleep T Sleepwear PJ Tops ***** ***** *****
22 PB-13233 Signature Cami Sleepwear PJ Tops ***** ***** ***** PB-13235P Olde English Sleep T Sleepwear PJ Tops ***** ***** ***** PB-13235W Olde English Tank Sleepwear PJ Tops ***** ***** ***** PB-14500 True Love Sleep Tee Sleepwear PJ Tops ***** ***** ***** PB-14502 Pinstripe Bunny Cami Sleepwear PJ Tops ***** ***** ***** PB-14504 Everyone Loves a Pla Sleepwear PJ Tops ***** ***** ***** PB-14514 Lips & Hearts Sleep Sleepwear PJ Tops ***** ***** ***** PB-14516 Floral Print Sleep T Sleepwear PJ Tops ***** ***** ***** PB-1454804 Playmate of the Mont Sleepwear PJ Tops ***** ***** ***** PB-14548MAYB Playmate of the Mont Sleepwear PJ Tops ***** ***** ***** PB-14548SEPP Playmate of the Mont Sleepwear PJ Tops ***** ***** ***** PB-14554 Floral Bunny Playboy Sleepwear PJ Tops ***** ***** ***** PB-14562 Playmate Coed Sleep Sleepwear PJ Tops ***** ***** ***** PB-14564 Sorority Sleep Tee Sleepwear PJ Tops ***** ***** ***** PB-14579 Eclipsed Heart Sleep Sleepwear PJ Tops ***** ***** ***** PB-14581 Eclipsed Heart Sleep Sleepwear PJ Tops ***** ***** ***** PB-14583 Honey Bunny Sleep Te Sleepwear PJ Tops ***** ***** ***** PB-15000 Honey Bunny Cami Sleepwear PJ Tops ***** ***** ***** PB-15002 Pinstripe Ditzy Bunn Sleepwear PJ Tops ***** ***** ***** PB-15146PNK Bunny Time Sleep Tee Sleepwear PJ Tops ***** ***** ***** PB-15146R Bunny Time Sleep Tee Sleepwear PJ Tops ***** ***** ***** PB-15166 Love Bunny Cami Sleepwear PJ Tops ***** ***** ***** PB-15174 Bunny Stripes Cami Sleepwear PJ Tops ***** ***** ***** PB-15176 Bunny Stripes Sleep Sleepwear PJ Tops ***** ***** ***** PB-16015 Bunnies & Hearts Cam Sleepwear PJ Tops ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- SLEEPWEAR ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-12620 Polka Dot Bikini Swimwear ***** ***** ***** PB-12622 Pretty In Pink Bikin Swimwear ***** ***** ***** PB-12618 Cut Out Swim Suit Swimwear ***** ***** ***** PB-12619 Medallion Bikini Swimwear ***** ***** ***** PB-15140 Champagne Bikini Swimwear ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- SWIMWEAR ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- PB-10416 Cutout Capri Womens Active Bottoms ***** ***** ***** PB-11082 Track Pants Womens Active Bottoms ***** ***** ***** PB-12526 Drawstring Crop Terr Womens Active Bottoms ***** ***** ***** PB-13016 Team Hef Crop Pant Womens Active Bottoms ***** ***** ***** PB-13018 80 Loungepant Womens Active Bottoms ***** ***** ***** PB-13020 Bunny 79 Short Womens Active Bottoms ***** ***** ***** PB-13112 Olde English Loungep Womens Active Bottoms ***** ***** ***** PB-13157 Brushed Short Womens Active Bottoms ***** ***** ***** PB-13213 Script Logo Crop Lou Womens Active Bottoms ***** ***** ***** PB-13214 Script Logo Active S Womens Active Bottoms ***** ***** ***** PB-14513 Marble Dye Pant Womens Active Bottoms ***** ***** ***** PB-14589 Foil Capri Pant Womens Active Bottoms ***** ***** ***** PB-14995B Sorority Short Womens Active Bottoms ***** ***** ***** PB-15029 Playboy Workout Shor Womens Active Bottoms ***** ***** *****
23 PB-15031 Playboy Workout Capr Womens Active Bottoms ***** ***** ***** PB-16001F Yoga Pant Womens Active Bottoms ***** ***** ***** PB-16001R Yoga Pant Womens Active Bottoms ***** ***** ***** PB-13156 Brushed French Terry Womens Active Jackets ***** ***** ***** PB-13212 Script Logo Hoodie Womens Active Jackets ***** ***** ***** PB-14490 Varisty Coed Hoodie Womens Active Jackets ***** ***** ***** PB-15011PK Velour Bunny Love Ho Womens Active Jackets ***** ***** ***** PB-8672 Velour Playboy Jacke Womens Active Jackets ***** ***** ***** PB-16002B Physical Unitard Womens Active Jumpsuits ***** ***** ***** PB-16002G Physical Unitard Womens Active Jumpsuits ***** ***** ***** PB-16010 Tube Top Romper Womens Active Jumpsuits ***** ***** ***** PB-15034 Playboy Workout Skir Womens Active Skirts ***** ***** ***** PB-10678 Miss May Stretch Cap Womens Denim Capris ***** ***** ***** PB-11084 Playboy Pin Up Capri Womens Denim Capris ***** ***** ***** PB-12327 Stretch Denim Dress Womens Denim Dresses ***** ***** ***** PB-10833 Bunny Denim Mini Ski Womens Denim Skirts ***** ***** ***** PB-12326 Denim Bustier Womens Denim Tops ***** ***** ***** PB-11109 Rabbit Head Medallio Womens Dresses ***** ***** ***** PB-15017 Rhinestone Keyhole D Womens Dresses ***** ***** ***** PB-15022 Plunge Neck Halter D Womens Dresses ***** ***** ***** PB-12331 Distressed Tube Top Womens Knit Tops ***** ***** ***** PB-12329 Denim Halter Womens Knit Tops Halter ***** ***** ***** PB-13003 Charmed Halter Top Womens Knit Tops Halter ***** ***** ***** PB-12519 Ballerina Scoop Top Womens Knit Tops L/S ***** ***** ***** PB-12521 Striped Hooded Tunic Womens Knit Tops L/S ***** ***** ***** PB-12527 Deep V Hoodie Womens Knit Tops L/S ***** ***** ***** PB-12564 Hooded Tattoo Top Womens Knit Tops L/S ***** ***** ***** PB-13114 Old School Crew Neck Womens Knit Tops L/S ***** ***** ***** PB-13134 Olde English Pullove Womens Knit Tops L/S ***** ***** ***** PB-13151 Script Thermal Top Womens Knit Tops L/S ***** ***** ***** PB-15179 Love Long Sleeve Tee Womens Knit Tops L/S ***** ***** ***** PB-12363 Ribbed Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12474 Deep V Neck Logo Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12532 Zebra Crew Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12567 May 1964 Vintage Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12607 Burnout Open Back Te Womens Knit Tops Novelty Tees ***** ***** ***** PB-12609 Silhouette Tattoo To Womens Knit Tops Novelty Tees ***** ***** ***** PB-12610 Tattoo Tunic Womens Knit Tops Novelty Tees ***** ***** ***** PB-12611 Silhouette V Neck Te Womens Knit Tops Novelty Tees ***** ***** ***** PB-12617 Vintage Cover Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12817 Somebunnys Gonna Get Womens Knit Tops Novelty Tees ***** ***** ***** PB-13017 Playboy 80 Jersey Womens Knit Tops Novelty Tees ***** ***** ***** PB-13019 Bunny 79 Jersey Womens Knit Tops Novelty Tees ***** ***** ***** PB-13159 Some Bunny Needs You Womens Knit Tops Novelty Tees ***** ***** ***** PB-13160 July 1969 Vintage Co Womens Knit Tops Novelty Tees ***** ***** ***** PB-13161 September 1967 Cover Womens Knit Tops Novelty Tees ***** ***** *****
24 PB-14488 Varsity Coed Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-14510 Vintage Tattoo Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-14511 Vintage Bunnny Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-14512 Crest Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-14567P Old School Rocker Pl Womens Knit Tops Novelty Tees ***** ***** ***** PB-14573B Distressed Classic T Womens Knit Tops Novelty Tees ***** ***** ***** PB-15005 Classic Rabbit Head Womens Knit Tops Novelty Tees ***** ***** ***** PB-15007 Tickled Pink Rhinest Womens Knit Tops Novelty Tees ***** ***** ***** PB-16003M Smooch Me Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-16003W Smooch Me Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-16008B Foil Bunny Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-16008W Foil Bunny Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-17084 Camo Tee Womens Knit Tops Novelty Tees ***** ***** ***** PB-12333 Pique Polo Womens Knit Tops Polo ***** ***** ***** PB-12522 Burnout Stripe Tunic Womens Knit Tops S/S ***** ***** ***** PB-12280 Rabbit Head Sequin T Womens Knit Tops Tank ***** ***** ***** PB-12562 I Love Playboy Ribbe Womens Knit Tops Tank ***** ***** ***** PB-12566 Ribbed Burnout Tank Womens Knit Tops Tank ***** ***** ***** PB-12612 Sequin Club Bunny Ta Womens Knit Tops Tank ***** ***** ***** PB-15009 Beautiful Bunny Ribb Womens Knit Tops Tank ***** ***** ***** PB-15010 Classic Rabbit Head Womens Knit Tops Tank ***** ***** ***** PB-16000 Physical Yoga Cami Womens Knit Tops Tank ***** ***** ***** PB-16009 Rhinestone Ribbed Ta Womens Knit Tops Tank ***** ***** ***** PB-23301 PB CREST TANK Womens Knit Tops Tank ***** ***** ***** PB-5507 Crest Tank Womens Knit Tops Tank ***** ***** ***** PB-13027 Quilted Hoodie Vest Womens Outerwear Vest ***** ***** ***** PB-13145 Quilted Nylon Hoodie Womens Outerwear Vest ***** ***** ***** PB-12475 Cotton Skirt Womens Skirts ***** ***** ***** PB-15020 Belted Charm Skirt Womens Skirts ***** ***** ***** PB-10972 Double Zip Tank Womens Woven Shirts Vest ***** ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- WOMENS ***** ***** - ------------------------------------------------------------------------------------------------------------------------------- ------------------------ ***** ***** ------------------------
25
EX-10.15(QQ) 4 d76389_ex1015-qq.txt 7TH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 10.15(qq) SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT February 17, 2009 PEI Holdings, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 Ladies and Gentlemen: Reference is hereby made to that certain Amended and Restated Credit Agreement, dated as of April 1, 2005, among PEI Holdings, Inc., a Delaware corporation ("Borrower"), the financial institutions from time to time party thereto ("Lenders"), and Bank of America, N.A., as Agent for Lenders ("Agent") (as amended, supplemented or otherwise modified to date, the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings provided to such terms in the Credit Agreement. Borrower has requested that Agent and Lenders agree to amend the Credit Agreement in certain respects, and Agent and Lenders have agreed to such amendments, on the terms, and subject to the conditions, contained herein. Therefore, Borrower, Agent and Lenders hereby agree as follows: 1. Amendments to Credit Agreement. Subject to the satisfaction of the conditions set forth in Section 3 hereof, the Credit Agreement is hereby amended as follows, provided, that the amendment described in clause (j) below will be effective retroactively to December 31, 2008: (a) The pricing grid set forth in the definition of "Applicable Rate" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows: "Applicable Rate
Eurodollar Rate Committed Loans and Letter of Credit Base Rate Pricing Level Financial Covenant Commitment Fee Fees Committed Loans - -------------------------------------------------------------------------------------------------------------- 1 Greater than $45,000,000 0.625% 2.00% 1.00% 2 Greater than $35,000,000, 0.675% 2.25% 1.00% but less than or equal to $45,000,000
3 Greater than $30,000,000, 0.675% 2.50% 1.25% but less than or equal to $35,000,000 4 Greater than $25,000,000, 0.675% 3.00% 1.50% but less than or equal to $30,000,000 5 Greater than $20,000,000, 0.750% 3.25% 1.75% but less than or equal to $25,000,000 6 Less than or equal to 0.750% 3.75% 2.25%" $20,000,000
(b) The definition of "Base Amount" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows: " 'Base Amount' means 60% of Net Worth as of December 31, 2008, as reflected in Playboy's 10-K filing as of such date." (c) The definition of "Increase Amount" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows: " 'Increase Amount' means 50% of Net Income for the period from January 1, 2009 through the last day of the applicable quarter, excluding negative results from any quarter, if any." (d) The definition of "Letter of Credit Sublimit" contained in Section 1.01 of the Credit Agreement is hereby amended by deleting the reference to "$50,000,000" and replacing it with a reference to "$30,000,000". (e) The definition of "Maturity Date" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows: " 'Maturity Date' means January 31, 2011." (f) The definition of "Net Worth" contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety as follows: " 'Net Worth' means the total assets of Playboy and its Restricted Subsidiaries plus non-cash charges less Total Liabilities of Playboy and its Subsidiaries, all determined on a consolidated basis and in accordance with GAAP." (g) Section 2.05(c) of the Credit Agreement is hereby amended by deleting the reference to "$25,000,000" and replacing it with a reference to "$15,000,000". -2- (h) Section 2.15 of the Credit Agreement is hereby amended and restated in its entirety as follows: "2.15 Assignment and Aggregate Commitment Increase Option. From and after February 17, 2009, Borrower shall have the right to notify Agent and Lenders in writing that it has identified one or more "New Lenders" (as defined below) that are willing to provide an additional Commitment to Borrower under this Agreement in a minimum amount of not less than Five Million Dollars ($5,000,000) or a One Million Dollar ($1,000,000) increment in excess thereof up to a maximum of Fifteen Million Dollars ($15,000,000) in one or more increases. Such notice shall identify the applicable third party financial institution or financial institutions (which may be an existing Lender or existing Lenders) reasonably acceptable to Agent and Borrower (each, a "New Lender") that is or are, as the case may be, prepared to provide the new Commitment or a portion thereof and shall specify the amount thereof. Such new Commitment shall be effected by (i) an assignment (an "Assignment") from the existing Lenders (on a pro rata basis) to the New Lender(s) of the first Five Million Dollars ($5,000,000) of such new Commitment and (ii) an increase (an "Increase") in the Aggregate Commitment in the amount by which the total new Commitment exceeds Five Million Dollars ($5,000,000). Any Assignment shall be further effected as provided in Section 10.07(b) and each existing Lender shall sign an assignment agreement effecting such Assignment and any Increase shall be further effected by an amendment to this Agreement. Only the consent of Agent, each New Lender and Borrower shall be required for such amendment to be effective, notwithstanding anything in Section 10.01 to the contrary. Each Assignment and Increase shall become effective at the date specified in such written notice, but in any event not less than 5 days after the date such notice is received by Agent, so long as no Default or Event of Default is in existence on such effective date. The then-existing Lenders providing any portion of the Increase or the New Lenders, as applicable, shall accept an assignment from the existing Lenders, and the existing Lenders shall make an assignment to the then-existing Lenders providing any portion of the Increase or the New Lenders, as applicable, of a direct interest in each then outstanding Committed Loan such that, after giving effect thereto, all credit exposure hereunder is held ratably by the Lenders in proportion of their respective Commitments. In each case, Borrower will issue to each affected Lender new Revolving Notes to the extent required by Section 10.07(c). Borrower hereby agrees to pay to Agent an annual agency fee of $7,500 per New Lender, the first installment of which shall be due and payable on the date on which such New Lender's Assignment or Increase is effective and the subsequent installments of which shall be due on the anniversaries of such date." -3- (i) Section 6.01 of the Credit Agreement is hereby amended by (i) deleting the word "and" at the end of clause (a) thereof and (ii) inserting the following at the end of clause (b) thereof, before the period: "; and (c) as soon as available, but in any event within 30 days after the end of each fiscal month of Playboy (other than a fiscal month constituting the last month of a fiscal quarter), a consolidated statement of income or operations of Playboy and its Restricted Subsidiaries as at the end of such fiscal month, setting forth in comparative form the figures for the corresponding fiscal month of the previous fiscal year and the corresponding portion of the previous fiscal year, all certified by a Responsible Officer of Playboy as fairly presenting in all material respects the financial condition, results of operations, shareholders equity and cash flows of Playboy and its Restricted Subsidiaries in accordance with GAAP, subject only to normal year-end adjustments." (j) Section 6.09(a) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(a) Net Worth. Maintain Net Worth on the last day of each calendar quarter hereafter commencing on March 31, 2009, at least equal to the Base Amount plus the Increase Amount applicable as of such day." (k) Section 6.09(b) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(b) Interest Coverage Ratio. Maintain an Interest Coverage Ratio of at least the ratio indicated below for the twelve (12) month period ending on each date below: Date Ratios ---- ------ March 31, 2009 2.00 : 1.0 June 30, 2009 2.25 : 1.0 September 30, 2009 2.50 : 1.0 December 31, 2009 and each March 31, June 30, September 30 and December 31 thereafter 3.00 : 1.0 (l) Section 7.01(ee) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(ee) Liens not otherwise permitted hereunder securing Indebtedness in a principal amount at any time outstanding not in excess of $5,000,000." -4- (m) Section 7.02(s) of the Credit Agreement is hereby amended by deleting the reference to "$25,000,000" and replacing it with a reference to "$10,000,000". (n) Section 7.03(k) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(k) the incurrence by Playboy, Borrower or any Guarantor of unsecured Subordinated Liabilities (in addition to the Convertible Note Debt) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding not to exceed $50,000,000, in each case on subordination terms reasonably acceptable to Agent;" (o) Section 7.06(a) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(a) Playboy, Borrower and the Restricted Subsidiaries may make Restricted Payments from time to time with the prior written consent of Agent so long as (i) no Default or Event of Default is then in existence or would result therefrom; and (ii) immediately after making each such Restricted Payment, Borrower has satisfied the Liquidity Test;" (p) Section 7.06(n) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(n) [Intentionally omitted.] (q) Section 7.08 of the Credit Agreement is hereby amended and restated in its entirety as follows: "7.08 Limitations in respect of Convertible Note Debt. Make any payment on, or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any of the Convertible Note Debt, other than (a) payments in exchange for or out of the net cash proceeds from the substantially concurrent sale or issuance of Equity Interests of Playboy (other than Disqualified Stock), with the proceeds of Indebtedness with respect to any Subordinated Liabilities not prohibited under this Agreement or with the proceeds of Dispositions which are not required to be used to prepay the Obligations pursuant to Section 2.05; (b) regularly scheduled payments by Playboy of principal, interest and contingent interest when due on or with respect to the Convertible Note Debt pursuant to the terms of the Convertible Note Documents as amended, modified or otherwise altered as permitted hereunder, so long as each such payment is then permitted to be made pursuant to the terms of the subordination provisions of the Convertible Note Indenture, as amended, modified or otherwise altered as permitted herein; provided, that no Loan Party shall make Distributions to Playboy for the purpose of making any such payment unless (i) no Event of Default is then in existence, and -5- (ii) Borrower is in compliance with the covenants contained in Section 6.09(a) and (b) computed as of the last day of the most recently ended calendar quarter, but after having given pro forma effect to such payment; and (c) payments in respect of the mandatory redemption or conversion of all or a portion of the Convertible Notes pursuant to the terms of the Convertible Note Indenture, as amended, modified or otherwise altered as permitted herein (other than a mandatory redemption or conversion due to a merger, consolidation or binding share exchange or a "Fundamental Change" (as defined in the Convertible Note Indenture, as such definition exists on the Closing Date), in each case, so long as each such payment is then permitted to be made pursuant to the terms of the subordination provisions of the Convertible Note Indenture, as amended, modified or otherwise altered as permitted herein; provided, that no Loan Party shall make Distributions to Playboy for the purpose of making any such payments described in Section 7.08(c) unless (A) no Event of Default is then in existence, (B) Borrower is in compliance with the covenants contained in Section 6.09(a) and (b) computed as of the last day of the most recently ended calendar quarter, but after having given pro forma effect to such payment, and (C) immediately after making such payment, Borrower has satisfied the Liquidity Test; or amend, modify or otherwise alter the terms of any Convertible Note Documents if the effect of such amendment or modification is to (1) increase the interest rate or fees on the Convertible Note Debt; (2) advance the dates upon which payments in respect of the Convertible Note Debt are due, or increase the principal amount of the Convertible Note Debt; (3) change the redemption, conversion or prepayment provisions of the Convertible Note Debt, other than to defer or reduce such redemptions, conversions or prepayments; (4) add any guaranties of or security for the Convertible Note Debt; or (5) modify the subordination provisions of the Convertible Note Indenture in a manner materially adverse to Agent or the Lenders; or designate any Indebtedness other than the Obligations as "Designated Senior Indebtedness" for purposes of the subordination provisions of the Convertible Note Indenture without the consent of the Required Lenders." (r) Schedule 2.01 of the Credit Agreement is hereby amended and restated in its entirety as set forth on Exhibit A attached hereto. 2. Scope. Except as amended hereby, the Credit Agreement remains unchanged and in full force and effect. 3. Effectiveness. This Seventh Amendment to Amended and Restated Credit Agreement (the "Amendment") shall be effective when executed by Lenders and Agent and agreed to by Borrower, and returned to Agent, together with the following, all in form and substance reasonably satisfactory to Agent: (a) the agreements, instruments and documents set forth on Exhibit B hereto (other than as provided in Section 5 hereof); and -6- (b) payment to Agent of an upfront fee equal to $75,000, for the benefit of Lenders in accordance with their respective Pro Rata Shares. 4. Representations and Warranties. To induce Lenders to execute and deliver this Amendment, Borrower hereby represents and warrants to Lenders on the date hereof that, after giving effect to this Amendment: (a) All representations and warranties contained in the Loan Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of this Amendment, except to the extent such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall be true and accurate in all material respects as of such earlier date), and except that the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01. (b) No Default or Event of Default has occurred which is continuing. (c) Since December 31, 2008, no event or circumstance has occurred that has had or would reasonably be expected to have a Material Adverse Effect. (d) This Amendment, and the Loan Agreement, as amended hereby, constitute valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (e) The execution and delivery by Borrower of this Amendment does not require the consent or approval of any Person, except such consents and approvals as have been obtained except for any such approval, consent, exemption, authorization or other action, or notice of filing that has been made, obtained or given or that if not obtained would not be reasonably likely to have a Material Adverse Effect. 5. Post-Closing Agreements. Borrower hereby agrees to deliver, or cause to be delivered, the following items to Agent on or before March 15, 2009, each in form and substance reasonably satisfactory to Agent, and Borrower hereby agrees that any failure to do so shall constitute an Event of Default under the Credit Agreement unless the time for such delivery is postponed by Agent in its sole discretion: (a) Secretary's Certificates of each of PEII, Playboy, PEGI, Playboy.com and Spice Entertainment Group, Inc. (collectively, the "Material Entities"); (b) Reaffirmation of Guaranty executed by Guarantors in favor of Agent (the "Post-Closing Reaffirmation"); -7- (c) fully-executed certified board resolutions of each Material Entity authorizing the execution of the Post-Closing Reaffirmation; (d) certified copies of the Certificate/Articles of Incorporation for each Material Entity; (e) good standing certificates for each Material Entity in such Material Entity's state of incorporation; (f) a legal opinion with respect to the execution of the Post-Closing Reaffirmation; and (g) an executed Amended and Restated Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing executed by PEII, together with a date-down endorsement to the title insurance policy. 6. Waiver. Lenders agree that to the extent Borrower was in breach of Section 6.09(a) of the Credit Agreement as of December 31, 2008, Lenders hereby waive any such breach. The foregoing waiver is expressly intended to be limited in scope and, except as otherwise expressly provided, shall not be construed as a waiver, consent or as an amendment or modification of the Credit Agreement. 7. Severability. If any provision of this Amendment or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Amendment and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid, or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which taken together shall be one and the same instrument. 9. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS; PROVIDED THAT BORROWER, AGENT AND EACH LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. [Signature Page to Follow] -8- Very truly yours, BANK OF AMERICA, N.A., as Agent By Craig W. McGuire ------------------------------------ Its Senior Vice President ----------------------------------- BANK OF AMERICA, N.A., as a Lender By Craig W. McGuire ------------------------------------ Its Senior Vice President ----------------------------------- ACKNOWLEDGED AND AGREED TO THIS 17th DAY OF FEBRUARY, 2009: PEI HOLDINGS, INC., as Borrower By Howard Shapiro ----------------------------------------- Its Vice President and Secretary ----------------------------------------- Signature Page to Seventh Amendment to Amended and Restated Credit Agreement EXHIBIT A Schedule 2.01 COMMITMENTS AND PRO RATA SHARES Lender Commitment Pro Rata Share - -------------------------------------------------------------------------------- Bank of America, N.A. $30,000,000 100% Exhibit A EXHIBIT B Closing Checklist See attached. Exhibit B
EX-10.22(D) 5 d76389_ex1022-d.txt SECOND AMENDED TO THE PLAYBOY ENTERPRISES, INC. Exhibit 10.22(d) SECOND AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. DEFERRED COMPENSATION PLAN (As Amended and Restated Effective January 1, 2005) WHEREAS, Playboy Enterprises, Inc. (the "Company") has established and maintains the Playboy Enterprises, Inc. Deferred Compensation Plan, as amended and restated effective January 1, 2005 and amended once thereafter (the "Plan"); and WHEREAS, Section 7.01 of the Plan reserves to the Company's Board of Directors (the "Board") the authority to amend the Plan at any time; and WHEREAS, the Board has determined that it is desirable to freeze the Plan as of December 31, 2008 and to add a new transitional distribution election feature to the Plan effective as of December 10, 2008; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. A new subsection(e) is added to Section 3.01, Participation, effective as of December 31, 2008, to read as follows: "e) Notwithstanding any Plan provision to the contrary, participation in the Plan shall be frozen as of December 31, 2008 and any Employee who is not already a Participant on that date shall not be permitted to elect to participate in the Plan for any Plan Year that begins after December 31, 2008." 2. A new subsection (c) is added to Section 3.02, Deferral of Salary and Incentive Award or Sales Commission, effective as of December 31, 2008, to read as follows: "c) Notwithstanding any Plan provision to the contrary, no contributions shall be made by or on behalf of any Participant with respect to any Plan Year that begins after December 31, 2008. Accordingly, no Agreements shall be permitted, accepted, honored or have any effect with respect to any such Plan Year and the deferral limitations set forth in Sections 3.03(a) and (b) below shall all be reduced to zero percent (0%) effective for any Plan Year that begins after December 31, 2008." 3. A new subsection (d) is added to Section 3.06, Company Allocation; effective as of December 31, 2008, to read as follows: "d) Notwithstanding any Plan provision to the contrary, no Company Allocation shall be made or credited on behalf of any Participant for any Plan Year that begins after December 31, 2008. Accordingly, no Company Allocation shall be made or credited with respect to any Salary, Incentive Award or Sales Commission (or attempted deferral thereof) that is attributable to a Participant's service to the Company during any such Plan Year." 4. A new Section 4.12 is added to the Plan, effective as of December 10, 2008, to read as follows: "4.12 Transitional Early Distribution Option. The Plan shall offer a new single sum benefit distribution option, commencing effective December 10, 2008, in accordance with this Section 4.12. All Participants who have not yet incurred a distributable event under any of Sections 4.01, 4.02, 4.03 or 4.04 prior to December 10, 2008 shall become 100% vested as of that date and shall have the opportunity to elect to receive a lump sum payment of the entire vested portion of their accounts under the Plan. Such benefit shall first become payable on January 2, 2009 and shall be processed for payment thereafter, valued and distributed no later than January 30, 2009. In order to receive such early distribution under this Section 4.12, the Participant must file a written election, in accordance with transition election guidance under Code Section 409A, not later than December 23, 2008 and the Participant must not have incurred a distributable event under any other provision of Article IV before such election is filed. A transitional distribution election made under this Section 4.12 shall override and supersede any and all other distribution rights and elections then - 2 - applicable to the electing Participant and shall render the Participant ineligible for distribution under any other Section of the Plan regardless of any distributable events subsequently incurred by the electing Participant. This distribution election shall be considered to be consistent with Section 3.02(d) and not subject to Section 3.02(e)." IN WITNESS WHEREOF, this Second Amendment, having been first duly adopted, is hereby executed by a duly authorized officer on behalf of the Company on this 10th day of December, 2008. PLAYBOY ENTERPRISES, INC. By: /s/ Robert D. Campbell -------------------------------------- Robert D. Campbell Senior Vice President, Treasurer - 3 - EX-10.22(E) 6 d76389_ex1022-e.txt THIRD AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. Exhibit 10.22(e) THIRD AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN (As Amended and Restated Effective January 1, 2005 WHEREAS, Playboy Enterprises, Inc. (the "Company") has established and maintains the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated effective January 1, 2005 and amended twice thereafter (the "Plan"); and WHEREAS, Sections 7.01 and 7.02 of the Plan reserve to the Company's Board of Directors (the "Board") the authority to amend and terminate the Plan at any time; and WHEREAS, the Board has determined that the Plan shall be terminated (i) if the Company's Deferred Compensation Plan for executives is terminated or (ii) if enough Participants elect to receive transition distributions in January 2009 under new Section 4.11 of the Plan so that at least 66 2/3% of the total benefits accrued through December 31, 2008 will have been paid out after such January 2009 distributions are completed, because so few assets and Participants would remain in the Plan and the costs of maintaining the Plan for such small numbers cannot be justified; and WHEREAS, the Board desires that the Plan be terminated (if the preconditions for termination are met) in a manner that permits all remaining benefits to be distributed during the thirteenth month after the actions authorizing the Plan termination take place without violating the anti-acceleration prohibition under Section 409A of the Internal Revenue Code of 1986, as amended; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. The following new paragraphs are added to Section 7.02, Company's Right to Terminate: "Notwithstanding any Plan provisions to the contrary, if sufficient Participant distribution elections are made under Section 4.11 so that, after such January, 2009 distributions are completed, no more than 33 1/3% of all vested benefits would remain unpaid under the Plan, then the Plan shall be terminated effective as of the last day of the distribution election period under Section 4.11 (December 23, 2008), in accordance with the provisions of this Section 7.02. Alternatively, if the Company terminates its Deferred Compensation Plan for executives due to a similar lack of participant interest, then this Plan also shall be terminated as if the conditions of the preceding sentence were satisfied, regardless of whether such conditions were actually met. If the preceding conditions are not met, then the Plan shall not terminate and the following provisions of this Section 7.02 shall be null and void. All distribution events occurring after the December 23, 2008 Plan termination date shall not give rise to any distribution rights. The only distributions payable under the Plan after the Plan termination date shall be (i) Plan termination distributions under this Section 7.02; (ii) distributions which are in pay status or already scheduled as of the Plan termination date due to a prior distribution event under Sections 4.01, 4.02 or 4.03; (iii) transition distributions elected under Section 4.11; and (iv) hardship distributions made in accordance with Section 4.06. Except for the foregoing removal of distribution events from the terminated Plan, Participants shall continue to have all other rights of Participants under the Plan until their benefit has been fully paid. Distributions triggered solely by the Plan termination shall be paid in a lump sum during the thirty (30) day period commencing with the one-year anniversary of the Plan termination date. Participants shall not be allowed any influence regarding in which calendar year this payment is made; the timing of such Plan termination payments shall be determined in the sole discretion of the Company. Any benefit that is in pay status or otherwise scheduled for payment after that thirty (30) day distribution period shall be accelerated and paid in a single lump sum during that thirty (30) day distribution period the same as a Plan termination distribution. This Plan termination shall be administered so as to comply with Treasury Regulation ss.1.409A-3(j)(4)(ix)(C) and any Plan provision not consistent with that intent shall be disregarded or conformed in operation, in the discretion of the Administrative Committee, to ensure compliance with such Regulation. The Company reserves the right to further amend the Plan, even after the Plan termination date, to facilitate the Plan termination, to maintain compliance with Code Section 409A or for any other purpose. The Company agrees to terminate all other similar plans, and not to adopt any similar replacement plan for at least the next three years after adoption of this Plan termination amendment, as and to the extent required by the aforesaid Treasury Regulation." - 2 - 2. The first sentence of Section 8.10, Deferred Compensation Plan Trust, is hereby rewritten, effective as of the Plan termination date (but only if the Plan is terminated hereunder), to read as follows: "The Company may establish a Trust and designate the trustee, and shall comply with the terms of the Trust." IN WITNESS WHEREOF, this Third Amendment, having been duly adopted, is hereby executed below by a duly authorized officer on behalf of the Company on this 10th day of December, 2008. PLAYBOY ENTERPRISES, INC. By: /s/ Robert D. Campbell ---------------------------------- Robert D. Campbell Senior Vice President, Treasurer - 3 - EX-10.22(H) 7 d76389_ex1022-h.txt SECOND AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. Exhibit 10.22(h) SECOND AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN (As Amended and Restated Effective January 1, 2005) WHEREAS, Playboy Enterprises, Inc. (the "Company") has established and maintains the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated effective January 1, 2005 and amended once thereafter (the "Plan"); and WHEREAS, Section 7.01 of the Plan reserves to the Company's Board of Directors (the "Board") the authority to amend the Plan at any time; and WHEREAS, the Board has determined that it is desirable to freeze the Plan as of December 31, 2008 and to add a new transitional distribution election feature to the Plan effective as of December 10, 2008; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. New subsections (g) and (h) are added to Section 3.01, Eligibility and Participation, effective as of December 31, 2008, to read as follows: "(g) Notwithstanding any Plan provision to the contrary, participation in the Plan shall be frozen as of December 31, 2008 and any Director who is not already a Participant on that date shall not be permitted to elect to participate in the Plan for any Plan Year that begins after December 31, 2008. (h) Notwithstanding any Plan provision to the contrary, no contributions shall be made by or on behalf of any Participant with respect to any Plan Year that begins after December 31, 2008. Accordingly, no Agreements shall be permitted, accepted, honored or have any effect with respect to any such Plan Year and the deferral limitations set forth in Sections 3.01(b) above shall all be reduced to zero percent (0%) effective for any Plan Year that begins after December 31, 2008." 2. A new Section 4.11 is added to the Plan, effective as of December 10, 2008, to read as follows: "4.11 Transitional Early Distribution Option. The Plan shall offer a new single sum benefit distribution option, commencing effective December 10, 2008, in accordance with this Section 4.11. All Participants who have not yet incurred a distributable event under any of Sections 4.01, 4.02 or 4.03 prior to December 10, 2008 shall have the opportunity to elect to receive a lump sum payment of their entire Account under the Plan. Such benefit shall first become payable on January 2, 2009 and shall be processed for payment thereafter, valued and distributed no later than January 30, 2009. In order to receive such early distribution under this Section 4.11, the Participant must file a written election, in accordance with transition election guidance under Code Section 409A, not later than December 23, 2008 and the Participant must not have incurred a distributable event under any other provision of Article IV before such election is filed. A transitional distribution election made under this Section 4.11 shall override and supersede any and all other distribution rights and elections then applicable to the electing Participant and shall render the Participant ineligible for distribution under any other Section of the Plan regardless of any distributable events subsequently incurred by the electing Participant. This distribution election shall be considered to be consistent with Section 3.01(e) and not subject to Section 3.01(f)." -2- IN WITNESS WHEREOF, this Second Amendment, having been first duly adopted, is hereby executed by a duly authorized officer on behalf of the Company on this 10th day of December, 2008. PLAYBOY ENTERPRISES, INC. By: /s/ Robert D. Campbell ----------------------------------- Robert D. Campbell Senior Vice President, Treasurer -3- EX-10.22(I) 8 d76389_ex1022-i.txt THIRD AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. Exhibit 10.22(i) THIRD AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN (As Amended and Restated Effective January 1, 2005 WHEREAS, Playboy Enterprises, Inc. (the "Company") has established and maintains the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan, as amended and restated effective January 1, 2005 and amended twice thereafter (the "Plan"); and WHEREAS, Sections 7.01 and 7.02 of the Plan reserve to the Company's Board of Directors (the "Board") the authority to amend and terminate the Plan at any time; and WHEREAS, the Board has determined that the Plan shall be terminated (i) if the Company's Deferred Compensation Plan for executives is terminated or (ii) if enough Participants elect to receive transition distributions in January 2009 under new Section 4.11 of the Plan so that at least 66 2/3% of the total benefits accrued through December 31, 2008 will have been paid out after such January 2009 distributions are completed, because so few assets and Participants would remain in the Plan and the costs of maintaining the Plan for such small numbers cannot be justified; and WHEREAS, the Board desires that the Plan be terminated (if the preconditions for termination are met) in a manner that permits all remaining benefits to be distributed during the thirteenth month after the actions authorizing the Plan termination take place without violating the anti-acceleration prohibition under Section 409A of the Internal Revenue Code of 1986, as amended; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. The following new paragraphs are added to Section 7.02, Company's Right to Terminate: "Notwithstanding any Plan provisions to the contrary, if sufficient Participant distribution elections are made under Section 4.11 so that, after such January, 2009 distributions are completed, no more than 33 1/3% of all vested benefits would remain unpaid under the Plan, then the Plan shall be terminated effective as of the last day of the distribution election period under Section 4.11 (December 23, 2008), in accordance with the provisions of this Section 7.02. Alternatively, if the Company terminates its Deferred Compensation Plan for executives due to a similar lack of participant interest, then this Plan also shall be terminated as if the conditions of the preceding sentence were satisfied, regardless of whether such conditions were actually met. If the preceding conditions are not met, then the Plan shall not terminate and the following provisions of this Section 7.02 shall be null and void. All distribution events occurring after the December 23, 2008 Plan termination date shall not give rise to any distribution rights. The only distributions payable under the Plan after the Plan termination date shall be (i) Plan termination distributions under this Section 7.02; (ii) distributions which are in pay status or already scheduled as of the Plan termination date due to a prior distribution event under Sections 4.01, 4.02 or 4.03; (iii) transition distributions elected under Section 4.11; and (iv) hardship distributions made in accordance with Section 4.06. Except for the foregoing removal of distribution events from the terminated Plan, Participants shall continue to have all other rights of Participants under the Plan until their benefit has been fully paid. Distributions triggered solely by the Plan termination shall be paid in a lump sum during the thirty (30) day period commencing with the one-year anniversary of the Plan termination date. Participants shall not be allowed any influence regarding in which calendar year this payment is made; the timing of such Plan termination payments shall be determined in the sole discretion of the Company. Any benefit that is in pay status or otherwise scheduled for payment after that thirty (30) day distribution period shall be accelerated and paid in a single lump sum during that thirty (30) day distribution period the same as a Plan termination distribution. This Plan termination shall be administered so as to comply with Treasury Regulation ss.1.409A-3(j)(4)(ix)(C) and any Plan provision not consistent with that intent shall be disregarded or conformed in operation, in the discretion of the Administrative Committee, to ensure compliance with such Regulation. The Company reserves the right to further amend the Plan, even after the Plan termination date, to facilitate the Plan termination, to maintain compliance with Code Section 409A or for any other purpose. The Company agrees to terminate all other similar plans, and not to adopt any similar replacement plan for at least the next three years after adoption of this Plan termination amendment, as and to the extent required by the aforesaid Treasury Regulation." -2- 2. The first sentence of Section 8.10, Deferred Compensation Plan Trust, is hereby rewritten, effective as of the Plan termination date (but only if the Plan is terminated hereunder), to read as follows: "The Company may establish a Trust and designate the trustee, and shall comply with the terms of the Trust." IN WITNESS WHEREOF, this Third Amendment, having been duly adopted, is hereby executed below by a duly authorized officer on behalf of the Company on this 10th day of December, 2008. PLAYBOY ENTERPRISES, INC. By: /s/ Robert D. Campbell ----------------------------------- Robert D. Campbell Senior Vice President, Treasurer -3- EX-10.22(J) 9 d76389_ex1022-j.txt PLAYBOY ENTERPRISES, INC. EMPLOYEES INVESTMENT SAVINGS PLAN Exhibit 10.22(j) PLAYBOY ENTERPRISES, INC. EMPLOYEES INVESTMENT SAVINGS PLAN (As Amended and Restated Effective January 1, 2008) Table of Contents Page ---- ARTICLE I .--HISTORY AND PURPOSE Section 1.01 History.............................................1 Section 1.02 Objectives..........................................1 Section 1.03 Supplements and Exhibits............................1 ARTICLE II --PARTICIPATION Section 2.01 Eligibility.........................................2 Section 2.02 Re-employment.......................................2 Section 2.03 Crediting Military Service..........................3 ARTICLE III .--CONTRIBUTIONS Section 3.01 Profit Sharing......................................3 Section 3.02 Salary Reductions...................................4 Section 3.03 Matching............................................5 Section 3.04 Limits on Salary Reduction Contributions............7 Section 3.05 Limits on Matching Contributions....................9 Section 3.06 Excess Contributions Under the ADP and ACP Tests....9 Section 3.07 Limits on Annual Additions.........................12 Section 3.08 Rollovers Contributions............................13 Section 3.09 Transfers..........................................14 Section 3.10 USERRA Make-Up Contributions.......................14 Section 3.11 Catch-Up Contributions.............................16 Section 3.12 Automatic Enrollment...............................16 ARTICLE IV .--PLAN ACCOUNTING AND INVESTING Section 4.01 Participant Accounts...............................19 Section 4.02 Commingled Investment of Accounts..................21 Section 4.03 Investment Funds...................................21 Section 4.04 Investment Directions..............................22 Section 4.05 Investment Fund Accounting.........................23 Section 4.06 Expenses...........................................24 Section 4.07 Crediting Contributions and Forfeitures............24 Section 4.08 Adjustment of Account Balances.....................25 ARTICLE V .--ENTITLEMENT TO BENEFITS Section 5.01 Retirement.........................................25 Section 5.02 Disability.........................................26 Section 5.03 Death..............................................26 Section 5.04 Vesting and Termination of Employment..............27 ARTICLE VI .--BENEFIT DISTRIBUTIONS Section 6.01 Forms of Distribution..............................29 Section 6.02 Timing of Distributions............................30 - i - Section 6.03 Distribution After Death...........................31 Section 6.04 Designated Beneficiaries...........................32 Section 6.05 Direct Rollovers...................................33 Section 6.06 Qualified Domestic Relations Orders................34 Section 6.07 Missing Payees.....................................34 Section 6.08 Incapacitated Payees...............................35 Section 6.09 Minimum Distribution Requirements..................35 ARTICLE VII .--IN-SERVICE DISTRIBUTIONS Section 7.01 Non-Hardship Withdrawals...........................39 Section 7.02 Hardship Withdrawals...............................40 Section 7.03 Loans to Participants..............................43 Section 7.04 No Representation Regarding Tax Effect of Withdrawals or Loans...............................45 Section 7.05 Deductions from Accounts and Investment Funds......46 ARTICLE VIII .--PLAN ADMINISTRATION Section 8.01 Committee..........................................46 Section 8.02 Plan Administrator's Powers........................46 Section 8.03 Uniform Application of Rules.......................48 Section 8.04 Claims Procedure...................................49 Section 8.05 Indemnity..........................................49 ARTICLE IX .--AMENDMENT, TERMINATION OR PLAN MERGER Section 9.01 Amendment..........................................50 Section 9.02 Plan Termination...................................50 Section 9.03 Continuation by a Successor or Purchaser...........51 Section 9.04 Plan Merger or Consolidation.......................51 ARTICLE X .--MISCELLANEOUS PROVISIONS Section 10.01 No Employment Guarantee............................51 Section 10.02 Nonalienation of Plan Benefits.....................51 Section 10.03 Applicable Law.....................................52 Section 10.04 Participant Litigation.............................52 Section 10.05 Participant and Beneficiary Duties.................52 Section 10.06 Individual Account Statements......................52 Section 10.07 Gender and Number..................................52 Section 10.08 Adequacy of Evidence...............................53 Section 10.09 Notice to Participants and Beneficiaries...........53 Section 10.10 Waiver of Notice...................................53 Section 10.11 Successors.........................................53 Section 10.12 Severability.......................................53 Section 10.13 Nonreversion.......................................53 Section 10.14 Qualification of Plan and Trust....................54 - ii - ARTICLE XI .--TOP-HEAVY-PLAN RULES Section 11.01 Top-Heavy Plan.....................................54 Section 11.02 Aggregation Groups.................................54 Section 11.03 Vesting............................................55 Section 11.04 Minimum Contribution...............................55 ARTICLE XII .--DEFINITIONS Section 12.01 Account(s).........................................56 Section 12.02 Annual Additions...................................56 Section 12.03 Beneficiary........................................56 Section 12.04 Board of Directors.................................56 Section 12.05 Break in Service Years.............................56 Section 12.06 Code...............................................56 Section 12.07 Company............................................56 Section 12.08 Compensation.......................................56 Section 12.09 Disability.........................................57 Section 12.10 Early Retirement Age...............................57 Section 12.11 Effective Date.....................................57 Section 12.12 Eligible Earnings..................................58 Section 12.13 Eligible Employee..................................59 Section 12.14 Employee...........................................60 Section 12.15 Employer(s)........................................60 Section 12.16 Entry Date.........................................61 Section 12.17 ERISA..............................................61 Section 12.18 Highly Compensated Employee(s).....................61 Section 12.19 Hours of Service...................................61 Section 12.20 Key Employee.......................................63 Section 12.21 Non-Highly Compensated Employee(s).................63 Section 12.22 Normal Retirement Age..............................64 Section 12.23 Participant........................................64 Section 12.24 Plan...............................................64 Section 12.25 Plan Administrator.................................64 Section 12.26 Plan Year..........................................64 Section 12.27 Profit Sharing Earnings............................64 Section 12.28 Spouse.............................................64 Section 12.29 Testing Earnings...................................65 Section 12.30 Trust..............................................65 Section 12.31 Trustee............................................65 Section 12.32 Year of Service....................................66 - iii - PLAYBOY ENTERPRISES, INC. EMPLOYEES INVESTMENT SAVINGS PLAN (As Amended and Restated Effective January 1, 2008) ARTICLE I.--HISTORY AND PURPOSE Section 1.01 History. Playboy Enterprises, Inc. originally established the Playboy Enterprises, Inc. Employees Profit Sharing Plan effective as of December 29, 1958. That plan has since been amended numerous times, restated effective as of July 1, 1984, July 1, 1989 and October 1, 1993, renamed the Playboy Enterprises, Inc. Employees Investment Savings Plan (the "Plan"), further restated effective as of January 1, 1997, and amended six times thereafter. The Plan is hereby further amended and completely restated, as set forth in this document, effective as of January 1, 2008, to reflect all the amendments made since the last restatement, to comply with all applicable changes in law to date and to reflect certain minor administrative changes. This Plan restatement shall govern the benefit rights of any Participant who becomes entitled to receive a benefit from the Plan on or after the effective date of this restatement. Section 1.02 Objectives. The primary purpose of the Plan is to enable eligible employees of the Company (including eligible employees of participating affiliates) to accumulate funds for their future retirement security by sharing in any profits of the participating employers and by electing to make their own pre-tax contributions to the Plan. The Plan is designed and intended to be a tax-qualified profit sharing plan under Code Section 401(a) that includes a qualified cash or deferred arrangement under Code Section 401(k). Section 1.03 Supplements and Exhibits. Supplements or exhibits to this Plan may be adopted from time to time and will be attached to and form a part of the Plan. The provisions of any such supplements or exhibits shall be given the same effect that such provisions would have if they were incorporated within the basic text of the Plan. Supplements may modify or supplement provisions of the Plan as they apply to particular groups of Participants. Supplements or exhibits will specify the persons affected and shall supersede the other provisions of the Plan to the extent necessary to eliminate inconsistencies between the Plan provisions and the provisions of such supplements or exhibits. The terms used in such supplements or exhibits shall have the same meanings as those terms have for all other purposes under the Plan, and all provisions of the Plan not inconsistent with such supplements or exhibits will continue to apply to the persons affected by such supplements or exhibits. - 1 - ARTICLE II--PARTICIPATION Section 2.01 Eligibility. (a) Eligibility Conditions. An Eligible Employee shall commence participation in the Plan as of the first Entry Date by which the Eligible Employee first completes the age and, where applicable, service requirements for participation. To satisfy the age requirement, the Eligible Employee must be at least eighteen (18) years of age. To satisfy the service requirement the Eligible Employee must complete one Year of Service. However, beginning January 1, 2000, the Year of Service requirement shall apply only for purposes of eligibility to participate in the profit sharing portion of the Plan; thereafter, no Eligible Employees will be required to complete a Year of Service for eligibility to participate in any other portion of the Plan. For purposes of the eligibility and re-employment provisions of this Article II, the profit sharing portion of the Plan consists of the making and allocation of Employer profit sharing contributions under Section 3.01 of the Plan. (b) Prior Participants. Each Employee who was a Participant in the Plan immediately before January 1, 2008 shall continue to participate in the Plan on and after that effective date without having to satisfy anew the eligibility requirements for participation. Such Employee's participation after that effective date shall be governed by the Plan as hereby restated, subject to any future amendments. (c) No Accelerated Entry. Nothing in this Section shall allow an Employee who was not a Participant immediately prior to the effective date of this Plan restatement to commence participation in the Plan earlier than the effective date of this restatement. Section 2.02 Re-employment. (a) Not Yet Participating. Any Eligible Employee who had not commenced participation in the Plan before terminating employment with his Employer must satisfy the eligibility conditions of Section 2.01 upon reemployment with an Employer before commencing participation in the Plan. If the Eligible Employee incurs at least a one year Break in Service before reemployment with an Employer, then his service before such Break in Service will not count towards completing the Year of Service requirement upon his reemployment. (b) Prior Participant. If an Eligible Employee was a Participant in the Plan immediately before terminating employment with an Employer, then upon reemployment with an Employer (no matter how much later) that Eligible Employee shall resume participation in the Plan immediately upon such reemployment. If such former Participant had not yet become eligible to participate in the profit sharing portion of the Plan, then the rules of Section 2.02(a) above shall apply to the crediting of service towards the Eligible Employee's satisfaction of the Year of Service requirement for subsequent participation in the profit sharing portion of the Plan. (c) Not Yet Vested. If a Participant who is not vested in Employer contributions made under the Plan incurs at least five consecutive Break in Service years before resuming employment as an Eligible Employee: (i) the Participant's service before such Break shall count only towards his vested interest in the portion of his Accounts derived from Employer - 2 - contributions attributable to pre-Break service; and (ii) only the Participant's post-Break service shall determine his vested interest in the portion of his Accounts derived from Employer contributions attributable to post-Break service. (d) Change of Status. A former Employee who was a Participant and is rehired by an Employer only on an as needed basis (that is, as a Class C or "limited-time" Employee), shall be required to complete 500 new Hours of Service within twelve months before being eligible to resume participation. Such rehired Employee shall resume participation as of the first day of the next calendar month after completing that twelve month service requirement. The twelve month period for completing those Hours shall end on each successive anniversary of the Employee's date of rehire. Section 2.03 Crediting Military Service. Any Employee who timely resumes employment covered by this Plan directly from an authorized leave of absence due to a qualifying period of "service in the uniformed services" ("qualifying uniformed service") of the United States (as defined in the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA") at 38 U.S.C. ss. 4303(13)) shall have service credited for the period of such uniformed service to the extent necessary to comply with USERRA. The Employee's period of uniformed service, to the extent it qualifies under USERRA for such treatment, shall be considered creditable service with an Employer for all purposes of this Plan and no Breaks in Service shall be assessed for any portion of said qualifying uniformed service. ARTICLE III.--CONTRIBUTIONS Section 3.01 Profit Sharing. Subject to the limitations of this Article III, the Company may make a discretionary profit sharing contribution to the Plan for any one or more Plan Years. The amount of such contribution, if any, shall be determined each year by the Company's Board of Directors (or any designee of the Board for this purpose) in its sole discretion based on business considerations rather than the condition of the Plan or the interests of its Participants. Any such contribution need not be made solely from, or dependent upon, available profits of the Company or any other Employer. Contributions under this Section generally shall be determined and made (if at all) as soon as practicable following the close of the Company's fiscal year ending within the Plan Year to which the contribution pertains. Such contributions (if any) must be made to the Plan no later than the earlier of the due date (including extensions) or actual filing date of the Company's federal income tax return for the fiscal year ending within the Plan Year to which the contribution pertains. The obligation to make any contribution which the Company decides upon under this Section for a given Plan Year may be allocated among the Employers (for the contribution to be made by them) in such proportions as the Company may direct. The Employers' contributions - 3 - for any Plan Year shall be pooled and allocated on a uniform basis among the accounts of all Participants who are entitled under the Plan to share in those contributions for that Plan Year. Section 3.02 Salary Reductions. (a) Permitted Level. Each Participant who is an Employee may elect, from time to time in accordance with this Article, to reduce his or her Eligible Earnings by up to the maximum percentage stated below for contribution to this Plan, subject to any other applicable Plan limits on such contributions. The maximum percentage for each Highly Compensated Employee shall be ten percent (10%) (subject to adjustment during 2008 or thereafter in accordance with Section 3.12(b) below) and the maximum percentage for each Non-Highly Compensated Employee shall be ninety percent (90%). This contribution election shall be expressed in whole percentage increments of the Employee's Eligible Earnings, not in dollar amounts unless otherwise allowed by the Plan Administrator for similarly situated Employees from time to time. Subject to other Plan limits, salary reduction amounts so elected shall be contributed to the Plan by the Employee's Employer as a before-tax contribution allocable to the account of the electing Employee. (b) Making Elections. Salary reduction contributions shall be made through payroll withholding. Such contributions shall be paid to the Trust as promptly as practicable and no later than fifteen (15) business days after the calendar month in which the payroll withholding occurred, or within such other deadline as applicable law may impose from time to time. No interest or earnings on salary reduction contributions shall be due or credited with respect to any period before such contributions are actually received by the Trust. (c) Effect of Election. Salary reduction elections by any Participant shall take effect as of the start of the first payroll period beginning after the date on which the Plan Administrator receives the Participant's written salary reduction election in proper form, or as of such other date (not earlier than the first payroll period ending after the date on which the Plan Administrator receives the election in proper form) as the Plan Administrator may allow on a uniform basis for similarly situated Participants. Any salary reduction election in effect as of the Effective Date shall continue in effect, subject to the subsequent operation of any conditions or limitations applicable to salary reduction elections under this Plan. A Participant may change, discontinue or resume his or her salary reduction election as of the start of any future payroll period by filing a proper written election to that effect with the Plan Administrator prior to the start of the payroll period for which it will be effective. (d) Electronic Elections. The Plan Administrator may shorten the advance notice periods and allow salary reduction contribution elections to be made by telephone and/or electronic means, rather than in writing, under procedures which: (i) Do not compel Participants to use methods they do not have either adequate access to or reasonable facility with the use of; (ii) Provide for reasonable monitoring to ensure accessibility; (iii) Provide for prompt written confirmation of elections made other than in writing; and - 4 - (iv) Conform to any legal standards that apply in this area from time to time. Section 3.03 Matching. (a) Transition. The matching contribution formula applicable to salary reduction contributions attributable to periods beginning on or after March 1, 2008 is set forth in Section 3.03(c) below. The matching contribution formula applicable to salary reduction contributions for periods prior to March 1, 2008 is set forth in Section 3.03(b) below. Except for the formula set forth in Section 3.03(b) below, all other provisions of this Section 3.03 shall continue to apply to matching contributions after March 1, 2008. (b) Pre-March 1. 2008 Formula. Matching contributions for salary reduction contributions attributable to Eligible Earnings earned prior to March 1, 2008 shall be made by a Participant's Employer in an amount determined as follows: (i) 100% of the first one percent (1%) of the Participant's Eligible Earnings that is credited as a salary reduction contribution to the Participant's account for the applicable contribution period; plus (ii) 75% of any amount up to the next one percent (1%) of the Participant's Eligible Earnings that is credited as a salary reduction contribution to the Participant's account for the applicable contribution period; plus (iii) 50% of any amount up to the next three percent (3%) of the Participant's Eligible Earnings that is credited as a salary reduction contribution to the Participant's account for the applicable contribution period; plus (iv) 25% of any amount up to the next one percent (1%) of the Participant's Eligible Earnings that is credited as a salary reduction contribution to the Participant's account for the applicable contribution period. No matching contribution shall be made with respect to any salary reduction contributions that are in excess of six percent (6%) of the Participant's Eligible Earnings for the Plan Year. The final matching contribution made on a Participant's behalf for a Plan Year shall reflect any adjustment upward or downward that may be required in order that the total matching contributions credited to the Participant's account for the Plan Year shall equal the graded cumulative matching contribution percentage which corresponds in the following table (or in the table in Section 3.03(c) below, where applicable, or to a pro rata combination of the two tables to reflect the different formulas in effect for portions of 2008) to the net level of salary reduction contributions credited to the Participant's account for the Plan Year after the application of all Plan limitations and adjustments to salary reduction contributions for that Plan Year: Participant's Adjusted Salary Cumulative Matching Reduction Percentage Contribution Percentage -------------------- ----------------------- 0% 0% - 5 - Participant's Adjusted Salary Cumulative Matching Reduction Percentage Contribution Percentage -------------------- ----------------------- 1% 1% 2% 1.75% 3% 2.25% 4% 2.75% 5% 3.25% 6% or more 3.5% In no event shall the aggregate matching contribution credited to any Participant for Plan Year exceed 3.5% of the Participant's Eligible Earnings for that Plan Year. (c) March 1, 2008 Formula. Notwithstanding any foregoing provisions of this Section 3.03 to the contrary, in accordance with Section 401(m)(12) of the Code, the matching contribution formula applicable to all salary reduction contributions attributable to Eligible Earnings earned on or after March 1, 2008 shall be: ------------------------------------------------------------ Salary Reduction Cumulative Matching Percentage Contribution Percentage ---------- ----------------------- ------------------------------------------------------------ Up to 1% 1.00% ------------------------------------------------------------ 2% 1.50% ------------------------------------------------------------ 3% 2.00% ------------------------------------------------------------ 4% 2.50% ------------------------------------------------------------ 5% 3.00% ------------------------------------------------------------ 6% or more 3.50% ------------------------------------------------------------ In no event shall the aggregate matching contribution credited to any Participant for Plan Year exceed 3.5% of the Participant's Eligible Earnings for that Plan Year. (d) Timing. Matching contributions generally shall be made simultaneous with the payment of salary reduction contributions for the same period; that is, as soon as practicable following each bi-weekly payroll period, except with respect to any year-end true-up contribution. In no event shall any contribution attributable to a particular Plan Year be made later than the Employer's federal income tax return filing deadline (or actual filing date, if earlier) for the Employer's tax year ending within that Plan Year. No interest or earnings on matching contributions shall be due or credited with respect to any period before such contributions are actually received by the Trust. - 6 - Section 3.04 Limits on Salary Reduction Contributions. (a) Dollar Limits. No Participant shall be permitted to elect, or have credited on his or her behalf, a salary reduction contribution in excess of the dollar limit under Code Section 402(g), as adjusted for cost of living factors by the Secretary of the Treasury from year to year. That dollar limit is $15,500 for 2008 and $16,500 for 2009, and may be further adjusted for subsequent years. This calendar year limit shall apply in aggregate to salary reduction contributions made on behalf of the Participant under all tax-qualified 401(k) plans in which the Participant participates. To the extent that salary reduction contributions in excess of that limit are made on behalf of a Participant for any calendar year, then the Plan Administrator shall direct the Trustee to pay to such Participant the amount of such excess, adjusted for any income, gains and losses allocable to such excess deferral. That refund shall be made by March 15th of the next calendar year following the year for which the excess deferral was made. A portion of such excess deferral (and any gains or losses allocable to that portion) shall be refunded to the Participant in lieu of the entire amount of such excess deferral only if, by March 1st preceding the March 15th refund deadline, the Participant has notified the Plan Administrator of the portion of such excess he or she would like refunded by the Plan. Any excess deferral refunded to a Participant under this Section 3.04(a) shall be counted as a salary reduction contribution made on behalf of the Participant for purposes of applying the ADP Test set forth in Section 3.04(b) below. The gain or loss allocable to an excess deferral is determined by multiplying by a fraction the Participant's salary reduction contribution account gain or loss for the calendar year to which the excess relates. The numerator of the fraction shall be the excess deferral amount made on behalf of the Participant for the calendar year. The denominator of the fraction shall be the total balance of the Participant's salary reduction contribution account as of the end of the calendar year, without counting any investment gain or loss for that year. Additional gain or loss allocable to the excess deferral for the period between the end of the calendar year and the date of the refund shall be determined (and included in the refund) by multiplying the total investment gain or loss of the Participant's salary reduction contribution account for that interim period by the same fraction determined as provided above in this paragraph. (b) ADP Test. As a condition of continued qualification of the Plan, the Average Deferral Percentage test (or "ADP Test") must be applied and passed for each Plan Year to which such test applies, with respect to salary reduction contributions under Section 3.02 of the Plan, as follows: (i) The Average Deferral Percentage for Highly Compensated Employees for any given Plan Year may not exceed the Average Deferral Percentage for Non-Highly Compensated Employees for that Plan Year multiplied by 1.25, or, if it produces a higher limit, (ii) The Average Deferral Percentage for the Highly Compensated Employees for any given Plan Year may not exceed the Average Deferral Percentage for Non-Highly Compensated Employees for that Plan Year multiplied by two (2), provided that the Average Deferral Percentage for such Highly Compensated Employees does not exceed - 7 - the Average Deferral Percentage for such Non-Highly Compensated Employees by more than two (2) percentage points or such lesser amount as the Secretary of the Treasury may prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. Notwithstanding the foregoing, the ADP Test set forth above shall not apply to any Plan Year throughout which the Plan qualifies as a safe harbor plan in accordance with Section 3.12(e) below. (c) Definitions. The following definitions apply to the ADP Test as indicated: (i) Average Deferral Percentage. The average, for a specified group of Participants for any given Plan Year, of the ratios (calculated separately for each Participant in such group) of A) the amount of salary reduction contributions actually paid over to the Trust on behalf of such Participant for that Plan Year, to B) the Participant's Compensation for such Plan Year (whether or not the Employee was a Participant for the entire Plan Year). For purposes of computing Average Deferral Percentages, an Eligible Employee who would be a Participant but for the failure to elect salary reduction contributions shall be treated as a Participant who makes no such contributions. (ii) Excess Contributions. With respect to any given Plan Year, the excess of: A) The aggregate amount of salary reduction contributions actually taken into account in computing the Average Deferral Percentage of Highly Compensated Employees for such Plan Year, over B) The maximum amount of such contributions permitted by the ADP Test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their individual actual deferral percentages, beginning with the highest of such percentages, in accordance with Section 3.06(a)). (d) Special Rule. The following special rule will apply to the ADP Test: The actual deferral percentage for any Highly Compensated Employee for any given Plan Year who is eligible to have salary reduction contributions credited (including any qualified employer deferral contributions, matching contributions, or qualified nonelective contributions, even though any such contributions may not be allowed in this Plan) to his or her account under two or more plans described in Sections 401(a) or 401(k) of the Code that are maintained by the Company or any other Employer will be determined as if all such contributions were made under a single plan. - 8 - Section 3.05 Limits on Matching Contributions. The Plan Administrator shall apply to any matching contributions made for the Plan Year nondiscrimination limitations similar to the ADP test, as set forth below. However, the nondiscrimination limitations set forth in this Section 3.05 shall not apply for any Plan Year throughout which the Plan qualifies as a safe harbor plan in accordance with Section 3.12(e) below. The nondiscrimination limitations of this Section 3.05 (known as the "ACP Test") operate as follows. The "average contribution percentage" of the Highly Compensated Employees shall not exceed, in any Plan Year, the greater of: (i) 125 percent of the average contribution percentage of all other Participants for such year; or (ii) The lesser of (A) 200 percent of the average contribution percentage of all other Participants for such year and (B) the average contribution percentage of all other Participants for such year plus two (2) percentage points, or such lesser amounts as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly Compensated Employee. The "average contribution percentage" for a designated group of Participants is the average of the ratios (calculated separately for each Participant in the group) of (1) the sum of the Employer matching contributions paid and credited to the account of such Participant for the Plan Year, and any qualified matching contributions or qualified nonelective contributions made on behalf of the Participant for the Plan Year to (2) such Participant's Compensation for such Plan Year (whether or not the Employee was a Participant for the entire Plan Year). Salary reduction contributions may be used in the ACP Test provided that the ADP Test under Section 3.04 is both (i) met before such contributions are used in the ACP Test and (ii) continues to be met following the exclusion of those salary reduction contributions that are used to meet the ACP Test. The excess of the (i) aggregate amount of Employer contributions taken into account in computing the numerator of the average contribution percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (ii) the maximum amount of Employer contributions permitted by the ACP Test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their contribution percentages beginning with the highest of such percentages, in accordance with Section 3.06) is the excess aggregate contribution. Section 3.06 Excess Contributions Under the ADP and ACP Tests. (a) Refunding Excess. For purposes of both the ACP and ADP tests (when applicable), any excess aggregate (matching) contribution or excess deferral amount shall be determined by starting with the Highly Compensated Employee(s) whose ACP or ADP (as appropriate) contribution percentage is highest and reducing that amount to the level of the next highest contribution percentage for any Highly Compensated Employee. If that reduction is not sufficient to pass the test, then all Highly Compensated Employees at that next highest - 9 - percentage level will be reduced to the third highest level, and so on until the applicable ADP or ACP Test is passed. Any excess amount determined under this percentage leveling method shall then be allocated among Highly Compensated Employees by using a separate dollar leveling method, taking the Highly Compensated Employee(s) with the highest dollar ADP deferral or ACP contribution amount (depending on which test is being run) and reducing that Employee's deferral or contribution level to that of the Highly Compensated Employee(s) with the next highest dollar amount, and so on until the excess amount determined under the percentage leveling method is fully allocated under the dollar leveling method. The excess so allocated shall then be deducted from the Accounts of the affected Highly Compensated Employees and refunded or reallocated in the amounts determined by the dollar leveling allocation, together with any earnings thereon. Excess contributions under the ADP Test, including any income and minus any loss allocable to those contributions, shall be refunded by distributing them to the subject Participant no later than the close of the Plan Year following the Plan Year in which the excess contribution was made. In addition, to the extent required to satisfy the general nondiscrimination rules for Code Section 401(a)(4), any matching contributions which are attributable to refunded salary reduction contributions shall be refunded to the contributing Employer. If such excess contributions are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten percent (10%) excise tax may be imposed on the Employer maintaining the Plan with respect to those amounts. Excess contributions shall be treated as Annual Additions under the Plan, even though refunded. Excess contributions under the ACP Test, including any income and minus any loss allocable to those contributions, shall be reallocated to the Matching Contribution Accounts of all Non-Highly Compensated Employees who for that Plan Year elected salary reduction contributions; but such reallocation shall be made pro rata according to their respective Eligible Earnings for the Plan Year. (b) Corrective Contributions. The Employers may choose to make contributions to the Plan on behalf of Non-Highly Compensated Employees for a particular Plan Year in lieu of having the Plan refund or reallocate excess amounts under Section 3.06(a) above. The decision whether to contribute, refund or reallocate in order to pass the ADP or ACP Tests shall be made by the Company based on the financial condition and business interests of the Employers, without regard to the interest or preferences of the Participants. Any such contribution would be made as of the last day of the Plan Year being tested. Such contribution would be in an amount sufficient to raise the Average Deferral Percentage or average contribution percentage for the Non-Highly Compensated Employee group to the minimum level necessary to satisfy the ADP or ACP Tests in Sections 3.04 and 3.05 for that Plan Year. Any contribution made under this Section 3.06(b) shall be treated as a supplemental salary reduction or matching contribution, as appropriate, for purposes of Plan administration, and shall be allocated to the appropriate Accounts of all Non-Highly Compensated Employees who had elected any salary reduction contributions for that Plan Year under Section 3.02. That allocation shall be made either on an equal per capita basis or on a pro rata basis in proportion to the relative salary reduction - 10 - contributions made under Section 3.02 on behalf of such Participants for that Plan Year, whichever method yields a smaller contribution by the Employers under this Section. Notwithstanding any provisions of Section 3.06(b) or (c) to the contrary, any supplemental contribution made to correct for ADP testing (a "QNEC" contribution) or ACP testing (a "QMAC" contribution) shall comply with the further provisions of this and the following two paragraphs in order to satisfy applicable regulations under Code Sections 401(k) and 401(m). Any QNEC or QMAC contribution for a particular Plan Year shall be credited to the affected Participant's Accounts as of the last day of that Plan Year, and shall be made no later than the last day of the next following Plan Year. The amount of QNEC and QMAC contributions made for any Plan Year shall not discriminate in violation of Code Section 401(a)(4). The QNEC and QMAC limits stated in these three paragraphs are intended to satisfy Treasury Regulations ss. 1.401(k)-2(a)(6) and ss. 1.401(m)-2(a)(6) and so shall be construed and administered in compliance therewith. The aggregate amount of QNEC or QMAC contributions credited for a Plan Year to the Account of any Participant cannot separately (with respect to either QNEC or QMAC contributions) exceed the product of the Participant's Compensation for the Plan Year being tested multiplied by the greater of (i) 5% or (ii) two times the Plan's Representative Contribution Rate for that Plan Year. The Representative Contribution Rate is the lowest Applicable Contribution Rate for the group of Non-Highly Compensated Employees consisting of the half of all Non-Highly Compensated Employees counted for ADP testing for the Plan Year whose lowest Applicable Contribution Rate is the highest. Such determination of the Plan's Representative Contribution Rate may be made by ranking all such Non-Highly Compensated Employees for the Plan Year from lowest (or zero percent) to highest respective Applicable Contribution Rate, then identifying the Applicable Contribution Rate for the Non-Highly Compensated Employee whose Applicable Contribution Rate is lowest within the top half (the half with the highest Applicable Contribution Rates) of all Non-Highly Compensated Employees on that list. A Participant's Applicable Contribution Rate, for all purposes under this Section 3.06, shall be the sum of the QNEC and QMAC contributions allocated to the Participant for the Plan Year, divided by the Participant's Compensation for the Plan Year. Any QMAC contributions taken into account for ACP testing compliance shall not be taken into account for purposes of determining the Plan's Representative Contribution Rate for purposes of ADP testing. Similarly, any QNEC contributions taken into account for ADP testing compliance shall not be taken into account for purposes of determining the Plan's Representative Contribution Rate for purposes of ACP testing. (c) Recharacterized Employer Contributions. In lieu of these additional contributions, the Plan Administrator may instead treat Employer profit sharing contributions or Employer matching contributions made on behalf of Participants who are not Highly Compensated Employees as qualified nonelective contributions ("QNECs") and qualified matching contributions, respectively, to the extent necessary to satisfy the ADP or ACP Tests. In such event, Employer profit sharing contributions and Employer matching contributions, to the extent treated as qualified nonelective contributions or qualified matching contributions, shall be nonforfeitable at all times and subject to the distribution requirements and restrictions applicable to Salary Reduction or Matching Contribution Accounts, as appropriate, under the Plan. - 11 - (d) Recharacterized Pre-Tax Contributions. A Participant may recharacterize his or her excess contributions as an amount treated as though distributed to the Participant and then contributed by the Participant as an after-tax contribution to the Plan in order to satisfy the ADP Test. Recharacterized amounts will remain nonforfeitable and subject to the same distribution rules as salary reduction contributions. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount, in combination with voluntary contributions made by that Employee, would exceed any stated limit under the Plan applicable to after-tax contributions. Recharacterization must occur no later than 2 1/2 months after the last day of the Plan Year in which the excess contributions arose. Recharacterization is deemed to occur on the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant originally would have received them in cash. (e) Timing and Records. For purposes of determining compliance with the ADP Test and ACP Test (when applicable), salary reduction contributions, Employer matching contributions, qualified nonelective contributions and qualified matching contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which the contributions relate. The Plan Administrator shall maintain for a reasonable period records sufficient to demonstrate satisfaction of the ADP Test and ACP Test and the amount of salary reduction contributions, after-tax contributions, Employer matching contributions, qualified nonelective contributions and qualified matching contributions, if any, used in such test. Section 3.07 Limits on Annual Additions. (a) Annual Limits. The total Annual Additions to a Participant's Accounts for any Limitation Year shall not exceed the lesser of the dollar limit or the percentage of compensation limit as in effect under Code Section 415(b), as amended from time to time. If either such limit under Code Section 415(b) is adjusted for cost of living increases from time to time by the Secretary of the Treasury, such adjusted limit shall then apply under this Section for any Limitation Year to which the adjustment relates. As of January 1, 2008 that dollar limit is Forty Six Thousand Dollars ($46,000.00, rising to $49,000.00 for 2009) and the percentage of compensation limit is One Hundred Percent (100%) under Code Section 415(b). (b) Definitions. For purposes of Section 3.07(a), the "Limitation Year" shall be the Plan Year. In addition, subject to any other applicable Plan provisions (including, without limitation, Section 3.12(d) below), the term "Annual Additions" shall mean with respect to any Participant, the sum of: (i) All Employer contributions made on behalf of the Participant for the Limitation Year, including profit sharing, salary reduction and matching contributions; (ii) All after-tax contributions, if any, made by the Participant for the Limitation Year; and - 12 - (iii) All forfeitures credited (if at all under the Plan) to the Participant's Account for the Limitation Year; but rollover and transfer amounts shall not be included; provided that (iv) Notwithstanding anything in the Plan to the contrary and consistent with Rev. Rul. 2002-45, a restorative payment that is allocated to a Participant's account does not give rise to an Annual Addition for any Limitation Year. Whether excess contributions that are refunded out of the Plan for a given Limitation Year shall be included or excluded from the term Annual Additions depends on the type of contribution and when it was refunded, in accordance with applicable regulations under Code Section 415(c). (c) Adjusting for Multiple Plans. Contributions and forfeitures credited to the Participant's account under any other defined contribution plan(s) for the same Limitation Year shall be counted as Annual Additions. The Annual Additions under this Plan and such other plan or plans must be adjusted in order to comply with the limits of Section 3.07(a) above for all such plans in aggregate with respect to their common participant for the applicable Limitation Year period. Such adjustment shall be made first to the Participant's accounts under such other plan or plans before any adjustment shall be made to the Participant's Accounts under this Plan. If any adjustment is needed to the Participant's Accounts under this Plan in order to comply with the limitation set forth in Section 3.07(a) above, that adjustment shall be made, to the extent necessary, by making adjustments in the following order of priority: (i) Any Employer profit sharing contribution for the Limitation Year shall be refunded to the contributing Employer; and (ii) To the extent step (i) is insufficient, any salary reduction and after-tax contributions credited to the Participant's account shall be refunded to the Participant; provided that after-tax contributions are refunded to the fullest extent before any salary reduction contributions are refunded. Earnings or losses attributable to the excess refunded contributions shall be paid out with the refunded excess only as and to the extent required by regulation under Code Section 415. (d) Applicable Law. The limits of this Section 3.07 shall be construed and applied solely to comply with, and in a manner consistent with, Code Section 415(c), on which they are based. Section 3.08 Rollover Contributions. The Plan shall accept Rollover Contributions on behalf of any Participant in accordance with this Section with respect to benefits accrued to the Participant under any other tax-qualified retirement plan from which applicable law allows this Plan to accept rollovers. If made as a cash contribution by the Participant, the rollover must be completed on or before the sixtieth (60th) day following the Participant's receipt of the eligible rollover distribution from the other tax-qualified plan or from an individual retirement account that was used as a conduit account - 13 - solely for an eligible rollover distribution. A rollover contribution also may be made through a direct trustee-to-trustee transfer from another tax-qualified plan in accordance with Code Section 401(a)(31). Any rollover contribution accepted by the Plan will be credited to the Participant's rollover account and invested in accordance with the Participant's investment direction under this Plan. The Plan Administrator may require information from the Participant and the transferor plan in order to determine whether the rollover is permissible under the Code. If the rollover is later found not to be permissible, in whole or in part, then any portion thereof which was not permissible shall be paid out to the Participant (or to the Participant's designated individual retirement account), together with investment earnings or losses attributable to such portion. Certain rollover contributions shall not be accepted. Contributions of assets other than cash shall be refused, except for any portion of the rollover contribution representing an outstanding plan loan, if the Plan Administrator decides to accept it. Any rollover which would carry with it any annuity distribution requirements may be refused. Any portion of a rollover that is attributable to after-tax contributions or to an outstanding plan loan may be refused, in the Plan Administrator's discretion.. The Plan Administrator has complete discretion to determine whether to accept all or any portion of a rollover contribution and may also refuse a rollover that would in any other manner unduly burden or complicate Plan administration. The Plan Administrator must have a good faith belief that a rollover contribution is permissible before accepting it, and may continue investigating the rollover to confirm its permissibility after accepting it, subject to paying out the rollover or any portion of it as provided above upon later determining that it was at least in part impermissible. Section 3.09 Transfers. The vested portion of a Participant's account under another tax-qualified retirement plan that is not subject to the survivor annuity rules of Code Sections 401(a)(9) and 417, or successor statutes thereto, may be transferred to and accepted by this Plan, but only if received by check unless the Plan Trustee allows payment by wire transfer or some other method. Only transfers of cash can be accepted. Transfers of outstanding plan loans will not be accepted. Transfers which would subject the Participant's Account under this Plan to any survivor annuity rules shall be refused. Transfers which, in the sole judgment of the Plan Administrator, carry with them benefit rights, features or forms of distribution that would unduly burden or complicate Plan administration shall be refused. Transfers that are accepted by the Plan shall be credited to a transfer account on behalf of the Participant and invested in accordance with the Participant's direction under this Plan. Section 3.10 USERRA Make-Up Contributions. (a) Mandated Employer Contributions. The Employer with whom an Employee resumes covered employment upon return on or after December 12, 1994 from qualifying uniformed service shall be obligated to make, as promptly as practicable, special make-up contributions ("Make-up Contributions") on behalf of the Employee, in accordance with this Section 3.10. Make-up contributions shall be in the amount of all salary reduction contributions, Employer matching contributions and profit sharing contributions, if any, which would have - 14 - been allocated to the Employee's Accounts under the Plan for the period of the Employee's qualifying uniformed service if the Employee had actually been working for the Employer in covered service throughout such period. No make-up earnings or forfeiture allocations for the period of such qualifying uniformed service shall be included in these or any other Make-Up Contributions under this Section 3.10. The amount of these Make-up Contributions shall be determined based on the level of compensation the Employee would have received had he remained actually employed during such period of qualifying uniformed service. If that level of compensation is uncertain, then the Employee's average level of compensation for the last twelve months of covered employment (or for his actual months of covered employment, if less) shall be used instead. (b) Elective Pre-Tax Make-Up. Immediately upon resuming covered employment (and applying the assumed measure of prior compensation as described above), the Employee shall have the opportunity to elect to make-up any salary reduction contributions which he or she could have elected under the Plan during his or her period of qualifying uniformed service, subject to the Plan limits on employee salary reduction contributions that were in effect for such prior year(s). If the Employee elected any salary reduction contributions during his or her qualifying uniformed service, proper adjustment shall be made to the limit on the Employee's make-up salary reduction contributions for such prior year(s). This make-up deferral opportunity shall not extend, however, beyond the lesser of: (i) Three times the duration of such qualifying uniformed service, or (ii) Five years, both measured from the date on which the Employee resumes covered employment. (c) Matching on Elective Make-Up. Any Employer matching contributions which would have been made on the Employee's behalf with respect to such period of qualifying uniformed service had the Employee's make-up salary reduction contributions, if any, been made during such period will be made and allocated on the Employee's behalf as such make-up salary reduction contributions are made, subject to the Plan limits on such Employer matching contributions that were in effect for such prior year(s). Make-up Contributions under this Section 3.10 shall be treated as annual additions for the prior year(s) to which they relate, rather than for the year in which they are made. (d) Allocating Profit Sharing Make-Up. Any Employer profit sharing contributions which would have been allocated to the Employee's Account with respect to such period of qualifying uniformed service shall be made as promptly as practicable and not later than ninety (90) days after the close of the Plan Year in which the Employee resumes covered employment. Those Make-up profit sharing contributions shall be allocated, without any make-up of earnings, as of the close of the Plan Years for which they would have been made on behalf of the Employee had he or she been in covered employment during his or her period of qualifying uniformed service. - 15 - Section 3.11 Catch-Up Contributions. All Employees who are eligible to make Salary Reduction Contributions under this Plan and who have attained age 50 or more before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Section 414(v) of the Code. Such catch-up contributions shall not be taken into account for purposes of the provisions in Article III of the Plan implementing the required limitations of Section 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416 of the Code, as applicable, by reason of the making of such catch-up contributions. The catch-up contributions authorized by this Section 3.11 are pre-tax contributions not subject to the ADP test, not eligible for matching under Section 3.03 and only permitted by qualifying Employees (as described above) who have or will have made their maximum allowable Salary Deferral Contribution to the Plan for the Plan Year after considering the application of all limits on Salary Deferral Contributions under this Article III and the Code. Section 3.12 Automatic Enrollment. (a) Intent. The Plan shall begin to implement an automatic enrollment feature effective March 1, 2008 in accordance with this Section 3.12. Automatic enrollment under the Plan shall involve the use of a "qualified automatic contribution arrangement" ("QACA") under Section 514 of ERISA and Code 401(k)(13), that also satisfies the "eligible automatic contribution arrangement" ("EACA") conditions of Code Section 414(w); except that, until 2009, this new automatic contribution feature shall not meet the QACA safe harbor requirement that it apply for a full twelve-month Plan Year. (b) Automatic Salary Reduction. Newly Eligible Employees who commence participation on or after March 1, 2008, and any other Participant who does not as of March 1, 2008 have an affirmative salary reduction election (including an election not to contribute, effectively a zero salary reduction percentage) in effect under the Plan, shall have a fixed percentage of their Eligible Earnings automatically reduced from each payroll period that begins on or after the later of March 1, 2008 or the date on which such Eligible Employee's participation in the Plan begins unless the Participant elects a different permitted salary reduction contribution election amount (from zero to the highest level then permitted under the Plan) in accordance with Section 3.02 of the Plan. The fixed contribution percentages under this Section 3.12(b) shall start at four percent (4%) of covered Eligible Earnings for the initial Plan Year to which automatic salary reduction first applies to the Participant. That automatic contribution percentage shall be successively increased by one percentage point as of the start of each subsequent Plan Year for which the Participant is subject to automatic salary reduction hereunder; except that, if permitted by applicable regulations governing QACA and EACA features, any Participant who first becomes subject to automatic salary reduction on or after July 1 during a Plan Year shall have the initial four percent (4%) automatic salary reduction percentage apply through the end of the next Plan Year in which the Participant could be subject to automatic salary reduction hereunder, so the initial increase to a five percent (5%) automatic salary reduction level would not take effect for - 16 - that Participant until the start of the second full Plan Year beginning after the Plan Year in which the Participant first commenced automatic salary reduction contributions hereunder. For example, an Eligible Employee hired in 2008 who first joins the Plan in August of 2008 would, if that Employee did not make an affirmative salary reduction contribution election for the balance of 2008, begin automatic salary reductions of four percent during 2008 and, if he or she did not make an affirmative salary reduction election for 2009, would continue automatically at that same four percent (4%) level for 2009 before having the percentage increase to five percent (5%) for 2010. But if that Participant had joined the Plan in May of 2008 instead, then his or her four percent (4%) automatic salary deferral percentage would increase to five percent (5%) for 2009. Once a Participant has reached an automatic salary reduction contribution percentage of six percent (6%) (which would take effect, under the foregoing rules, at the start of either the third or fourth Plan Year during which the individual was eligible for automatic salary reductions if not for an affirmative salary reduction election), thereafter, the automatic contribution percentage may be increased in annual one (1) percentage point increments for any subsequent Plan Year at the discretion of the Plan Administrator, but in no event shall such percentage exceed ten percent (10%) for any Plan Year. To the extent permitted without sacrificing QACA safe harbor status to be exempt from ADP and ACP Testing under the applicable statutes and regulations, the increase in the Plan's automatic contribution percentage may take effect as of the effective date of the Company's annual salary increases (typically during each January) for that Plan Year but such adjusted percentage shall then apply retroactively to the Participant's adjusted Eligible Earnings for that entire Plan Year. The 10% salary reduction contribution limit for Highly Compensated Employees under Section 3.02(a) may, in the Plan Administrator's discretion and by its announcement in advance, be lifted and removed effective as of any date designated during the 2008 Plan Year. If the 10% limit is lifted, then the same cap on salary reduction contributions for other Participants under Section 3.02(a) shall also apply thereafter to Highly Compensated Employees. In any event, that 10% salary reduction contribution limit will not apply beginning January 1, 2009 if it is not lifted sooner. (c) Notice of Election Rights. Any Participant who is subject to automatic contributions under Section 3.12(b) above shall be furnished notice (i) of their salary reduction contribution election rights in accordance with Code Section 414(w) and ERISA Section 514(e) (3), and (ii) of the operation of the QDIA default investment fund and the Participant's investment direction rights in accordance with Section 404(c)(5)(B) of ERISA. Such notices may be combined. Generally, such notices shall be provided no less than thirty (30) and no more than ninety (90) days before the start of each Plan Year (beginning with the 2009 Plan Year), or in accordance with other timing requirements made applicable by regulation under those governing statutes. However, for 2008 and for any new Participant commencing participation after the start of a Plan Year, such notices instead may be furnished (subject to different regulatory requirements) during the ninety (90) day period ending on the later of the individual's - 17 - first day of Plan participation or the first day on which the Participant becomes eligible for automatic salary reduction contributions. (d) Special Withdrawal Rights. Commencing whenever, on or after January 1, 2009, the Plan Administrator announces prospectively that the withdrawal rights set forth in this Section 3.12(d) shall first become available, any Participant may - within thirty (30) days after the first payroll date on which an automatic salary reduction contribution under Section 3.12(b) was withheld from the Participant's paycheck or such longer period (not to exceed a total of 90 days in aggregate), as the Plan Administrator shall, in its discretion, allow - make and file with the Plan Administrator an election to withdraw all the automatic salary reductions made on the Participant's behalf through the close of the next payroll period that begins after the date on which that withdrawal election is made. Such withdrawal election shall require a withdrawal and refund to the Participant of all such automatic salary reduction contributions, adjusted for investment gains and losses. Any matching contributions attributable to automatic salary reduction contributions withdrawn under this Section 3.12(d) shall be forfeited immediately upon such withdrawal. Any automatic salary reduction contributions withdrawn under this Section 3.12(d) shall not be counted for purposes of the ADP Test, if applicable (subject to Section 3.12(f) below), for the Plan Year to which such withdrawn contribution relates. Similarly, any forfeited matching contributions attributable to withdrawn automatic salary reduction contributions under this Section 3.12(d) shall not be counted for purposes of any ACP Test, if applicable. To the extent so provided by applicable law, such withdrawn and forfeited contributions also shall not count as Annual Additions for purposes of the limits under Section 3.07 above. Withdrawals under this Section 3.12(d) shall not be eligible for direct rollover. (e) ADP/ACP Testing. For any Plan Year (beginning with 2009) to which the automatic salary reduction contribution provisions apply for the entire twelve-month period, the Plan shall be deemed to satisfy both the ADP Test under Section 3.04 above and the ACP Test under Section 3.05 above without the need to actually run those tests. This exemption from ADP and ACP Testing shall apply provided that all the conditions for such safe harbor under Code Sections 401(k)(13) and (m)(12) to apply to a QACA feature are met for such Plan Year. (f) Vesting. Notwithstanding any provisions of Section 5.04(b) below to the contrary, Matching Contributions and Profit Sharing Contributions attributable to periods that begin on or after March 1, 2008, and transferred amounts received by the Plan on or after March 1, 2008 (to the extent not already vested more generously under the transferor plan), shall vest under the following table, based on the complete Years of Service standing to the Participant's credit as of the date on which his or her employment with any and all Employers terminates: --------------------------------------------------------- Years of Service Vested Percentage ---------------- ----------------- --------------------------------------------------------- Less than 2 0% --------------------------------------------------------- 2 or more 100% --------------------------------------------------------- - 18 - (g) Separate Accounting. Notwithstanding any provisions of Section 4.01 or any other Plan provisions to the contrary, the Plan Administrator shall establish and maintain additional separate accounts, or sub-accounts, to reflect (i) automatic salary deferral contributions apart from other salary reduction contributions; and (ii) matching contributions which are subject to the vesting schedule under Section 3.12(f) above apart from matching contributions which are subject to the vesting schedule under Section 5.04(b) below. (h) Refunds of Excess Contributions. The deadline under Section 3.06(a) for refunding excess contributions on or after January 1, 2008, in order to avoid the ten percent (10%) excise tax, shall be extended to six (6) months after the last day of the Plan Year in which such excess amounts arose, to the extent such extension and tax avoidance is authorized under Code Section 4979, as amended. In addition, such refund of excess contributions shall not include gap period income (the investment earnings on such refundable excess contributions for the period after the end of the Plan Year for which such excess contributions were made until the excess contributions are refunded) to the extent such investment adjustment is no longer required under Code Section 4979. (i) Resumption After Suspension. If a Participant's automatic salary reduction contributions are suspended following a hardship withdrawal under Section 7.02, when the suspension period ends and automatic salary reduction contributions resume they shall resume at the fixed percentage level then applicable under Section 3.12(b) at the time such contributions resume regardless of what the automatic contribution level last was before the hardship withdrawal. (j) Miscellaneous. Except as provided in this Section 3.12, automatic salary reduction contributions shall be treated as salary reduction contributions for purposes of all other Plan provisions and matching contributions attributable to automatic salary reduction contributions shall be treated as matching contributions for purposes of all other Plan provisions. This Section shall be administered and construed so as to comply with the safe harbor provisions applicable to QACA and EACA contribution arrangements under the applicable Pension Protection Act of 2006 amendments to ERISA and the Code. ARTICLE IV.--PLAN ACCOUNTING AND INVESTING Section 4.01 Participant Accounts. The Plan Administrator shall establish and maintain the following separate accounts, as needed, with respect to Participants, and any other accounts it deems necessary from time to time for purposes of Plan administration: (a) Salary Reduction Contribution Account. A "salary reduction contribution account" shall be maintained on behalf of each Participant. With respect to any Participant, this Account shall represent the amount of such Participant's salary reduction contributions (whether automatic or elective, made under Article III) and the earnings, expenses, appreciation and depreciation attributable to such contributions under the Plan, as well as any dispositions made therefrom under the Plan. - 19 - (b) Profit Sharing Contribution Account. A "profit sharing contribution account" shall be maintained on behalf of each Participant. With respect to any Participant, this Account shall represent the portion of an Employer's profit sharing contributions (made under Article III) and forfeitures for Plan Years commencing on or after July 1, 1984 which are allocated for the Participant's benefit and the earnings, expenses, appreciation and depreciation attributable thereto, as well as any dispositions made therefrom under the Plan. (c) Matching Contribution Account. A "matching contribution account" shall be maintained on behalf of each Participant on whose behalf matching contributions are made under Section 3.03. Such Account shall represent the Participant's allocated share of such contributions and the earnings, expenses, appreciation and depreciation thereon, as well as any dispositions made therefrom under the Plan. (d) After-Tax Contribution Account. An "after-tax contribution account" shall be maintained as needed on behalf of each Participant, which shall represent the amount of such Participant's after-tax contributions, if any, to this Plan (to the extent allowed by the Plan), and the earnings, expenses, appreciation and depreciation attributable to such contributions under the Plan, as well as any dispositions made therefrom under the Plan. (e) Rollover Account. A "rollover account" shall be maintained on behalf of each Participant with respect to whom a qualifying rollover contribution to this Plan is made in accordance with Section 3.08. Such Account will reflect his or her qualifying rollover contribution(s) and the earnings, expenses, appreciation and depreciation attributable thereto, as well as any dispositions made therefrom under the Plan. The "rollover account" shall separately reflect, and account for, any portion of a rollover contribution that represents after-tax contributions, outstanding loans or any other feature for which separate accounting is appropriate. (f) Transfer Account. A "transfer account" shall be maintained on behalf of each Participant with respect to whom a transfer is made to this Plan from another tax-qualified plan in accordance with Section 3.09, which will reflect the Participant's transfer and the earnings, losses, expenses, appreciation and depreciation attributable thereto, as well as dispositions made therefrom under the Plan. The "transfer account" shall separately reflect, and account for, any portion of the transferred account that represents after-tax contributions, outstanding loans or any other feature for which separate accounting is appropriate. (g) Pending Forfeitures Account. A "pending forfeitures account" shall be maintained as a holding account for the Plan (not for any Participant) to which will be credited all forfeitures arising under the Plan during the then current Plan Year. The "pending forfeiture account" may contain sub-accounts, as appropriate, reflecting the source of the forfeited amounts, including pre- and post- March 1, 2008 matching and profit sharing account sources. From time to time as the pending forfeitures account balance becomes sufficient for such purpose, on such dates as determined or authorized by the Plan Administrator, such portion of the accumulated balance of this account (or of any sub-account therein) shall be deducted from the account and applied or reallocated as a forfeiture in accordance with Section 4.07(d). - 20 - Any make-up or corrective contributions, such as QNECs and recharacterized amounts, shall be allocated not to their own separate accounts but to the account for which such corrective amount is made or recharacterized, although such special contributions may be reflected in separate sub-accounts if the Plan recordkeeper so provides. The maintenance of separate account balances shall not require physical segregation of Plan assets with respect to each account balance. The accounts maintained hereunder represent the Participants' respective interests in the Plan and are intended as bookkeeping account records to assist in the administration of this Plan. Any reference to a Participant's "Accounts" or "Account balances" shall refer to all of the accounts maintained in the Participant's name from time to time under the Plan. The Plan Administrator or recordkeeper may, in their discretion, rename, reorganize, combine, divide and supplement the various accounts maintained under the Plan from time to time as deemed necessary, convenient or advisable. References in the Plan to particular accounts by name shall also be deemed to refer to that part of a Participant's account(s) in the future that is attributable to or similar in nature to such former account, as the context shall dictate, regardless of how such future account is named or characterized. The Plan operates on a daily valuation basis, so each business day shall be an accounting date. Consequently, except as otherwise provided in Section 4.07, Participants' Accounts shall be credited or debited with contributions, allocations and distributions when actually made or received by the Plan. Section 4.02 Commingled Investment of Accounts. The Trustee, the investment manager and any insurance institution responsible for investment of Trust assets shall be permitted to commingle the assets of the Trust for purposes of investment with the assets of other plans or trusts which are intended to qualify for a federal tax exemption under Sections 401(a) and 501(a) of the Code. Any documents which are required to be incorporated in the Plan and the Trust to permit such commingled investments are hereby so incorporated. Segregated investment of Plan and Trust assets shall not be required with respect to any one or more Participants, except as authorized for missing payees under Section 6.07. Each account invested in a particular investment fund shall represent an undivided interest in such investment fund which corresponds to the balance of such account. Section 4.03 Investment Funds. From time to time the Plan Administrator may establish, or may cause the Trustee, an investment manager or an insurance institution to establish, one or more investment funds for the investment and reinvestment of Plan assets. The continued availability of any investment fund is necessarily conditioned upon the terms and conditions of applicable investment management agreements and other investment arrangements. While the Plan Administrator shall select the various investment funds to be offered by the Trustee under the Plan, the continued availability of these funds cannot be assured nor is it possible to assure that the arrangements or the investment funds managed by a particular investment manager or insurance institution or by the Trustee will continue to be available on the same or similar terms. The Plan Administrator shall maintain an Investment Policy Statement for the Plan, from time to time, as required under ERISA. - 21 - The Plan shall make available for Participant-directed investment one or more investment choices from at least each of the following different types of investment funds: (a) An "Equity Fund" designed to invest primarily in domestic or foreign equity securities, having capital appreciation and growth, some current income and growth of income, with varying levels of risk as the Fund objectives; (b) A "Managed Income Fund" designed to invest primarily in fixed income securities issued or backed by federal or state governments or related agencies, and/or by corporations and by insurance companies, banks and other financial institutions, and having preservation of capital and production of income as the primary Fund objectives; and (c) A "Balanced Fund" designed to invest in both equity and income-producing securities, and using asset allocation and other strategies to provide, with varying levels of risk, both capital growth and income generation as primary Fund objectives. Participant-directed investing shall be made available under the Plan in a manner that complies with Section 404(c) of ERISA and applicable regulations under that statute, so as to protect Plan fiduciaries from liability for any investment selections made under the Plan to the full extent allowed by law. The Plan Administrator may, in its discretion, from time to time change the available number and identity of investment funds within any of the three categories described above and within any new categories utilized in the future, add new types of investment funds or delete any type of investment funds, as it deems appropriate. Except as provided in this Section 4.03 and Section 4.04, Participants' Accounts shall be invested in any one or more of the available investment funds. Any investment fund may be partially or entirely invested in any common, commingled or collective trust fund, pooled investment fund or mutual fund which is invested in property of the kind specified for that investment fund. Section 4.04 Investment Directions. (a) Participants are permitted to make and change their investment directions with respect to both future contributions and existing Account balances effective as of any prospective date, with such advance notice as the Plan Administrator may require, as frequently as the Participant may desire, and to allocate investments among the available investment funds in increments of one percent. If allowed by the Plan Administrator, Participants may give investment directions directly to any Plan recordkeeper, Trustee or investment manager, and such directions may be given verbally or in writing by such methods as the Plan Administrator allows by arrangement with such recordkeeper, Trustee or investment manager. During any period for which a Participant has not made either or both elections regarding the investment of existing Account balances and future contributions, he or she will be considered to have elected by default to have his or her other current Account balances or his or her future contributions, or both, as the case may be, invested entirely in a Managed Income Fund determined by the Plan Administrator to provide the least risk of loss of capital; provided, however, that on and after December 21, 2007 the default investment fund or funds under the Plan shall be determined instead in accordance with the last paragraph of this Section. It shall be - 22 - the responsibility of the Plan Administrator to accumulate, aggregate and transmit to the Trustee from time to time, and it shall be the responsibility of the Trustee to duly execute, investment instructions based upon a record of all proper actual and default investment directions. From time to time temporary suspensions of the right to direct investment changes (and to take loans or withdrawals under the Plan) may be imposed on Participants, with advance notice, by the Plan Administrator as needed to accommodate changes in such things as Plan fiduciaries, service providers, sponsorship, coverage or investment funds. During such "black-out" periods, existing investment directions shall continue in effect, subject to such rules as the Plan Administrator may establish for any such "black-out" period. Effective December 24, 2007, the Plan Administrator shall designate a new default investment fund which shall satisfy the requirements for being a "qualified default investment alternative" ("QDIA") as defined in Section 404(c)(5) of ERISA and regulations thereunder. The new default fund shall apply (i) to any newly Eligible Employee who becomes a Participant on or after December 24, 2007, and (ii) to any Participant for whom automatic salary reduction contributions are made after March 1, 2008. At least thirty (30) days advance notice of the new QDIA fund shall be provided to such existing Participants in order to meet the conditions for the fiduciary protections of Section 404(c) of ERISA to apply to the Plan's use of default funds. The prior default fund (a Managed Income Fund, as designated by the Plan Administrator from time to time) shall continue to be available thereafter (i) as a grandfathered default investment option for amounts attributable to prior contributions, and (ii) as an investment option with respect to subsequent contributions only to the extent selected by affirmative Participant investment direction. Section 4.05 Investment Fund Accounting. The undivided interest of each Participant's Account in an investment fund shall be determined in accordance with the accounting procedure specified in the trust agreement, investment management agreement, insurance contract, custodian agreement or other document under which such investment fund is maintained. To the extent not inconsistent with such procedures, the following rules shall apply: (a) Deposits. Amounts deposited in an investment fund may be deposited by means of a transfer of such amounts to such investment fund from another investment fund as required to conform with the investment directions properly received in accordance with Section 4.04. (b) Distributions. Amounts required to be transferred from an investment fund to satisfy benefit payments and required transfers to effectuate investment directions in accordance with Section 4.04 shall be transferred from such investment funds as soon as practicable following receipt by the Trustee or investment manager of proper instructions to complete such transfers. (c) Allocation of Fund Earnings. Except as provided in the applicable investment fund document, all amounts deposited in an investment fund shall be invested as soon as practicable following receipt of such deposit. Notwithstanding the primary purpose or investment policy of an investment fund, assets of any investment fund which are not invested in - 23 - the manner required by the investment fund document shall be invested in such short term instruments or funds as the applicable trustee or investment manager shall determine, pending investment in accordance with such investment policy. Section 4.06 Expenses. All costs and expenses incurred in connection with the general administration of the Plan and Trust, to the extent not paid by the Company, shall be allocated (for deduction) among the investment funds in the proportion in which the amount invested in each such fund bears to the amount invested in all funds as of the accounting date preceding the day of application, provided that all costs and expenses directly identifiable to one fund shall be allocated to that fund. Section 4.07 Crediting Contributions and Forfeitures. (a) Salary Reduction Contributions. Salary reduction contributions shall be credited to the Account of the Participant that elected such contributions or for whom such contributions were automatically made. Amounts credited to the Participant's Salary Reduction Contribution Account shall be based on the Participant's election (actual or automatic), subject to any limitations and adjustments applicable under the Plan. Salary reduction contributions shall be made to the Plan as promptly as practicable and not later than (i) the fifteenth (15th) day of the calendar month next following the month in which the contribution amount was withheld from the Participant's paycheck; or (ii) any other deadline imposed under applicable ERISA regulations in order to avoid the Employer being considered to have held such amounts as Plan assets. These contributions shall be credited as soon as practicable on or after the first business day on or next following the date such contribution is received by the Plan. No one--including any Employer, the Plan and any Plan fiduciary--shall have any obligation to invest or credit interest on the amounts contributed with respect to any period between the close of the relevant pay period and the date the contribution is credited to the Plan, and no such interest credit shall be made for that period. (b) Matching Contributions. Matching contributions shall be made in accordance with Sections 3.03 or 3.12(e), as applicable, subject to adjustment, and credited to the Account of each Participant for whom a salary reduction contribution is made for the same Plan Year. The amount of each matching contribution shall be based on the amount of salary reduction contribution that is made on behalf of the Participant, subject to any limitations and adjustments applicable under the Plan. Matching contributions shall be made simultaneous with, or as soon as practicable after, the salary reduction contribution is made to which the matching contribution relates. Matching contributions shall be credited on the first business day on or next following the date such contribution is received by the Plan. No one--including any Employer, the Plan and any Plan fiduciary--shall have any obligation to invest or credit interest on matching contributions with respect to any period between the close of the pay period to which the corresponding salary reduction contribution relates and the date the matching contribution is credited to the Plan, and no such interest credit shall be made for that period. - 24 - (c) Profit Sharing Contributions. Employer profit sharing contributions, if any, made under Section 3.01 (or other applicable provision of Article III), shall be allocated to eligible Participants' Accounts on the first business day on or next following the date such contribution is received by the Plan. To be eligible, a Participant must remain employed with an Employer as of the close of the Employer's fiscal year for which the contribution is made and the Participant must have completed a year of service, as described below, for that fiscal year period. For this purpose, a year of service is completed if the Participant earns 1,000 or more Hours of Service during that fiscal year. The allocation of profit sharing contributions to eligible Participants' Accounts shall be made pro rata in proportion to the relative Profit Sharing Earnings of each such Participant for the applicable fiscal year. No one--including any Employer, the Plan and any Plan fiduciary--shall have any obligation to invest or credit interest on profit sharing contribution with respect to any period before the contribution is credited to the Plan, and no such interest credit shall be made for that period. (d) Forfeitures. Subject to Section 5.04(c), amounts credited to the Pending Forfeitures Account shall be applied first to the payment of reasonable Plan administrative expenses and any remaining balance in that Account shall be offset against Employer matching contributions as they come due to the Plan. Section 4.08 Adjustment of Account Balances. As of each accounting date, including any interim accounting date, the Plan Administrator, or its designee, may adjust the Account balances of Participants, as needed, to reflect adjustments in the value of the trust fund, to reflect distributions and to reflect transfers of benefits to or for the benefit of any Participant, including withdrawals and loans, as follows: (a) First, charge to the proper Accounts all loan repayments, adjustments, transfers, withdrawals or loans made since the last accounting date; and (b) Next, contributions made under Article III since the last accounting date shall be allocated and credited to the proper Accounts of Participants as required by Section 4.07; and (c) Finally, as and when appropriate, adjust contributions to satisfy the limitations of Article III. ARTICLE V.--ENTITLEMENT TO BENEFITS Section 5.01 Retirement. A Participant shall be 100% vested in his or her Accounts on the date he or she first attains Normal Retirement Age or Early Retirement Age. If the Participant's employment terminates on or after that date, the Participant shall be considered retired and entitled to the vested interest in his or her Accounts as a benefit from the Plan. That retirement benefit shall be payable in accordance with Article VI below. - 25 - Section 5.02 Disability. A Participant whose employment terminates due to his or her Disability shall have a 100% vested interest in his or her Accounts regardless of his or her age and Years of Service. Such disabled Participant shall be entitled to the vested interest in his or her Accounts as a benefit from the Plan. That benefit shall be payable in accordance with Article VI below. Section 5.03 Death. (a) Entitlement. A Participant who dies while employed by any Employer shall be 100% vested in his or her Accounts as of the date of his or her death regardless of the Participant's age and Years of Service. The deceased Participant's vested interest in his or her Accounts shall be distributed as a benefit to the Participant's surviving Beneficiary(ies) in accordance with this Section 5.03 and Article VI below. (b) Beneficiary. (i) Each Participant may designate any legal or natural person or persons as his or her Beneficiary under the Plan to receive any portion of such Participant's benefit that remains unpaid as of the date of the Participant's death. Each Beneficiary designation will be in the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all prior Beneficiary designations. Notwithstanding the foregoing, no Beneficiary designation will be effective under the Plan unless the Participant's eligible Spouse consents in writing to such designation, such consent acknowledges the effect of such designation, and the eligible Spouse's signature is witnessed by the Plan Administrator or a notary public. Notwithstanding the foregoing, spousal consent to a Participant's Beneficiary designation will not be required if: A) the eligible Spouse is designated as the sole primary Beneficiary by the Participant; or B) it is established to the satisfaction of the Plan Administrator that spousal consent cannot be obtained because there is no eligible Spouse, or because of such other circumstances as may be prescribed in regulations issued by the Secretary of the Treasury. For this purpose, reasonable reliance by the Plan Administrator on suitable written representation or other evidence from the Participant shall be allowed. Any consent by an eligible Spouse or any determination by the Plan Administrator that the consent is not required pursuant to parts (A) or (B) above may not be revoked by the Spouse and will be effective only with respect to such eligible Spouse. (ii) If any Participant fails to designate a Beneficiary in the manner provided above, or if the Beneficiary designated by a Participant dies before him or before - 26 - complete distribution of the Participant's benefits, such Participant's benefits will be paid in accordance with the following order of priority: A) to the Participant's eligible Spouse; or, if there be none surviving, B) to the Participant's children (including legally adopted children) and the descendants of deceased children (per stirpes), in equal parts; or, if there be none surviving; C) to the Participant's estate. The Plan Administrator may determine the identity of the distributees and in so doing may act and rely upon any information deemed reliable upon reasonable inquiry, and upon any affidavit, certificate, or other paper believed to be genuine, and upon any evidence believed sufficient. If a Participant or Beneficiary is under a legal disability and is unable to attend properly to his personal financial matters, the Plan Administrator may direct that payments be made to any individual legally appointed to care for such Participant or Beneficiary. Any payment made pursuant to this Section will be a complete discharge of the obligation for paying such benefit under the Plan. Section 5.04 Vesting and Termination of Employment. (a) Entitlement. A Participant whose employment with any and all Employers is terminated before the Participant's retirement, Disability or death shall be entitled to a benefit only from the vested portion of his or her Accounts. That vested portion shall be determined under Section 5.04(b) below. Any resulting benefit shall be payable in accordance with Article VI below. In accordance with final regulations under Code Section 401(k), any change in a Participant's status from a W-2 Employee to a Leased Employee that takes effect on or after January 1, 2006 shall not be treated as a termination of the Participant's employment and so shall not constitute a distributable event under this Plan. However, beginning January 1, 2009 (or as of whatever later date Code Section 414(u)(12)(B) takes effect) any absence of a Participant from employment due to a period of qualifying military service may be considered a termination of employment as provided under Code Section 414(u)(12)(B); provided, however, that a Participant who receives a distribution hereunder in connection with such military service shall not be permitted to make any salary reduction contributions to the Plan for the 6-month period beginning on the date of such distribution, in accordance with that statute. (b) Vesting. Different vesting schedules apply to different types of accounts under the Plan. A Participant shall always have a 100% vested interest in his or her Salary Reduction Contribution Account, his or her After-Tax Contribution Account and his or her Rollover Account, if any. A Participant's vested interest in his or her Transfer Account initially shall be the same percentage as the Participant's Transfer Account was vested immediately prior to its transfer to and acceptance by this Plan (unless the Company accelerates vesting by arrangement with the sponsor of the transferor plan); thereafter such vested percentage shall increase by - 27 - operation of the vesting schedule below based on the Participant's completed Years of Service. A Participant's vested interest in his or her Profit sharing and Matching Contribution Accounts, if any, shall be the vested percentage determined under the following table, based upon the complete Years of Service standing to the Participant's credit as of the date on which his or her employment with any and all Employers terminates. Years of Service Vested Percentage ---------------- ----------------- Less than 1 0% 1 20% 2 40% 3 60% 4 80% 5 or more 100% The foregoing vesting schedule shall be superseded as provided in Section 3.12(g) with respect to post-March 1, 2008 contributions as described therein. A Participant's vested interest reflects the vested percentage of his or her Accounts but does not attach to, nor guaranty a benefit equal to, any particular balance that exists in his or her Accounts prior to the actual distribution of the Participant's benefit. (c) Forfeitures. If a Participant's employment with any and all Employers terminates before he or she has become 100% vested in all his or her Accounts, the portions of the Participant's Accounts which are not vested shall immediately become a forfeiture. Forfeitures shall be credited immediately to the Pending Forfeiture Account, which is then applied in accordance with Section 4.07 during the Plan Year in which the forfeiture arose. If the same Participant is reemployed by an Employer before incurring five consecutive Break in Service years, then the forfeited amount (without interest) shall be restored to the credit of the Participant's Accounts from which the forfeiture was taken. For example, under the vesting schedule in Section 5.04(b) above applicable to certain pre-March 1, 2008 contributions, if a Participant terminated employment during the year 2007 (after earning 1,000 or more Hours of Service in that year) while only 60% vested in his or her Matching and Profit Sharing Contribution Accounts, the non-vested 40% portion of those two Accounts would be forfeited. If that Participant returns to employment as an Eligible Employee during the year 2011, the forfeited amount would then be restored to his or her respective Matching and Profit Sharing Contribution Accounts because the Participant had not incurred five consecutive Break in Service years before resuming covered employment. But if that Participant instead resumes employment in 2012, too late to earn 1,000 Hours of Service in that year, because he or she would have incurred five consecutive Break in Service years (2007 through 2012, inclusive) no restoration of the previously forfeited amounts would be made. Any such restoration shall be made from the Pending Forfeiture Account. If the balance of that Account is insufficient, then the remaining portion of such restoration shall come from a special make-up contribution from the Participant's Employer made as of the end of the Plan Year in which the Participant resumes employment with the Employer. - 28 - ARTICLE VI.--BENEFIT DISTRIBUTIONS Section 6.01 Forms of Distribution. (a) Normal Form. The normal form of benefit distribution under this Plan shall be a single sum payment. If such payment is made in cash to the Participant or a surviving Beneficiary, it shall be subject to the 20% tax withholding requirement of Code Section 3405(a) for so long as that statute applies to this Plan. If such payment is made instead by a direct rollover pursuant to Section 6.05 below, then such tax withholding shall not apply, but the Participant's After-Tax Contribution Account is not eligible for such a rollover and instead shall be paid (without tax withholding) to the Participant or surviving Beneficiary. (b) Optional Form. In lieu of the normal form, the Participant may elect to have his or her benefit paid in a series of substantially equal quarterly or annual installments over a chosen period of not more than twenty (20) years, the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and his or her Beneficiary (only if the Beneficiary is one or more individuals), whichever period will be the shortest. (c) Grandfathered Option. A Participant who commenced participation in the Plan before January 1, 1994 and whose employment with any and all Employers terminates before his or her Normal Retirement Age may make a one-time election to receive a distribution of up to one-half the vested portion of his or her Accounts at any time before attaining Normal Retirement Age. The remaining vested interest in the Participant's Accounts may not thereafter be distributed until the Participant attains Normal Retirement Age, unless he or she dies or the Plan is terminated sooner. Any interim distribution under this Section 6.01(c) shall be made not later than sixty (60) days after the close of the calendar quarter in which the Participant's election is received by the Plan. Any prior distribution from the Participant's Accounts shall disqualify the Participant from eligibility for this partial distribution right, but withdrawals and loans under Article VII (including taxable loan defaults) shall not count as prior distributions for this purpose. This partial distribution right shall be available as well to any beneficiary or alternate payee who has an interest in the Accounts of a Participant who qualified for this grandfathered option. (d) Small Benefit Cashout. Regardless of any provisions of this Article VI to the contrary, if the total vested interest of a Participant does not exceed $1,000 at the time he or she becomes entitled to a benefit from the Plan, then the Participant's total benefit shall be paid automatically in a single sum (the normal form) as though the Participant had elected immediate commencement of his or her benefit under Section 6.02. Notwithstanding the foregoing, any distribution of more than $1,000 made to a Participant (but not to a Beneficiary) on or after March 28, 2005 under this Section 6.01(d) shall, in accordance with Code Section 401(a)(31)(B)(i), be made instead by a direct rollover to an individual retirement account held by the Plan's designated IRA provider (or any approved affiliate thereof) in the name of the Participant, unless the Participant elects, in timely fashion, (i) to have such distribution paid in a direct rollover to some other eligible retirement plan designated by the Participant or (ii) to receive the distribution in a single sum. The Plan's designated IRA provider shall be selected from time to time by the Administrative Committee, - 29 - and the initial provider shall be Fidelity (or any approved affiliate thereof). A Participant's rollover account shall be counted for purposes of determining the Participant's eligibility for a cashout benefit under this Section 6.01(d). Any direct rollovers made under this Section shall be made in accordance with Section 6.05 to the extent not inconsistent with this Section. The Administrative Committee shall enter into a written agreement with the Plan's designated IRA provider consistent with the safe harbor rules of U.S. Department of Labor Regulation ss.2550.404a-2, which agreement shall be substantially enforceable by or on behalf of the Participant against the IRA provider. Once such distribution is made, the Plan is considered to have fully satisfied its benefit payment obligation with respect to that Participant. The implementation of this Section shall not adversely affect the Plan's standing as a 404(c) plan under ERISA. (e) Elections. Elections to receive an optional form or partial distribution under (b) or (c) above, or to have the single sum distributed as a direct rollover under (a) or (d) above, shall be made by the Participant in writing and filed with the Plan Administrator. However, the Plan Administrator, by arrangement with the Plan recordkeeper or Trustee, may authorize and approve electronic or telephonic elections under procedures which provide adequate access and written confirmation to Participants. (f) Miscellaneous. The life expectancy of a Participant or of a Participant and a designated Beneficiary shall be determined by the Plan Administrator in accordance with the actuarial tables adopted by it, from time to time, for this purpose. The installment form of benefit payment shall be designed so that the present value of the amount to be paid over the Participant's life expectancy is at least 50 percent of the value of the vested portion of the Participant's Accounts on the date of benefit commencement, unless the Participant designates the Spouse as his or her Beneficiary. (g) Cash or In Kind. Benefits under this Article shall be distributed in cash only, except as authorized by Section 7.03 with respect to in kind distribution of outstanding loans as part of distributions made after December 31, 2000. The Plan Administrator may establish a minimum amount of any installment payments to be made under the Plan. Benefit payments shall be taken pro rata from each of the Participant's Accounts and from each investment fund in which his or her Accounts are invested. (h) Minimum Required Distributions. All distributions made under this Plan shall be determined and made in accordance with the applicable regulations under Section 401(a)(9) of the Code, as provided under Section 6.09 below. Section 6.02 Timing of Distributions. (a) Normal Commencement; Deferral Election. Except for immediate small benefit cashouts under Section 6.01(d), benefits shall commence to be paid in the normal course within ninety (90) days after the event, as described in Article V, which entitles the payee to receive a benefit from the Plan. Prior to such 90 day period the Participant shall be notified of the benefit distribution options available under the Plan and the Participant's right to defer distribution to any date not later than April 1st after the calendar year in which the Participant attains age 70 1/2. Prior to the start of his or her scheduled benefit payment(s), the Participant may elect to defer his - 30 - or her benefit and may elect any optional form of distribution then available under the Plan. Absent such an election, payment shall be made in the normal single sum form on or about the end of the 90 day election and processing period described above. The election shall be filed in writing with the Plan Administrator or made by such electronic or telephonic method as the Plan Administrator may approve and allow from time to time. (b) Age 70 1/2. A Participant who remains an Employee past age 70 1/2 shall become entitled to a benefit distribution upon his eventual retirement (or death, if earlier), except that: (i) A Participant who is a "5% owner" of an Employer (within the meaning of Section 416(i) of the Code) must commence receiving his or her benefit in accordance with Code Section 401(a)(9) by the next April 1st following the calendar year in which the Participant attains age 70 1/2 ; and (ii) Any Participant (other than a 5% owner) who attained age 70 1/2 before January 1, 1997 while still an Employee must also commence receiving his or her benefit in accordance with Code Section 401(a)(9) by the next April 1st following the calendar year in which the Participant attained age 70 1/2, unless such Participant elected (in accordance with the First Amendment to the previous Plan restatement), by the later of April 1, 1997 or 90 days after receiving notice of such right, to suspend and defer benefit payments until his or her retirement. (c) Required Deadline. Unless the Participant has deferred distribution under Section 6.02(a) above, the distribution of a Participant's benefit from the Plan shall commence no later than 60 days after the end of the Plan Year during which the latest of the following events occurs: (i) The Participant attains Normal Retirement Age; or (ii) The Participant ceases employment as an Employee; provided also that distribution shall not commence later than the Participant's "required beginning date" as defined in Section 6.09 below. (d) Age 59 1/2. Notwithstanding any Plan provisions to the contrary, no amount attributable to Employer contributions made on behalf of a Participant while the Participant was a "5% owner" (within the meaning of the Section 416(k) of the Code) shall be distributed to such Participant before he or she attains age 59 1/2, unless such distribution is a result of the Participant's disability within the meaning of Code Section 72(m)(7). Section 6.03 Distribution After Death. (a) Death in Pay Status. If a Participant dies after the distribution of his benefit has begun under Section 6.01 above, but before his entire interest has been distributed to him, the remaining portion of such interest will be distributed to his Beneficiary at least as rapidly as under the method of distribution in effect at the date of the Participant's death; provided that benefit payments for any "distribution calendar years" (as defined in Section 6.09(e) below) shall satisfy the minimum required amount determined under Section 6.09(d)(i). - 31 - (b) Death Before Pay Status. If distribution in accordance with Section 6.01 has not commenced to the Participant before his death, the Participant's entire benefit shall be distributed within five years of his death (as provided in Section 6.09(b)(ii) below) unless distribution is made in accordance with the following: (i) Installments Payable to a Designated Beneficiary. If any portion of the Participant's benefit is payable to or for the benefit of a designated Beneficiary who is an individual and such portion is to be distributed in installments over a period beginning not later than one year after the Participant's death or such later date as the Secretary of the Treasury may by regulation prescribe, then such portion may be distributed to such designated Beneficiary over a period not exceeding the lesser of 20 years or the life expectancy of such Beneficiary. (ii) Special Rules for Amounts Payable to Surviving Spouse. If the Participant's designated Beneficiary is his surviving Spouse, distributions to such surviving Spouse need not begin until the date the Participant would have attained age 70 1/2; subject, however, to satisfying the five-year deadline for the completion of distributions under Sections 6.09(b)(ii) and (d)(ii) below if part (i) above is not applicable. If the surviving Spouse dies before distributions to such Spouse begin, distribution of the Participant's Accounts pursuant to this Section 6.03 shall be made as if the surviving Spouse were the Participant. For any "distribution calendar year" (as defined in Section 6.09(e) below), benefits payable under this Section 6.03(b) shall satisfy the minimum required amount determined under Section 6.09(c). (c) Commencement; Single Sum Election. Benefits due to a Beneficiary upon the death of a Participant shall, to the extent practicable, commence within ninety (90) days after the Participant's death. A surviving Beneficiary may elect, prior to the start of benefit payments to the Beneficiary, to receive his or her benefit in the form of a single sum regardless of any other form selected by the deceased Participant. (d) Beneficiary Rollovers. Any beneficiary who is the Participant's surviving spouse may elect a direct rollover of any single sum benefit due to the Beneficiary under Section 6.03(b). Effective on and after January 1, 2008, a Beneficiary who is not the Participant's surviving Spouse also may elect a direct rollover, but such rollover may only be payable to an individual retirement account, in accordance with Section 402(c)(11) of the Code, not to any other type of eligible retirement plan described in Section 6.05(d) below. Section 6.04 Designated Beneficiaries. A Participant may from time to time designate a Beneficiary or Beneficiaries to whom the Participant's benefits will be distributed in the event of the Participant's death prior to complete payment of his or her benefits under the Plan. A Participant may designate contingent or successive Beneficiaries and may name individuals, legal persons or entities, trusts, estates, trustees or other legal representatives as Beneficiaries. Notwithstanding the foregoing or any Beneficiary designation filed by a Participant, if a Participant is married at the date of his death - 32 - the Participant's surviving Spouse will be his designated Beneficiary for all purposes of the Plan unless the surviving Spouse has consented in writing to the Participant's designation of another Beneficiary. Beneficiary designations must be completed and filed with the Plan Administrator during the Participant's lifetime. A Beneficiary designation properly completed and filed will cancel all such designations filed earlier. The consent of a surviving Spouse to the Participant's designation of another Beneficiary must be in writing, must acknowledge the effect of such designation and the specific Beneficiary designated, and must be witnessed by a Plan representative or a notary public. Any consent by a Spouse shall be valid only with respect to such Spouse and with respect to the specific Beneficiary designation or class of designations to which it expressly applies. Any change in a Participant's Beneficiary designation will require a new spousal consent unless the former consent contained a sufficient waiver and consent to future Beneficiary designations of the type actually made. If the Participant is not married, or demonstrates to the satisfaction of the Plan Administrator that his or her Spouse cannot be located (or in such other instances as the Secretary of the Treasury may prescribe), then spousal consent would not be required. A Spouse's consent, once given, shall be irrevocable with respect to the specific Beneficiary designation or class of designations to which the consent pertained. Section 6.05 Direct Rollovers. (a) Direct Rollover Election. If a Participant's single sum distribution qualifies as an eligible rollover distribution, then the Participant may: (i) elect to have such distribution paid directly to an eligible retirement plan, and (ii) designate the eligible retirement plan to which such distribution is to be paid (in such form and at such time as the Plan Administrator may prescribe). Upon a proper election, such distribution shall be made in the form of a trustee-to-trustee payment directly to the eligible retirement plan so specified, in lieu of a cash distribution to the Participant. The income tax withholding applicable to lump sum distributions shall not apply to any direct rollover made under this Section. (b) Eligible Amounts. Subsection (a) above shall apply to the extent that the eligible rollover distribution would be includible in gross income, if not so transferred under Subsection (a) above; however, a direct rollover under Subsection (a) above also may include the portion of an eligible rollover distribution that would not be includible in gross income if not so transferred (i.e., the portion representing after-tax contributions) provided that such transfer is made to an eligible retirement plan that will separately account for the amount so transferred, including separately accounting for the portions of the distribution which are and which are not otherwise includible in gross income. (c) Definitions. For purposes of this Section 6.05; the term "eligible rollover distribution" has the meaning given to such term by Code Section 402(c)(4), as in effect from time to time. - 33 - For purposes of this Section 6.05, the term "eligible retirement plan" shall include, among the entities mentioned in Code Section 402(c)(8)(B), only an individual account retirement plan that is tax-qualified under Code Section 401(a) or an individual retirement account described in Code Section 408(a), the terms of which permit the acceptance of rollover distributions. (d) Alternate Payee Rollover. For purposes of this Section 6.05, to the extent allowed under Code Section 402 an alternate payee entitled to receive an eligible rollover distribution from the Plan pursuant to a qualified domestic relations order, and a surviving Beneficiary of a deceased Participant, shall have the same right to elect a direct rollover of their benefit as a Participant is accorded under this Section. (e) Notice. Within a reasonable time before making an eligible rollover distribution, the Plan Administrator shall provide, in accordance with Code Section 402(f)(1), to the recipient of such distribution, a written explanation of the recipient's direct rollover rights under this Section 6.05 and of the required withholding of tax on the distribution if such a rollover were not elected. The information required to be provided to a Participant under U.S. Department of Labor Regulation ss.2550.404a-2(c)(4) and Code Section 401(a)(31)(B)(i) with respect to automatic rollovers of small benefit cashouts under Section 6.01(d) above shall be included, when applicable, in the 402(f) notice provided under this Section 6.05(e) unless such information is contained in a Summary Plan Description or Summary of Material Modifications that has been provided to the affected Participant. Section 6.06 Qualified Domestic Relations Orders. The nonalienation rules of Section 10.02 shall not apply to a Qualified Domestic Relations Order, as defined in Section 414(p) of the Code. The Plan Administrator shall establish written procedures to determine the qualified status of domestic relations orders and to administer accounts and distributions under such Orders. To the extent provided under a Qualified Domestic Relations Order, a former Spouse of a Participant shall be treated as the Spouse or surviving Spouse under the Plan with respect to benefits specifically identified under the terms of the Qualified Domestic Relations Order. To the extent legally permitted, payments to an alternate payee under a Qualified Domestic Relations Order may commence prior to the subject Participant's earliest retirement age if so authorized by such Order and (if required by the Order) so requested by the alternate payee. Recordkeeping accounts may be established on behalf of alternate payees and those payees shall, if so provided in the Order have the rights of a Participant with respect to their respective accounts. Section 6.07 Missing Payees. (a) Address. Each Participant and Beneficiary must promptly notify the Employer or Plan Administrator of any change in their address. Any communication addressed to a Participant or Beneficiary shall be sent to their most current address filed with the Employer or Plan Administrator. If no address is so filed, then the last address as shown in the Employer's records will be used for such person for all purposes of the Plan. - 34 - (b) Forfeiture and Reinstatement. In the event that the Plan Administrator cannot, after a reasonable search, locate any person to whom a benefit payment is due under the Plan, that benefit shall be forfeited and applied in accordance with Section 4.07 at such time as the Plan Administrator shall determine in its sole discretion (but in all events prior to the time such benefit would otherwise escheat under any applicable law). However, such forfeited benefit shall be reinstated (without adjustment for any interim investment experience) if a valid claim for such benefit is made prior to termination of the Plan. Restoration of such forfeited benefit shall be made, when needed, from the same sources as provided for restoring forfeitures under Section 5.04. (c) Outside Accounts. In connection with the termination of the Plan, any as yet unclaimed benefit forfeitures under this Section 6.07 shall be restored to the account of the missing payee and deposited by the Plan Administrator in a bank account (which need not be interest-bearing) to be held outside this Plan and Trust for the benefit of the missing payee, subject to any proper claims of the state to such account (if it remains unclaimed) under any applicable state escheat laws. Any Plan bank accounts previously established for the benefit of missing payees shall be forfeited as provided in (b) above, subject to the aforesaid restoration (with or without removal from the Plan and Trust) upon being claimed or upon the termination of the Plan. Section 6.08 Incapacitated Payees. If any person entitled to benefits under the Plan is under a legal disability or in the Plan Administrator's opinion is incapacitated in any way so as to be unable to manage his financial affairs, the Plan Administrator may, in its sole discretion, direct the payment of such benefits to such person's court-appointed legal representative or guardian for such person's benefit in lieu of making payment directly to the disabled or incapacitated person. Payments made in accordance with this Section shall discharge all liabilities for such payments under the Plan. Section 6.09 Minimum Distribution Requirements. (a) General Rules. (i) Effective Date. The provisions of this Section will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year. (ii) Precedence. The requirements of this Section will take precedence over any inconsistent provisions of the Plan. (iii) Requirements of Treasury Regulations Incorporated. All distributions required under this Section will be determined and made in accordance with the Treasury Regulations under Code Section 401(a)(9). (iv) TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this article, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal - 35 - Responsibility Act (TEFRA) and the provisions of the Plan that relate to section 242(b)(2) of TEFRA. (b) Time and Manner of Distribution. (i) Required Beginning Date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's required beginning date (as defined in Section 6.09(e) below). (ii) Death of Participant Before Distributions Begin. If the Participant dies before distributions begin and the exceptions under Section 6.03(b) do not apply, the Participant's entire interest will be distributed, or begin to be distributed, no later than as follows: A) If the Participant's surviving Spouse is the Participant's sole designated Beneficiary, the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. B) If the Participant's surviving Spouse is not the Participant's sole designated Beneficiary, then the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. C) If there is no designated Beneficiary as of September 30 of the year following the year of the Participant's death, the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. D) If the Participant's surviving Spouse is the Participant's sole designated Beneficiary and the surviving Spouse dies after the Participant but before distributions to the surviving Spouse begin, this subsection (b)(2), other than paragraph (A), will apply as if the surviving Spouse were the Participant. For purposes of this subsection (b)(2) and subsection (d) below, unless paragraph (D) applies, distributions are considered to begin on the Participant's required beginning date. If paragraph (D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving Spouse under paragraph (A). (iii) Forms of Distribution. Unless the Participant's interest is distributed in the form of a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with subsections (c) and (d) below. (c) Required Minimum Distributions During Participant's Lifetime. - 36 - (i) Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participant's lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of: A) the quotient obtained by dividing the Participant's account balance by the distribution period in the Uniform Lifetime Table set forth in ss. 1.4.01(a)(9)-9 of the Treasury Regulations, using the Participant's age as of the Participant's birthday in the distribution calendar year; or B) if the Participant's sole designated Beneficiary for the distribution calendar year is the Participant's Spouse, the quotient obtained by dividing the Participant's account balance by the number in the Joint and Last Survivor Table set forth in ss. 1.401(a)(9)-9 of the Treasury Regulations, using the Participant's and Spouse's attained ages as of the Participant's and Spouse's birthdays in the distribution calendar year. (ii) Lifetime Required Minimum Distributions Continue Through Year of Participant's Death. Required minimum distributions will be determined under this subsection (c) beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant's date of death. (d) Required Minimum Distributions After Participant's Death. (i) Death On or After Date Distributions Begin. A) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated Beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant's designated Beneficiary, determined as follows: i. The Participant's remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year. ii. If the Participant's surviving Spouse is the Participant's sole designated Beneficiary, the remaining life expectancy of the surviving Spouse is calculated for each distribution calendar year after the year of the Participant's death using the surviving Spouse's age as of the Spouse's birthday in that year. For distribution calendar years after the year of the surviving Spouse's death, the remaining life expectancy of the surviving Spouse is calculated using the age of the surviving Spouse as of the Spouse's birthday in the calendar year of the Spouse's death, reduced by one for each subsequent calendar year. - 37 - iii. If the Participant's surviving Spouse is not the Participant's sole designated Beneficiary, the designated Beneficiary's remaining life expectancy is calculated using the age of the Beneficiary in the year following the year of the Participant's death, reduced by one for each subsequent year. B) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated Beneficiary as of September 30 of the year after the year of the Participant's death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the Participant's remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year. (ii) Death Before Date Distributions Begin. A) Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated Beneficiary, distribution of the Participant's entire interest will be completed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. B) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated Beneficiary as of September 30 of the year following the year of the Participant's death, distribution of the Participant's entire interest will be completed by December 31 of the calendar year containing the fifth (5th) anniversary of the Participant's death. C) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant's surviving Spouse is the Participant's sole designated Beneficiary, and the surviving Spouse dies before distributions are required to begin to the surviving Spouse under subsection (b)(2)(A) above, this subsection (d)(2) will apply as if the surviving Spouse were the Participant. (e) Definitions. (i) Designated beneficiary. The individual who is designated to receive death benefits under Section 5.03 and applicable provisions of this Article VI and is the designated beneficiary under Code Section 401(a)(9) and ss. 1.401(a)(9)-1, Q&A-4 of the Treasury Regulations. (ii) Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the - 38 - first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin under subsection (b)(2) above. The required minimum distribution for the Participant's first distribution calendar year will be made on or before the Participant's required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant's required beginning date occurs, will be made on or before December 31 of that distribution calendar year. (iii) Life expectancy. Life expectancy as computed by use of the Single Life Table in ss. 1.401(a)(9)-9 of the Treasury Regulations. (iv) Participant's account balance. The Account balance as of the last accounting date in the calendar year immediately preceding the distribution calendar year ("valuation calendar year") increased by the amount of any contributions made and allocated or forfeitures allocated to his Accounts as of dates in the valuation calendar year after the accounting date and decreased by distributions made in the valuation calendar year after the accounting date. The Participant's Account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year. (v) Required beginning date. In accordance with Section 6.02 of the Plan, the April 1 after the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or, (ii) in the case of a non-5% owner, the calendar year in which the Participant ceases to be an Employee. ARTICLE VII.--IN-SERVICE DISTRIBUTIONS Section 7.01 Non-Hardship Withdrawals. (a) Withdrawals from After-Tax Contribution Account. A Participant may withdraw all or any portion of his or her After-Tax Contribution Account at any time in accordance with this Section 7.01(a). Such withdrawals may be requested in writing or by any electronic or telephonic method then permitted by the Plan recordkeeper. The withdrawal shall be paid out as promptly as practicable after the request is approved. Withdrawals of less than $500 shall be permitted only if the withdrawal represents the entire balance of the Account. (b) The Participant may designate whether and in what proportions he or she wishes to withdraw contributions made before January 1, 1987 or contributions made on or after that date. Absent such designation, the Plan will treat the Participant's after-tax contributions as being withdrawn in chronological order beginning with the oldest. With respect to pre-1997 contributions, the contributions shall be considered as being withdrawn entirely before any earnings attributable to such contributions are considered as being withdrawn. With respect to post-1996 contributions, however, in accordance with Code Sections 22(e)(8) and (9), any - 39 - withdrawal shall be deemed to consist of a simultaneous withdrawal of earnings thereon in the same proportion as the amount of such contribution being withdrawn bears to the total of such post-1996 after-tax contributions then credited to the Participant's account. (c) Withdrawals After Age 59 1/2. A Participant (including a former Employee) who has attained age 59 1/2 may withdraw all or any portion of his or her Accounts, to the extent vested, upon request and without the need to demonstrate hardship. The request may be in writing or by any electronic or telephonic method then permitted by the Plan recordkeeper. The withdrawal shall be paid out as promptly as practicable after the request is approved. Withdrawals of less than $500 shall be permitted only if the withdrawal represents the entire balance of the Participant's vested interest in his or her Accounts. Any withdrawal request approved under this Section 7.01(b) shall be satisfied by deducting amounts from the Participant's Accounts in the manner of allocation and order of priority used for hardship withdrawals under Section 7.02(c). Section 7.02 Hardship Withdrawals. (a) Eligibility. Any Participant who is still an Employee and who demonstrates a financial hardship (as defined in part (c) of this Section) may request a withdrawal to cover that hardship in accordance with this Section 7.02. Hardship withdrawals under this Section shall be permitted only while the Participant remains an Employee. Unless the Participant has attained age 59 1/2, he or she shall not be entitled to a withdrawal from any Accounts except in accordance with this Section 7.02 or Section 7.01(a). (b) Processing. The request for a hardship withdrawal shall be directed to and processed by the Plan recordkeeper. The request shall be in writing or by such electronic or telephonic method as the Plan recordkeeper may allow. The request shall be made at least thirty (30) days prior to the desired withdrawal date, or such lesser period as the Plan recordkeeper, in its discretion, may allow. The completed withdrawal application record shall be forwarded to the Plan Administrator for review and a decision as to approval or denial. The withdrawal shall be disbursed as soon as practicable after the withdrawal request has been approved. No withdrawal shall be permitted under this Section 7.02 for less than $500. The Participant shall provide such further information in support of the withdrawal request as the Plan recordkeeper or the Plan Administrator may require. The withdrawal request shall be processed in accordance with applicable regulations under Code Section 401(k) and such rules (consistent with those regulations) as either the Plan recordkeeper or the Plan Administrator, or both, may adopt from time to time and apply uniformly to similarly situated Participants. (c) Allocating the Withdrawal. A hardship withdrawal, if approved, shall be taken from the requesting Participant's Accounts in the following order of priority: (i) First, from the After-Tax Contribution Account; (ii) Second, if needed, from the Salary Reduction Contribution Account; (iii) Third, if needed, from the Profit Sharing Contribution Account; - 40 - (iv) Fourth, if needed, from the Matching Contribution Account; (v) Fifth, if needed, from any separate account representing qualified nonelective Employer contributions made on behalf of the Participant in accordance with Section 3.06(b); (vi) Sixth, if needed, from the Transfer Account; and (vii) Finally, if needed, from the Rollover Account. Withdrawals must be exhausted from all Accounts which have earlier priority before taking any amount in withdrawal from the Account next in priority. Withdrawals may be taken only from the vested portion of an Account. Earnings may not be withdrawn from the Participant's Salary Reduction Contribution Account. Earnings shall be withdrawn from the After-Tax Contribution Account in the same manner as applies to that Account under Section 7.01(b) above. (d) Financial Hardship. For purposes of this Section, "financial hardship" means immediate and heavy financial need occurring in the Participant's personal affairs which cannot reasonably be satisfied from other resources available to the Participant. Such hardship shall be determined by the Plan Administrator from appropriate evidence furnished by the Participant and in accordance with applicable regulations under Code Section 401(k). Unless the Plan Administrator decides, from time to time, to determine financial need on the basis of all relevant facts and circumstances, a Participant's financial need shall be deemed sufficiently immediate and heavy to justify a hardship withdrawal under this Section only with respect to: (i) expenses for (or necessary to obtain) medical care that would be deductible under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income or other applicable dollar limit for deductibility thereunder); (ii) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments); (iii) payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the Participant, his spouse, children or dependents (as defined in Code Section 152 and without regard to Sections 152(b)(1), (b)(2) and (d)(1)(B) of that statute); (iv) payments necessary to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage on that residence; (v) payments for burial or funeral expenses for the Participant's deceased parent, spouse, children or dependents (as defined in Code Section 152 and without regard to Section 152(d)(i)(B) of that statute); - 41 - (vi) expenses for the repair of damage to the Participant's principal residence that would qualify for the casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income or other applicable dollar limit for deductibility thereunder); (vii) emergency or restorative expenses incurred by the Participant directly as a result of a disaster that has been recognized by the President of the United States in an emergency or disaster declaration; provided that the Participant applies for the withdrawal within a reasonable time (not to exceed 6 months, unless good cause for later application is shown) after the President's declaration; or (viii) any other circumstances determined by the Internal Revenue Service to constitute immediate and heavy financial need for this purpose. In addition, the Participant must demonstrate to the satisfaction of the Plan Administrator that the amount of the requested withdrawal does not exceed the amount required to relieve such immediate and heavy financial need, considering also the extent to which such need may be satisfied from other resources reasonably available to the Participant, including assets of his spouse and minor children to the extent reasonably available to him. The amount of a hardship withdrawal may be increased, at the Participant's request, by the estimated amount of income taxes and related penalties the Participant may owe on the amount being withdrawn. Other reasonably available resources shall be deemed insufficient, so as to justify the hardship withdrawal, if: (i) the Participant first has obtained, or simultaneously with the withdrawal will obtain, all nonhardship distributions and all nontaxable loans currently available under all qualified plans maintained by the Employers; (ii) the Participant's right to make elective and employee contributions under this Plan and all other qualified Plans maintained by any Employer shall be suspended for the six (6) consecutive months following his or her receipt of the hardship withdrawal; and (iii) the maximum amount of elective contributions (taking into account all qualified plans of an Employer) to be made on behalf of the Participant for his or her taxable year following the taxable year in which he or she receives the hardship withdrawal shall not exceed (A) the dollar limit in effect under Code 402(g), reduced by (B) his or her salary reduction contributions for the taxable year in which he or she received the hardship withdrawal. Hardship withdrawals which are subject to the preceding sentence shall not be allowed unless the other plans referred to in points (i) through (iii) of that sentence contain substantially similar provisions. For purposes of point (i) next above, any Participant who has a loan outstanding from this Plan will be deemed to have already obtained all available loans from this Plan unless the Participant has the financial resources to refinance that loan in lieu of all or part of the requested hardship withdrawal. - 42 - However, if the Plan Administrator elects instead to make an independent determination as to the sufficiency of the Participant's resources, then for that purpose the Plan Administrator may place reasonable reliance on the Participant's written representations to the effect that such need cannot be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by reasonable liquidation of the Participant's assets to a degree which would not itself cause immediate and heavy financial need; (iii) by cessation of elective or Participant contributions under the Plan; or (iv) by other distributions or loans from plans maintained by any present or former employer of the Participant, or by borrowing from commercial sources on reasonable commercial terms. Section 7.03 Loans to Participants. The Plan Administrator, upon proper written request by an eligible borrower, shall direct the Trustee to make a loan from the vested portion of the accounts of the Participant in accordance with this Section. Eligibility for and the rules with respect to loans shall, in the discretion of the Plan Administrator, be uniformly applied to all similarly situated loan applicants and this loan program shall not operate to discriminate in favor of Highly Compensated Employees, officers or shareholders of an Employer. Eligible borrowers shall include any participating Employee and any alternate payee (under a Qualified Domestic Relations Order) with an Account under the Plan. Any Participant who is a former Employee, any surviving Beneficiary, or any other person entitled to benefits under the Plan shall not be eligible to receive a loan on or after the effective date of this Plan restatement unless such person is then an "interested party" with respect to the Plan, as defined in Section 3(14) of ERISA. The Plan Administrator may direct that loan requests from time to time be made directly to the Plan recordkeeper or Trustee, which may then administer this loan program instead of the Plan Administrator for such periods as the Plan Administrator allows. The loan request may be verbal, written or electronic, as the loan program administrator may allow from time to time. Loans shall be available to eligible borrowers on the following terms: (a) Amount. The initial principal amount of any loan may not be less than $500. The maximum principal amount of all loans outstanding to any one borrower shall not exceed 50% of the balance of the vested portion of the Participant's accounts or $50,000, whichever is less. For purposes of this paragraph (a), the $50,000 maximum figure shall be reduced by the excess, if any, of the highest outstanding balance of loans from the Participant's Accounts during the one-year period ending on the day before the date on which such loan is made over the outstanding balance of loans from the Participant's Accounts on the date on which such loan is made. (b) Source. Loans shall be taken from the Participant's Accounts in the same order of priority set forth for withdrawals in Section 7.02(c). Loans shall be taken pro rata from all investment funds in which the Participant's Accounts from which the loan is made are invested. - 43 - (c) Maturity. The term of the loan may not exceed five years, unless the loan principal is used to acquire any dwelling unit which within a reasonable time is to be used as a principal residence of the Participant. The term of such residential purchase loans may not exceed ten years. (d) Interest. Loans shall have a fixed rate of interest. The interest rate shall be set as of the last day of each calendar quarter by the Plan Administrator for loans to be made in the next following calendar quarter, and shall equal the prime rate then charged (as of the quarter-end date on which the rate is to be set) by a large domestic money center bank (which may be the Company's principal commercial bank) selected by the Plan Administrator, plus one percentage point (1%). (e) Payroll Withholding. The Plan Administrator shall have the authority to require that the loan be repaid by payroll withholding over its term and, as a condition precedent to approval of the loan, require the borrower to irrevocably authorize payroll withholding to accomplish the same. Borrowers not on an Employer's payroll must make their loan repayments monthly by certified check, payable as directed by the Plan Administrator, unless direct payment from the borrower's bank account is arranged as provided in paragraph (f) below. The Plan Administrator, in its discretion, may suspend an employee's obligation to repay a Plan loan for any period during the employee's uniformed service, regardless of whether such service is qualified under USERRRA; provided, however, that such loan must still be repaid within the maximum period of maturity allowed under the Plan and applicable law for loans of that type. (f) Security. The loan shall be secured by the vested interest in the Participant's Accounts to the extent of the principal amount of the loan plus accrued interest. However, not more than 50% of the vested portion of the Participant's Accounts may be used as security for all loans from the Participant's Accounts. The Plan Administrator may request such other or further security as it shall deem necessary and prudent from time to time in order to protect the Plan from risk of loss of principal or income if a default were to occur. With respect to loans made to eligible Beneficiaries, and loans to Participants who are no longer on the Employer's payroll, the Plan Administrator shall have the authority to require and arrange that the loan be repaid by direct deposit to the Trustee from a checking account of the borrower. If such payroll withholding or direct deposit arrangements ceased or cannot be arranged, the Plan Administrator may reserve the right to deny the loan request or accelerate and call the existing loan due in order to avoid the risk of loss to the Plan. (g) Offset. If the nonforfeitable portion of a Participant's Accounts is to be distributed as a benefit prior to the repayment of all principal and accrued interest due on any Plan loan from the Participant's Accounts, the outstanding balance due on the loan (unless then repaid to the Plan) shall be offset against that benefit distribution. That offset will count as part of the distribution for purposes of calculating any income tax withholding by the Plan. (h) Note and Terms. All loans shall be bona fide and evidenced by a note containing such additional terms and conditions, consistent with this Section, as the Plan Administrator shall require. Payments shall be scheduled to be made no less frequently than quarterly. Any - 44 - refinancing shall be made at the interest rate in effect for new loans at the time the refinancing takes place. (i) Number Outstanding. A Participant shall be permitted no more than one outstanding loan at any time, but this limitation shall not prohibit such refinancing and adjustment of the terms and conditions of any Participant's loan as the Plan Administrator, within the other limitations of this Section, may allow. Once the Company's payroll system is modified during the 2009 calendar year to accommodate a second loan, the Company shall notify the Plan Administrator and the Plan Administrator will designate (with notice to Participants) a prospective effective date for allowing any Participant to have no more than two loans outstanding at any time. (j) Default. Loans shall provide for a grace period on any delinquent payment until the last day of the first calendar quarter which commences after the loan payment was due. Failure to pay that delinquent payment and accrued interest thereon in full before the grace period expires shall be considered a default. The entire outstanding loan balance (including interest accrued through the last day of the grace period) shall be a deemed distribution upon default and thus shall be reported as taxable income to the borrower for the taxable year in which the default arises. Interest on the loan shall cease to accrue as of the default. The defaulted loan amount shall continue to be treated as a receivable of the borrower's Accounts under the Plan. Such receivable amount shall be deducted from any balance of the Accounts as an offset against benefits only when benefit distributions actually commence to or on behalf of the borrower. If any payment is received by the Plan on a defaulted loan, such payment shall be credited to the borrower's Account (reducing the receivable amount) and separately accounted for as an after-tax contribution. Any loan to a Participant which is outstanding at the time of his or her termination of employment with the Employers shall become immediately due and payable in full as of such termination date. All loans shall be treated as a separate investment fund of the affected Participant's Accounts. All payments with respect to loans shall be credited to the Accounts of the Participant from which the loan was made and shall be invested pro rata according to the most recent investment direction for those Accounts. Subject to applicable regulations, an outstanding loan may be distributed as part of an affected Participant's benefit distribution as and to the extent that the recipient plan or individual retirement account will accept such loan with the benefit distribution. Section 7.04 No Representation Regarding Tax Effect of Withdrawals or Loans. Neither any Employer, the Plan Administrator, the Trustee nor any other person shall be considered to have represented or guaranteed the tax effects of any withdrawals or loans in accordance with this Article. It shall be the responsibility of the Participants or other applicants requesting withdrawals or loans to identify and consider the tax effects of such withdrawals or loans. - 45 - Section 7.05 Deductions from Accounts and Investment Funds. All loans and withdrawals made under this Article VII shall be deducted from each of the investment funds in which the Account is invested from which the loan or withdrawal is being made in the proportion that the amount of the account invested in that particular investment fund bears to the entire Account balance. ARTICLE VIII.--PLAN ADMINISTRATION Section 8.01 Committee. The Plan shall be administered by a committee consisting of such officers, employees or directors of the Company as are appointed from time to time by the Board of Directors of the Company or that Board's delegated agent for that purpose. That committee shall serve as the Plan Administrator and the "named fiduciary" of the Plan for purposes of ERISA. That committee shall not also serve as Trustee, nor shall any person serve the Plan simultaneously as a member of that committee and as Trustee. Committee members may be reimbursed for reasonable expenses incurred in serving on that committee, but no committee member who is on the Company's payroll as a full-time employee may be compensated for service on the committee. The committee shall act by majority vote of its members, or by unanimous consent from time to time if the committee has only two members. The committee may adopt such rules and procedures governing its conduct and decision-making process as it deems appropriate, and may authorize one or more members to sign documents, issue communications and take other actions on its behalf. Section 8.02 Plan Administrator's Powers. The Plan Administrator shall have such powers, to exercise in its sole discretion, as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following powers, rights and duties: (a) Interpretation of Plan and Trust. The Plan Administrator shall have the power, right and duty to construe and interpret the Plan and Trust provisions and to determine all questions arising under the Plan, including questions of Plan participation, eligibility for Plan benefits, and the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to determine the amount, manner and time of payment of any benefits hereunder. (b) Plan Procedures. The Plan Administrator shall have the power, right and duty to adopt procedures, rules, regulations and forms to be followed by employees, Participants, Beneficiaries and other persons or to be otherwise utilized in the efficient administration of the Plan and Trust. In the interest of administrative efficiency and convenience for recipients, any written notices, disclosures, forms and elections called for on behalf of the Plan or its Participants and Beneficiaries may be issued, distributed and made electronically by such methods, and with such safeguards, as the Plan Administrator deems reasonable and adequate for the purpose, provided that hard copy writings shall be used: (i) to confirm electronic - 46 - transactions; (ii) to document and record administrative matters; and (iii) to reach persons who lack reasonable access to, or facility with, such electronic communication. (c) Benefit Determination. The Plan Administrator shall have the power, right and duty to make determinations as to the rights of employees, Participants, Beneficiaries and other persons to benefits under the Plan and to afford any person dissatisfied with such determination the right to challenge such determination pursuant to a claims procedure adopted by the Plan Administrator in accordance with Section 8.04 and ERISA standards. (d) Enforcement of The Plan. The Plan Administrator shall have the power, right and duty to enforce the Plan in accordance with the terms of the Plan and the Trust and to enforce its procedures, rules or regulations. (e) Trust Distributions. The Plan Administrator shall have the power, right and duty to direct the Trustee to make, or to direct investment managers and insurance institutions regarding, distributions or payments from Trust assets in accordance with the Plan. (f) Maintenance of Plan Records. The Plan Administrator shall be responsible for preparing and maintaining records necessary to determine the rights and benefits of employees, Participants and Beneficiaries or other persons under the Plan and the Trust and shall be entitled to request and receive from any Employer such information as may be necessary in preparing such records or in the proper administration of the Plan. (g) Reporting and Disclosure. The Plan Administrator shall have the power, right and duty to prepare and distribute, in such manner as it deems appropriate, and to prepare and file with appropriate government agencies, information, disclosures, descriptions and reporting documents regarding the Plan. In the preparation of such reports the Plan Administrator is entitled to rely upon information supplied to it by the Employers, by the Employers' accountants, the Employers' legal counsel, the Employers' actuaries, the investment managers and any insurance institutions serving the Plan. (h) Allocation of Duties. The Plan Administrator shall be empowered to allocate fiduciary responsibilities and shall have the right to employ reputable agents (who may also be employees of the Employers) and to delegate to them any of the administrative duties imposed upon the Plan Administrator; provided that such delegation is in writing. (i) Reporting to the Company. The Plan Administrator shall furnish the Company, upon reasonable request, with such annual or other reports as the Company deems necessary regarding the administration of the Plan. (j) Self-Corrections. The Plan Administrator shall have discretionary authority to design and implement minor self-corrections of certain operational defects discovered from time to time. Such self-corrections shall be subject to the following guidelines: (i) to the extent that the self-correction program under the Employee Plan Compliance Resolution System set forth in IRS Revenue Procedure 2006-22, as amended ("EPCRS"), applies, any self-correction shall be consistent with general EPCRS - 47 - guidelines and correction methods approved thereunder, as well as the further provisions of this Section 8.02(j); (ii) self-correction shall be non-discriminatory within the meaning of Code Section 401(a) (4); (iii) self-correction shall not be inconsistent with any other statutory or regulatory guidance to the extent such guidance clearly applies; (iv) self-correction shall be complete as far as practicable, but corrections where the principal amount involved is determined by the Plan Administrator to be deminimis, or where the cost and burden of correction would exceed the value of the correction, need not be made; (v) whenever possible without violating applicable legal limits, mistaken Company contributions or related allocations shall remain in the Plan and, to the extent that not correcting such mistakes would increase benefits without exceeding legal limits then leaving the mistake uncorrected or recharacterizing the contributions as additional discretionary contributions, so as to minimize adjustments to allocations already made, shall be permissible; provided, however, that the Company shall make whole any participant who, for any Plan year, receives less than the proper allocation as a result of other participants receiving an uncorrected excess, so long as such under-allocation exceeds the applicable EPCRS deminimis standard and the cost of processing and delivering the corrected contribution does not exceed the participant's make-whole amount; and (vi) records of corrections and correction determinations made under this Section 8.02(j) shall be maintained by the Plan Administrator for so long as deemed necessary. The Plan Administrator shall have no power to add to, subtract from or modify any of the terms of the Plan, nor to change or add to any benefits provided by the Plan, nor to waive or fail to apply any requirements of eligibility for benefits under the Plan, except as expressly provided by appropriate delegation of any such powers by the Company. Section 8.03 Uniform Application of Rules. The Plan Administrator will apply all rules, regulations, procedures and decisions uniformly and consistently to all persons similarly situated. Any ruling, regulation, procedure or decision of the Plan Administrator which is not inconsistent with the provisions of the Plan or the Trust shall be conclusive and binding upon all persons affected by it. There shall be no appeal from any ruling by the Plan Administrator which is within its authority, except as provided in Section 8.04 below. When making a determination or a calculation, the Plan Administrator shall be entitled to rely on information supplied by the Employers, Trustee, investment managers, insurance institutions, accountants and other professionals, including legal counsel for the Company. - 48 - Section 8.04 Claims Procedure (a) Claims. If a claim for benefits by a Participant, any Beneficiary or other interested person (the "applicant") is denied, the Plan Administrator shall furnish the applicant within 90 days after receipt of such claim (or within 180 days after receipt if special circumstances require an extension of time) a written notice which specifies the reason for the denial, refers to the pertinent provisions of the Plan on which the denial is based, describes any additional material or information necessary for properly completing the claim and explains why such material or information is necessary, explains the claim review and appeal procedures of this Section 8.04, and includes a statement that the failure of the applicant to appeal the Plan Administrator's determination to the Plan Administrator in writing within 60 days after receiving it shall render the Plan Administrator's last determination final, binding and conclusive. (b) Appeals. If the applicant should appeal to the Plan Administrator, the applicant or his duly authorized representative must submit in writing all issues, facts, evidence and comments he/she, or his/her duly authorized representative, feels are pertinent. Such written materials on appeal must be received by the Plan Administrator within 60 days after the determination being appealed from was received by the applicant. The applicant, or his or her duly authorized representative, may review pertinent Plan documents and records in order to prepare an appeal. The Plan Administrator shall reexamine all facts, materials and issues related to the appeal and may consult with counsel regarding the appeal. The Plan Administrator shall then make a final determination as to whether the prior determination is justified under the circumstances. The Plan Administrator shall advise the applicant of its decision within sixty (60) days of receiving the applicant's complete written appeal, unless special circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day limit impractical. However, in no event shall the Plan Administrator render a decision on appeal later than one hundred twenty (120) days after its receipt of the complete appeal materials from the applicant. Section 8.05 Indemnity. To the extent permitted by applicable law and to the extent that they are not indemnified or saved harmless under any liability insurance contracts, any present or former Plan Administrator, Trustee (if an employee, officer or director of any Employer), and any other officers, directors or employees of the Employers or their subsidiaries or affiliates, if any, and each of them, shall be indemnified and saved harmless by the Company from and against any and all liabilities or allegations of liability to which they may be subjected by reason of any act done or omitted to be done in good faith in the operation of the Plan, including all expenses reasonably incurred in their defense in the event that the Company fails to provide such defense after having been requested in writing to do so. - 49 - ARTICLE IX.--AMENDMENT, TERMINATION OR PLAN MERGER Section 9.01 Amendment. The Company shall have the right at any time to amend any or all of the provisions of this Plan, in whole or in part, by written instrument adopted by its Board of Directors or that Board's designee, except as expressly set forth below: (a) No Reversionary Amendments. Except as expressly provided in Section 10.13 below, no amendment may result in, authorize or permit any part of the trust fund, the income from the trust fund or any Plan assets to be distributed to or for the benefit of anyone other than the participating Employees or former employees of the Employers and any other persons specifically entitled to benefits under the Plan. (b) No Benefit Reductions. No amendment may be adopted which will reduce any Participant's interest in his or her Accounts to an extent less than the interest that the Participant would have been entitled to if he or she had resigned from the employ of the Employers immediately prior to the date of such amendment. (c) No Increase in Plan Administrator Duties. No amendment may materially increase the duties of the Plan Administrator without its consent. Section 9.02 Plan Termination. The Plan will terminate as to all Employers as of any prospective date specified by the Company. Complete termination of the Plan must be authorized by action of the Company's Board of Directors. Upon a complete termination of the Plan, all Participants will become 100% vested in all their Accounts and the Plan Administrator will proceed to wind up the Plan and distribute all Participant Accounts with reasonable promptness after Internal Revenue Service approval of the Plan as tax-qualified through its termination. Upon a partial termination of the Plan (within the meaning of Section 411(d)(3) of the Code), all affected Participants will become 100% vested in all their Accounts but the Plan will continue to operate and only to the extent the partial termination constitutes a distributable event under Article V will any benefit payments be triggered to affected Participants as a result of that partial Plan termination. The Plan will terminate as to any single Employer on the first of the following dates: (a) Termination by the Employer. Any date that the Plan is terminated by the Employer, provided that advance written notice of such termination shall be given to the Company, the Plan Administrator and the Trustee. (b) Insolvency. Any date the Employer is judicially declared bankrupt or insolvent. (c) Discontinuance of Contributions. Any date the Employer completely discontinues its contributions under the Plan. (d) Changes in the Employer. Any date the Employer is dissolved, merged, consolidated or reorganized, or the date on which the assets of the Employer are completely or - 50 - substantially sold, unless arrangements have been made whereby the Plan will be continued by a successor to the Employer or purchaser of its assets under Section 9.03. Section 9.03 Continuation by a Successor or Purchaser. Notwithstanding Section 9.02(d), the Plan and the Trust shall not terminate as to an Employer in the event of dissolution, merger, consolidation or reorganization of the Employer, or sale by the Employer of its entire assets or substantially all of its assets, if arrangements are made in writing between the Employer and any successor to the Employer or purchaser of all or substantially all of its assets whereby such successor or purchaser shall be substituted for the Employer under the Plan. Section 9.04 Plan Merger or Consolidation. The Company may cause the Plan or the Trust, or both, to be merged or consolidated with, or may transfer the assets or liabilities under the Plan to, any other qualified plan or from any other qualified plan, provided that the documents and other arrangements regarding such merger, consolidation or transfer provide safeguards which would cause each Participant in the Plan, if the Plan terminated, to receive a benefit in the event of a Plan termination immediately after such merger, consolidation or transfer which is equal to or greater than the benefit the Participant would have been entitled to receive if the Plan had terminated immediately prior to such merger, consolidation or transfer. ARTICLE X.--MISCELLANEOUS PROVISIONS Section 10.01 No Employment Guarantee. Neither the establishment of the Plan nor any modification thereof, nor the creation of any fund or account, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against any Employer, the Plan Administrator or the Trustee. Under no circumstances shall the terms of employment of any Participant be modified or in any way affected hereby. The maintenance of this Plan shall not constitute a contract of employment and participation in the Plan will not give any Participant a right to be retained in the employ of the Employers. Section 10.02 Nonalienation of Plan Benefits. The rights or interests of any Participant or any Participant's Beneficiaries to any benefits or future payments hereunder shall not be subject to attachment or garnishment or other legal process by any creditor of any such Participant or Beneficiary, nor shall any such Participant or Beneficiary have any right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or rights which he may expect to receive, contingently or otherwise, under this Plan except as may be required by the tax withholding provisions of the Code or of a state's income tax act or pursuant to a Qualified Domestic Relations Order. - 51 - Section 10.03 Applicable Law. The Plan and the Trust shall be construed in accordance with the provisions of ERISA and other applicable federal laws. To the extent not inconsistent with such laws, the Plan and Trust shall be construed in accordance with the laws of the State of Illinois. Section 10.04 Participant Litigation. In any action or proceeding regarding the Plan assets or any property constituting a portion or all thereof or regarding the administration of the Plan, employees or former employees of the Employers or their Beneficiaries or any other persons having or claiming to have an interest in this Plan shall not be necessary parties and shall not be entitled to any notice or process. Any final judgment which is not appealed or appealable and may be entered in any such action or proceeding shall be binding and conclusive on the parties hereto and all persons having or claiming to have any interest in this Plan. To the extent permitted by law, if a legal action is begun against the Employers, the Plan Administrator or the Trustee by or on behalf of any person and such action results adversely to such person, or if a legal action arises because of conflicting claims to a Participant's or other person's benefits, the costs to the Employers, the Plan Administrator or the Trustee of defending the action will be charged to the sums, if any, which were involved in the action or were payable to the Participant or other person concerned. To the extent permitted by applicable law, acceptance of participation in this Plan shall constitute a release of the Employers, the Plan Administrator and the Trustee and their agents from any and all liability and obligation not involving willful misconduct or gross neglect. Section 10.05 Participant and Beneficiary Duties. Persons entitled to benefits under the Plan shall file with the Trustee from time to time such person's post office address and each change of post office address. Each such person entitled to benefits under the Plan also shall furnish the Plan Administrator with all appropriate documents, evidence, data or information which the Plan Administrator considers necessary or desirable in administering the Plan. Any document will be properly filed with the Plan Administrator if it is delivered or mailed by registered mail postage prepaid to the Plan Administrator in care of the Company. Section 10.06 Individual Account Statements. The Plan Administrator will deliver to each Participant an account balance statement on a quarterly basis. Section 10.07 Gender and Number. Words denoting the masculine gender shall include the feminine and neuter genders and the singular shall include the plural and the plural shall include the singular wherever required by the context. - 52 - Section 10.08 Adequacy of Evidence. Evidence which is required of anyone under the Plan shall be executed or presented by proper individuals or parties and may be in the form of certificates, affidavits, documents or other information which the Plan Administrator, the Trustee, the Employers or any other person acting on such evidence considers pertinent and reliable. Section 10.09 Notice to Participants and Beneficiaries. A notice mailed to a Participant or Beneficiary at his last address filed with the Plan Administrator in care of the Company will be binding on the Participant or Beneficiary for all purposes of the Plan. Section 10.10 Waiver of Notice. Any notice under the Plan may be waived by the person entitled to notice. Section 10.11 Successors. The Plan and the Trust will be binding on all persons entitled to benefits hereunder and their respective heirs and legal representatives, and on the Plan Administrator and the Trustee and their successors. Section 10.12 Severability. If any provision of the Plan shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect the remaining provisions of the Plan and the Plan shall be construed and enforced as if such illegal or invalid provisions had never been contained in the Plan. Section 10.13 Nonreversion. The Employers have no right, title or interest in the assets of the Plan or in the trust fund and no portion of the trust fund or the assets of the Plan or interest thereon shall at any time revert or be repaid to the Employers. However, notwithstanding the preceding sentence, the following Employer contributions or Participant contributions may be returned to the Employers or the Participant, as the case may be: (a) Limitation Reversions. The Employer contributions which cannot be credited to a Participant's account because of the limitations of Article III may be returned to the respective Employer. (b) Mistake of Fact Reversions. Employer contributions and Participant contributions which are made as a result of a mistake of fact may be returned to the Employer or the Participant making those contributions, provided that Employer contributions may only be repaid under this subsection within 12 months after the date the error is discovered by the Company. - 53 - (c) Adverse Determination Reversions. All Employer contributions are conditioned upon (i) qualification of the Plan and the Trust and (ii) being fully deductible. Upon failure of either condition, the Employer contributions so affected shall be refunded to the contributing Employer, but not later than one year after the Internal Revenue Service determines that the condition is not met. Section 10.14 Qualification of Plan and Trust. The Trust and this Plan taken together are intended to qualify under Section 401 of the Code, and the Trust is intended to qualify for tax exemption under Section 501(a) of the Code, or under any comparable provisions of any future legislation which may amend or supersede said provisions of the Code. Unless and until advised to the contrary the Plan Administrator, the Trustee, any investment managers and persons dealing with the Plan Administrator, the Trustee and any investment managers shall be entitled to assume that the Plan and the Trust are so qualified and tax exempt. ARTICLE XI.--TOP-HEAVY-PLAN RULES Section 11.01 Top-Heavy Plan. The Plan will be considered a "top-heavy Plan" for any Plan Year if as of the last day of the preceding Plan Year (but the last day of the initial Plan Year in the case of that Year) (the "determination date") the sum of (i) the aggregate of the Accounts of all Key Employees under the Plan and all other defined contribution plans in an aggregation group of plans as described in Section 11.02 below, and (ii) the present value of the aggregate cumulative accrued benefits for Key Employees under all defined benefit plans in an aggregation group of plans, exceeds sixty percent (60%) of such sum determined for all participants under all such plans, excluding participants who are former Key Employees. There shall be included in the determination of a Participant's accounts and accrued benefit under such plans any amounts distributed to the Participant during the preceding five year period. Notwithstanding the foregoing, if any individual has not received any compensation from the Employer (other than benefits under the Plan) at any time during the five-year period ending on the determination date, any account of such individual (and the accrued benefit for such individual) shall not be included for purposes of this Section. Furthermore, a rollover contribution initiated by a Participant and made to any plan in an aggregation group of plans shall not be taken into account for purposes of determining whether the plan is a top-heavy plan. Section 11.02 Aggregation Groups. All Employer plans in a required aggregation group of plans shall be considered to be top-heavy plans if either the required or permissive aggregation group of plans is determined to be top-heavy under Section 11.01 above. If the required or permissive aggregation group of plans is not a top-heavy group, no Employer plans in the group shall be considered to be top-heavy plans. A "required aggregation group of plans" shall include each Employer plan in which a Key Employee participates and any other Employer plan which enables any plan in which a Key Employee participates to meet the coverage and nondiscrimination requirements of Sections 401(a)(4) or 410 of the Internal Revenue Code. A "permissive aggregation group of - 54 - plans" shall include all plans in the required aggregation group plus any other Employer plans which satisfy the requirements of Sections 401(a)(4) and 410 of the Internal Revenue Code when considered together with the required aggregation group of plans. For purposes of determining aggregation groups, any Employer plans that terminated effective as of a date that is within five years prior to the determination date shall be included, along with all Employer plans in effect on the determination date, so that distributions from such terminated plans may be counted for purposes of the sixty percent (60%) calculation in Section 11.01 above. Section 11.03 Vesting. For any Plan Year for which the Plan is considered to be a top-heavy plan, the following vesting schedule shall replace any less generous vesting schedule then in effect under Section 5.04: Completed Years of Service to the Participant's Credit Vested Percentage -------------------- ----------------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100% Section 11.04 Minimum Contribution. For any Plan Year for which the Plan is considered to be a top-heavy plan, the following required minimum contribution rule will apply. The aggregate Employer contributions allocated to the Accounts of any and all Participants who are not Key Employees for that Plan Year shall equal at least the lesser of (i) three percent (3%) of such Participant's Testing Earnings or (ii) the largest aggregate Employer contributions (expressed as a percentage of Testing Earnings) allocated to the Accounts of any Participant who is a Key Employee for that Plan Year. The minimum contribution required under this Section shall be made and allocated regardless of whether the Participant has met any other Plan conditions for eligibility to share in such contributions for that Plan Year. Any extra contribution required under this Section for any Participant, beyond the Employer contributions (including profit sharing, salary reduction and matching contributions) already made on his or her behalf for the Plan Year, shall be made as additional profit sharing contributions and allocated as of the last day of the Plan Year for which the contribution is made. This Section shall be administered to comply with the minimum requirements of Code Section 416(c)(2) and regulations thereunder. ARTICLE XII.--DEFINITIONS Where the following words and phrases appear in this Plan they will have the meanings respectively set forth in this Article, unless the context clearly indicates to the contrary. - 55 - Section 12.01 Account(s). The bookkeeping account or accounts established and maintained pursuant to Article IV to record and reflect the interests of each respective Participant (and persons claiming under or through a Participant) in contribution allocations, investment experience and benefits under this Plan. Section 12.02 Annual Additions. With respect to any Plan Year, the total of the contributions and any forfeitures that become allocated to a Participant's Accounts for that year, excluding investment experience and rollover or transfer contributions. Annual Additions are used to apply annual limits on a Participant's allocations in accordance with Code Section 415(c) and Section 3.07 of the Plan. The inclusion of forfeitures among Annual Additions in this definition is intended to comply with the statutory definition in Code Section 415(c), but shall not be construed to require any different allocation or treatment of forfeitures under the Plan than is authorized by Sections 4.07(d) and 5.04(c) above. Section 12.03 Beneficiary. Any legal or natural person or persons designated by a Participant, or otherwise authorized under Articles V or VI, to receive any benefit that is payable under this Plan upon or after the Participant's death. Section 12.04 Board of Directors. The Board of Directors of the Company. Section 12.05 Break in Service Years. Any Plan Year in which the Employee completes fewer than 501 Hours of Service. Section 12.06 Code. The Internal Revenue Code of 1986, as amended from time to time. Section 12.07 Company. Playboy Enterprises, Inc., and any successor or assign which adopts, and continues the sponsorship of, the Plan either by action of its board of directors or by contractual undertaking. As Plan sponsor, the Company alone may amend or terminate the Plan and appoint Plan fiduciaries as provided in the Plan. Section 12.08 Compensation. Compensation is defined differently for different purposes under this Plan. "Eligible Earnings" is used as the measure of compensation for calculating Salary Reduction Contributions and allocating Matching Contributions made under Sections 3.02 and 3.03, respectively. "Profit - 56 - Sharing Earnings" is the measure of compensation used for allocating Profit Sharing Contributions and forfeitures under Section 4.07. "Testing Earnings" is the measure of compensation for purposes of applying the ADP and ACP tests, measuring top heavy contributions, and applying the limit on Annual Additions under Article III. Notwithstanding any other provisions of the Plan to the contrary the annual compensation taken into account under the Plan for any and all purposes for any Plan Year or other limitation year beginning on or after the Effective Date of this Plan restatement shall not exceed the $150,000 (indexed) limit in effect from year to year under Code Section 401(a)(17), as amended or indexed from time to time, and as adjusted by the Secretary of the Treasury at the same time and in the same manner as under Code Section 415(d), and any Amounts in excess of that applicable annual limit shall be disregarded for all purposes under the Plan. That Code Section 401(a)(7) annual compensation limit (the "$150,000 (indexed) limit") is $230,000 for the year 2008, and will increase to $245,000 for the year 2009. For purposes of applying this $150,000 (indexed) limit on annual compensation covered under the Plan, the annual compensation of any Participant taken into account under the Plan shall not exceed the OBRA `93 annual compensation limit. That limit as of January 1, 1994 was $150,000 and it is subject to adjustment by the Commissioner of the Internal Revenue Service for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost of living adjustment in effect for a calendar year applies to any period, not exceeding twelve (12) months, over which compensation is determined (the "determination period") beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the OBRA `93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period and the denominator of which is twelve (12). Any reference in this Plan to the Code Section 401(a)(17) limitation shall mean the OBRA `93 annual compensation limit set forth above. Section 12.09 Disability. A condition caused by bodily injury or disease which prevents the Participant form engaging in the occupation in which the Participant had been engaged, as determined exclusively in accordance with the standards for benefit eligibility under the Company's long-term disability plan as then in effect. For this purpose, any determination of the Participant's being (or not being) disabled for purposes of the Company's long-term disability plan shall be conclusive evidence of the Participant's disability (or lack thereof) for purposes of this Plan. Section 12.10 Early Retirement Age. With respect to a Participant, the date on which the Participant first satisfies both age and service conditions for early retirement under the Plan. Those conditions are the attainment of age fifty-five (55) and having not less than five (5) completed Years of Service to his or her credit. Section 12.11 Effective Date. The date as of which this restated Plan document takes effect, which is January 1, 2008. - 57 - Section 12.12 Eligible Earnings. The earnings paid by the Employers to or on behalf of the Participant for the Plan Year for personal services as an Employee, including salary and or wages, sick pay, bonuses, commissions, incentives and overtime pay, as well as any pre-tax salary deferrals elected by or made on behalf of the Participant to this Plan, to any cafeteria plan under Code Section 125, to any nonqualified deferred compensation plan maintained by any Employer, or to any other benefit or fringe benefit plan or program maintained by any Employer. Eligible Earnings also shall include pre-tax salary deferrals which are elected under a qualified transportation fringe benefit plan and consequently are not includible in the Employee's gross income by reason of Code Section 132(f)(4). The following items shall be excluded: (i) Tips; (ii) Noncash remuneration, including amounts (other than pre-tax salary deferrals described as included above) contributed by any Employer on behalf of the Participant under this Plan or any other retirement or benefit plan maintained by any Employer; (iii) Reimbursements for travel expenses, moving expenses, automobile allowances, meal allowances, relocation allowances, educational assistance and other special allowances and awards; (iv) Imputed income attributable to group term life insurance; (v) Employer gross-up payments intended to cover all or a portion of a Participant's income tax liability anticipated for various types of special income, such as disqualifying dispositions under a stock purchase plan, employee awards, and other irregular taxable events or items; (vi) Compensation payable for military service and for disabled Participants as described in Treasury Regulation Section 1.415(c)-2(e)(4); (vii) Any compensation payable to the Participant, or to any governmental body or agency on account of the Participant, under the term of any state, federal or foreign law requiring the payment of such compensation because of the Participant's voluntary or involuntary termination of employment with the Employers; (viii) Any compensation payable in other than Untied States source income (as determined under Code Section 861 and any applicable treaty between the United States and a foreign country), except that any such compensation payable from an Employer's domestic United States payroll with respect to a Participant's foreign service rendered on or after September 1, 2007 shall be included as Eligible Earnings to the extent it qualifies as a type of compensation otherwise includable as described above; and - 58 - (ix) Any benefits distributed to the Participant during the Plan Year pursuant to any nonqualified deferred compensation plan, program, contract or arrangement. Notwithstanding anything in the Plan to the contrary, effective for Plan Years commencing on or after January 1, 2008, Eligible Earnings shall include payments made to an Employee following his severance from employment (as defined in Section 401(k)(2)(B)(i)(l) of the Code) only if they constitute regular pay that satisfies Treas. Reg. ss. 1.415(c)-2(e)(3)(ii) or unused vacation time that satisfies Treas. Reg. ss. 1.415(c)-2(e)(3)(iii); and shall not include any amounts that are not permitted to be taken into account under Treas. Regs. ss. 1.401(k)-1(e)(8) and ss.1.415(c)-2(e). Section 12.13 Eligible Employee. Any Employee of an Employer that has adopted this Plan, except as follows: (i) An Employee who is a member of a bargaining unit whose employment is governed by a collective bargaining agreement between the Employee's bargaining representative and an Employer, and for whose bargaining unit retirement benefits were a subject of good faith bargaining, shall not be an Eligible Employee unless (A) such agreement specifically provides for the Employee's eligibility to participate in this Plan, or (B) the Employee was a member of the bargaining unit on December 2, 1985 and on or before that date the Employee had satisfied the Plan's age, service and employment conditions for participation; (ii) An employee who is employed by an Employer at a location outside the United States and its territories shall be an Eligible Employee on and after September 1, 2007 while on the Employer's United States payroll, but shall not be an Eligible Employee while on a foreign payroll; (iii) A Class X Employee (as defined in Section 12.14 below) shall be considered an Eligible Employee only upon completion of a Year of Service; (iv) Leased employees (as defined in Section 12.14 below) shall only be considered Eligible Employees to the extent their participation is required in order for the Plan to remain tax-qualified under Code Section 401(a) by complying with Code Section 410(b), but even in that event any leased employee who is covered by a money purchase pension plan maintained by the leasing organization shall not be considered an Employee for purposes of this Plan if: A) Leased employees constitute no more than 20% of the total workforce of all Employees, and B) Such money purchase pension plan provides for a nonintegrated employer contribution rate of at least 10% of compensation, provides for full and immediate vesting, and provides that all employees of the leasing organization (except those performing substantially all their services for the leasing organization) participate immediately as and to the extent necessary to satisfy the safe harbor in Code Section 414(n)(5); - 59 - (v) A nonresident alien who is not on any domestic United States payroll of any Employer shall not be considered an Employee and shall be excluded from eligibility to participate in this Plan while in such nonresident alien/foreign payroll status unless such individual already was a Participant as of September 30, 1996; and (vi) A limited time Employee (Class C) shall be considered an Eligible Employee only upon completion of a Year of Service. Section 12.14 Employee. Any common law employee of an Employer as well as any leased employee who is required to be treated as an employee for purposes of the Plan according to Code Section 414(n). In addition to leased employees, there are the following classes of Employees: Class A is full-time employees; Class B is part-time employees; Class C is limited time employees; and Class X is a special class of limited-time employees who are hourly-paid and serve as promotional representatives of the Company. A "leased employee" means any individual who provides services to an Employer, but not as a common law employee, where such services are provided pursuant to an agreement between the Employer and any other person or organization, the individual has performed such services for the Employer (or for a related person within the meaning of Section 144(a)(3) of the Code) on a substantially full-time basis for at least one year, and such services are performed under the primary direction or control of the Employer (or such related person). Any independent contractor who does not meet this definition shall not be considered an Employee for purposes of this Plan. Any individual who is classified by the Employer on its payroll records as either a leased employee or an independent contractor shall be excluded from eligibility to participate in the Plan except as provided in Section 2.13(iv) and below regardless of his or her age or Hours of Service. If such individual is later found to have been misclassified as a leased employee or independent contractor and is determined instead to be a common law employee of an Employer, this exclusion from participation shall continue to apply retroactively but shall cease, and such individual shall be considered an Employee under the Plan, prospectively from the date of such determination. Section 12.15 Employer(s). (a) Any corporation that is a member of a controlled group of corporations with the Company, as determined under Code Section 414(b); (b) Any trade or business, whether or not incorporated, that is under common control with the Company, as determined under Code Section 414(c); (c) Any trade or business that is a member of an affiliated service group of which the Company is also a member, as determined under Code Section 414(m); or (d) Any other entity required to be aggregated with the Company under Section 414(o) of the Code. - 60 - In addition, the Company shall be considered an Employer for purposes of Plan references to all Employers as a group, and any entity affiliated with the Company but not described above shall be included as an Employer if it adopts or assumes the Plan with the knowledge and consent of the Company. Any entity designated as an Employer under this Section shall not be considered an Employer for any period before the date such entity satisfied (or after the date such entity ceased to satisfy) the conditions for Employer status set forth above. The Employers maintain the Plan for the benefit of their eligible Employees and may contribute to the Plan; but shall not have any authority or responsibility for Plan design and selection of Plan fiduciaries as does the Company as Plan sponsor. Section 12.16 Entry Date. Entry Date shall mean the first day on which the Employee has met the eligibility conditions of Section 2.01. Section 12.17 ERISA. The Employee Retirement Income Security Act of 1974, a federal statute, as amended from time to time. Section 12.18 Highly Compensated Employee(s) Any Employee who: (i) Is a "5-percent owner" of the Employer, as defined in Code Section 416(i)(1), at any time during the current or immediately preceding Plan Year; or (ii) Received compensation, as defined in Code Section 415(c)(3), from the Employer in excess of $80,000 (as adjusted from time to time under Section 414(q)(1) of the Code) for that immediately preceding Plan Year. Such $80,000 figure has been increased to $105,000 for purposes of determining who is highly compensated for the 2008 Plan Year, and will increase to $110,000 for determinations applicable to the 2009 Plan Year. In addition, a former Employee shall be considered a Highly Compensated Employee for purposes of the Plan if the former Employee was a Highly Compensated Employee either when he separated from service with the Employer or at any time after attaining age 55. The determination of who is a Highly Compensated Employee for a particular year will be made in accordance with Section 414(q) of the Code and the regulations in effect under that statute from time to time. Section 12.19 Hours of Service. An Employee shall be credited with Hours of Service in accordance with the following rules: - 61 - (a) Hours Credited for Performance of Service. An Hour of Service shall be credited to an Employee for each hour for which the Employee is directly or indirectly paid or entitled to payment by the Company or any other Employer for the performance of duties (including periods for which backset is awarded by final judgment of an appropriate court or other appropriate body or for which backset is agreed to by the Employer). (b) Hours Credited Without Regard To Performance of Services. In addition to Hours of Service credited under subsection (a) above, an Hour of Service shall be credited to an Employee for each hour for which the Employee is directly or indirectly paid or entitled to payment by the Company or any other Employer for a period during which no duties are required to be performed (including such periods for which backpay is awarded by final judgment of an appropriate court or other appropriate body or for which backpay is agreed to by the Employer); except that no Hours of Service shall be credited for any severance pay or other special compensation (not including accrued vacation pay) received or payable to any former Employee with respect to any period after (or paid in connection with) the termination of his employment with the Company and all other Employers. (c) Authorized Leave of Absence. Regardless of the limits of subsection (b) above, for vesting purposes only Hours of Service shall be credited under this Section 12.19 for the entire period of an Employee's Authorized Leave of Absence from which he timely returns, whether paid or unpaid, as though the Employee were actively at work during such absence. The crediting of all Hours of Service for which an Employee on Authorized Leave of Absence would have been credited had the Employee worked during such Authorized Leave shall apply equally to any absence from work with any Employer by reason of the Employee's pregnancy, birth of a child of the Employee, placement of a child with the Employee in connection with the adoption of such child by the Employee, or for purposes of caring for the child immediately after its birth or placement for adoption (without regard to any 501 hour limit on crediting such maternity or paternity absence under applicable law or regulation), but in the case of such a maternity or paternity absence the deemed Hours of Service shall be credited: (i) only in the year in which the absence begins, if the Employee would be prevented from incurring a Break in Service in such year solely because the period of absence is treated as Hours of Service; or (ii) in any other case, in the immediately following year. (d) Compliance With Final Regulations. In addition to any other hours credited under subsections (a), (b) and (c) above, an Hour of Service shall be credited to an Employee for any additional hour which is required to be credited in accordance with appropriate final regulations of the United States Department of Labor interpreting the minimum participation standards of ERISA. For this purpose the rules for crediting hours of service set forth in Section 2530.200-2 of the Department of Labor regulations are hereby incorporated by reference. (e) Period For Which Hours Are Credited. Hours shall be credited for the periods to which such hours pertain rather than the periods during which payment for such hours is made or received, subject to the special rule for allocating hours credited for maternity or paternity absence in accordance with subsection (c) above. - 62 - (f) Non-duplication of Service. Hours required to be credited for more than one reason under this Section which pertain to the same period of time shall be credited only once. Section 12.20 Key Employee. Any Employee or former Employee shall be a "key employee" for any Plan Year if during such Plan Year or during any of the four preceding Plan Years the employee is: (i) an officer of an Employer having an annual compensation greater than 150 percent of the amount in effect under Section 415(c)(1)(A) of the Code for any such Plan Year, or (ii) one of the 10 employees of an Employer having annual compensation from an Employer of more than the limitation in effect under Section 415(c)(1)(A) of the Code and owning (or considered as owning within the meaning of Section 318 of the Code) the largest interests in the Employer, or (iii) any person who owns (or is considered as owning within the meaning of Section 318 of the Code) more than 5 percent of the outstanding stock of the Employer or stock possessing more than 5 percent of the total combined voting power of all the Employer's stock, or (iv) any person having annual compensation in excess of $150,000 who owns (or is considered as owning within the meaning of Section 318 of the Code) more than 1 percent of the outstanding stock of the Employer or stock possessing more than 1 percent of the total combined voting power of all the Employer's stock. For purposes of item (i) above, if the number of officers exceeds 50 then only the 50 officers with the highest compensation shall be considered Key Employees, and if the number of officers is less than 50 then the number of officers considered Key Employees shall not exceed the greater of three such officers or 10 percent of all employees. For purposes of items (iii) and (iv) above, Section 318(a)(2)(C) of the Code shall be applied by substituting "5 percent" for the reference to "50 percent" therein and the rules of Section 414(b), (c) and (m) of the Code shall not apply for determining ownership in the Employer. The Beneficiary of a Key Employee shall be considered a Key Employee. For purposes of this Section, references to an individual's annual compensation shall mean the individual's compensation as defined in Section 414(q)(7) of the Code, which consists of compensation as defined in Section 3.07(d) of the Plan but without regard to Code Sections 125, 402(a)(8), 402(h)(1)(B) and 403(b). Section 12.21 Non-Highly Compensated Employee(s). Any Employee whose Entry Date has passed during or prior to the Plan Year in question so that the Employee is eligible to participate in the Plan, regardless of whether the Employee has elected to make salary reduction contributions to the Plan, and who also is not a Highly Compensated Employee for the Plan Year in question. - 63 - Section 12.22 Normal Retirement Age. With respect to a Participant, the date on which the Participant attains age 60. A participant who is still employed by an Employer when he or she reaches Normal Retirement Age shall be 100% vested in all his or her Accounts under the Plan as of that date, regardless of his or her Years of Service. Section 12.23 Participant. Any Employee who has satisfied the requirements for eligibility to participate and reached his or her entry date under Section 2.01. That individual shall remain a Participant in the Plan until no balance is left in his or her Accounts either due to benefit distributions (including transfers and withdrawals) or forfeitures or a combination of the two. Section 12.24 Plan. The Playboy Enterprises, Inc. Employees Investment Savings Plan, a tax-qualified 401(k) and profit sharing plan, as set forth in this document and as in effect from time to time. Section 12.25 Plan Administrator. The Committee appointed to administer the Plan in accordance with Article VIII. That Committee is also the "named fiduciary" of the Plan for purposes of ERISA. Section 12.26 Plan Year. The calendar year, beginning on January 1 and ending on the next following December 31. The Plan Year is the fiscal year on which the Plan operates and is tested, as well as being the limitation year of the Plan for purposes of applying Code Section 415 limits. Section 12.27 Profit Sharing Earnings. The Participant's Eligible Earnings for the Plan Year, but excluding any pre-tax salary reduction amounts elected by the Participant and credited to the Participant's account for that period under any non-qualified deferred compensation plan maintained by any of the Employers. Section 12.28 Spouse. The lawful husband or wife of the Participant according to the laws of the Participant's state of residence. A surviving Spouse is the Participant's Spouse surviving at the time of the Participant's death. Surviving Spouse also may refer to a former Spouse of the Participant to the extent that a Qualified Domestic Relations Order requires that such former Spouse be treated as the Participant's surviving Spouse for purposes of determining survivor benefits upon the Participant's death. - 64 - Section 12.29 Testing Earnings. All W-2 income paid by any of the Employers to or on behalf of the Participant for the Plan Year under consideration, including sick pay, bonuses, commissions, incentives, overtime pay, gross-up amounts, severance pay and benefit distributions made during the Plan Year to the Participant pursuant to any nonqualified deferred compensation plan maintained by any Employer. Testing Earnings shall include any salary reduction amounts elected under this Plan, or under any other Section 401(k), Section 125 or other benefit or fringe benefit plan or program maintained by any Employer (whether or not reportable as W-2 income). Testing Earnings also shall include salary reduction amounts which are elected under a qualified transportation fringe benefit plan and consequently are not includible in the Employee's gross income by reason of Code Section 132(f)(4). Testing Earnings shall include any portion of Eligible Earnings payable to an Employee from an Employer's domestic U.S. payroll for any periods of service on or after September 1, 2007 regardless of whether such Eligible Earnings are reportable as W-2 income. Testing Earnings shall not include: (i) Any Employer contributions (other than salary reduction amounts) made for or with respect to the applicable Plan Year period on behalf of the Participant under this Plan or any other retirement or nonqualified deferred compensation plan maintained by any Employer; (ii) Any Participant contributions made for or with respect to the applicable Plan Year period under any such nonqualified deferred compensation plan to the extent that such contributions are not includible in the Participant's gross taxable income for federal income tax purposes for the Participant's taxable year in which the contribution is made; (iii) Any income in excess of the $150,000 (indexed) limit on annual covered compensation for the applicable Plan Year (such limit being $230,000 for the year 2008 and $245,000 for the year 2009), as described in Section 12.08 above; and (iv) California Regulation 15 transportation and parking expense reimbursements. Section 12.30 Trust. The trust fund established and maintained pursuant to a trust agreement between the Company and any trustee appointed from time to time by the Company in accordance with Article IV. The trust fund shall be the sole recipient of contributions made under the Plan and the sole funding source for benefit payments from the Plan. Section 12.31 Trustee. The fiduciary appointed from time to time by the Company pursuant to Article IV, having the authority and responsibility to manage the Plan's assets in the trust in accordance with the trust agreement. - 65 - Section 12.32 Year of Service. A twelve consecutive month period ending on an anniversary date of the Employee's most recent date of hire with an Employer during which the Employee completes at least 1,000 Hours of Service. Years of Service are measured and counted primarily for purposes of eligibility to participate in the Plan, eligibility to share in allocations of profit sharing contributions and vesting (including avoiding Break in Service Years) and for any other purpose specified in the Plan. For purposes of eligibility to participate in the Plan and vesting, an Employee's Years of Service are measured from the date of hire and anniversaries thereof as provided above. However, for purposes of eligibility to share in profit sharing contributions the Company's fiscal year shall be the twelve-month measuring period, as provided in Section 4.07(c). IN WITNESS WHEREOF, Playboy Enterprises, Inc. has caused this Plan restatement, having been first duly adopted, to be signed by a duly authorized officer this 23rd day of January, 2009. PLAYBOY ENTERPRISES, INC. By: /s/ Robert D. Campbell ---------------------------------------- Its: SVP, Treasurer & Strategic Planning ---------------------------------------- - 66 - EX-10.25(C) 10 d76389_ex1025-c.txt 1ST AMENDMENT TO SECOND AMENDED AND RESTATED 1997 EQUITY PLAN Exhibit 10.25(c) FIRST AMENDMENT TO THE SECOND AMENDED AND RESTATED 1997 EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS OF PLAYBOY ENTERPRISES, INC. (As Amended and Restated as of September 17, 2008) Cessation of Future Deferrals of Cash and Equity Awards as of January 1, 2009 WHEREAS, Playboy Enterprises, Inc. (the "Company") maintains the Second Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc. (the "Plan") for the benefit of its members of the Board of Directors of the Company who are not employees of the Company (the "Non-Employee Directors"); WHEREAS, Section 14(a) of the Plan provides that the Board of Directors of Playboy Enterprises, Inc. (the "Board") may alter, amend or modify the Plan from time to time; and WHEREAS, effective January 1, 2009, the Board deems it desirable and appropriate to cease the ability of Non-Employee Directors to defer any awards or amounts received by such Non-Employee Director under this Plan into the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan (Amended and Restated as of January 1, 2005). NOW THEREFORE, the First Amendment to the Second Amended and Restated 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc. is hereby amended effective as of January 1, 2009, in the following particulars: 1. By deleting the last sentence of paragraph (a) of Section 6 of the Plan and substituting the following two new sentences as a part thereof: "Anything in this Section 6 to the contrary notwithstanding, any Mandatory Meeting Fee Shares that become subject to deferral under the Deferred Compensation Plan shall be issued in such form (including book-entry form), at such times and with such rights and restrictions as shall be specified in the Deferred Compensation Plan; provided, however, notwithstanding anything to the contrary, effective January 1, 2009, no new Mandatory Meeting Fee Shares may be deferred into the Deferred Compensation Plan on or after January 1, 2009. On and after January 1, 2009, all Mandatory Meeting Fee Shares shall be paid by the respective Issuance Date." 2. By deleting the last sentence of paragraph (b) of Section 6 of the Plan and substituting the following two new sentences as a part thereof: "Anything in this Section 6 to the contrary notwithstanding, any Mandatory Committee Fee Shares that become subject to deferral under the Deferred Compensation Plan shall be issued in such form (including book-entry form), at such times and with such rights and restrictions as shall be specified in the Deferred Compensation Plan; provided, however, notwithstanding anything to the contrary, effective January 1, 2009, no new Mandatory Committee Fee Shares may be deferred into the Deferred Compensation Plan on or after January 1, 2009. On and after January 1, 2009, all Mandatory Committee Fee Shares shall be paid by the respective Issuance Date." 3. By deleting the last sentence of paragraph (c) of Section 6 of the Plan and substituting the following two new sentences as a part thereof: "Anything in this Section 6 to the contrary notwithstanding, any Mandatory Retainer Shares that become subject to deferral under the Deferred Compensation Plan shall be issued in such form (including book-entry form), at such times and with such rights and restrictions as shall be specified in the Deferred Compensation Plan; provided, however, notwithstanding anything to the contrary, effective January 1, 2009, no new Mandatory Retainer Shares may be deferred into the Deferred Compensation Plan on or after January 1, 2009. On and after January 1, 2009, all Mandatory Retainer Shares shall be paid by the respective Issuance Date." 4. By deleting the last sentence of paragraph (b) of Section 7 of the Plan and substituting the following two new sentences as a part thereof: "Anything in this Section 7 to the contrary notwithstanding, any Voluntary Shares that become subject to deferral under the Deferred Compensation Plan shall be issued in such form (including book-entry form), at such times and with such rights and restrictions as shall be specified in the Deferred Compensation Plan; provided, however, notwithstanding anything to the contrary, effective January 1, 2009, no new Voluntary Shares may be deferred into the Deferred Compensation Plan on or after January 1, 2009. On and after January 1, 2009, all Voluntary Shares shall be paid by the respective Issuance Date." IN WITNESS WHEREOF, the following officer who is designated the authority to execute this First Amendment hereby affix his signature as of this 10th day of December 2008. PLAYBOY ENTERPRISES, INC. /s/ Robert D. Campbell --------------------------- 2 EX-10.27(A) 11 d76389_ex1027-a.txt AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10.27(a) AMENDED AND RESTATED SEVERANCE AGREEMENT THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (this "Agreement"), dated as of September 1, 2008, is by and between Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and ____________, (the "Executive") and is, effective as of January 1, 2008, hereby amending, restating and superseding that prior Severance Agreement between the parties dated November 29, 2001, for compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). WITNESSETH: WHEREAS, the Executive is a senior executive or key employee of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly-held companies, the possibility of a Change in Control exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives and other key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a Committee thereof. (b) "Change in Control" means any of the following occurrences during the Term: (i) Hugh M. Hefner directly or as beneficial owner and Christie Hefner cease collectively to hold over 50% of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); or (ii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), a sale, exchange or other disposition of PLAYBOY Magazine; or (iii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), the liquidation or dissolution of the Company; or (iv) the Company is merged, consolidated or reorganized into or with another corporation or other legal person; provided, however, that no such merger, consolidation or reorganization will constitute a Change in Control if the merger, consolidation or reorganization is initiated by the Company and as a result of such merger, consolidation or reorganization not less than a majority of the combined voting power of the then-outstanding securities of the surviving, resulting or ultimate parent corporation, as the case may be, immediately after such transaction is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such transaction; or (v) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person; provided, however, that no such sale or transfer will constitute a Change in Control if the sale or transfer is initiated by the Company and as a result of such sale or transfer not less than a majority of the combined voting power of the then-outstanding securities of such corporation or other legal person, as the case may be, immediately after such sale or transfer is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such sale or transfer; or (vi) an equity or other investment in the Company, the result of which is that Christie Hefner ceases to serve as the Company's Chief Executive Officer or relinquishes upon request or is divested of any of the following responsibilities: (A) functioning as the person primarily responsible for establishing policy and direction for the Company; or (B) being the person to whom the senior executives of the Company report; or (vii) the adoption by the Board of a resolution that, for purposes of this Agreement, a Change in Control has occurred. For purposes of Section 1(b)(i), any Voting Stock beneficially owned (as such term is defined under Rule 13d-3 or any successor rule or regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by the Hugh M. Hefner Foundation shall be deemed to be held by Christie Hefner if and so long as she has sole voting power with respect to such Voting Stock. 2 (c) "Cause" means that, prior to any termination pursuant to Section 3(b) hereof, the Executive shall have: (i) been convicted of a criminal violation involving dishonesty, fraud or breach of trust; or (ii) willfully engaged in misconduct in the performance of Executive's duties that materially injures the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"). (d) "Disability" means a condition whereby the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Executive's employer. (e) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, executive protection, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are provided thereunder immediately prior to a Change in Control. (f) "Incentive Pay" means bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits provided thereunder immediately prior to a Change In Control. (g) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: 3 (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (iii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (h) "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse upon the occurrence of a Change in Control or, if earlier: (i) with respect to a Potential Change in Control occurring pursuant to Section l(f)(i), immediately upon the abandonment or termination of the applicable agreement; (ii) with respect to a Potential Change in Control occurring pursuant to Section l(f)(ii), immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control; or (iii) with respect to a Potential Change in Control occurring pursuant to Section l(f)(iii), upon the one year anniversary of the occurrence of a Potential Change in Control (or such earlier date as may be determined by the Board). (i) "Severance Period" means the period of time commencing on the date of each occurrence of a Change in Control and continuing until the earliest of: (i) eighteen months following the occurrence of the Change in Control; or (ii) the Executive's death; provided, however, that commencing on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional eighteen months unless, not later than 120 calendar days prior to such date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (j) "Term" means the period commencing as of the date hereof and expiring as of the later of: (i) the close of business on December 31, 2008; or (ii) the expiration of the Severance Period; provided, however, that the term of this Agreement will automatically be extended each year for an additional year unless, not later than September 30 of the immediately preceding year, 4 the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended. Notwithstanding the foregoing, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company or any Subsidiary, thereupon without further action, the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(i), the Executive shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (k) "Targeted Bonus" shall mean the targeted bonus for Executive's position as set forth in the Company's Executive Incentive Compensation Plan ("EICP") established for the then applicable fiscal year, which shall be equal to fifty percent (50%) times the maximum amount which Executive could earn under the EICP with respect to established quantifiable and objective financial goals. 2. Operation of Agreement: This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement, to the contrary notwithstanding, will not be operative unless and until a Change in Control occurs, whereupon without further action this Agreement shall become immediately operative. 3. Termination Following a Change in Control: (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall not be entitled to the benefits provided by Section 4 only upon the occurrence of one or more of the following events: (i) The Executive's death; (ii) The Executive's Disability; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following "Good Reason" events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment) which occur without the Executive's consent: (i) the Executive is not elected to, or is removed from, any elected office of the Company and/or Subsidiary, as the case may be, which the Executive held immediately prior to the Change of Control; or 5 (ii) the Executive is not re-nominated by the Board as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; or (iii) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position, authority, duties or responsibilities which the Executive held immediately prior to the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iv) any failure by the Company to comply with any of the provisions of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (v) a material reduction in the aggregate of the Executive's Base Pay and Incentive Pay payable to the Executive by the Company and any Subsidiary; or (vi) the failure of a successor/tranferee organization to assume all duties and obligations of the Company under this Agreement pursuant to Section 10(a) following the liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, and where the Executive has no employee/employer relationship with such successor/transferee organization following the Change of Control; or (vii) The Company or any of its Subsidiaries requires the Executive regularly to perform Executive's duties of employment beyond a materially different geographic radius from the location of Executive's employment immediately prior to the Change in Control or requires the Executive to travel away from Executive's office in the course of discharging Executive's responsibilities or duties hereunder at least 50% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change of Control. (c) A termination by the Company pursuant to Section 3(a) or 3(d) or by the Executive pursuant to Section 3(b) or 3(d) will not affect any rights or benefits which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits (an "Other Arrangement"), which rights and benefits shall be governed by the terms thereof, including, without limitation, rights to payments under the Company's bonus and incentive plans for prior fiscal years which have been earned but not yet paid to Executive. Notwithstanding the foregoing, if the Executive has any rights to severance compensation upon termination of employment under any employment agreement Executive may have with the Company or any Other Arrangement, such rights shall, during the Severance Period, be completely superseded by this Agreement; for the 6 avoidance of doubt, Executive can only receive severance compensation under this Agreement or under the Other Arrangement, not both. (d) For purposes of this Agreement, a termination of Executive's employment during a Potential Change in Control Period: ( (i) by the Company other than pursuant to the events described in Section 3(a)(i), 3(a)(ii) or 3(a)(iii); or (ii) by Executive following the occurrence of one of the events described in Section 3(b)(i) through (vii), shall be deemed to be a termination of Executive's employment during the Severance Period entitling Executive to benefits provided by Section 4. 4. Severance Compensation: (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates Executive's employment pursuant to Section 3(b), the Company will pay to the Executive the following: (i) an amount (the "Severance Payment") equal to three times the sum of: (A) Base Pay, plus (B) the greater of: (I) the average actual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs such Change in Control (or, such lesser number of years during which the Executive was employed by the Company and annualized in the case of any such bonus paid in respect of a portion of a fiscal year); and (II) the Targeted Bonus (determined in accordance with Section 1(j) of this Agreement (the greater of Subclause (I) and Subclause (II) being hereinafter referred to as the "Highest Bonus"); such Severance Payment, as permitted pursuant to Treasury Regulation Section 1.409A-1(b)(9)(iii), shall be payable in three payments as follows: (1) an amount equal to the lesser of: (a) fifty percent (50%) of the Executive's annual Base Pay as of his date of termination; or 7 (b) two (2) times the compensation limit of Code Section 401(a)(17) (i.e., $460,000 for 2008) shall be paid to Executive equally over the number of pay periods between the Executive's date of termination and the seventh month anniversary of the Executive's date of termination; and (2) an amount, if any, equal to the Executive's annual Base Pay as of the Executive's date of termination reduced by the amount paid to the Executive under Item (1) immediately above will be paid equally over the number of pay periods between the Executive's seventh month anniversary of his date of termination and the 12 month anniversary of his date of termination; and (3) the remainder, if any, which is an amount equal to the Severance Payment reduced by the amount paid to Executive under Items (1) and (2) immediately above, shall be paid to Executive in a lump sum no later than the seventh month anniversary of his date of termination; (ii) for 36 months following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) no less favorable than those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, including benefits provided under the Company's Executive Protection Plan. If and to the extent that any benefit described in this Section 4(a)(ii) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, or Executive's dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purpose or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period. Such welfare benefits shall be provided and paid for the Executive per regular payroll period of the Company commencing with the first payroll period following the Executive's termination of employment and continuing for 36 month thereafter. Medical expenses (as defined in Code Section 213(d)) paid pursuant to this subparagraph (ii) are intended to be exempt from Code Section 409A to the extent permitted under Treasury Regulation ss.ss.1.409A-1(b)(9)(v)(B) and -3(i)(1)(iv)(B). However, to the extent any welfare benefits provided pursuant to this subparagraph (ii) do not qualify for exemption under Code Section 409A, the Company shall provide Executive with a lump sum payment in an amount equal to the number of months of coverage to which he is entitled times the then applicable premium for the relevant benefit plan in which Executive participated. Such lump sum amount will be paid during the second month following the month in which such coverage expires. 8 (iii) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of: (A) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Termination Date under any such plan and which, as of the Termination Date, is contingent only upon the continued employment of the Executive to a subsequent date; and (B) the product of the Highest Bonus and a fraction, the numerator of which is the number of days in the fiscal year in which the Termination Date occurs prior to the Termination Date and the denominator of which is 365. Such amount shall be paid to the Executive in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of termination under this Section 4(a). (iv) Notwithstanding the terms or conditions of any awards relating to a grant of restricted shares, all restricted shares which are not vested as of the Termination Date shall become fully vested. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position. The Executive shall commence the outplacement services no later than sixty (60) days following his termination date under this Section 4(a), but in no event shall such services be provided beyond December 31 of the second year following the year of termination or, if earlier, the first acceptance by the Executive of an offer of employment.. (b) There will be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement, except as expressly provided in Section 4(a)(ii). (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at the prime rate in effect at the First National Bank of Chicago. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 4 and under Sections 6 and 7 will survive any termination or expiration of this Agreement following a Change in Control or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult and may be impossible: 9 (a) for the Executive to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise reduce any payments or benefits to be provided to Executive hereunder, except as expressly provided in Section 4(a)(ii). 6. Certain Additional Payments by the Company: (a) In the event that this Agreement becomes operative and it is determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding anything to the contrary, any Gross-Up Payment pursuant to this Section 6(a) shall be paid no later than December 31 of the year following the year in which the Executive pays the applicable Excise Tax, and, if the Executive is a `specified employee', as defined and applied in Code Section 409A as of the termination date, no earlier than the first day of the seventh month following such date. (b) Subject to the provisions of Section 6(f) below, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by a nationally recognized firm of certified public accountants (the "Accounting Firm") selected by Executive in Executive's sole discretion. Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of the Change in Control or the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive 10 shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Termination Date (or if there is no Termination Date, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company will pay the required Gross-Up Payment to Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Excise Tax is payable by Executive, it will, at the same time as it makes such determination, furnish Executive with an opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal, state, local income or other tax return. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment will be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6(f) below and Executive thereafter is required to make a payment of any Excise Tax, Executive will direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment will be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive will each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 6(b) above. (d) The federal, state and local income or other tax returns filed by Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive will make proper payment of the amount of any Excise Tax. If prior to the filing of Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Executive will within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(b) and (d) above will be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company will reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of Executive's payment thereof. 11 (f) Executive will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification will be given as promptly as practicable, but no later than 10 business days after Executive actually receives notice of such claim, and Executive will further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Executive). Executive will not pay such claim prior to the earlier of: (i) the expiration of the 30-calendar-day period following the date on which Executive gives such notice to the Company; and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will: (A) provide the Company with any written records or documents in Executive's possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company will reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6(f), the Company will control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided that Executive may participate therein at Executive's own cost and expense) and may, at its option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs Executive to pay the tax claimed and sue for a refund, the Company will advance the amount of such payment to Executive on an 12 interest-free basis and will indemnify and hold Executive harmless, on an after-tax basis, from any excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, Executive receives any refund with respect to such claim, Executive will (subject to the Company's complying with the requirements of Section 6(f) above) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, a determination is made that Executive will not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial or refund prior to the expiration of 30-calendar-days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid pursuant to this Section 6. 7. Legal Fees and Expenses: If it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void, invalid or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company will pay and be solely financially responsible for Executive's out-of-pocket expenses, including reasonable attorneys' fees and expenses, incurred by the Executive in connection with any of the foregoing; provided, however, in the case of any such litigation or other action or proceeding in which the Company or any of its affiliates and Executive are adverse parties, the Company shall not pay or be responsible for any such expenses if the Company or any of its affiliates prevails against the Executive. 8. Employment Rights; Termination Prior to Change in Control: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. 13 9. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 10. Successors and Binding Agreement: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b) hereof. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, garnishment, creation of a security interest, claims for alimony, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices: For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 12. Dispute Resolutions: Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided, however, 14 that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 13. Governing Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 14. Validity: If a ny provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. Miscellaneous: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which is not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. Effective as of the date hereof, this Agreement supersedes and replaces the prior Severance Agreement entered into between the Executive and the Company. 16. Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. PLAYBOY ENTERPRISES, INC., By: ----------------------------------------- Title: -------------------------------------- ACCEPTED and AGREED to: - ------------------------------ Alex Vaickus 15 EX-10.27(B) 12 d76389_ex1027-b.txt AMENDED AND RESTATED SEVERANCE AGREEMENT Exhibit 10.27(b) AMENDED AND RESTATED SEVERANCE AGREEMENT THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (this "Agreement"), dated as of September 1, 2008, is by and between Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and ____________, (the "Executive") and is, effective as of January 1, 2008, hereby amending, restating and superseding that prior Severance Agreement between the parties dated November 29, 2001, for compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). WITNESSETH: WHEREAS, the Executive is a senior executive or key employee of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly-held companies, the possibility of a Change in Control exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives and other key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a Committee thereof. (b) "Change in Control" means any of the following occurrences during the Term: (i) Hugh M. Hefner directly or as beneficial owner and Christie Hefner cease collectively to hold over 50% of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); or (ii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), a sale, exchange or other disposition of PLAYBOY Magazine; or (iii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), the liquidation or dissolution of the Company; or (iv) the Company is merged, consolidated or reorganized into or with another corporation or other legal person; provided, however, that no such merger, consolidation or reorganization will constitute a Change in Control if the merger, consolidation or reorganization is initiated by the Company and as a result of such merger, consolidation or reorganization not less than a majority of the combined voting power of the then-outstanding securities of the surviving, resulting or ultimate parent corporation, as the case may be, immediately after such transaction is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such transaction; or (v) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person; provided, however, that no such sale or transfer will constitute a Change in Control if the sale or transfer is initiated by the Company and as a result of such sale or transfer not less than a majority of the combined voting power of the then-outstanding securities of such corporation or other legal person, as the case may be, immediately after such sale or transfer is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such sale or transfer; or (vi) an equity or other investment in the Company, the result of which is that Christie Hefner ceases to serve as the Company's Chief Executive Officer or relinquishes upon request or is divested of any of the following responsibilities: (A) functioning as the person primarily responsible for establishing policy and direction for the Company; or (B) being the person to whom the senior executives of the Company report; or (vii) the adoption by the Board of a resolution that, for purposes of this Agreement, a Change in Control has occurred. For purposes of Section 1(b)(i), any Voting Stock beneficially owned (as such term is defined under Rule 13d-3 or any successor rule or regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by the Hugh M. Hefner Foundation shall be deemed to be held by Christie Hefner if and so long as she has sole voting power with respect to such Voting Stock. 2 (c) "Cause" means that, prior to any termination pursuant to Section 3(b) hereof, the Executive shall have: (i) been convicted of a criminal violation involving dishonesty, fraud or breach of trust; or (ii) willfully engaged in misconduct in the performance of Executive's duties that materially injures the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"). (d) "Disability" means a condition whereby the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Executive's employer. (e) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, executive protection, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are provided thereunder immediately prior to a Change in Control. (f) "Incentive Pay" means bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits provided thereunder immediately prior to a Change In Control. (g) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: 3 (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (iii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (h) "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse upon the occurrence of a Change in Control or, if earlier: (i) with respect to a Potential Change in Control occurring pursuant to Section l(f)(i), immediately upon the abandonment or termination of the applicable agreement; (ii) with respect to a Potential Change in Control occurring pursuant to Section l(f)(ii), immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control; or (iii) with respect to a Potential Change in Control occurring pursuant to Section l(f)(iii), upon the one year anniversary of the occurrence of a Potential Change in Control (or such earlier date as may be determined by the Board). (i) "Severance Period" means the period of time commencing on the date of each occurrence of a Change in Control and continuing until the earliest of: (i) eighteen months following the occurrence of the Change in Control; or (ii) the Executive's death; provided, however, that commencing on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional eighteen months unless, not later than 120 calendar days prior to such date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (j) "Term" means the period commencing as of the date hereof and expiring as of the later of: (i) the close of business on December 31, 2008; or (ii) the expiration of the Severance Period; provided, however, that the term of this Agreement will automatically be extended each year for an additional year unless, not later than September 30 of the immediately preceding year, 4 the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended. Notwithstanding the foregoing, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company or any Subsidiary, thereupon without further action, the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(i), the Executive shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (k) "Targeted Bonus" shall mean the targeted bonus for Executive's position as set forth in the Company's Executive Incentive Compensation Plan ("EICP") established for the then applicable fiscal year, which shall be equal to fifty percent (50%) times the maximum amount which Executive could earn under the EICP with respect to established quantifiable and objective financial goals. 2. Operation of Agreement: This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement, to the contrary notwithstanding, will not be operative unless and until a Change in Control occurs, whereupon without further action this Agreement shall become immediately operative. 3. Termination Following a Change in Control: (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall not be entitled to the benefits provided by Section 4 only upon the occurrence of one or more of the following events: (i) The Executive's death; (ii) The Executive's Disability; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof. (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following "Good Reason" events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination exists or has occurred, including without limitation other employment) which occur without the Executive's consent: (i) the Executive is not elected to, or is removed from, any elected office of the Company and/or Subsidiary, as the case may be, which the Executive held immediately prior to the Change of Control; or 5 (ii) the Executive is not re-nominated by the Board as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; or (iii) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position, authority, duties or responsibilities which the Executive held immediately prior to the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iv) any failure by the Company to comply with any of the provisions of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (v) a material reduction in the aggregate of the Executive's Base Pay and Incentive Pay payable to the Executive by the Company and any Subsidiary; or (vi) the failure of a successor/tranferee organization to assume all duties and obligations of the Company under this Agreement pursuant to Section 10(a) following the liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, and where the Executive has no employee/employer relationship with such successor/transferee organization following the Change of Control; or (vii) The Company or any of its Subsidiaries requires the Executive regularly to perform Executive's duties of employment beyond a materially different geographic radius from the location of Executive's employment immediately prior to the Change in Control or requires the Executive to travel away from Executive's office in the course of discharging Executive's responsibilities or duties hereunder at least 50% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change of Control. (c) A termination by the Company pursuant to Section 3(a) or 3(d) or by the Executive pursuant to Section 3(b) or 3(d) will not affect any rights or benefits which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of the Company providing Employee Benefits (an "Other Arrangement"), which rights and benefits shall be governed by the terms thereof, including, without limitation, rights to payments under the Company's bonus and incentive plans for prior fiscal years which have been earned but not yet paid to Executive. Notwithstanding the foregoing, if the Executive has any rights to severance compensation upon termination of employment under any employment agreement Executive may have with the Company or any Other Arrangement, such rights shall, during the Severance Period, be completely superseded by this Agreement; for the 6 avoidance of doubt, Executive can only receive severance compensation under this Agreement or under the Other Arrangement, not both. (d) For purposes of this Agreement, a termination of Executive's employment during a Potential Change in Control Period: ( (i) by the Company other than pursuant to the events described in Section 3(a)(i), 3(a)(ii) or 3(a)(iii); or (ii) by Executive following the occurrence of one of the events described in Section 3(b)(i) through (vii), shall be deemed to be a termination of Executive's employment during the Severance Period entitling Executive to benefits provided by Section 4. 4. Severance Compensation: (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates Executive's employment pursuant to Section 3(b), the Company will pay to the Executive the following: (i) an amount (the "Severance Payment") equal to three times the sum of: (A) Base Pay, plus (B) the greater of: (I) the average actual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs such Change in Control (or, such lesser number of years during which the Executive was employed by the Company and annualized in the case of any such bonus paid in respect of a portion of a fiscal year); and (II) the Targeted Bonus (determined in accordance with Section 1(j) of this Agreement (the greater of Subclause (I) and Subclause (II) being hereinafter referred to as the "Highest Bonus"); such Severance Payment, as permitted pursuant to Treasury Regulation Section 1.409A-1(b)(9)(iii), shall be payable in three payments as follows: (1) an amount equal to the lesser of: (a) one (1) times the Executive's annual Base Pay as of his date of termination; or 7 (b) two (2) times the compensation limit of Code Section 401(a)(17) (i.e., $460,000 for 2008) shall be paid to Executive in a lump sum payment no later than ten (10) days following the Executive's date of termination; and (2) the remainder, which is an amount equal to the Severance Payment reduced by the amount paid to Executive under Item (1) immediately above, shall be paid to Executive in a lump sum no later than the seventh month anniversary of her date of termination; and (ii) for 36 months following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) no less favorable than those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, including benefits provided under the Company's Executive Protection Plan. If and to the extent that any benefit described in this Section 4(a)(ii) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, or Executive's dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purpose or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period. Such welfare benefits shall be provided and paid for the Executive per regular payroll period of the Company commencing with the first payroll period following the Executive's termination of employment and continuing for 36 month thereafter. Medical expenses (as defined in Code Section 213(d)) paid pursuant to this subparagraph (ii) are intended to be exempt from Code Section 409A to the extent permitted under Treasury Regulation ss.ss.1.409A-1(b)(9)(v)(B) and -3(i)(1)(iv)(B). However, to the extent any welfare benefits provided pursuant to this subparagraph (ii) do not qualify for exemption under Code Section 409A, the Company shall provide Executive with a lump sum payment in an amount equal to the number of months of coverage to which he is entitled times the then applicable premium for the relevant benefit plan in which Executive participated. Such lump sum amount will be paid during the second month following the month in which such coverage expires. (iii) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of: (A) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Termination Date under any such plan and which, as of the Termination Date, is contingent only upon the continued employment of the Executive to a subsequent date; and 8 (B) the product of the Highest Bonus and a fraction, the numerator of which is the number of days in the fiscal year in which the Termination Date occurs prior to the Termination Date and the denominator of which is 365. Such amount shall be paid to the Executive in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of termination under this Section 4(a). (iv) Notwithstanding the terms or conditions of any awards relating to a grant of restricted shares, all restricted shares which are not vested as of the Termination Date shall become fully vested. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position. The Executive shall commence the outplacement services no later than sixty (60) days following his termination date under this Section 4(a), but in no event shall such services be provided beyond December 31 of the second year following the year of termination or, if earlier, the first acceptance by the Executive of an offer of employment.. (b) There will be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement, except as expressly provided in Section 4(a)(ii). (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at the prime rate in effect at the First National Bank of Chicago. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 4 and under Sections 6 and 7 will survive any termination or expiration of this Agreement following a Change in Control or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult and may be impossible: (a) for the Executive to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be reasonable and will be liquidated damages, and the Executive will not be required to mitigate the 9 amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise reduce any payments or benefits to be provided to Executive hereunder, except as expressly provided in Section 4(a)(ii). 6. Certain Additional Payments by the Company: (a) In the event that this Agreement becomes operative and it is determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding anything to the contrary, any Gross-Up Payment pursuant to this Section 6(a) shall be paid no later than December 31 of the year following the year in which the Executive pays the applicable Excise Tax, and, if the Executive is a `specified employee', as defined and applied in Code Section 409A as of the termination date, no earlier than the first day of the seventh month following such date. (b) Subject to the provisions of Section 6(f) below, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by a nationally recognized firm of certified public accountants (the "Accounting Firm") selected by Executive in Executive's sole discretion. Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of the Change in Control or the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Termination Date (or if there is no Termination Date, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company will pay the required Gross-Up Payment to Executive within five business days after receipt of such determination and calculations. If the Accounting Firm 10 determines that no Excise Tax is payable by Executive, it will, at the same time as it makes such determination, furnish Executive with an opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal, state, local income or other tax return. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment will be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6(f) below and Executive thereafter is required to make a payment of any Excise Tax, Executive will direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment will be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive will each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 6(b) above. (d) The federal, state and local income or other tax returns filed by Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive will make proper payment of the amount of any Excise Tax. If prior to the filing of Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Executive will within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(b) and (d) above will be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company will reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of Executive's payment thereof. (f) Executive will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification will be given as promptly as practicable, but no later than 10 business days after Executive actually receives notice of such claim, and Executive will further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Executive). Executive will not pay such claim prior to the earlier of: (i) the expiration of the 30-calendar-day period following the date on which Executive gives such notice to the Company; and 11 (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will: (A) provide the Company with any written records or documents in Executive's possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company will reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6(f), the Company will control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided that Executive may participate therein at Executive's own cost and expense) and may, at its option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs Executive to pay the tax claimed and sue for a refund, the Company will advance the amount of such payment to Executive on an interest-free basis and will indemnify and hold Executive harmless, on an after-tax basis, from any excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, Executive receives any refund with respect to such 12 claim, Executive will (subject to the Company's complying with the requirements of Section 6(f) above) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, a determination is made that Executive will not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial or refund prior to the expiration of 30-calendar-days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid pursuant to this Section 6. 7. Legal Fees and Expenses: If it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void, invalid or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company will pay and be solely financially responsible for Executive's out-of-pocket expenses, including reasonable attorneys' fees and expenses, incurred by the Executive in connection with any of the foregoing; provided, however, in the case of any such litigation or other action or proceeding in which the Company or any of its affiliates and Executive are adverse parties, the Company shall not pay or be responsible for any such expenses if the Company or any of its affiliates prevails against the Executive. 8. Employment Rights; Termination Prior to Change in Control: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. 9. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 10. Successors and Binding Agreement: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and 13 to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b) hereof. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, garnishment, creation of a security interest, claims for alimony, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 10(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices: For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 12. Dispute Resolutions: Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 13. Governing Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 14. Validity: If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise 14 illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. Miscellaneous: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which is not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. Effective as of the date hereof, this Agreement supersedes and replaces the prior Severance Agreement entered into between the Executive and the Company. 16. Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. PLAYBOY ENTERPRISES, INC., By: ----------------------------------------------- Title: -------------------------------------------- ACCEPTED and AGREED to: - ----------------------------- Richard Rosenzweig 15 EX-10.27(C) 13 d76389_ex1027-c.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.27(c) AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), dated as of September 1, 2008, is by and between ROBERT MEYERS (the "Executive"), and PLAYBOY ENTERPRISES, INC., a Delaware corporation (the "Employer" or the "Company"), hereby amending, restating and superseding that prior Employment Agreement between the parties dated September 15, 2006 (the "Original Agreement"), for compliance with Section 409A of the Internal Revenue Code of 1986 (the "Code"). RECITALS WHEREAS, Employer is primarily engaged in the business of multimedia entertainment. Employer desires to continue employment with Executive, and Executive desires to continue his employment with Employer on the terms and subject to the conditions set forth below. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows: 1. Employment of the Executive. Employer hereby agrees to continue employing Executive and Executive hereby agrees to remain in the employ of Employer, as an Executive Vice President of Employer, upon the terms and conditions hereinafter set forth. 2. Employment Period. As provided in the Original Agreement, the term of Executive's employment under this Agreement (the "Employment Period") commenced as of September 15, 2006 (the "Commencement Date") and, subject to earlier termination as provided pursuant to Section 5 below, shall continue for a period of three years (the "Initial Period") after the Commencement Date. Unless earlier terminated pursuant to Section 5 below, at the end of the Initial Period, the parties will determine whether or not to renew this Agreement, and, if so, on what terms and conditions. 3. Duties and Responsibilities. During the Employment Period, Executive (i) shall have the title of Executive Vice President and President, Media Group, (ii) shall devote his full business time and attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company, and shall not engage in any other activity that would interfere with the performance of his duties under this Agreement (provided that Executive is permitted to serve on the board of directors of Double Click - to the extent that doing so does not create any conflict of interest with Executive's obligations or duties under this Agreement--other organizations, subject to approval of the Company's Chief Executive Officer (CEO), or engage in endeavors related to the community, his faith and other charitable functions which do not materially interfere with the performance of his duties hereunder) and (iii) shall perform such duties, and comply with all reasonable directions and instructions of the Company's CEO. (a) During the Employment Period, Executive's responsibilities will include all pay and free cable and satellite broadcast television, home video and theatrical entertainment development activities of the Company, and the associated production, programming and distribution activities, the Company's online, radio and wireless activities and the Company's publishing activities (other than international publishing); provided, however, that the foregoing will not be construed so as to prevent or limit the Company's good faith determination for bona fide business reasons to operate one or more of any such activities through a joint venture, third party license or other arrangement with a third party, subject to Section 5(e)(ii) below. (b) During the Employment Period, Executive will report to the Company's CEO and will be the Company's most senior executive in regard to those responsibilities set forth in paragraph (a) immediately above. 4. Compensation. (a) Base Salary. For all services rendered and required to be rendered by, covenants of and restrictions in respect to Executive, under this Agreement, Employer shall pay to Executive during and with respect to the Employment Period, and Executive agrees to accept a base salary computed at a rate of $721,000.28 (which became effective as of December 29, 2007) per annum ("Base Salary"), payable on a biweekly basis in accordance with the Employer's standard payroll practices. (b) Incentive Program. Executive shall also be eligible to participate in a Board of Directors' approved incentive compensation plan, as in place from time to time, with Executive's being eligible to earn up to a maximum potential of 100% of his Base Salary. The incentive compensation will be based in part (50%) on the Company's fiscal year net income performance as determined by the CEO and the Company's Board of Directors and in part (50%) on Media Group financial performance established by the CEO in consultation with Executive. Subject to Section 5 hereof and as provided in the Original Agreement, incentive compensation for fiscal years 2006 and 2009 will be prorated based on Executive's initial hire date of September 15, 2006. (c) Equity Awards. As provided in the Original Agreement, for calendar year 2008 and 2009, Executive will be granted 20,000 deferred stock awards subject to the terms and conditions determined by the Company's Compensation Committee of the Company's Board of Directors consistent with the terms and conditions of deferred stock awards to other executive officers of the Company (which will include performance goals based on the Company's operating income as such term is used and determined by the Company for purposes of the Company's rolling three year plan). Any such deferred stock awards shall be paid to Executive in a lump sum no later than March 15 of the year following the year in which such awards vest. (d) Other Benefits. Executive will continue to be entitled to participate in the Company's health benefit plans, Executive vacation policy, matching 401-K plan, deferred compensation plan and similar plans in effect from time to time. Executive's participation in the foregoing plans, perquisites and travel and entertainment policy will be on terms no less favorable than afforded to other executives of the Company commensurate with Executive's level. 5. Termination of Employment Period; Change of Control. (a) Termination by the Company for Cause. Employer may, at any time during the Employment Period by notice to Executive (the "Termination Notice"), 2 terminate the Employment Period for "Cause" effective immediately. The Termination Notice shall specify the Cause for termination. In such an event, Executive shall not be entitled to any compensation or other amount from the Company from the effective date of termination. For purposes hereof, for "Cause" means a: (i) willful failure or refusal by Executive to implement or follow lawful policies or directions of the CEO or Board of Directors after notice from Company; (ii) commission by Executive of an act of moral turpitude or act bringing disgrace or disrepute to the Company, or commission of/conviction for any felony or any misdemeanor involving theft, fraud or other dishonest action or event that results in harm to the Company; (iii) material violation of this Employment Agreement; and (iv) material misrepresentation or material and willful non-disclosure by Executive to the Company in connection with performance of Executive duties. Provided that in the event any such wrongful conduct is capable of being cured, Executive will have fifteen (15) days from his receipt of the Termination Notice to cure such conduct to the reasonable satisfaction of Company. (b) Termination by the Company Without Cause. The Company may terminate this Agreement at any time, by delivering a notice to Executive, without Cause, effective thirty (30) days after Executive receives such notice in accordance with the terms hereof. In such an event, Executive's sole remedy shall be: (i) To collect all unpaid Base Salary and all unreimbursed expenses payable for all periods through the effective date of termination; plus (ii) A severance payment in the sum of twelve (12) months of Executive's then Base Salary; plus (iii) A prorata payout under the incentive compensation plan for Executive in the year of such termination in an amount equal to the fraction, the numerator of calendar days from the beginning of the year of such termination through the effective date of termination and the denominator of which is 365. (the sum of subparagraphs (i), (ii) and (iii) immediately above being collectively referred to as the "Severance Payment"). With respect to the amounts due: (A) under subparagraph (i) immediately above, such amount shall be payable in a lump sum no later than ten (10) days following the effective date of the termination under this paragraph (b); 3 (B) under subparagraph (ii) immediately above, such amount shall be payable in a lump sum on the first day of the seventh month following the date of the termination under this paragraph (b); and (C) under subparagraph (iii) immediately above, such amount shall be payable in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of termination under this paragraph (b). (c) Executive's Disability. (i) Determination of Disability. In the event Executive becomes totally disabled or disabled such that he is rendered unable to perform substantially all of his usual duties for Company, and if such disability shall persist for a continuous period in excess of three months, or an aggregate period in excess of three months in any one fiscal year, Company shall have the right at any time after the end of such period during continuance of Executive's disability by the delivery of not less than thirty (30) days' prior written notice to Executive to terminate Executive's employment under this Agreement whereupon the applicable provisions of subparagraph (ii) immediately below shall apply. For purposes of this Agreement, if Executive and Company shall disagree as to whether Executive is totally disabled, or disabled such that he is rendered unable to perform substantially all of his usual duties for Company as set forth above, or as to the date at which time such total disability began, the decision of a license medical practitioner, mutually agreed upon by the parties, shall be binding as to both questions. If the parties cannot agree as to the identity of the licensed medical practitioner, Executive shall select a licensed medical practitioner of his choice and the Company shall select a licensed medical practitioner of its choice. The two licensed medical practitioners so selected shall select a third licensed medical practitioner, which third individual shall resolve either or both of the questions referred to above and which resolution shall be binding upon the parties. (ii) Termination Due to Disability. If Executive's employment with the Company is terminated on account of Executive's disability as provided for in subparagraph (i) immediately above, then Executive shall only be entitled to receive, and Company shall pay to Executive (or Executive's estate or personal representative, as applicable) the following amounts: (A) all unpaid Base Salary and all unreimbursed expenses payable for all periods through the effective date of termination; plus (B) the sum of six months of Executive's then Base Salary; plus 4 (C) a pro rata payout under the incentive compensation plan for Executive in the year of such termination in an amount equal to the fraction, the numerator of which is the number of calendar days from the beginning of the year of such termination through the effective date of termination and the denominator of which is 365. With respect to the amounts due as a result of your disability: (I) under Clause (A) immediately above, such amount shall be payable in a lump sum no later than ten (10) days following the effective date of the Executive's termination due to disability; (II) under Clause (B) immediately above, such amount shall be payable in a lump sum on the first day of the seventh month following the date of the Executive's termination due to disability; and (III) under Clause (C) immediately above, such amount shall be payable in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of termination due to disability. (d) Executive's Death. If Executive's employment with the Company is terminated on account of Executive's death, then Executive's estate or personal representative, as applicable, shall only be entitled to receive, and Company shall pay to Executive's estate or personal representative, as applicable, the following amounts: (i) all unpaid Base Salary and all unreimbursed expenses payable for all periods through the effective date of termination; plus (ii) the sum of six {6) months of Executive's then Base Salary; plus (iii) a pro rata payout under the incentive compensation plan for Executive in the year of such termination in an amount equal to the fraction, the numerator of which is the number of calendar days from the beginning of the year of such termination through the effective date of termination and the denominator of which is 365. With respect to the amounts due as a result of your death: (A) under subparagraph (i) immediately above, such amount shall be payable in a lump sum no later than ten (10) days following the effective date of the Executive's death; 5 (B) under subparagraph (ii) immediately above, such amount shall be payable in a lump sum no later than ten (10) days following the effective date of the Executive's death; and (C) under subparagraph (iii) immediately above, such amount shall be payable in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of death. (e) Resignation by Executive for Good Reason. Executive shall have the right to terminate his employment under this Agreement and receive the Severance Payment by the delivery of written notice to Company within thirty (30) days after any of the events hereinbelow defined as Good Reason. For purposes hereof, "Good Reason" means that: (i) the Company has materially breached this Agreement and the Company has failed to cure such breach after thirty (30) days written notice from Executive; (ii) there has occurred any material diminution or reduction in duties of Executive, whether in scope or nature; (iii) Executive fails to report directly to the CEO of the Company (or reports to a CEO other than Christie Hefner); (iv) there has occurred a Change in Control (as defined in the Severance Agreement referenced in paragraph (1) immediately below); (v) the Company sells or otherwise transfers all or substantially all of its media assets in a single transaction or series of transactions, except if, and only for so long as, the Company, directly or indirectly, continues to own a controlling interest in the buyer or transferee; or (vi) the Company permanently closes its New York office. With respect to the Severance Payment due, the specific amount due: (A) under Section 5(b)(i), such amount shall be payable in a lump sum no later than ten (10) days following the effective date of the Executive's resignation under this paragraph (e); (B) under Section 5(b)(ii), such amount shall be payable in a lump sum on the first day of the seventh month following the date of the Executive's resignation under this paragraph (e); and (C) under Section 5(b)(iii), such amount shall be payable in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to 6 such plan with respect to any such incentive compensation for such year which includes Executive's date of resignation under this paragraph (e). (f) Severance Agreement (Change of Control). The Company is party to a certain severance agreement with certain executives of the Company ("the Severance Agreement") a copy of which is attached hereto as Exhibit A. The Company will enter into a Severance Agreement on substantially the same terms upon the execution hereof by Executive. Notwithstanding anything to the contrary, if the Executive has any rights to severance compensation upon involuntary termination of employment under any Severance Agreement (i.e., parachute agreement or change of control agreement) Executive may have with the Company or any other arrangement, any such rights under this Agreement shall be completely superseded by such Severance Agreement; for the avoidance of doubt, Executive can only receive severance compensation under this Agreement or under the Severance Agreement, not both. (g) No Offset or Mitigation. If Executive's employment with Company is terminated for any reason, Company will have no right of offset, nor will Executive be under any duty or obligation to seek alternative or substitute employment at any time after the effective date of such termination or otherwise mitigate any amounts payable by Company to Executive. 6. Location of Executive's Activities. Executive's place of business in the performance of his duties and obligations under this Agreement shall be split principally between the Employer's place of business in Glendale, California and New York, New York. Notwithstanding the preceding sentence, Executive will engage in such travel and spend such time in other places, including Chicago, as may be necessary or appropriate in furtherance of his duties hereunder at the Employer's expense. 7. Miscellaneous. (a) Notices. All notices, requests, demands, consents, and other communications required or permitted to be given or made hereunder shall be in writing and shall be deemed to have been duly given and received, (i) if delivered by hand, the day it is so delivered, (ii) if mailed via the United States mail, certified first class mail, postage prepaid, return receipt requested, five business days after it is mailed, or (iii) if sent by a nationally recognized overnight courier for next business day delivery, the business day after it is sent, to the party to whom the same is so given or made, at the address of such party as set forth at the head of this Agreement, which address may be changed by notice to the other party hereto duly give as set forth herein, with copies delivered as follows: if to Executive: 640 West End Avenue, #9B New York, NY 10024 7 with a copy to: Ted Schachter Schachter Entertainment 1157 South Beverly Drive Los Angeles, CA 90035 if to the Company: General Counsel Playboy Enterprises, Inc. 680 North Lake Shore Drive Chicago, Illinois 60611 (b) Governing Law; Jurisdiction. This agreement shall be governed by, and construed and enforced in accordance with, the substantive and procedural laws of the State of Illinois. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts located in Cook County, Illinois, and waives any claim based upon forum non-conveniens. (c) Headings. All descriptive headings in this agreement are inserted for convenience only and shall be disregarded in construing or applying any provision of this Agreement. (d) Counterparts. This Agreement maybe executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (e) Severability. If any provision of this Agreement, or part thereof, is held to be unenforceable, the remainder of such provision and this Agreement, as the case may be, shall nevertheless remain in full force and effect. (f) Entire Agreement and Representation. This Agreement contains the entire agreement and understanding between Employee and Executive with respect to the subject matter hereof. This Agreement supersedes any prior agreement between the parties relating to the subject matter hereof. Except as otherwise provided herein, this Agreement cannot be changed or terminated except by an instrument in writing signed by the parties hereto. (g) Binding Effect. This Agreement shall be binding upon, and insure to the benefit of, each parties' successors, transferees, heirs and assigns. (h) Confidentiality; Disclosure of Information. (i) Confidentiality. Executive recognized and acknowledges that he will have access to Confidential Information (as defined below) relating to the business or interests of Company or of persons with whom Company may have business relationships. Except as permitted herein or as may be approved by 8 Company from time to time, Executive will not during the Employment Period or at any time thereafter, use or disclose to any other person or entity, any Confidential Information of Company (except s required by applicable law or in connection with performance of Executive's duties and responsibilities hereunder). If Executive is requested or becomes legally compelled to disclose any of the Confidential Information, he will give prompt notice of such request or legal compulsion to Company. Company may waive compliance with this subparagraph (i) or will provide Executive with legal counsel at no cost to Executive to seek an appropriate remedy; provided however Executive may disclose any Confidential Information in the event notwithstanding all such efforts of the Company and such legal counsel Executive if compelled by court order to do so. The term "Confidential Information" means information relating to Company's business affairs, proprietary technology, trade secrets, patented processes, research and development data, know-how, market studies and forecasts, competitive analyses, pricing policies, executive lists, employment agreements (other than this Employment Agreement), personnel policies, the substance of agreements with customers, suppliers and others, marketing arrangements, customer lists, commercial arrangements, or any other information relating to Company's business which is treated as confidential or proprietary by Company in accordance with its policies. Notwithstanding the immediately preceding sentence, the provisions of this subparagraph (i) shall not apply to any information that (A) is in the public domain; (B) is or becomes available to the public other than as a result of a disclosure by Executive in violation of this subparagraph (i); (C) was available to Executive on a non-confidential basis prior to the date of this Employment Agreement; (D) was already lawfully in Executive's possession prior to the date of this Employment Agreement; or (E) becomes available to Executive on a non-confidential basis from a source other than Company. This obligation shall continue until such Confidential Information becomes publicly available, other than pursuant to a breach of this subparagraph (i) by the Executive, regardless of whether the Executive continues to be employed by the Company. (ii) Company Property. It is further agreed and understood by and between the parties to this Agreement that all "Company Materials," which include, but are not limited to, computers, computer software, computer disks, tapes, printouts, source, HTML and other codes, flowcharts, schematics, designs, graphics, drawings, photographs, charts, graphs, notebooks, customer lists, sound recordings, other tangible or intangible manifestation of content, and all other documents whether printed, typewritten, handwritten, electronic, or stored on computer disks, tapes, hard drives, or any other tangible medium, as well as samples, prototypes, models, products and the like shall be the exclusive property of Company and, upon termination of Executive's employment with Company, and/or upon the written request of Company, all Company Materials, including copies thereof, as well as all other Company property then in Executive's possession or control, shall be returned to and left with Company. 9 (i) Copyright. Executive acknowledges that all original works of authorship by Executive, whether created alone or jointly with others, relating to the Executive's employment with the Company, and which are protectable by copyright, are "works made for hire" within the meaning of the United States Copyright Act, 17 U.S.C. Section 101, as amended, and the copyright of which shall be owned solely, completely and exclusively by Company. If any such work is considered to be a work not included in the categories of work covered by the United States Copyright Act, 17 U.S.C. Section 101, as amended, such work is hereby conveyed and transferred completely and exclusively to Company. Executive hereby irrevocably designates counsel to Company as Executive's agent and attorney-in-fact to do all lawful acts necessary to apply for and obtain patents and copyrights and to enforce Company's rights under this section, provided that such counsel shall take any such actions only after Executive has been requested in writing to do such acts by Company and failed to promptly do so. This Paragraph 7.9 shall survive the termination of this Agreement. Any conveyance of copyright hereunder includes all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights." (j) Indemnification. Company recognizes that the activities within the scope of Executive's employment create the potential in some jurisdictions of civil or even criminal actions being brought against Executive. To the fullest extent permitted by law, Company shall indemnify, defend, protect and hold Executive harmless from and against all claims, demands, causes of action, actions, suits, costs, damages, penalties, fines, liabilities, losses and expenses, whether civil or criminal, including, without limitation, reasonable attorneys' and consultant's fees and expenses arising out of or resulting from the performance of Executive's duties within the scope of Executive's employment. Company will include Executive as a named insured on Company's directors and officers liability policy. (k) Non-Competition and Non-Solicitation. Executive acknowledges that Company has invested substantial time, money and resources in the development and retention of its Confidential Information (including trade secrets), customers, accounts and business partners, and further acknowledges that during the course of Executive's employment with Company, Executive will have access to Company's Confidential Information (including trade secrets), and will be introduced to existing and prospective customers, vendors, cable operators, accounts and business partners of Company. Executive acknowledges and agrees that any and all "goodwill" associated with any existing or prospective customer, vendor, cable operator, account or business partner belongs exclusively to Company, including, but not limited to, any goodwill created s a result or direct or indirect contacts or relationships between Executive and any existing or prospective customers, vendors, cable operators, accounts or business partners. Additionally, the parties acknowledge and agree that Executive possesses skills that are special, unique or extraordinary and that the value of Company depends upon his use of such skills on its behalf. In recognition of this, Executive covenants and agrees that: (i) Noncompetition. During Executive's employment with Company, Executive may not, without prior written consent of Company (whether as an executive, agent, servant, owner, partner, consultant, independent contractor, 10 representative, stockholder, or in any other capacity whatsoever) perform any work directly competitive in any way to the business of Company or a substantially planned business that Executive is aware of during Executive's employment with Company on behalf of any entity or person other than Company (including Executive). (ii) Nonsolicitation of Employees. During Executive's employment with Company and for one year thereafter, Executive may not notice, solicit or encourage any Company employee to leave the employ of the Company or any independent contractor to sever its engagement with Company, absent prior written consent from Company. (iii) Nonsolicitation of Customers. During Executive's employment with Company and for one year thereafter, Executive may not, directly or indirectly, entice, solicit or encourage any customer or prospective customer of Company to cease doing business with Company, reduce its relationship with Company or refrain from establishing or expanding a relationship with Company. (l) Non-Disparagement Non-Disclosure. (i) Nondisparagement. Executive and Company hereby agree that during the Employment Period and all times thereafter, neither Executive or Company will make any public statement, or engage in any conduct, that is disparaging to the other party or, in the case of Company, any of its Executives, officers, directors, or shareholders known to Executive, including, but not limited to, any statement that disparages the products, services, finances, financial condition, capabilities or other aspect of the business of Company and the capabilities of Executive. Notwithstanding any term to the contrary herein, neither Executive nor Company shall be in breach of this subparagraph (i) for the making of any truthful statements under oath. (ii) Nondisclosure. Executive will not directly or indirectly be the source of disclosing, by publishing or by granting interviews, of any Confidential Information (which is known to Executive to be confidential) concerning the personal, social or business activities of Company, its affiliates or the executives and principals and the officers, directors, agents and Executives of all the foregoing during or at any time after the termination of Executive's employment, subject to the exceptions specified in Section 7(11)(0. In addition, Executive agrees that without Company's express written approval in each case, Executive will not: (A) write, be the source of or contribute to any articles, stories, books, screenplays or any other communication or publicity of any kind (written or otherwise) or deliver lectures in any way regarding or concerning the Confidential Information, or 11 (B) grant any interviews regarding or concerning the Confidential Information during or at any time after the termination of his employment. (m) Representations and Warranties. The execution, delivery and performance of this Agreement by the Company has been duly authorized by all necessary corporate action of the Company and this Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first above written. Playboy Enterprises, Inc. By: /s/ Howard Shapiro ------------------------- Howard Shapiro /s/ R. Meyers ------------------------- Robert Meyers 12 EXHIBIT A AMENDED AND RESTATED SEVERANCE AGREEMENT THIS AMENDED AND RESTATED SEVERANCE AGREEMENT (this "Agreement"), dated as of September 1, 2008, is by and between Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and Robert Meyers, (the "Executive") and is, effective as of January 1, 2008, hereby amending, restating and superseding that prior Severance Agreement between the parties dated September 15, 2006, for compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). WITNESSETH: WHEREAS, the Executive is a senior executive or key employee of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth and financial strength of the Company; WHEREAS, the Company recognizes that, as is the case for most publicly-held companies, the possibility of a Change in Control exists; WHEREAS, the Company desires to assure itself of both present and future continuity of management and desires to establish certain minimum severance benefits for certain of its senior executive officers and other key employees, including the Executive, applicable in the event of a Change in Control; WHEREAS, the Company wishes to ensure that its senior executives and other key employees are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change in Control; and WHEREAS, the Company desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Company; NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Base Pay" means the Executive's annual base salary at a rate not less than the Executive's annual fixed or base compensation as in effect for Executive immediately prior to the occurrence of a Change in Control or such higher rate as may be determined from time to time by the Board of Directors of the Company (the "Board") or a Committee thereof. (b) "Change in Control" means any of the following occurrences during the Term: (i) Hugh M. Hefner directly or as beneficial owner and Christie Hefner cease collectively to hold over 50% of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company ("Voting Stock"); or (ii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), a sale, exchange or other disposition of PLAYBOY Magazine; or (iii) except pursuant to a transaction described in the proviso to Section 1(b)(iv) or (v), the liquidation or dissolution of the Company; or (iv) the Company is merged, consolidated or reorganized into or with another corporation or other legal person; provided, however, that no such merger, consolidation or reorganization will constitute a Change in Control if the merger, consolidation or reorganization is initiated by the Company and as a result of such merger, consolidation or reorganization not less than a majority of the combined voting power of the then-outstanding securities of the surviving, resulting or ultimate parent corporation, as the case may be, immediately after such transaction is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such transaction; or (v) the Company sells or otherwise transfers all or substantially all of its assets to another corporation or other legal person; provided, however, that no such sale or transfer will constitute a Change in Control if the sale or transfer is initiated by the Company and as a result of such sale or transfer not less than a majority of the combined voting power of the then-outstanding securities of such corporation or other legal person, as the case may be, immediately after such sale or transfer is held in the aggregate by persons who held not less than a majority of the combined voting power of the outstanding Voting Stock of the Company immediately prior to such sale or transfer; or (vi) an equity or other investment in the Company, the result of which is that Christie Heftier ceases to serve as the Company's Chief Executive Officer or relinquishes upon request or is divested of any of the following responsibilities: (A) functioning as the person primarily responsible for establishing policy and direction for the Company; or (B) being the person to whom the senior executives of the Company report; or (vii) the adoption by the Board of a resolution that, for purposes of this Agreement, a Change in Control has occurred. For purposes of Section 1(b)(i), any Voting Stock beneficially owned (as such term is defined under Rule 13d-3 or any successor rule or regulation under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) by the Hugh M. Hefner Foundation shall be deemed to be 14 held by Christie Hefner if and so long as she has sole voting power with respect to such Voting Stock. (c) "Cause" means that, prior to any termination pursuant to Section 3(b) hereof, the Executive shall have: (i) been convicted of a criminal violation involving dishonesty, fraud or breach of trust; or (ii) willfully engaged in misconduct in the performance of Executive's duties that materially injures the Company or any entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"). (d) "Disability" means a condition whereby the Executive: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Executive's employer. (e) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under any and all employee retirement income and welfare benefit policies, plans, programs or arrangements in which Executive is entitled to participate, including without limitation any stock option, stock purchase, stock appreciation, savings, pension, supplemental executive retirement, or other retirement income or welfare benefit, deferred compensation, incentive compensation, group or other life, health, medical/hospital or other insurance (whether funded by actual insurance or self-insured by the Company), disability, salary continuation, executive protection, expense reimbursement and other employee benefit policies, plans, programs or arrangements that may now exist or any equivalent successor policies, plans, programs or arrangements that may be adopted hereafter by the Company, providing perquisites, benefits and service credit for benefits at least as great in the aggregate as are provided thereunder immediately prior to a Change in Control. (f) "Incentive Pay" means bonus, incentive or other payments of cash compensation, in addition to Base Pay, made or to be made in regard to services rendered pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar agreement, policy, plan, program or arrangement (whether or not funded) of the Company, or any successor thereto providing benefits at least as great as the benefits provided thereunder immediately prior to a Change In Control. 15 (g) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following subsections shall have occurred: (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (iii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (h) "Potential Change in Control Period" shall commence upon the occurrence of a Potential Change in Control and shall lapse upon the occurrence of a Change in Control or, if earlier: (i) with respect to a Potential Change in Control occurring pursuant to Section 1(0(0, immediately upon the abandonment or termination of the applicable agreement; (ii) with respect to a Potential Change in Control occurring pursuant to Section 1(0(ii), immediately upon a public announcement by the applicable party that such party has abandoned its intention to take or consider taking actions which if consummated would result in a Change in Control; or (iii) with respect to a Potential Change in Control occurring pursuant to Section 1(f)(iii), upon the one year anniversary of the occurrence of a Potential Change in Control (or such earlier date as may be determined by the Board). (i) "Severance Period" means the period of time commencing on the date of each occurrence of a Change in Control and continuing until the earliest of (i) eighteen months following the occurrence of the Change in Control; or (ii) the Executive's death; provided, however, that commencing on each anniversary of the Change in Control, the Severance Period will automatically be extended for an additional eighteen months unless, not later than 120 calendar days prior to such date, either the Company or the Executive shall have given written notice to the other that the Severance Period is not to be so extended. (j) "Term" means the period commencing as of the date hereof and expiring as of the later of: (i) the close of business on December 31, 2008; or 16 (ii) the expiration of the Severance Period; provided, however, that the term of this Agreement will automatically be extended each year for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or the Executive, as the case may be, does not wish to have the Term extended. Notwithstanding the foregoing, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company or any Subsidiary, thereupon without further action, the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect. For purposes of this Section 1(i), the Executive shall not be deemed to have ceased to be an employee of the Company or any Subsidiary by reason of the transfer of Executive's employment between the Company and any Subsidiary, or among any Subsidiaries. (k) "Targeted Bonus" shall mean the targeted bonus for Executive's position as set forth in the Company's Executive Incentive Compensation Plan ("EICP") established for the then applicable fiscal year, which shall be equal to fifty percent (50%) times the maximum amount which Executive could earn under the EICP with respect to established quantifiable and objective financial goals. 2. Operation of Agreement: This Agreement will be effective and binding immediately upon its execution, but, anything in this Agreement, to the contrary notwithstanding, will not be operative unless and until a Change in Control occurs, whereupon without further action this Agreement shall become immediately operative. 3. Termination Following a Change in Control: (a) In the event of the occurrence of a Change in Control, the Executive's employment may be terminated by the Company during the Severance Period and the Executive shall not be entitled to the benefits provided by Section 4 only upon the occurrence of one or more of the following events: (i) The Executive's death; (ii) The Executive's Disability; or (iii) Cause. If, during the Severance Period, the Executive's employment is terminated by the Company other than pursuant to Section 3(a)(i), 3(a)(ii) or 3(a)(iii), the Executive will be entitled to the benefits provided by Section 4 hereof (b) In the event of the occurrence of a Change in Control, the Executive may terminate employment with the Company and any Subsidiary during the Severance Period with the right to severance compensation as provided in Section 4 upon the occurrence of one or more of the following "Good Reason" events (regardless of whether any other reason, other than Cause as hereinabove provided, for such termination 17 exists or has occurred, including without limitation other employment) which occur without the Executive's consent: (i) the Executive is not elected to, or is removed from, any elected office of the Company and/or Subsidiary, as the case may be, which the Executive held immediately prior to the Change of Control; or (ii) the Executive is not re-nominated by the Board as a Director of the Company (or any successor thereto) if the Executive shall have been a Director of the Company immediately prior to the Change in Control; or (iii) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position, authority, duties or responsibilities which the Executive held immediately prior to the Change of Control, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (iv) any failure by the Company to comply with any of the provisions of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; or (v) a material reduction in the aggregate of the Executive's Base Pay and Incentive Pay payable to the Executive by the Company and any Subsidiary; or (vi) the failure of a successor/tranferee organization to assume all duties and obligations of the Company under this Agreement pursuant to Section 10(a) following the liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or substantially all of its business and/or assets, and where the Executive has no employee/employer relationship with such successor/transferee organization following the Change of Control; or (vii) The Company or any of its Subsidiaries requires the Executive regularly to perform Executive's duties of employment beyond a materially different geographic radius from the location of Executive's employment immediately prior to the Change in Control or requires the Executive to travel away from Executive's office in the course of discharging Executive's responsibilities or duties hereunder at least 50% more (in terms of aggregate days in any calendar year or in any calendar quarter when annualized for purposes of comparison to any prior year) than was required of Executive in any of the three full years immediately prior to the Change of Control. (c) A termination by the Company pursuant to Section 3(a) or 3(d) or by the Executive pursuant to Section 3(b) or 3(d) will not affect any rights or benefits which the Executive may have pursuant to any agreement, policy, plan, program or arrangement of 18 the Company providing Employee Benefits (an "Other Arrangement"), which rights and benefits shall be governed by the terms thereof, including, without limitation, rights to payments under the Company's bonus and incentive plans for prior fiscal years which have been earned but not yet paid to Executive. Notwithstanding the foregoing, if the Executive has any rights to severance compensation upon termination of employment under any employment agreement Executive may have with the Company or any Other Arrangement, such rights shall, during the Severance Period, be completely superseded by this Agreement; for the avoidance of doubt, Executive can only receive severance compensation under this Agreement or under the Other Arrangement, not both. (d) For purposes of this Agreement, a termination of Executive's employment during a Potential Change in Control Period: (i) by the Company other than pursuant to the events described in Section 3(a)(i), 3(a)(ii) or 3(a)(iii); or (ii) by Executive following the occurrence of one of the events described in Section 3(b)(i) through (vii), shall be deemed to be a termination of Executive's employment during the Severance Period entitling Executive to benefits provided by Section 4. 4. Severance Compensation: (a) If, following the occurrence of a Change in Control, the Company terminates the Executive's employment during the Severance Period other than pursuant to Section 3(a), or if the Executive terminates Executive's employment pursuant to Section 3(b), the Company will pay to the Executive the following: (i) an amount (the "Severance Payment") equal to three times the sum of (A) Base Pay, plus (B) the greater of: (I) the average actual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three fiscal years ending immediately prior to the fiscal year in which occurs such Change in Control (or, such lesser number of years during which the Executive was employed by the Company and annualized in the case of any such bonus paid in respect of a portion of a fiscal year); and (II) the Targeted Bonus (determined in accordance with Section 1(j) of this Agreement 19 (the greater of Subclause (I) and Subclause (II) being hereinafter referred to as the "Highest Bonus"); such Severance Payment shall be payable in a lump sum on the seventh month anniversary of the Executive's date of termination; (ii) for 36 months following the Termination Date (the "Continuation Period"), the Company will arrange to provide the Executive with Employee Benefits that are welfare benefits (but not stock option, stock purchase, stock appreciation or similar compensatory benefits) no less favorable than those which the Executive was receiving or entitled to receive immediately prior to the Termination Date, including benefits provided under the Company's Executive Protection Plan. If and to the extent that any benefit described in this Section 4(a)(ii) is not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or any Subsidiary, as the case may be, then the Company will itself pay or provide for the payment to the Executive, or Executive's dependents and beneficiaries, of such Employee Benefits. Without otherwise limiting the purpose or effect of Section 5, Employee Benefits otherwise receivable by the Executive pursuant to this Section 4(a)(ii) will be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer during the Continuation Period. Such welfare benefits shall be provided and paid for the Executive per regular payroll period of the Company commencing with the first payroll period following the Executive's termination of employment and continuing for 36 month thereafter. Medical expenses (as defined in Code Section 213(d)) paid pursuant to this subparagraph (ii) are intended to be exempt from Code Section 409A to the extent permitted under Treasury Regulation Sections 1.409A-1(b)(9)(v)(B) and - 3(i)(1)(iv)(B). However, to the extent any welfare benefits provided pursuant to this subparagraph (ii) do not qualify for exemption under Code Section 409A, the Company shall provide Executive with a lump sum payment in an amount equal to the number of months of coverage to which he is entitled times the then applicable premium for the relevant benefit plan in which Executive participated. Such lump sum amount will be paid during the second month following the month in which such coverage expires. (iii) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of: (A) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed fiscal year or other measuring period preceding the Termination Date under any such plan and which, as of the Termination Date, is contingent only upon the continued employment of the Executive to a subsequent date; and (B) the product of the Highest Bonus and a fraction, the numerator of which is the number of days in the fiscal year in which the 20 Termination Date occurs prior to the Termination Date and the denominator of which is 365. Such amount shall be paid to the Executive in accordance with the terms of the relevant underlying incentive compensation plan at the time all other executives are paid pursuant to such plan with respect to any such incentive compensation for such year which includes Executive's date of termination under this Section 4(a). (iv) Notwithstanding the terms or conditions of any awards relating to a grant of restricted shares, all restricted shares which are not vested as of the Termination Date shall become fully vested. (v) The Company shall provide the Executive with outplacement services suitable to the Executive's position. The Executive shall commence the outplacement services no later than sixty (60) days following his termination date under this Section 4(a), but in no event shall such services be provided beyond December 31 of the second year following the year of termination or, if earlier, the first acceptance by the Executive of an offer of employment.. (b) There will be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to or benefit for the Executive provided for in this Agreement, except as expressly provided in Section 4(a)(ii). (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided hereunder on a timely basis, the Company will pay interest on the amount or value thereof at the prime rate in effect at the First National Bank of Chicago. Such interest will be payable as it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties' respective rights and obligations under this Section 4 and under Sections 6 and 7 will survive any termination or expiration of this Agreement following a Change in Control or the termination of the Executive's employment following a Change in Control for any reason whatsoever. 5. No Mitigation Obligation: The Company hereby acknowledges that it will be difficult and may be impossible: (a) for the Executive to find reasonably comparable employment following the Termination Date; and (b) to measure the amount of damages which Executive may suffer as a result of termination of employment hereunder. Accordingly, the payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement is hereby acknowledged by the Company to be 21 reasonable and will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise reduce any payments or benefits to be provided to Executive hereunder, except as expressly provided in Section 4(a)(ii). 6. Certain Additional Payments by the Company: (a) In the event that this Agreement becomes operative and it is determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment or payments (a "Gross-Up Payment") in an amount such that, after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding anything to the contrary, any Gross-Up Payment pursuant to this Section 6(a) shall be paid no later than December 31 of the year following the year in which the Executive pays the applicable Excise Tax, and, if the Executive is a `specified employee', as defined and applied in Code Section 409A as of the termination date, no earlier than the first day of the seventh month following such date. (b) Subject to the provisions of Section 6(f) below, all determinations required to be made under this Section 6, including whether an Excise Tax is payable by Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, will be made by a nationally recognized firm of certified public accountants (the "Accounting Firm") selected by Executive in Executive's sole discretion. Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of the Change in Control or the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Termination Date (or if there is no Termination Date, then the date on which the Gross- 22 Up Payment is calculated for purposes of this Section 6(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company will pay the required Gross-Up Payment to Executive within five business days after receipt of such determination and calculations. If the Accounting Firm determines that no Excise Tax is payable by Executive, it will, at the same time as it makes such determination, furnish Executive with an opinion that Executive has substantial authority not to report any Excise Tax on Executive's federal, state, local income or other tax return. Any determination by the Accounting Finn as to the amount of the Gross-Up Payment will be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 6(f) below and Executive thereafter is required to make a payment of any Excise Tax, Executive will direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and Executive as promptly as possible. Any such Underpayment will be promptly paid by the Company to, or for the benefit of, Executive within five business days after receipt of such determination and calculations. (c) The Company and Executive will each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determination contemplated by Section 6(b) above. (d) The federal, state and local income or other tax returns filed by Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive will make proper payment of the amount of any Excise Tax. If prior to the filing of Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, Executive will within five business days pay to the Company the amount of such reduction. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(b) and (d) above will be borne by the Company. If such fees and expenses are initially advanced by Executive, the Company will reimburse Executive the full amount of such fees and expenses within five business days after receipt from Executive of a statement therefor and reasonable evidence of Executive's payment thereof. (f) Executive will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification will be given as promptly as practicable, but no 23 later than 10 business days after Executive actually receives notice of such claim, and Executive will further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by Executive). Executive will not pay such claim prior to the earlier of: (i) the expiration of the 30-calendar-day period following the date on which Executive gives such notice to the Company; and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will: (A) provide the Company with any written records or documents in Executive's possession relating to such claim reasonably requested by the Company; (B) take such action in connection with contesting such claim as the Company will reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (C) cooperate with the Company in good faith in order effectively to contest such claim; and (D) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company will bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and will indemnify and hold harmless Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 6(f), the Company will control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(1) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided that Executive may participate therein at Executive's own cost and expense) and may, at its option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs Executive to pay the tax claimed and sue for a refund, the Company will advance the amount of such payment to Executive on an interest-free basis and will indemnify and hold Executive haluiless, on an after-tax basis, from any excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to 24 such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (g) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6(f) above, Executive receives any refund with respect to such claim, Executive will (subject to the Company's complying with the requirements of Section 6(f) above) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 6W above, a determination is made that Executive will not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial or refund prior to the expiration of 30-calendar-days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid pursuant to this Section 6. 7. Legal Fees and Expenses: If it should appear to the Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void, invalid or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as hereafter provided, to advise and represent the Executive in connection with any such interpretation, enforcement or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any Director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to the Executive's entering into an attorney-client relationship with such counsel, and in that connection the Company and the Executive agree that a confidential relationship shall exist between the Executive and such counsel. The Company will pay and be solely financially responsible for Executive's out-of-pocket expenses, including reasonable attorneys' fees and expenses, incurred by the Executive in connection with any of the foregoing; provided, however, in the case of any such litigation or other action or proceeding in which the Company or any of its affiliates and Executive are adverse parties, the Company shall not pay or be responsible for any such expenses if the Company or any of its affiliates prevails against the Executive. 8. Employment Rights; Termination Prior to Change in Control: Nothing expressed or implied in this Agreement will create any right or duty on the part of the Company 25 or the Executive to have the Executive remain in the employment of the Company or any Subsidiary prior to or following any Change in Control. 9. Withholding of Taxes: The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 10. Successors and Binding Agreement: (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 10(a) and 10(b) hereof. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, garnishment, creation of a security interest, claims for alimony, or otherwise, other than by a transfer by Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section I0(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 11. Notices: For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or five business days after having been mailed by United States registered mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express, UPS, or Purolator, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at Executive's principal residence, or to such other address as any party may have 26 furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 12. Dispute Resolutions: Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Chicago, Illinois in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 13. Governing Law: The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Delaware, without giving effect to the principles of conflict of laws of such State. 14. Validity: If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 15. Miscellaneous: No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by either party which is not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. Effective as of the date hereof, this Agreement supersedes and replaces the prior Severance Agreement entered into between the Executive and the Company. 27 16. Counterparts: This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. PLAYBOY ENTERPRISES, INC., By: /s/ Howard Shapiro ---------------------------------- Title: EVP ------------------------------- ACCEPTED and AGREED to: /s/ R. Meyers - ------------------------ Robert Meyers 28 EX-10.27(D) 14 d76389_ex1027-d.txt AGREEMENT BETWEEN CHRISTIE HEFNER AND PLAYBOY EXHIBIT 10.27(d) Portions of this Exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. The omissions have been indicated by asterisks ("*****"), and the omitted text has been filed separately with the Securities and Exchange Commission. February 9, 2009 Christie Hefner CAH LLC 628 North State Street Chicago, IL 60610 Dear Christie: This letter, when the enclosed copy has been signed, dated and returned by you, and the revocation period as set forth in paragraph 19. has passed, will evidence the agreement (the "Agreement") between Playboy Enterprises, Inc. ("Playboy") and you, regarding your separation as an employee and officer of Playboy and shall be binding on Playboy and you. You and Playboy agree as follows: 1.a. Your employment with Playboy ended effective January 31, 2009 (the "Employment End Date"). You will receive severance and termination benefits only as described in this Agreement. In particular, and except as provided in paragraph 2., you will receive severance pay in the amount of $2 million. The total severance pay identified in this paragraph includes all severance pay you might otherwise be entitled to under any policy, plan or practice of Playboy and exceeds any severance pay that you might otherwise be entitled to in consideration of the terms and covenants in this Agreement. 1.b. The severance pay set out in paragraph 1.a. will be made in a lump sum within 10 days after the revocation period set forth in paragraph 19. has expired. 2.a. ***** 2.b. You will receive a one-time grant of 30,000 Class B shares of Playboy's common stock within 10 days after the revocation period set forth in paragraph 19. has expired. 3. You will receive, at the same time you receive the payment under paragraph 1.b. above, a lump sum payment in the amount of $22,211.55, representing 7 vacation carryover days as indicated on Playboy's payroll system. You certify that the vacation reports submitted by you to payroll are complete and accurate insofar as the number of vacation days taken by you during the period January 1, 2008 through the Employment End Date. 4. As of the Employment End Date, you will no longer remain covered by any of Playboy's health insurance plans, and you will have the right to convert your life insurance and long term disability insurance, applications for which must be made within 31 days following the Employment End Date. All other benefits, including participation in Playboy's 401(k) plan, will cease as of the Employment End Date. 5. After the Employment End Date, you may elect to continue your health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), paying premiums as they become due. Coverage may be continued for you under COBRA for up to 18 months. You may contact Katy O'Mahony, at 312 373 2045 to discuss your coverage. 6. Any stock options that were granted to you and which were vested as of January 31, 2009 are exercisable through the "Option Expiration Date," which is the 90th day following January 31, 2009. ***** This paragraph 6 shall apply notwithstanding any provision in any stock option plan or agreement to the contrary. Your contact for any option questions is Bob Campbell at 312 373 2180. Playboy has provided you with information regarding your stock options and the exercise thereof. 7. ***** 8. Playboy will reimburse you for all reasonable business expenses incurred by you through January 31, 2009, and charged to your Diners Club Card or other credit cards prior to the payment due date of such credit cards, subject to submission of (I) the credit card bills and (ii) invoices or other supporting documentation indicating the business purpose of each charge, 9. ***** 10. You shall be under no duty to mitigate any of the amounts received by you hereunder by securing employment with a subsequent employer or otherwise, nor shall any amounts received by you from any subsequent employment or otherwise, if applicable, entitle Playboy to any right to off-set the amount of severance pay or any other amount it owes you in accordance with the terms of this Agreement. 11. You acknowledge that, as a result of your position with Playboy, you had access to confidential information and trade secrets of Playboy, including customer and employee identification and contacts, information about customers or vendors, business relationships, contract provisions, pricing, margins, business plans, marketing plans, financial data, business and customer strategy, techniques, models, software, solutions, discussion guides, personal or performance information about employees, research and development, patent applications and plans or proposals related to the foregoing, which in each instance is: (a) generated or collected by or utilized in the operations of Playboy and relating to the actual or anticipated business or research or development of Playboy or Playboy's actual or prospective clients; (b) not generally known within the industry; and (b) of commercial value to Playboy ("Confidential Information"). You will not, without Playboy's prior written permission, disclose Confidential Information to anyone outside 2 of Playboy, either during or after your employment with Playboy, as long as such matters remain trade secrets or confidential. Confidential Information shall not include any information that: (a) is, or becomes, generally known to the public without breach of the terms of this Agreement; (b) was known to you prior to your employment with Playboy or learned by you independently of your employment with Playboy; (c) is lawfully obtained from a third party with no duty of confidentiality to Playboy; or is required to be disclosed by law, provided that, you shall if permitted by law promptly inform Playboy of any such situations and shall, if permitted by law, take reasonable steps, at Playboy's expense, to prevent disclosure of confidential information or trade secrets until Playboy has been informed of such required disclosure and has had a reasonable opportunity to seek a protective order. For purposes of this paragraph: 12.a. (i) You agree that, at all times following the Employment End Date, you will not (a) engage in any public vilification of, or (b) make any false or disparaging public statements concerning Playboy or any of its officers, directors, shareholders or employees of Playboy, or any of their respective products, brands or trademarks, including management style, methods of doing business, the quality of products and services, role in the community or treatment of employees. (ii) Playboy agrees that, at all times following the Employment End Date, its directors and executive officers will not and Playboy will not knowingly authorize any employee of Playboy to (a) engage in any public vilification of, or (b) make any false, or disparaging public statements concerning you or your management style, methods of doing business, role in the community or treatment of employees. (iii) The restrictions set forth in paragraphs 12.a.(i) and 12.a.(ii) shall not apply to truthful or factual statements made as the result of an order from a court, arbitration panel or governmental authority to make such statements, or to truthful or factual statements made in the course of your participation in legal proceedings, or as otherwise required by law. 12.b. For a period of twelve (12) months after the Employment End Date, you will not directly or indirectly: (i) ***** (ii) (a) raid, hire, solicit, or attempt to persuade any employee of Playboy (except Deb Parry) to leave the employ of Playboy; (b) interfere with the performance by any such persons of their duties for Playboy; or (c) communicate with any such persons for the purposes described in items (a) and (b) in this paragraph; (iii) interfere with Playboy's relationship with any person or entity that was a vendor or supplier of Playboy's during your employment at Playboy; or 3 (iv) on behalf of yourself or in conjunction with any other person, company or entity, own (other than less than 3% ownership in a publicly traded company), manage, operate, or participate in the ownership, management, operation, or control of, or be employed by any Adult Entertainment Company. For purposes of this paragraph 12 and paragraph 15 hereof, the term "Playboy" includes any of Playboy's subsidiaries and affiliated companies, and its and their officers, directors, employees and agents. 12.c. You agree that, at all times following the Employment End Date, you will not make commercial use of Playboy's intellectual property without the prior consent of Playboy. 13. From and after the Employment End Date and subject to your other employment and vacation commitments, you will make yourself reasonably available to Playboy by telephone or as otherwise provided below to provide reasonable cooperation and assistance to Playboy with respect to (i) transition advice to the new chief executive officer of Playboy (ii) current litigation concerning Playboy (including attendance at out-of-town proceedings for which travel may be required at the request of Playboy, although satellite or telephone conferences will be used in lieu of such travel where available and practical), and (iii) pending or threatened litigation concerning Playboy which involves areas or matters in which you were involved during your employment. Playboy agrees to pay in advance, either to you or directly, the actual expenses you incur (including reasonable travel expenses while traveling) as a result of your complying with this paragraph 13., subject to your submission to Playboy of documentation substantiating such expenses as Playboy may reasonably require. It is expressly agreed, however, that notwithstanding Playboy's policy in connection therewith, you shall be entitled to fly business class when traveling for Playboy and shall be entitled to first-class accommodations, and meals. 14. Should you die before all the cash payments including wire transfers, checks or similar forms of payment due hereunder have been made, Playboy shall pay the remainder of such amounts to such other person or entity indicated by you to Playboy in writing (with the last such designation prior to your death being the governing election). The treatment of your stock options in the event of your death shall be governed by the terms of the applicable stock option plans and agreements. 15.a. For and in consideration of your promises made hereunder, Playboy hereby agrees not to sue or make any claim of any kind against you, your heirs, agents, assignees, executors, administrators, beneficiaries, trustees, and personal and legal representatives and anyone who could claim through you, both past and present, and either personally or in any other capacity (the "HEFNER RELEASEES") before any agency, court or other forum, and Playboy releases and discharges the HEFNER RELEASEES, and each of them, from all manner of action and actions, cause or causes of action in law or in equity, administrative proceedings, suits, claims, debts, liens, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, whether known or unknown, arising from acts or omissions of you in connection with your employment and the 4 termination thereof (except those relating to any breach of this Agreement by you). In addition, for and in consideration of the payments and other benefits provided to you hereunder, you agree not to sue or make any claim of any kind against Playboy, its subsidiaries and affiliated and predecessor companies, its and their successors and assigns and all its and their past and present directors, officers, employees, agents and attorneys, either personally or in their capacity as directors, officers, employees, agents and attorneys (the "PLAYBOY RELEASEES") before any agency, court or other forum, and you release and discharge the PLAYBOY RELEASEES, and each of them, from all manner of action and actions, cause or causes of action in law or in equity, administrative proceedings, suits, claims, debts, liens, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims and demands whatsoever, whether now known or unknown, arising from acts or omissions of the PLAYBOY RELEASEES in connection with your employment and the termination thereof. This includes without limitation any and all wage claims, tort claims, contract claims, ERISA claims, wrongful termination claims, retaliation claims, defamation claims, fraud claims, claims under the Age Discrimination in Employment Act, 29 U.S.C. Section 621 at seq., claims under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000, et seq., the Americans with Disabilities Act of 1990, 42 U.S.C. Section 12101, et seq., and the Family and Medical Leave Act of 1993, 29 U.S.C. Section 2601, et seq., as well as all other federal, state and local statutes and regulations, presently or hereafter enacted, and any other claims, demands or causes of action for monetary or equitable relief, including back pay, front pay, reinstatement, compensatory damages, punitive damages, attorneys' fees, expenses and costs of litigation. Notwithstanding any other provision of this Agreement, neither this release nor any other provision of this Agreement shall operate to release Playboy from (i) any such payments or benefits required to be provided under this Agreement, (ii) any such claims relating to any breach of this Agreement by Playboy, or (iii) to the extent arising out of your service as an employee, officer or director of Playboy or any of its subsidiaries or affiliates on or prior to January 31, 2009, any such claims or potential claims for indemnification, advancement or to the benefits of Playboy's directors' and officers' liability insurance policies as in effect from time to time, in accordance with Playboy's charter or by laws, or under any separate agreement between you and Playboy. 15.b. THIS MEANS THAT, BY SIGNING THIS AGREEMENT, OTHER THAN AS SPECIFICALLY SET FORTH HEREIN, YOU AND PLAYBOY EACH WILL HAVE WAIVED ANY RIGHT YOU OR THEY MAY HAVE HAD TO BRING A LAWSUIT OR MAKE ANY CLAIM, AS SET FORTH IN PARAGRAPH 15.(a) ABOVE, AGAINST THE PLAYBOY RELEASEES OR HEFNER RELEASEES, RESPECTIVELY, BASED ON ANY ACTS OR OMISSIONS OF THE PLAYBOY RELEASEES OR HEFNER RELEASEES, RESPECTIVELY, UP TO THE DATE OF THE SIGNING OF THIS AGREEMENT. EXCLUDED FROM YOUR AGREEMENT TO RELEASE AND DISCHARGE THE PLAYBOY RELEASEES ARE ANY CLAIMS OR RIGHTS WHICH CANNOT BE WAIVED BY LAW, INCLUDING YOUR RIGHT TO FILE A CHARGE OF DISCRIMINATION WITH AN ADMINISTRATIVE AGENCY OR PARTICIPATE IN ANY AGENCY INVESTIGATIONS. YOU ARE, HOWEVER, WAIVING YOUR RIGHT TO RECOVER ANY MONEY IN CONNECTION WITH SUCH A CHARGE OR INVESTIGATION. YOU ARE ALSO WAIVING YOUR RIGHT TO RECOVER MONEY IN CONNECTION WITH A CHARGE FILED BY ANY OTHER INDIVIDUAL OR BY THE EQUAL EMPLOYMENT OPPORTUNITY COMMISSION OR ANY OTHER FEDERAL, STATE OR LOCAL AGENCY THAT INVESTIGATES CLAIMS OF DISCRIMINATION. 5 16. All payments due to you hereunder shall be subject only to such income tax withholding, payroll taxes and any other withholdings required by law. 17. All payments due to you hereunder shall be made, at your election, by wire transfer to an account designated by you in writing, and if you elect to provide such instructions, shall be considered to have been "received," for purposes of this Agreement, when credited to such account. Until and unless you notify Playboy otherwise in writing, Playboy shall make wire transfers in accordance with the written instructions you provide to us. 18. If Playboy assigns this Agreement to any other person or entity, such other person or entity must assume this Agreement in writing. Notwithstanding such assignment, Playboy shall remain primarily liable for all obligations under this Agreement (and Playboy may only assign this Agreement in its entirety). Playboy shall give you contemporaneous written notice of any such assignment. 19. You also agree that you have entered into this Agreement knowingly and voluntarily and that you have been represented by and have consulted with an attorney in connection with the negotiation and drafting of this Agreement. You understand that you may take up to 21 days to consider this Agreement before signing it. After you sign this Agreement, you will have 7 days to revoke it if you change your mind. If you want to revoke the Agreement, you must deliver a written revocation to Howard Shapiro, General Counsel, Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, IL 60611 within 7 days after you sign it. If you do not revoke this Agreement, the payments and other consideration referenced in paragraphs 1., 2., 3., and 9. hereof shall be paid as provided herein and the payments referenced in paragraphs 6. through 8., hereof shall be made at the times provided herein irrespective of whether you revoke this Agreement. 20. No waiver of any breach of any provision of this Agreement shall be effective unless it is in writing and no waiver shall be construed to be a waiver of any succeeding breach or as a modification of such provision. The provisions or any part thereof of this Agreement shall be severable and if any provision of this Agreement is found by any court to be unenforceable, in whole or in part, the remainder of this Agreement shall nevertheless be enforceable and binding on the parties. A court may modify any invalid, overbroad or unenforceable term of this Agreement so that such term, as modified, is valid and enforceable under applicable law. Further, you and Playboy each affirmatively state that you have not, will not and cannot rely on any representations not expressly made herein. The terms of this Agreement shall not be amended by you or Playboy except by the express written consent of Playboy and you. You and Playboy acknowledge that each was represented by counsel and had an equal opportunity to review and/or modify the provisions set forth in this Agreement. Thus, in the event of any misunderstanding, ambiguity or dispute concerning this Agreement's provisions or their interpretation, no rule of construction shall be applied that would result in having this Agreement interpreted against any party. This Agreement and all rights, remedies, and obligations hereunder including, but not limited to, matters of construction, validity and performance, shall be governed by the laws of the State of Illinois and any actions arising out of this Agreement shall exclusively be brought in the State of Illinois. Finally, except to the extent specifically otherwise set forth herein, this Agreement embodies the complete understanding between the undersigned parties. No other promises or agreements, either express or implied, shall be binding unless in writing and signed by these parties. 6 21. In the event of a breach or a threatened breach of this Agreement by you, you acknowledge that Playboy could face irreparable injury which may be difficult to calculate in dollar terms and that Playboy shall be entitled to seek, in addition to remedies otherwise available at law or in equity, temporary restraining orders and. preliminary injunctions and final injunctions without the posting of a bond enjoining such breach or threatened breath. The prevailing party in any action taken by Playboy to enforce any portion of this Agreement before a trier of fact shall be entitled to all of its reasonable attorney's fees, expenses and costs incurred as a result of enforcing or defending the claim based upon such portion of this Agreement. 7 If the above is acceptable to you, please sign, date and return an executed original copy of this letter. Very truly yours, PLAYBOY ENTERPRISES, INC. /s/ Howard Shapiro ------------------------- Howard Shapiro ACCEPTED AND AGREED TO: PLAYBOY ENTERPRISES, INC. /s/ Howard Shapiro - ------------------------------------ By: Howard Shaprio Title: Executive Vice President ACCEPTED AND AGREED TO: /s/ Christie Hefner - ------------------------------------ Christie Hefner Date: February 9, 2009 ---------------- 8 EX-21 15 d76389_ex-21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 PLAYBOY ENTERPRISES, INC. ================================================================================ The following are wholly-owned or partially-owned subsidiaries of the corporations preceding them that are less indented. Unless otherwise indicated, each corporation is a 100%-owned subsidiary of PLAYBOY ENTERPRISES, INC., or the last preceding less-indented corporation, as the case may be: PLAYBOY ENTERPRISES, INC. (Delaware 4-30-98) - -------------------------------------------- PEI HOLDINGS, INC. (Delaware 11-24-98) -------------------------------------- SPICE ENTERTAINMENT, INC. (Delaware 5-13-92) CPV PRODUCTIONS, INC. (Delaware 3-5-94) CYBERSPICE, INC. (Delaware 4-19-94) MH PICTURES, INC. (California 2-11-93) PLANET SPICE, INC. (Delaware 12-22-00) SEI 4 ApS (Denmark 10-1-98) SPICE DIRECT, INC. (Delaware 10-26-92) SPICE INTERNATIONAL, INC. (Delaware 7-31-92) SPICE NETWORKS, INC. (New York 8-21-87) SPICE PRODUCTIONS, INC. (Nevada 9-21-94) PLAYBOY ENTERPRISES INTERNATIONAL, INC. (Delaware 5-27-64) ALTA LOMA ENTERTAINMENT, INC. (Delaware 8-30-01) ITASCA HOLDINGS, INC. (Illinois 7-30-87) LAKE SHORE PRESS, INC. (Delaware 11-26-69) Branches -------- Hong Kong Japan LIFESTYLE BRANDS, LTD. (Delaware 9-14-70) PLANET PLAYBOY, INC. (Delaware 9-29-99) Name changed from Playboy International, Inc. and filed with Delaware on 1/10/00 Branches -------- Finland Hong Kong Japan Norway PLANET PLAYBOY BRAZIL LICENCIAMENTO DE NOMES DE DOMINIO LTDA. (Planet Playboy Brazil Domain Names Licensing Limited - Rio de Janeiro, Brazil September 14, 2002) PLAYBOY CLUBS INTERNATIONAL, INC. (Delaware 1-15-60) PLAYBOY CLUB OF HOLLYWOOD, INC. (Delaware 10-30-61) PLAYBOY CLUB OF NEW YORK, INC. (New York 10-14-60) PLAYBOY OF LYONS, INC. (Wisconsin 7-23-65) PLAYBOY OF SUSSEX, INC. (Delaware 7-22-68) PLAYBOY PREFERRED, INC. (Illinois 8-11-66) 1 PLAYBOY.COM, INC. (Delaware 11-25-98) Name changed from Playboy Online, Inc. on 12/14/99 PLAYBOY.COM INTERNET GAMING, INC. (Delaware 12-19-00) PLAYBOY.COM RACING, INC. (Delaware 2-27-01) PLAYBOY.COM INTERNET GAMING (GIBRALTAR) LIMITED (Gibraltar 2/12/01) SPICETV.COM, INC.(Delaware - 3/8/00 Name changed from Cyberspice.com, Inc. on 3/2/01) PLAYBOY ENTERTAINMENT GROUP, INC. (Delaware 11-30-89) ADULTVISION COMMUNICATIONS, INC. (Delaware 5-12-95) ALTA LOMA DISTRIBUTION, INC. (Delaware 7-7-69) AL ENTERTAINMENT, INC. (California 4-3-98) formerly known as Alta Loma Entertainment, Inc. - name change: 9/26/01 RIDANTA, INC. (California 3-19-03) formerly known as Andrita Studios, Inc. - name change: 5/1/08 CJI HOLDINGS, INC. (Delaware 1-27-06) CLUB JENNA, INC. (converted to Delaware 05-02-07; originally incorporated in Colorado 12-1-99) DOLCE AMORE, INC. (converted to Delaware 05-02-07; originally incorporated in Colorado 11-17-99) Y-TEL WIRELESS, LLC (3) (originally incorporated in Colorado 10-8-03; converted to Delaware 05-02-07) ICS ENTERTAINMENT, INC. (Delaware 12-22-65) Name changed from After Dark Video, Inc. on 7-27-05 IMPULSE PRODUCTIONS, INC. (Delaware 1-9-84) INDIGO ENTERTAINMENT, INC. (Illinois 11-5-76) MYSTIQUE FILMS, INC. (California 6-16-95) PLAYBOY TV INTERNATIONAL, LLC (PTVI) (1) (Delaware 6-15-99) CANDLELIGHT MANAGEMENT LLC (Delaware 11-30-00) 1945/1947 CEDAR RIVER C.V. (Netherlands Limited Partnership) (2) CHELSEA COURT HOLDINGS, LLC (Delaware 11-30-00) CLARIDGE ORGANIZATION LLC (Delaware 11-30-00) STICHTING 1945/1947 LA LAGUNA (Netherlands Trust) PLAYBOY TV INTERNATIONAL B.V. (Netherlands) PLAYBOY TV UK LIMITED (UK) PLAYBOY TV/UK BENELUX LTD. (United Kingdom) STV INTERNATIONAL B.V. (Netherlands) PRECIOUS FILMS, INC. (California 9-28-94) SEI INC. ApS (Denmark 10-1-98) WOMEN PRODUCTIONS, INC. (California 11-1-95) PLAYBOY FORUM SHOPS, INC. (Delaware 07-30-08) PLAYBOY GAMING INTERNATIONAL, LTD. (Delaware 8-26-70) PLAYBOY CRUISE GAMING, INC. (Delaware 6-24-98) PLAYBOY GAMING UK, LTD. (Delaware 6-1-00) 2 PLAYBOY GAMING NEVADA, INC. (Nevada 8-12-98) PLAYBOY JAPAN, INC. (Delaware 3-4-99) Branches -------- Japan PLAYBOY MACAO LLC (Delaware 06-13-07 and Illinois 06-15-07) PLAYBOY MODELS, INC. (Illinois 8-8-56) PLAYBOY PRODUCTS & SERVICES INTERNATIONAL, B.V. (Netherlands 4-14-77) PLAYBOY PROPERTIES, INC. (Delaware 11-29-63) PLAYBOY SHOWS, INC. (Delaware10-7-68) SPECIAL EDITIONS, LTD. (Delaware 5-1-79) SPICE HOT ENTERTAINMENT, INC. (Delaware 6-29-01) SPICE PLATINUM ENTERTAINMENT, INC. (Delaware 6-29-01) STEELTON, INC (Delaware 2-6-68) TELECOM INTERNATIONAL, INC. (Florida 3-8-94) *THE HUGH M. HEFNER FOUNDATION (an Illinois not-for-profit corporation 2-13-64) (1) PTVI is 95% owned by Playboy Entertainment Group, Inc. and 5% owned by Adultvision Communications, Inc. (2) 1945/1947 Cedar River is 99.998 % owned by Chelsea Court Holdings LLC, 0.001% owned by Candlelight Management LLC and 0.001% owned by Stichting 1945/1947 La Laguna. (3) Y-Tel Wireless, LLC is 61.95% owned by Club Jenna, Inc. and 38.05% owned by CJI Holdings, Inc. 3 EX-23 16 d76389_ex-23.txt CONSENTS OF EXPERTS AND COUNSEL Exhibit 23 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-74451, Form S-8 No. 333-10470, Form S-8 No. 333-105454 and Form S-8 No. 333-139728) of Playboy Enterprises, Inc. and in the related prospectuses of our reports dated March 11, 2009, with respect to the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc., and the effectiveness of internal control over financial reporting of Playboy Enterprises, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2008. /s/ Ernst & Young LLP Chicago, Illinois March 12, 2009 EX-31.1 17 d76389_ex31-1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jerome Kern, Interim Chairman of the Board, Interim Chief Executive Officer and Director of Playboy Enterprises, Inc., or the registrant, certify that: 1. I have reviewed this Annual Report on Form 10-K of Playboy Enterprises, Inc. for the year ended December 31, 2008; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2009 /s/ Jerome Kern --------------- Name: Jerome Kern Title: Interim Chairman of the Board, Interim Chief Executive Officer and Director EX-31.2 18 d76389_ex31-2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Linda G. Havard, Executive Vice President, Finance and Operations, and Chief Financial Officer of Playboy Enterprises, Inc., or the registrant, certify that: 1. I have reviewed this Annual Report on Form 10-K of Playboy Enterprises, Inc. for the year ended December 31, 2008; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 13, 2009 /s/ Linda Havard ---------------- Name: Linda G. Havard Title: Executive Vice President and Chief Financial Officer EX-32 19 d76389_ex32.txt SECTION 1350 CERTIFICATION Exhibit 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Playboy Enterprises, Inc. (the "Company") for the annual period ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jerome Kern, as Interim Chief Executive Officer of the Company, and Linda G. Havard, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of her knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jerome Kern - --------------- Name: Jerome Kern Title: Interim Chief Executive Officer Date: March 13, 2009 /s/ Linda Havard - ---------------- Name: Linda G. Havard Title: Chief Financial Officer Date: March 13, 2009 This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by ss. 906 has been provided to Playboy Enterprises, Inc. and will be retained by Playboy Enterprises, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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