<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-2258830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
___ ___
As of October 31, 1997, there were 4,748,954 shares of Class A Common Stock, par
value $0.01 per share, and 15,771,186 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
____________
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Part I. Financial Information
Condensed Consolidated Statements of Operations for the
Quarters Ended September 30, 1997 and 1996 (Unaudited) 3
Condensed Consolidated Balance Sheets at September 30,
1997 (Unaudited) and June 30, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
Quantitative and Qualitative Disclosures about Market Risk 14
Part II. Other Information 15-16
</TABLE>
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net revenues $68,214 $66,224
------- -------
Costs and expenses:
Cost of sales (57,093) (56,261)
Selling and administrative expenses (8,793) (7,534)
------- -------
Total costs and expenses (65,886) (63,795)
------- -------
Operating income 2,328 2,429
------- -------
Nonoperating income (expense):
Investment income 22 20
Interest expense (121) (134)
Other, net 92 (75)
------- -------
Total nonoperating expense (7) (189)
------- -------
Income before income taxes 2,321 2,240
Income tax expense (1,226) (1,203)
------- -------
Net income $ 1,095 $ 1,037
======= =======
Weighted average number of common shares outstanding 20,454 20,261
======= =======
Net income per common share $ 0.05 $ 0.05
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, June 30,
1997 1997
----------- --------
<S> <C> <C>
Assets
- ------
Cash and cash equivalents $ 525 $ 1,303
Receivables, net of allowance for doubtful accounts of
$4,236 and $3,882, respectively 31,531 32,326
Inventories 24,965 23,304
Programming costs 41,668 41,954
Deferred subscription acquisition costs 10,954 9,077
Other current assets 12,136 12,315
-------- --------
Total current assets 121,779 120,279
-------- --------
Property and equipment, at cost 37,412 37,831
Accumulated depreciation (27,444) (27,524)
-------- --------
Property and equipment, net 9,968 10,307
-------- --------
Programming costs - noncurrent 6,826 4,673
Trademarks 14,089 13,761
Net deferred tax assets 13,488 14,145
Other noncurrent assets 12,702 12,377
-------- --------
Total assets $178,852 $175,542
======== ========
Liabilities
- -----------
Short-term borrowings $ 9,000 $ 4,500
Current financing obligations 349 347
Accounts payable 25,190 26,914
Accrued salaries, wages and employee benefits 4,388 7,232
Reserves for losses on disposals of discontinued operations 630 628
Income taxes payable 911 1,227
Deferred revenues 44,708 42,273
Other liabilities and accrued expenses 6,958 7,937
-------- --------
Total current liabilities 92,134 91,058
Other noncurrent liabilities 8,327 8,351
-------- --------
Total liabilities 100,461 99,409
-------- --------
Shareholders' Equity
- --------------------
Common stock, $0.01 par value
Class A - 7,500,000 shares authorized; 5,042,381 issued 50 50
Class B - 30,000,000 shares authorized; 17,059,018 and
17,029,018 issued, respectively 171 170
Capital in excess of par value 43,062 42,645
Retained earnings 45,287 44,192
Foreign currency translation adjustment (114) (74)
Unearned compensation restricted stock (3,350) (4,089)
Less cost of treasury stock (6,715) (6,761)
-------- --------
Total shareholders' equity 78,391 76,133
-------- --------
Total liabilities and shareholders' equity $178,852 $175,542
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended September 30 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
------------------------------------
Net income $ 1,095 $ 1,037
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation of property and equipment 524 564
Amortization of intangible assets 438 451
Amortization of investments in entertainment programming 5,732 4,509
Investments in entertainment programming (7,599) (7,732)
Net change in operating assets and liabilities (4,967) (2,815)
Net cash provided by discontinued operations 2 -
Other, net (27) 14
------- -------
Net cash used for operating activities (4,802) (3,972)
------- -------
Cash Flows From Investing Activities
------------------------------------
Additions to property and equipment (194) (293)
Funding of international ventures (350) (280)
Other, net - 60
------- -------
Net cash used for investing activities (544) (513)
------- -------
Cash Flows From Financing Activities
------------------------------------
Increase in short-term borrowings 4,500 3,000
Proceeds from exercise of stock options 22 11
Proceeds from sales under employee stock purchase plan 46 42
------- -------
Net cash provided by financing activities 4,568 3,053
------- -------
Net decrease in cash and cash equivalents (778) (1,432)
Cash and cash equivalents at beginning of period 1,303 2,438
------- -------
Cash and cash equivalents at end of period $ 525 $ 1,006
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
</TABLE>
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
--------------------
The financial information included herein is unaudited, but in the opinion
of management, reflects all normal recurring adjustments necessary for a
fair presentation of the results for the interim periods. The interim
results of operations and cash flows are not necessarily indicative of such
results and cash flows for the entire year. These financial statements
should be read in conjunction with the financial statements and notes
thereto contained in the Annual Report on Form 10-K for the fiscal year
ended June 30, 1997 (the "1997 Form 10-K") of Playboy Enterprises, Inc. and
Subsidiaries (the "Company").
(B) INCOME TAXES
------------
The Company's net deferred tax asset declined to $13.8 million at September
30, 1997 based on taxable income for the current quarter and management's
projection of fiscal 1998 taxable income. As reported in the Company's 1997
Form 10-K, the deferred tax asset includes principally the anticipated
benefit of net operating loss carryforwards. Of the $13.8 million and $14.4
million net deferred tax assets included in the Condensed Consolidated
Balance Sheets at September 30, 1997 and June 30, 1997, respectively, $0.3
million is included in "Other current assets" with the remainder segregated
as "Net deferred tax assets."
Realization of the net deferred tax asset is dependent upon the Company's
ability to generate taxable income in future years. The recognition of
benefits in the financial statements is based upon projections by
management of future operating income and the anticipated reversal of
temporary differences that will result in taxable income. Projections of
future earnings were based on adjusted historical earnings.
In order to fully realize the net deferred tax asset of $14.4 million
recorded at June 30, 1997, the Company will need to generate future taxable
income of approximately $42.4 million prior to the expiration, beginning in
2004, of the Company's net operating loss carryforwards. Management
believes that it is more likely than not that the required amount of such
taxable income will be realized. Management will periodically reconsider
the assumptions utilized in the projection of future earnings and, if
warranted, increase or decrease the amount of deferred tax benefits
recognized through an adjustment to the valuation allowance.
(C) INVENTORIES
-----------
Inventories, which are stated at the lower of cost (average cost and
specific cost) or market, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Sept. 30, June 30,
1997 1997
---------- ---------
<S> <C> <C>
Paper $ 8,585 $ 7,564
Editorial and other prepublication costs 6,381 6,213
Merchandise finished goods 9,999 9,527
------- -------
Total inventories $24,965 $23,304
======= =======
</TABLE>
(D) TREASURY STOCK
--------------
Treasury stock consisted of 293,427 Class A common shares and 978,517 Class
B common shares at September 30, 1997. At June 30, 1997, treasury stock
consisted of 293,427 Class A common shares and 987,341 Class B common
shares.
6
<PAGE>
(E) EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS
--------------------------------------
In September 1997, the Board of Directors of the Company (the "Board")
adopted the 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc. ("the Plan"), which is subject to shareholder approval.
The Plan authorizes the issuance of 200,000 shares of the Company's Class B
common stock ("Class B Stock"). The Plan requires that payment to non-
employee directors of the Company ("Non-Employee Directors") of all
compensation earned for attendance at Board and committee meetings, and for
committee positions held, be in the form of Class B Stock. The Plan also
permits Non-Employee Directors to elect to receive all or a portion of
their annual retainers in the form of shares of Class B Stock and permits
the Company to issue to Non-Employee Directors (i) options to purchase
shares of Class B Stock, (ii) awards of restricted Class B Stock and (iii)
awards of Class B Stock. As of September 30, 1997, 25,000 shares of Class B
Stock had been granted as restricted stock awards under the Plan which are
expected to result in approximately $0.1 million of compensation expense
for the fiscal year ended June 30, 1998.
(F) CONTINGENCIES
-------------
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act of 1996 which, among other things, regulates the
cable transmission of adult programming, such as the Company's domestic pay
television programs. The Company's revenues attributable to its domestic
pay television cable services will continue to be materially adversely
affected as a result of enforcement of Section 505, which commenced May 18,
1997, due to reduced buy rates from the systems that roll back carriage to
a 10:00 p.m. start time and possibly reduced carriage from cable operators
due to aggressive competition for carriage from all program suppliers.
Preliminary results which the Company has received from the cable operators
are consistent with the Company's testimony given in spring of 1996
indicating that the Entertainment Group's annual revenue decline will be
approximately $5 million. See Part II. Item 1. "Legal Proceedings."
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially
responsible party" ("PRP") in connection with a site identified as the
Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in
Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of
the Company. The Resort was sold by the Company's subsidiary to LG
Americana-GKP Joint Venture in 1982. Two other entities were also
identified as PRPs in the notice. The notice relates to actions that may be
ordered taken by the EPA to sample for and remove contamination in soils
and sediments, purportedly caused by skeet shooting activities at the
Resort property. During fiscal 1994, the EPA advised the Company of its
position that the area of land requiring remediation is approximately twice
the size of the initial site. The Company believes that it has established
adequate reserves, which totaled $0.6 million at September 30, 1997, to
cover the eventual cost of its anticipated share (based on an agreement
with one of the other PRPs) of any remediation that may be agreed upon. The
Company is also reviewing available defenses and claims it may have against
third parties.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions of dollars, except per share amounts)
RESULTS OF OPERATIONS
- ---------------------
The Company's revenues increased 3% to $68.2 for the quarter ended
September 30, 1997 compared to $66.2 for the prior year quarter primarily due to
higher revenues from the Entertainment Group, driven by an increase in Playboy
TV, combined with higher revenues from the other domestic publishing businesses.
Partially offsetting the above was a decline in revenues from the Catalog Group.
The Company reported operating income of $2.3 for the quarter ended
September 30, 1997 compared to $2.4 in the prior year quarter. The slight
decrease was primarily due to a decline in operating performance for the Catalog
Group and higher Corporate Administration and Promotion expenses, largely offset
by higher operating income from the Publishing Group. Entertainment Group
operating income remained relatively stable as Playboy TV revenue and operating
income growth was largely offset by higher Playboy businesses programming and
administrative expenses.
Net income for the quarter ended September 30, 1997 was $1.1, or $0.05 per
share, compared to $1.0, or $0.05 per share, for the prior year quarter.
Net income for the quarter ended September 30, 1997, adjusted to eliminate
federal income tax expense that will not be paid due to the Company's net
operating loss and tax credit carryforwards, was $1.8, or $0.09 per share,
compared to $1.7, or $0.08 per share, for the prior year quarter.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary with the timing of
sales to international customers, particularly on a tier basis.
Publishing Group
The revenues and operating income of the Publishing Group were as follows
for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
September 30,
----------------
1997 1996
------ ------
<S> <C> <C>
Revenues
Playboy Magazine........... $24.3 $24.1
Other Domestic Publishing.. 6.2 5.7
International Publishing... 2.2 2.3
----- -----
$32.7 $32.1
Total Revenues............ ===== =====
Operating Income........... $ 1.9 $ 1.1
===== =====
</TABLE>
Publishing Group revenues increased $0.6, or 2%, for the quarter ended
September 30, 1997 compared to the prior year. This was primarily due to higher
revenues from newsstand specials, Playboy magazine and Playboy Cyber Club, the
Company's new pay site on the Internet, partially offset by lower international
publishing revenues.
8
<PAGE>
Playboy magazine advertising revenues increased $0.5, or 9%, for the
quarter ended September 30, 1997 compared to the prior year primarily due to 9%
more ad pages in the current year quarter. Advertising sales for the fiscal 1998
second quarter issues of the magazine are closed, and the Company expects to
report basically stable advertising pages and revenues compared to the fiscal
1997 second quarter. Playboy magazine circulation revenues for the quarter ended
September 30, 1997 decreased slightly by 2%, with subscription revenues somewhat
lower. Newsstand revenues increased slightly as more newsstand copies sold in
the current year quarter were mostly offset by an unfavorable variance related
to newsstand sales adjustments.
Revenues from other domestic publishing businesses increased $0.5, or 9%,
for the quarter ended September 30, 1997 compared to the prior year primarily
due to the mix of newsstand specials titles sold. Additionally, the Company
generated revenues in the current year quarter from Playboy Cyber Club.
International publishing revenues decreased $0.1, or 7%, for the quarter
ended September 30, 1997.
For the quarter ended September 30, 1997, Publishing Group operating income
increased $0.8, or 76%, compared to the prior year even after the Company's
planned investment in Playboy Cyber Club. The increase was primarily due to
lower manufacturing costs, principally lower average paper prices, combined with
the higher Playboy magazine advertising and newsstand specials revenues.
Partially offsetting the above were the lower Playboy magazine subscription
revenues and higher expenses related to filling the vacant division president
position and performance-related variable compensation.
Entertainment Group
The revenues and operating income of the Entertainment Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
September 30,
------------------
1997 1996
----- -----
<S> <C> <C>
Revenues
Playboy TV
Cable............................................................. $ 4.4 $ 5.0
Satellite Direct-to-Home.......................................... 7.2 5.1
Off-Network Productions and Other................................. 0.9 0.4
----- -----
Total Playboy TV................................................... 12.5 10.5
Domestic Home Video................................................ 1.7 1.6
International TV and Home Video.................................... 2.6 2.3
----- -----
Total Playboy Businesses........................................... 16.8 14.4
AdulTVision........................................................ 1.1 1.2
Movies and Other................................................... 0.3 0.2
----- -----
Total Revenues.................................................... $18.2 $15.8
===== =====
Operating Income
Profit Contribution Before Playboy Businesses Programming Expense.. $ 9.1 $ 7.9
Playboy Businesses Programming Expense............................. (5.5) (4.4)
----- -----
Total Operating Income............................................ $ 3.6 $ 3.5
===== =====
</TABLE>
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").
Playboy TV
For the quarter ended September 30, 1997, revenues of $12.5 from the
Company's branded domestic pay television service, Playboy TV, were $2.0, or
19%, higher compared to the prior year quarter.
9
<PAGE>
Cable revenues were $0.6, or 12%, lower compared to the prior year quarter
primarily as a result of the estimated negative effect of Section 505 of the
Telecommunications Act of 1996 ("Section 505"), partially offset by a favorable
variance related to prior year adjustments. At September 30, 1997, Playboy TV
was available to approximately 10.9 million cable addressable households, a 1%
decrease compared to September 30, 1996. Of the 10.9 million cable addressable
households, only an estimated 1.3 million could receive Playboy TV on a 24-hour
basis, a 2.8 million, or 68%, decrease compared to September 30, 1996. The
number of total cable addressable households to which Playboy TV was available
at September 30, 1997 decreased 3% from June 30, 1997, while households with 24-
hour availability decreased 1.5 million, or 54%, over the same period. The drop
in households with 24-hour availability began in the fourth quarter of fiscal
1997 after the enforcement of Section 505.
Management believes that the Company's revenues attributable to its
domestic pay television cable services will continue to be materially adversely
affected as a result of enforcement of Section 505, which commenced May 18,
1997, due to reduced buy rates from the systems that roll back carriage to a
10:00 p.m. start time and possibly reduced carriage from cable operators due to
aggressive competition for carriage from all program suppliers. Preliminary
results which the Company has received from the cable operators are consistent
with the Company's testimony given in spring of 1996 indicating that the
Entertainment Group's annual revenue decline will be approximately $5 million.
The Company intends to pursue in the United States District Court in Wilmington,
Delaware (the "Court") its case challenging on constitutional grounds the
validity of Section 505 and to seek a permanent injunction against the
enforcement of Section 505. The Company's full case on the merits will not be
heard or decided by the Court until calendar 1998. There can be no assurance
that the Court will grant such an injunction. See Part II. Item 1. "Legal
Proceedings."
Additionally, management believes that the growth in cable access for the
Company's domestic pay television businesses has slowed in recent years due to
the effects of cable reregulation by the Federal Communications Commission
("FCC"), including the "going-forward rules" announced in fiscal 1995 which
provide cable operators with incentives to add basic services. As cable
operators have utilized available channel space to comply with "must-carry"
provisions, mandated retransmission consent agreements and "leased access"
provisions, competition for channel space has increased. Further, the delay of
new technology, primarily digital set-top converters which would dramatically
increase channel capacity, has contributed to the slowdown. Management believes
that growth will continue to be affected in the near term as the cable
television industry responds to the FCC's rules and subsequent modifications,
and develops new technology. However, as digital technology (which is unaffected
by Section 505) becomes more available, the Company believes that ultimately its
pay television networks will be available to the vast majority of cable
households on a 24-hour basis.
More than offsetting the cable decline were satellite direct-to-home
("DTH") revenues which were $2.1, or 43%, higher for the quarter ended September
30, 1997 compared to the prior year primarily due to significant increases in
addressable universes for PrimeStar and DirecTV and, beginning in March 1997,
the availability of monthly subscriptions through PrimeStar. As expected,
revenues from TVRO, or the big-dish market, continued to decline. Playboy TV was
available to approximately 6.4 million DTH households, including approximately
235,000 monthly subscribers, at September 30, 1997, an increase of 23% compared
to September 30, 1996, and 2% since June 30, 1997.
For the quarter ended September 30, 1997, revenues from off-network
productions and other increased $0.5, or 90%, compared to the prior year
primarily due to licensing more episodes of Women: Stories of Passion to
Showtime Networks Inc.
Profit contribution for Playboy TV increased $2.0 for the quarter ended
September 30, 1997 primarily due to the net increase in revenues discussed
above.
Domestic Home Video
Domestic home video revenues increased $0.1, or 10%, for the quarter ended
September 30, 1997 compared to the prior year primarily as a result of higher
net sales of new releases, principally Farrah Fawcett: All of Me, partially
offset by overall lower sales of other new releases. Partially offsetting the
higher revenues from new releases were lower revenues related to the Company's
direct-response continuity series. Profit contribution decreased $0.3 for the
quarter compared to the prior year as the increase in revenues was more than
offset by higher marketing and promotion costs.
10
<PAGE>
International TV and Home Video
For the quarter ended September 30, 1997, revenues from the international
TV and home video business increased $0.3, or 10%, compared to the prior year.
The higher revenues were due to international TV, principally as the result of
net revenues in the current year quarter from Germany and the Latin American
network, partially offset by lower revenues from Taiwan. International home
video revenues were lower principally due to revenues from South Korea in the
prior year quarter. Profit contribution declined $0.1 due to international home
video, as a result of the lower revenues, mostly offset by higher profit
contribution from international TV which resulted from the higher revenues,
partially offset by higher related distribution costs. Variations in quarterly
performance are caused by revenues and profit contribution from the recognition
of tier sales depending upon the timing of program delivery, license periods and
other factors.
Playboy Businesses Programming Expense
Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above increased $1.1 for the quarter ended
September 30, 1997 compared to the prior year primarily due to the net higher
revenues discussed above combined with the Company's increased cash investments
in programming over the last several years.
AdulTVision
AdulTVision revenues decreased $0.1, or 6%, for the quarter ended September
30, 1997 compared to the prior year due to lower international revenues, mostly
offset by higher revenues from the domestic network even after the estimated
negative effect of Section 505 as previously discussed. At September 30, 1997,
the network was available domestically to approximately 5.5 million cable
addressable and DTH households, a 15% and 4% increase from September 30, 1996
and June 30, 1997, respectively. For the quarter ended September 30, 1997,
operating income remained stable as the lower revenues were mostly offset by
lower marketing costs.
Movies and Other
For the quarter ended September 30, 1997, revenues from movies and other
businesses increased $0.1 while operating income remained stable. The
Entertainment Group's administrative expenses for the quarter ended September
30, 1997 increased $0.4 compared to the prior year due in part to the timing of
performance-related variable compensation expense.
Product Marketing Group
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
[CAPTION]
<TABLE>
Quarters Ended
September 30,
---------------
<S> <C> <C>
1997 1996
---- ----
$2.4 $2.2
Revenues................................ ==== ====
$1.5 $1.3
Operating Income........................ ==== ====
</TABLE>
Revenues and operating income for the quarter ended September 30, 1997 both
increased $0.2 compared to the prior year quarter.
11
<PAGE>
Catalog Group
The revenues and operating income (loss) of the Catalog Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Ended
September 30,
----------------
<S> <C> <C>
1997 1996
---- ----
$14.9 $16.1
Revenues............................... ===== =====
$(0.1) $ 0.5
Operating Income (Loss)................ ===== =====
</TABLE>
For the quarter ended September 30, 1997, revenues of the Catalog Group
decreased $1.2, or 7%, compared to the prior year quarter primarily due to lower
sales volume from the Collectors' Choice Music and Critics' Choice Video
catalogs. These lower revenues were primarily attributable to lower response
rates, which the Company believes were due in part to the negative impact of the
United Parcel Service strike, combined with lower revenues from promotions for
the Collectors' Choice Music catalog.
Catalog Group operating performance decreased $0.6 for the quarter ended
September 30, 1997 compared to the prior year quarter primarily due to the lower
revenues, partially offset by lower related costs.
Corporate Administration and Promotion
Corporate administration and promotion expense of $4.6 for the quarter
ended September 30, 1997 increased $0.6, or 16%, compared to the prior year
quarter largely due to filling the chief marketing officer position and
associated marketing spending, combined with filling the chief financial officer
position. Both positions were vacant in the prior year quarter.
Casino Gaming
In fiscal 1996, the Company announced plans to reenter the casino gaming
business. The Company, with a consortium of Greek investors, bid for and won an
exclusive casino gaming license on the island of Rhodes, Greece. The Company's
consortium executed the contract with the government in October 1996 and is
renovating the historic Hotel des Roses to be the Playboy Casino and Beach
Hotel, which is expected to open in calendar 1998. The Company announced the
addition of a senior gaming executive who will oversee the exploration of other
casino gaming opportunities, with a strategy to form joint ventures with strong
local partners, in which the Company would receive license fees for the use of
the Playboy name and trademarks and would typically take equity positions.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1997, the Company had $0.5 in cash and cash equivalents
and $9.0 in short-term borrowings, compared to $1.3 in cash and cash equivalents
and $4.5 in short-term borrowings at June 30, 1997. The Company expects to meet
its short- and long-term cash requirements through cash generated from
operations and its revolving credit agreement.
Cash Flows From Operating Activities
Net cash used for operating activities was $4.8 for the quarter ended
September 30, 1997 compared to $4.0 for the prior year quarter. Cash used for
operating assets and liabilities was $5.0 in the current year quarter compared
to $2.8 in the prior year primarily due to the timing of advances received for
Playboy magazine newsstand sales combined with advances received in the prior
year quarter related to a promotion for the Collectors' Choice Music catalog.
The Company invested $7.6 in Company-produced and licensed entertainment
programming during the first quarter of fiscal 1998 compared to $7.7 in the
prior year quarter, and expects to invest approximately $23.2 in such
programming during the remainder of fiscal 1998.
12
<PAGE>
Cash Flows From Investing Activities
Net cash used for investing activities was $0.5 for both of the quarters
ended September 30, 1997 and 1996.
Cash Flows From Financing Activities
Net cash provided by financing activities was $4.6 for the quarter ended
September 30, 1997 compared to $3.1 for the prior year quarter. This increase
was principally due to a $1.5 higher increase in the level of short-term
borrowings under the Company's revolving line of credit in the current year
quarter to finance ongoing operations.
Income Taxes
Based on current tax law, the Company must generate approximately $42.4 of
future taxable income prior to the expiration, beginning in 2004, of the
Company's net operating loss carryforwards ("NOLs") for full realization of the
$14.4 net deferred tax asset recorded at June 30, 1997. At June 30, 1997, the
Company had NOLs of $20.8 for tax purposes, with $1.2 expiring in 2004, $2.1
expiring in 2007, $1.1 expiring in 2008 and $16.4 expiring in 2009.
Management believes that it is more likely than not that a sufficient level
of taxable income will be generated prior to the expiration of the Company's
NOLs to realize the $14.4 net deferred tax asset recorded at June 30, 1997. The
Company's net deferred tax asset declined to $13.8 at September 30, 1997 based
on taxable income for the current quarter and management's projection of fiscal
1998 taxable income. Following is a summary of the bases for management's belief
that a valuation allowance of $15.9 at June 30, 1997 is adequate, and that it is
more likely than not that the net deferred tax asset of $14.4 at June 30, 1997
will be realized:
. In establishing the net deferred tax asset, management reviewed the
components of the Company's NOLs and determined that they primarily
resulted from several nonrecurring events, which were not indicative of the
Company's ability to generate future earnings.
. All of the Company's operating groups, particularly the Entertainment
Group, continue to generate meaningful earnings, and the Company's
substantial investments in the Entertainment Group are anticipated to lead
to increased earnings in future years.
. The Company has opportunities to accelerate taxable income into the NOL
carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and amortization
methods for tax purposes and the sale-leaseback of certain property that
would generate taxable income in future years.
Other
In January 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap &
Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin
(the "Resort"), formerly owned by a subsidiary of the Company. The Resort was
sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two
other entities were also identified as PRPs in the notice. The notice relates to
actions that may be ordered taken by the EPA to sample for and remove
contamination in soils and sediments, purportedly caused by skeet shooting
activities at the Resort property. During fiscal 1994, the EPA advised the
Company of its position that the area of land requiring remediation is
approximately twice the size of the initial site. The Company believes that it
has established adequate reserves, which totaled $0.6 at September 30, 1997, to
cover the eventual cost of its anticipated share (based on an agreement with one
of the other PRPs) of any remediation that may be agreed upon. The Company is
also reviewing available defenses and claims it may have against third parties.
13
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Forward-Looking Statements
This Form 10-Q report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. Such forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The following are some of the important
factors that could cause actual results or outcomes to differ materially from
those discussed in the forward-looking statements: (1) government actions or
initiatives, including (a) attempts to limit or otherwise regulate the sale of
adult-oriented materials, including print, video and online materials or
businesses such as casino gaming, (b) regulation of the advertisement of tobacco
products, or (c) substantive changes in postal regulations or rates, (2)
increases in paper prices, (3) changes in distribution technology and/or
unforeseen delays in the implementation of such technology by the cable and
satellite industries that might affect the Company's plans and assumptions
regarding carriage of its program services, (4) increased competition for
advertisers from other publications and media or any significant decrease in
spending by advertisers generally or with respect to the adult male market, and
(5) increased competition for transponders and channel space, and any decline in
the Company's access to, and acceptance by, cable systems.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required until fiscal year ended June 30, 1998 because the Company's
market capitalization was less than $2.5 billion as of January 28, 1997.
14
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
In February 1996, Congress passed the Telecommunications Act of 1996 (the
"Telecommunications Act"), and President Clinton signed it into law. Certain
provisions of the Telecommunications Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to nonsubscribing cable customers. This is
called "bleeding." The practical effect of Section 505 of the Telecommunications
Act ("Section 505") is to require many existing cable systems to employ
additional blocking technology in every household in every cable system that
offers adult programming, whether or not customers request it or need it, to
prevent any possibility of bleeding, or to restrict the period during which the
programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation
of the Telecommunications Act are significant and include fines and
imprisonment. Surveying of cable operators and initial results indicate that
most will choose to comply with Section 505 by restricting the hours of
transmission.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the United States District Court in Wilmington, Delaware (the "Court")
challenging Section 505 on constitutional grounds. The suit names as defendants
The United States of America, The United States Department of Justice, Attorney
General Janet Reno and The Federal Communications Commission. On March 7, 1996,
the Company was granted a Temporary Restraining Order ("TRO") staying the
implementation and enforcement of Section 505. In granting the TRO, the court
found that the Company had demonstrated it was likely to succeed on the merits
of its claim that Section 505 is unconstitutional. On November 8, 1996, eight
months after the TRO was granted, a three-judge panel in the Court denied the
Company's request for preliminary injunction against enforcement of Section 505
and, in so denying, found that the Company was not likely to succeed on the
merits of its claim. The Company appealed the Court's decision to the United
States Supreme Court and enforcement of Section 505 was stayed pending that
appeal. On March 24, 1997, without opinion, the Supreme Court summarily affirmed
the Court's denial of the Company's request for a preliminary injunction. On
July 22, 1997, the Company filed a motion for summary judgment on the ground
that Section 505 is unconstitutionally vague based on the Supreme Court's
decision on June 26, 1997 that certain provisions of the Telecommunications Act
regulating speech on the Internet were invalid for numerous reasons, including
vagueness. On October 31, 1997, the Court denied the motion on the grounds that
further discovery in the case was necessary to assist the Court in resolving the
issues posed in the motion.
Management believes that the Company's revenues attributable to its
domestic pay television cable services will continue to be materially adversely
affected as a result of enforcement of Section 505, which commenced May 18,
1997, due to reduced buy rates from the systems that roll back carriage to a
10:00 p.m. start time and possibly reduced carriage from cable operators due to
aggressive competition for carriage from all program suppliers. Preliminary
results which the Company has received from the cable operators are consistent
with the Company's testimony given in spring of 1996 indicating that the
Entertainment Group's annual revenue decline will be approximately $5 million.
The Company intends to pursue in the Court its case challenging on
constitutional grounds the validity of Section 505 and to seek a permanent
injunction against the enforcement of Section 505. The Company's full case on
the merits will not be heard or decided by the Court until calendar 1998. There
can be no assurance that the Court will grant such an injunction.
15
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Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.1 1997 Equity Plan for Non-Employee Directors
a 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc.
b Form of Restricted Stock Agreement
#10.2 Memorandum of Agreement as of July 29, 1997 between Playboy
Entertainment Group, Inc. and the Modern Times Group related to
broadcasting a pay television service known as Playboy TV/ Scandinavia
#10.3 Third Amendment to November 15, 1993 Affiliation Agreement between
Playboy Entertainment Group, Inc. and DirecTV, Inc. regarding the
satellite distribution of Playboy TV dated August 26, 1997
10.4 Letter Agreement, in reference to the Letter Agreement dated January
13, 1997, between Playboy Entertainment Group, Inc. and Bloomfield
Mercantile, Inc. regarding Playboy Television programming in
Scandinavia dated as of July 31, 1997
10.5 Selected Employment, Termination and Other Agreements
a Letter Agreement dated September 25, 1997 regarding employment of
Helen Isaacson
b Letter Agreement dated September 26, 1997 regarding employment of
Garry Saunders
11 Computation of Earnings Per Common Share
27 Financial Data Schedule
_________
# Certain information omitted pursuant to a request for confidential treatment
filed separately with the Securities and Exchange Commission
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date November 10, 1997 By s/ Linda G. Havard
-------------------- ----------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
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1997 EQUITY PLAN FOR NON-EMPLOYEE
DIRECTORS OF PLAYBOY ENTERPRISES, INC.
1. Purpose. The purposes of the Plan are (1) to promote the growth and
long-term success of Playboy Enterprises, Inc., a Delaware corporation (the
"Company"), by offering Non-Employee Directors the ability to acquire Common
Stock of the Company, (2) to enable the Company to attract and retain qualified
persons to serve as Non-Employee Directors, which services are considered
essential to the long-term success of the Company, by offering them an
opportunity to own Common Stock of the Company, and (3) to more closely align
the interests of Non-Employee Directors with the interests of the Company's
stockholders by paying certain amounts of compensation for services as a
Director in the form of shares of Common Stock.
2. Definitions. In addition to the other terms defined elsewhere herein,
wherever the following terms are used in this Plan with initial capital letters,
they have the meanings specified below, unless the context clearly indicates
otherwise.
"Accounting Period" means each fiscal quarter of the Company, such quarters
beginning on January 1, April 1, July 1 and October 1 of each year.
"Award" means an award of an Option Right, Restricted Stock or Common Stock
Grant under this Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Common Stock" means the Class B Common Stock, par value $0.01 per share,
of the Company, and any security into which such Common Stock may be converted
or for which such Common Stock may be exchanged by reason of any transaction or
event of the type described in Section 9 of this Plan.
"Common Stock Grant" means Common Stock, other than Restricted Stock,
awarded pursuant to Section 5 of this Plan.
"Company" has the meaning set forth in Section 1, and includes its
successors.
"Date of Award" means the date specified by the Board on which an Award
becomes effective, which shall not be earlier than the date on which the Board
takes action with respect thereto.
"Deferred Compensation Plan" means the Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, effective as of October 1, 1992, as it
may be amended from time to time.
<PAGE>
"Employee" means any officer or other employee of the Company or of any
corporation which is then a Subsidiary.
"Fiscal Year" means the period beginning on July 1 of each year and ending
on June 30 of the subsequent year.
"Issuance Date" has the meaning set forth in Section 6.
"Mandatory Fee Shares" means Common Stock awarded pursuant to Section 6 in
an amount equal to a Non-Employee Director's Meeting Fees.
"Meeting Fees" means the compensation payable to a Non-Employee Director
with regard to the number of Board or Committee meetings attended, or Committee
positions held, as determined by the Board from time to time, but does not
include any such compensation subject to deferral under the Deferred
Compensation Plan pursuant to an agreement executed by a Non-Employee Director
and the Company in accordance with the terms of the Deferred Compensation Plan.
"Market Value per Share" means either (a) the closing price of a share of
Common Stock as reported on the New York Stock Exchange (the "NYSE") on the date
as of which such value is being determined, or, if there are no reported
transactions for such date, on the next preceding date for which transactions
were reported, as published in the Midwest Edition of The Wall Street Journal,
or (b) if there is no reporting of transactions on the NYSE, the fair market
value of a share of Common Stock as determined by the Board from time to time.
"Non-Employee Director" means a member of the Board who is not an Employee.
"Optionee" means a Non-Employee Director to whom an Option Right is awarded
under this Plan.
"Option Price" means the purchase price payable upon the exercise of an
Option Right.
"Option Right" means the right to purchase shares of Common Stock from the
Company upon the exercise of an option awarded hereunder.
"Participant" means a Non-Employee Director (or a person who has agreed to
commence serving in such capacity) who is selected by the Board to receive
Awards under this Plan, who is entitled to receive Mandatory Fee Shares or who
has elected to receive Voluntary Shares.
"Participation Agreement" means the agreement submitted by a Non-Employee
Director to the Secretary of the Company pursuant to which a Non-Employee
Director may elect to receive all or any portion of his or her Retainer in the
form of Voluntary Shares for a specified period in the future.
2
<PAGE>
"Performance Objectives" means the performance objectives that may be
established by the Board pursuant to this Plan for Participants who have
received Awards.
"Plan" means the 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc. as set forth herein, as the same may be amended or restated
from time to time.
"Restricted Stock" means Common Stock awarded pursuant to Section 5 of this
Plan as to which neither the substantial risk of forfeiture nor the restrictions
on transfer referred to in Section 5 hereof have expired.
"Restricted Stockholder" means a Non-Employee Director to whom Restricted
Stock has been awarded under this Plan.
"Retainer" means the portion of a Non-Employee Director's annual
compensation that is payable without regard to the number of board or committee
meetings attended or committee positions, as determined by the Board from time
to time, but does not include any such compensation subject to deferral under
the Deferred Compensation Plan pursuant to an agreement executed by a Non-
Employee Director and the Company in accordance with the terms of the Deferred
Compensation Plan.
"Rule 16b-3" means Rule 16b-3 under the Securities Exchange Act of 1934, as
amended or any successor rule.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company, unincorporated association or other entity (each, an
"Entity") in an unbroken chain of Entities beginning with the Company if each of
the Entities other than the last Entity in the unbroken chain then owns stock or
other interests possessing 50 percent or more of the total combined voting power
of all classes of stock or other interests in one of the other Entities in such
chain.
"Termination of Directorship" means the time when a Participant ceases to
be a Director for any reason, including, without limitation, a termination by
resignation, removal, failure to be elected or reelected, death or retirement.
"Valuation Dates has the meaning set forth in Section 6.
"Voluntary Shares" has the meaning set forth in Section 7(a).
3. Shares Available under the Plan. Subject to adjustment as provided in
Section 9 of this Plan, the number of shares of Common Stock issued or
transferred, plus the number of shares of Common Stock covered by outstanding
Awards and not forfeited under this Plan, shall not in the aggregate exceed
200,000 shares, which may be shares of original issuance or shares held in
treasury or a combination thereof. If an Option Right lapses or terminates
before such Option is exercised or shares of Restricted Stock or Common Stock
Grants are forfeited, for any reason, the shares covered thereby may again be
made subject to Awards or issued as Mandatory Fee Shares or Voluntary Shares
under this Plan.
3
<PAGE>
4. Option Rights. The Board may from time to time authorize Awards to
Participants of Options to purchase shares of Common Stock upon such terms and
conditions as the Board may determine in accordance with the following
provisions:
(a) Each Award shall specify the number of shares of Common Stock to
which the Option Rights pertain.
(b) Each Award of Option Rights shall specify an Option Price per
share of Common Stock, which shall be equal to or greater than the Market
Value per Share on the Date of Award.
(c) Each Award of Option Rights shall specify the form of
consideration to be paid in satisfaction of the Option Price and the manner
of payment of such consideration, which may include (i) cash in the form of
currency or check or other cash equivalent acceptable to the Company, (ii)
nonforfeitable, nonrestricted shares of Common Stock, which are already
owned by the Optionee and have a value at the time of exercise that is
equal to the Option Price, (iii) any other legal consideration that the
Board may deem appropriate, including, without limitation, any form of
consideration authorized under Section 4(d) below, on such basis as the
Board may determine in accordance with this Plan, and (iv) any combination
of the foregoing.
(d) On or after the Date of Award of any Option Right, the Board may
determine that payment of the Option Price may also be made in whole or in
part in the form of shares of Restricted Stock or other shares of Common
Stock that are subject to risk of forfeiture or restrictions on transfer.
Unless otherwise determined by the Board on or after the Date of Award,
whenever any Option Price is paid in whole or in part by means of any of
the forms of consideration specified in this Section 4(d), the shares of
Common Stock received by the Optionee upon the exercise of the Option Right
shall be subject to the same risks of forfeiture or restrictions on
transfer as those that applied to the consideration surrendered by the
Optionee; provided, however, that such risks of forfeiture and restrictions
on transfer shall apply only to the same number of shares of Common Stock
received by the Optionee as applied to the forfeitable or restricted shares
of Common Stock surrendered by the Optionee.
(e) Any Award of Option Rights may provide for the deferred payment of
the Option Price from the proceeds of sale through a broker of some or all
of the shares of Common Stock to which the exercise relates.
(f) Successive Awards may be made to the same Participant regardless
of whether any Option Rights previously awarded to the Participant remain
unexercised.
(g) Each Award shall specify the period or periods of continuous
service as a Non-Employee Director by the Optionee that are necessary or
Performance Objectives that must be achieved before the Option Rights or
installments thereof shall become exercisable, and any Award may provide
for the earlier exercise of the Option Rights in the event of a change in
control of the Company or other transaction or event.
4
<PAGE>
(h) The term of an Option Right shall be set by the Board; provided,
however, that no Option Right awarded pursuant to this Section 4 may have a
term of more than 10 years from the Date of Award.
(i) Each Award of an Option Right shall be evidenced by a written
Stock Option Agreement, which shall be executed on behalf of the Company by
any officer thereof and delivered to and accepted by the Optionee and shall
contain such terms and provisions as the Board may determine consistent
with this Plan.
5. Common Stock Grants and Restricted Stock. The Board may also authorize
Awards to Participants of Common Stock Grants and Restricted Stock upon such
terms and conditions as the Board may determine in accordance with the following
provisions:
(a) A Common Stock Grant consists of the transfer by the Company to a
Participant of shares of Common Stock in consideration and as additional
compensation for services performed for the Company. Each Award of Common
Stock Grants and Restricted Stock shall constitute an immediate transfer of
the ownership of shares of Common Stock to the Participant in consideration
of the performance of services, entitling such Participant to dividend,
voting and other ownership rights, subject to, in the case of Awards of
Restricted Stock, the substantial risk of forfeiture and restrictions on
transfer hereinafter referred to.
(b) Each Award of Restricted Stock shall provide that the shares of
Restricted Stock covered thereby shall be subject to a "substantial risk of
forfeiture" within the meaning of Section 83 of the Code for a period to be
determined by the Board on the Date of Award, and may provide for the
termination of such risk of forfeiture upon the achievement of certain
Performance Objectives, in the event of a change in control of the Company,
or upon any other transaction or event.
(c) Each Award of Restricted Stock shall provide during the period for
which such substantial risk of forfeiture is to continue, and any Award of
Common Stock Grants may provide, that the transferability of the shares of
Common Stock subject to such Awards shall be prohibited or restricted in
the manner and to the extent prescribed by the Board on the Date of Award.
Such restrictions may include, without limitation, rights of repurchase or
first refusal in the Company or provisions subjecting the shares of
Restricted Stock to a continuing substantial risk of forfeiture in the
hands of any transferee.
(d) Any Award of a Common Stock Grant or Restricted Stock may be made
in consideration of payment by the Participant of an amount that is less
than the Market Value per Share on the Date of Award, but in no event shall
the value of the consideration provided with respect to any such Award be
less than the par value per share of Common Stock.
(e) Any Award of Restricted Stock may require that any or all
dividends or other distributions paid on the shares of Restricted Stock
during the period of such restrictions be automatically sequestered and
reinvested on an immediate or
5
<PAGE>
deferred basis in additional shares of Common Stock, which may be subject
to the same restrictions as the underlying award or such other restrictions
as the Board may determine.
(f) Each Award of a Common Stock Grant and Restricted Stock shall be
evidenced by a Stock Grant Agreement or Restricted Stock Agreement (as the
case may be), which shall be executed on behalf of the Company by any
officer thereof and delivered to and accepted by the Participant and shall
contain such terms and provisions as the Board may determine consistent
with this Plan. Unless otherwise directed by the Board, Restricted Stock
will be held in book-entry form by the Company as custodian for the
Participant. Any certificates representing shares of Restricted Stock,
together with a stock power endorsed in blank by the Participant with
respect to the shares of Restricted Stock, shall be held in custody by the
Company until all restrictions thereon lapse.
(g) The Board may provide, at or after the Date of Award of any Common
Stock Grant or Restricted Stock, for the payment of a cash award intended
to offset the amount of tax that the Participant may incur in connection
with such Common Stock Grant or Restricted Stock, including, without
limitation, tax on the receipt of such cash award.
(h) The Board may provide in any individual Stock Grant Agreement or
Restricted Stock Agreement that the Company shall have the right to
repurchase the Restricted Stock then subject to restrictions under the
Restricted Stock Agreement, or the Common Stock subject to the Common Stock
Grant, immediately upon a Termination of Directorship for any reason at a
cash price per share equal to the cash price paid by the Participants for
such Restricted Stock or Common Stock. In the discretion of the Board,
provision may be made that no such right of repurchase shall exist in the
event of a Termination of Directorship without cause or because of the
Participant's retirement, death or permanent and total disability.
6. Mandatory Fee Shares. Commencing with the first meeting of the Board
following the effective date of this Plan, all Meeting Fees shall be payable in
the form of Mandatory Fee Shares. No later than ten (10) days following the end
of an Accounting Period (the "Issuance Date"), the Company shall issue to each
Non-Employee Director a number of Mandatory Fee Shares equal to (i) the amount
of such Director's Meeting Fees for such Accounting Period, divided by (ii) the
Market Value per Share on the last day of each Accounting Period (the "Valuation
Date") with respect to which such Meeting Fees are payable. To the extent that
the application of the foregoing formula would result in the issuance of
fractional shares of Common Stock, any such fractional shares shall be
disregarded, and the remaining amount of Meeting Fees shall be paid in cash. The
Company shall pay any and all fees and commissions incurred in connection with
the payment of Mandatory Fee Shares to a Director.
7. Voluntary Shares. Each Non-Employee Director shall be eligible to elect
to receive shares of Common Stock in accordance with the following provisions:
6
<PAGE>
(a) Prior to the commencement of the Company's Fiscal Year (or by such
other date as may be specified by the Board), a Participant may elect, by
the filing of a Participation Agreement, to have up to 100 percent of his
or her Retainer paid by the Company in the form of shares of Common Stock
in lieu of a cash payment (the "Voluntary Shares"). Such Participation
Agreement must, except as the Board may otherwise provide, be filed as a
one-time election for the applicable Fiscal Year. Unless the Director
revokes or changes such election by filing a new Participation Agreement by
the due date therefor specified in this Section 7(a), such election shall
apply to a Participant's Retainer for each subsequent Fiscal Year. Once an
election has been terminated, another election may not be made effective
until the commencement of the next subsequent full Fiscal Year unless the
Board shall have otherwise provided.
(b) No later than the Issuance Date, the Company shall issue to each
Participant who has made an election under Section 7(a), a number of
Voluntary Shares for the prior Accounting Period equal to (i) the amount of
such Director's Retainer for such Accounting Period that such Director has
elected to receive as Voluntary Shares, divided by (ii) the Market Value
per Share on the Valuation Date. To the extent that the application of the
foregoing formula would result in the issuance of fractional shares of
Common Stock, any such fractional shares shall be disregarded, and the
remaining amount of the Retainer shall be paid in cash. The Company shall
pay any and all fees and commissions incurred in connection with the
payment of the Voluntary Shares to a Director.
8. Transferability.
(a) Except as may be otherwise determined by the Board, (i) Awards,
Mandatory Fee Shares and Voluntary Shares issued or granted under this Plan
shall be issued only to a Participant, (ii) Option Rights and Restricted
Stock may be transferred by a Participant only by will or the laws of
descent and distribution, and (iii) Option Rights may not be exercised
during a Participant's lifetime except by the Participant or, in the event
of the Participant's legal incapacity, by his guardian or legal
representative acting in a fiduciary capacity on behalf of the Participant
under state law and court supervision.
(b) Any Award made under this Plan may provide that all or any part of
the shares of Common Stock that are to be issued or transferred by the
Company upon the exercise of Option Rights, or are no longer subject to the
substantial risk of forfeiture and restrictions on transfer referred to in
Section 5 of this Plan, shall be subject to further restrictions upon
transfer.
(c) To the extent required to satisfy any condition to exemption
available pursuant to Rule 16b-3, Mandatory Fee Shares and Voluntary Shares
acquired by a Participant shall be held by the Participant for a period of
at least six months following the date of such acquisition.
9. Adjustments. The Board may make or provide for such adjustments in the
(a) number of shares of Common Stock covered by outstanding Awards, payable as
7
<PAGE>
Mandatory Fee Shares or subject to elections to receive Voluntary Shares, (b)
prices per share applicable to Option Rights, and (c) kind of shares (including,
without limitation, shares of another issuer) covered thereby, as the Board in
its sole discretion may in good faith determine to be equitably required in
order to prevent dilution or enlargement of the rights of Participants that
otherwise would result from (x) any stock dividend, stock split, combination of
shares, recapitalization or other change in the capital structure of the
Company, (y) any merger, consolidation, spin-off, split-off, split-up,
reorganization, partial or complete liquidation or other distribution of assets,
or issuance of rights or warrants to purchase securities or (z) any other
corporate transaction or event having an effect similar to any of the foregoing.
In the event of any such transaction or event, the Board may provide in
substitution for any or all outstanding Awards, Mandatory Fee Shares or
Voluntary Shares to be issued under this Plan such alternative consideration as
it may in good faith determine to be equitable under the circumstances and may
require in connection therewith the surrender of all Awards, Mandatory Fee
Shares or Voluntary Shares so replaced. The Board may also make or provide for
such adjustments in the numbers and kind of shares specified in Section 3 of
this Plan as the Board may in good faith determine to be appropriate in order to
reflect any transaction or event described in this Section 9.
10. Fractional Shares. The Company shall not be required to issue any
fractional shares of Common Stock pursuant to this Plan. The Board may provide
for the elimination of fractions, for the settlement thereof in cash or for such
other adjustments as the Board may deem appropriate under this Plan.
11. Withholding Taxes. To the extent, if any, that the Company is required
to withhold federal, state, local or foreign taxes in connection with any
payment made or benefit realized by a Participant or other person under this
Plan, and the amounts available to the Company for the withholding are
insufficient, it shall be a condition to the receipt of any such payment or the
realization of any such benefit that the Participant or such other person make
arrangements satisfactory to the Company for payment of the balance of any taxes
required to be withheld. At the discretion of the Board, any such arrangements
may include relinquishment of a portion of any such payment or benefit. The
Company and any Participant or such other person may also make similar
arrangements with respect to the payment of any taxes with respect to which
withholding is not required.
12. Certain Terminations of Directorships.
(a) Notwithstanding any other provision of this Plan to the contrary,
in the event of a Termination of Directorship by reason of death or
disability, or in the event of hardship or other special circumstances, of
a Participant who holds an Option Right that is not immediately and fully
exercisable or any Award as to which the substantial risk of forfeiture or
the prohibition or restriction on transfer has not lapsed, the Board may in
its sole discretion take any action that it deems to be equitable under
the circumstances or in the best interests of the Company, including,
without limitation, waiving or modifying any limitation or requirement
with respect to any Award under this Plan.
(b) If a Non-Employee Director becomes an Employee while continuing to
serve as a Director, that fact alone shall not result in a Termination of
8
<PAGE>
Directorship or otherwise impair the rights such Director may have under
this Plan, including, without limitation, the rights such Director may have
under any Award outstanding under this Plan, but such Director shall no
longer be eligible to receive any further Awards, Mandatory Fee Shares or
Voluntary Shares under this Plan.
13. Administration.
(a) Administration by the Board; Delegation. This Plan shall be
administered by the Board, which may from time to time delegate all or any
part of its authority under this Plan to a committee or subcommittee of not
less than two Directors appointed by the Board who are "non-employee
directors" within the meaning of that term as defined in Rule 16b-3. To the
extent of any delegation by the Board under this Plan, references in this
Plan to the Board shall also refer to the applicable committee or
subcommittee. The majority of any such committee or subcommittee shall
constitute a quorum, and the action of a majority of its members present at
any meeting at which a quorum is present, or acts unanimously approved in
writing, shall be the acts of such committee or subcommittee.
(b) Administrative Powers. The Board shall have the power to interpret
this Plan, the Option Rights, the Common Stock Grants, the Restricted
Stock, the procedures for issuance of Mandatory Fee Shares and elections to
receive Voluntary Shares, and the agreements pursuant to which the Option
Rights, the Common Stock Grants, the Restricted Stock, the Mandatory Fee
Shares and the Voluntary Shares are awarded and issued (including
Participation Agreements), and to adopt such rules for the administration,
interpretation and application of this Plan and such agreements as are
consistent therewith and to interpret, amend or revoke any such rules. Any
Award under this Plan need not be the same with respect to each Optionee or
Restricted Stockholder.
(c) Professional Assistance; Good Faith Actions. All expenses and
liabilities which members of the Board incur in connection with the
administration of this Plan shall be borne by the Company. The Board may
employ attorneys, consultants, accountants, appraisers, brokers or other
persons. The Board, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any
such persons. All actions taken and all interpretations and determinations
made by the Board in good faith shall be final and binding upon all
Participants, the Company and all other interested persons. No members of
the Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan, or any Option,
Common Stock Grant, Restricted Stock, Mandatory Fee Shares or Voluntary
Shares, and all members of the Board shall be fully protected by the
Company in respect of any such action, determination or interpretation.
14. Amendment, Suspension, Termination and Other Matters.
(a) This Plan may be wholly or partially amended or otherwise
modified, suspended or terminated at any time or from time to time by the
Board. However, without further approval of the stockholders of the
Company, no action of the Board
9
<PAGE>
may, except as provided in Section 9 of this Plan, increase the limits
imposed in Section 3 on the maximum number of shares of Common Stock which
may be issued under this Plan, and no action of the Board may be taken that
would otherwise require stockholder approval as a matter of applicable law
or the rules of any U.S. stock exchange, including the NYSE, on which the
Common Stock may be listed for trading or authorized for quotation. No
amendment, suspension or termination of this Plan shall, without the
consent of the holder of an Award, alter or impair any rights or
obligations under any Award theretofore granted, unless the Award itself
otherwise expressly so provides.
(b) The Board may make under this Plan any Award or combination of
Awards authorized under this Plan in exchange for the cancellation of an
Award that was not made under this Plan.
(c) Except as provided in Section 14(b) of this Plan, the making of
one or more Awards to a Non-Employee Director under this Plan shall not
preclude the making of Awards to such Non-Employee Director under any other
stock option or incentive plan previously or subsequently adopted by the
Board, nor shall the fact that a Non-Employee Director has received one or
more awards under any other stock option or incentive plan of the Company
preclude such Non-Employee Director from receiving awards under this Plan.
15. Termination of the Plan. No further awards shall be made under this
Plan after the passage of 10 years from the date on which this Plan is first
approved by the stockholders of the Company.
16. Effective Date. The effective date of this Plan shall be the date of
its adoption by the Board of Directors. This Plan and all Awards granted,
Mandatory Fee Shares issued, and any elections to receive Voluntary Shares
effected prior to the stockholder approval hereinafter mentioned, shall be void
and of no further force and effect unless this Plan shall have been approved at
a meeting of stockholders of the Company called for such purpose by the
affirmative vote of a majority of the shares of Class A Common Stock of the
Company represented in person or by proxy.
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<PAGE>
PLAYBOY ENTERPRISES, INC.
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (the "Agreement") dated __________, 1997
(the "Award Date"), is made by and between PLAYBOY ENTERPRISES, INC., a Delaware
corporation (the "Company"), and _____________, a Non-Employee Director of the
Company (the "Director"):
WHEREAS, the Company has established the 1997 Equity Plan for Non-Employee
Directors of Playboy Enterprises, Inc. (the "Plan");
WHEREAS, the Company wishes to carry out the Plan (the terms of which are
incorporated by reference in and made a part of this Agreement, and which shall
control in the event of any inconsistency between this Agreement and the Plan or
any interpretation of this Agreement);
WHEREAS, the Plan provides for the issuance of shares of the Company's
Common Stock (as hereinafter defined), subject to certain restrictions thereon
(hereinafter referred to as "Restricted Stock"); and
WHEREAS, the Board of Directors of the Company, appointed to administer the
Plan, has determined that it would be in the best interests of the Company to
issue the shares of Restricted Stock provided for herein to the Director in
partial consideration of past services to the Company and/or its Subsidiaries
and to provide further incentives for performance and continued service during
the vesting periods provided herein, and has advised the Company thereof and
instructed the undersigned officer to issue said Restricted Stock;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Agreement, they have the
meanings specified below unless the context clearly indicates to the contrary.
Capitalized terms used but not defined herein have the meanings set forth in the
Plan.
"Change in Control" means the occurrence of any of the following events:
(i) except in a transaction described in clause (iii) below, Hugh M. Hefner,
Christie Hefner, the Hugh M. Hefner 1991 Trust (for so long as Hugh M. Hefner
and Christie Hefner are
<PAGE>
joint trustees or one of them is sole trustee), and the Hugh M. Hefner
Foundation (for so long as Hugh M. Hefner and Christie Hefner are joint trustees
or one of them is sole trustee) cease collectively to own a majority of the
total number of votes that may be cast for the election of directors of the
Company; or (ii) a sale of Playboy magazine by the Company; or (iii) the
liquidation or dissolution of the Company, or any merger, consolidation or other
reorganization involving the Company unless (x) the merger, consolidation or
other reorganization is initiated by the Company, and (y) is one in which the
stockholders of the Company immediately prior to such reorganization become the
majority stockholders of a successor or ultimate parent corporation of the
Company resulting from such reorganization and (z) in connection with such
event, provision is made for an assumption of outstanding options and rights or
a substitution thereof of a new option or right in such successor or ultimate
parent of substantially equivalent value.
"Common Stock" means the Class B Common Stock, par value $0.01 per share,
of the Company and any security into which such Common Stock may be converted or
for which such Common Stock may be exchanged by reason of any transaction or
event of the type described in Section 3.9 of this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"Plan" means the 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc., as it may be amended or restated from time to time.
"Restrictions" means the transferability restrictions or substantial risk
of forfeiture imposed upon Restricted Stock under this Agreement.
"Restricted Stock" means the Common Stock of the Company issued under this
Agreement and subject to the Restrictions imposed hereunder.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act, as amended or any
successor rule.
"Secretary" means the Secretary of the Company.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Termination of Directorship" means the time when the Director ceases to
be a Director for any reason, including, without limitation, a termination by
resignation, removal, failure to be elected or reelected, death or retirement.
"Vested Stock" means Restricted Stock with respect to which the Director
has satisfied the time or performance vesting standards of this Agreement as
specified in Article III hereof.
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<PAGE>
ARTICLE II
ISSUANCE OF RESTRICTED STOCK
In consideration of past services rendered to the Company by the Director
and for other good and valuable consideration that the Board has determined to
be equal to not less than the par value of the Restricted Stock issued
hereunder, on the date hereof the Company issues to the Director 5,000 shares of
Common Stock, upon the terms, conditions and restrictions set forth in this
Agreement.
ARTICLE III
RESTRICTIONS
Section 3.1 - Vesting Period
All Restrictions will lapse automatically and Vested Stock will be issued
on ______, 2007, if and only if (i) there has been no Termination of
Directorship of the Director for any reason prior to such date, and (ii) there
has been no forfeiture of shares due to a Change of Control as specified in
Section 3.8 prior to such date.
Section 3.2 - Accelerated Vesting: Performance Objectives
Performance objectives have been established as a condition to accelerated
vesting of the Restricted Stock. The performance objectives are based on the
Company's "Operating Income" as such term is used and determined by the Company
for purposes of the Company's financial reports filed with the Securities and
Exchange Commission under the Exchange Act. Operating Income will be measured
before any unusual or "one-time" economic or accounting instances that would
distort the actual Operating Income of the Company as determined by the Board,
which may rely in its discretion on the Company's publicly reported Operating
Income Before One-Time Items. The Restrictions will lapse with respect to
specified percentages of the shares of Restricted Stock subject to this Award,
without duplication, on the second business day following the issuance by the
Company's independent auditors of their audit report after the end of any fiscal
year of the Company, beginning with the fiscal year ended June 30, 1997, during
which Operating Income first equals or exceeds each of the following thresholds:
Annual Operating Income Objective Percentage of Total Restricted
($ million) Stock Award
----------- -----------
15 30%
20 100% less any amount
previously vested
3
<PAGE>
For example, if no Restrictions have yet lapsed, and the Company's
Operating Income equals $17 million in a given year, the Restrictions would
lapse with respect to 30% of the Restricted Stock, whereas if 30% of the
Restricted Stock had previously vested, no additional Restricted Stock would
vest; if in a subsequent fiscal year, Operating Income equals $21 million, the
Restrictions would lapse with respect to the remaining 70% of the Restricted
Stock.
The lapse of the Restrictions shall be effective on the second business day
following the issuance by the Company's independent auditors of their audit
report with respect to the prior fiscal year.
Section 3.3 - Right to Payment of Restricted Stock
Upon issuance of an independent auditor's report with respect to each
fiscal year, a determination will be made as to the amount of Restricted Stock
earned, if any, on the basis of the vesting guidelines in Sections 3.1 and 3.2
and what Restricted Stock has thereby become Vested Stock. Participants must be
Directors of the Company on the second business day following the issuance by
the Company's independent auditors of their audit report with respect to such
year in order to receive any Vested Stock. Unlegended stock certificates will be
issued to Participants only after the independent audit report confirms that
vesting requirements have been satisfied; pending such issuance, Restricted
Stock will be held in book-entry form by the Company as custodian for the
Director. Unless the Secretary determines that certificates must be issued
pursuant to applicable law or contractual obligations, Restricted Stock shall
not be issued to the Director in certificated form. The Secretary of the Company
shall establish book-entry procedures sufficient to prevent unauthorized
transfers of the Restricted Stock.
Section 3.4 - Legend
The Secretary shall, or shall instruct the Company's transfer agent to,
provide stop transfer instructions in the Company's stock transfer records to
prevent any transfer of Restricted Stock for any purpose until the stock is
vested. Any certificate that the Secretary or transfer agent deems necessary to
issue to represent shares of Restricted Stock shall, until all restrictions
lapse and new certificates are issued pursuant to Section 3.5, bear the
following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
VESTING REQUIREMENTS AND MAY BE SUBJECT TO REACQUISITION BY THE COMPANY
UNDER THE TERMS OF THAT RESTRICTED STOCK AGREEMENT BY AND BETWEEN PLAYBOY
ENTERPRISES, INC. (THE "COMPANY") AND THE HOLDER OF THE SECURITIES. PRIOR
TO THE VESTING OF OWNERSHIP IN THE SECURITIES, THEY MAY NOT BE, DIRECTLY OR
INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNDER ANY CIRCUMSTANCES. COPIES OF THE ABOVE
REFERENCED AGREEMENT ARE ON FILE AT THE OFFICES
4
<PAGE>
OF THE COMPANY AT 680 NORTH LAKE SHORE DRIVE, CHICAGO, IL 60611.
Section 3.5 - Lapse of Restrictions
Upon the vesting of the shares of Restricted Stock as provided in Sections
3.1 through 3.3 and subject to Sections 4.2 and 4.3, the Company shall cause new
certificates to be issued with respect to such Vested Stock and delivered to the
Director or his legal representatives, free from the legend provided for in
Section 3.4 and any of the other Restrictions. Such Vested Stock shall thereupon
cease to be considered Restricted Stock subject to the terms and conditions of
this Agreement.
Section 3.6 - Restricted Stock Not Transferrable
Prior to the issuance of Vested Stock, no Restricted Stock or any interest
or right therein or part thereof shall be liable for the debts, contracts or
engagements of the Director or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgement, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect.
Section 3.7 - Termination of Directorship
If there is a Termination of Directorship for any reason, whether voluntary
or involuntary, with or without cause, by retirement or by reason of death or
disability or otherwise, at any time prior to ____________, 2007, the Director
shall forfeit all unvested Restricted Stock, and all Restricted Stock shall, on
the effective date of such Termination of Directorship, be immediately cancelled
and returned to the status of authorized and unissued Common Stock. If a
Director was a Non-Employee Director on the last day of a fiscal year and there
is a Termination of Directorship of such Director prior to the second business
day following the issuance of an independent audit report that shows that
Restrictions have lapsed with respect to any unvested Restricted Stock, such
Employee shall not receive (and shall forfeit all rights to) such Restricted
Stock.
Section 3.8 - Change in Control
Upon a Change in Control specified in clause (iii) of the definition
thereof, any Restricted Stock that has not vested shall be forfeited on the
effective date of such Change in Control, and all Restricted Stock shall, on the
effective date of such Change in Control, be immediately cancelled and returned
to the status of authorized and unissued Common Stock; provided, however, that
a Change in Control specified in clause (i) or (ii) of the definition thereof
occurs, such Restricted Stock shall remain outstanding, subject to any
remaining Restrictions.
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<PAGE>
Section 3.9 - Changes in Common Stock
In the event that the outstanding shares of the Company Common Stock are
changed into or exchanged for a different number or kind of shares or other
securities of the Company pursuant to a recapitalization, reclassification,
stock split-up, stock dividend, or other combination of shares or similar
transaction, any new, additional or different shares or securities which are
issued in the name of the Director as a holder of Restricted Stock shall be
considered to be Restricted Stock and shall be subject to all of the
Restrictions.
ARTICLE IV
MISCELLANEOUS
Section 4.1 - Administration
The Board shall have the power to interpret the Plan, this Agreement and
all other documents relating to Restricted Stock and to adopt such rules for
administration, interpretation and application of the Plan as are consistent
herewith and to interpret, amend or revoke any such rules. All actions taken and
all interpretations and determinations made by the Board in good faith shall be
final and binding upon the Director, the Company and all other interested
persons. No member of the Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan or
Restricted Stock and all members of the Board shall be fully protected by the
Company in respect of any such action, determination or interpretation. The
Board may from time to time delegate all or any part of its authority under this
Agreement to a committee or subcommittee of not less than two Directors
appointed by the Board who are "non-employee directors" within the meaning of
that term as defined in Rule 16b-3. To the extent of any delegation by the Board
under this Agreement, references in this Agreement to the Board shall also refer
to the applicable committee or subcommittee.
Section 4.2 - Approval of Plan by Stockholders
The Restricted Stock will not vest prior to the approval of the Plan by the
stockholders, and, if such approval is not obtained at a meeting of stockholders
of the Company called for such purpose by the affirmative vote of a majority of
the shares of Class A Common Stock of the Company represented in person or by
proxy such Restricted Stock shall thereupon be cancelled and become null and
void.
Section 4.3 - Conditions to the Issuance of Stock Certificates
The Company shall not be required to issue or deliver any certificate or
certificates for Vested Stock pursuant to this Agreement prior to the
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on which
such Common Stock is then listed;
6
<PAGE>
(b) The completion of any registration or other qualification of such
shares under any state or Federal law or under rulings or regulations of the
Securities and Exchange Commission or of any other governmental regulatory body,
which the Board shall, in its absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or clearance from any state or Federal
governmental agency which the Board shall, in its absolute discretion, determine
to be necessary or advisable;
(d) Subject to the provisions of Section 4.8 the payment by the Director of
any amounts required to be withheld, under federal, state and local tax laws,
with respect to the issuance of Restricted Stock and/or the lapse or removal
of any of the Restrictions; and
(e) The lapse of such reasonable period of time as the Board may establish
from time to time for reasons of administrative convenience.
Section 4.4 - Notices
Any notice to be given under the terms of this Agreement will be by
registered mail, return receipt requested and if to the Company shall be
addressed in care of its Secretary at 680 North Lake Shore Drive, Chicago,
Illinois 60611, and any notice to be given to the Director shall be addressed
to the Director at the address given beneath the Director's signature hereto. By
a notice given pursuant to this Section 4.4, either party may hereafter
designate a different address for notices to be given to the Company or such
Director. Any notice which is required to be given to the Director shall, if the
Director is then deceased, be given to the Director's personal representative if
such representative has previously informed the Company of such Director's
status and address by written notice under this Section 4.4. Any notice shall be
deemed duly given when received.
Section 4.5 - Rights as a Stockholder
Upon issuance of the Restricted Stock in the name of the Director, the
Director shall have all the rights of a stockholder with respect to said shares
including the right to receive all dividends and other distributions paid or
made with respect to the shares.
Section 4.6 - Headings
Headings are provided for herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 4.7 - Amendment
This Agreement may be amended only in writing executed by the parties
hereto which specifically states that it is amending this Agreement.
7
<PAGE>
Section 4.8 - Tax Withholding
The Company's obligation (i) to issue or deliver to the Director any
certificate or certificates for Vested Stock or (ii) to pay to the Director any
dividends or make any distributions with respect to the Restricted Stock, is
expressly conditioned upon receipt from the Director, on or prior to the date
the same is required to be withheld, of:
(a) Full payment (in cash or by check) of any amount that must be withheld
by the Company for federal, state or local tax purposes; or
(b) Subject to the Board's consent and Section 4.8(c), full payment by
delivery to the Company of unrestricted shares of the Company's Common Stock
previously owned by the Director duly endorsed for transfer to the Company by
the Director with an aggregate fair market value equal to any amount that must
be withheld by the Company for federal, state or local tax purposes; or
(c) With respect to any withholding obligation for shares of Restricted
Stock that become unrestricted shares of stock as of a certain date (the
"Vesting Date"), subject to the Board's consent, full payment by retention by
the Company of a portion of such shares of Restricted Stock which become Vested
Stock with an aggregate fair market value (determined as of the Vesting Date)
equal to the amount that must be withheld by the Company for federal, state or
local tax purposes; or
(d) Any combination of payments provided for in the foregoing subsections
(a), (b) or (c).
Section 4.9 - Governing Law
The laws of the State of Delaware shall govern the interpretation,
validity, administration, enforcement and performance of the terms of this
Agreement regardless of the law that might be applied under principles of
conflicts of laws.
8
<PAGE>
IN WITNESS HEREOF, this Agreement has been executed and delivered by the
parties hereto.
PLAYBOY ENTERPRISES, INC.
By
---------------------------------------
Its
--------------------------------------
- -------------------------------------
Director
- -------------------------------------
- -------------------------------------
Address
Restricted Stock Issued: 5,000 shares
Par Value of Stock: $0.01 per share
Date Issued: _____________, 1997
9
<PAGE>
PLAYBOY TV/SCANDINAVIA
Memorandum of Agreement
As of July 29, 1997
1. Overview
This Memorandum of Agreement (the "Agreement") sets forth the essential
terms and conditions under which Playboy Entertainment Group, Inc. ("PEGI")
will license programming to the Modern Times Group ("MTG") for the purposes
of broadcasting a pay television service known as Playboy TV/Scandinavia
("PBTV/S"). This Agreement consists of twenty-three (23) Section cover
pages and the attached Exhibit A of PEGI's Standard Terms and Conditions
for agreements of this type. In the event of any inconsistencies between
such cover pages and Standard Terms and Conditions, the cover pages shall
prevail.
2. Program Supply for PBTV/S
PEGI will supply MTG with *** Program Hours of New Programs per Year. For
the purposes of this Agreement, a "New Program" is a program never before
broadcast on the PBTV/S service. A "Year" is any consecutive 12-month
period commencing on the launch date of the PBTV/S service or any
anniversary thereof. "Program Hours" shall be calculated as follows:
(a) programs 11-40 minutes in length shall be treated as .5 Program Hours,
(b) programs 41-70 minutes in length shall be treated as 1.0 Program
Hours, and (c) programs 71-100 minutes in length shall be treated as 1.5
Program Hours. Program Hours for programs of greater length shall be
calculated in an analogous manner.
3. Supply of Movies
In addition to the programs and interstitial materials supplied by PEGI for
the PBTV/S service, PEGI will supply to MTG a total of *** movies (the
"Movies") per Year, for unbranded transmission within the Territory during
such Year by a single Non-Standard TV service of MTG's choice other than
PBTV/S.
4. The Playboy TV/Scandinavia Service
PBTV/S will run as a 4-hour block each night, commencing no earlier than
10:00 pm and no later than 1:00 am Stockholm time.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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<PAGE>
PBTV/S will be sold to DTH consumers only as a part of a "package" that
also includes TV 1000 and TV 1000 Cinema; this package is currently
referred to as "Viasat Gold." Pricing to the consumer for the Viasat Gold
package has been set at 199 SEK per month; PEGI will have the right of
consultation over any pricing variance from this level. MTG agrees that
neither TV 1000 nor TV 1000 Cinema will be available to consumers without
PBTV/S.
In the event that PBTV/S is distributed to consumers via pay cable
television as part of the Viasat Gold package (or any other "bundling" of
services), the parties will negotiate a fair proportion of gross revenues
due PEGI for the PBTV/S service in relation to total gross revenues
received by MTG from the distribution of such a package(s). In the event
that PBTV/S is sold to consumers via pay cable television on an a la carte
basis, PEGI will have approval over the retail price charged to consumers
for the PBTV/S service.
5. Territory
5.1 For PBTV/S
The "Territory" for the PBTV/S service will consist of Norway, Sweden,
Denmark and Finland.
5.2 For Movies
The "Territory" for the Movies will consist of Norway, Sweden, Denmark
and Finland. To the extent that the Non-Standard TV rights for a given
Movie in the Baltic States are controlled by PEGI for the applicable
Year of the Term and have not been granted to a third party at the
time this Agreement is executed, the Territory for such Movie will
also include the Baltic States. If the Non-Standard TV rights for a
given Movie are controlled by PEGI for the applicable Year of the Term
and have been previously granted to a third party or third parties for
one or more territories in the Baltic States but not all territories
in the Baltic States, the Territory for such Movie will also include
that (those) territory(ies) within the Baltic States for which such
rights have not been previously granted. MTG acknowledges that the
Non-Standard TV rights to a particular Movie may be subject to home
video holdbacks in some or all of the Baltic States, and MTG agrees
that MTG's rights to the Movies in the Baltic States, if any, shall be
subject to, and MTG shall abide by, all of such holdbacks, as
instructed by PEGI.
2
<PAGE>
6. Languages
PBTV/S will be authorized to transmit programs in English, Norwegian,
Swedish, Danish, and Finnish.
7. Term
The "Term" of the Agreement will be *** years, commencing on the launch
date. MTG agrees that the launch date will be no later than September 30,
1997, and will be deemed to have occurred when any programming supplied by
PEGI is exhibited in any part of the Territory over any form of Non-
Standard TV by or under the authority of MTG.
8. Program Schedule
PEGI will schedule the PBTV/S service in its entirety. Each program day
will consist of a mix of New Programs and Encore Programs. An "Encore
Program" is the repeat of a program that has already aired as a New
Program.
In order to fill each hour to its entirety, PEGI will supply MTG with
interstitial material and promos of certain upcoming programs.
MTB shall have the right to exhibit each of the Movies *** times over a
single Non-Standard TV service in the Territory other than PBTV/S during
the Year for which the particular Movie is delivered by PEGI. In no event
may MTG use any of the "PlayboyMarks" (as defined in the Standard Terms and
Conditions) in connection with any of such exhibitions.
9. Delivery Materials
For each month of the Term, PEGI will provide MTG with a program schedule,
which will identify each New Program, each Encore Program, each
interstitial and each promo that is to be transmitted each day. PEGI will
also provide MTG with one NTSC Betacam copy of each program, interstitial
and promo, and MTG will then be responsible for the assembly of a given
day's broadcast from these materials. The cost of shipping these materials
from Los Angeles will be borne by MTG. During the first month of each Year
of the Term, PEGI also will provide to MTG one NTSC Betacam copy of each of
the *** Movies for such Year. MTG shall be responsible for any assembly or
preparation of materials for the exhibition of the Movies, and the cost of
shipping all materials in connection with the Movies from Los Angeles will
be borne by MTG.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
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<PAGE>
10. Dubbing and/or Subtitling
PEGI will supply an English-language version of each New Program,
interstitial, promo and Movie. If PEGI owns or acquires at no cost,
versions of certain New Programs or Movies in the other authorized
languages, these also will be provided to MTG. MTG may, at its cost, dub or
sub-title any program, interstitial, promo and/or Movie, subject to PEGI's
approval of the quality of such dubbing and/or subtitling. *** At the end
of the Term, all dubbed and/or subtitled materials *** will be destroyed by
MTG, and MTG shall deliver to PEGI a certificate of destruction reasonably
acceptable to PEGI.
11. Media
MTG will be authorized to transmit PBTV/S into all Non-Standard TV media in
the Territory throughout the Term (the "Media"). MTG also will be
authorized to transmit each Movie on a single Non-Standard TV service in
the Territory other than PBTV/S during the particular Year of the Term for
which the particular Movie was delivered by PEGI. For the purposes of this
Agreement, "Non-Standard TV" shall include pay cable television and DTH
transmission. PEGI acknowledges that MTG may also distribute the PBTV/S
service via the DTH platform to consumers who receive the service via
SMATV, MMDS, DBS, or DSS technologies. Such technologies will be considered
part of the DTH component of this Agreement. Non-Standard TV specifically
excludes terrestrial broadcast television and basic subscription (i.e.,
"non-premium pay") television.
12. Marketing and Distribution
MTG will bear all responsibility for the marketing and distribution of the
PBTV/S service in the Media throughout the Territory. PEGI will use
reasonable efforts to supply MTG with marketing materials as needed to
support the sales and marketing of the PBTV/S service. All duplication,
printing, distribution and similar marketing costs will be borne by MTG.
MTG agrees as part of its marketing plan to run cross-promotional
advertisements for the Viasat Gold package on its other Non-Standard TV
services ***. In MTG's cross-promotional advertisements for the Viasat Gold
package, MTG shall give substantially the same prominence to PBTV/S as it
does to other third party channels as components of the Viasat Gold
package.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
4
<PAGE>
13. Exclusivity
MTG will be the exclusive distributor for PBTV/S in DTH media in the
Territory throughout the Term.
For pay cable television, PEGI will grant MTG the exclusive right to
distribute the PBTV/S service in the Territory for one year from the
commencement of the Term. On a country-by-country basis, if, at the end of
Year 1, MTG has not secured access for PBTV/S in cable television systems
representing at least 50% of the cable television households in a given
country at such time, that country will become non-exclusive to MTG for
PBTV/S for the medium of pay cable television for the remainder of the
Term.
14. ***
PEGI acknowledges that MTG will achieve pay cable television coverage by
subdistributing the PBTV/S service to cable television operators, via
contracts with each cable television operator (each, a "Cable Distribution
Agreement"). PEGI will have approval rights over the terms and conditions
of each Cable Distribution Agreement. ***
15. Technical Operations
MTG will handle and pay for all technical functions, including provision
for satellite transponders, uplink, playback, subscriber management
services, costs of assembly, music performance fees, shipping, and the
like.
16. Program License Fees
16.1 For PBTV/S DTH Homes
Program license fees for PBTV/S will be the sum of: a) the "Minimum
Guaranteed License Fees"; and b) the "Subscriber-Based Overage":
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
5
<PAGE>
16.1.1 The Minimum Guaranteed License Fees
The Minimum Guaranteed License Fees for each Year will be as follows:
***
The payment schedule for such Minimum Guaranteed License Fees will be
as follows:
***
16.1.2 The Subscriber-Based Overage
MTG will calculate the average number of subscribers to the Viasat
Gold package each month of the Term. For the following monthly
subscriber counts, MTG will pay PEGI an additional Subscriber-Based
Overage as follows:
When Average Subscriber The Subscriber-Based
Counts Are Between... Overage Will Be
*** ***
* on subscribers *** through the actual number.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
6
<PAGE>
By way of example, if for month ***, the average number of subscribers
to the Viasat Gold package is ***, MTG will pay PEGI a Subscriber-
Based Overage of ***. If, for month ***, the average number of
subscribers to the Viasat Gold package is ***, MTG will pay PEGI a
Subscriber-Based Overage of ***.
For multiple-dwelling units, offices buildings and other consumers who
do not receive PBTV/S through an individual subscription, but rather
receive it on a "group" basis, such as via SMATV, each residence,
office or other individual unit capable of receiving PBTV/S shall be
counted as a subscriber for purposes of calculating the Subscriber-
Based Overage. Similarly, for hotels and motels, hospitals and other
multiple-room facilities receiving PBTV/S that are occupied only on a
day-by-day, temporary basis for which a daily charge is incurred (as
opposed to apartment buildings, office buildings, dormitories and
other multiple-dwelling units that are occupied on a longer term
basis), the number of subscribers on a particular day shall be
calculated by multiplying the total number of rooms in such facility
on such day by the greater of (a) the average monthly occupancy rate
of such facility, or (b) ***. The average number of subscribers for a
particular month shall be determined by averaging the number of
subscribers on the first day of the month and the number of
subscribers on the last day of the month.
Payment of Subscriber-Based Overages will be made on a monthly basis,
30 days after the close of the appropirate month.
16.2 For PBTV/S Cable Television Homes
For cable television distribution of the PBTV/S service, MTG will remit to
PEGI all sums actually collected from distribution through cable television
operators, ***. In the event that PBTV/S is bundled with other services in
a package, MTG will remit to PEGI the fair proportion (as agreed by the
parties) of net revenues actually collected from the distribution of such
package(s), ***.
Payments will be made on a monthly basis, included with the accounting
statement for that month.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
7
<PAGE>
16.3 For Movies
MTG will pay PEGI the sum of US *** per Movie, payable as follows:
***
17. Accounting
MTG will handle the collection of all moneys due from the consumer and/or
cable television operators. 30 days after the close of a given month, MTG
will provide PEGI with an accounting statement that details the following:
17.1 For Viasat Gold DTH Homes
a) Number of subscribers at the beginning of the month.
b) Number of subscribers at the end of the month.
c) Mean average number of subscribers for that month.
d) Actual revenues collected from the sale of the Viasat Gold
package to those households for that month.
17.2 For Cable Television Homes (For Each Individual Cable
Television Operator)
a) Number of subscribers at the beginning of the month.
b) Number of subscribers at the end of the month.
c) Mean average number of subscribers for that month.
d) Actual revenues collected from monthly subscriptions to
PBTV/S for the month.
e) Actual revenues collected from pay-per-view sales of PBTV/S
for that month.
***
As indicated in the Program License Fees Section, any Subscriber-
Based Overage due PEGI from DTH subscriber counts and any revenues
*** from cable television distribution will be
*** Confidential information omitted pursuant to a request for
confidential treatment filed separately with the Securities and
Exchange Commission.
8
<PAGE>
due with the statement for the appropriate month.
18. Advertising
PEGI reserves the right to schedule up to *** of advertising for products
bearing any Playboy Marks sold by PEGI or its affiliates. Use of such
advertising time will be at the discretion of PEGI but will conform to any
guidelines set by any relevant regulatory body in the Territory.
19. Other Adult Services or Programs
PEGI acknowledges that MTG exhibits certain adult films within its current
roster of channels.***
Accordingly, MTG warrants that: ***
20. Censorship
MTG shall accept and pay for all programming supplied by PEGI for the
PBTV/S service and all Movies regardless of censorship regulations or the
potential for same throughout the Territory or in any individual country or
area within the Territory. MTG will be obliged either to edit the
programming, including the Movies, as supplied by PEGI (subject to PEGI's
approval) or blackout the territory(ies) where the censorship problem
occurs, with all costs of editing and/or blackout to be borne by MTG.
21. Transfer of PEG Rights
PEGI reserves the right to transfer this Agreement to an affiliate in which
PEGI or its parent company, Playboy Enterprises, Inc. ("PEI"), is a
shareholder, partner, member or other equity participant. ***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
9
<PAGE>
22. Transfer of MTG Responsibilities
In the event that MTG merges or affiliates with any other owners, operators
or providers of distribution, this Agreement will automatically take effect
for all parties to such mergers or affiliations. ***
23. ***
IN WITNESS WHEREOF, PEGI and MTG have executed this Agreement as of July 29,
1997.
PLAYBOY ENTERTAINMENT GROUP, INC.
/s/ Mary Herne
By:____________________________
Sr VP International
____________________________
Name and Title
MODERN TIMES GROUP
/s/ Hans Albrecht
By:____________________________
CEO, PAY TV
____________________________
Name and Title
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT A
PLAYBOY TV/SCANDINAVIA MEMORANDUM OF AGREEMENT
(Standard Terms and Conditions)
The following are the Standard Conditions to and a part of the Playboy
TV/Scandinavia Memorandum of Agreement dated as of July 29, 1997 (the
"Agreement") attached hereto by and between the Modern Times Group ("Licensee")
and Playboy Entertainment Group, Inc. ("Licensor") with regard to the Playboy
TV/Scandinavia pay television service ("PBTV/S"). All defined terms used in
these Standard Terms and Conditions but not defined herein are defined in the
cover pages of the Agreement (the "Cover Pages").
1. DELIVERY AND RETURN: Licensor shall deliver to Licensee the delivery
materials as set forth in the Cover Pages. Delivery to Licensee at its
address set forth below shall be deemed delivery hereunder. All costs of
delivery and return of tapes and all risks of loss in transit or while in
Licensee's possession or control shall be borne by Licensee. All shipping
costs will be paid by Licensee as all shipping will be via Freight Collect.
At all times after receipt of tapes, Licensee shall keep the tapes in
Licensee's exclusive possession and control until returned as hereafter
provided. Licensee will not make or authorize others to make copies of the
programs, Movies or other exhibition materials other than the minimum
number of copies necessary to exhibit them. Licensee shall furnish an
affidavit with respect to any lost, stolen or destroyed tapes. All tapes
and parts or replacements thereof shall remain the property of Licensor at
all times. licensee shall promptly examine each tape and shall give
Licensor immediate written notice if said tape is not physically suitable
for exhibition other than the need to dub the tapes into the authorized
languages. The tape or tapes shall be deemed acceptable unless Licensor is
notified no later than ten (10) days after delivery thereof that a tape is
defective. At its option, Licensor may furnish another tape of said program
or Movie, or a suitable tape of another similar program or movie or grant
Licensee a proportionate credit in the Minimum Guaranteed Licensee Fees or
Movie license fees, but Licensor shall have no other obligation or
liability whatsoever. Original undubbed Licensor-supplied tapes and reels
of each program, movie or other exhibition materials shall be returned
within sixty (60) days of receipt by Licensee in the same condition as
received, normal wear and tear excepted, either directly to Licensor or to
such address as Licensor may designate. Licensee shall, within forty-eight
(48) hours after the date of the last scheduled exhibition of each program,
Movie and other exhibition materials, in Licensor's discretion, either
destroy and provide Licensor with an acceptable certificate of destruction,
or sell and deliver to Licensor all dubbed sound tracks and all optical
and/or magnetic sound tracks and all copies and tapes of such materials
manufactured by or at the instance of Licensee, whether or not any of said
sound tracks, materials or tapes were actually utilized by Licensee in
connection with the exercise of rights granted to Licensee hereunder.
Additionally, within ten (10) days after the end of the Term or earlier
termination of Licensee's exhibition rights or this Agreement with respect
to a particular program or Movie, Licensee shall send to Licensor all
transparencies, artwork and other marketing supplies, and all ratings and
censorship certificates, correspondence and other documents in connection
with such program or Movie. It is expressly agreed that title in and to any
material provided to Licensee hereunder shall remain in Licensor, and that
title in and to any such material created by, for or at the instance of
Licensee and all rights including copyrights therein shall vest in Licensor
upon the creation thereof, subject only to possession and control thereof
by Licensee during the Term for the applicable program or Movie solely for
the purpose of exercise of the rights granted herein. Licensee will
execute, acknowledge and deliver to Licensor any instruments of transfer,
conveyance or assignment in or to any such material necessary or desirable
to evidence or effectuate Licensor's ownership thereof, and in the event
that Licensee fails or refuses to execute, acknowledge or deliver any such
instrument or documents, then Licensor shall be deemed to be and Licensee
hereby nominates, constitutes and appoints Licensor Licensee's true and
lawful attorney-in-fact irrevocably to execute and deliver all such
instruments in Licensee's name or otherwise, it being acknowledged that
such power is a power coupled with an interest. Anything herein to the
contrary notwithstanding, Licensee shall not have the right to use any
dubbed sound tracks, sub-titled materials,
Page 1 of 9
<PAGE>
optical sound tracks, or tapes made therefor except in the exercise of the
rights granted to Licensee hereunder and in accordance with all limitations
on said rights as are contained in this Agreement. It is distinctly
understood and agreed that all payments, fees, royalties, residual payments
and the like shall be the sole obligation of Licensee with respect to the
production of and use of any and all dubbed magnetic sound tracks, sub-
titled materials, and all optical sound tracks and tapes containing optical
sound tracks made by, for or at the instance of Licensee, and Licensee
hereby indemnifies Licensor with respect thereto.
2. CREDITS AND ALTERATION OF TAPES: Licensee may make only such cuts or
deletions as are necessary to make the programs, Movies and other materials
supplied by Licensor (collectively, "Materials") conform to the orders of
any duly authorized public censorship authority, its time segment
requirements and its continuity acceptance standards. Licensee will provide
Licensor with a description of the editing which it intends to perform
prior to doing so, and such editing shall be subject to the prior written
approval of Licensor (not to be unreasonably withheld). Additionally, once
the editing is completed, such edited version shall be supplied to Licensor
for its prior-to-broadcast approval (such approval not to be unreasonably
delayed or withheld). Licensee will not delete the copyright notice and/or
credits incorporated in the Materials as delivered by Licensor. Licensee
will not and will not authorize others to copy, duplicate or sub-license
any tape nor part with possession thereof.
3. PAYMENT: Licensee shall pay Licensor the Minimum Guaranteed License Fees,
Subscriber-Based Overage and Movie license fees stipulated in the Cover
Pages at the times and in the manner therein specified. Said payments shall
be due and payable whether or not any one or more of the programs or Movies
is actually exhibited. Any payment not made within thirty (30) days of its
due date shall bear legal interest equal to the lesser of 12% per annum or
the maximum legal rate, from the due date until paid. Acceptance of any
payment after its due date shall not constitute a waiver by Licensor of any
of its rights except as to such payment. All payments shall be made only in
U.S. dollars by wire transfer of immediately available federal funds to
LaSalle National Bank, 135 South LaSalle Street, Chicago, Illinois 60603,
ABA#: 071000505, Benefit of: Playboy Entertainment Group, Inc. (PEGI),
Account #: 2292148.
4. SUBSTITUTION OF PROGRAMS; CERTIFICATE OF PERFORMANCE:
----------------------------------------------------
a. Licensor may, in its absolute discretion, withdraw any Materials if
Licensor determines that the exhibition thereof would or might (i)
infringe upon the rights of others; (ii) violate the law, court order,
government regulation or other ruling of any governmental agency;
(iii) interfere with the actual or contemplated use of the Materials
or the material or rights contained therein for any purpose other than
the exhibition of the Materials in Licensee's basic area; or (iv)
subject Licensor to any liability.
b. If Licensor elects to withdraw any program or Movie as set forth in
the preceding Sub-paragraph 6.a., Licensor shall have the right, in
its sole discretion, either to deliver another program or movie of
comparable quality to Licensee (which program or movie shall be deemed
to replace the program or Movie withdrawn) or reduce the number of
programs or Movies to be delivered hereunder ("Partial Cancellation")
by one, and Licensee shall be given a pro rata refund or credit of the
license fees (based on whether the program or Movie already has been
exhibited, with the first exhibition on any service being worth *** of
the portion of the license fee attributable to such withdrawn program
or Movie, the second exhibition on any service being worth *** of such
portion of the license fee and subsequent exhibitions on any service
worth *** of such portion of the license fee each), at Licensor's
election, of such portion of the license fee attributable to such
withdrawn program or Movie. ***
Page 2 of 9
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
c. If a tape of any withdrawn program or Movie has been shipped to
Licensee, Licensee will promptly return it to Licensor.
5. WARRANTY AND INDEMNITY: Licensor MAKES NO REPRESENTATIONS, WARRANTIES OR
INDEMNITIES, EXPRESS OR IMPLIED EXCEPT AS SPECIFICALLY SET FORTH IN THIS
PARAGRAPH:
Subject to Paragraph 21 hereof, Licensor agrees to indemnify and save
Licensee harmless from the amounts of any damages (except loss of profits
and consequential damages, if any) awarded in any final judgment entered
against Licensee, by reason of any claim which may be made alleging that
any of the programs or Movies infringe upon the copyright, literary or
dramatic right or right of privacy of any claimant or constitutes a libel
or slander of such person, except with respect to any material added by
Licensee and except with respect to music which is specifically covered by
Paragraph 6 below:
6. ADDITIONAL WARRANTIES: Licensor warrants and represents that to the best of
its knowledge, information and belief, the performing rights in all musical
compositions contained in the programs or Movies are controlled by (a) a
performing rights society having jurisdiction; or (b) Licensor; or (c) in
the public domain. Licensor does not represent or warrant that Licensee may
exercise the performing rights to said musical compositions without the
payment of a performing rights royalty or license fee. If Licensee is
required to pay a performing rights royalty or license fee, Licensee shall
be solely responsible for the payment of such royalty or fee and shall hold
Licensor free and harmless therefrom.
7. EXHIBITION RESTRICTIONS AND REQUIREMENTS: Licensee will not delete the
copyright notice and/or credits incorporated in any Materials as delivered
by Licensor. Furthermore, without Licensor's prior written approval,
Licensee shall not couple any Materials with any other material or add any
material to any of the Materials. Notwithstanding anything to the contrary
in this Agreement, in no event shall Licensee exhibit on the same channel
or frequency as PBTV/S, within the Territory during the Term, any
programming produced, distributed or licensed by or which carries the brand
of any other men's magazine, such as and including Penthouse and Hustler.
8. ASSIGNMENT AND SUB-LICENSE PROHIBITED: This Agreement and the rights and
licenses granted hereunder to Licensee are personal to Licensee, and except
as expressly authorized under the Cover Pages, Licensee shall not sell,
assign, mortgage, pledge or hypothecate any such rights or licenses in
whole or in part without obtaining the prior written consent of Licensor,
nor shall any of said rights or licenses be assigned or transferred by
Licensee to any third party by operation of law or otherwise. Any action in
violation of the foregoing shall be null and void and without effect. In
the event Licensor consents to any such action by Licensee, Licensee shall
nevertheless continue to remain fully and primarily responsible and liable
to Licensor for due, full, complete and faithful performance of all terms
and conditions of this Agreement to be performed on the part of Licensee.
Licensor may assign, transfer, pledge or hypothecate all or any part of the
payments to be received by Licensor hereunder. Licensee agrees that in the
event of receipt of written notice of assignment by Licensor, monies due to
Licensor shall be paid to any third party assignee in accordance with
Licensor's instructions. Licensor may assign this Agreement to any
corporation controlling, controlled by or under common control with
Licensor or to any person or entity that may hereafter become the licensor
of the Materials.
9. RESERVATION OF RIGHTS: All licenses, rights and interest in, to and with
respect to the Materials not specifically granted to Licensee shall be and
are specifically and entirely reserved to Licensor and may be fully
exploited and utilized by Licensor.
10. RECEPTION FROM OUTSIDE EXHIBITIONS: Licensee acknowledges that satellite or
terrestrial exhibitions of the Materials intended for reception outside the
Territory may be received by television sets located within such Territory,
and Licensee agrees that such unintended reception shall not constitute a
breach of this Agreement by Licensor.
Page 3 of 9
<PAGE>
11. SPILL-OVER RETRANSMISSION: It is acknowledged that due to the "footprint"
of the satellites used by Licensee, Licensee's transponder signal may
"spill over" beyond the boundaries of the Territory. To the extent such
"spill over" is not intended by Licensee, Licensee's signal is encrypted
and not authorized for receipt beyond the Territory and Licensee does not
receive compensation for such "spill over," Licensee shall have no
liability to Licensor for such "spill over." Licensor shall be free to seek
recovery from any third party for such "spill over" retransmission.
12. BRAND RIGHTS: Licensee may publicize and advertise exhibitions of a program
or Movie or any person appearing therein (unless specifically notified to
the contrary) in the Territory for publicity and exploitation only of such
particular program or Movie but (i) advertising material pertaining to a
specific program or Movie may be used to advertise only that specific
program or Movie, (ii) advertising containing the name or likeness of a
person may be used to advertise only the specific program or Movie in which
such person appears, and (iii) in no event shall the names of such persons
or of Licensor be used in such manner so that such use may be construed as
an endorsement, express or implied, of any party, sponsor, product or
service. All such advertising may be only in the authorized Languages and
shall be subject to Licensor's prior written approval at least thirty (30)
days prior to its intended distribution. Licensee hereby acknowledges that
the trade names "Playboy" and "Playmate" and the registered trademark and
service mark "Playboy," the Playboy "Rabbit Head Design" and trade names
"The Playboy Channel," "Playboy TV," "Playboy Television" and all related
or derivative names or marks (collectively, the "Playboy Marks") are the
sole and exclusive property of Licensor's affiliate, PEI, and that all uses
of the Playboy marks shall inure solely to the benefit of PEI. Licensee
shall have the non-exclusive right to develop and distribute advertising,
publicity, and promotional materials relating to the programs or PBTV/S,
but not the Movies, incorporating certain of the Playboy Marks in
connection with Licensee's rights hereunder; provided, however, that such
rights shall relate to the programs for PBTV/S licensed under this
Agreement and not extend to the Movies or any other program, shall expire
on the expiration of the Term or earlier termination of the Agreement,
shall not be exercised without reference to a particular program or PBTV/S
generically, and any such materials incorporating any Playboy Mark shall:
i. Clearly identify the Playboy Mark using a legible credit line
with whatever credit or notice required by Licensor, such as
"'Playboy' is the mark of and used with the permission of Playboy
Enterprises, Inc." or such other words as Licensor may designate;
ii. Be submitted in representative form to Licensor for Licensor's
prior written approval in each case at least thirty (30) days
prior to their intended distribution. Licensor may disapprove any
use if, in Licensor's opinion, such use (i) jeopardizes the
validity of any of the Playboy Marks, (ii) does not conform to
previously approved uses of the Playboy Marks, (iii) does not
conform to Licensor's standards, which may vary from time to
time, or (iv) negatively affects or impacts the good name, good
will or reputation of Licensor or PEI. Licensee will not
disseminate any material that has not been so approved by
Licensor; and
iii. Be issued only in the authorized languages.
It is expressly understood that Licensor shall retain all good will
associated with the Playboy Marks, and no good will from same will
inure to Licensee or to any person or entity other than Licensor or
PEI. Other than as expressly set forth in this Paragraph, Licensee
shall make no use of the Playboy Marks or any confusingly similar
designation without the prior express written consent of Licensor in
each instance. Licensee shall also make no use whatsoever of any other
trademark, trade name or service mark that is the property of Licensor
or any of its suppliers or producers without the prior express written
consent of Licensor in each instance. Licensee similarly agrees that
it will not authorize or purport to authorize any third party to make
any such use, and it will expressly provide in any applicable third
party agreements that such third parties will only be entitled to use
such names and marks in accordance with Licensee's rights
Page 4 of 9
<PAGE>
hereunder. Licensee also must secure Licensor's prior written approval
of all media of advertising and distribution and the specific
publications, broadcasters and exhibitors that will be running the
advertisements. Licensee will not disseminate any advertising material
that has not been so approved by Licensor in each instance.
Additionally, Licensee agrees that except as expressly authorized in
accordance with this Paragraph, Licensee shall not, without Licensor's
prior written consent, permit any product or service to be advertised
or promoted with the use or involvement of, or bearing the designation
of, any part of any Playboy Mark, on, as a part of, or in connection
with any television service of Licensee or any advertising, publicity
or promotion of any such television service.
13. ADVERTISING CREDITS: Licensee will comply with all instructions furnished
to it by Licensor with respect to advertising credits, and Licensee agrees
to and will indemnify and hold Licensor harmless from any loss, damage,
cost or expense (including reasonable attorneys' fees) incurred or suffered
by Licensor by reason of the failure by Licensee to adhere to and observe
any such credit instructions.
14. CONTINGENT ROYALTIES: In the event that any monies are paid to or become
due to or can be claimed by Licensee in connection with any use of the
Materials or copyright or related materials thereof other than as licensed
hereunder, such monies shall be received and held by Licensee in trust for
Licensor.
15. DEFAULT AND TERMINATION: If Licensee defaults in the payment of any
installment of any Minimum Guaranteed License Fees, Subscriber-Based
Overage, Movie license fees or any other payment to Licensor, or if
Licensee defaults in the performance of any of the other obligations
hereunder and such default shall not be cured within ten (10) days after
written notice thereof to Licensee, or if Licensee becomes insolvent, or if
a petition under any bankruptcy act shall be filed by or against Licensee
(which petition, if filed against Licensee, shall not have been dismissed
within thirty (30) days thereafter), or if Licensee executes an assignment
for the benefit of creditors, or if a receiver is appointed for the assets
of Licensee, or if Licensee takes advantage of any applicable insolvency or
any other like statute, or if Licensor notifies Licensee that it in good
faith has reasonable doubts that Licensee can or will continue to perform
hereunder, and Licensee fails to give adequate financial security and
assurances within fifteen (15) days of said notice (any of the above acts
is hereinafter called "event of default"), then Licensor may, in addition
to any and all other rights which it may have against Licensee, terminate
this Agreement and any other agreements between the parties then in
existence by giving written notice to Licensee at any time after the
occurrence of such event of default. Whether or not Licensor exercises such
right of termination, Licensor shall upon the occurrence of such event of
default have no further obligation to deliver tapes of Materials hereunder
and shall be entitled to immediate return of all tapes theretofore
delivered to and in possession of Licensee. Upon termination, Licensor may
recover from Licensee the entire unpaid Minimum Guaranteed License Fees,
Subscriber-Based Overages, Movie licensee fee payments and any other
payments then owed to Licensor, plus interest at the lesser of 12% per
annum or the maximum legal rate on that portion of the payments that was
delinquent prior to the termination, and any consequential damages.
Licensee acknowledges that the terms hereof and the industry custom of
licensing programs substantially in advance of the scheduled exhibition
dates, have the effect of rendering the programs and Movies hereunder
unmarketable in the Territory during any period that includes the Term of
this Agreement or any part thereof. Licensee also acknowledges that, by
reason of the foregoing, no method exists for accurate measurement of
damages for any breach of Licensee's agreement to pay Licensor as provided
in this Agreement. It is therefore agreed that, in addition to all other
remedies available at law, in equity, or under other provisions of this
Agreement, Licensor shall be entitled (upon breach by Licensee of such
agreement to pay Licensor) to recover from Licensee, as liquidated damages,
the total unpaid Minimum Guaranteed License Fees, Subscriber-Based Overages
and Movie licensee fee payments for the Term, and in addition, reasonable
attorneys' fees or collection agency fees if an attorney or collection
agency is retained by Licensor at any time to enforce the provisions
hereof, plus such other amounts as may be due hereunder. The remedies
provided herein are not exclusive but are cumulative and in addition to all
other remedies existing at law, in equity, or in
Page 5 of 9
<PAGE>
courts of bankruptcy. Subject to Paragraph 23 below, in the event that
either party commences litigation to enforce, interpret or declare any of
the terms, covenants, conditions or obligations of this Agreement,
prevailing party shall be entitled to recover all costs, fees and expenses
of or in preparation for, litigation, appeal, review, or post-judgment or
order, collection or enforcement efforts. All parties to this Agreement
agree that the court shall retain and reserve jurisdiction in any judgment
over the parties and the subject matter for purposes of enforcing this
paragraph.
16. TAXES: Licensee shall pay, without limitation, any tax, levy or charge
howsoever denominated, imposed or levied (excluding only any applicable net
income or franchise taxes imposed or levied against Licensor) by any
statute, law, rule or regulation now in effect or hereafter enacted
including, without limitation, sales, use, property and excise or other
similar taxes, licenses, import permits, state, county, city or other taxes
howsoever denominated relating to or imposed on license fees, rentals,
negatives, tapes or other material, or the right or privilege to use the
same in connection with any program or Movie licensed hereunder whether or
not billed or demanded by Licensor; it being the intent hereof that the
payments specified as the consideration of the license granted herein shall
be a net amount, free and clear of any tax, levy or charge of whatsoever
kind or nature howsoever denominated. To the extent that any such taxes,
levies or charges or penalties and interest thereon are paid by Licensor,
Licensee shall reimburse Licensor on demand, and on the failure of Licensee
to reimburse Licensor, Licensor will have available to it all of the
remedies provided for herein with respect to failure to pay the Minimum
Guaranteed License Fees, as well as such other remedies as may be provided
by law. If Licensee denies liability for any tax, levy or charge which
Licensor must pay or collect, Licensee shall indemnify Licensor for any
liability, penalty or interest which may result, and Licensor shall have
the immediately aforementioned remedies against Licensee for the collection
of same. Licensor shall have no obligation to contest or dispute any tax
assessed or levied. Licensee shall have the right to do so at its sole cost
and expense.
17. EXEMPTION: In regard to any payment due Licensor hereunder which is subject
to withholding taxes required by any tax laws, Licensee shall use its best
efforts to cooperate with Licensor in supplying Licensor with, and helping
Licensor file the tax-exemption form specified by the appropriate Double
Taxation Treaty that will allow Licensee to make such payment in full
without the withholding of any such taxes.
18. GOVERNMENT AND OTHER LEVIES AND FEES: In the event Licensee receives
compensation as the result of any form of governmental levy, now or
hereinafter imposed, for the copying, by any means, of the sound or visual
elements of any Materials licensed hereunder, or as a result of any relay
of any Materials by cable or other transmission networks, such compensation
will be held in trust for and paid over to Licensor.
19. NO CENSORSHIP CONDITION: This Agreement is not subject to any censorship
conditions or restrictions. Thus, Licensee's payment and other obligations
are not conditioned on any of the Materials meeting any censorship
requirements or being approved by any censorship or other authority.
20. LICENSEE INDEMNITY: Licensee will indemnify Licensor, its officers,
directors and employees from all claims, liabilities and judgments,
together with reasonable costs and expenses of litigation and reasonable
counsel fees arising from the breach or alleged breach of any provision of
this Agreement by Licensee or the use, exhibition or other exploitation of
any element of any Materials or Playboy Mark other than as expressly
authorized under this Agreement. Licensee shall specifically so indemnify
Licensor and such other parties from such claims, liabilities, judgments,
costs, expenses and fees made or assessed against Licensor arising from the
exhibition of any material in connection with or relating to any Materials
other than material delivered by Licensor for exhibition, or from the
temporary or permanent loss of any such material.
21. REQUIREMENTS FOR LICENSOR CONTENT INDEMNITY: Notwithstanding any other
terms herein to the contrary, Licensor's indemnification will be valid in
the event of a claim involving an allegation of
Page 6 of 9
<PAGE>
violation of the laws insofar as the content of any Materials is concerned,
only in the event each of the following conditions is met:
a. Immediate telephone contact be made with both the General Counsel's
office of Licensor in Chicago at 312-751-8000 and Licensor's Senior
Vice President, International Sales, in Beverly Hills at 310-246-4000
or other numbers hereafter specified by Licensor. Such telephone
notification should be immediately followed with a letter containing
copies of all papers that have been served and giving complete
information then available regarding the incident.
b. Licensor shall have the right to approve Licensee's choice of counsel
and to determine in advance the terms of retention.
c. Licensor will assist in defended actions only and will not be
responsible in cases where there is any admission of guilt by anyone
charged with violation of the law as to the content of any Program.
Settlement or dismissal of any case will not be allowed, except with
Licensor's prior written consent.
d. Actual or prospective parties involved in such prosecution shall make
no voluntary disclosure regarding support or lack thereof by Licensor
under this policy.
22. WAIVER: A waiver by either party of any breach or default by the other
party will not be construed as a continuing waiver of the same or any other
breach or default under this Agreement.
23. ARBITRATION:
a. Except as provided in Sub-paragraph 23.d. below, if Licensor (or any
affiliate of Licensor) or Licensee has any claim, right or cause of
action against the other arising out of this Agreement or the
transactions contemplated hereby that the parties shall be unable to
settle by agreement between themselves, such claim, right or cause of
action shall be determined by arbitration in accordance with the
UNCITRAL Arbitration Rules. The American Arbitration Association shall
serve as the appointing authority. Arbitration shall take place in the
State of California, the United States of America and shall be
conducted in the English language. Any party may seek enforcement or
recognition of any arbitration award in any proper court having
jurisdiction in the United States or elsewhere.
b. Licensor and Licensee recognize that this Paragraph 23 is governed by
the United Nations convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the New York Arbitration Convention)(New York,
June 10, 1958) (the "Convention") and that any differences between the
parties hereto arising out of this Agreement or any Other Agreement,
whether contractual or not, shall be considered as "commercial" under
the federal law of the United States and under Italian law, and that
this Paragraph 23 constitutes a written agreement to arbitrate within
the meaning of the Convention.
c. All decisions of the arbitrators and any award or awards made by them
shall be conclusive and nonappealable and binding on all parties to the
arbitration, their attorneys and successors in interest.
d. As an exception to the agreement under this Paragraph 23 to arbitrate
any claim, right or cause of action arising out of this Agreement or
the transactions contemplated hereby (i) any claim, right or cause of
action involving the rights of Licensor or any affiliate of Licensor in
intellectual property, including the validity or enforceability
thereof, shall not be arbitrable, and (ii) if Licensor, in its good
faith belief, believes that Licensor or any of Licensor's or Licensor's
affiliates' rights or properties will be irreparably harmed or that an
appropriate remedy is not timely or readily available or enforceable
through arbitration, then Licensor, in its discretion, may bring an
action,
Page 7 of 9
<PAGE>
including for equitable relief, in a court of law in any appropriate
jurisdiction (a "Licensor Action") and pursue such Licensor Action,
through final entry of judgment. In connection with any Licensor
Action, Licensee irrevocably submits to the non-exclusive jurisdiction
of the courts of the State of California or any jurisdiction in which
the Licensor Action is brought and waives any rights that Licensee
might have to contest such jurisdiction. Licensee further
acknowledges and agrees that in addition to any other jurisdiction
where the pursuit of a Licensor Action is appropriate, the County of
Los Angeles, State of California is an appropriate locale for the
resolution of any such Licensor Action, and that such locale will not
subject Licensee to unreasonable inconvenience or hardship. In the
event that process must be served in connection with any such Licensor
Action, Licensee agrees that such process may be served in the same
manner as notices are to be given pursuant to Paragraph 24, below.
Service shall be deemed complete when notice is deemed given pursuant
to such Paragraph 24. Licensee hereby appoints the Secretary of the
State of California as Licensee's agent for receipt of any service of
process.
e. This Agreement and any dispute in connection therewith shall be
governed by and interpreted under laws of the State of California
applicable to contracts entered into and fully performed therein.
24. NOTICES: Any notice which either party hereto may desire to give or which
is required under the terms of this Agreement shall be given in writing by
mail (by registered or certified mail if to a U.S. address) or by
facsimile, telex or telegraph or by personal service (in all cases, all
charges prepaid) to the addresses noted below. In the event any such notice
is given by mail, such notice shall be deemed given on the date five (5)
business days following the date after deposit in the United States mail.
If notice is given by any other method, such notice shall be deemed given
on the date deposited with the telegraph or telex company or on the date
personal delivery is made, provided that notice given by facsimile shall be
deemed given upon receipt by sender of electronic confirmation that the
notice was received. A copy of all notices to Licensor shall be
concurrently sent by one of the methods provided in this Paragraph 24, to
Playboy Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois
60611, Attention: General Counsel. Licensee's address for notice purposes
shall be as follows: Modern Times Group, c/o Modern Times Broadcasting, Pay
TV Division, Soder Malarstrand 65, Box 17104, S-104 Stockholm Sweden,
Attention: Mr. Hans Holger Albrecht, Telecopier Number: 011-46-8-5624-1010.
Licensor's address for notices purposes shall be as follows: Playboy
Entertainment Group, Inc., 9242 Beverly Boulevard, Beverly Hills,
California 90210, Attention: Senior Vice President International Sales and
Senior Vice President, Business and Legal Affairs. Telephone Number: (310)
246-4077.
25. COUNTERPART EXECUTION: This Agreement may be executed in counterparts but
shall not be deemed to be effective until and unless executed by Licensor
at its home office, and the date of execution by Licensor shall be deemed
to be the effective date of the Agreement. When so executed by each party,
the counterparts together shall be deemed an original and shall constitute
one and the same instrument.
26. ENTIRE AGREEMENT: This Agreement, including all Exhibits hereto,
constitutes the complete and entire agreement between the parties, and all
prior understandings are merged herein. This Agreement cannot be changed or
terminated orally, and no amendments, modifications or assignments hereof
shall be binding upon Licensor until accepted in writing by a duly
authorized officer of Licensor in California. The titles of the paragraphs
of this Agreement are for convenience only and shall not in any way affect
the interpretation of this Agreement or any paragraph hereof.
27. INVALIDITY: If any provision or any application of any provision of this
Agreement is adjudged illegal, unenforceable or invalid and such
adjudication has become final and non-appealable, such provision or
application shall be deemed deleted without affecting the remainder of this
Agreement unless such deletion shall have a material adverse effect upon
the rights or obligations of either party hereto and notice of such effect
is given as provided in the following sentence. Either party may notify the
other
Page 8 of 9
<PAGE>
within forty-five (45) days after such adjudication has become final and
non-appealable that in its opinion such deletion would have a material
adverse effect upon the notifying party and that this Agreement is
terminated by reason thereof, but the existence of such effect and the
termination of this Agreement shall be subject to contest by the party
receiving such notice if the receiving party notifies the other party
within forty-five (45) days after service of the notice of termination upon
the receiving party of the receiving party's desire so to contest the
matter and thereafter proceeds promptly with a proceeding so to contest the
matter. During such time as the matter is being contested, this Agreement
shall remain in full force and effect.
28. CONFIDENTIALITY: Neither Licensee nor any of its successors or assigns or
their respective representatives shall disclose to any third party (other
than their respective employees, in their capacity as such) any information
with respect to the provisions of this Agreement except: (i) to the extent
necessary to comply with law or the valid order of a court of competent
jurisdiction, in which event Licensee shall notify Licensor of the
disclosure obligation and shall seek confidential treatment of such
information, (ii) as part of its normal reporting procedure to its parent
company, its auditors and its attorneys; provided, however, that such
parent company, auditors and attorneys agree to be bound by the provisions
of this Paragraph; and (iii) in order to enforce its rights pursuant to
this Agreement in a court of competent jurisdiction. All press releases and
public disclosures relating to any provisions of this Agreement shall be
subject to Licensor's sole approval in each instance.
29. EU TERRITORY: In the event the Territory or any portion thereof under this
Agreement is within the European Union ("EU"), formerly known as the
European Economic Community, then, anything in this Agreement to the
contrary notwithstanding, no obligations created or imposed under this
Agreement may be exercised or enforced in manner contrary to Community Law
of the EU.
- END OF STANDARD TERMS AND CONDITIONS -
Page 9 of 9
<PAGE>
THIRD AMENDMENT TO AFFILIATION AGREEMENT FOR DBS SATELLITE
EXHIBITION OF CABLE PROGRAMMING BY AND BETWEEN PLAYBOY
ENTERTAINMENT GROUP, INC. AND DIRECTV, INC.
This Third Amendment (the "Third Amendment") to that certain AFFILIATION
AGREEMENT FOR DBS SATELLITE EXHIBITION OF CABLE PROGRAMMING dated as of November
15, 1993, and amended by the First Amendment dated as of April 19, 1994 and the
Second Amendment dated July 26, 1995 (as so amended, the "Agreement"), by and
between Playboy Entertainment Group, Inc., a Delaware corporation ("Programmer")
with offices at 9242 Beverly Boulevard, Beverly Hills, California 90210, and
DIRECTV, Inc., a California corporation ("DIRECTV" or "AFFILIATE") with offices
at 2230 East Imperial Highway, El Segundo, California 90245, is made and entered
into this 26th day of August, 1997, as follows:
A. Amendment. For other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto amend the
Agreement as follows:
1. The Term is hereby extended to ***.
2. Affiliate agrees to participate in and promote Programmer's
November 1997 15th Birthday national free or discounted preview
promotion, including funding a DIRECTV subscriber sweepstakes with
a Grand Prize trip for two to the Playboy TV 15th Birthday Party
at the Playboy Mansion in Los Angeles in January 1998 (not to
exceed ***) and one (1) of Programmer's other national free or
discounted preview promotions each calendar year during the Term.
3. Affiliate will promote Programmer in each of Affiliate's monthly
printed Pay-Per-View bill inserts ***. Programmer and/or
Affiliate may elect to fund other promotional efforts for Playboy
TV through Affiliate throughout the Term.
4. Programmer and Affiliate acknowledge and agree that Exhibit A is
hereby amended to read as set forth in the attached Revised
Exhibit A.
B. No Other Amendment. Except as specifically provided above, all terms
and provisions of the Agreement shall remain unmodified and in full
force and effect.
C. Counterparts. This Third Amendment may be executed in counterparts,
each of which shall be deemed an original, and all such counterparts
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Third Amendment through their
duly authorized representatives as of the date first set forth below.
ACCEPTED AND AGREED TO:
Playboy Entertainment Group, Inc. DIRECTV, Inc.
By: /s/ Douglas H. Lindquist By: /s/ Richard E. Goldberg
------------------------------ --------------------------
Douglas H. Lindquist Richard E. Goldberg
Title: Senior Vice President, Title: Vice President,
Satellite Program Acquisition
-------------------------- ------------------------
Date: August 26, 1997 Date: 8/26/97
-------------------------- ------------------------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
REVISED EXHIBIT A (August 25, 1997)
PROGRAMMER'S RATE CARD FOR NON-HOTEL/MOTEL DISTRIBUTION
For the monthly reporting periods* beginning ***
I. Affiliate Share ***/ Programer Share ***.
II. *** DIRECTV must meet both of the following minimum on-air promotion
requirements (i.e., Playboy spots/month and percentage of Playboy spots
aired between 8AM and 8PM) during the month immediately prior to any given
reporting period in addition to achieving or exceeding the listed mininum
Per Capita Gross Receipts ("PCGR")** level of *** during the current
relevant reporting period:
DIRECTV will air 30 and/or 60 second promotional spots as produced by
Playboy and approved by DIRECTV, which approval shall not be
unreasonably withheld, per the schedule below. DIRECTV, in its
discretion, will select which cross-channel promotional spots to air on
those channels which DIRECTV and Playboy mutually agree, in their
reasonable business judgment, have a likely target audience for Playboy
programming (subject to programmer limitations on adult-oriented
promotional spots) and not on channels where the spot may be
objectionable to a significant percentage of that channel's viewing
audience. ***
***
* Reporting period refers to the monthly statement of Gross Receipts
which typically reflects the average number of DIRECTV basic and
Playboy subscribers and the amount of all Playboy pay-per-view
purchases from the Commencement Date through approximately the 10th
day of the current month which were not counted in any prior
reports.
** The "Per Capita Gross Receipts" for any reporting period shall be
determined by taking the amount of Gross Receipts for such reporting
period and dividing that amount by the average number of DIRECTV
Subscribers for such reporting period. By example, DIRECTV's Invoice
By Company for Playboy for the reporting period of May 1997 shows
the following information:
- --------------------------------------------------------------------------------
Aggregate Gross Revenue (from Playboy Subscriptions and PPV) ***
DIRECTV Subscribers ***
- --------------------------------------------------------------------------------
The "Per Capita Gross Receipts" would thus be calculated as: ***
*** Confidential information omitted pursuant to a request for
confidential treatment filed separately with the Securities and
Exchange Commission.
<PAGE>
As of July 31, 1997
Bloomfield Mercantile, Inc.
c/o Cisneros Television Services, Inc.
426 Jefferson Avenue
Miami Beach, FL 33139
Attention: Marc J. Zand, Esq.
RE: Playboy Television Programming in Scandinavia
Ladies and Gentlemen:
Reference is made to that certain letter agreement dated January 13, 1997
between Playboy Entertainment Group, Inc. ("Playboy") and Bloomfield
Mercantile, Inc. ("Bloomfield") regarding the expansion of the operations of
Playboy TV-Latin America, LLC to Spain and Portugal (the "Iberian Agreement").
Pursuant to Paragraph 8 of the Iberian Agreement, Playboy granted to
Bloomfield, among other rights, a first negotiation and matching right (the
"Negotiation/Matching Right") to participate in a new venture if Playboy were
to operate a Playboy-branded television service (a "Playboy Service") in all or
any territory of Sweden, Finland, Denmark, Norway, Germany, Austria or
Switzerland via a venture with a non-Playboy entity. Although Playboy is not
operating a Playboy Service in any of such territories via a venture with a non-
Playboy entity, Playboy does intend itself to establish and operate a Playboy
Service in the territory of Norway, Sweden, Denmark and Finland (collectively,
"Scandinavia"; and such a Playboy Service is referred to as "PBTV/S"), that
Playboy intends be distributed for a fixed period (the "Term") on an exclusive
basis by the Modern Times Group ("MTG"), pursuant to a distribution agreement
with MTG (the "Distribution Agreement"). The Distribution Agreement also
contemplates the potential expansion to some or all of the Baltic States for
exhibition rights in certain feature programs. Additionally, Playboy
concurrently is negotiating with Bloomfield to form a joint venture limited
liability company (the "Venture") to operate a Playboy Service in Germany and
Scandinavia. If Playboy and Bloomfield or an affiliate of Bloomfield
(Bloomfield and its affiliates are each referred to as a "Bloomfield Entity")
were able to consummate their agreement (the "JV Agreement") for the formation
of the Venture to operate a Playboy Service in Germany and Scandinavia prior to
Playboy's entering into the Distribution Agreement with MTG, the Venture, and
not Playboy directly, would enter into a distribution agreement with MTG, and
the Venture would acquire Playboy-branded programming from Playboy for PBTV/S to
be distributed by MTG. However, it appears that Playboy will enter into the
Distribution Agreement with MTG prior to finalizing and entering into, if ever,
the JV Agreement with a Bloomfield Entity.
1
<PAGE>
Accordingly, in light of the foregoing and instead of any Negotiation/Matching
Right or any other right under the Iberian Agreement or otherwise in favor of
any Bloomfield Entity in connection with PBTV/S or the Distribution Agreement,
as finally agreed upon by Playboy and MTG, including any amendments thereto (the
"Playboy/MTG Distribution Agreement"), Playboy and Bloomfield agree as follows:
1. Playboy shall enter into the Playboy/MTG Distribution Agreement, providing
for minimum guaranteed license fee payments (the "License Fees") to
Playboy for the distribution of PBTV/S by MTG.
2. Playboy and a Bloomfield Entity shall continue to negotiate in good faith
regarding the JV Agreement. If Playboy and a Bloomfield Entity enter into
and execute the JV Agreement and the Venture is formed by Playboy and a
Bloomfield Entity prior to the end of the Term, if ever: (a) Playboy shall
assign to the Venture the Playboy/MTG Distribution Agreement, including the
right to receive payment of all License Fees and other sums payable by MTG
to Playboy under the Playboy/MTG Distribution Agreement (collectively, "MTG
Payments") with respect to all periods of the Term following the date of
formation of the Venture; and (b) Playboy and a Bloomfield Entity shall
negotiate in good faith regarding the treatment, sharing and payment of the
MTG Payments and all related programming costs in connection therewith for
all periods of the Term preceding the date of formation of the Venture.
3. If by the end of the Term, Playboy and a Bloomfield Entity are unable to
enter into and execute the JV Agreement for the formation of the Venture
for the operation of a Playboy Service in Germany and Scandinavia, then
Playboy and a Bloomfield Entity shall negotiate in good faith some form of
consideration, if any, from Playboy to Bloomfield in connection with the
Playboy/MTG Distribution Agreement ("Bloomfield's Scandinavian
Consideration"). Neither Playboy nor Bloomfield shall have any further
obligations to the other with respect to PBTV/S, the Playboy/MTG
Distribution Agreement, the MTG Payments or Bloomfield's Scandinavian
Consideration if Playboy and a Bloomfield Entity are not able to enter into
and execute an agreement in connection with Bloomfield's Scandinavian
Consideration or the JV Agreement.
4. The Negotiation/Matching Right shall survive the execution of this letter
agreement with respect to applicable transactions other than those covered
by this letter agreement, in accordance with the provisions of such
Negotiation/Matching Right as set forth in the Iberian Agreement.
If this letter agreement correctly sets forth the agreement between Playboy and
Bloomfield with respect to PBTV/S, the proposed Playboy/MTG Distribution
Agreement and Bloomfield's rights in
2
<PAGE>
connection therewith, please execute a copy of this letter agreement in the
appropriate space provided below.
Very truly yours,
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ Anthony J. Lynn
-----------------------------
Anthony J. Lynn
-----------------------------
Name and Title
ACCEPTED AND AGREED TO:
BLOOMFIELD MERCANTILE, INC.
By: /s/ Marc Zand
-----------------------------
Attorney-in-fact
-----------------------------
Name and Title
3
<PAGE>
PLAYBOY ENTERPRISES, INC.
CHRISTIE HEFNER
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
September 25, 1997
Ms. Helen Isaacson
158 N. Woodland Street
Englewood, NJ 07631
Dear Helen:
It is with great pleasure that I offer you the position of Senior Vice
President, Product Marketing for Playboy Enterprises, Inc.
You will be reporting directly to me. You will be domiciled at the Playboy
offices in New York, although you will be expected to do such traveling as may
be necessary and appropriate for the performance of your duties, especially to
Chicago where some of the Product Marketing staff is based.
You will be paid a base salary of $300,000 per year, to be paid on a biweekly
basis on our normal payroll dates. In addition, you are entitled to participate
in a Board approved incentive plan with a maximum potential of 50% of your base
salary based upon divisional and Company performance prorated in '98 based on
start date. To offset the bonus you may be forfeiting, you will receive a bonus
of $104,000 paid in January half of which ($52,000) is against the '98 incentive
payout.
You will be entitled to participate in all fringe benefits made available to
Playboy executives. You will also be a member of the Executive Committee of the
Company. You will be entitled to four weeks' paid vacation.
You will also be granted an option to purchase 50,000 shares of Playboy's Class
B stock and the right to receive up to 10,000 shares of Class B stock under the
Company's restricted stock plan, vesting 2,500 shares upon the Company's
achieving operating income of $15 million and 7,500 shares on the Company's
achieving
680 North Lake Shore Drive
Chicago, Illinois 60611
312-751-8000
<PAGE>
September 23, 1997
Helen Isaacson
Page Two
operating income of $20 million according to the terms and conditions of the
1995 Playboy Enterprises, Inc. Stock Incentive Plan.
If you should be terminated at any time not for cause (as defined below), you
will be entitled to receive no less than six months guaranteed severance and up
to an additional six months if you remain unemployed. "For cause" is defined as
conviction of a crime involving dishonesty, fraud or breach of trust, or
engaging in conduct materially injurious to Playboy.
You will be entitled to participate in the "parachute plan" that is described on
page 14 of Playboy's 1996 proxy statement.
If the above is acceptable, please sign, date and return the enclosed copy of
this letter.
Once again, welcome to the Playboy family. I look forward to working with you.
Sincerely,
/s/ Christie Hefner
Christie Hefner
ACCEPTED:
/s/ Helen Isaacson
- --------------------------
Helen Isaacson
September 26, 1997
- --------------------------
Date
<PAGE>
PLAYBOY ENTERPRISES, INC.
CHRISTIE HEFNER
Chairman and
Chief Executive Officer
September 26, 1997
Mr. Garry Saunders
1001 Trophy Hills Drive
Las Vegas, NV 89134
Dear Garry:
It is with great pleasure that I offer you, contingent upon further reference
checking, the position of President - Gaming for Playboy Enterprises, Inc.
reporting directly to me.
You will be paid a base salary of $400,000 per year, to be paid on a biweekly
basis on our normal payroll dates. In addition, you are entitled to participate
in a Board approved executive incentive plan with an annual maximum potential of
60% of your base salary based upon divisional and Company performance. For
FY'98, the bonus will be prorated dependent upon your start date.
You will be a member of the Executive Committee of the Company. You will be
entitled to four weeks' paid vacation per calendar year. You will be entitled to
participate in any other executive benefits made available to other PEI
executives.
You will also be entitled to participation in the Company's Executive 1995 Long-
Term Incentive Plan. The long-term incentive plan includes two components: stock
options and restricted stock. Your stock option grant of 75,000 Class B options
vest in 25% increments over a four year period. The stock price of the options
is calculated as the closing price of the Class B stock the day preceding your
start date. You will also be entitled to 15,000 shares of Class B restricted
stock with accelerated vesting based upon financial performance achievement.
Under the restricted stock plan, your first payout of 2500 shares will be earned
upon the Company's achievement of $15 million Operating Income and the second
traunch of 12,500 shares at $20 million Operating Income. The plan, which was
implemented in FY'95, has already
680 North Lake Shore Drive
Chicago, Illinois 60611
312-751-8000
<PAGE>
September 26, 1997
Garry Saunders
Page Two
paid out its first two traunches as the initial two targets have been achieved.
Our three-year plan projects the achievement of both traunches over the next two
years. It is my expectation that once this plan successfully ends, it will be
replaced by another similar plan. Garry, as you know, Playboy's future gaming
strategy can potentially have a major impact on PEI's stock price.
If you should be terminated at any time not for cause (as defined below) you
will be entitled to receive no less than six months guaranteed severance and up
to an additional six months if you remain unemployed. "For cause" is defined as
conviction of a crime involving dishonesty, fraud or breach of trust, or
engaging in conduct materially injurious to Playboy.
You will be entitled to participate in the "parachute plan" that is described in
the attached.
I have not attempted to value the profit-sharing plan, the matching 401k plan,
deferred compensation plan or discounted employee stock plan but am providing a
brief description of these programs:
The 401K plan is a company-matching plan that allows for pre-tax contributions.
The Company matches 3.5% on the first 6% of compensation contributed each year.
The exact formula is explained in the attachments. Eligibility begins after the
first year of employment. There are a number of different investment options to
choose from and the plan is administered by Fidelity Investments.
The profit-sharing pool is determined at the end of each fiscal year. Each
employees' share is a function of compensation against the total compensation
pool of participants.
Last year, the Company implemented an Employee Stock Purchase Plan which allows
for the purchase of Playboy Class B stock at a 15% discount (limited to $25,000
or 10% of base salary by the IRS). You would be eligible to participate
immediately.
<PAGE>
September 26, 1997
Garry Saunders
Page Three
The Deferred Compensation Plan is another investment opportunity for the
executive group. It allows senior executives to defer a portion of base (from 5-
15%) and variable (up to 50%) compensation as a savings mechanism and to build
future financial security. The value of the account is paid out upon retirement
over a chosen period of time.
If the above is acceptable, please sign, date and return the enclosed copy of
this letter.
Once again, welcome to the Playboy family. I look forward to working with you.
Sincerely,
/s/ Christie Hefner
-----------------------
Christie Hefner
ACCEPTED:
/s/ Garry Saunders
- -----------------------
Garry Saunders
October 3, 1997
- -----------------------
Date
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
for the Quarters Ended September 30
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Primary:
- -------
Earnings:
Net income $ 1,095 $ 1,037
======= =======
Shares:
Weighted average number of common
shares outstanding 20,454 20,261
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options 437 508
------- -------
Weighted average number of common
shares outstanding as adjusted 20,891 20,769
======= =======
Primary earnings per common share:
Net income $ 0.05/1/ $ 0.05/1/
======= =======
Fully Diluted:
- -------------
Earnings:
Net income $ 1,095 $ 1,037
======= =======
Shares:
Weighted average number of common
shares outstanding 20,454 20,261
Assuming exercise of options reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such options 585 508
------- -------
Weighted average number of common
shares outstanding as adjusted 21,039 20,769
======= =======
Earnings per common share assuming
full dilution:
Net income $ 0.05/1/ $ 0.05/1/
======= =======
</TABLE>
/1/ This calculation is submitted in accordance with Regulation S-K item 601(b)
(11) although not required by footnote 2 to paragraph 14 of APB Opinion No.
15 because it results in dilution of less than 3%.
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