<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended .......
OR
[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 1997 to December 31, 1997
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-2258830
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Class A Common Stock, par value $0.01 per share..... New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share..... New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
The aggregate market value of Class A Common Stock, par value $0.01 per share,
held by nonaffiliates (based upon the closing sale price on the New York Stock
Exchange) on February 28, 1998 was $20,946,289. The aggregate market value of
Class B Common Stock, par value $0.01 per share, held by nonaffiliates (based
upon the closing sale price on the New York Stock Exchange) on February 28, 1998
was $124,413,152.
As of February 28, 1998, there were 4,748,954 shares of Class A Common Stock,
par value $0.01 per share, and 15,784,920 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable
<PAGE>
PLAYBOY ENTERPRISES, INC.
FORM 10-K TRANSITION REPORT
JULY 1, 1997 TO DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I ----
<S> <C> <C>
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 21
Item 3. Legal Proceedings..................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................................... 24
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................. 25
Item 6. Selected Financial Data.............................................................. 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 42
Item 8. Financial Statements and Supplementary Data.......................................... 43
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 67
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 67
Item 11. Executive Compensation............................................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 80
Item 13. Certain Relationships and Related Transactions....................................... 82
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 84
</TABLE>
2
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PART I
Item 1. Business
- ----------------
Playboy Enterprises, Inc. was organized in 1953 to publish Playboy
magazine. The term "Company" means Playboy Enterprises, Inc., together with its
subsidiaries, unless the context otherwise requires. Since its inception, the
Company has expanded its publishing operations and has engaged in entertainment
businesses that are related to the content and style of Playboy magazine.
Additionally, the Company licenses its trademarks for use on various consumer
products, is reentering the casino gaming business and operates a direct
marketing business.
On November 6, 1997, the Board of Directors of the Company (the "Board")
approved a change in the Company's fiscal year end from June 30 to December 31
which will better align the Company's businesses with its customers and partners
who also operate and plan on a calendar-year basis. The six-month transition
period from July 1, 1997 through December 31, 1997 (the "transition period")
precedes the start of the new calendar and fiscal year and is represented in
this Form 10-K Transition Report.
The Company's businesses are classified into five industry segments:
Publishing, Entertainment, Product Marketing, Casino Gaming and Catalog. Casino
Gaming is reported as a segment for the first time in the transition period as a
result of the Company's early adoption of a Statement of Position, Reporting on
the Costs of Start-Up Activities. This statement requires the expense
recognition, as opposed to capitalization, of costs related to start-up
activities. The net revenues, income (loss) before income taxes and cumulative
effect of change in accounting principle and identifiable assets of each
industry segment are set forth in the section "Financial Information Relating to
Industry Segments" on page 28 of this Form 10-K Transition Report.
The Company's trademarks are vital to the success and future growth of all
of the Company's businesses. The trademarks, which are renewable periodically
and which can be renewed indefinitely, include Playboy, Playmate, Rabbit Head
Design, Sarah Coventry, Critics' Choice Video, Collectors' Choice Music and
AdulTVision.
PUBLISHING GROUP
The Company's Publishing Group operations include the publication of
Playboy magazine, other domestic publishing businesses (including newsstand
specials, calendars, books and new media) and the licensing of international
editions of Playboy magazine.
The revenues and operating income of the Publishing Group were as follows
for the periods indicated in the following table (in millions):
<TABLE>
<CAPTION>
Six Months
Ended Dec. 31, Fiscal Years Ended June 30,
-------------- ---------------------------
1997 1997 1996 1995
----- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Playboy magazine........... $ 50.9 $105.0 $105.3 $104.4
Other domestic publishing.. 11.8 22.7 21.4 18.7
International publishing... 5.3 10.0 6.2 4.2
------ ------ ------ ------
Total Revenues......... $ 68.0 $137.7 $132.9 $127.3
====== ====== ====== ======
Operating Income........... $ 2.8 $ 8.4 $ 9.2 $ 10.7
====== ====== ====== ======
</TABLE>
Playboy Magazine
Founded by Hugh M. Hefner in 1953, Playboy magazine is the best-selling
men's magazine in the world. Worldwide monthly circulation, which includes
international editions, is approximately 4.5 million copies. Approximately 3.2
million copies of the U.S. edition are sold monthly. International sales of the
U.S. edition of Playboy magazine and 16 licensed international editions extend
the magazine's reach to approximately 50 countries worldwide. According to Fall
1997 data published by Mediamark Research, Inc. ("MRI"), in the United States
Playboy magazine is read by approximately one in every seven men aged 18 to 34.
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Playboy magazine is a general-interest magazine for men and offers a
balanced variety of features. It has gained a loyal customer base and a
reputation for excellence by providing quality entertainment and informative
articles on current issues and trends. Each issue of Playboy magazine includes
an in-depth, candid interview with a well-known, thought-provoking personality.
Over the magazine's 44-year history, exclusive interviews have included
prominent public figures (e.g., Martin Luther King, Jr., Jimmy Carter, Fidel
Castro, Mike Wallace, Rush Limbaugh), business leaders (e.g., Bill Gates, David
Geffen, Tommy Hilfiger, Ted Turner), entertainers (e.g., Steve Martin, Jerry
Seinfeld, David Letterman, Jay Leno, Mel Gibson, Bruce Willis, John Travolta),
authors (e.g., Salman Rushdie, Anne Rice, Ray Bradbury, Alex Haley, James
Michener) and sports figures (e.g., Michael Jordan, Muhammad Ali, Brett Favre).
The magazine also regularly publishes the works of leading journalists, authors
and other prominent individuals. For example, Playboy magazine has published
fiction by Scott Turow, Jay McInerney, John Updike and Margaret Atwood, articles
by Michael Crichton, Bill Maher and William F. Buckley, and book adaptations by
Tony Horwitz (Middle East correspondent for The Wall Street Journal) and
Pulitzer Prize winning author William Kennedy. It has long been known for its
graphic excellence and features, and publishes the work of top artists and
photographers. Playboy magazine also features lifestyle articles on consumer
products, fashion, automobiles and consumer electronics and covers the worlds of
sports and entertainment. It is also renowned for its pictorials of beautiful
women and frequently features celebrities on its cover and in exclusive
pictorials (among them Farrah Fawcett, Pamela Anderson, Elle Macpherson, Jenny
McCarthy, Cindy Crawford, Sharon Stone, Madonna and Stephanie Seymour).
The net circulation revenues of the U.S. edition of Playboy magazine for
the transition period and fiscal years 1997, 1996 and 1995 were $37.3 million,
$74.9 million, $76.2 million and $75.4 million, respectively. Net circulation
revenues are gross revenues less provisions for newsstand returns and unpaid
subscriptions, and commissions. Circulation revenue comparisons may be
materially impacted with respect to any period which includes one or more issues
of unusually high public interest.
According to the Audit Bureau of Circulations ("ABC"), an independent audit
agency, Playboy magazine's circulation rate base (the total newsstand and
subscription circulation guaranteed to advertisers) at December 31, 1997 was
larger than Newsweek and Cosmopolitan, and also greater than the combined
circulation rate bases of Rolling Stone, Esquire and GQ, which have substantial
adult male audiences. Playboy magazine's rate base compares to that of other
selected publications as noted in the following table:
<TABLE>
<CAPTION>
Selected U.S. Consumer Publications Rate Base (1) Ranking (2)
- ----------------------------------- ------------- -----------
<S> <C> <C>
Reader's Digest................................................ 15.00 1
TV Guide....................................................... 13.00 2
National Geographic............................................ 8.50 3
Time........................................................... 4.00 10
Playboy........................................................ 3.15 12
People......................................................... 3.15 12
Sports Illustrated............................................. 3.15 12
Newsweek....................................................... 3.10 15
Cosmopolitan................................................... 2.25 20
Rolling Stone.................................................. 1.25 45
Business Week.................................................. 0.88 83
Esquire........................................................ 0.65 111
GQ............................................................. 0.65 111
</TABLE>
__________
(1) Represents rate base at December 31, 1997 (in millions) as reported by
ABC.
(2) Based on rate base at December 31, 1997 as reported by ABC.
4
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Effective with the January 1996 issue, the Company reduced the rate base 7%
to 3.15 million in response to extraordinary paper price increases plus a postal
rate increase in order to enable the Company to manage circulation more
profitably, while maintaining the magazine's circulation leadership as the best-
selling men's magazine. A number of other magazine publishers have also reduced
their rate bases in the recent past. From fiscal year 1987 until the January
1996 issue, the U.S. edition of Playboy magazine reported a circulation rate
base of 3.40 million, which it met or exceeded in most of the six-month periods
over which it was averaged in each fiscal year, and which it did not meet by
less than 5% in the other periods, including the six-month period leading up to
the rate base reduction.
Playboy magazine has historically generated over two-thirds of its revenues
from subscription and newsstand circulation, with the remainder primarily from
advertising. Subscription copies as a percentage of total copies sold were
approximately 80% for the transition period. The Company believes that managing
Playboy's circulation to be primarily subscription driven, like most major
magazines, provides a stable and desirable circulation base, which is also
attractive to advertisers. According to the MRI data previously mentioned, the
median age of male Playboy readers is 33, with a median annual household income
of approximately $40,000. The Company also derives meaningful income from the
rental of Playboy magazine's subscriber list, which consists of the subscriber's
name, address and other information maintained by the Company.
The price of a one-year subscription ranges from $19.97 to $34.96,
depending on the source of the subscription and the length of time the
subscription has been held. The Company continually tests a variety of
subscription pricing strategies. The Company attracts new subscribers to the
magazine through its own direct mail advertising campaigns, and through
subscription agent campaigns. In calendar year 1998, the Company also plans to
utilize television advertising as a way of attracting new subscribers. The
Company recognizes revenues from magazine subscriptions over the terms of the
subscriptions.
Subscription copies of the magazine are delivered through the U.S. Postal
Service as second class mail. The Company attempts to contain these costs
through presorting and other methods. The Company experienced a general postal
rate increase of 14% in January 1995 and expects to be materially adversely
impacted by another 8% increase late in the second quarter of calendar year
1998.
Distribution of the magazine to newsstands and other retail outlets is
accomplished through Warner Publisher Services, a national distributor that
maintains a network of approximately 240 wholesale distributors. Copies of the
magazine are shipped in bulk to the wholesalers, who are responsible for local
retail distribution. The Company receives a substantial cash advance from its
national distributor at the time each issue goes on sale. The Company recognizes
revenues from newsstand sales based on estimated copy sales at the time each
issue goes on sale, and adjusts for actual sales upon settlement with its
national distributor. These revenue adjustments generally are not material.
Retailers return unsold copies to the wholesalers who count and then shred the
returned magazines and report the returns via affidavit. The Company then
settles with its national distributor based on the number of magazines that
actually were sold compared to the number that initially were projected to be
sold. The number of issues sold on newsstands varies from month to month,
depending in part on the cover, the pictorials and the editorial features.
Playboy magazine is one of the highest priced magazines in the United
States. The basic U.S. newsstand cover price has been $4.95, $5.95 for holiday
issues, since fiscal year 1993. The Company increased the Canadian cover price
to C$5.95, C$6.95 for holiday issues, in fiscal year 1995. The Company regularly
price tests, but no newsstand price increases are planned for copies sold in the
United States or Canada in calendar year 1998.
5
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<TABLE>
<CAPTION>
Advertising by category, as a percent of total ad pages, was as follows:
Six Months
Advertising Category Ended Dec. 31, Fiscal Years Ended June 30,
-------------------- -------------- ---------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tobacco 23% 21% 24% 20%
Beer/Wine/Liquor 22 24 19 18
Retail/Direct Mail 21 23 25 31
Home Electronics 9 4 1 4
Drugs/Remedies 5 3 3 4
Toiletries/Cosmetics 4 7 9 9
Jewelry/Optical/Photo 4 4 3 3
Entertainment 3 3 2 1
Automotives 3 4 8 4
Apparel/Footwear/Accessories 3 4 3 4
All Other 3 3 3 2
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
Playboy magazine targets a wide range of advertisers and continues to focus
on securing new advertisers from underdeveloped categories. The Company utilizes
information from its database of approximately 11 million names, including
Playboy magazine subscribers and catalog customers, to offer advertisers new
ways to reach Playboy readers. In fiscal year 1996 the Company implemented a
national trade campaign, Growing Up, I never thought I'd be in Playboy, which
features top executives from top advertisers talking about the power and appeal
of the magazine and the Playboy brand. The campaign was expanded in fiscal year
1997 and continued in the transition period. The thrust of the campaign is to
reinforce the mainstream, upscale nature of the publication and its readership
to the advertising community, specifically targeting the fashion, fragrance and
consumer electronics categories.
In fiscal year 1995, Playboy's advertising pages remained stable compared
to the prior year at 595 pages, while advertising revenues declined by 1% based
on higher frequency discounts, special pricing and a change in the mix of
advertising pages sold. Net advertising income increased by 8%.
In fiscal year 1996, Playboy's advertising pages decreased 4% from the
prior year to 569 pages, while advertising revenues declined by 1% primarily due
to the effect of a 2% cost per thousand ("CPM") increase in advertising rates
effective with the January 1996 issue. Net advertising income increased by 5%.
In fiscal year 1997, Playboy's advertising pages decreased 2% from the
prior year to 558 pages, while advertising revenues increased by 4% primarily
due to the mix of advertising pages sold combined with the effect of rate
increases effective with the January 1997 and 1996 issues. Net advertising
income increased by 5%.
In the transition period, Playboy's advertising pages increased 4% from the
six months ended December 31, 1996 to 273 pages, resulting in a 4% increase in
advertising revenues. Net advertising income increased by 6%.
Advertising sales for the calendar year 1998 first quarter issues of the
magazine are closed, and the Company expects to report 12% fewer ad pages and
11% lower ad revenues compared to the quarter ended March 31, 1997. The Company
implemented a 6% CPM increase in advertising rates effective with the January
1998 issue.
The Company does not believe that it will be impacted by the Food and Drug
Administration (the "FDA") regulation announced in August 1996 which prohibits
the publication of tobacco advertisements containing drawings, colors or
pictures. The regulation does not apply to a magazine which is demonstrated to
be an "adult publication," which means a publication (i) whose readers younger
than 18 years of age constitute no more than 15% of total readership, and (ii)
is read by fewer than two million persons younger than 18 years of age, in each
case as measured by competent and reliable survey evidence. Based on information
available to the Company on its readership, the Company believes that Playboy
magazine qualifies as an "adult publication" and that the regulation is not
applicable to the magazine. On April 25, 1997, the Federal District Court for
the Middle District of North Carolina ruled that the FDA has no authority under
existing law to restrict the advertising and promotion of tobacco products and
ordered the
6
<PAGE>
FDA not to implement any of the advertising and promotion restrictions contained
in the regulation. The Government has appealed this ruling and a decision is
pending.
The Company publishes the U.S. edition of Playboy magazine in 15
advertising editions: one upper income zip-coded, eight regional, two state and
four metro. All contain the same editorial material but provide targeting
opportunities for advertisers. The net advertising revenues of the U.S. edition
of Playboy magazine for the transition period and fiscal years 1997, 1996 and
1995 were $13.7 million, $28.4 million, $27.4 million and $27.6 million,
respectively. Net advertising revenues are gross revenues less advertising
agency commissions, frequency and cash discounts and rebates. Levels of
advertising revenues may be affected by, among other things, general economic
activity and governmental regulation of advertising content.
The Playboy Jazz Festival provides advertisers sponsorship and advertising
opportunities through the Festival at the Hollywood Bowl, the published Jazz
Festival program, free community concerts, and a national public radio
broadcast. The Company has produced this music event on an annual basis in Los
Angeles at the Hollywood Bowl since June 1979.
Playboy magazine and newsstand specials are printed at Quad/Graphics, Inc.,
located in Wisconsin. The actual print run varies each month and is determined
with input from the Company's national distributor. Paper is the principal raw
material used in the production of Playboy magazine. The Company uses a variety
of types of high-quality coated paper that is purchased from a number of
suppliers. Manufacturing costs for the transition period decreased 12% compared
to the six months ended December 31, 1996 principally as a result of lower
average paper prices. As expected, average paper prices for the transition
period were lower (by 18%, or $2.2 million) compared to the six months ended
December 31, 1996 largely due to a decline in paper prices which began impacting
the Company in the second quarter of fiscal year 1997. In calendar year 1998,
the Company expects to be materially adversely impacted by an approximate 7%
increase in paper prices effective January 1, 1998.
Magazine publishing companies face intense competition for both readers and
advertising. Magazines primarily aimed at men are Playboy magazine's principal
competitors. In addition, other types of media that carry advertising, such as
newspapers, radio, television and Internet sites, compete for advertising
revenues with Playboy magazine.
From time to time, Playboy magazine, and certain of its distribution
outlets and advertisers, have been the target of certain groups who seek to
limit its availability because of its content. In its 44-year history, the
Company has never sold a product that has been judged to be obscene or illegal
in any U.S. jurisdiction.
The National Defense Authorization Act of 1997 was signed into law in
September 1996. One section of that legislation that began as the Military Honor
and Decency Act (the "Military Act") bans the sale or rental of sexually
oriented written or videotaped material on property under the jurisdiction of
the Department of Defense. A Federal Court permanently enjoined enforcement of
the Military Act and prohibited the Department of Defense from changing its
acquisition and stocking practices based on the Military Act. The government
filed an appeal. On November 21, 1997, the U.S. Court of Appeals vacated the
trial court's decision and remanded the case back to the trial court, ordering
it to hold the Military Act constitutional. The Court of Appeals decision has
been stayed pending further appeal. The Military Act, if applicable to the
Company's products, would prohibit the sale of Playboy magazine, newsstand
specials and videos at commissaries, PX's and ship stores, and would adversely
affect a portion of the Company's sales attributable to such products. Based on
preliminary estimates and current sales levels at such locations, the Company
believes that any such impact would be immaterial.
Other Domestic Publishing
The Publishing Group has also created media extensions, taking advantage of
the magazine's reputation for quality and its libraries of art, photography and
editorial text. These products include newsstand specials and calendars, which
are primarily sold in newsstand outlets and use both original photographs and
photographs from the Company's library. In fiscal years 1995, 1996 and 1997, the
group published 18, 21 and 22 newsstand specials, respectively. The group
published 11 newsstand specials in the transition period and expects to publish
23 newsstand specials in calendar year 1998. The last increase in the newsstand
cover price (to $6.95) was implemented in fiscal year 1996.
7
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The Publishing Group also generates revenues from various businesses which
include 900-number Playboy-related audiotext services, Playboy Collectible
Trading Cards and books. In conjunction with General Publishing Group, Inc., an
unaffiliated third party, the Company published The Playmate Book: Five Decades
of Centerfolds in fiscal year 1997, which featured photographs and capsule
biographies of 514 Playmates. Also in conjunction with General Publishing Group,
Inc., the Company expects to release Inside the Playboy Mansion in the fall of
1998, featuring a private glimpse, in photographs and text, into the inner-
sanctums of the legendary Playboy Mansions in both Chicago and Los Angeles.
In fiscal year 1995, the Company launched a free site on the Internet.
Playboy.com is one of the Internet's most visited destination sites, averaging
approximately 1.4 million page impressions per day in December 1997 according to
unaudited information from Nielsen I/PRO. A "page impression" is recorded each
time an Internet page is seen by a user, regardless of the number of files
contained on the page. Taking full advantage of the technological capabilities
of the medium, Playboy.com features approximately 2,500 pages containing popular
editorial features from Playboy magazine, such as excerpts of Playboy
Interviews, articles and Playboy Advisor columns, and select photos from
Playmate pictorials. Playboy.com also features French, German, Italian and
Spanish translations. The site also promotes Playboy TV's monthly programming
schedule and sells Playboy magazine subscriptions. In January 1998 the Company
announced a partnership with Dark Horse Comic Books to bring to life many of the
Dark Horse titles beginning with Bettie Page: Spicy Adventure. The Company has
also launched The Listening Lounge in conjunction with Rhino Records, in which
visitors can listen to select audio samples of various recordings. The Company
plans to continue to increase the original content on Playboy.com, including
through other alliances. The Company also implemented two additional mirror
servers in fiscal year 1997 (one in the United States and one in the United
Kingdom) to handle increased traffic on Playboy.com.
In fiscal year 1996, the Company began generating revenues from the sale of
advertising on Playboy.com which resulted in the site realizing a net profit in
fiscal year 1996. The site nearly tripled advertising revenues in fiscal year
1997. It experienced modest revenue growth in the transition period compared to
the six months ended December 31, 1996. The Company expects to see continued
growth in advertising revenues in calendar year 1998. Advertising on Playboy.com
is priced on a CPM basis determined by page impressions. Advertising is sold by
the Company as well as a division of Softbank, Interactive Media Sales ("IMS").
The Company continued to add new advertisers to the site in the transition
period.
In July 1997, the Company launched a pay site on the Internet. Playboy
Cyber Club, which is currently offered on a subscription basis for $60 per year,
has already attracted over 20,000 subscribers as of December 31, 1997. Playboy
Cyber Club allows members to peruse approximately 35,000 pages on the site.
Major attractions include individual home pages for every Playboy Playmate;
every Playboy Interview published in the magazine; Playboy Advisor columns;
video clips of Playboy home videos and Playboy TV shows; the Playboy Photo
Library, which includes never-before-published images from Playboy magazine's 9-
million-image photo library; the Playboy Art Gallery, which features images from
the Company's extensive art collection; and the Playboy Sports Page, which
includes real-time sports scores and sports-related features. Playboy Cyber Club
also features six chat rooms and five exclusive newsgroups. In the transition
period, Playboy Cyber Club successfully launched a live webcast of the annual
New Year's Eve bash at the Playboy Mansion, marking the first time that members
could attend an event inside the Playboy Mansion via their computer. Pay-per-
visit access is expected to be available by calendar year 1999.
Beginning with the first quarter of calendar year 1998, the online, or new
media, business will be reported as a separate operating group. In addition to
the online businesses discussed above, in calendar year 1998 the group's results
will reflect e-commerce (sales through the Internet) which is currently reported
in the Catalog Group, and is discussed in that section, and Playboy magazine.
The free and pay sites combined will offer the Company four sources of
revenue: advertising, e-commerce, subscription and pay-per-visit.
8
<PAGE>
International Publishing
The Company licenses the right to publish 16 international editions of
Playboy magazine in the following countries: Australia, Brazil, Croatia, the
Czech Republic, France, Germany, Greece, Italy, Japan, Netherlands, Poland,
Russia, Scandinavia, Slovakia, Spain and Taiwan. In the transition period, the
Company launched the edition in Scandinavia, which is initially being circulated
in Norway, with plans to expand later to Sweden, Finland and Denmark. The
Company discontinued the Mexican edition in early calendar year 1998 and is
exploring relaunching the edition with another publisher. The Company's equity
interest in the Polish edition was increased from 45% to a majority interest in
March 1996. Combined average circulation of the international editions is
approximately 1.3 million copies monthly.
Local publishing licensees tailor their international editions by mixing
the work of their national writers and artists with editorial and pictorial
material from the U.S. edition. The Company monitors the content of the
international editions so that they retain the distinctive style, look and
quality of the U.S. edition, while meeting the needs of their respective
markets. The terms of the license agreements for Playboy magazine's
international editions vary, but in general are for terms of three or five years
and carry a guaranteed minimum royalty as well as a formula for computing earned
royalties in excess of the minimum. Royalty computations are generally based on
both circulation and advertising revenues. In the transition period, two
editions - Brazil and Germany - accounted for approximately 57% of the total
licensing revenues from international editions.
Other Publications
The Company owns a 20% interest in duPont Publishing, Inc. ("duPont"),
publisher of duPont Registry, A Buyers Gallery of Fine Automobiles; duPont
Registry, A Buyers Gallery of Fine Homes; and duPont Registry, A Buyers Gallery
of Fine Boats. The Company has an option to acquire the remaining 80% interest
in duPont at a price based on fair market value as of December 31, 1999, and
receives management fees. This investment is accounted for on the equity method
and the Company's proportionate share of duPont's net income or loss is included
in nonoperating income or expense.
Entertainment Group
The Company's Entertainment Group operations include the production and
marketing of programming through domestic Playboy TV, other domestic television,
international television and worldwide home video businesses as well as the
worldwide distribution of programming through AdulTVision and the co-production
and distribution of feature films.
In early calendar year 1998, the Company and Spice Entertainment Companies,
Inc. ("Spice"), a competitor in the adult movie service industry, announced an
agreement whereby the Company will acquire all of the outstanding shares of
Spice, subject to the satisfactory completion of various items. See Note S of
Notes to Consolidated Financial Statements.
9
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<TABLE>
<CAPTION>
The revenues and operating income of the Entertainment Group were as
follows for the periods indicated in the following table (in millions):
Six Months
Ended Dec. 31, Fiscal Years Ended June 30,
-------------- ---------------------------
1997 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Playboy TV
Cable............................................. $ 9.6 $ 21.2 $ 21.2 $ 18.9
Satellite direct-to-home.......................... 14.0 23.1 16.4 9.6
Off-network productions and other................. 1.3 3.0 1.7 0.4
------ ------ ------ ------
Total Playboy TV.................................... 24.9 47.3 39.3 28.9
Domestic home video................................. 3.3 8.5 9.4 9.5
International TV and home video..................... 4.7 12.2 11.9 11.2
------ ------ ------ ------
Total Playboy Businesses............................ 32.9 68.0 60.6 49.6
AdulTVision......................................... 2.3 4.5 1.9 -
Movies and other.................................... 2.2 2.2 2.3 2.1
------ ------ ------ ------
Total Revenues...................................... $ 37.4 $ 74.7 $ 64.8 $ 51.7
====== ====== ====== ======
Operating Income
Profit contribution before programming expense...... $ 19.2 $ 39.7 $ 30.5 $ 21.1
Programming expense (a)............................. (11.2) (21.4) (21.3) (20.1)
------ ------ ------ ------
Total Operating Income.............................. $ 8.0 $ 18.3 $ 9.2 $ 1.0
====== ====== ====== ======
</TABLE>
(a) Includes amortization expense for all businesses listed above, including
AdulTVision and movies.
Programming
- -----------
The Entertainment Group develops, produces and distributes programming for
domestic Playboy TV, other domestic pay television, domestic home video and
international television and home video markets. Its productions have included
feature films, magazine-format shows, dramatic series, game shows, live events,
anthologies of sexy short stories and celebrity and Playmate features.
The Company invests in Playboy-style, original quality programming to
support its expanding businesses. The Company invested $14.4 million, $30.7
million, $25.5 million and $21.3 million in entertainment programming in the
transition period and fiscal years 1997, 1996 and 1995, respectively. These
amounts, which include expenditures for Playboy-branded programming, AdulTVision
and feature films, resulted in 96, 166, 120 and 86 hours of original programming
being produced in the transition period and fiscal years 1997, 1996 and 1995,
respectively. At December 31, 1997, the Company's library of exclusive, Playboy-
brand original programming totaled approximately 1,200 hours. In calendar year
1998, the Company expects to invest approximately $31.4 million in Company-
produced and licensed programming, which would result in approximately 175 hours
of original programming being produced. These amounts could vary based on the
timing of completion of productions.
10
<PAGE>
The following tables list movies produced or co-produced by the Company and
the series still in distribution, each generally containing 26 episodes, and
certain information related to each:
Movies Number of Releases
------ ------------------
Playboy Films
Fiscal year 1995................................... Three
Fiscal year 1996................................... Four
Fiscal year 1997................................... Three
Transition period.................................. Two
The Eros Collection
Fiscal year 1995................................... Six
Fiscal year 1996................................... Twelve
Fiscal year 1997................................... Seventeen
Transition period.................................. Two
Title of Series Genre
--------------- -----
Playboy Late Night................................... magazine-format
Inside Out........................................... anthology
Eden................................................. dramatic series
Playboy's Secret Confessions and Fantasies........... hosted series
Playboy's Love & Sex Test............................ game show
Erotic Fantasies..................................... anthology
Women: Stories of Passion............................ anthology
Red Shoe Diaries..................................... anthology
In fiscal year 1995, the Company began releasing feature films in the $1
million to $2 million range under the Playboy Films label. These films are
generally completed under co-production and distribution agreements with, among
others, the Motion Picture Corporation of America. In fiscal year 1997, the
Company signed a co-production agreement with Zalman King Entertainment, Inc.
("Zalman King"). The agreement provides for the Company and Zalman King to co-
produce feature films, two of which were completed in fiscal year 1997 and
released in the transition period. During the transition period, the Company
began production of a third film under the Zalman King agreement, as well as an
additional film to be produced exclusively by the Company. These two films,
currently under production, are expected to be completed and released during
calendar year 1998. All of the Playboy Films have also aired or will air on
domestic Playboy TV.
Also in fiscal year 1995, the Company created and began marketing The Eros
Collection, a line of small-budget, non-Playboy-branded movies. These movies are
released internationally through home video and television and air on domestic
Playboy TV. In fiscal year 1997, seven co-produced films were also included
under the Eros label, bringing the total Eros Collection films released during
the period to 17. Two films were also released under the label during the
transition period, and a number of films are currently in production.
In fiscal year 1996, the Company and Orion Home Video ("Orion") signed an
agreement to release a total of 18 Playboy Films and 24 Eros Collection films in
the domestic home video market. In July 1997, Orion was purchased by a division
of MGM/UA Home Entertainment ("MGM"). During the transition period, the Company
reached a cash settlement with MGM, relieving them of contract obligations
regarding distribution of the last nine Playboy Films in the original agreement.
The Company is currently in the process of finding a new distributor for Playboy
Films and Eros Collection Films.
The Company's series air on domestic and international Playboy TV networks
and are marketed to distributors internationally. Additionally, some episodes
have been released as Playboy Home Video titles and have been licensed to other
networks. In fiscal year 1996, the Company began production of Women: Stories of
Passion ("Women"), a series of 30-minute erotic anthologies written, produced
and directed by women. In fiscal years 1997 and 1996 combined, the Company
licensed 39 episodes of the Women series to Showtime Networks Inc. ("Showtime"),
the last six of which were delivered during the transition period. Broadcast
initially by Showtime, the series is then distributed worldwide by the Company.
11
<PAGE>
As part of the co-production agreement with Zalman King discussed above,
the Company and Zalman King have also co-produced 18 new episodes of the popular
cable television series Red Shoe Diaries, 16 of which were completed and
released by the end of the transition period. The remaining two episodes under
the agreement were completed and released at the beginning of calendar year
1998. The production of the series is co-financed by the Company and Showtime.
The agreement grants the Company international distribution rights to the new
episodes of Red Shoe Diaries, plus 48 episodes previously aired on Showtime.
During fiscal year 1997, Farrah Fawcett became the subject of the Company's
first multimedia celebrity production. Early in June 1997, Farrah's second
Playboy magazine cover and pictorial went on sale and she starred in a cable and
satellite direct-to-home ("DTH") pay-per-view special event. A Playboy home
video of the event, Farrah Fawcett: All of Me, was released in August 1997.
The Company's Playboy-branded programming is available in the United States
through Playboy TV, and internationally through Playboy TV networks and, on a
tier or program-by-program basis, by foreign broadcasters. Domestic Playboy TV
is offered on cable and through the DTH market on a pay-per-view and monthly
subscription basis. There are currently three international Playboy TV networks
in the United Kingdom, Japan and Latin America. Additionally, the Company has an
AdulTVision network in Latin America. The Company has also announced plans to
launch Playboy TV networks in Iberia as well as in Germany and Scandinavia
during calendar year 1998. An agreement was signed during fiscal year 1997 to
launch a Playboy TV network in South Korea, however, the launch of the network
has been temporarily delayed due to the poor economic conditions in that
country. At this point, the Company expects that the network will not be
launched in South Korea until calendar year 1999. The Company also distributes
its programming on videocassettes, laserdiscs and digital video discs ("DVDs"),
which are sold or rented through retail outlets and the Company's Internet sites
worldwide and sold through direct mail, including two of the Company's catalogs,
in domestic markets.
The Company's Playboy-branded programming features stylized eroticism in a
variety of entertaining formats for men and women, with an emphasis on
programming for couples. The programming does not contain depictions of explicit
sex or scenes that link sexuality with violence, and is consistent with the
level of taste and quality established by Playboy magazine.
Playboy TV
When the Company introduced its domestic pay cable network, Playboy TV, in
1982, it was available only through monthly subscriptions. In December 1989, the
Company began to focus on the then-emerging pay-per-view market by promoting the
pay-per-view option in addition to the monthly subscription option. Pay-per-view
services are available in cable systems that are equipped with addressable
hardware that allows cable subscribers to order specific programs. In recent
years, Playboy TV has added a significant number of viewers through the DTH
market, which is the fastest-growing segment of the pay television business.
Cable
In May 1994, the Company expanded Playboy TV from a ten-hour per night
schedule to 24-hour availability. This change enabled the Company to increase
revenues through maximum utilization of its transponder on Hughes
Communications' Galaxy V satellite by offering more buying opportunities to the
consumer. At December 31, 1997, Playboy TV was available to approximately 11.6
million cable addressable households, a 4% increase compared to December 31,
1996. Of the 11.6 million cable addressable households, only an estimated 2.0
million could receive Playboy TV on a 24-hour basis, a 2.5 million, or 56%,
decrease compared to December 31, 1996. The number of total cable addressable
households to which Playboy TV was available at December 31, 1997 increased 4%
from June 30, 1997, while households with 24-hour availability decreased 0.8
million, or 29%, over the same period. The drop in households with 24-hour
availability began in the fourth quarter of fiscal year 1997 after enforcement
of Section 505 of the Telecommunications Act of 1996 (the "Telecommunications
Act") began, as discussed below.
The performance of Playboy TV in individual cable systems varies based
principally on the ordering technology and the quantity and quality of marketing
done by affiliated cable systems ("Cable Affiliates").
12
<PAGE>
Pay-per-view permits customers to purchase only as much of the Company's
programming as they wish and only when they desire to watch the programming.
Pay-per-view also permits customers to control the viewing of the programming
within their households. In addition, the relatively low price of an evening of
pay-per-view programming competes well with many other forms of entertainment.
Individual Cable Affiliates determine the retail price of the pay-per-view
service, although prices average approximately $5.70 for a block of programming.
The number of monthly cable subscribers has declined, as expected. As of
December 31, 1997, Playboy TV had an estimated 115,000 monthly subscribing
households, down from 157,000 at June 30, 1997, 192,000 at June 30, 1996 and
201,000 at June 30, 1995. Individual Cable Affiliates determine the retail price
of the monthly subscription service, although prices average approximately
$9.15, largely dependent on the number of premium services to which a household
subscribes.
The following table illustrates certain information regarding cable
households in general, and Playboy TV (in thousands):
<TABLE>
<CAPTION>
Total Cable Playboy TV
Total Cable Addressable Cable Addressable
Households (a) Households (a) Households (b)
-------------- -------------- --------------
<S> <C> <C> <C>
June 30, 1995 60,350 23,450 10,600
June 30, 1996 62,850 26,400 11,300
June 30, 1997 64,000 29,350 11,200
December 31, 1997 64,500 30,700 11,600
Compound Annual Growth
Rate (July 1, 1994 -
December 31, 1997) 2.7% 11.4% 3.7%
</TABLE>
- -----------
(a) Source: Information reported in April 1997 by Paul Kagan Associates,
Inc. ("Kagan") for December 31 of each respective year. June 30 numbers
are estimated by the Company based on the December 31 information.
Kagan projects less than 1% and 9% average annual increases in total
cable households and total cable addressable households, respectively,
through calendar year 2000.
(b) Represents the approximate number of cable addressable households to
which Playboy TV was available as of the end of the period.
Most cable service in the United States is distributed through large
multiple system operators ("MSOs"). At December 31, 1997, the Company had
arrangements with 19 of the nation's 20 largest MSOs. These 19 MSOs, through
Cable Affiliates, controlled access to approximately 56.4 million, or 87%, of
the 64.5 million total cable households. Once arrangements are made with an MSO,
the Company is able to negotiate channel space for Playboy TV with the Cable
Affiliates controlled by that MSO, and acceptance by Cable Affiliates provides
the basis for expanding the Company's access to individual cable households.
Four of these 19 MSOs served approximately 9.2 million, or 79%, of the
approximately 11.6 million cable addressable households to which Playboy TV was
available at December 31, 1997. Consistent with industry practice, the Company's
agreements with Cable Affiliates are generally cancelable upon 60 or 90 days'
notice by either party.
Management believes that the Telecommunications Act discussed below has
slowed growth in cable access for the Company's domestic pay television
businesses. Additionally, management believes that the growth 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 year 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)
13
<PAGE>
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.
In February 1996, Congress passed 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. Based on the limited information
received, the Company believes that most of the cable operators that were not in
compliance with Section 505 have complied by restricting the hours of
transmission. See Part I. Item 3. "Legal Proceedings."
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, subscriber declines and reduced carriage from cable
operators due to aggressive competition for carriage from all program suppliers.
The Company has estimated that the Entertainment Group's calendar year 1998
revenues will be reduced by approximately $3.5 million, and approximately $25
million (at present value at 6%) over the next ten years, due to Section 505.
These amounts do not take into account the loss of revenues due to the slowing
of access to new homes and of upgrading of old homes from ten to 24 hours. The
Company is pursuing in the United States District Court in Wilmington, Delaware
(the "Delaware District Court") its case challenging on constitutional grounds
the validity of Section 505 and is seeking a permanent injunction against the
enforcement of Section 505. The Company's full case on the merits was heard by
the Delaware District Court in March 1998. A decision is expected by July 1998.
There can be no assurance that the Delaware District Court will grant such an
injunction.
Additionally, from time to time, certain groups have sought to exclude the
Company's programming from local pay television distribution because of the
adult-oriented content of the programming. Management does not believe that any
such attempts will materially affect the Company's access to cable systems, but
the nature and impact of any such limitations in the future cannot be
determined.
Growth in the pay-per-view market is expected to result in part from cable
systems upgrades, utilizing fiber-optic, compression technologies or other
bandwidth expansion methods that provide cable operators additional channel
capacity. When implemented, compression technology, where employed, will
dramatically increase channel capacity. Industry analysts expect a large
percentage of this additional channel capacity to be dedicated to pay-per-view
programming. The timing and extent of these developments and their impact on the
Company cannot yet be determined.
Playboy TV's cable programming is delivered primarily through a
communications satellite transponder. The Company's current transponder lease,
effective January 1, 1993, contains protections typical in the industry against
transponder failure, including access to spare transponders on the same
satellite as well as transponders on another satellite currently in operation.
Access to the transponder may be denied under certain narrowly defined
circumstances relating to violations of law or threats to revoke the license of
the satellite owner to operate the satellite based on programming content.
However, the Company has the right to challenge any such denial and believes
that the transponder will continue to be available to it through the end of the
expected life of the satellite (currently estimated to be in 2004). The
Company's current lease term expires October 30, 2001.
As of April 30, 1996, the Company was no longer obligated to make monthly
royalty payments that the Company had paid under a termination agreement with
the former distributor of its pay television service. As a result, the profit
contribution of Playboy TV and the operating performance of the Entertainment
Group have been favorably impacted by the termination of such royalty payments.
Competition among providers of cable services for channel space and viewer
spending is intense and the Company competes in this segment of its business
primarily on the basis of its brand name and its original unique quality
programming. Playboy TV's competition varies in the type and quality of
programming offered, and includes adult movie services which offer primarily
third party programming. As the Company's agreements with
14
<PAGE>
cable operators have come up for renewal or renegotiation, the Company has
experienced significant competition from these lower cost competitors with
respect to the revenue split between the cable operator and the Company. The
Company believes that a majority of its current fee arrangements with its Cable
Affiliates with respect to Playboy TV are generally more favorable to it as a
service provider than fee arrangements offered by its adult movie service
competitors and less favorable to the Company as a service provider than fee
arrangements offered by general interest movie service competitors. While there
can be no assurance that the Company will be able to maintain its current fee
structures in the face of price competition, the Company believes that strong
Playboy brand recognition, the quality of its programming and its resulting
ability to appeal more effectively to a broader range of adult audiences are
critical factors which will continue to differentiate Playboy TV from its
competitors. In fiscal year 1996, in part as a response to such price
competition, the Company launched a flanker network, AdulTVision, to provide a
lower-cost product that, in combination with Playboy TV, can result in a more
attractive overall fee arrangement for cable operators. As previously mentioned,
in early calendar year 1998, the Company and Spice, a competitor in the adult
movie service industry, announced an agreement whereby the Company will acquire
all of the outstanding shares of Spice, subject to the satisfactory completion
of various items. See Note S of Notes to Consolidated Financial Statements. If
the transaction is completed, the Company expects that the overall package
available to cable operators will improve, thereby strengthening the Company's
performance in the cable industry.
DTH
The Company also provides Playboy TV via encrypted signal, on both a pay-
per-view and monthly subscription basis, to home satellite dish viewers. The DTH
market, which is not impacted by Section 505, is the fastest-growing segment of
Playboy TV, with fiscal year 1997 DTH revenues exceeding cable revenues for the
first time. Playboy TV was available on a monthly subscription and/or pay-per-
view basis to the following number of DTH households (in thousands):
Dec. 31, June 30, June 30, June 30,
1997 1997 1996 1995
- --------------------------------------------------------------------------------
DTH Households 6,774 6,277 4,867 3,282
- --------------------------------------------------------------------------------
At the end of fiscal year 1994, Playboy TV became one of the first networks
to be launched on DirecTV, the first commercial digital broadcast satellite
("DBS") service. This service provides exceptional improvements in program
delivery and consumer interface to households equipped with Digital Satellite
System receiving units, consisting of an 18-inch satellite antenna, a digital
receiver box and a remote control. Playboy TV expanded from ten-hour to 24-hour
programming on DirecTV in August 1995. Playboy TV was added to a second DBS
service, PrimeStar, at the end of fiscal year 1995 and was expanded from ten-
hour to 24-hour programming and became available on a subscription (as well as a
pay-per-view) basis beginning in April 1997. Playboy TV is now also available on
EchoStar and the DISH network in the United States, and on Star Choice in
Canada, making it the only adult service to be available on all five DTH
services in the United States and Canada. The significant growth in the DTH
market has provided the Company with an expanded customer base via a digital
transmission which has historically produced higher buy rates than analog cable
markets.
Domestic Home Video
The Company also distributes its original programming domestically via
videocassettes, laserdiscs and DVDs that are sold or rented in video stores,
music and other retail outlets, the Company's Internet sites and through direct
mail, including two of the Company's catalogs. Playboy Home Video is one of the
largest-selling brands of nontheatrically released, special-interest videos in
the United States. Playboy Home Video was named as one of Billboard magazine's
"Top Video Sales Labels" for calendar years 1995, 1996 and 1997. The format of
Playboy Home Videos is consistent with the style, quality and focus of Playboy
magazine.
During fiscal year 1995, the Company released 14 new Playboy Home Video
titles, including The Best of Pamela Anderson in June 1995, which became the
first Playboy Home Video title ever to reach the number one spot on Billboard
magazine's weekly Top Video Sales Chart ("Sales Chart"), a position that it
maintained for 12 weeks in fiscal year 1996. Additionally, three other fiscal
year 1995 releases were in the top five on the Sales Chart. In addition, the
Company released four other titles in fiscal year 1995, including a documentary
and a workout video. Also in fiscal
15
<PAGE>
year 1995, a new product line, The Eros Collection, was introduced. As
previously discussed, these are small-budget, non-Playboy-branded movies.
In fiscal year 1996, the Company released 14 new Playboy Home Video titles,
including The Best of Anna Nicole Smith which reached the number two spot on the
Sales Chart. Eight of the 14 new titles entered the top five on the Sales Chart
in fiscal year 1996. The Best of Jenny McCarthy was released in June 1996 and
became the second Playboy title to reach the number one spot on the Sales Chart,
a position it held for five weeks in the summer of 1996. Due to its outstanding
performance throughout the year, this title held the number four position in
Billboard magazine's 1996 Year in Video Chart.
The Company released 14 new Playboy Home Video titles in fiscal year 1997,
all of which entered the top 20 on the Sales Chart during the fiscal year, with
11 of the 14 also reaching the top ten.
During the transition period, the Company released eight new Playboy Home
Video titles, all of which entered the top 20 on the Sales Chart during the
transition period. As previously mentioned, Farrah Fawcett: All of Me was
released in August 1997 and became the third Playboy title to reach the number
one position on the Sales Chart where it remained for two weeks. The Company
plans to release 16 Playboy Home Video titles in calendar year 1998.
In addition to retail sales, the Company also sells its videos through
direct-marketing channels, including Playboy magazine, Playboy catalog, and
Critics' Choice Video catalog, and two of the Company's Internet sites,
Playboy.com and CCVideo. The Company has also entered into various direct
marketing alliances for the sales of its continuity series. In fiscal year 1997,
the Company introduced a second continuity series featuring new products with
Sony Music Direct. As of June 1997, Sony Music Direct also took over from Time
Life Inc. the marketing and distribution of the first continuity series
representing the core retail product line to new direct response customers. Time
Life Inc. is expected to continue to market and distribute the core retail
product to the existing customer base through June 1998. Also, the Company
entered into an agreement with Real Entertainment, Inc. in May 1997 for a
separate direct response program representing the Playboy Home Video product
line which is expected to roll out during calendar year 1998.
The Company's Playboy Home Video products have been distributed in the
United States and Canada by Universal Music & Video Distribution ("Uni")
whereby, until the fourth quarter of fiscal year 1995, the Company was
responsible for manufacturing the video product and for certain marketing and
sales functions. The Company's new release titles are still distributed in this
manner, however, in the fourth quarter of fiscal year 1995 the Company entered
into a three-year distribution agreement with Uni related to backlist titles
(titles in release for longer than a year) that shifted manufacturing and
marketing responsibilities to Uni. The Company has received annual guarantees
for the backlist titles. During fiscal year 1997, the third and final year of
the agreement was extended through June 1998. The Company is currently in
negotiations for a new distribution agreement.
The Company also distributes its video programming via laserdiscs and,
beginning in fiscal year 1997, the new DVD format, through agreements with Image
Entertainment, Inc.
International TV and Home Video
Internationally, Playboy programming is available in approximately 150
countries and territories, either on a tier or program-by-program basis or, in
the United Kingdom, Japan and approximately 20 Latin America countries and
territories, through a local Playboy network in which the Company owns an equity
interest and from which it receives licensing fees for programming and the use
of the Playboy brand name.
The Company markets its programming to foreign broadcasters and pay
television services. As appropriate, typically the licensees then customize, dub
or subtitle the programming to meet the needs of individual markets. In
countries that can support a Playboy programming tier, the Company has expanded
its relationships with foreign broadcasters by entering into exclusive multiyear
multiproduct output agreements with international pay television distributors.
These agreements enable the Company to have an ongoing branded presence in
international markets and generate higher and more consistent revenues than
selling programs on a show-by-show basis.
16
<PAGE>
In fiscal year 1995, the Company launched the first international Playboy
TV network in the United Kingdom in a joint-venture agreement with Flextech plc,
a U.K. entertainment company that is majority-owned by a subsidiary of Tele-
Communications, Inc. ("TCI") and British Sky Broadcasting Ltd. ("BSKyB"). The
Company owns 19% of the network, with an option to acquire an additional 10%
equity interest, and receives license fees for programming and the use of the
Playboy brand name.
During fiscal year 1996, a second international Playboy TV network, in
which the Company owns less than a 20% interest, was launched in Japan in
partnership with Tohokushinsha Film Corp. Under the terms of a long-term program
supply agreement the Company will provide 700 hours of programming over the
first five years of the venture and receives a royalty for use of its brand
name. During fiscal year 1997, the venture was granted a license to distribute
to the DTH market in Japan.
A third international Playboy TV network and the first international
AdulTVision network were launched in Latin America in the fall of 1996. The
Company holds a 19% interest in the venture, with an option to acquire up to
49.9% of all equity interests. The Company also receives licensing fees for its
programming and royalty payments for use of its brand name. The venture is with
an affiliate of the Cisneros Group of Companies ("Cisneros"), one of Latin
America's most prominent conglomerates and broadcasters. The two Latin American
networks are on Galaxy Latin America, a DTH service majority-owned by Hughes
Electronics, which owns DirecTV in the United States.
The Company's partnership with Cisneros has been expanded to encompass
Playboy TV networks in Iberia as well as in Germany and Scandinavia, which are
expected to be launched during calendar year 1998. In March 1997, the Company
announced that it will launch a Playboy TV network in South Korea through a
partnership with Daewoo Corporation. However, the launch has been temporarily
delayed due to the poor economic conditions in that country. At this point, the
Company expects that the network will not be launched in South Korea until
calendar year 1999. The Company continues to explore opportunities for
additional international networks.
As the Company's international networks grow, the Company intends to
produce programming specifically targeted to the local markets in order to
maximize the appeal of Playboy TV among the Company's new customers. For
example, the U.S. popularity of Night Calls, the Company's live call-in talk
show, prompted the creation of Night Calls U.K. in fiscal year 1997, and the
Company also plans to develop a Latin American version of the show.
Through separate distribution agreements, the Company also distributes its
U.S. home video products to more than 55 countries and territories in North and
South America, Europe, Australia, Asia and Africa. These products are based on
the videos produced for the U.S. market, with dubbing or subtitling into the
local language where necessary.
AdulTVision
In July 1995, the Company launched a second pay television network,
AdulTVision, as a flanker network to Playboy TV, which allows the Company to
appeal more effectively to a broader range of adult audiences. AdulTVision is
principally offered on a pay-per-view basis and is sold primarily in combination
with Playboy TV through cable operators, and to the DTH market. At December 31,
1997, the network was available domestically to approximately 5.9 million cable
addressable and DTH households, a 20% and 11% increase from December 31, 1996
and June 30, 1997, respectively. As previously discussed, the Company launched
the network internationally in Latin America in the fall of 1996.
AdulTVision's programming is available domestically through a full-service
distribution agreement with a third-party provider until June 1998. Under the
terms of this agreement, uplink, encoding, access to a transponder and other
services are provided. Management believes that upon expiration of the current
agreement it will be able to continue with its current provider or locate
another transponder for the transmission of AdulTVision.
Product Marketing Group
The Product Marketing Group licenses the Playboy name, Rabbit Head Design
and other trademarks and artwork owned by the Company for the worldwide
manufacture, sale and distribution of a variety of consumer products.
17
<PAGE>
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated in the following table (in millions):
<TABLE>
<CAPTION>
Six Months Fiscal Years Ended June 30,
Ended Dec. 31, ----------------------------
1997 1997 1996 1995
-------------- --------- -------- -------
<S> <C> <C> <C> <C>
Revenues.................. $4.2 $8.0 $7.1 $6.8
==== ==== ==== ====
Operating Income.......... $1.6 $3.5 $3.7 $3.4
==== ==== ==== ====
</TABLE>
The Product Marketing Group works with licensees to develop, market and
distribute high-quality, branded merchandise. The Company's licensed product
lines include men's clothing, accessories, watches, jewelry, fragrances, small
leather goods, stationery, eyewear and home fashions. These products are
marketed principally in countries in Asia, primarily through retail outlets,
including department and specialty stores. The Company's Hong Kong-based apparel
licensee operates approximately 425 freestanding Playboy stores and boutiques
within department stores in China and Hong Kong. This licensee completed
construction of a new factory in November 1997 and is currently in the process
of consolidating its five distribution and sales offices throughout the country
into three.
Continuing its alliance with Consolidated Cigar Corporation, a second
Playboy cigar line was launched in fiscal year 1997, the limited-edition LeRoy
Neiman Selection. Neiman, whose artwork has been featured in Playboy magazine
for more than 40 years, created an original work of art for the cigar box and
his image appears on the cigar band. Beginning in the transition period, the
Company's first cigar line, Playboy by Don Diego, was marketed internationally.
The cigars are currently available on a limited basis in Germany, the United
Kingdom and parts of Asia, with official marketing launches in these and other
countries scheduled during calendar year 1998.
Royalties are based on a fixed or variable percentage of the licensee's
total net sales, in many cases against a guaranteed minimum. During the
transition period, approximately 69% of the royalties earned from licensing the
Company's trademarks was derived from licensees in Asia, 15% from the United
States and 14% from Europe.
The Company maintains control of the design and quality specifications of
its licensed products to ensure that products are consistent with the quality of
the Playboy image. To project a consistent image for Playboy-branded products
throughout the world, a global advertising campaign and brand strategy was
launched in fiscal year 1995 to integrate all of the marketing efforts of the
product licensees and to control the brand more effectively. Continued
investments in brand marketing and product design were made during the
transition period to further promote a cohesive brand image. The emphasis on
ensuring consistent product design is expected to continue in calendar year
1998.
To capitalize on its international name recognition, the Company continues
to increase its international product marketing activities, targeting growth for
its licensing business in South America and Europe as well as supporting and
expanding its current presence throughout Asia. More specifically, the Company
plans to promote business in particular countries by capitalizing on the
presence of other Playboy products, such as international editions of Playboy
magazine and Playboy TV networks.
Special Editions, Ltd. primarily licenses art-related products based on the
Company's extensive collection of artwork, many of which were commissioned as
illustrations for Playboy magazine and for use in the Company's other
businesses. These include posters, limited-edition prints, art watches, art ties
and collectibles. Prominent artists represented have included Salvador Dali,
Keith Haring, LeRoy Neiman, Patrick Nagel, Alberto Vargas, Ed Paschke, Andy
Warhol, Bas Van Reek, Karl Wirsum and Roger Brown.
Additionally, the Company owns all of the trademarks and service marks of
Sarah Coventry, Inc., which it licenses primarily domestically. Costume jewelry
and watches are the principal product lines distributed by Sarah Coventry
licensees.
18
<PAGE>
To protect the success and potential future growth of the Company's product
marketing and other businesses, the Company actively defends its trademarks
throughout the world and monitors the marketplace for counterfeit products.
Consequently, it initiates legal proceedings from time to time to prevent
unauthorized use of the trademarks. The Company uses a hologram on Playboy
packaging as a mark of authenticity. While the trademarks differentiate the
Company's products, the marketing of apparel and jewelry is an intensely
competitive business that is extremely sensitive to economic conditions, shifts
in consumer buying habits and fashion trends, as well as changes in the retail
sales environment.
Casino Gaming Group
In fiscal year 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 (the "Rhodes Casino"), which is expected to open in calendar year
1998. The Company has hired a senior gaming executive who will oversee the
management of the Rhodes Casino and exploration of additional 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. As a
result of the Company's early adoption of a Statement of Position, Reporting on
the Costs of Start-Up Activities, as previously discussed, expenses of $0.5
million were incurred during the transition period related to development costs
for the Rhodes Casino and other potential casino gaming ventures.
Catalog Group
The Company's Catalog Group operations include the direct marketing of
products through the Critics' Choice Video catalog, including The Big Book of
Movies (the "Big Book"), the Collectors' Choice Music catalog and the Playboy
catalog, combined with the marketing of products through the Company's sites on
the Internet.
The revenues and operating income of the Catalog Group were as follows for
the periods indicated in the following table (in millions):
<TABLE>
<CAPTION>
Six Months Fiscal Years Ended June 30,
Ended Dec. 31, ----------------------------
1997 1997 1996 1995
-------------- ------ ------ ------
<S> <C> <C> <C> <C>
Revenues................ $40.0 $76.3 $71.7 $61.4
===== ===== ===== =====
Operating Income........ $ 2.0 $ 4.8 $ 5.2 $ 5.2
===== ===== ===== =====
</TABLE>
The Critics' Choice Video catalog, one of the largest-circulation catalogs
of classic, popular and hard-to-find movies, is published quarterly and includes
movies from all of the major film studios. The catalog has expanded through
alternative distribution methods such as an online service, package inserts,
solo mailings and ads in specialty publications. Critics' Choice Video has been
challenged over the past year and a half by a softness in response rates
primarily from prospective customers. In an attempt to counter this softness,
the Company established several new initiatives in the fall of 1997, including
the launch of CCVideo, an online version of the catalog, and the Big Book, both
of which are discussed below. Additionally, a new pricing concept is being
tested offering prospective customers discounts of 25% and 50% off numerous
titles. Although still being evaluated, initial results are positive.
In October 1997, Critics' Choice Video launched the first Big Book, a 324-
page, perfect-bound oversize catalog featuring 10,000 in-stock videos, of which
over 2,000 are offered at a 25% discount. Sales from this catalog in the
transition period exceeded expectations, resulting in current plans for a second
printing. The Big Book will be revised on an annual basis, with the second
edition expected to be released in the fall of 1998.
The Collectors' Choice Music catalog currently offers more than 1,500
titles from all music genres on CDs and cassettes, including imports and hard-
to-find reissues. The Collectors' Choice Music catalog is published three times
annually. Since the catalog's inception in fiscal year 1994, the Company has
continued to increase the circulation and product offerings of the catalog.
However, the Company plans to lower circulation of the catalog for calendar year
1998 compared to calendar year 1997 due to a reduction in prospecting.
19
<PAGE>
In a continuing effort to provide superior customer service, the Critics'
Choice Video and Collectors' Choice Music catalogs operate telephone search
lines through which customers can inquire about the availability of any film or
musical recording, including those not in the catalogs. This service not only
provides immediate assistance to the customer, but information on the interests
of the customers. The Company continues to increase the number of titles
produced under its own labels. As a result, in the transition period
approximately 30 and 35 new exclusive titles were released under the Critics'
Choice Video and Collectors' Choice Music catalogs, respectively. Both catalogs
plan to continue to expand their exclusive offerings in calendar year 1998.
Playboy catalog products include Playboy-branded fashions, cigars and
gifts, Playboy Home Video titles, Playboy collectibles, such as calendars, back
issues of the magazine and newsstand specials, and CD-ROM products. The Playboy
catalog is published three times annually and, beginning in the transition
period, has been reformatted to a larger (8 1/2" x 11"), more upscale catalog
which expands on Playboy-branded and licensed product offerings.
To expand the reach of the group's products, in April 1996 an online
version of the Playboy catalog, called the Playboy Store, was added to the
Company's Internet site (http://www.playboy.com). The Playboy Store offers the
same products as the printed version, at a 20% discount. In fiscal year 1997,
its first full year of operation, sales from the Playboy Store equaled
approximately 9% of the print catalog sales, of which 80% were from first-time
buyers, and orders were received from approximately 40 countries.
Based on the performance of the Playboy Store and consumer interest in
purchasing music and videos online, the group launched CCMusic, an online
version of the Collectors' Choice Music catalog, in the summer of 1997 at
http://www.ccmusic.com. CCMusic offers approximately 35,000 titles in every
musical genre, including exclusive releases and titles not found on any other
Internet site. The site also features select audio clips of interviews with
various recording artists. In the fall of 1997, the group launched CCVideo, the
online version of the Critics' Choice Video catalog, at http://www.ccvideo.com.
CCVideo offers a database of 40,000 videos, with over 19,000 in stock for
immediate shipment, including those not easily found in local retail outlets or
other Internet sites. The site also features live chat rooms for film fans.
Customers can also utilize CCVideo's search service to find any video from a
list of more than 75,000 titles. A significant number of customers to these
sites were also first-time buyers.
In calendar year 1998, the Company plans to increase marketing efforts and
enhancements of all of the Company's Internet sites, and will report the
financial results of the sites in the newly formed online group.
Paper is the principal raw material used in publishing the Company's
catalogs. All of the catalogs are expected to be adversely impacted in calendar
year 1998 due to an expected 6% paper price increase and an 8% postal rate
increase, both of which are expected mid-year. In an effort to mitigate the
impact of these price increases, the Company is considering changing to a
different grade of paper for the Critics' Choice Video and Collectors' Choice
Music catalogs as well as lowering overall circulation for the catalogs in
calendar year 1998.
In the summer of 1997, the catalog operations moved to a larger facility to
meet additional space requirements resulting from growth in the business. This
constitutes the group's second expansion in five years. The facility features an
automated inventory management system and houses the group's merchandising,
marketing, customer service and order fulfillment divisions.
The catalog business is subject to competition from other catalogs and
distributors and retail outlets selling similar merchandise, including Internet
sites. The Company continuously reviews potential catalog acquisitions and joint
ventures to publish catalogs that would offer products, especially entertainment
software, that would appeal to customers who buy the Company's other
merchandise. In fiscal year 1997, the Company purchased from the trustee in
bankruptcy selected assets of the Time Warner Viewer's Edge videocassette
catalog.
20
<PAGE>
Seasonality
The Company's businesses are generally not seasonal in nature. However,
revenues and operating income for the quarters ending December 31 are typically
impacted by higher newsstand cover prices of holiday issues. This, coupled with
typically higher sales of subscriptions of Playboy magazine during such
quarters, also results in an increase in accounts receivable.
Promotional and Other Activities
The Company believes that its sales of products and services are enhanced
by the public recognition of Playboy as a lifestyle. To establish such public
recognition, the Company, among other activities, acquired in 1971 a mansion in
Holmby Hills, California (the "Mansion") where the Company's founder, Hugh M.
Hefner, lives. The Mansion is used for various corporate activities, including
serving as a valuable location for video production and magazine photography,
business meetings, enhancing the Company's image, charitable functions and a
wide variety of promotional and marketing purposes. The Mansion generates
substantial publicity and recognition which increase public awareness of the
Company and its products and services. As indicated in Part III. Item 13.
"Certain Relationships and Related Transactions," Mr. Hefner pays rent to the
Company for that portion of the Mansion used exclusively for his and his
family's residence as well as the value of meals and other benefits received by
him, his family and personal guests. The Mansion is included in the Company's
financial statements as of December 31, 1997 at a cost, including all
improvements and after accumulated depreciation, of approximately $2,620,000.
The operating expenses of the Mansion, including depreciation, taxes and
security charges, net of rent received from Mr. Hefner, were approximately
$1,615,000, $3,635,000, $3,615,000 and $3,530,000 for the transition period and
fiscal years 1997, 1996 and 1995, respectively.
Through the Playboy Foundation, the Company supports not-for-profit
organizations and projects concerned with issues historically of importance to
Playboy magazine and its readers, including anti-censorship efforts, civil
rights, AIDS education, prevention and research, and reproductive freedom. The
Playboy Foundation provides financial support to many organizations and also
donates public service advertising space in Playboy magazine and in-kind
printing and design services.
Employees
At February 28, 1998, the Company employed 713 full-time employees compared
to 684 at August 31, 1997. No employees are represented by collective bargaining
agreements. The Company believes it maintains a satisfactory relationship with
its employees.
Item 2. Properties
- ------------------
The Company leases office space at the following locations:
The Company was lessee under an initial fifteen-year lease effective
September 1989 of approximately 100,000 square feet of corporate headquarters
space located at 680 North Lake Shore Drive, Chicago, Illinois. In August 1996,
the Company renegotiated this lease on more favorable terms, including a lower
base rent which will result in savings of approximately $2.0 million over the
initial term of the lease, combined with the Company obtaining certain expansion
options in the building. Further, the lease term was extended three years to
August 2007, with a renewal option for an additional five years. Subsequent to
the renegotiation of the lease, average annual base rental expense is
approximately $985,000. The Company was granted a rent abatement for the first
two years of the initial lease; however, rent expense is being charged to
operations on a straight-line basis over the extended term of the lease.
Additionally, the lease requires the Company to pay its proportionate share of
the building's real estate taxes and operating expenses. The majority of this
space is used by all of the Company's operating groups, primarily Publishing,
and for executive and administrative personnel. Subsequent to the transition
period, the Company exercised the previously mentioned expansion options in
addition to two right of first refusals, primarily to house its growing online
business. This will result in the Company leasing approximately 30,000
additional square feet of space in the building at an average annual base rental
expense of approximately $430,000.
The Company's Publishing Group headquarters in New York City consist of
approximately 50,000 square feet of space in the Crown Building, 730 Fifth
Avenue, Manhattan. The Crown Building lease expires in August 2004, has an
average annual base rental expense of approximately $1,380,000, and is subject
to periodic increases to reflect rising real estate taxes and operating
expenses. The Company was granted a rent abatement under this lease;
21
<PAGE>
however, rent expense is being charged to operations on a straight-line basis
over the term of the lease. A limited amount of this space is utilized by the
Entertainment and Product Marketing Groups and executive and administrative
personnel.
The Company's principal Entertainment Group offices are located at 9242
Beverly Boulevard, Beverly Hills, California. The Company holds a lease for
approximately 40,000 square feet in the building through March 2002, with an
average annual base rental expense of approximately $1,550,000, which is subject
to annual increases calculated on a formula involving tax and operating expense
increases. The Company was granted a partial rent abatement for the first two
years of the lease; however, rent expense is being charged to operations on a
straight-line basis over the term of the lease. A limited amount of this space
is utilized by the Publishing Group and executive and administrative personnel.
The Company leases space for its operations facilities at the following
locations:
In fiscal year 1993, the Company entered into a five-year lease for a
64,000 square foot warehouse facility in Itasca, Illinois, which has been used
primarily for Catalog Group operations. Due to the growth of the catalog
business, beginning June 1997, the Company began leasing a new larger facility
in the same Chicago suburb under a 10 1/2 year lease, with a renewal option for
an additional five years. The purpose of the catalog operations facility is to
provide order fulfillment and related activities, and also house a portion of
the Company's data processing operations and serve as a storage facility for the
entire Company. The Company currently utilizes 106,000 square feet of space in
the new facility and has an option to lease an additional 23,000 square feet
commencing December 2002. The lease under the previous facility was terminated
early as of August 1997. The average annual base rental expense under the
previous lease was approximately $300,000, and is approximately $780,000 under
the new lease agreement. Additionally, the terms of the new lease require the
Company to pay real estate taxes and operating expenses.
The Company's West Coast photography studio is located in Santa Monica,
California, under terms of a ten-year lease, which commenced January 1994. The
lease is for approximately 9,800 square feet of space, with an average annual
base rental expense of approximately $180,000. The Company was granted a rent
abatement under this lease; however, rent expense is being charged to operations
on a straight-line basis over the term of the lease. Additionally, the lease
requires the Company to pay its proportionate share of the building's real
estate taxes and operating expenses.
In June 1995, the Company entered into a two-year lease effective July 1995
for a motion picture production facility located in Los Angeles, California to
be used by its Entertainment Group. In March 1997, this lease was extended an
additional year until June 1998. The lease is for 11,600 square feet, with an
annual base rental expense of approximately $105,000 for the first two years,
which increased to approximately $108,000 for the third year, beginning July
1997.
The Company owns a Holmby Hills, California mansion property comprised of
5 1/2 acres. See "Promotional and Other Activities" under Part I. Item 1.
"Business."
Item 3. Legal Proceedings
- -------------------------
The Company is from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which are vigorously defended by the Company. The Company is presently
engaged in other litigation, most of which is generally incidental to the normal
conduct of its business and is immaterial in amount. Management believes that
its reserves are adequate and that no such action will have a material adverse
impact on the Company's financial condition. However, there can be no assurance
that the Company's ultimate liability will not exceed its reserves. See Note Q
of Notes to Consolidated Financial Statements.
In February 1996, Congress passed 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 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
22
<PAGE>
include fines and imprisonment. Based on the limited information received, the
Company believes that most of the cable operators that were not in compliance
with Section 505 have complied by restricting the hours of transmission.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the Delaware District 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 FCC. 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
Delaware District 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 Delaware District 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 Delaware District Court's decision to the United States Supreme
Court (the "Supreme Court") and enforcement of Section 505 was stayed pending
that appeal. On March 24, 1997, without opinion, the Supreme Court summarily
affirmed the Delaware District 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 Delaware
District Court denied the motion on the grounds that further discovery in the
case was necessary to assist it 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, subscriber declines and reduced carriage from cable
operators due to aggressive competition for carriage from all program suppliers.
The Company has estimated that the Entertainment Group's calendar year 1998
revenues will be reduced by approximately $3.5 million, and approximately $25
million (at present value at 6%) over the next ten years, due to Section 505.
These amounts do not take into account the loss of revenues due to the slowing
of access to new homes and of upgrading of old homes from ten to 24 hours. The
Company is pursuing in the Delaware District Court its case challenging on
constitutional grounds the validity of Section 505 and is seeking a permanent
injunction against the enforcement of Section 505. The Company's full case on
the merits was heard by the Delaware District Court in March 1998. A decision is
expected by July 1998. There can be no assurance that the Delaware District
Court will grant such an injunction.
On December 18, 1995, BrandsElite International Corporation, an Ontario,
Canada corporation ("BrandsElite"), filed a complaint against the Company in the
Circuit Court of Cook County, Illinois (the "Illinois Circuit Court"). In the
complaint, BrandsElite, an international distributor of premium merchandise,
including liquor, perfume, cosmetics and luxury gifts, principally to duty-free
retailers, alleges that the Company breached a product license agreement,
shortly after its execution by the Company in October 1995. The agreement
provided for the appointment of BrandsElite as the exclusive, worldwide licensee
of the Playboy trademark and tradename with respect to the sale of cognac and
possibly some deluxe whiskeys. The Company has admitted that it advised
BrandsElite that it had determined not to proceed with the transaction but
disputes strongly BrandsElite's allegation that as a result of the Company's
breach, BrandsElite has suffered millions of dollars of damages in future lost
profits and diminished value of its stock. BrandsElite also seeks to recoup out-
of-pocket expenses, fees and costs incurred in bringing the action. The license
agreement provides for recovery by a party in any judgment entered in its favor
of attorneys' fees and litigation expenses, together with such court costs and
damages as are provided by law. The action is in discovery and is likely to go
to trial during calendar year 1998. On October 22, 1997, the Company filed a
motion for partial summary judgment challenging BrandsElite's claims for future
lost profits and stock market valuation damages. On March 4, 1998, the Illinois
Circuit Court granted the portion of the Company's motion relating to stock
market valuation damages but denied the portion of the motion relating to future
lost profits. BrandsElite's expert reports on damages assert future lost profits
damages ranging from $3.5 million to $12.5 million. In addition, BrandsElite
claims entitlement to out-of-pocket expenses, legal fees and costs.
23
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Company's annual meeting of shareholders was held on November 6, 1997.
At the meeting, the following director nominees were elected:
<TABLE>
<CAPTION>
Nominee Votes For Withheld
------- --------- --------
<S> <C> <C>
Dennis S. Bookshester 4,368,006 22,552
David I. Chemerow 4,368,011 22,547
Donald G. Drapkin 4,367,879 22,679
Christie A. Hefner 4,367,940 22,618
Sol Rosenthal 4,367,964 22,594
Richard S. Rosenzweig 4,367,849 22,709
Sir Brian Wolfson 4,367,977 22,581
</TABLE>
Also at the meeting, the shareholders approved, with voting as set forth
below, (i) the Company's 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc. (the "1997 Equity Plan") and (ii) ratification of Coopers &
Lybrand L.L.P. as independent auditors ("Auditors"):
<TABLE>
<CAPTION>
Votes Votes Votes
Matter For Against Withheld Non-Vote
------ ----- --------- -------- --------
<S> <C> <C> <C> <C>
1997 Equity Plan 4,302,825 59,643 28,090 N/A
Auditors 4,350,553 9,864 30,141 N/A
</TABLE>
24
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ----------------------------------------------------------------------------
The stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note R of Notes to Consolidated Financial
Statements on pages 62 and 63 of this Form 10-K Transition Report. The
registrant's securities are traded on the exchanges listed on the cover page of
this Form 10-K Transition Report. As of February 28, 1998, there were 8,287 and
9,000 record holders of Class A Common Stock and Class B Common Stock,
respectively. There were no cash dividends declared during the transition period
or either of the last two fiscal years. The Company's revolving credit agreement
prohibits the payment of cash dividends.
Item 6. Selected Financial and Operating Data
- ---------------------------------------------
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
(in thousands) 12/31/97 6/30/97 6/30/96 6/30/95
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues
Publishing
Playboy magazine
Subscription $ 25,919 $ 52,955 $ 51,837 $ 50,531
Newsstand 11,345 21,972 24,408 24,876
Advertising 13,718 28,414 27,431 27,588
Other (44) 1,651 1,653 1,387
- ----------------------------------------------------------------------------------------------------------
Total Playboy magazine 50,938 104,992 105,329 104,382
Other domestic publishing 11,755 22,745 21,419 18,718
International publishing 5,305 9,951 6,172 4,173
- ----------------------------------------------------------------------------------------------------------
Total Publishing 67,998 137,688 132,920 127,273
- ----------------------------------------------------------------------------------------------------------
Entertainment
Playboy TV
Cable 9,560 21,165 21,149 18,938
Satellite direct-to-home 14,047 23,065 16,457 9,602
Off-network productions and other 1,331 3,052 1,672 420
- ----------------------------------------------------------------------------------------------------------
Total Playboy TV 24,938 47,282 39,278 28,960
Domestic home video 3,247 8,515 9,370 9,517
International TV and home video 4,728 12,218 11,955 11,160
- ----------------------------------------------------------------------------------------------------------
Total Playboy Businesses 32,913 68,015 60,603 49,637
AdulTVision 2,305 4,487 1,907 -
Movies and other 2,138 2,214 2,316 2,060
- ----------------------------------------------------------------------------------------------------------
Total Entertainment 37,356 74,716 64,826 51,697
- ----------------------------------------------------------------------------------------------------------
Product Marketing 4,199 7,968 7,125 6,844
- ----------------------------------------------------------------------------------------------------------
Casino Gaming - - - -
- ----------------------------------------------------------------------------------------------------------
Catalog 39,988 76,251 71,716 61,435
- ----------------------------------------------------------------------------------------------------------
Total Net Revenues $149,541 $296,623 $276,587 $247,249
==========================================================================================================
Operating Income (Loss)
Publishing $ 2,831 $ 8,387 $ 9,235 $ 10,709
- ----------------------------------------------------------------------------------------------------------
Entertainment
Before programming expense 19,144 39,609 30,467 21,097
Programming expense (11,153) (21,355) (21,263) (20,130)
- ----------------------------------------------------------------------------------------------------------
Total Entertainment 7,991 18,254 9,204 967
- ----------------------------------------------------------------------------------------------------------
Product Marketing 1,614 3,512 3,692 3,428
- ----------------------------------------------------------------------------------------------------------
Casino Gaming (541) - - -
- ----------------------------------------------------------------------------------------------------------
Catalog 1,959 4,795 5,244 5,209
- ----------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (9,395) (19,203) (17,882) (17,256)
- ----------------------------------------------------------------------------------------------------------
Total Operating Income $ 4,459 $ 15,745 $ 9,493 $ 3,057
==========================================================================================================
</TABLE>
25
<PAGE>
Selected Financial and Operating Data
- -------------------------------------
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
(in thousands, except per share amounts, Ended Ended Ended Ended Ended Ended
number of employees and ad pages) 12/31/97 6/30/97 6/30/96 6/30/95 6/30/94 6/30/93
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Net revenues $149,541 $296,623 $276,587 $247,249 $218,987 $214,875
Interest expense, net (239) (354) (592) (569) (779) (131)
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle 2,142 21,394 4,252 629 (16,364) 365
Net income (loss) 1,065 21,394 4,252 629 (9,484) 365
Basic income (loss) per common share
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle 0.10 1.05 0.21 0.03 (0.83) 0.02
Net income (loss) 0.05 1.05 0.21 0.03 (0.48) 0.02
Diluted income (loss) per common share
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle 0.10 1.03 0.21 0.03 (0.83) 0.02
Net income (loss) 0.05 1.03 0.21 0.03 (0.48) 0.02
Cash dividends declared per common share -- -- -- -- -- --
Before items described below (1)
Operating income (loss) 4,459 15,745 9,493 3,057 (9,610) 3,291
Net income (loss) 2,142 7,908 4,252 629 (12,371) 925
Basic net income (loss) per common share 0.10 0.39 0.21 0.03 (0.62) 0.05
Diluted net income (loss) per common share 0.10 0.38 0.21 0.03 (0.62) 0.05
Adjusted EBITDA (2) $ 3,225 $ 10,904 $ 9,921 $ 6,311 $ (9,333) $ (3,709)
- ----------------------------------------------------------------------------------------------------------------------------------
At Period End
Total assets $185,947 $175,542 $150,869 $137,835 $131,921 $127,767
Long-term financing obligations $ -- $ -- $ 347 $ 687 $ 1,020 $ 1,347
Shareholders' equity $ 78,683 $ 76,133 $ 52,283 $ 47,090 $ 46,311 $ 55,381
Long-term financing obligations as a percentage
of total capitalization --% --% 0.7% 1.4% 2.2% 2.4%
Number of common shares outstanding
Class A voting 4,749 4,749 4,749 4,714 4,709 4,701
Class B non-voting 15,775 15,636 15,437 15,276 15,255 15,192
Number of full-time employees 684 666 621 600 578 624
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Data
Playboy magazine ad pages 273 558 569 595 595 660
Cash investments in Company-produced and licensed
entertainment programming $ 14,359 $ 30,747 $ 25,549 $ 21,313 $ 17,185 $ 23,033
Amortization of investments in Company-produced
and licensed entertainment programming $ 11,153 $ 21,355 $ 21,263 $ 20,130 $ 18,174 $ 14,076
Playboy TV (at period end)
Cable addressable households 11,600 11,200 11,300 10,600 9,600 9,100
Satellite direct-to-home households 6,774 6,277 4,867 3,282 1,926 197
Percentage of total U.S. cable addressable
households with access to Playboy TV (3) 37.8% 38.2% 42.8% 45.2% 43.2% 50.1%
AdulTVision domestic cable addressable households
(at period end) (4) 3,827 3,121 2,175 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For a more detailed description of the Company's financial position, results of
operations and accounting policies, please refer to Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto, beginning on page 29 of this Form 10-K
Transition Report.
Notes to Selected Financial and Operating Data
(1) Six Months Ended 12/31/97: Charge of $1,077 due to the Company's early
adoption of a Statement of Position, Reporting on the Costs of Start-Up
Activities, which requires the expense recognition, as opposed to
capitalization, of costs related to start-up
26
<PAGE>
activities. The expenses were primarily related to development costs of
casino gaming ventures which had previously been capitalized prior to July
1, 1997, the date of adoption. Fiscal Year Ended 6/30/97: Federal income
tax benefit of $13,486 related to net operating loss and tax credit
carryforwards. Fiscal Year Ended 6/30/94: Restructuring expenses of $2,875,
unusual items of $1,676, primarily due to write-offs of entertainment
programming, and nonrecurring expenses of $62. Fiscal year 1994 results
also included a tax benefit of $7,500 that resulted from the adoption of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which required a change in the method of accounting for income
taxes. Fiscal Year Ended 6/30/93: Expenses of $1,379 incurred in connection
with the relocations of the Entertainment Group's headquarters, the
Publishing Group's headquarters and the Catalog Group's operations
facility, a $1,000 tax benefit resulting from the settlement of a tax
dispute for an amount less than the related reserve and a gain of $665
resulting from the sale of the Catalog Group's former operations facility.
Fiscal year 1993 results also included nonrecurring expenses of $886,
consisting primarily of operating losses and restructuring charges related
to the events business.
(2) Represents earnings before income taxes and cumulative effect of change in
accounting principle plus interest expense, depreciation and amortization
less cash investments in programming.
(3) Based on projections by Kagan.
(4) Network launched in fiscal year 1996.
27
<PAGE>
FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
(in thousands) 12/31/97 6/30/97* 6/30/96* 6/30/95*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues (1) (2)
Publishing $ 67,998 $137,688 $132,920 $ 127,273
Entertainment 37,356 74,716 64,826 51,697
Product Marketing 4,199 7,968 7,125 6,844
Casino Gaming -- -- -- --
Catalog 39,988 76,251 71,716 61,435
- -----------------------------------------------------------------------------------------------------
Total $ 149,541 $296,623 $276,587 $ 247,249
=====================================================================================================
Income (Loss) Before Income Taxes
and Cumulative Effect of Change
in Accounting Principle (2)
Publishing $ 2,831 $ 8,387 $ 9,235 $ 10,709
Entertainment 7,991 18,254 9,204 967
Product Marketing 1,614 3,512 3,692 3,428
Casino Gaming (541) -- -- --
Catalog 1,959 4,795 5,244 5,209
Corporate Administration and Promotion (3) (9,395) (19,203) (17,882) (17,256)
Investment income 50 73 88 139
Interest expense (289) (427) (680) (708)
Other, net 70 (640) (452) (52)
- -----------------------------------------------------------------------------------------------------
Total $ 4,290 $ 14,751 $ 8,449 $ 2,436
=====================================================================================================
Identifiable Assets
Publishing $ 50,427 $ 42,137 $ 45,661 $ 38,433
Entertainment 73,218 74,279 60,336 53,229
Product Marketing 6,794 6,648 5,484 5,964
Casino Gaming 1,863 2,936 2,499 694
Catalog 19,501 15,627 12,966 14,807
Corporate Administration and Promotion (4) 34,144 33,915 23,923 24,708
- -----------------------------------------------------------------------------------------------------
Total $ 185,947 $175,542 $150,869 $ 137,835
=====================================================================================================
Depreciation and Amortization (5)
Publishing $ 325 $ 1,046 $ 967 $ 909
Entertainment 11,356 22,027 21,836 20,606
Product Marketing 78 176 217 194
Casino Gaming -- -- -- --
Catalog 237 651 639 673
Corporate Administration and Promotion 1,009 2,573 2,682 2,098
- -----------------------------------------------------------------------------------------------------
Total $ 13,005 $ 26,473 $ 26,341 $ 24,480
=====================================================================================================
Capital Expenditures
Publishing $ 112 $ 251 $ 213 $ 101
Entertainment 40 71 74 22
Product Marketing 9 14 20 2
Casino Gaming -- -- -- --
Catalog 381 25 77 10
Corporate Administration and Promotion 223 310 376 247
- -----------------------------------------------------------------------------------------------------
Total $ 765 $ 671 $ 760 $ 382
=====================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these tables.
* Certain reclassifications have been made to conform to the current
presentation.
Notes to Financial Information Relating to Industry Segments
(1) Net revenues include export sales of $21,289, $43,032, $36,682 and $30,916
in the transition period and fiscal years 1997, 1996 and 1995,
respectively.
(2) Intercompany transactions have been eliminated.
(3) Corporate Administration and Promotion expenses together with segment
selling and administrative expenses comprise the Company's selling and
administrative expenses.
(4) Corporate assets consist principally of property and equipment, trademarks
and net deferred tax assets.
(5) Amounts include depreciation of property and equipment, amortization of
intangible assets, expenses related to the 1995 Stock Incentive Plan and
amortization of investments in entertainment programming.
28
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
(In millions of dollars, except per share amounts)
On November 6, 1997, the Board approved a change in the Company's fiscal
year end from June 30 to December 31 which will better align the Company's
businesses with its customers and partners who also operate and plan on a
calendar-year basis.
RESULTS OF OPERATIONS
SIX-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1996
The Company's revenues were $149.5 for the transition period, a 2% increase
over revenues of $146.0 for the six months ended December 31, 1996. This
increase was principally due to higher revenues from the Entertainment Group,
primarily driven by an increase from Playboy TV.
The Company reported operating income of $4.5 for the transition period
compared to $7.7 for the six months ended December 31, 1996. This decrease was
primarily due to lower operating income for the Catalog and Product Marketing
Groups. Also unfavorably impacting the results was a decline in operating income
for the Publishing Group, principally due to the Company's planned investments
in the online, or new media, business and expenses associated with the early
termination of an executive contract.
Net income for the transition period was $1.1, resulting in earnings per
share ("EPS") of $0.05 (basic and diluted), compared to net income of $3.9, or
basic and diluted EPS of $0.19, for the six months ended December 31, 1996. Net
income for the transition period included a charge of $1.1, primarily related to
development costs of casino gaming ventures, that resulted from the Company's
early adoption of a Statement of Position, Reporting on the Costs of Start-Up
Activities. Excluding the impact of this $1.1 cumulative effect of change in
accounting principle, net income for the transition period was $2.2, or basic
and diluted EPS of $0.10.
Net income for the six-month periods ended December 31, 1997 and 1996,
adjusted to eliminate federal income tax expense that will not be paid due to
the Company's net operating loss and tax credit carryforwards ("tax-adjusted net
income"), was $1.7, or basic and diluted EPS of $0.08, and $6.1, or basic and
diluted EPS of $0.30, respectively.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
Playboy magazine newsstand revenues vary from issue to issue, with revenues
generally higher for holiday issues and any issues including editorial or
pictorial features that generate unusual public interest. Advertising revenues
also vary from quarter to quarter, depending on product introductions by
advertising customers, changes in advertising buying patterns and economic
conditions. In addition, Entertainment Group revenues vary with the timing of
sales to international customers, particularly on a tier basis. To allow greater
flexibility the Company modified how it programs its international networks
effective with the fourth quarter of fiscal year 1996. This modification results
in the revenues from these networks now being recorded on a quarterly basis,
which has the effect of smoothing out the fluctuations caused by recording a
year's worth of programming sales in one quarter. Previously, the Company
scheduled programming for a full year in the quarter during which the network
was launched or an agreement was renewed, and recognized the full year of
revenues in that quarter.
Publishing Group
Publishing Group revenues of $68.0 for the transition period decreased
$0.4, or 1%, compared to the six months ended December 31, 1996. This was
largely due to lower revenues from Playboy magazine, partially offset by higher
revenues from the new media business principally due to Playboy Cyber Club, the
Company's new pay site on the Internet. Beginning with the first quarter of
calendar year 1998, the new media business will be reported as a separate
operating group.
29
<PAGE>
Playboy magazine circulation revenues for the transition period decreased
$1.3, or 3%, compared to the prior year primarily due to lower newsstand
revenues principally as the result of 9% fewer U.S. and Canadian newsstand
copies sold in the transition period. Subscription revenues decreased slightly
by 1%. Playboy magazine advertising revenues increased $0.5, or 4%, for the
transition period primarily due to 4% more ad pages in the transition period.
Advertising sales for the calendar year 1998 first quarter issues of the
magazine are closed, and the Company expects to report 12% fewer ad pages and
11% lower ad revenues compared to the quarter ended March 31, 1997.
Revenues from other domestic publishing businesses increased $0.4, or 3%,
for the transition period compared to the prior year primarily due to revenues
generated from Playboy Cyber Club combined with higher advertising revenues from
Playboy.com, the Company's free site on the Internet. Also contributing to the
increase were higher revenues from newsstand specials primarily due to the
publication of an additional issue in the transition period combined with the
mix of titles sold, offset in part by lower average copies sold per issue in the
United States and Canada. Partially offsetting the increases in revenues
mentioned above were lower revenues from other businesses.
International publishing revenues increased $0.1, or 1%, for the transition
period compared to the prior year.
Publishing Group operating income decreased $0.9, or 24%, for the
transition period compared to the prior year. The decrease was primarily due to
the Company's planned investments in Playboy Cyber Club and Playboy.com combined
with the lower Playboy magazine newsstand revenues. Also contributing to the
decrease were higher editorial costs and expenses associated with the early
termination of an executive contract. Partially offsetting the above were lower
manufacturing costs, principally due to lower average paper prices, combined
with the higher Playboy magazine advertising, Playboy Cyber Club and Playboy.com
revenues in the transition period. Operating income is expected to be materially
adversely impacted in calendar year 1998 due to a 7% paper price increase
effective January 1, 1998 and an 8% postal rate increase expected late in the
second quarter of calendar year 1998.
The National Defense Authorization Act of 1997 was signed into law in
September 1996. One section of that legislation that began as the Military Act
bans the sale or rental of sexually oriented written or videotaped material on
property under the jurisdiction of the Department of Defense. A Federal Court
permanently enjoined enforcement of the Military Act and prohibited the
Department of Defense from changing its acquisition and stocking practices based
on the Military Act. The government filed an appeal. On November 21, 1997, the
U.S. Court of Appeals vacated the trial court's decision and remanded the case
back to the trial court, ordering it to hold the Military Act constitutional.
The Court of Appeals decision has been stayed pending further appeal. The
Military Act, if applicable to the Company's products, would prohibit the sale
of Playboy magazine, newsstand specials and videos at commissaries, PX's and
ship stores, and would adversely affect a portion of the Company's sales
attributable to such products. Based on preliminary estimates and current sales
levels at such locations, the Company believes that any such impact would be
immaterial.
Entertainment Group
Entertainment Group revenues for the transition period of $37.4 increased
$3.5, or 10%, compared to the six months ended December 31, 1996. Operating
income of $8.0 increased $0.3, or 4%, from the prior year.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").
Playboy TV
For the transition period, revenues of $24.9 from the Company's branded
domestic pay television service, Playboy TV, were $2.6, or 12%, higher compared
to the six months ended December 31, 1996.
Cable revenues were $0.8, or 8%, lower compared to the prior year primarily
due to the estimated negative effect of the enforcement of Section 505 combined
with a decline in the average number of subscribing households due to some
system drops, partially offset by higher retail rates. At December 31, 1997,
Playboy TV was available to approximately 11.6 million cable addressable
households, a 4% increase compared to December 31, 1996. Of the 11.6 million
cable addressable households, only an estimated 2.0 million could receive
Playboy TV on a 24-hour basis, a 2.5 million, or 56%, decrease compared to
December 31, 1996. The number of total cable addressable
30
<PAGE>
households to which Playboy TV was available at December 31, 1997 increased 4%
from June 30, 1997, while households with 24-hour availability decreased 0.8
million, or 29%, over the same period. The drop in households with 24-hour
availability began in the fourth quarter of fiscal year 1997 after enforcement
of Section 505 began.
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, subscriber declines and reduced carriage from cable
operators due to aggressive competition for carriage from all program suppliers.
The Company has estimated that the Entertainment Group's calendar year 1998
revenues will be reduced by approximately $3.5, and approximately $25 (at
present value at 6%) over the next ten years, due to Section 505. These amounts
do not take into account the loss of revenues due to the slowing of access to
new homes and of upgrading of old homes from ten to 24 hours. The Company is
pursuing in the Delaware District Court its case challenging on constitutional
grounds the validity of Section 505 and is seeking a permanent injunction
against the enforcement of Section 505. The Company's full case on the merits
was heard by the Delaware District Court in March 1998. A decision is expected
by July 1998. There can be no assurance that the Delaware District Court will
grant such an injunction. See Part I. Item 3. "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 FCC, including the "going-forward
rules" announced in fiscal year 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 higher DTH revenues which were
$4.1, or 41%, higher for the transition period 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 6.8
million DTH households, including approximately 245,000 monthly subscribers, at
December 31, 1997, an increase of 21% and 8% compared to December 31, 1996 and
June 30, 1997, respectively.
For the transition period, revenues from off-network productions and other
decreased $0.7, or 33%, compared to the prior year primarily due to licensing
fewer episodes of Women to Showtime.
Profit contribution for Playboy TV increased $2.2 for the transition period
primarily due to the net increase in revenues discussed above.
Domestic Home Video
Domestic home video revenues for the transition period decreased $0.6, or
16%, compared to the prior year primarily due to lower revenues related to the
Company's direct-response continuity series combined with overall lower net
sales of new releases, partially offset by significant sales in the transition
period of Farrah Fawcett: All of Me. Profit contribution decreased $1.0
primarily due to the decrease in revenues combined with higher marketing and
promotion costs.
International TV and Home Video
For the transition period, revenues from the international TV and home
video business increased $0.4, or 9%, compared to the prior year. The higher
revenues were due to international TV, primarily as the result of higher net
revenues from Playboy TV networks and Germany, partially offset by lower
revenues from Taiwan. International home video revenues were lower principally
due to revenues from South Korea in the prior year. There were no revenues from
South Korea in the transition period primarily due to the poor economic
conditions in that country. Profit contribution remained stable as a decline in
international home video, due to the lower revenues, was offset
31
<PAGE>
by higher profit contribution from international TV which resulted from the
higher revenues, partially offset by higher related 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 $1.6 for the transition period
compared to the prior year primarily related to the higher revenues from
international TV, higher production costs of live events on domestic Playboy TV
and costs related to the home video featuring Farrah Fawcett. Partially
offsetting the above was lower amortization related to the lower revenues from
off-network productions.
Cash investments in entertainment programming for all of the Entertainment
Group's businesses, including those businesses discussed below, were $25.5 in
fiscal year 1996, $30.7 in fiscal year 1997 and $14.4 in the transition period.
These amounts include expenditures for Playboy-branded programming, AdulTVision
and feature films. In calendar year 1998, the Company plans to invest
approximately $31.4 in entertainment programming and anticipates programming
amortization expense will be approximately $28.6.
AdulTVision
AdulTVision revenues for the transition period decreased $0.1, or 3%,
compared to the prior year, while operating income remained stable. At December
31, 1997, the network was available domestically to approximately 5.9 million
cable addressable and DTH households, a 20% and 11% increase from December 31,
1996 and June 30, 1997, respectively. AdulTVision is also available
internationally.
Movies and Other
Revenues and operating income from movies and other businesses both
increased $1.2 for the transition period primarily due to a favorable settlement
from a distributor of feature films. The Entertainment Group's administrative
expenses for the transition period increased $0.6 compared to the prior year
largely due to higher overall salary and related expenses including net higher
performance-related variable compensation expense.
Product Marketing Group
Product Marketing Group revenues of $4.2 for the transition period
decreased $0.1, or 2%, compared to the six months ended December 31, 1996
largely due to favorable adjustments in the prior year for international product
licensing royalties. Partially offsetting the above were higher royalties in the
transition period related to increased domestic and international distribution
of the Company's line of cigars. Operating income decreased $0.7, or 28%,
compared to the prior year primarily due to the net decrease in revenues
combined with higher expenses primarily due to bad debt related to licensees in
certain Asian countries, legal and increased investments in brand marketing.
Casino Gaming Group
In fiscal year 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 Rhodes Casino, which is
expected to open in calendar year 1998. The Company has hired a senior gaming
executive who will oversee the management of the Rhodes Casino and exploration
of additional 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. As a result of the Company's early adoption of a Statement of
Position, Reporting on the Costs of Start-Up Activities, as previously
discussed, expenses of $0.5 were incurred during the transition period related
to development costs for the Rhodes Casino and other potential casino gaming
ventures.
32
<PAGE>
Catalog Group
Catalog Group revenues of $40.0 for the transition period increased $0.6,
or 1%, compared to the six months ended December 31, 1996 due to higher revenues
for the Collectors' Choice Music and Critics' Choice Video catalogs, partially
offset by lower revenues from the Playboy catalog. For the transition period,
all of the catalogs were favorably impacted by an extended sales cut-off as a
result of changing the Company's fiscal year end from June 30 to December 31.
Sales volume for the Collectors' Choice Music catalog was also slightly higher
primarily as a result of significantly higher circulation mostly offset by lower
revenues from promotions. Critics' Choice Video was favorably impacted by sales
in the transition period from the first Big Book available in October 1997, but
they were more than offset by lower circulation and lower response rates from
prospective customers to the catalog. Revenues from the Playboy catalog were
also impacted by lower response rates from prospective customers. The Company
believes lower response rates were due in part to the negative impact of the
United Parcel Service strike in August 1997.
For the transition period, Catalog Group operating income decreased $0.9,
or 33%, compared to the prior year. This decline was primarily due to lower
operating income from the Critics' Choice Video and Collectors' Choice Music
catalogs as the higher revenues were not sufficient to offset higher costs.
Additionally, administrative expenses were higher for the group principally due
to higher salary and related expenses.
Corporate Administration and Promotion
Corporate administration and promotion expense of $9.4 for the transition
period increased $0.5, or 6%, compared to the six months ended December 31, 1996
due in part to filling the chief marketing officer position in October 1996 and
higher investment spending on corporate marketing, combined with filling the
chief financial officer position in May 1997.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
The Company's revenues were $296.6 for the fiscal year ended June 30, 1997,
a 7% increase over revenues of $276.6 for the fiscal year ended June 30, 1996.
This increase was due to higher revenues from all of the Company's Groups,
largely the Entertainment Group, primarily driven by an increase from Playboy
TV. Also contributing to the increase were higher revenues from the
international publishing and other domestic publishing businesses and the
Catalog Group.
The Company reported operating income of $15.7 for the year ended June 30,
1997 compared to $9.5 for the year ended June 30, 1996. This increase was due to
significant growth in operating income of Playboy TV.
Net income for the year ended June 30, 1997 was $21.4, resulting in basic
EPS of $1.05 and diluted EPS of $1.03. This compared to net income of $4.3, or
basic and diluted EPS of $0.21, for the year ended June 30, 1996. Net income for
fiscal year 1997 included a federal income tax benefit of $13.5 related to net
operating loss and tax credit carryforwards. Excluding the impact of the $13.5
federal income tax benefit, net income for the year ended June 30, 1997 was
$7.9, or basic EPS of $0.39 and diluted EPS of $0.38.
Net income for the years ended June 30, 1997 and 1996, adjusted to
eliminate a noncash net federal income tax benefit and noncash federal income
tax expense, respectively, due to the Company's net operating loss and tax
credit carryforwards was $12.2, or basic EPS of $0.60 and diluted EPS of $0.59,
and $6.7, or basic and diluted EPS of $0.33, respectively.
Publishing Group
Fiscal year 1997 Publishing Group revenues of $137.7 increased $4.8, or 4%,
compared to fiscal year 1996. This was primarily due to higher revenues from
international publishing and the new media business, slightly offset by lower
Playboy magazine revenues.
Playboy magazine circulation revenues for the year ended June 30, 1997
decreased $1.3, or 2%, due to 10% lower newsstand revenues principally as the
result of 13% more U.S. and Canadian newsstand copies sold in fiscal year 1996,
when two exceptionally strong-selling issues featuring celebrities were
published. Subscription revenues increased 2% primarily due to an increase in
the number of subscriptions served, partially offset by lower revenues
33
<PAGE>
from the rental of Playboy's subscriber list. Playboy magazine advertising
revenues increased 4% compared to fiscal year 1996 due to higher average net
revenue per page principally due to the mix of pages sold combined with rate
increases effective with the January 1997 and 1996 issues, partially offset by
2% fewer ad pages in fiscal year 1997.
Revenues from other domestic publishing businesses increased $1.3, or 6%,
for the year ended June 30, 1997 compared to the prior year primarily due to
higher advertising revenues generated from Playboy.com, combined with higher
revenues from other businesses.
International publishing revenues increased principally due to higher
revenues in fiscal year 1997 related to the purchase of additional equity in
March 1996 in VIPress Poland Sp. z o.o. ("VIPress"), publisher of the Polish
edition of Playboy magazine, which resulted in its consolidation.
For the year ended June 30, 1997, Publishing Group operating income
decreased $0.8, or 9%, compared to the prior year. The decrease was primarily
due to the lower newsstand revenues and higher editorial costs related to the
magazine combined with the Company's planned investments in the new media
business largely related to developing Playboy Cyber Club. Partially offsetting
the above were the higher Playboy magazine advertising revenues combined with
lower manufacturing costs, primarily due to lower average paper prices which
were partially offset by an increase in the magazine's average book size, and
higher operating income related to the consolidation of VIPress previously
discussed.
Entertainment Group
Fiscal year 1997 Entertainment Group revenues of $74.7 increased $9.9, or
15%, compared to fiscal year 1996. Operating income of $18.3 increased $9.1,
almost double fiscal year 1996 operating income of $9.2.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense.
Playboy TV
For the year ended June 30, 1997, revenues of $47.3 from Playboy TV were
$8.0, or 20%, higher compared to the prior year.
Cable revenues remained stable compared to fiscal year 1996 as a 9%
increase in pay-per-view revenues was offset by a 19% decline in monthly
subscription revenues, principally due to some system drops which resulted in a
decline in the average number of subscribing households. The increase in pay-
per-view revenues was primarily due to higher average buy rates combined with
larger favorable adjustments, as reported by cable systems, in fiscal year
1997. At June 30, 1997, Playboy TV was available to approximately 11.2 million
cable addressable households, a 1% decrease compared to June 30, 1996, while
households with 24-hour availability decreased 1.1 million, or 28%, to
approximately 2.8 million over the same period. The drop in households with 24-
hour availability occurred in the fourth quarter of fiscal year 1997 after
enforcement of Section 505 began as previously discussed.
DTH revenues were $6.7, or 40%, higher for the year ended June 30, 1997
compared to the prior year. The increase was primarily due to higher DirecTV and
PrimeStar revenues, principally as a result of significant increases in their
addressable universes, slightly offset by lower revenues, as expected, from
TVRO. Playboy TV was available to approximately 6.3 million DTH households,
including approximately 230,000 monthly subscribers, at June 30, 1997, an
increase of 29% compared to June 30, 1996.
For the year ended June 30, 1997, revenues from off-network productions and
other increased $1.4, or 83%, compared to the prior year primarily due to
licensing more episodes of Women to Showtime.
Profit contribution for Playboy TV increased $11.4 compared to fiscal year
1996 primarily due to the significant increase in revenues combined with no
royalty expense related to the Company's former distributor in fiscal year 1997.
Royalty payments were discontinued April 30, 1996, when the agreement ended.
Also contributing to the increase were lower marketing costs and bad debt
expense combined with favorable music licensing settlements in fiscal year 1997.
34
<PAGE>
Domestic Home Video
Domestic home video revenues decreased $0.9, or 9%, for the year ended June
30, 1997 compared to the prior year largely due to lower revenues related to the
Company's direct-response continuity series, the second of which was launched
during fiscal year 1997, combined with lower net sales of new releases, due in
part to extraordinary sales of The Best of Pamela Anderson in fiscal year 1996.
Partially offsetting the above were higher net revenues from a three-year
distribution agreement with Uni related to backlist titles. Fiscal year 1997
included revenues related to the third year of the guarantee, which were higher
than net revenues in fiscal year 1996 related to the guarantees for the first
two years. Profit contribution decreased $0.8 for the year ended June 30, 1997
compared to the prior year principally due to the net decrease in revenues
combined with the timing of promotion costs.
International TV and Home Video
For the year ended June 30, 1997, revenues and profit contribution from the
international TV and home video business increased $0.3 and decreased $1.7,
respectively, compared to the prior year. The decline in profit contribution was
due to international home video, principally due to lower revenues primarily as
a result of the need to slow down shipments in countries where the distribution
pipeline was full. Higher international TV revenues in fiscal year 1997, largely
from Playboy TV networks, were offset by higher 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. To allow greater flexibility the Company modified how it programs
its international networks effective with the fourth quarter of fiscal year 1996
as previously discussed.
Playboy Businesses Programming Expense
For the year ended June 30, 1997, programming amortization expense
associated with the Entertainment Group's Playboy businesses discussed above
remained relatively stable compared to the prior year. Fiscal year 1997 included
lower amortization related to the lower international home video revenues and
regular programming on the domestic Playboy TV network. Offsetting these
decreases were higher amortization related to an increase in the number of live
events on domestic Playboy TV combined with costs related to the pay-per-view
special event and home video featuring Farrah Fawcett.
AdulTVision
AdulTVision revenues increased $2.6, or 135%, for the year ended June 30,
1997 compared to the prior year primarily due to revenues related to the
September 1996 launch of a network in Latin America. Also contributing to the
increase were higher revenues from the domestic network as a result of an
increase in its addressable universe and higher buys. At June 30, 1997, the
network was available domestically to approximately 5.3 million cable
addressable and DTH households, an 18% increase from June 30, 1996.
For the year ended June 30, 1997, AdulTVision was profitable, resulting in
an increase in operating performance of $1.7. The increase was primarily due to
the higher revenues, partially offset by higher distribution costs due to the
launch in Latin America and an increase in domestic fees in fiscal year 1997
related to transferring to a different transponder.
Movies and Other
For the year ended June 30, 1997, revenues and operating income from movies
and other businesses decreased $0.1 and $0.2, respectively, compared to the
prior year. The Entertainment Group's administrative expenses increased $1.3
compared to fiscal year 1996 largely due to higher performance-related variable
compensation expense and higher expense related to new business development in
fiscal year 1997.
Product Marketing Group
Product Marketing Group revenues of $8.0 increased $0.8, or 12%, for the
year ended June 30, 1997 compared to the prior year. The increase was primarily
due to higher international product licensing royalties, principally from Asia,
combined with royalties in fiscal year 1997 related to the Company's second line
of cigars
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distributed domestically. Operating income of $3.5 decreased $0.2, or
5%, for the year ended June 30, 1997 compared to the prior year due to higher
expenses, principally reflecting increased investments in brand marketing,
promotion and product design as well as severance, search fees associated with a
new division executive and higher legal expenses.
Catalog Group
Catalog Group revenues of $76.3 increased $4.5, or 6%, for the year ended
June 30, 1997 compared to the prior year as a result of higher sales volume from
all three of the Company's catalogs. The higher sales volume for the Critics'
Choice Video and Collectors' Choice Music catalogs was primarily attributable to
higher circulation. Increased sales volume for the Playboy catalog was
principally related to higher sales from the Playboy Store, a version of the
catalog which launched on Playboy.com in the spring of 1996.
For the year ended June 30, 1997, Catalog Group operating income of $4.8
decreased $0.4, or 9%, compared to the prior year primarily as a result of
lower-than-anticipated response rates from prospective customers. The increase
in revenues plus lower paper prices generally were not sufficient to offset
higher related costs, due in part to prospecting. Additionally, administrative
expenses were higher for the group primarily due to higher salary and related
expenses combined with atypical expenses in fiscal year 1997 related to the
group's move to a new facility. At the end of fiscal year 1997, the catalog
operations began moving from its former facility to a larger facility, under
terms of a built-to-suit lease, to meet additional space requirements resulting
from growth in the business. The new facility is located in the same Chicago
suburb.
Corporate Administration and Promotion
Corporate administration and promotion expense of $19.2 for the year ended
June 30, 1997 increased $1.3, or 7%, compared to the prior year largely due to
investment spending on corporate marketing.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
The Company's revenues were $276.6 for the fiscal year ended June 30, 1996,
a 12% increase over revenues of $247.2 for the fiscal year ended June 30, 1995.
This increase was due to higher revenues from all of the Company's Groups,
primarily driven by increases from Playboy TV, the Catalog Group, other domestic
publishing businesses, including Playboy.com, and international publishing.
The Company reported operating income of $9.5 for the year ended June 30,
1996 compared to $3.1 for the year ended June 30, 1995. This increase was
primarily due to significant growth in operating income of the Entertainment
Group, principally as a result of substantial growth of Playboy TV.
Net income for the year ended June 30, 1996 was $4.3, or basic and diluted
EPS of $0.21, compared to $0.6, or basic and diluted EPS of $0.03, for the prior
year.
Tax-adjusted net income for the year ended June 30, 1996 was $6.7, or basic
and diluted EPS of $0.33, compared to $1.3, or basic and diluted EPS of $0.06,
for the year ended June 30, 1995.
Publishing Group
Fiscal year 1996 Publishing Group revenues of $132.9 increased $5.6, or 4%,
compared to fiscal year 1995. This was due to higher revenues from all of the
Publishing Group businesses.
Playboy magazine circulation revenues increased $0.8 for the year ended
June 30, 1996 compared to the prior year. Subscription revenues were 3% higher,
including an increase in revenues from the rental of Playboy magazine's
subscriber list. Newsstand revenues were down slightly as favorable newsstand
sales adjustments in fiscal year 1995 related to fiscal year 1994 issues and 1%
fewer U.S. and Canadian newsstand copies sold in fiscal year 1996 were mostly
offset by a higher average newsstand price primarily due to sales of two
exceptionally strong-selling issues featuring celebrities, which were at a
higher cover price. Advertising revenues declined $0.2, or 1%, for the year
ended June 30, 1996 compared to the prior year primarily as a result of 4% fewer
advertising pages in fiscal year 1996, mostly offset by higher average net
revenue per page, principally due to rate increases effective with the January
1996 and 1995 issues.
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Revenues from other domestic publishing businesses increased $2.7, or 14%,
for the year ended June 30, 1996 compared to the prior year. This increase was
principally due to higher revenues from newsstand specials primarily as a result
of the favorable impact of a $1.00 increase in the cover price to $6.95 in most
of the country in the fourth quarter of fiscal year 1995, combined with the
publication of three additional newsstand specials in fiscal year 1996.
Additionally, there was a significant increase in revenues related to developing
new media businesses due in part to Playboy.com, which generated advertising
revenues in fiscal year 1996. Partially offsetting the above were lower revenues
from other businesses.
Revenues from international publishing increased $2.0, or 48%, due to
higher royalty income combined with revenues related to the March 1996 purchase
of additional equity of VIPress, which resulted in its consolidation.
For the year ended June 30, 1996, Publishing Group operating income
decreased $1.5, or 14%, compared to the prior year. The decrease was principally
due to higher manufacturing costs, primarily as the result of a significant
increase in paper prices. Also contributing to the unfavorable variance was
higher Company performance-related variable compensation expense and higher
employee medical benefit expenses in fiscal year 1996. Partially offsetting the
above were the higher other domestic publishing businesses, international
publishing and Playboy subscription revenues in fiscal year 1996. Additionally,
fiscal year 1996 benefited from lower subscription acquisition amortization,
primarily as a result of improving efficiencies by lowering the advertising rate
base in fiscal year 1996, and lower advertising sales expenses.
Entertainment Group
Fiscal year 1996 Entertainment Group revenues of $64.8 increased $13.1, or
25%, compared to fiscal year 1995. Operating income of $9.2 increased $8.2
compared to fiscal year 1995 operating income of $1.0.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense.
Playboy TV
For the year ended June 30, 1996, revenues of Playboy TV were $10.3, or
36%, higher compared to the prior year.
Cable pay-per-view revenues increased $2.3, or 20%, attributable to an
increase in the number of cable addressable households to which Playboy TV was
available, higher average buy rates, and higher average revenue per buy in
fiscal year 1996. At June 30, 1996, Playboy TV was available to approximately
11.3 million cable addressable households, a 7% increase compared to June 30,
1995. Of the 11.3 million cable addressable households, approximately 3.9
million could receive Playboy TV on a 24-hour basis, a 30% increase compared to
June 30, 1995. Cable monthly subscription revenues declined 2% for the year
ended June 30, 1996 compared to the prior year due in part to a decline in the
average number of subscribing households.
DTH revenues were $6.8, or 71%, higher for the year ended June 30, 1996
compared to the prior year. The increase was primarily due to higher DirecTV
revenues, as a result of a significant increase in its addressable universe and
the Company's change to 24-hour programming in August 1995, and higher revenues
from PrimeStar, which launched Playboy TV in the fourth quarter of fiscal year
1995, slightly offset by lower revenues, as expected, from TVRO. Playboy TV was
available to approximately 4.9 million DTH households, including approximately
185,000 monthly subscribers, at June 30, 1996, a 48% increase compared to June
30, 1995.
Fiscal year 1996 revenues from off-network productions and other increased
$1.3 primarily due to licensing episodes of Women to Showtime.
Profit contribution for Playboy TV increased $8.1, or 65%, compared to
fiscal year 1995, in spite of higher marketing costs and expenses in fiscal year
1996 related to the Section 505 lawsuit, due to the significant increase in
revenues.
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Domestic Home Video
Domestic home video revenues decreased $0.1, or 2%, for the year ended June
30, 1996 compared to the prior year primarily due to recording a higher net
guarantee in fiscal year 1995 from a three-year distribution agreement with Uni
related to backlist titles effective in the fourth quarter of fiscal year 1995,
and subject to certain earn-out provisions in the final year. Fiscal year 1996
included the second year of the guarantee as well as a reserve established
related to the first year of the guarantee recorded in fiscal year 1995 in the
event that the earn-out provisions will not be met in the final year. Fiscal
year 1995 also included sales and returns of backlist titles prior to the
inception of the distribution agreement. Partially offsetting the above were
higher sales of new releases in fiscal year 1996, in part due to extraordinary
sales of The Best of Pamela Anderson. Additionally, there were higher revenues
in fiscal year 1996 from the Company's first direct-response continuity series.
Profit contribution increased $0.5 for the year ended June 30, 1996
compared to the prior year principally due to the timing of promotion costs.
International TV and Home Video
For the year ended June 30, 1996, revenues and profit contribution from the
international TV and home video business increased $0.8 and $2.2, respectively,
compared to the prior year. Revenues and profit contribution from the
international home video business both increased $1.4 due in part to higher
sales to South Korea. An increase in the profit contribution of the
international TV business of $0.8 is primarily due to a write-off of $1.3
recorded in fiscal year 1995 related to sales to a distributor in fiscal year
1994, partially offset by lower revenues in fiscal year 1996, primarily due to
revenues in fiscal year 1995 associated with tier agreements. 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 year ended June 30,
1996 compared to the prior year. The increase was principally due to higher
international home video amortization combined with increased investments in
regular programming on the domestic Playboy TV network, partially offset by
lower international TV amortization.
AdulTVision
For the year ended June 30, 1996, revenues for the network were $1.9. The
network reported an operating loss for fiscal year 1996, the first year of
operation.
Movies and Other
For the year ended June 30, 1996, revenues from movies and other businesses
increased $0.3, or 12%, primarily due to higher revenues related to feature
films. Operating income increased $0.2, or 35%, compared to fiscal year 1995.
The Entertainment Group's administrative expenses for the year ended June 30,
1996 increased $0.9 compared to the prior year primarily due to higher
performance-related variable compensation expense and higher employee medical
benefit expenses in fiscal year 1996.
Product Marketing Group
Product Marketing Group revenues of $7.1 for the year ended June 30, 1996
increased $0.3, or 4%, compared to the prior year primarily due to 19% higher
international product licensing royalties, primarily due to strong sales from
Asia. Partially offsetting the above were lower revenues in fiscal year 1996
from Special Editions, Ltd., as the Company's art publishing and art products
business continued to move from direct sales to licensing, combined with no
royalties in fiscal year 1996 from a Sarah Coventry licensee that experienced
financial difficulties and was terminated in the second quarter of fiscal year
1995. Operating income of $3.7 increased $0.3, or 8%, for the year ended June
30, 1996 compared to the prior year principally due to an increase in operating
income of international product licensing, primarily due to the higher revenues.
Partially offsetting the favorable variance was lower operating income from
Sarah Coventry product licensing, principally due to the lower revenues,
combined
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with higher performance-related variable compensation expense and higher
employee medical benefit expenses in fiscal year 1996.
Catalog Group
Fiscal year 1996 Catalog Group revenues of $71.7 increased $10.3, or 17%,
compared to fiscal year 1995. The revenue increase was a result of higher sales
volume from all of the Company's catalogs. The increase was primarily
attributable to higher circulation for all three catalogs combined with a strong
response to the Critics' Choice Video catalog's implementation of a competitive
pricing strategy in the second quarter of fiscal year 1996. This strategy was in
reaction to lower response rates in the two prior quarters which the Company
believes were due in part to competition from mass marketers which offer popular
videos at deeply discounted prices. Additionally, the higher Collectors' Choice
Music revenues were also due in part to a promotion.
Fiscal year 1996 Catalog Group operating income of $5.2 remained stable
compared to fiscal year 1995 as incremental profit generated from the higher
revenues was sufficient to absorb higher expenses related to paper price and
postal rate increases. There were also higher expenses in fiscal year 1996
relative to the higher revenues from expanded mailings to prospective customers
of the catalogs.
Corporate Administration and Promotion
Corporate administration and promotion expense of $17.9 for the year ended
June 30, 1996 increased $0.6, or 4%, compared to the prior year. Expenses were
higher in fiscal year 1996 primarily due to higher performance-related variable
compensation expense and higher employee medical benefit expenses, partially
offset by lower marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $0.9 in cash and cash equivalents and
$10.0 in short-term borrowings. At June 30, 1997, the Company had $1.3 in cash
and cash equivalents and $4.5 in short-term borrowings, compared to $2.4 in cash
and cash equivalents and $5.0 in short-term borrowings at June 30, 1996. The
Company expects to meet its short- and long-term cash requirements through its
revolving credit agreement and cash generated from operations.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $3.9 for the transition period
compared to $7.1 for the six months ended December 31, 1996. Cash used for
accounts receivable decreased $4.9 in the transition period primarily due to
lower cable pay-per-view, off-network productions and international home video
revenues combined with the timing of cash receipts from the Entertainment
Group's international markets. Partially offsetting the above was a higher
negotiated advance from the Company's national distributor of Playboy magazine
for the July 1997 issue featuring Farrah Fawcett combined with relatively lower
advances for open issues of Playboy magazine at December 31, 1997. The Company
invested $14.4 in Company-produced and licensed entertainment programming during
the transition period compared to $15.5 in the prior year six-month period.
Net cash provided by operating activities was $1.5 for the fiscal year
ended June 30, 1997 compared to $4.5 for the prior year despite the Company's
improved performance. The Company's performance improved $3.7, excluding the
$13.5 federal income tax benefit recorded in fiscal year 1997 which was offset
by a corresponding change in net deferred tax assets. Cash used for deferred
revenues in fiscal year 1997 compared to cash provided in fiscal year 1996 was
due in part to higher subscription production in fiscal year 1996. The Company
invested $30.7 in Company-produced and licensed entertainment programming during
fiscal year 1997 compared to $25.5 in fiscal year 1996. The increase in
investments in programming for fiscal year 1997 compared to fiscal year 1996
primarily reflects spending for presold made-for-television and home video
programming, co-produced films and a celebrity event.
Net cash provided by operating activities was $4.5 for the fiscal year
ended June 30, 1996 compared to $3.2 for the prior year. This increase was
primarily due to the Company's improved operating performance in fiscal year
1996. Additionally, there was an increase in cash provided by accrued salaries,
wages and employee benefits during fiscal year 1996 primarily due to the timing
of payrolls combined with higher accruals at June 30, 1996 related to
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the 1995 Stock Incentive Plan and employee benefits. Partially offsetting these
increases was lower cash provided by accounts payable in fiscal year 1996,
primarily due to the timing of inventory purchases for the Critics' Choice Video
catalog, principally as the result of lower liabilities recorded at June 30,
1996 due to a later mailing date for the July 1996 catalog combined with higher
liabilities recorded at June 30, 1995 to support higher circulation for the July
1995 catalog. The Company invested $25.5 in Company-produced and licensed
entertainment programming during fiscal year 1996 compared to $21.3 in the prior
year.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $1.9 for the transition period
compared to $1.1 for the six months ended December 31, 1996. Investments in
international ventures of $1.1 for the transition period relate to additional
funding of the Playboy TV network in the United Kingdom and the Playboy TV and
AdulTVision networks in Latin America. This compares to $0.7 of investments for
the six months ended December 31, 1996 related to additional funding of the
network in the United Kingdom and an equity interest in the Latin America
networks. Capital expenditures of $0.8 for the transition period were $0.3
higher compared to the prior year. In the transition period, the Company also
entered into leases of furniture and equipment totaling $1.2, compared to $1.3
for the six months ended December 31, 1996.
Net cash used for investing activities was $2.5 for the year ended June 30,
1997 compared to $4.2 for the prior year. Fiscal year 1996 included investments
in equity interests of $3.6 in the international Playboy TV networks in the
United Kingdom and Japan, the casino gaming venture that was awarded an
exclusive license on the island of Rhodes, Greece, and an additional equity
interest in VIPress. This compares to $1.9 of investments in fiscal year 1997
principally related to additional funding of the network in the United Kingdom
and an equity interest as well as additional funding in the Playboy TV and
AdulTVision networks in Latin America. Capital expenditures for the year ended
June 30, 1997 were $0.1 lower than in the prior year. In fiscal year 1997, the
Company also entered into leases of furniture and equipment totaling $2.8,
compared to $1.7 in fiscal year 1996. The increase in leased assets in fiscal
year 1997 compared to fiscal year 1996 is largely related to the new media
business and the catalog operations move.
Net cash used for investing activities was $4.2 for the year ended June 30,
1996 compared to $0.3 for the prior year. Fiscal year 1996 included the
investments in equity interests of $3.6 discussed above. Capital expenditures
for the year ended June 30, 1996 were $0.4 higher than in the prior year. The
Company also leased $1.7 of furniture and equipment in fiscal year 1996,
compared to $1.4 in fiscal year 1995.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $5.4 for the transition
period compared to $6.8 for the six months ended December 31, 1996. This
decrease was principally due to a $1.5 lower increase in the level of short-term
borrowings under the Company's revolving line of credit in the transition
period.
Net cash used for financing activities was $0.2 for the year ended June 30,
1997 compared to net cash provided of $0.6 for the prior year. This decrease was
due in part to a $0.5 reduction in short-term borrowings under the Company's
revolving line of credit in fiscal year 1997.
Net cash provided by financing activities was $0.6 for the year ended June
30, 1996 compared to net cash used for financing activities of $2.7 in the prior
year. This increase was principally due to a payment on July 1, 1994 of $1.5 in
promissory notes which reflects partial payment related to the Company's
acquisition of the remaining 20% interest in Critics' Choice Video, Inc.,
combined with a reduction in short-term borrowings under the Company's revolving
line of credit of $1.0 in fiscal year 1995.
INCOME TAXES
At June 30, 1997, the Company evaluated its net operating loss
carryforwards ("NOLs") and other deferred tax assets and liabilities in relation
to the Company's recent earnings history and its projected future earnings. As a
result of this review, the Company reduced the valuation allowance balance by
$13.5 as a result of reevaluating the realizability of the deferred tax assets
in future years. In the transition period the Company realized $0.4 of the net
deferred tax asset recorded at June 30, 1997. Management believes that the net
deferred tax asset of $14.0 at December 31, 1997 is an amount that will more
likely than not be realized in future periods.
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Based on current tax law, the Company will need to generate approximately
$41.2 of future taxable income prior to the expiration of the Company's NOLs for
full realization of the $14.0 net deferred tax asset recorded at December 31,
1997. At December 31, 1997, the Company had NOLs of $23.2 for tax purposes, with
$1.1 expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008, $16.4
expiring in 2009 and $2.5 expiring in 2012.
Management believes that it is more likely than not that the required
amount of such taxable income will be generated in years subsequent to December
31, 1997 and prior to the expiration of the Company's NOLs to realize the $14.0
net deferred tax asset at December 31, 1997. Following is a summary of the bases
for management's belief that a valuation allowance of $16.5 at December 31, 1997
is adequate, and that it is more likely than not that the net deferred tax asset
of $14.0 at December 31, 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, while 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 year 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 December 31, 1997, to
cover the eventual cost of its anticipated share (based on an agreement with one
of the other PRPs) of any remediation that may be agreed upon. The Company is
also reviewing available defenses and claims it may have against third parties.
On December 18, 1995, BrandsElite filed a complaint against the Company in
the Illinois Circuit Court. In the complaint, BrandsElite, an international
distributor of premium merchandise, including liquor, perfume, cosmetics and
luxury gifts, principally to duty-free retailers, alleges that the Company
breached a product license agreement, shortly after its execution by the Company
in October 1995. The agreement provided for the appointment of BrandsElite as
the exclusive, worldwide licensee of the Playboy trademark and tradename with
respect to the sale of cognac and possibly some deluxe whiskeys. The Company has
admitted that it advised BrandsElite that it had determined not to proceed with
the transaction but disputes strongly BrandsElite's allegation that as a result
of the Company's breach, BrandsElite has suffered millions of dollars of damages
in future lost profits and diminished value of its stock. BrandsElite also seeks
to recoup out-of-pocket expenses, fees and costs incurred in bringing the
action. The license agreement provides for recovery by a party in any judgment
entered in its favor of attorneys' fees and litigation expenses, together with
such court costs and damages as are provided by law. The action is in discovery
and is likely to go to trial during calendar year 1998. On October 22, 1997, the
Company filed a motion for partial summary judgment challenging BrandsElite's
claims for future lost profits and stock market valuation damages. On March 4,
1998, the Illinois Circuit Court granted the portion of the Company's motion
relating to stock market valuation damages but denied the portion of the motion
relating to future lost profits. BrandsElite's expert reports on damages assert
future lost profits damages ranging from $3.5 to $12.5. In addition, BrandsElite
claims entitlement to out-of-pocket expenses, legal fees and costs.
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The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income Summary ("Statement 130") for
financial statements issued for fiscal years beginning after December 15, 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. Management is evaluating the effect
that adoption of Statement 130 will have on the Company's financial statements.
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131") for financial statements issued for periods
beginning after December 15, 1997. Statement 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. Management is evaluating the effect
that adoption of Statement 131 will have on the Company's financial statements.
In response to the Year 2000 issue, the Company has begun to identify,
evaluate and implement changes to its existing computerized business systems.
The Company is addressing the issue through a combination of modifications to
existing programs and conversions to Year 2000 compliant software. In addition,
the Company is communicating with its vendors and other service providers to
determine whether they are actively involved in projects to ensure that their
products and business systems will be Year 2000 compliant. If modifications and
conversions by the Company and those it conducts business with were not made in
a timely manner, the Year 2000 issue could have a material adverse affect on the
Company's business, financial condition, and results of operations. Certain key
systems of the Company have already been identified as Year 2000 compliant,
including financial applications and new media operations. Although the Company
is still quantifying the impact, the early estimate of the total costs
associated with the required modifications and conversions are expected to be
approximately $2.0, of which approximately $0.8 is expected to be expensed in
calendar year 1998. These costs are being expensed as incurred.
FORWARD-LOOKING STATEMENTS
This Form 10-K Transition 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) further 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 and DTH
systems.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not required as the Company's market capitalization was less than $2.5
billion as of January 28, 1997.
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Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The following consolidated financial statements of the registrant and
report of independent accountants are set forth in this Form 10-K Transition
Report as follows:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Operations - Six-Month Transition Period Ended
December 31, 1997, Six-Month Period Ended December 31, 1996 (Unaudited) and
Fiscal Years Ended June 30, 1997, 1996 and 1995 44
Consolidated Balance Sheets - December 31, 1997, June 30, 1997 and June 30,
1996 45
Consolidated Statements of Shareholders' Equity - Six-Month Transition
Period Ended December 31, 1997 and Fiscal Years Ended June 30, 1997, 1996
and 1995 46
Consolidated Statements of Cash Flows - Six-Month Transition Period Ended
December 31, 1997, Six-Month Period Ended December 31, 1996 (Unaudited) and
Fiscal Years Ended June 30, 1997, 1996 and 1995 47
Notes to Consolidated Financial Statements 48-64
Report of Independent Accountants 65
</TABLE>
The supplementary data regarding quarterly results of operations are set
forth in Note R of Notes to Consolidated Financial Statements on pages 62 and 63
of this Form 10-K Transition Report.
43
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
(in thousands, except per share amounts) 12/31/97 12/31/96(1) 6/30/97 6/30/96 6/30/95
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 149,541 $ 146,003 $ 296,623 $ 276,587 $ 247,249
- ------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (126,658) (122,062) (245,023) (234,247) (214,327)
Selling and administrative expenses (18,424) (16,247) (35,855) (32,847) (29,865)
- ------------------------------------------------------------------------------------------------------------------------
Total costs and expenses (145,082) (138,309) (280,878) (267,094) (244,192)
- ------------------------------------------------------------------------------------------------------------------------
Operating income 4,459 7,694 15,745 9,493 3,057
- ------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 50 35 73 88 139
Interest expense (289) (299) (427) (680) (708)
Other, net 70 (98) (640) (452) (52)
- ------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (169) (362) (994) (1,044) (621)
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 4,290 7,332 14,751 8,449 2,436
Income tax benefit (expense) (2,148) (3,470) 6,643 (4,197) (1,807)
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle 2,142 3,862 21,394 4,252 629
Cumulative effect of change
in accounting principle (1,077) - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,065 $ 3,862 $ 21,394 $ 4,252 $ 629
=======================================================================================================================
Weighted average number of
common shares outstanding
Basic 20,487 20,291 20,318 20,014 19,984
=======================================================================================================================
Diluted 20,818 20,587 20,694 20,261 20,128
=======================================================================================================================
Basic EPS
Income before cumulative effect of
change in accounting principle $ 0.10 $ 0.19 $ 1.05 $ 0.21 $ 0.03
Cumulative effect of change
in accounting principle (0.05) - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.19 $ 1.05 $ 0.21 $ 0.03
=======================================================================================================================
Diluted EPS
Income before cumulative effect of
change in accounting principle $ 0.10 $ 0.19 $ 1 .03 $ 0.21 $ 0.03
Cumulative effect of change
in accounting principle (0.05) - - - -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.19 $ 1.03 $ 0.21 $ 0.03
=======================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(1) Unaudited.
44
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, June 30, June 30,
(in thousands, except share data) 1997 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 947 $ 1,303 $ 2,438
Receivables, net of allowance for doubtful
accounts of $4,467, $3,882 and $3,009 33,324 32,326 29,110
Inventories 25,376 23,304 23,499
Programming costs 41,504 41,954 33,873
Deferred subscription acquisition costs 12,143 9,077 9,569
Other current assets 11,910 12,315 10,420
- ------------------------------------------------------------------------------------------------
Total current assets 125,204 120,279 108,909
- ------------------------------------------------------------------------------------------------
Property and equipment
Land 292 292 292
Buildings and improvements 8,386 8,332 8,333
Furniture and equipment 21,030 20,554 20,352
Leasehold improvements 8,237 8,653 8,427
- ------------------------------------------------------------------------------------------------
Total property and equipment 37,945 37,831 37,404
Accumulated depreciation (27,892) (27,524) (25,510)
- ------------------------------------------------------------------------------------------------
Property and equipment, net 10,053 10,307 11,894
- ------------------------------------------------------------------------------------------------
Programming costs--noncurrent 8,329 4,673 3,362
Trademarks 14,978 13,761 11,887
Net deferred tax assets 13,688 14,145 4,191
Other noncurrent assets 13,695 12,377 10,626
- ------------------------------------------------------------------------------------------------
Total assets $185,947 $175,542 $150,869
================================================================================================
Liabilities
Short-term borrowings $ 10,000 $ 4,500 $ 5,000
Current financing obligations - 347 340
Accounts payable 32,258 26,914 22,745
Accrued salaries, wages and employee benefits 4,499 7,232 6,941
Reserves for losses on disposals of discontinued operations 610 628 707
Income taxes payable 627 1,227 970
Deferred revenues 43,216 42,273 44,378
Other liabilities and accrued expenses 7,706 7,937 8,940
- ------------------------------------------------------------------------------------------------
Total current liabilities 98,916 91,058 90,021
- ------------------------------------------------------------------------------------------------
Long-term financing obligations - - 347
Other noncurrent liabilities 8,348 8,351 8,218
- ------------------------------------------------------------------------------------------------
Total liabilities 107,264 99,409 98,586
- ------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, $0.01 par value
Class A voting--7,500,000 shares authorized; 5,042,381 issued 50 50 50
Class B non-voting--30,000,000 shares authorized;
17,076,518, 17,029,018 and 16,963,393 issued 171 170 170
Capital in excess of par value 43,539 42,645 40,867
Retained earnings 45,257 44,192 22,798
Foreign currency translation adjustment (131) (74) (17)
Unearned compensation restricted stock (3,511) (4,089) (4,549)
Less cost of 293,427 Class A common shares
and 974,227, 987,341 and 1,040,045
Class B common shares in treasury (6,692) (6,761) (7,036)
- ------------------------------------------------------------------------------------------------
Total shareholders' equity 78,683 76,133 52,283
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $185,947 $175,542 $150,869
================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
45
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned
Class A Class B Capital in Comp.
Common Common Excess of Retained Restricted Treasury
(in thousands of dollars) Stock Stock Par Value Earnings Other Stock Stock Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 50 $ 165 $36,381 $17,917 $ - $ - $(8,202) $46,311
Net income - - - 629 - - - 629
Exercise of 4,500 Class A and
20,000 Class B stock options - - 14 - - - 128 142
Issuance of 960 Class B shares
as service awards - - 3 - - - 5 8
Issuance of 516,250 Class B shares
as restricted stock awards - 5 4,835 - - (4,840) - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 50 170 41,233 18,546 - (4,840) (8,069) 47,090
Net income - - - 4,252 - - - 4,252
Exercise of 35,000 Class A and
159,750 Class B stock options - - (81) - - - 1,025 944
Issuance of 1,499 Class B shares
as service awards - - 6 - - - 8 14
Issuance of 20,000 Class B shares
as restricted stock awards - - 177 - - (177) - -
Forfeiture of 50,000 Class B shares
related to restricted stock awards - - (468) - - 468 - -
Foreign currency translation adjustment - - - - (17) - - (17)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 50 170 40,867 22,798 (17) (4,549) (7,036) 52,283
Net income - - - 21,394 - - - 21,394
Exercise of 57,500 Class B
stock options - - 264 - - - 170 434
Issuance of 1,147 Class B shares
as service awards - - 9 - - - 6 15
Issuance of 68,750 Class B shares
as restricted stock awards - - 940 - - (940) - -
Forfeiture of 28,125 Class B shares
related to restricted stock awards - - (263) - - 263 - -
Issuance of 19,057 Class B shares
under employee stock purchase plan - - 93 - - - 99 192
Vesting of 121,564 Class B
restricted stock awards - - - - - 1,137 - 1,137
Foreign currency translation adjustment - - - - (57) - - (57)
Income tax benefit related to
stock plans - - 735 - - - - 735
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 50 170 42,645 44,192 (74) (4,089) (6,761) 76,133
Net income - - - 1,065 - - - 1,065
Exercise of 15,000 Class B
stock options - - 93 - - - 27 120
Issuance of 337 Class B shares
as service awards - - 4 - - - 2 6
Issuance of 37,500 Class B shares
as restricted stock awards - 1 526 - - (527) - -
Issuance of 7,777 Class B shares
under employee stock purchase plan - - 61 - - - 40 101
Vesting of 115,939 Class B
restricted stock awards - - - - - 1,105 - 1,105
Foreign currency translation adjustment - - - - (57) - - (57)
Income tax benefit related to
stock plans - - 210 - - - - 210
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 50 $ 171 $ 43,539 $ 45,257 $(131) $ (3,511) $ (6,692) $78,683
===========================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
46
<PAGE>
<TABLE>
<CAPTION>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
(in thousands) 12/31/97 12/31/96(1) 6/30/97 6/30/96 6/30/95
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,065 $ 3,862 $ 21,394 $ 4,252 $ 629
Adjustments to reconcile net income
to net cash provided by (used for) operating activities
Depreciation of property and equipment 1,007 1,135 2,210 2,383 2,531
Amortization of intangible assets 845 903 1,893 1,783 1,590
Amortization of investments in
entertainment programming 11,153 9,619 21,355 21,263 20,130
Investments in entertainment programming (14,359) (15,518) (30,747) (25,549) (21,313)
Changes in current assets and liabilities
Receivables (998) (5,896) (3,286) (4,574) (3,498)
Inventories (2,072) 1,023 195 (2,061) (2,160)
Deferred subscription acquisition costs (3,066) (1,418) 492 (393) 910
Other current assets 367 (2,475) (2,146) (426) (1,586)
Accounts payable 5,344 2,469 4,169 2,931 5,869
Accrued salaries, wages and employee benefits (1,628) (1,707) 1,428 2,853 277
Income taxes payable (600) 200 284 27 92
Deferred revenues 943 395 (2,105) 1,468 1,171
Other liabilities and accrued expenses (231) (832) (1,003) 224 581
--------- --------- ------- -------- --------
Net change in current assets and liabilities (1,941) (8,241) (1,972) 49 1,656
--------- --------- ------- -------- --------
Increase in trademarks (1,767) (1,066) (2,898) (1,766) (1,856)
(Increase) decrease in net deferred tax assets 457 2,216 (9,954) 2,399 629
Increase in other noncurrent assets (466) (192) (519) (487) (832)
Increase (decrease) in other noncurrent liabilities (3) 168 106 258 96
Net cash used for discontinued operations (18) (18) (79) (59) (124)
Other, net 174 6 750 15 44
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (3,853) (7,126) 1,539 4,541 3,180
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Additions to property and equipment (765) (431) (671) (760) (382)
Acquisitions and funding of equity
interests in international ventures (1,109) (731) (1,905) (3,619) -
Other, net - 105 126 211 67
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,874) (1,057) (2,450) (4,168) (315)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings 5,500 7,000 (500) - (1,000)
Repayment of debt (350) (350) (350) (350) (1,850)
Proceeds from exercise of stock options 120 65 434 944 198
Proceeds from sales under employee stock purchase plan 101 91 192 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 5,371 6,806 (224) 594 (2,652)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (356) (1,377) (1,135) 967 213
Cash and cash equivalents at beginning of period 1,303 2,438 2,438 1,471 1,258
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 947 $ 1,061 $ 1,303 $ 2,438 $ 1,471
==============================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(1) Unaudited.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Change in Fiscal Year: On November 6, 1997, the Board approved a change in the
Company's fiscal year end from June 30 to December 31 which will better align
the Company's businesses with its customers and partners who also operate and
plan on a calendar-year basis. The six-month transition period from July 1, 1997
through December 31, 1997 precedes the start of the new calendar and fiscal year
and is represented in this Form 10-K Transition Report. The unaudited financial
information for the six months ended December 31, 1996 is presented for
comparative purposes, but in the opinion of management, reflects all normal
recurring adjustments necessary for a fair presentation.
Revenue Recognition: Revenues from the sale of magazine subscriptions are
recognized over the terms of the subscriptions. Sales of magazines and newsstand
specials (net of estimated returns), and revenues from the sale of
advertisements, are recorded when each issue goes on sale. Domestic pay
television revenues are recognized based on pay-per-view buys and monthly
subscriber counts reported each month by the system operators. Domestic home
video revenues are recognized based on unit sales reported for new releases each
month by the Company's distributor and a distribution agreement for backlist
titles. International television revenues are recognized either upon
identification of programming scheduled for networks, delivery of programming to
customers and/or upon the commencement of the license term. Revenues from the
direct marketing of catalog products are recognized when the items are shipped.
Cash Equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates market value.
Inventories: Inventories are stated at the lower of cost (average cost and
specific cost) or market.
Property and Equipment: Property and equipment is stated at cost. Depreciation
is provided on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated on a straight-line basis over the
shorter of their estimated useful lives or the terms of the related leases.
Repair and maintenance costs are expensed as incurred, and major betterments are
capitalized. Sales and retirements of depreciable property and equipment are
recorded by removing the related cost and accumulated depreciation from the
accounts. Gains or losses on sales and retirements of property and equipment are
included in nonoperating income or expense.
Deferred Subscription Acquisition Costs: Costs associated with the promotion of
magazine subscriptions, which consist primarily of postage, costs to produce
direct-mail solicitation materials and other costs to attract and renew
subscribers, are deferred and amortized over the period during which the future
benefits are expected to be received. This is consistent with the provisions of
Statement of Position 93-7, Reporting on Advertising Costs, which the Company
adopted in fiscal year 1995. See Note G.
Programming Costs and Amortization: Programming costs include original
programming and film acquisition costs, which are capitalized and amortized. The
portion of original programming costs assigned to the domestic pay television
market is amortized on the straight-line method over three years. The portion of
original programming costs assigned to each of the worldwide home video and
international television markets are amortized using the individual-film-
forecast-computation method. Film acquisition costs are assigned to domestic and
international markets as appropriate, and are amortized principally on the
straight-line method over the license term, generally three years, and the
premiere schedule, respectively. Management believes that these methods provide
a reasonable matching of expenses with total estimated revenues over the periods
that revenues associated with films and programs are expected to be realized.
Film and program amortization is adjusted periodically to reflect changes in the
estimates of amounts of related future revenues. Film and program costs are
stated at the lower of unamortized cost or estimated net realizable value as
determined on a specific identification basis. Based on management's estimate of
future total gross revenues as of December 31, 1997, substantially all
unamortized programming costs applicable to released programs are expected to be
amortized during the next three years. See Note F.
48
<PAGE>
Intangible Assets: Trademark acquisition costs are capitalized and amortized on
the straight-line method over 40 years. Trademark and copyright defense,
registration and/or renewal costs are capitalized and amortized on the straight-
line method over 15 years. Other intangible assets are comprised substantially
of goodwill, which is amortized generally over 40 years. Accumulated
amortization of intangible assets was $12,800,000, $11,955,000 and $10,062,000
at December 31, 1997, June 30, 1997 and June 30, 1996, respectively.
Income (Loss) per Common Share: During the transition period, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 128,
Earnings per Share ("Statement 128"). Statement 128 simplifies the previous
standards for computing EPS, replacing the presentation of primary EPS with a
presentation of basic EPS. Unlike primary EPS, basic EPS excludes any dilutive
potential common shares. Diluted EPS is very similar to the previously required
fully diluted EPS. Statement 128 also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures, which applies to the Company. All EPS amounts presented have
been restated to conform to the Statement 128 requirements. See Note D.
Foreign Exchange Forward Contracts: The Company utilizes forward contracts to
minimize the impact of currency movements on royalties received and certain
payments denominated in Japanese yen, German marks and French francs. The terms
of these contracts are generally one year or less. Gains and losses related to
these agreements are recorded in operating results as part of, and concurrent
with, the transaction. As of December 31, 1997, June 30, 1997 and June 30, 1996,
the Company had approximately $1,025,000, $2,330,000 and $2,300,000,
respectively, in outstanding contracts. At their respective balance sheet dates,
the difference between these contracts' values and the fair market value of
these instruments in the aggregate was not material.
Minority Interest: The Company owns a majority interest in VIPress, publisher of
the Polish edition of Playboy magazine. The financial statements of VIPress are
included in the Company's financial statements. The minority interest in the
results of operations is included in nonoperating income or expense in the
Consolidated Statements of Operations and the minority interest in the equity of
VIPress is included in "Other noncurrent liabilities" in the Consolidated
Balance Sheets.
Foreign Currency Translation: Assets and liabilities in foreign currencies are
translated into U.S. dollars at the exchange rate existing at the balance sheet
date. The net exchange differences resulting from these translations are
recorded as a separate component of shareholders' equity. Revenues and expenses
are translated at average rates for the period.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
New Accounting Pronouncements: The Company will adopt the provisions of
Statement 130, Reporting Comprehensive Income Summary for financial statements
issued for fiscal years beginning after December 15, 1997. Statement 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. Management is evaluating the effect that adoption
of Statement 130 will have on the Company's financial statements.
The Company will adopt the provisions of Statement 131, Disclosures about
Segments of an Enterprise and Related Information for financial statements
issued for periods beginning after December 15, 1997. Statement 131, which is
based on the management approach to segment reporting, includes requirements to
report selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. Management is evaluating the effect
that adoption of Statement 131 will have on the Company's financial statements.
49
<PAGE>
(B) INCOME TAXES
The income tax provision (benefit) consisted of the following (in thousands):
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
12/31/97 6/30/97 6/30/96 6/30/95
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ 354 $ 241 $ 115
State 180 501 67 65
Foreign 747 1,721 1,490 998
- -----------------------------------------------------------------------------------------------------
Total current 927 2,576 1,798 1,178
- -----------------------------------------------------------------------------------------------------
Deferred:
Federal 457 (9,954) 2,399 629
State - - - -
Foreign - - - -
- -----------------------------------------------------------------------------------------------------
Total deferred 457 (9,954) 2,399 629
- -----------------------------------------------------------------------------------------------------
Benefit of stock compensation recorded
in capital in excess of par value 210 735 - -
Benefit recorded as part of cumulative
effect of change in accounting principle 554 - - -
- -----------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 2,148 $ (6,643) $ 4,197 $ 1,807
=====================================================================================================
</TABLE>
The income tax provision (benefit) differed from a provision computed at the
U.S. statutory tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
12/31/97 6/30/97 6/30/96 6/30/95
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory rate tax provision $ 1,459 $ 5,163 $ 2,871 $ 828
Increase (decrease) in taxes resulting from:
Foreign withholding tax on licensing income 747 1,452 1,448 998
State income taxes 180 501 67 65
Nondeductible expenses 180 342 129 341
Reduction in valuation allowance - (13,486) - -
Tax benefit of foreign taxes paid or accrued (328) (538) (356) (339)
Other (90) (77) 38 (86)
- -----------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 2,148 $ (6,643) $ 4,197 $ 1,807
=====================================================================================================
</TABLE>
The U.S. statutory tax rate applicable to the Company for the transition period
and fiscal years 1997, 1996 and 1995 was 34%, 35%, 34% and 34%, respectively.
Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates
expected to apply in the years in which the temporary differences are expected
to reverse.
At June 30, 1997, the Company evaluated its NOLs and other deferred tax
assets and liabilities in relation to the Company's recent earnings history and
its projected future earnings. As a result of this review, the Company reduced
the valuation allowance balance by $13.5 million as a result of reevaluating the
realizability of the deferred tax assets in future years.
50
<PAGE>
The significant components of the Company's deferred tax assets and
deferred tax liabilities as of June 30, 1996, June 30, 1997 and December 31,
1997 are presented below (in thousands):
<TABLE>
<CAPTION>
June 30, Net June 30, Net Dec. 31,
1996 Change 1997 Change 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 12,734 $(5,677) $ 7,057 $ 844 $ 7,901
Capital loss carryforwards 10,512 - 10,512 - 10,512
Tax credit carryforwards 5,851 2,161 8,012 964 8,976
Other deductible temporary differences 9,855 694 10,549 695 11,244
- ------------------------------------------------------------------------------------------------
Total deferred tax assets 38,952 (2,822) 36,130 2,503 38,633
Valuation allowance (27,971) 12,101 (15,870) (634) (16,504)
- ------------------------------------------------------------------------------------------------
Deferred tax assets 10,981 9,279 20,260 1,869 22,129
- ------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (3,685) 319 (3,366) (1,148) (4,514)
Other taxable temporary differences (2,824) 356 (2,468) (1,178) (3,646)
- ------------------------------------------------------------------------------------------------
Deferred tax liabilities (6,509) 675 (5,834) (2,326) (8,160)
- ------------------------------------------------------------------------------------------------
Net deferred tax assets $ 4,472 $ 9,954 $ 14,426 $ (457) $ 13,969
================================================================================================
</TABLE>
In the Consolidated Balance Sheet at June 30, 1996, $0.3 million of the $4.5
million net deferred tax asset is included in "Other current assets" and $4.2
million is segregated as "Net deferred tax assets." In the Consolidated Balance
Sheet at June 30, 1997, $0.3 million of the $14.4 million net deferred tax asset
is included in "Other current assets" and $14.1 million is segregated as "Net
deferred tax assets." In the Consolidated Balance Sheet at December 31, 1997,
$0.3 million of the $14.0 million net deferred tax asset is included in "Other
current assets" and $13.7 million is segregated as "Net deferred tax assets."
In addition to the federal tax benefits in the table above, the Company has
NOLs available in various states, none of which are reflected in the net
deferred tax assets in the Consolidated Balance Sheets at December 31, 1997,
June 30, 1997 and June 30, 1996.
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 $14.0 million at
December 31, 1997, the Company will need to generate future taxable income of
approximately $41.2 million prior to the expiration of the Company's NOLs.
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 assets through an adjustment to
the valuation allowance.
At December 31, 1997, the Company had NOLs of $23.2 million with $1.1
million expiring in 2004, $2.1 million expiring in 2007, $1.1 million expiring
in 2008, $16.4 million expiring in 2009 and $2.5 million expiring in 2012. The
Company had capital loss carryforwards of $30.9 million with $1.0 million
expiring in 1998 and $29.9 million expiring in 1999. In addition, foreign tax
credit carryforwards of $6.2 million and investment tax credit carryforwards of
$1.9 million are available to reduce future U.S. federal income taxes. The
foreign tax credit carryforwards expire in 1998 through 2003 and the investment
tax credit carryforwards expire in 1998 through 2001.
51
<PAGE>
(C) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
A $1,077,000 charge, net of an income tax benefit of $554,000, was reported in
the transition period as "Cumulative effect of change in accounting principle"
as a result of the Company's change in accounting for certain start-up costs to
conform to the accounting required by the proposed Statement of Position,
Reporting on the Costs of Start-Up Activities, expected to be issued in the
first half of calendar year 1998. This statement requires the expense
recognition, as opposed to capitalization, of costs related to start-up
activities. The expenses were primarily related to development costs of casino
gaming ventures which had previously been capitalized prior to July 1, 1997, the
date of adoption. The impact of this change in accounting principle on operating
income in the transition period resulted in expenses of $576,000.
Pro forma amounts, assuming the Statement of Position was applied beginning
in fiscal year 1995, follow with comparisons to actual results (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Six Months Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/97 12/31/96(1) 6/30/97 6/30/96 6/30/95
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before cumulative effect of
change in accounting principle
As reported $2,142 $3,862 $21,394 $4,252 $ 629
Pro forma 2,142 3,676 20,857 4,179 171
Net income
As reported 1,065 3,862 21,394 4,252 629
Pro forma 2,142 3,676 20,857 4,179 171
Income per common share before
cumulative effect of change in
accounting principle
Basic, as reported 0.10 0.19 1.05 0.21 0.03
Basic, pro forma 0.10 0.18 1.03 0.21 0.01
Diluted, as reported 0.10 0.19 1.03 0.21 0.03
Diluted, pro forma 0.10 0.18 1.01 0.21 0.01
Net income per common share
Basic, as reported 0.05 0.19 1.05 0.21 0.03
Basic, pro forma 0.10 0.18 1.03 0.21 0.01
Diluted, as reported 0.05 0.19 1.03 0.21 0.03
Diluted, pro forma $ 0.10 $ 0.18 $ 1.01 $ 0.21 $0.01
(1) Unaudited.
</TABLE>
52
<PAGE>
(D) INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted EPS (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Six Months Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/97 12/31/96 (1) 6/30/97 6/30/96 6/30/95
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator:
For basic and diluted EPS--income
available to common shareholders:
Income before cumulative effect of
change in accounting principle $ 2,142 $ 3,862 $21,394 $ 4,252 $ 629
Cumulative effect of change in
accounting principle (1,077) - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,065 $ 3,862 $21,394 $ 4,252 $ 629
==================================================================================================================================
Denominator:
Denominator for basic EPS--
weighted-average shares 20,487 20,291 20,318 20,014 19,984
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of dilutive common shares:
Stock options 331 296 315 217 144
Nonvested restricted stock awards - - 61 30 -
- ----------------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 331 296 376 247 144
- ----------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS--
adjusted weighted-average shares 20,818 20,587 20,694 20,261 20,128
==================================================================================================================================
Basic EPS
Income before cumulative effect of
change in accounting principle $ 0.10 $ 0.19 $ 1.05 $ 0.21 $ 0.03
Cumulative effect of change
in accounting principle (0.05) - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.19 $ 1.05 $ 0.21 $ 0.03
==================================================================================================================================
Diluted EPS
Income before cumulative effect of
change in accounting principle $ 0.10 $ 0.19 $ 1.03 $ 0.21 $ 0.03
Cumulative effect of change
in accounting principle (0.05) - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.05 $ 0.19 $ 1.03 $ 0.21 $ 0.03
==================================================================================================================================
</TABLE>
(1) Unaudited.
During the transition period, approximately 320,000 weighted-average shares of
Class B restricted stock awards outstanding were not included in the computation
of diluted EPS as the operating income objectives applicable to these restricted
awards were not met during that period. Additionally, options to purchase
approximately 230,000 weighted-average shares of Class B common stock were
outstanding during the transition period but were not included in the
computation of diluted EPS as the options' exercise prices were greater than the
average market price of the Class B common stock, the effect of which was
antidilutive. For additional disclosure regarding the Company's stock plans, see
Note J.
53
<PAGE>
(E) INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30, June 30,
1997 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Paper $ 7,573 $ 7,564 $10,771
Editorial and other prepublication costs 6,002 6,213 6,566
Merchandise finished goods 11,801 9,527 6,162
- ------------------------------------------------------------------------
Total inventories $25,376 $23,304 $23,499
========================================================================
</TABLE>
(F) PROGRAMMING COSTS
Current programming costs consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30, June 30,
1997 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Released, less amortization $32,601 $31,214 $24,040
Completed, not yet released 8,903 10,740 9,833
- ------------------------------------------------------------------------
Total current programming costs $41,504 $41,954 $33,873
========================================================================
</TABLE>
Noncurrent programming costs of $8.3 million, $4.7 million and $3.4 million at
December 31, 1997, June 30, 1997 and June 30, 1996, respectively, consist of
programs in the process of production.
(G) ADVERTISING COSTS
Effective July 1, 1994, the Company adopted the provisions of Statement of
Position 93-7, Reporting on Advertising Costs.
The Company expenses advertising costs as incurred, except for direct-
response advertising. Direct-response advertising consists primarily of costs
associated with the promotion of magazine subscriptions, principally the
production of direct-mail solicitation materials and postage, and the
distribution of catalogs for use in the Catalog Group. The capitalized direct-
response advertising costs are amortized over the period during which the future
benefits are expected to be received, principally six to 12 months.
At December 31, 1997, June 30, 1997 and June 30, 1996, advertising costs of
$9.1 million, $6.3 million and $6.9 million, respectively, were deferred and
included in "Deferred subscription acquisition costs" and "Other current assets"
in the Consolidated Balance Sheets. For the transition period and fiscal years
1997, 1996 and 1995, the Company's advertising expense was $23.9 million, $46.2
million, $44.3 million and $43.1 million, respectively.
(H) DISCONTINUED OPERATIONS
During fiscal year 1982, the Company discontinued its resort hotel operations.
The net current liabilities related to these discontinued operations have been
segregated in the Consolidated Balance Sheets at December 31, 1997, June 30,
1997 and June 30, 1996 as "Reserves for losses on disposals of discontinued
operations."
In January 1993, the Company received a General Notice from the EPA as a
PRP in connection with a site identified as the Southern Lakes Trap & Skeet
Club, apparently located at 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 year 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 $610,000 at
December 31, 1997, to cover the eventual cost of its anticipated share (based on
an agreement with one of the other PRPs) of any remediation that may be agreed
upon. The Company is also reviewing available defenses and claims it may have
against third parties.
54
<PAGE>
(I) LONG-TERM FINANCING OBLIGATIONS
Long-term financing obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 31, June 30, June 30,
1997 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10% note due in installments through October 1997, net of
unamortized discount of $ -, $3 and $13, respectively,
based upon imputed interest rate of 13% $ - $ 347 $ 687
Less current maturities, net of unamortized discount
of $ -, $3 and $10, respectively - (347) (340)
- ------------------------------------------------------------------------------------------
Total long-term financing obligations $ - $ - $ 347
==========================================================================================
</TABLE>
The remaining principal balance of long-term debt was paid in October 1997 in
the amount of $350,000. The carrying value of this debt approximated the fair
market value.
The Company has a $35.0 million revolving credit agreement with two
domestic banks which expires in March 1999. The credit agreement provides for
interest based on fixed spreads over specified index rates and for commitment
fees based on a combination of the unused portion of the total line of credit
and cash balances. The credit agreement, which covers short-term borrowings and
the issuance of letters of credit, is collateralized by substantially all of the
Company's assets and requires the Company to maintain financial covenants
pertaining to net worth, leverage and cash flow. Additionally, there are
limitations on other indebtedness and investments, and cash dividends are
prohibited. The carrying value of these borrowings approximates the fair market
value of the debt.
At December 31, 1997, short-term borrowings of $10.0 million and letters of
credit of $0.4 million were outstanding. At June 30, 1997, short-term borrowings
of $4.5 million and letters of credit of $5.4 million were outstanding compared
to short-term borrowings and letters of credit outstanding at June 30, 1996 of
$5.0 million and $5.4 million, respectively. The weighted average interest rates
on the short-term borrowings outstanding at December 31, 1997, June 30, 1997 and
June 30, 1996 were 8.04%, 8.50% and 7.77%, respectively.
(J) STOCK PLANS
The Company presently has three plans under which stock options or shares may be
granted: the 1991 Non-Qualified Stock Option Plan for Non-Employee Directors
(the "1991 Directors' Plan"), the Amended and Restated 1995 Stock Incentive Plan
for key employees (the "1995 Stock Incentive Plan") and the 1997 Equity Plan for
Non-Employee Directors of Playboy Enterprises, Inc., as Amended (the "1997
Directors' Plan"). Previously, stock options were also granted under the 1989
Stock Option Plan (the "1989 Option Plan"). At this time, however, there are no
shares available for future grant under this plan.
The 1989 Option Plan authorized the grant of nonqualified stock options to
key employees to purchase up to 342,500 shares of Class A common stock ("Class A
stock") and 1,027,500 shares of Class B common stock ("Class B stock") at a
price that was equal to the fair market value at date of grant. The remaining
103,000 Class B options available for future grants under the 1989 Option Plan
were transferred into the 1995 Stock Incentive Plan and the remaining 175,100
Class A options were canceled.
The 1991 Directors' Plan provides for the grant of nonqualified stock
options to each nonemployee director to purchase shares of Class B stock at a
price that is equal to the fair market value at date of grant. Options to
purchase an aggregate of 80,000 shares of Class B stock may be granted under the
1991 Directors' Plan.
The 1995 Stock Incentive Plan provides for the grant of nonqualified and
incentive stock options, shares of restricted stock and deferred stock and other
performance-based equity awards. Non-Qualified Stock Option, Incentive Stock
Option and Restricted Stock Agreements are presently outstanding under the 1995
Stock Incentive Plan. The 1995 Stock Incentive Plan authorizes the issuance of a
total of 1,803,000 shares of Class B stock, which includes the previously
mentioned 103,000 shares that were transferred from the 1989 Option Plan and an
additional 600,000 shares approved by shareholders of the Company in November
1996. The Non-Qualified and Incentive Stock Option Agreements authorize the
grant of options to key employees to purchase shares of Class B stock at a price
that is not less than the fair market value at date of grant. The Restricted
Stock Agreements provide for the issuance of Class B stock to key employees
subject to certain restrictions that lapse upon the Company meeting
55
<PAGE>
specified operating income objectives pertaining to a fiscal year. Such
operating income objectives are set at $7.5 million, $10.0 million, $15.0
million and $20.0 million, after related expenses. However, vesting requirements
for certain restricted stock grants will lapse automatically for any remaining
restricted stock on June 30, 2005. The first two operating income objectives of
$7.5 million and $10.0 million were met in fiscal years 1996 and 1997,
respectively, and 121,564 and 115,939 shares of restricted stock vested in
August 1996 and 1997, respectively. The remaining two operating income
objectives of $15.0 million and $20.0 million were not met in the transition
period, and as a result, no additional shares of restricted stock have vested
and thus no related compensation expense has been recognized. Compensation
expense recognized in fiscal years 1995, 1996 and 1997 in connection with the
1995 Stock Incentive Plan was $228,000, $972,000 and $1,078,000, respectively.
In November 1996, the Board authorized the grant of nonqualified stock
options to purchase a total of 20,000 shares of the Company's Class B stock to
two nonemployee directors under no specific plan (the "Board Grant"). The
resolution provided for the grant of these options at a price equal to the fair
market value at date of grant.
In September 1997, the Board adopted the 1997 Directors' Plan, which was
approved by shareholders of the Company in November 1997. The 1997 Directors'
Plan authorizes the issuance of a total of 200,000 shares of Class B stock and
(i) authorizes the grant of stock options, shares of restricted stock and stock
awards to nonemployee directors of the Company, (ii) provides for the receipt by
such directors of all compensation (other than deferred compensation) paid to
them for attendance at Board and committee meetings in the form of shares of
Class B stock, and (iii) authorizes such directors to elect to receive up to
100% of their annual retainer in the form of shares of Class B stock. The
exercise price of options granted to nonemployee directors under the 1997
Directors' Plan must equal or exceed the fair market value at date of grant. As
of December 31, 1997, no stock options or stock awards had been granted,
however, 25,000 shares of Class B stock had been granted as restricted stock
awards under the 1997 Directors' Plan. The restricted stock awards are subject
to certain restrictions that lapse upon the Company meeting specified operating
income objectives pertaining to a fiscal year. Such operating income objectives
are set at $15.0 million and $20.0 million, after related expenses, upon
attainment of which the restrictions lapse as to 30% and 70% of the shares of
restricted stock, respectively. However, vesting requirements for the restricted
stock grants will lapse automatically for any remaining restricted stock on July
1, 2007. As previously discussed, the operating income objectives of $15.0
million and $20.0 million were not met in the transition period, and as a
result, no shares of restricted stock have vested and thus no related
compensation expense has been recognized in connection with the 1997 Directors'
Plan.
Stock options under all of the plans discussed above are generally for a
term of ten years and are generally exercisable in cumulative annual
installments of 25% each year, beginning on the first anniversary of the date
such options were initially granted. At December 31, 1997, options to purchase
115,000 shares of Class A stock and 624,940 shares of Class B stock were
exercisable under the 1989 Option Plan, options to purchase 25,000 shares of
Class B stock were exercisable under the 1991 Directors' Plan, options to
purchase 227,500 shares of Class B stock were exercisable under the 1995 Stock
Incentive Plan and options to purchase 5,000 shares of Class B stock were
exercisable under the Board Grant. The Board has reserved treasury shares for
issuance upon exercise of options under the 1989 Option Plan and the Board
Grant. Shares issued upon exercise of options granted or shares awarded under
the 1991 Directors' Plan, the 1995 Stock Incentive Plan and the 1997 Directors'
Plan may be either treasury shares or newly issued shares. At December 31, 1997,
a total of 548,625 shares of Class B stock were available for future grants
under the 1991 Directors' Plan, the 1995 Stock Incentive Plan and the 1997
Directors' Plan combined. Stock option transactions are summarized as follows:
56
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Stock Options Outstanding
- ---------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- ---------------------------------------------------------------------------------
Class A Class B Class A Class B
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1994 176,600 993,750 6.35 6.58
Granted - 496,250 - 9.28
Exercised (4,500) (20,000) 6.69 5.61
Canceled (22,100) (161,250) 6.69 6.96
- -------------------------------------------------------
Outstanding at June 30, 1995 150,000 1,308,750 6.29 7.59
Granted - 40,000 - 9.31
Exercised (35,000) (159,750) 4.88 4.84
Canceled - (42,500) - 9.13
- -------------------------------------------------------
Outstanding at June 30, 1996 115,000 1,146,500 6.72 7.97
Granted - 477,500 - 13.87
Exercised - (57,500) - 7.55
Canceled - (51,250) - 12.72
- -------------------------------------------------------
Outstanding at June 30, 1997 115,000 1,515,250 6.72 9.74
Granted - 70,000 - 15.03
Exercised - (15,000) - 7.96
Canceled - - - -
- -------------------------------------------------------
Outstanding at December 31, 1997 115,000 1,570,250 6.72 9.99
=================================================================================
</TABLE>
The weighted average exercise prices for Class A and Class B exercisable options
at June 30, 1995 were $6.28 and $6.38, respectively, and at June 30, 1996 were
$6.72 and $7.36, respectively. The weighted average exercise prices for Class A
and Class B exercisable options at June 30, 1997 were $6.72 and $7.59,
respectively. The following table summarizes information regarding stock options
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A
$6.69-$7.38 115,000 2.04 6.72 115,000 6.72
Class B
$5.38-$8.88 687,750 3.43 7.15 654,940 7.11
$9.38-$12.38 512,500 7.23 10.33 198,750 9.94
$13.31-$16.23 370,000 9.02 14.78 28,750 14.84
- --------------------------------------------------------------------------
Total Class B 1,570,250 5.99 9.99 882,440 8.00
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes transactions related to restricted stock awards:
Restricted Stock Awards Outstanding
- ------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------
<S> <C>
Outstanding at June 30, 1994 -
Awarded 516,250
Vested -
Canceled -
- -----------------------------------------------------------------------------
Outstanding at June 30, 1995 516,250
Awarded 20,000
Vested -
Canceled (50,000)
- -----------------------------------------------------------------------------
Outstanding at June 30, 1996 486,250
Awarded 68,750
Vested (121,564)
Canceled (28,125)
- -----------------------------------------------------------------------------
Outstanding at June 30, 1997 405,311
Awarded 37,500
Vested (115,939)
Canceled -
- -----------------------------------------------------------------------------
Outstanding at December 31, 1997 326,872
=============================================================================
</TABLE>
Effective July 1, 1996 the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") to provide substantially all regular full- and part-time
employees an opportunity to purchase shares of its Class B stock through payroll
deductions up to the lower of 10% of base salary, or $25,000 of fair market
value of Class B stock per calendar year (as required by the Internal Revenue
Service). The funds are withheld and then used to acquire stock on the last
trading day of each quarter, based on the closing price less a 15% discount.
Under the Purchase Plan, shares issued upon purchase may be either treasury
shares or newly issued shares and a total of 50,000 shares are available for
purchase. During fiscal year 1997 and the transition period, approximately
19,000 and 8,000 shares, respectively, of Class B stock were sold to employees
under the Purchase Plan.
Stock options and shares issued under the Purchase Plan are accounted for
under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Accordingly, no compensation expense has
been recognized related to these options and shares. Under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), compensation expense is measured at the grant date based on
the fair value of the award and is recognized over the vesting period. The
Company has adopted the disclosure-only provisions of Statement 123. Had
compensation expense for these options and shares been determined consistent
with Statement 123, the Company's net income and basic and diluted EPS would
have been reduced to the following pro forma amounts (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year
Ended Ended Ended
12/31/97 6/30/97* 6/30/96*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 1,065 $ 21,394 $ 4,252
Pro forma 641 20,981 4,227
Basic EPS
As reported 0.05 1.05 0.21
Pro forma 0.03 1.03 0.21
Diluted EPS
As reported 0.05 1.03 0.21
Pro forma $ 0.03 $ 1.01 $ 0.21
- -----------------------------------------------------------------------------
</TABLE>
* Certain reclassifications have been made to conform to the current
presentation.
58
<PAGE>
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year
Ended Ended Ended
12/31/97 6/30/97 6/30/96
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.14% 6.56% 5.98%
Expected stock price volatility 40.07% 40.00% 40.00%
Expected dividend yield - - -
- -------------------------------------------------------------------------------
</TABLE>
For fiscal years 1996 and 1997 and the transition period, an expected life of
six years was used for all of the stock options except one as noted below, and
the weighted average fair value of options granted was $4.55, $6.87 and $7.35,
respectively. For a certain incentive stock option granted in fiscal year 1997
with a shorter term, an expected life of five years was used, and the weighted
average fair value of that option granted was $6.17. For fiscal years 1996 and
1997 and the transition period, the weighted average fair value of restricted
stock awarded was $8.88, $13.67 and $14.05, respectively.
The pro forma effect on net income for fiscal years 1996 and 1997 and the
transition period may not be representative of the pro forma effect on net
income in future years as the Statement 123 method of accounting for pro forma
compensation expense has not been applied to options granted prior to July 1,
1995.
(K) ACQUISITIONS
On March 29, 1996 the Company acquired an additional 45% interest in VIPress for
approximately $315,000, including approximately $85,000 in acquisition costs.
Subsequent to this purchase, the Company owned 90% of the capital stock of
VIPress. The acquisition was accounted for under the purchase method and,
accordingly, the results of VIPress since the date of acquisition have been
included in the Company's Consolidated Statements of Operations. Prior to
acquiring the additional 45% interest, the investment was accounted for under
the equity method and as such, the Company's proportionate share of net income
or loss from VIPress prior to the acquisition was included in nonoperating
income or expense. The acquisition resulted in goodwill of approximately
$106,000 which is being amortized over five years. The Company's interest in
VIPress may be reduced to a minimum of 80% by the end of calendar year 2000 as a
result of shares that may be sold for a nominal amount to two managing minority
partners generally pursuant to an incentive plan that requires certain
performance objectives to be met. At December 31, 1997 the Company's interest in
VIPress was 86%. Pro forma results reflecting this acquisition, assuming it had
been made at the beginning of each period presented prior to the acquisition,
would not be materially different from the results reported.
The Company owns a 20% interest and has an option to acquire the remaining
80% interest in duPont at a price based on fair market value as of December 31,
1999. duPont is the publisher of three duPont Registry magazines: A Buyers
Gallery of Fine Automobiles, A Buyers Gallery of Fine Homes and A Buyers Gallery
of Fine Boats. Previously, the Company was required to make loans to duPont to
fund its working capital requirements. These loans, with an interest rate of 1%
over the prime rate, amounted to $125,000 at June 30, 1996 and were paid off by
June 30, 1997.
(L) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended
12/31/97 6/30/97 6/30/96 6/30/95
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest $ 268 $ 480 $ 610 $ 774
Income taxes $1,545 $2,293 $1,851 $1,064
- -------------------------------------------------------------------------
</TABLE>
59
<PAGE>
(M) LEASE COMMITMENTS
The Company's principal lease commitments are for office space, a satellite
transponder used in its domestic pay television operations, and furniture and
equipment. The office leases provide for the Company's payment of its
proportionate share of operating expenses and real estate taxes in addition to
monthly base rent.
The Company's corporate headquarters were under terms of a 15-year lease,
which commenced September 1, 1989. In August of 1996 the Company renegotiated
this lease on more favorable terms, including a lower base rent which will
result in savings of approximately $2.0 million over the initial term of the
lease, combined with the Company obtaining certain expansion options in the
building. Further, the lease term was extended three years to 2007, with a
renewal option for an additional five years. The Entertainment Group's Los
Angeles office is under terms of a ten-year lease, which commenced April 1,
1992. The Publishing Group's New York office is under a lease with a term of
approximately 11 years, which commenced April 1, 1993. The Publishing Group's
Los Angeles photo studio is under terms of a ten-year lease, which commenced
January 1, 1994. These leases provide for base rent abatements; however, rent
expense is being charged to operations on a straight-line basis over the terms
of the leases. This resulted in liabilities of $5.3 million, $5.4 million and
$5.7 million at December 31, 1997, June 30, 1997 and June 30, 1996,
respectively, which are included in "Other noncurrent liabilities" in the
Consolidated Balance Sheets. In addition, during fiscal year 1993, the Company
entered into a five-year lease for the Catalog Group's suburban Chicago
operations facility. Due to the growth of the catalog business, the Company
began leasing a new larger facility in the same Chicago suburb under a 10 1/2
year lease, which commenced June 1, 1997. The lease under the previous facility
was terminated early as of August 31, 1997.
In December 1992, the Company executed a lease for its current satellite
transponder that became effective January 1, 1993. This operating lease is for a
term of approximately nine years and includes a purchase option. A $5.0 million
letter of credit was issued under the Company's revolving line of credit for the
benefit of the lessor to collateralize the Company's obligations under this
lease. Based upon the achievement in fiscal year 1997 of certain criteria
related to financial results, this letter of credit was irrevocably released
effective December 31, 1997.
The Company leases certain furniture and equipment for use in its
operations. The leases are for terms of two to five years and generally include
end-of-lease purchase options.
Rent expense for the transition period and fiscal years 1997, 1996 and 1995
was $5,232,000 $9,611,000, $9,177,000 and $8,854,000, respectively. There was no
contingent rent expense or sublease income in any of these periods.
The minimum commitments at December 31, 1997, under operating leases with
noncancelable terms in excess of one year, were as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Calendar year ending December 31 Leases
- ---------------------------------------------------------------------
<S> <C>
1998 $ 9,793
1999 9,051
2000 8,561
2001 7,834
2002 4,474
Later years 13,321
- ---------------------------------------------------------------------
Total minimum lease payments $53,034
=====================================================================
</TABLE>
(N) CABLE TELEVISION
Effective April 1, 1986, the Company assumed marketing and distribution
responsibilities for The Playboy Channel and other North American Playboy pay
television products (the "Service") from its former distributor, Rainbow
Programming Services Company ("Rainbow"). The termination agreement provided for
the assignment to the Company of all distribution contracts with cable system
operators and others that carried the Service.
Under the termination agreement, Rainbow was to receive a monthly royalty
of 5% of revenues received by the Company for the Service, subject to a minimum
royalty based on number of subscribers, as long as the Service is in operation.
These royalty payments were discontinued April 30, 1996, when the agreement
ended. The
60
<PAGE>
agreement provided for noncompetition in the North American distribution and
production of an adult-oriented pay television service by Rainbow as long as
royalty payments were being made.
(O) SEGMENT INFORMATION
The five industry segments in which the Company currently operates are as
follows: Publishing, Entertainment, Product Marketing, Casino Gaming and
Catalog. Publishing Group operations include the publication of Playboy
magazine; other domestic publishing businesses, comprising newsstand specials,
calendars and new media and ancillary businesses; and the licensing of
international editions of Playboy magazine. Entertainment Group operations
include the production and marketing of programming through Playboy TV, other
domestic television, international television and worldwide home video
businesses as well as the worldwide distribution of programming through
AdulTVision and the co-production of feature movies. Product Marketing Group
operations include licensing the manufacture, sale and distribution of consumer
products carrying one or more of the Company's trademarks and the licensing of
artwork owned by the Company. Casino Gaming Group operations include development
costs for the Rhodes Casino and other potential casino gaming ventures. Catalog
Group operations include the direct marketing of three catalogs: Critics' Choice
Video, Collectors' Choice Music and Playboy, combined with the marketing of
products through their respective online services, CCVideo, CCMusic and the
Playboy Store. Financial information relating to industry segments for the
transition period and fiscal years 1997, 1996 and 1995 is presented on page 28
of this Form 10-K Transition Report and is an integral part of these
consolidated financial statements.
(P) EMPLOYEE BENEFIT PLAN
The Company's Employees Investment Savings Plan is a defined contribution plan
consisting of two components, a profit sharing plan and a 401(k) plan. The
profit sharing plan covers all employees who have completed 12 months of service
of at least 1,000 hours. The Company's discretionary contribution to the profit
sharing plan is distributed to each eligible employee's account in an amount
equal to the ratio of each eligible employee's compensation, subject to Internal
Revenue Service limitations, to the total compensation paid to all such
employees. Contributions for the transition period and fiscal years 1997, 1996
and 1995 were approximately $275,000, $1,035,000, $620,000 and $200,000,
respectively.
Eligibility for the 401(k) plan is either upon date of hire or after an
employee has completed 12 months of service of at least 1,000 hours, depending
on the employee's annual salary. The Company makes matching contributions to the
401(k) plan based on each participating employee's contributions and eligible
compensation. In the transition period and fiscal years 1997, 1996 and 1995, the
maximum matching contributions were 3 1/2%, 3 1/2%, 2 3/4% and 2 3/4%,
respectively, of each employee's eligible compensation, subject to Internal
Revenue Service limitations. For calendar year 1998, the maximum match will be 3
1/2% of such compensation. The Company's matching contributions for the
transition period and fiscal years 1997, 1996 and 1995 related to this plan were
approximately $455,000, $920,000, $630,000 and $630,000, respectively.
Effective October 1, 1992, the Company established a Deferred Compensation
Plan, which permits certain employees and directors to annually elect to defer a
portion of their compensation. The Deferred Compensation Plan is available to
approximately 60 of the Company's most highly compensated employees and all
nonemployee directors. Employee participants could defer between 5% and 15% (in
1% increments) of salary, and up to 50% (in 10% increments) of payments due
under Executive Incentive Compensation Plans or sales commissions. Directors
could defer between 25% and 100% (in 25% increments) of their annual retainer
and meeting fees paid in cash. Amounts deferred under this plan are credited
with interest each quarter at a rate equal to the preceding quarter's average
composite yield on corporate bonds as published by Moody's Investor's Service,
Inc. ("Moody's"). All amounts deferred and interest credited are 100% vested
immediately and are general unsecured obligations of the Company. Such
obligations totaled $1,722,000, $1,540,000 and $1,186,000 at December 31, 1997,
June 30, 1997 and June 30, 1996, respectively, and are included in "Other
noncurrent liabilities" in the Consolidated Balance Sheets.
Effective January 1, 1998, the Company amended its Deferred Compensation
Plan, which increased the maximum deferral percentages and added new investment
alternatives as well as a Company match on certain contributions. Employee
participants may now defer between 6% and 25% (in 1% increments) of salary, and
up to 100% (in 10% increments) of payments due under Executive Incentive
Compensation Plans or sales commissions. Directors may now also defer Company
stock portions of their annual retainer in 25% increments up to 100%
61
<PAGE>
and 100% of their meeting fees. Five mutual fund options, in addition to the
Moody's corporate bond rate, are now available to all participants for their
cash deferrals. A Company match is provided to employees who participate in the
Deferred Compensation Plan and whose annual eligible earnings exceed the salary
limitation contained in the 401(k) plan.
(Q) CONTINGENCIES
Playboy TV's cable programming is delivered primarily through a communications
satellite transponder. The Company's current transponder lease, effective
January 1, 1993, contains protections typical in the industry against
transponder failure, including access to spare transponders on the same
satellite as well as transponders on another satellite currently in operation.
Access to the transponder may be denied under certain narrowly defined
circumstances relating to violations of law or threats to revoke the license of
the satellite owner to operate the satellite based on programming content.
However, the Company has the right to challenge any such denial and believes
that the transponder will continue to be available to it through the end of the
expected life of the satellite (currently estimated to be in 2004). The
Company's current lease term expires October 30, 2001.
In February 1996, the Company filed suit challenging Section 505 which,
among other things, regulates the cable transmission of adult programming, such
as the Company's domestic pay television programs. Management believes that the
Company's revenues attributable to its domestic pay television cable services
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, subscriber declines
and reduced carriage from cable operators due to aggressive competition for
carriage from all program suppliers. The Company has estimated that the
Entertainment Group's calendar year 1998 revenues will be reduced by
approximately $3.5 million, and approximately $25 million (at present value at
6%) over the next ten years, due to Section 505. These amounts do not take into
account the loss of revenues due to the slowing of access to new homes and of
upgrading of old homes from ten to 24 hours.
The Company believes that it has established adequate reserves in
connection with the General Notice received from the EPA in January 1993 related
to its discontinued resort hotel operations. See Note H.
(R) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the transition period and fiscal years 1997 and 1996 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Quarters Ended Six Months
------------------------- Ended
Six-Month Transition Period Ended December 31, 1997 Sept. 30 Dec. 31 12/31/97
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $68,214 $ 81,327 $149,541
Gross profit 11,121 11,762 22,883
Operating income 2,328 2,131 4,459
Income before cumulative effect of
change in accounting principle 1,095 1,047 2,142
Net income (loss) 1,095 (30) 1,065
Basic and diluted EPS
Income before cumulative effect of
change in accounting principle 0.05 0.05 0.10
Net income 0.05 - 0.05
Common stock price
Class A high 13 7/8 15 1/8
Class A low 10 3/8 12 3/16
Class B high 15 3/8 16 11/16
Class B low $10 3/4 $ 13 1/2
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended Fiscal Year
------------------------------------- Ended
Fiscal Year Ended June 30, 1997 Sept. 30 Dec. 31 Mar. 31 June 30 6/30/97
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $66,224 $79,779 $73,247 $77,373 $296,623
Gross profit 9,963 13,978 14,394 13,265 51,600
Operating income 2,429 5,265 4,667 3,384 15,745
Net income 1,037 2,825 2,510 15,022 21,394
Basic EPS 0.05 0.14 0.12 0.74 1.05
Diluted EPS 0.05 0.14 0.12 0.72 1.03
Common stock price
Class A high 14 7/8 12 1/2 15 5/8 15
Class A low 12 1/4 9 5/8 9 1/2 10 7/8
Class B high 15 1/4 12 3/4 16 3/8 16
Class B low $12 1/8 $ 9 1/2 $ 9 3/8 $11 1/4
Quarters Ended Fiscal Year
------------------------------------- Ended
Fiscal Year Ended June 30, 1996 Sept. 30 Dec. 31 Mar. 31 June 30 6/30/96
- -------------------------------------------------------------------------------------
Net revenues $62,263 $71,618 $66,257 $76,449 $276,587
Gross profit 8,579 11,120 9,555 13,086 42,340
Operating income 1,440 2,854 1,835 3,364 9,493
Net income 1,012 1,138 676 1,426 4,252
Basic and diluted EPS 0.05 0.06 0.03 0.07 0.21
Common stock price
Class A high 9 5/8 9 1/2 11 15 3/4
Class A low 7 7/8 8 5/8 8 3/8 10
Class B high 9 3/8 9 1/4 11 1/8 16 1/2
Class B low $ 7 3/8 $ 7 1/2 $ 7 1/2 $ 9 7/8
</TABLE>
The net loss for the quarter ended December 31, 1997 includes a charge of $1,077
reported as "Cumulative effect of change in accounting principle" as a result of
the Company's early adoption of a Statement of Position, Reporting on the Costs
of Start-Up Activities. See Note C.
Net income for the quarter ended June 30, 1997 includes a federal income tax
benefit of $13,486 related to net operating loss and tax credit carryforwards.
See Note B.
(S) SUBSEQUENT EVENT
On February 4, 1998, the Company and Spice announced an agreement whereby the
Company will acquire all of the outstanding shares of Spice, subject to the
satisfactory completion of the items discussed below. For each share of Spice
stock, shareholders will receive the sum of $3.60 in cash and approximately
0.1524 shares of the Company's Class B stock. The total transaction value,
including the assumption of debt, is expected to be approximately $95 million.
It is expected that the acquisition will be accounted for under the purchase
method of accounting. The Company expects to initially finance the cash portion
of the purchase price through a new bank credit agreement.
Under the terms of the agreement, Spice's shareholders will retain
ownership of Spice's digital operations center, its option to acquire the
outstanding stock of Emerald Media, Inc., a provider of adult entertainment in
the C-Band market, and certain rights to a library of adult films. Spice's
domestic networks, Spice and Adam & Eve, reached approximately 21.5 million
households at September 30, 1997 and reported revenues of $22.0 million for the
12 months ended September 30, 1997.
63
<PAGE>
Consummation of the proposed transaction is subject to due diligence
review, receipt of necessary government approvals, definitive documentation,
working capital and tax adjustments, approval by the Board of Directors of the
Company and Spice and the shareholders of Spice, receipt of a fairness opinion
by Spice and other customary closing conditions. Closing of the transaction is
expected to occur during the second quarter of calendar year 1998, however,
there is no assurance that any definitive agreement regarding the sale of Spice
will be reached or that the transaction will be completed.
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Playboy
Enterprises, Inc. and its Subsidiaries as of December 31, 1997, June 30, 1997
and June 30, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the six-month transition period ended
December 31, 1997, and for each of the three fiscal years in the period ended
June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Playboy
Enterprises, Inc. and its Subsidiaries as of December 31, 1997, June 30, 1997
and June 30, 1996, and the consolidated results of their operations and their
cash flows for the six-month transition period ended December 31, 1997, and for
each of the three fiscal years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note C to the Consolidated Financial Statements, the
Company changed its method of recognizing costs related to start-up activities
in the six-month transition period ended December 31, 1997.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 4, 1998
65
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial information
herein are the responsibility of the Company. The financial statements, which
include amounts based on judgments, have been prepared in accordance with
generally accepted accounting principles. Other financial information in this
Form 10-K Transition Report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and are properly recorded, that assets are
safeguarded and that accountability for assets is maintained. The system of
internal controls is characterized by a control-oriented environment within the
Company, which includes written policies and procedures, careful selection and
training of personnel, and internal audits.
Coopers & Lybrand L.L.P., independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of three
nonmanagement directors, meets periodically with Coopers & Lybrand L.L.P.,
management representatives and the Company's internal auditor to review internal
accounting control and auditing and financial reporting matters. Both Coopers &
Lybrand L.L.P. and the internal auditor have unrestricted access to the Audit
Committee and may meet with it without management representatives being present.
Christie A. Hefner
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Linda Havard
Executive Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
66
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Christie A. Hefner
Term Expires 1999
Director since 1979
Chairman of the Board and
Chief Executive Officer
Age 45
Ms. Hefner was appointed Chairman of the Board and Chief Executive Officer
of the Company in November 1988. From September 1986 to November 1988, she was
Vice Chairman of the Board, President and Chief Operating Officer. From February
1984 to September 1986, she was President and Chief Operating Officer; she had
been President since April 1982. From January 1978 to April 1982, she was a
Corporate Vice President. She joined the Company in 1975 as Special Assistant to
the Chairman of the Board. Ms. Hefner is also a member of the Board of Directors
of Sealy Corporation. Ms. Hefner is the daughter of Mr. Hugh M. Hefner, Editor-
in-Chief.
Dennis S. Bookshester
Term Expires 1999
Director since 1990
Age 59
Mr. Bookshester has been Chairman of the Board of Cutanix Corporation, a
company principally engaged in scientific skin research, since November 1997.
Prior to his current position, Mr. Bookshester was an independent business
consultant. From December 1990 to May 1991, he served as Chief Executive Officer
of Zale Corporation, a company principally involved in the retail sale of
jewelry. Mr. Bookshester was Corporate Vice Chairman, Chairman and Chief
Executive Officer of the Retail Group of Carson Pirie Scott & Co., positions
which he held from 1984 to 1989. In addition, Mr. Bookshester is a member of the
Board of Directors of Evans, Inc., Fruit of the Loom, Inc., Sundance Homes and
Arthur Treachers, Inc. Mr. Bookshester is on the Visiting Committee of the
University of Chicago Graduate School of Business. Mr. Bookshester is Chairman
of the Audit Committee of the Board and is a member of the Compensation
Committee of the Board.
David I. Chemerow
Term Expires 1999
Director since 1996
Age 46
Mr. Chemerow has been Executive Vice President and Chief Operating Officer
of GT Interactive Software Corp., a company principally engaged in publishing
computer games, since May 1997. Prior to that he was Executive Vice President
and Chief Financial Officer of ENTEX Information Services, Inc., a company
principally involved in personal computer systems integration, from April 1996.
Prior to joining ENTEX, he was Executive Vice President, Finance and Operations,
and Chief Financial Officer of the Company from 1990. From 1988 to 1990, he
served as President of Beechwood Capital Corporation, an investment company
involved in acquiring and operating businesses. Mr. Chemerow is also a member of
the Board of Directors of Dunham's Athleisure Corporation. Mr. Chemerow is a
member of the Audit Committee of the Board.
67
<PAGE>
Donald G. Drapkin
Term Expires 1999
Director since July 1997
Age 50
Mr. Drapkin has been Vice Chairman and Director of MacAndrews & Forbes
Holdings Inc. since March 1987. Prior to his current position, Mr. Drapkin was a
partner in the New York law firm of Skadden, Arps, Slate, Meagher & Flom from
1977 to 1987. In addition, Mr. Drapkin serves as Director of Algos
Pharmaceutical Corporation, BlackRock Asset Investors, Cardio Technologies,
Inc., The Coleman Company, Inc., Coleman Worldwide Corporation, The Cosmetic
Center, Inc., Genta, Inc., Revlon Consumer Products Corporation, Revlon, Inc.,
Revlon Worldwide Corporation, VIMRx Pharmaceuticals Inc. and Weider Nutrition
International Inc. Mr. Drapkin is a member of the Compensation Committee of the
Board.
Sol Rosenthal
Term Expires 1999
Director since 1985
Age 63
Mr. Rosenthal has been Of Counsel to the Los Angeles law firm of Blanc
Williams Johnston & Kronstadt, L.L.P. since May 1996. Prior to that he was a
senior partner in the law firm of Buchalter, Nemer, Fields & Younger from 1974
through April 1996. He has served as an Arbitrator in entertainment industry
disputes since 1977 and as the Writers Guild-Association of Talent Agents
Negotiator since 1978. Mr. Rosenthal is a former member of the Board of
Governors, Academy of Television Arts & Sciences, on which he served from 1990
to 1992; he is a former President of the Beverly Hills Bar Association and a
former President of the Los Angeles Copyright Society. In addition, Mr.
Rosenthal is a Director of Artista Management, A.G. Mr. Rosenthal is Chairman of
the Compensation Committee of the Board.
Richard S. Rosenzweig
Term Expires 1999
Director since 1973
Executive Vice President
Age 62
Mr. Rosenzweig has been Executive Vice President of the Company since
November 1988. From May 1982 to November 1988, he was Executive Vice President,
Office of the Chairman, and from July 1980 to May 1982, he was Executive Vice
President, Corporate Affairs. Before that, from January 1977 to June 1980, he
had been Executive Vice President, West Coast Operations. His other positions
with the Company have included Executive Vice President, Publications Group, and
Associate Publisher, Playboy magazine. He has been with the Company since 1958.
Sir Brian Wolfson
Term Expires 1999
Director since 1996
Age 62
Sir Brian Wolfson has been Chairman of Global Health Alternatives Inc., a
company principally involved in health products, since October 1995. From
January 1986 to June 1995, he served as Chairman of Wembley plc., a company
engaged in the sports and entertainment industry. From 1967 to 1970, he served
as joint managing director of Granada Group. He is currently a Director of Fruit
of the Loom, Inc., Kepner-Tregoe Inc., and Autotote Inc., Chairman of Natural
Health Trends, and a governor of the Joseph H. Lauder Institute of the
University of Pennsylvania. Sir Brian Wolfson is a member of the Audit Committee
of the Board.
68
<PAGE>
Hugh M. Hefner
Editor-in-Chief
Age 71
Mr. Hefner founded the Company in 1953. He was appointed to his present
position in November 1997. From November 1988 to November 1997, he was Chairman
Emeritus and Editor-in-Chief. From October 1976 to November 1988 Mr. Hefner
served as Chairman of the Board and Chief Executive Officer, and before that he
served as Chairman, President and Chief Executive Officer. Mr. Hefner is the
father of Ms. Christie A. Hefner, Chairman of the Board and Chief Executive
Officer.
Linda Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
Age 43
Ms. Havard was appointed to her present position in May 1997. From August
1982 to May 1997 she held various financial and management positions at Atlantic
Richfield Company ("ARCO"). From October 1996 to May 1997 Ms. Havard served as
ARCO's Senior Vice President in the Global Energy Ventures division. She also
served as ARCO's Vice President of Corporate Planning from January 1994 to
December 1996. Her other positions with ARCO included Vice President, Finance,
Planning and Control, ARCO Transportation Co. and President, ARCO Pipe Line Co.
Helen Isaacson
Executive Vice President and
President, Product Marketing Group
Age 51
Ms. Isaacson was appointed to her present position in October 1997. From
January 1997 to October 1997 she served as Executive Vice President of worldwide
licensing at the Marvel Comics Group, an entertainment company. From November
1991 to December 1996 Ms. Isaacson served as Senior Vice President of
international licensing and merchandising at Turner Home Entertainment, a wholly
owned subsidiary of Time Warner, Inc.
Herbert M. Laney
Executive Vice President and
President, Catalog Group
Age 53
Mr. Laney was appointed to his present position in December 1996. From
September 1995 to December 1996 he served as Senior Vice President and
President, Catalog Group. From June 1993 to September 1995 Mr. Laney served as
President, Catalog Group. From August 1990 to June 1993 he served as Senior Vice
President, Catalog Group. From June 1988 to August 1990 he served as Senior Vice
President, Direct Marketing.
Anthony J. Lynn
Executive Vice President and
President, Entertainment Group
Age 45
Mr. Lynn was appointed to his present position in June 1992. From 1991 to
1992 he served as President of international television distribution and
worldwide pay television at MGM-Pathe Communications Co., where he was Executive
Vice President from 1987 to 1991.
69
<PAGE>
Robert J. Perkins
Executive Vice President,
Chief Marketing Officer
Age 50
Mr. Perkins was appointed to his present position in October 1996. From
March 1995 to September 1996 he served as Senior Vice President of licensing and
marketing at Calvin Klein, Inc., a leading producer of designer apparel. From
March 1994 to February 1995 Mr. Perkins served as President of Q Direct, a data
base marketing subsidiary of QVC Inc. From March 1991 to March 1994 he was
Senior Vice President of Marketing at Pizza Hut Inc. and from April 1985 to
March 1991 he held a variety of positions, finally as President and Chief
Operating Officer, at the New York office of Chiat/Day/Mojo, a distinguished
advertising agency.
Garry W. Saunders
Executive Vice President and
President, Gaming Group
Age 46
Mr. Saunders was appointed to his present position in March 1998 after
serving as an independent consultant to the Company from October 1997. From July
1995 to July 1997 he served as Executive Vice President and Director of Gaming
Operations at ITT Caesars World, a casino resort corporation. From February 1994
to July 1995 he served as Executive Vice President and Director of Gaming
Operations of ITT Sheraton, a hotel and casino company. From 1987 to 1993 he
served as Executive Vice President of the Sands Hotel and Casino in Atlantic
City.
Howard Shapiro
Executive Vice President,
Law and Administration,
General Counsel and Secretary
Age 50
Mr. Shapiro was appointed to his present position in May 1996. From
September 1989 to May 1996, he served as Executive Vice President, Law and
Administration and General Counsel. From May 1985 to September 1989 Mr. Shapiro
served as Senior Vice President, Law and Administration and General Counsel.
From July 1984 to May 1985 he served as Senior Vice President and General
Counsel. From September 1983 to July 1984 he served as Vice President and
General Counsel. From May 1981 to September 1983 he served as Corporate Counsel.
From June 1978 to May 1981 he served as Division Counsel. From November 1973 to
June 1978 he served as Staff Counsel.
Buford F. Smith
Senior Vice President
and President, New Media Group
Age 54
Mr. Smith was appointed to his present position in March 1998. From
November 1996 until March 1998, Mr. Smith was President of Baywood Enterprises,
Inc., a management consulting company. From November 1986 to November 1996, he
held various management positions at Reuters America, a leading news and
information company, including President of Reuters New Media.
Martha O. Lindeman
Vice President, Corporate
Communications and
Investor Relations
Age 47
Ms. Lindeman was appointed to her present position in March 1992. From 1986
to 1992 she served as Manager of Communications at the Tribune Company, a
leading information and entertainment company.
70
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC")
and the New York Stock Exchange and Pacific Exchange. Officers, directors and
greater than 10% beneficial owners are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Information
regarding reporting compliance with respect to fiscal year 1997 is set forth in
the Company's proxy statement for the annual meeting held on November 6, 1997
and is incorporated herein by reference. Based solely on the Company's review of
the copies of such forms received by it, or written representations from certain
reporting persons that no other reports were required during the transition
period, all of the Company's officers, directors and greater than 10% beneficial
owners complied with all Section 16(a) filing requirements during the transition
period except as follows: Ms. Isaacson filed late a Form 3.
Item 11. Executive Compensation
- -------------------------------
The following tables set forth information regarding the compensation
received by the Company's Chief Executive Officer and the other four most highly
compensated executive officers, determined from the Company's transition period
(the "Named Executive Officers"), and for the last three fiscal years. The
first table ("Compensation Earned During and With Respect to Transition
Period") reflects salary and bonus, as well as the value of restricted stock
awards and stock options granted in prior years but which vested with respect to
or through the indicated transition period or fiscal year. The second and third
tables ("Summary Compensation Table" and "Aggregated Option Exercises in
Transition Period and Transition Period-End Option Values") are in the format
dictated by the applicable rules of the SEC. The Summary Compensation Table
reflects salary, bonus and other cash compensation earned in the designated
transition period and fiscal years as well as stock options and restricted stock
awards granted (without regard to vesting) in such transition period and fiscal
years. The third table reflects certain information regarding vested and
unvested stock options held as of December 31, 1997 and the value thereof as of
such date. No Named Executive Officer exercised any stock options during the
transition period.
71
<PAGE>
Compensation Earned During and With Respect to Transition Period
<TABLE>
<CAPTION>
Annual Compensation Vesting of Long-Term Compensation
---------------------------- ------------------------------------------------------
Transition Transition
Value of Estimated Period- Period-
Vested Tax Liability End Value of End Value of
Other Class B with Respect Class A Stock Class B Stock
Annual Restricted To Vesting of Underlying Underlying
Compen- Stock Restricted Exercisable Exercisable
Salary Bonus sation Awards Stock Options Options
Name and Principal Position Year(1) ($)(2) ($) ($) ($) ($) ($)(3)(4) ($)(3)(4)
- --------------------------- ------- -------- -------- -------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christie A. Hefner 1997.5 $249,990 $391,875 $1,706,849
Chairman of the Board and 1997 499,980 $178,781 $217,969(9) $70,731(9) 261,250 855,546
Chief Executive Officer 1996 450,008 337,506 248,438(10) 80,618(10) 446,875 1,410,507
1995 467,316 247,006 67,969 183,750
Anthony J. Lynn 1997.5 262,496 340,800 1,295,415
Executive Vice President 1997 524,992 757,700 76,295(9) 27,047(9) 582,561
And President, 1996 499,982 380,000 86,960(10) 30,827(10) 1,047,274
Entertainment Group 1995 483,318 10,938
Hugh M. Hefner 1997.5 374,995
Editor-in-Chief 1997 419,978 106,792
1996 399,986 160,000
1995 399,600 98,893
Marianne Howatson(5) 1997.5 199,992 120,000
Executive Vice President 1997 76,921 23,342 $15,000(7)
And President, Publishing
Group
Robert J. Perkins(6) 1997.5 199,992 82,813
Executive Vice President, 1997 298,450 95,350 60,228(8)
Chief Marketing Officer
</TABLE>
- ------------------------
(1) The transition period is identified as 1997.5 for purposes of this table and
included 13 pay periods.
(2) For fiscal year 1995, base salaries reflect compensation paid over 27 pay
periods as compared to fiscal years 1997 and 1996 in which base salaries
reflected compensation paid over 26 pay periods.
(3) Value of stock options under the 1989 Option Plan and the 1995 Stock
Incentive Plan that were exercisable as of the respective transition period-
and year-end are based on the difference between the closing price of Class
A Stock or Class B Stock, as applicable, on December 31 of the transition
period or on June 30 (or the last business day) of the indicated fiscal year
and the exercise price of such option. The closing price of the Class A
Stock was $13.875 at December 31, 1997, $11.50 at June 30, 1997, $14.875 at
June 28, 1996, and $8.00 at June 30, 1995. The closing price of the Class B
Stock was $15.6875 at December 31, 1997, $11.5625 at June 30, 1997, $14.75
at June 28, 1996, and $7.875 at June 30, 1995.
72
<PAGE>
(4) The period-to-period increase or decrease in value of stock underlying
exercisable options is a function of both fluctuations in the market price
of the Class A Stock and Class B Stock underlying options and the vesting
or exercise of options. The following tables reflect, for period-to-period
fluctuations in the value of Class A Stock and Class B Stock underlying
options, the amount of the fluctuation attributable to appreciation or
depreciation in the market value of such stock and the amount of any
increase attributable to the vesting of additional options. No Named
Executive Officer exercised any stock options during the transition period.
<TABLE>
<CAPTION>
Class A Stock
1997 to 1997.5 Increase in Value 1996 to 1997 Decrease in Value 1995 to 1996 Increase in Value
-------------------------------- ------------------------------ ------------------------------
Appreciation Vesting Depreciation Vesting Appreciation Vesting
of of of of of of
Name Stock Options Total Stock Options Total Stock Options Total
- ---- ------------ ------- ----- ------------ ------- ----- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ms. Hefner $130,625 $0 $130,625 $(185,625) $0 $(185,625) $378,125 $781 $378,906
Class B Stock
1997 to 1997.5 Increase in Value 1996 to 1997 Decrease in Value 1995 to 1996 Increase in Value
-------------------------------- ------------------------------ ------------------------------
Appreciation Vesting Depreciation Vesting Appreciation Vesting
of of of of of of
Name Stock Options Total Stock Options Total Stock Options Total
- ---- ------------ ------- ----- ------------ ------- ----- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ms. Hefner $835,313 $15,990 $851,303 $(645,469) $90,508 $(554,961) $1,134,375 $92,382 $1,226,757
Mr. Lynn 712,854 0 712,854 (550,842) 86,129 (464,713) 806,648 229,688 1,036,336
Mr. Perkins 0 82,813 82,813
</TABLE>
(5) Ms. Howatson joined the Company in April 1997. Accordingly, compensation
information is not provided for periods prior to fiscal year 1997. Ms.
Howatson's employment with the Company terminated as of December 31, 1997.
(6) Mr. Perkins joined the Company in October 1996. Accordingly, compensation
information is not provided for periods prior to fiscal year 1997.
(7) Represents amounts paid by the Company for Ms. Howatson for negotiation of
her employment agreement.
(8) Represents amounts paid by the Company for Mr. Perkins to relocate to
Chicago and for tax gross-ups related to such amounts.
(9) Values of vested restricted stock awards are based on the closing price of
Class B Stock on August 7, 1997, the date on which restrictions lapsed with
respect to 25% of the shares as a result of the Company's annual operating
income for fiscal year 1997 exceeding $10.0 million. As a result of such
vesting, each of the Named Executive Officers indicated became liable for
payment of taxes owed on the value of such vested shares. The Company did
not withhold shares of restricted stock to satisfy, or otherwise fund, such
tax obligations related to such vesting.
(10) Values of vested restricted stock awards are based on the closing price of
Class B Stock on August 5, 1996, the date on which restrictions lapsed with
respect to 25% of the shares as a result of the Company's annual operating
income for fiscal year 1996 exceeding $7.5 million. As a result of such
vesting, each of the Named Executive Officers indicated became liable for
payment of taxes owed on the value of such vested shares. The Company did
not withhold shares of restricted stock to satisfy, or otherwise fund, such
tax obligations related to such vesting.
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<PAGE>
Summary Compensation Table
The following table reflects salary, bonus and other cash compensation
earned in the transition period and the last three fiscal years as well as stock
options and restricted stock awards granted (without regard to vesting) in such
transition period and fiscal years.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
--------------------------- -------------------------
Other Securities
Annual Class B Underlying
Compensa- Restricted Options All Other
Salary Bonus tion Stock Class B Compensation
Name and Principal Position Year(1) ($)(2) ($) ($) Awards(3)($) Stock (#) ($)
- ------------------------------- ------ -------- -------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Christie A. Hefner 1997.5 $249,990 $ 3,709(12)
Chairman of the Board and 1997 499,980 $178,781 75,000(8) 11,007
Chief Executive Officer 1996 450,008 337,506 7,721
1995 467,316 247,006 $684,375 75,000(9) 5,378
Anthony J. Lynn 1997.5 262,496 340,800 2,834(12)
Executive Vice President 1997 524,992 757,700 11,315
and President, 1996 499,982 380,000 7,683
Entertainment Group 1995 483,318 239,531 5,578
Hugh M. Hefner 1997.5 374,995 2,389(12)
Editor-in-Chief 1997 419,978 106,792 11,057
1996 399,986 160,000 8,075
1995 399,600 98,893 5,026
Marianne Howatson(4) 1997.5 199,992 120,000 535,394(12)
Executive Vice President 1997 76,921 23,342 $15,000(6) 225,000 75,000(10)
and President, Publishing
Group
Robert J. Perkins(5) 1997.5 199,982 3,089(12)
Executive Vice President, 1997 298,450 95,350 60,228(7) 185,625 100,000(11)
Chief Marketing Officer
</TABLE>
- ------------------------------------------
(1) The transition period is identified as 1997.5 for purposes of this table and
included 13 pay periods.
(2) For fiscal year 1995, base salaries reflect compensation paid over 27 pay
periods as compared to fiscal years 1997 and 1996 in which base salaries
reflected compensation paid over 26 pay periods.
(3) Values of restricted stock awards under the 1995 Stock Incentive Plan shown
in the Summary Compensation Table are based on the closing price of Class B
Stock on the date of grant. As of December 31, 1997, Ms. Hefner held 75,000
shares of restricted Class B Stock, valued at $1,176,563; Mr. Lynn held
26,250 shares of restricted Class B Stock, valued at $411,797; Ms. Howatson
held 15,000 shares of restricted Class B Stock, valued at $235,313 and Mr.
Perkins held 15,000 shares of restricted Class B Stock, valued at $235,313.
The restrictions on the stock awards granted to Ms. Hefner and Mr. Lynn
lapse in increments of 25% of the shares at the end of any fiscal year,
beginning with fiscal year 1996, during which annual operating income first
equals or exceeds $7.5 million; $10.0 million; $15.0 million; and $20.0
million; in each case less expenses related to the vesting of such shares.
In August 1996, restrictions lapsed on 25% of the shares as a result of
annual operating income for fiscal year 1996 exceeding $7.5 million and in
August 1997, restrictions lapsed on an additional 25% of the shares as a
result of annual operating income for fiscal year 1997 exceeding $10.0
million. The restrictions on the stock
74
<PAGE>
awards granted to Ms. Howatson would have lapsed in increments of 33% and
67% of the shares at the end of any fiscal year during which annual
operating income first equals or exceeds $15.0 million and $20.0 million,
respectively, in each case after deducting expenses related to the vesting
of restricted shares at such income level. All restricted shares held by
Ms. Howatson were canceled upon her termination of employment. The
restrictions on the stock awards granted to Mr. Perkins lapse in increments
of 50% of the shares at the end of any fiscal year during which annual
operating income first equals or exceeds $15.0 million and $20.0 million;
in each case after deducting expenses related to the vesting of restricted
shares at such income level. Dividends are not paid on restricted Class B
Stock.
(4) Ms. Howatson joined the Company in April 1997. Accordingly, compensation
information is not provided for periods prior to fiscal year 1997. Ms.
Howatson's employment with the Company terminated as of December 31, 1997.
(5) Mr. Perkins joined the Company in October 1996. Accordingly, compensation
information is not provided for periods prior to fiscal year 1997.
(6) Represents amounts paid by the Company for Ms. Howatson for negotiation of
her employment agreement.
(7) Represents amounts paid by the Company for Mr. Perkins to relocate to
Chicago and for tax gross-ups related to such amounts.
(8) Represents two stock options granted in fiscal year 1997 under the 1995
Stock Incentive Plan. The first option is an incentive stock option for
6,779 shares of Class B Stock, with an exercise price of $16.225 (110% of
fair market value on the date of grant), and an expiration date of July 1,
2001. The second option is a non-qualified stock option for 68,221 shares
of Class B Stock, with an exercise price of $14.75 (100% of fair market
value on the date of grant), and an expiration date of July 1, 2006. Both
options are exercisable in equal annual increments over a four-year period
beginning July 1, 1997.
(9) Represents two stock options granted in fiscal year 1995 under the 1995
Stock Incentive Plan. The first option is an incentive stock option for
43,835 shares of Class B Stock, with an exercise price of $10.3125 (110% of
fair market value on the date of grant), and an expiration date of February
6, 2000. The second option is a non-qualified stock option for 31,165
shares of Class B Stock, with an exercise price of $9.375 (100% of fair
market value on the date of grant), and an expiration date of February 6,
2005. Both options are exercisable in equal annual increments over a four-
year period beginning February 6, 1996.
(10) Represents an incentive stock option granted in fiscal year 1997 under the
1995 Stock Incentive Plan which is exercisable in equal annual increments
over a four-year period beginning April 21, 1998. The option terminated in
connection with Ms. Howatson's employment termination.
(11) Represents an incentive stock option granted in fiscal year 1997 under the
1995 Stock Incentive Plan which is exercisable in equal annual increments
over a four-year period beginning October 1, 1997. The option expires on
October 1, 2006.
(12) The amounts disclosed:
(a) Include Company contributions of $1,474 on behalf of Ms. Hefner and
Messrs. Lynn, Hefner and Perkins in the transition period under the
Company's Employees Investment Savings Plan.
(b) Include Company matching contributions of the following amounts in the
transition period under the Company's Employees Investment Savings
Plan on behalf of Ms. Hefner, $2,235; Mr. Lynn, $1,360; Mr. Hefner,
$915; and Mr. Perkins, $1,615.
(c) Represent termination payments to Ms. Howatson pursuant to the terms
of her employment contract.
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<PAGE>
Aggregated Option Exercises In Transition Period
and Transition Period-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at in-the-Money Options at
Transition Period-End (#) Transition Period-End(1) ($)
---------------------------------------------- ----------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------------- ---------------------- --------------------- ------------------------
Class A Class B Class A Class B Class A Class B Class A Class B
Stock Stock Stock Stock Stock Stock Stock Stock
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christie A. Hefner
Fiscal year 1990 grant 50,000 150,000 $359,375 $1,350,000
Fiscal year 1992 grant 5,000 15,000 32,500 124,688
Fiscal year 1995 grant 37,500 37,500 216,171 $216,172
Fiscal year 1997 grant 1,694 5,085 (2) (2)
Fiscal year 1997 grant 17,056 51,165 15,990 47,967
Anthony J. Lynn
Fiscal year 1992 grant 140,000 1,006,250
Fiscal year 1994 grant 32,813 10,937 289,165 96,382
Marianne Howatson
Fiscal year 1997 grant 75,000 51,563
Robert J. Perkins
Fiscal year 1997 grant 25,000 75,000 82,813 248,438
</TABLE>
(1) Based on a closing price for Class A Stock of $13.875 per share and for
Class B Stock of $15.6875 per share on December 31, 1997 as reported in the
New York Stock Exchange Composite Listing.
(2) Option exercise price exceeded closing price as of December 31, 1997.
Director Compensation
Prior to July 1997, nonemployee directors received an annual fee of
$25,000, pro rated from the effective date of their election and paid quarterly.
An additional fee of $750 ($1,000 beginning in July 1997) was paid for each in-
person Board meeting attended by a nonemployee director. In addition, from time
to time the Board compensated members of committees for extra time and effort
expended on the Company's affairs. For the transition period, Messrs.
Bookshester, Chemerow, Drapkin and Rosenthal and Sir Brian Wolfson each earned
$14,500.
Since November 1997, the 1997 Directors' Plan has provided that, except to
the extent payments are deferred as described below, each nonemployee director
(i) must receive the value of his fees for attending Board and committee
meetings (currently $1,000 per Board meeting) in the form of Class B Stock
("Mandatory Fee Shares") and (ii) can choose to receive up to 100% (in 25%
increments) of his annual retainer (currently $25,000) in the form of Class B
Stock ("Voluntary Shares"). The number of Mandatory Fee Shares and Voluntary
Shares to be issued is calculated quarterly by dividing the cash amount at issue
(meeting fees and the portion of annual retainer attributable to that quarter
and to be paid in Class B Stock) by the market value of the Class B Stock on the
last trading date of the fiscal quarter. Mandatory Fee Shares and Voluntary
Shares are issued in the quarter following the quarter in which such shares are
earned. During the transition period, each of Messrs. Bookshester and Rosenthal
and Sir Brian Wolfson earned 63 Mandatory Fee Shares and Messrs. Chemerow and
Drapkin each deferred 63 Mandatory Fee Shares, the value of which is included in
the $14,500 amount referred to in the preceding paragraph.
76
<PAGE>
The 1997 Directors' Plan also permits the Board to grant options, stock
grants and restricted stock awards to nonemployee directors and to set the terms
of those awards. Exercise prices of options must be equal to or greater than
market value on the date of grant.
During the transition period, each nonemployee director (Messrs.
Bookshester, Chemerow, Drapkin and Rosenthal and Sir Brian Wolfson) received
5,000 shares of restricted Class B Stock under the 1997 Directors' Plan pursuant
to a restricted stock agreement. The restrictions will lapse with respect to 30%
of the shares covered thereby after the first fiscal year in which the Company's
operating income (after deducting expenses related to the vesting of restricted
shares at such income level) exceeds $15 million and with respect to 100% of the
shares covered thereby (less any previously vested shares) after the first
fiscal year in which the Company's operating income (after deducting expenses
related to the vesting of restricted shares at such income level) exceeds $20
million. Notwithstanding the foregoing, all restrictions on such shares will
lapse (if not previously lapsed) in July 2007 if the director remains a
nonemployee director through such date. The value (based on closing price) of
5,000 shares of Class B Stock on the date of grant of these restricted shares
was $66,563.
Since October 1992, nonemployee directors have also been eligible to
participate in the Company's Deferred Compensation Plan ("DCP") for
nonemployee directors. Each nonemployee director may elect to defer any amount
between 25% and 100% (in 25% increments) of their annual fees and 100% of per-
meeting payments. Nonemployee directors who are former employees of the Company
may also transfer into the DCP amounts credited to a similar deferred
compensation plan for employees. The amount deferred tracks various investment
options, including "phantom" shares of Class B stock. All amounts representing
fees for attending Board and committee meetings must be invested in the
"phantom" Class B stock investment option. All deferred amounts and earnings
thereon are 100% vested immediately and are general unsecured obligations of the
Company. DCP accounts are paid in a cash lump sum or in specified cash
installments to directors upon their death or upon termination of service.
Directors may also request payment of their accounts following a Change in
Control of the Company (as defined in the DCP). The DCP was amended effective
January 1, 1998. See Note P of Notes to Consolidated Financial Statements.
Each nonemployee director is also a participant in the 1991 Directors'
Plan. Under the 1991 Directors' Plan, each nonemployee director is granted a
nonqualified stock option to purchase shares of Class B Stock. An aggregate of
80,000 shares of Class B Stock are available for grant under the 1991 Directors'
Plan. Each option is exercisable in four equal annual installments, beginning on
the first anniversary of the date such options were initially granted, unless
accelerated under certain circumstances set forth in the 1991 Directors' Plan.
All of such installments are cumulative and may be exercised in whole or in
part. Options granted under the 1991 Directors' Plan generally expire ten years
after the date of grant, though they may expire earlier. Shares issued upon
exercise of options granted under the 1991 Directors' Plan may be either
treasury shares or newly issued shares. During the transition period, an option
for 10,000 shares of Class B Stock with an exercise price of $11.5625 was
granted to Mr. Drapkin upon his joining the Board.
Employment And Change in Control Agreements
And Incentive Compensation Plans
To aid the Company in retaining its most senior executives and certain
other officers, the Board approved Change in Control Agreements (the
"Agreements"), which provide for the payment of specified benefits to selected
officers in the event their employment terminates after a "change in control"
(defined below) of the Company. Ms. Hefner and Messrs. Lynn and Perkins are
beneficiaries of this program. Ms. Howatson was a beneficiary of this program
prior to the termination of her employment. Each Agreement provides that (i) a
lump-sum cash payment will be made within ten days following termination, equal
to 300% of the sum of the officer's annual base salary in effect immediately
prior to the occurrence of the change in control and the maximum bonus for the
officer's position under the Executive Incentive Compensation Plan (the
"Program") established for the then applicable fiscal year; (ii) the amount of
the payment would be subject to reduction so that no portion would be subject to
the excise tax provision of the Internal Revenue Code of 1986, as amended (the
"Code"), but only if the officer would obtain a net after-tax benefit from
such reduction; (iii) the officer will be allowed to continue his or her
participation in then existing welfare benefit plans, such as medical insurance,
for up to a year from the effective date of termination; (iv) it will have an
initial five-year term, automatically extended on each anniversary of its
execution unless the Company or the officer gives notice that it or the officer
does not wish to extend the Agreement; and (v) payments become due and benefits
are provided if, within 18 months after a change in control, the employee is
involuntarily terminated for reasons other than death, disability or "cause"
(defined below), or voluntarily terminates employment for certain reasons. A
"change in control" is defined as (1) any liquidation or dissolution of the
Company; (2) a sale, exchange or other disposition of Playboy magazine; (3) any
occurrence by which The Hugh M. Hefner 1991 Trust and Christie Hefner (who is
deemed to hold
77
<PAGE>
shares beneficially owned by the Trust to the extent Ms. Hefner has sole voting
power with respect to such shares) cease, collectively, to hold at least 50% of
the Company's stock entitled to vote generally in the election of Company
directors; and (4) the merger, consolidation or reorganization of the Company,
or sale of all or substantially all of the Company's assets, unless such
transaction is initiated by the Company and, as a result of the transaction, not
less than a majority of the combined voting power of the securities of the
surviving or transferee corporation is held by persons who held not less than a
majority of the combined voting power of the outstanding voting stock of the
Company immediately prior to the transaction. Under the Agreements, "cause" is
defined as conviction of a crime involving dishonesty, fraud or breach of trust,
or willful engagement in conduct materially injurious to the Company. The
Agreements also provide that the reasons for which the officer may voluntarily
terminate employment without forfeiture of benefits include failure to maintain
the officer in the position held prior to the change in control, removal of the
officer from the Board, assignment to the officer of duties materially
inconsistent with the authorities and responsibilities exercised prior to the
change in control, an aggregate reduction in the officer's cash compensation, a
termination or reduction in scope or value of the officer's employee benefits, a
good-faith determination by the officer that, as a result of a change in
circumstances following a change in control, the officer is unable to carry out
the authorities or responsibilities of the officer's position, or requiring the
officer to perform duties beyond a 50-mile radius from the officer's employment
immediately prior to the change in control, or to travel at least 50% more than
was previously required in any of the three years prior to the change in
control.
Effective June 1, 1992, the Company hired Anthony J. Lynn, pursuant to an
employment contract, as President of its Entertainment Group. Mr. Lynn is
charged with the responsibility of managing the Entertainment Group's
television, home video and international operations. Mr. Lynn's employment
contract, as amended, extends through June 30, 2000, unless terminated earlier
pursuant to its terms and conditions. Mr. Lynn is to receive "Base Compensation"
ranging from $525,000 (for fiscal year 1998) to a maximum of $550,000 per year
(beginning with fiscal year 1999) during the amended term plus all benefits
otherwise accorded to senior executives of the Company in similar positions.
During the term of the contract, management shall also recommend to the
Compensation Committee the grant of options to Mr. Lynn should such grants be
made generally to other members of senior management. Upon termination of his
employment, Mr. Lynn is entitled to receive all or a portion of his Base
Compensation and benefits, depending on the date and circumstances of such
termination. If the Company terminates Mr. Lynn without cause, he is entitled to
receive a one-time payment equal to his Base Compensation in the year in which
such termination occurs.
Mr. Lynn may also receive compensation under the Playboy Enterprises, Inc.
Incentive Compensation Plan for Anthony J. Lynn (the "Lynn Plan"), which
provides Mr. Lynn with the opportunity to receive compensation based on the
performance of the Company's Entertainment Group. The Lynn Plan also provides
Mr. Lynn with a cash bonus in the event of certain dispositions of the equity or
assets of the Entertainment Group.
The Lynn Plan entitles Mr. Lynn to receive contingent compensation for each
fiscal year ("Contingent Compensation") equal to 5% of the amount by which the
Entertainment Group's Pre-tax Profits for such fiscal year exceed $2.35
million; provided that if the sum of $550,000 ($525,000 for fiscal year 1997)
plus such fiscal year's Contingent Compensation equals $2,000,000, any
additional Contingent Compensation payable to Mr. Lynn for such fiscal year will
equal 2.5% of the amount by which the Entertainment Group's Pre-tax Profits
exceed $2.35 million. With respect to the transition period, Contingent
Compensation was equal to 5% of the amount by which the Entertainment Group's
Pre-tax Profit during such period exceeded $1.175 million. The Entertainment
Group's Pre-tax Profits is defined under the Lynn Plan as the amount, if any, by
which the total net revenues of the Entertainment Group exceed all reasonable
and applicable operating expenses attributable to same, in accordance with
"Generally Accepted Accounting Principles" computed consistent with methods
utilized by the Company and the Company's outside auditors in the preparation of
the Company's audited financial statements. In computing the Pre-tax Profits of
the Entertainment Group for any period, there shall be allowed all fair and
reasonable allocation of items of revenue and expenses between divisions,
subsidiaries and affiliates of the Company, including, but not limited to,
intercompany sales, expenses such as rent, occupancy, general administrative and
personnel salaries, MIS, insurance, employee benefits costs, security, payroll
processing, legal and tax advisory fees, depreciation, profit sharing and
auditing expenses. In addition, the effect of any One Time Gain or Loss (defined
below) accounted for as part of the Entertainment Group shall be amortized
evenly over four years, beginning in the month of occurrence, for purposes of
calculating Pre-tax Profits for any period, regardless of how the transaction is
accounted for under Generally Accepted Accounting Principles. A "One Time Gain
or Loss" is a gain or loss resulting from a transaction not in the ordinary
course of business and which does not result in an Equity Bonus (as described
below). Profits or losses from any other period shall not, except as described
above for One Time Gains or Losses, be carried over or back to any other period
or otherwise be taken into consideration in computing the Pre-tax Profits of a
particular period. The Lynn Plan entitles Mr. Lynn to receive Contingent
Compensation for the 1998, 1999 and 2000 fiscal years, and for each fiscal year
after fiscal
78
<PAGE>
year 2000 unless notice is given by the Compensation Committee to Mr. Lynn that
the provisions of the Lynn Plan pertaining to Contingent Compensation will not
apply to the specified fiscal year after fiscal year 2000. Mr. Lynn's Contingent
Compensation with respect to the transition period was $340,800.
If Mr. Lynn's employment is terminated "for cause," Mr. Lynn will receive
all Contingent Compensation payable with respect to all periods prior to the
fiscal year during which the Company notifies Mr. Lynn that his employment is
terminated. If Mr. Lynn's employment is terminated because of Mr. Lynn's death
or disability, he (or his estate or personal representative, as applicable) will
receive all unpaid Contingent Compensation payable with respect to all periods
prior to the fiscal year during which such death or disability occurs plus a
prorated percentage of the Contingent Compensation for such fiscal year. If Mr.
Lynn's employment is terminated by the Company without cause, he will receive
100% of the Contingent Compensation to which Mr. Lynn would have been entitled
for and only for the year in which such termination occurs, reduced by amounts
payable to Mr. Lynn pursuant to Mr. Lynn's Change in Control Agreement
(described above).
If the Company directly or indirectly sells, transfers or otherwise
disposes of an equity interest in Playboy Entertainment Group, Inc. ("PEGI") or
all or a portion of the assets comprising the Playboy Entertainment Group
operations (except sales of assets or operations that contributed less than 25%
of the Group's total Pre-tax Profits in the immediately preceding fiscal year or
less than a 25% equity interest) to a third party (including a sale to the
public) during Mr. Lynn's employment or within three (3) months following the
termination of Mr. Lynn's employment (an "Equity Disposition Transaction"), then
Mr. Lynn will receive a one-time Equity Bonus equal to the product of EB Pre-tax
Profits times the Remaining Term. EB Pre-tax Profits is defined in the Lynn Plan
as (i) in the case of the sale, transfer or other disposition of an equity
interest in PEGI entitling Mr. Lynn to an Equity Bonus, the total Pre-tax
Profits of PEGI for the fiscal year immediately preceding the Equity Disposition
Transaction times the fully-diluted percentage equity interest in PEGI acquired
by the third party, and (ii) in the case of a sale, transfer or other
disposition of all or a portion of the assets comprising the Entertainment Group
entitling Mr. Lynn to an Equity Bonus, that portion of the Pre-tax Profits of
the Entertainment Group generated or attributable to such assets for the fiscal
year immediately preceding the Equity Disposition Transaction. Remaining Term is
defined in the Lynn Plan as the lesser of (i) three (3) or (ii) the number
arrived at by dividing by 12 the number of full months remaining in Mr. Lynn's
employment term. The payment of the Equity Bonus, if any, will be in addition to
any Contingent Compensation payable to Mr. Lynn under the Lynn Plan. The Equity
Bonus will be payable only in connection with an Equity Distribution which
constitutes a bona fide transfer of an equity interest in PEGI or a bona fide
sale of assets and will not be payable in connection with any other transaction
(whether in the form of joint ventures, co-productions or otherwise) which
represents a financing transaction. The Company is prohibited from structuring a
transaction which would otherwise qualify as a sale or distribution of any
equity interest in PEGI or a sale of assets of the Entertainment Group as a
financing transaction for the purpose of frustrating the provisions of the Lynn
Plan.
Effective April 21, 1997, Marianne Howatson joined the Company as its
Executive Vice President and President of the Publishing Group. Pursuant to an
agreement related to Ms. Howatson's employment, she received an annual base
salary of $400,000 (which was to be increased annually at a rate of no less than
5%) and was entitled to participate in the Program at a maximum level for fiscal
year 1997 of 60% of her base salary earned, 50% of which amount ($120,000) was
guaranteed in respect of fiscal year 1998 and was deemed earned in the
transition period. Ms. Howatson's bonus under the Program was based in part on
performance of the Publishing Group and in part on performance of the Company.
Pursuant to the agreement, Ms. Howatson was to receive profit participation each
fiscal year in an amount equal to 5% of the amount by which the Publishing
Group's pre-tax profits were greater than the previous fiscal year's pre-tax
profits. The pre-tax profits of the Publishing Group were calculated in a manner
similar to the calculation of the Entertainment Group's Pre-tax Profits under
the Lynn Plan. Pursuant to the agreement, Ms. Howatson was entitled to receive a
full year's salary and, during the first year of her agreement, her base salary
through her first anniversary of employment if her employment was terminated for
any reason other than cause, described as conviction of a crime involving
dishonesty, fraud or breach of trust, or engaging in conduct materially
injurious to the Company, or in the event of a constructive termination without
cause, defined as including a reduction in her compensation, a removal from her
position or a material diminution in her duties. In connection with a
reorganization of the Company's Publishing Group, Ms. Howatson's employment
terminated effective December 31, 1997. Ms. Howatson is entitled to severance
payments under her employment agreement. Such payments total $535,394.
Effective October 1, 1997, Robert J. Perkins joined the Company as its
Executive Vice President, Chief Marketing Officer. Pursuant to an agreement
related to Mr. Perkins' employment, he receives an annual base salary of
$400,000 and is entitled to participate in the Program with an annual target
award opportunity of 50% of his base salary earned. The Company also agreed to
cover certain expenses related to Mr. Perkins' relocation to Chicago. Pursuant
to
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<PAGE>
the agreement, Mr. Perkins is entitled to receive a full year's severance (based
on his salary at that time) if his employment is terminated for any reason other
than cause, which is described as conviction of a crime involving dishonesty,
fraud or breach of trust, or engaging in conduct materially injurious to the
Company.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during the transition period were
Sol Rosenthal, Chairman, Dennis S. Bookshester and Donald G. Drapkin.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
Voting Securities and Principal Holders Thereof
As of February 28, 1998, the only party known to the Company to be the
beneficial owner of 5% or more of the Company's voting securities was:
<TABLE>
<CAPTION>
Number of
Shares
of Class A Percent
Name and Address Stock of Class
- ---------------- ---------- --------
<S> <C> <C>
Hugh M. Hefner, Trustee
The Hugh M. Hefner 1991 Trust (1)
9242 Beverly Boulevard
Beverly Hills, CA 90210............. 3,321,836 69.95%
</TABLE>
- ------------
(1) Mr. Hefner, founder of the Company and Editor-in-Chief of Playboy magazine,
owns these shares through The Hugh M. Hefner 1991 Trust. Mr. Hefner has sole
investment and voting power over these shares of Class A Stock.
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<PAGE>
Beneficial Ownership of Common Stock by Directors and Executive Officers
The following table sets forth, as of February 28, 1998, the number and
percentage of shares of Class A Stock and Class B Stock beneficially owned by
each Director, by each of the Named Executive Officers and by all Directors and
Executive Officers as a Group. As used herein, ''beneficially owned'' means the
sole or shared power to vote or direct the voting of a security and/or the sole
or shared power to dispose or direct the disposition of a security.
<TABLE>
<CAPTION>
Shares of Percent of Shares of Percent
Name of Director or Class A Class A Class B Class B
Named Executive Officer(1) Stock(2) Stock Stock(2) Stock
-------------------------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C>
Dennis S. Bookshester(3)(4)........................... 3,000 * 21,500 *
David I. Chemerow(3)(4)............................... 800 * 37,200 *
Donald G. Drapkin(4).................................. 0 * 5,000 *
Christie A. Hefner(3)(4).............................. 72,274 1.50 360,928 2.25
Hugh M. Hefner........................................ 3,321,836 69.95 7,965,508 50.46
Marianne Howatson..................................... 0 * 0 *
Anthony J. Lynn(3)(4)................................. 600 * 204,066 1.28
Robert J. Perkins(3)(4)............................... 0 * 40,289 *
Sol Rosenthal(3)(4)................................... 252 * 20,256 *
Richard S. Rosenzweig(3)(4)........................... 25,365 * 111,095 *
Sir Brian Wolfson(3)(4)............................... 2,500 * 10,000 *
All Directors and Executive Officers as a Group
(15 persons)(3)(4)................................... 3,461,692 71.17 9,045,658 54.23
</TABLE>
- ------------
*Less than 1% of the total shares outstanding.
(1) See Part III. Item 10. "Directors and Executive Officers of the Registrant."
(2) In each case, beneficial ownership consists of sole voting and investment
power, with the exception of Mr. Rosenthal, who owns two shares of Class A
Stock and six shares of Class B Stock as custodian for his son. Mr.
Rosenthal disclaims beneficial ownership of these shares. As of February 28,
1998, all Directors and Executive Officers as a Group shared voting and
investment power over 52 shares of Class A Stock and 156 shares of Class B
Stock.
(3) Includes the following shares of Class A Stock and Class B Stock which are
subject to installments of stock option grants, including those made
pursuant to the Company's 1989 Option Plan, the 1995 Stock Incentive Plan
and the 1991 Directors' Plan, which are either exercisable, or are
exercisable within 60 days of February 28, 1998.
<TABLE>
<CAPTION>
Director or Class A Class B
Named Executive Officer Stock Stock
----------------------- ------- -------
<S> <C> <C>
Mr. Bookshester....................................................... -- 12,500
Mr. Chemerow.......................................................... -- 2,500
Ms. Hefner............................................................ 55,000 240,000
Mr. Lynn.............................................................. -- 172,813
Mr. Perkins........................................................... -- 25,000
Mr. Rosenthal......................................................... -- 12,500
Mr. Rosenzweig........................................................ 25,000 90,000
Sir Wolfson........................................................... -- 5,000
All Directors and Executive Officers as a Group (11 persons).......... 115,000 730,938
</TABLE>
81
<PAGE>
(4) Includes the following shares of Class B Stock which are subject to the
vesting of restricted stock awards made pursuant to the 1995 Stock Incentive
Plan and the 1997 Directors' Plan.
<TABLE>
<CAPTION>
Director or Initial Unvested
Named Executive Officer Grant Portion
-------------------------- ------- --------
<S> <C> <C>
Mr. Bookshester.............................................. 5,000 5,000
Mr. Chemerow................................................. 5,000 5,000
Mr. Drapkin.................................................. 5,000 5,000
Ms. Hefner................................................... 75,000 37,500
Mr. Lynn..................................................... 26,250 13,124
Mr. Perkins.................................................. 15,000 15,000
Mr. Rosenthal................................................ 5,000 5,000
Mr. Rosenzweig............................................... 20,000 10,000
Sir Wolfson.................................................. 5,000 5,000
All Directors and Executive Officers as a Group (14 persons). 258,750 164,374
</TABLE>
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The Company owns a 29-room mansion located on 5 1/2 acres in Los Angeles,
which is used for various corporate activities, including serving as a valuable
location for video production and magazine photography, business meetings,
enhancing the Company's image, charitable functions and a wide variety of
promotional and marketing purposes. The Mansion generates substantial publicity
and recognition, which increases public awareness of the Company and its
products and services. Facilities at the Mansion include a tennis court,
swimming pool, gymnasium and other recreational facilities as well as extensive
film, video, sound and security systems. The Mansion also includes
accommodations for guests and serves as Mr. Hefner's office and the residence
for his family (the "Hefner Family"). The Mansion has a full-time staff which
maintains it, serves in various capacities at the functions held there and
provides the Hefner Family, their guests, and the Company's guests with meals,
beverages and other services.
Under a 1979 lease entered into with the Company, the annual rent for the
Hefner Family's basic Mansion accommodations, and the Mansion's facilities,
utilities and attendant services is to be determined by independent expert
appraisals based on comparable hotel accommodations. In addition, Mr. Hefner is
required to pay the sum of the per unit value of nonbusiness meals, beverages
and other benefits received by the Hefner Family and any of their personal
guests. Standard food and beverage unit values are determined by independent
expert appraisals based on fair market values. Valuations for both basic
accommodations and standard food and beverage units are to be reappraised every
three years, with annual adjustments made on the basis of appropriate consumer
price index figures in other years. A reappraisal occurred in October 1997 and,
due to the change in fiscal year-end, will be used for calculating Mr. Hefner's
benefits through December 31, 2000, a three and one half year period rather than
the usual three years. Mr. Hefner is also responsible for the cost of all
improvements in any Hefner Family accommodations, including capital
expenditures, that are in excess of normal maintenance for those areas. During
the transition period, no such improvements were made, and consequently no such
payments were required.
Usage of services and benefits is recorded through a system initially
developed by the auditing and consulting firm of Price Waterhouse and now
administered (with appropriate modifications approved by the Audit and
Compensation Committees of the Board) by the Company. The lease, effective as of
July 1, 1979, had an initial term ending June 30, 1981, and continues for
ensuing 12-month periods unless terminated by either party. By terms of the
current such agreement, Mr. Hefner's lease automatically renewed through June
30, 1998. To accommodate the change in the fiscal year, upon the expiration of
the current term, Mr. Hefner's lease will be continued for only a six-month
period through December 31, 1998. At December 31, 1998, the lease will begin to
automatically renew again for 12-month periods per the terms of the lease
described above. Within 120 days of December 31, 1998, the actual monthly charge
for all rent and other benefits during the 18-month period will be finally
determined. Mr. Hefner will be billed or credited for actual benefits received
during the 18-month period. During the period from July 1997 through January
1998, the estimated monthly charge was $65,110 per month and during the period
from February 1998 through December 1998, the estimated monthly charge is
$53,492 per month.
The Company purchased the Mansion in 1971 for $1,050,000 and in the
intervening years has made substantial capital improvements at a cost of
approximately $12,450,000 through the transition period (including approximately
$2,470,000 to bring the Hefner Family accommodations to a standard similar to
the Mansion's common areas). The Mansion is included in the Company's financial
statements as of December 31, 1997 at a cost,
82
<PAGE>
including all improvements and after accumulated depreciation, of approximately
$2,620,000. The Company receives rent from Mr. Hefner (see above) and pays all
operating costs of the Mansion, which were approximately $1,615,000 in the
transition period (net of rent received from Mr. Hefner), including
depreciation, taxes and security charges related to the protection of the
Mansion, employees located there, business guests, the Hefner Family and other
visitors.
In June 1993, William A. Marovitz, Ms. Hefner's spouse since July 1995,
brought an opportunity to the Company to participate in one or more applications
for gaming licenses in Greece. Over the next two years, Mr. Marovitz actively
pursued that and other gaming opportunities on the Company's behalf. In June
1994, the independent members of the Company's Board, in recognition of Mr.
Marovitz' substantial time and effort on gaming matters, approved a compensation
arrangement for all of his gaming-related activities to date and all of his
future activities relating to gaming opportunities in Greece. In consideration
for past and future services, the Company paid Mr. Marovitz $125,000 in February
1995. In addition, should the Greek-gaming initiatives result in the opening of
a gaming operation in which the Company has an interest, the independent members
of the Board agreed to pay Mr. Marovitz a success fee of: (1) $25,000 on the
date of such opening; and (2) $100,000 on each of the first, second and third
anniversaries of such opening date, provided that such gaming operations are
ongoing on the date of payment. The Company was part of a consortium (the
"Consortium"), which Mr. Marovitz was instrumental in putting together, that
applied for a gaming license on the island of Rhodes, Greece in June 1995. In
November 1995 the Greek government notified the Consortium that the application
for the gaming license had been granted. The Company has a licensing
relationship with, and owns a minority equity interest in, the Consortium. In
October 1996, the Consortium and the government executed a contract governing
the operation of the casino. The Consortium is currently renovating the property
that will be the Rhodes Casino, which is expected to open in calendar year 1998.
Mr. Marovitz has continued to be very involved in government regulatory
negotiations and to travel to Greece to assist in the project, for which he has
received reimbursement of his expenses. Subsidiaries or affiliates of the
Company are entitled to two seats on the Consortium's Board of Directors. Mr.
Marovitz and director Dennis S. Bookshester were representing the Company's
interests on the Consortium's Board. For their service on that Board, the
Company's Board (with Mr. Bookshester abstaining) approved a retainer of $5,000
and an in-person per meeting fee of $1,250 for Messrs. Marovitz and Bookshester.
Accordingly, for the transition period, Mr. Bookshester received $2,500 and Mr.
Marovitz received $5,000. This project is the Company's first reentry into the
casino gaming business.
83
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Certain Documents Filed as Part of the Form 10-K
Financial Statements of the registrant and report of independent accountants
following are as set forth under Item 8 of this Form 10-K Transition Report:
Page
----
Consolidated Statements of Operations - Six-Month Transition Period
Ended December 31, 1997, Six-Month Period Ended December 31, 1996
(Unaudited) and Fiscal Years ended June 30, 1997, 1996 and 1995 44
Consolidated Balance Sheets - December 31, 1997, June 30, 1997
and June 30, 1996 45
Consolidated Statements of Shareholders' Equity - Six-Month
Transition Period Ended December 31, 1997 and Fiscal Years
ended June 30, 1997, 1996 and 1995 46
Consolidated Statements of Cash Flows - Six-Month Transition
Period Ended December 31, 1997, Six-Month Period Ended
December 31, 1996 (Unaudited) and Fiscal Years Ended June 30,
1997, 1996 and 1995 47
Notes to Consolidated Financial Statements 48-64
Report of Independent Accountants 65
Report of Independent Accountants on Financial Statement Schedule 98
Schedule II - Valuation and Qualifying Accounts 99
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, the Company filed a Form 8-K
Current Report dated November 6, 1997 under Item 8 of such report. The
purpose of this report was to announce the Company's decision to change
its fiscal year end from June 30, which was the fiscal year used in its
most recent filing with the Commission, to December 31.
(c) Exhibits
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 from the Company's annual report on Form 10-K
for the year ended June 30, 1995 (the "1995 Form 10-K"))
3.2 Bylaws of the Company
a Restated bylaws of the Company (incorporated by reference to Exhibit
3.2 from the Company's annual report on Form 10-K for the year ended
June 30, 1994 (the "1994 Form 10-K"))
b Amendment to restated bylaws of the Company
*10.1 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter ended March 31, 1997
(the "March 31, 1997 Form 10-Q"))
b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock
Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock Options
which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued under
the Plan (items (b), (c) and (d) incorporated by reference to
Exhibits 4.3, 4.4 and 4.5, respectively, from the Company's
Registration Statement No. 33-58145 on Form S-8 dated March 20,
1995)
e Form of Section 162(m) Restricted Stock Agreement for Section 162(m)
Restricted Stock issued under the Plan (incorporated by reference to
Exhibit 10.1(e) from the Company's annual report on Form 10-K for
the year ended June 30, 1997 (the "1997 Form 10-K"))
*10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended
and restated (incorporated by reference to Exhibit 10.2 from the
March 31, 1997 Form 10-Q)
84
<PAGE>
*10.3 1997 Equity Plan for Non-Employee Directors
a 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc., as amended
b Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan (incorporated by reference to Exhibit 10.1(b) from
the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1997 (the "September 30, 1997 Form 10-Q"))
&10.4 Playboy Magazine Printing and Binding Agreement dated as of October
22, 1997 between Playboy Enterprises, Inc. and Quad/Graphics, Inc.
10.5 Playboy Magazine Distribution Agreement dated as of May 27, 1997
between Playboy Enterprises, Inc. and Warner Publisher Services, Inc.
(incorporated by reference to Exhibit 10.4 from the 1997 Form 10-K)
10.6 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 agreement between Communication Data Services, Inc.
and Playboy Enterprises, Inc. (incorporated by reference to
Exhibit 10.12(a) from the Company's annual report on Form 10-K
for the year ended June 30, 1992 (the "1992 Form 10-K"))
b Amendment dated as of June 1, 1988 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.12(b) from the Company's
annual report on Form 10-K for the year ended June 30, 1993 (the
"1993 Form 10-K"))
c Amendment dated as of July 1, 1990 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.12(c) from the Company's
annual report on Form 10-K for the year ended June 30, 1991 (the
"1991 Form 10-K"))
d Amendment dated as of July 1, 1996 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.5(d) from the Company's
annual report on Form 10-K for the year ended June 30, 1996 (the
"1996 Form 10-K"))
&e Amendment dated July 7, 1997 to said Fulfillment Agreement
10.7 Transponder Lease Agreement dated as of December 31, 1992 between
Playboy Entertainment Group, Inc. and General Electric Capital
Corporation (incorporated by reference to Exhibit 10.3 from the
Company's quarterly report on Form 10-Q for the quarter ended December
31, 1992 (the "December 31, 1992 Form 10-Q"))
10.8 Distribution License to Exploit Home Video Rights effective October 1,
1991 between Playboy Video Enterprises, Inc. and Uni Distribution
Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form
10-K)
10.9 Distribution Agreement between Playboy Entertainment Group, Inc. and
Universal Music & Video Distribution (formerly Uni Distribution Corp.)
regarding licensing and sale of domestic home video product
a Agreement dated as of March 24, 1995 (incorporated by reference
to Exhibit 10.8 from the 1995 Form 10-K)
b Amendment to March 24, 1995 agreement dated February 28, 1997
(incorporated by reference to Exhibit 10.6 from the March 31,
1997 Form 10-Q)
10.10 Agreements effective November 1, 1995 between Playboy Entertainment
Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and
Playboy TV/Benelux Limited regarding the establishment of a Playboy TV
pay television service in the United Kingdom (incorporated by
reference to Exhibit 10.9 from the 1996 Form 10-K)
10.11 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha
Film Corporation regarding the establishment of a Playboy TV pay
television service in Japan
a Memorandum of Agreement and Amendment dated July 31, 1995
b Amendment to July 31, 1995 agreement dated March 26, 1996
(items (a) and (b) incorporated by reference to Exhibits 10.10(a) and
(b), respectively, from the 1996 Form 10-K)
10.12 Agreements between Playboy Entertainment Group, Inc. and Bloomfield
Mercantile Inc. related to establishing international networks in
Latin America, Spain and Portugal
#a Agreement outline as of March 29, 1996
#b Letter agreement dated January 13, 1997
(items (a) and (b) incorporated by reference to Exhibits 10.4(a) and
(b), respectively, from the March 31, 1997 Form 10-Q)
10.13 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 (incorporated by reference to
Exhibit 10.4 from the September 30, 1997 Form 10-Q)
&10.14 Letter Agreement dated October 20, 1997 between Playboy Entertainment
Group, Inc., Bloomfield Mercantile Inc. and White Oak Enterprises, Ltd
related to establishing international networks in Germany and
Scandinavia
85
<PAGE>
#10.15 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
(incorporated by reference to Exhibit 10.2 from the September 30, 1997
Form 10-Q)
#10.16 Memorandum of Understanding as of February 26, 1997 between Playboy
Entertainment Group, Inc. and Daewoo Corporation related to
establishing international networks in South Korea (incorporated by
reference to Exhibit 10.5 from the March 31, 1997 Form 10-Q)
10.17 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide
and TVN regarding distribution and services related to the AdulTVision
pay television service (incorporated by reference to Exhibit 10.11
from the 1996 Form 10-K)
10.18 Distribution Agreements between Playboy Entertainment Group, Inc.,
Orion Home Video and Metro-Goldwyn-Mayer Studios Inc. regarding the
distribution of certain home video programs and product
a Agreement dated June 27, 1996 (incorporated by reference to
Exhibit 10.12 from the 1996 Form 10-K)
b First Amendment to June 27, 1996 agreement dated July 29, 1996
(incorporated by reference to Exhibit 10.7 from the March 31,
1997 Form 10-Q)
&c Second Amendment to June 27, 1996 agreement dated December 31,
1997
10.19 Letter Agreement dated as of January 5, 1998 between Playboy
Entertainment Group, Inc. and Metro-Goldwyn-Mayer Studios Inc. in
reference to Metro-Goldwyn-Mayer Studios Inc. assuming full right,
power and authority over certain distribution and production
agreements on behalf of other parties
10.20 Affiliation Agreement between Playboy Entertainment Group, Inc. and
DirecTV, Inc. regarding the satellite distribution of Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 agreement dated as of April
19, 1994
c Second Amendment to November 15, 1993 agreement dated as of July
26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 agreement dated August 26,
1997 (incorporated by reference to Exhibit 10.3 from the
September 30, 1997 Form 10-Q)
10.21 Warner Home Video/Critics' Choice Direct Marketing License Agreements
a Agreement dated February 22, 1994 regarding purchase of Turner
product
b Agreement dated February 22, 1994 regarding purchase of non-
Turner product
(items (a) and (b) incorporated by reference to Exhibits 10.10 and
10.11, respectively, from the 1995 Form 10-K)
c Agreement dated June 28, 1996 regarding purchase of Turner and
non-Turner product (incorporated by reference to Exhibit 10.15(c)
from the 1996 Form 10-K)
10.22 Product License Agreements between Playboy Enterprises, Inc. and
Chaifa Investment, Limited
a Agreement dated September 26, 1989 related to the Hong Kong
territory
b Agreement dated March 4, 1991 related to the People's Republic of
China territory
c Amendment dated July 21, 1992 related to the March 4, 1991
agreement
d Amendment dated August 17, 1993 related to the agreements dated
September 26, 1989 and March 4, 1991
e Amendment dated January 23, 1996 related to the agreements dated
September 26, 1989 and March 4, 1991
(items (a) through (e) incorporated by reference to Exhibits 10.16(a)
through (e), respectively, from the 1996 Form 10-K)
f Amendment dated May 12, 1997 related to the agreements dated
September 26, 1989 and March 4, 1991 (incorporated by reference
to Exhibit 10.18(f) from the 1997 Form 10-K)
10.23 Revolving Line of Credit
a Credit Agreement dated as of February 10, 1995 by and among
Playboy Enterprises, Inc., Harris Trust and Savings Bank and
LaSalle National Bank
b First Amendment to February 10, 1995 Credit Agreement dated as of
March 31, 1995
(items (a) and (b) incorporated by reference to Exhibits 10.12(a) and
(b), respectively, from the 1995 Form 10-K)
c Second Amendment to February 10, 1995 Credit Agreement dated as
of March 5, 1996 (incorporated by reference to Exhibit 10.17(c)
from the 1996 Form 10-K)
d Third Amendment to February 10, 1995 Credit Agreement dated as of
September 11, 1997 but effective as of July 8, 1997 (incorporated
by reference to Exhibit 10.19(d) from the 1997 Form 10-K)
10.24 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
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<PAGE>
b Agreement of lease
(items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b),
respectively, from the 1991 Form 10-K)
10.25 Los Angeles Office Lease Documents
a Office lease dated as of July 25, 1991 between Playboy Enterprises,
Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to
Exhibit 10.6(c) from the 1991 Form 10-K)
b Amendment to July 25, 1991 lease dated June 26, 1996
c Amendment to July 25, 1991 lease dated September 12, 1996
(items (b) and (c) incorporated by reference to Exhibits 10.19(b) and
(c), respectively, from the 1996 Form 10-K)
10.26 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between Playboy Enterprises,
Inc. and LaSalle National Bank as Trustee under Trust No. 112912
(incorporated by reference to Exhibit 10.7(a) from the 1993 Form
10-K)
b First Amendment to April 7, 1988 lease dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from the 1995 Form
10-K)
c Second Amendment to April 7, 1988 lease dated June 1, 1992
(incorporated by reference to Exhibit 10.1 from the December 31,
1992 Form 10-Q)
d Third Amendment to April 7, 1988 lease dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995 Form
10-K)
e Fourth Amendment to April 7, 1988 lease dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996 Form
10-K)
10.27 New York Office Lease Agreement dated August 11, 1992 between Playboy
Enterprises, Inc. and Lexington Building Co. (incorporated by reference
to Exhibit 10.9(b) from the 1992 Form 10-K)
10.28 Itasca Warehouse Lease Documents - Teachers' Retirement System of the
State of Illinois
a Agreement dated as of October 20, 1992 between Teachers' Retirement
System of the State of Illinois and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.4 from the December 31,
1992 Form 10-Q)
b Lease termination agreement related to the October 20, 1992 lease
agreement dated May 27, 1997 (incorporated by reference to Exhibit
10.24(b) from the 1997 Form 10-K)
c Settlement Agreement and Mutual Release dated as of February 23,
1998 related to the October 20, 1992 lease agreement and the lease
termination agreement dated May 27, 1997
10.29 Itasca Warehouse Lease Documents - Centerpoint Properties Corporation
a Agreement dated as of September 6, 1996 between Centerpoint
Properties Corporation and Playboy Enterprises, Inc. (incorporated
by reference to Exhibit 10.23 from the 1996 Form 10-K)
b Amendment to September 6, 1996 lease dated June 1, 1997
(incorporated by reference to Exhibit 10.25(b) from the 1997 Form
10-K)
*10.30 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990 (incorporated by
reference to Exhibit 10.18(c) from the 1995 Form 10-K)
b Deferred Compensation Plan for Employees effective October 1, 1992
c Deferred Compensation Plan for Nonemployee Directors effective
October 1, 1992
(items (b) and (c) incorporated by reference to
Exhibits 10.2(g) and (h), respectively, from the 1992 Form 10-K)
d First Amendment to Deferred Compensation Plan for Employees
effective December 31, 1993 (incorporated by reference to Exhibit
10.1(f) from the 1994 Form 10-K)
e Second Amendment to Deferred Compensation Plan for Employees
effective April 1, 1996
f First Amendment to Deferred Compensation Plan for Nonemployee
Directors effective April 1, 1996
(items (e) and (f) incorporated by reference to Exhibits 10.24(g) and
(h), respectively, from the 1996 Form 10-K)
g Third Amendment to Deferred Compensation Plan for Employees
effective July 1, 1997
h Second Amendment to Deferred Compensation Plan for Nonemployee
Directors effective July 1, 1997
(items (g) and (h) incorporated by reference to Exhibits 10.26(g) and
(h), respectively, from the 1997 Form 10-K)
*10.31 Selected Employment, Termination and Other Agreements
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For
Key Employees (the "1989 Option Plan") (incorporated by reference to
Exhibit 10.4(mm) from the 1991 Form 10-K)
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<PAGE>
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7, 1990
recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits 10.19(c) and
(d), respectively, from the 1995 Form 10-K)
d Consent and Amendment regarding the 1989 Option Plan
e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan
for Non-Employee Directors, as amended
f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option
Agreement for Non-Employee Directors
(items (d), (e) and (f) incorporated by reference to Exhibits
10.4(aa), (rr) and (nn), respectively, from the 1991 Form 10-K)
g Playboy Enterprises, Inc. Severance Agreement (incorporated by
reference to Exhibit 10.4(vv) from the 1991 Form 10-K)
h Employment Agreement dated May 21, 1992 between Playboy
Enterprises, Inc. and Anthony J. Lynn (incorporated by reference
to Exhibit 10.4(bbb) from the 1992 Form 10-K)
i Amendment dated August 15, 1996 regarding the Employment
Agreement dated May 21, 1992 between Playboy Enterprises, Inc.
and Anthony J. Lynn (incorporated by reference to Exhibit
10.25(i) from the 1996 Form 10-K)
j Agreement dated October 16, 1996 amending the Employment
Agreement dated May 21, 1992 between Playboy Enterprises, Inc.
and Anthony J. Lynn
k Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony
J. Lynn
(items (j) and (k) incorporated by reference to Exhibits 10.3(a) and
(b), respectively, from the March 31, 1997 Form 10-Q)
l Letter Agreement dated February 26, 1993 regarding Special
Incentive Compensation Plan for Herb Laney
m Memorandum dated May 1, 1996 regarding extension of Special
Incentive Compensation Plan for Herb Laney dated February 26,
1993
(items (l) and (m) incorporated by reference to Exhibits 10.25(j) and
(k), respectively, from the 1996 Form 10-K)
n Memorandum dated October 11, 1996 regarding special compensation
plan for Herb Laney
o Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert
M. Laney
p Employment Agreement dated April 7, 1997 between Playboy
Enterprises, Inc. and Marianne Howatson
q Letter Agreement dated April 18, 1997 regarding employment of
Linda Havard
(items (n) through (q) incorporated by reference to Exhibits 10.3(c)
through (f), respectively, from the March 31, 1997 Form 10-Q)
r Letter Agreement dated September 6, 1996 regarding employment of
Bob Perkins
s Letter Agreement dated September 4, 1997 regarding Anthony J.
Lynn's waiver of fiscal year 1998 base salary increase
(items (r) and (s) incorporated by reference to Exhibits 10.27(r) and
(s), respectively, from the 1997 Form 10-K)
t Letter Agreement dated September 25, 1997 regarding employment of
Helen Isaacson
u Letter Agreement dated September 26, 1997 regarding employment of
Garry Saunders
(items (t) and (u) incorporated by reference to Exhibits 10.5(a) and
(b), respectively, from the September 30, 1997 Form 10-Q)
*10.32 Form of Nonqualified Option Agreement between Playboy Enterprises,
Inc. and each of Dennis S. Bookshester and Sol Rosenthal (incorporated
by reference to Exhibit 4.4 from the Company's Registration Statement
No. 333-30185 on Form S-8 dated November 13, 1996)
18 Letter regarding change in accounting principle
21 Subsidiaries
23 Consent of Independent Public Accountants
88
<PAGE>
27 Financial Data Schedules
a Financial Data Schedule for transition period
b Restated Financial Data Schedule for fiscal year 1997 due to
Statement 128 adoption
- --------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
& Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
(d) Financial Statement Schedules
See Item 14(a) above
89
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
March 20, 1998 By s/Linda Havard
--------------------------------
Linda Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
s/Christie A. Hefner March 20, 1998
- ---------------------------------------
Christie A. Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
s/Richard S. Rosenzweig March 24, 1998
- ---------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
s/Dennis S. Bookshester March 24, 1998
- ---------------------------------------
Dennis S. Bookshester
Director
s/David I. Chemerow March 23, 1998
- ---------------------------------------
David I. Chemerow
Director
s/Donald G. Drapkin March 24, 1998
- ---------------------------------------
Donald G. Drapkin
Director
s/Sol Rosenthal March 20, 1998
- ---------------------------------------
Sol Rosenthal
Director
s/Sir Brian Wolfson March 23, 1998
- ---------------------------------------
Sir Brian Wolfson
Director
s/Linda Havard March 20, 1998
- ---------------------------------------
Linda Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
90
<PAGE>
EXHIBIT INDEX
-------------
All agreements listed below may have additional exhibits which are not
attached. All such exhibits are available upon request, provided the
requesting party shall pay a fee for copies of such exhibits, which fee shall
be limited to the Company's reasonable expenses incurred in furnishing these
documents.
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 from the 1995 Form 10-K)
3.2 Bylaws of the Company
a Restated bylaws of the Company (incorporated by reference to Exhibit
3.2 from the 1994 Form 10-K)
@b Amendment to restated bylaws of the Company 100
*10.1 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive
Plan (incorporated by reference to Exhibit 10.1 from the March 31,
1997 Form 10-Q)
b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock
Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock Options
which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued under
the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3, 4.4
and 4.5, respectively, from the Company's Registration Statement No. 33-
58145 on Form S-8 dated March 20, 1995)
e Form of 162(m) Restricted Stock Agreement for Section 162(m)
Restricted Stock issued under the Plan (incorporated by reference to
Exhibit 10.1(e) from the 1997 Form 10-K)
*10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and
restated (incorporated by reference to Exhibit 10.2 from the March 31,
1997 Form 10-Q)
*10.3 1997 Equity Plan for Non-Employee Directors
@a 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises,
Inc., as amended 101-113
b Form of Restricted Stock Agreement for Restricted Stock issued under
the Plan (incorporated by reference to Exhibit 10.1(b) from the
September 30, 1997 Form 10-Q)
@&10.4 Playboy Magazine Printing and Binding Agreement dated as of
October 22, 1997 between Playboy Enterprises, Inc. and Quad/Graphics,
Inc. 114-175
10.5 Playboy Magazine Distribution Agreement dated as of May 27, 1997
between Playboy Enterprises, Inc. and Warner Publisher Services, Inc.
(incorporated by reference to Exhibit 10.4 from the 1997 Form 10-K)
10.6 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 agreement between Communication Data Services, Inc. and
Playboy Enterprises, Inc. (incorporated by reference to Exhibit
10.12(a) from the 1992 Form 10-K)
b Amendment dated as of June 1, 1988 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.12(b) from the 1993 Form
10-K)
</TABLE>
91
<PAGE>
<TABLE>
<S> <C>
c Amendment dated as of July 1, 1990 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.12(c) from the 1991 Form
10-K)
d Amendment dated as of July 1, 1996 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.5(d) from the 1996 Form
10-K)
@& e Amendment dated July 7, 1997 to said Fulfillment Agreement 176-177
10.7 Transponder Lease Agreement dated as of December 31, 1992 between
Playboy Entertainment Group, Inc. and General Electric Capital
Corporation (incorporated by reference to Exhibit 10.3 from the
December 31, 1992 Form 10-Q)
10.8 Distribution License to Exploit Home Video Rights effective October 1,
1991 between Playboy Video Enterprises, Inc. and Uni Distribution Corp.
(incorporated by reference to Exhibit 10.16 from the 1991 Form 10-K)
10.9 Distribution Agreement between Playboy Entertainment Group, Inc. and
Universal Music & Video Distribution (formerly Uni Distribution Corp.)
regarding licensing and sale of domestic home video product
a Agreement dated as of March 24, 1995 (incorporated by reference to
Exhibit 10.8 from the 1995 Form 10-K)
b Amendment to March 24, 1995 agreement dated February 28, 1997
(incorporated by reference to Exhibit 10.6 from the March 31, 1997
Form 10-Q)
10.10 Agreements effective November 1, 1995 between Playboy Entertainment
Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and
Playboy TV/Benelux Limited regarding the establishment of a Playboy TV
pay television service in the United Kingdom (incorporated by reference
to Exhibit 10.9 from the 1996 Form 10-K)
10.11 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha
Film Corporation regarding the establishment of a Playboy TV pay
television service in Japan
a Memorandum of Agreement and Amendment dated July 31, 1995
b Amendment to July 31, 1995 agreement dated March 26, 1996
(items (a) and (b) incorporated by reference to Exhibits 10.10(a) and
(b), respectively, from the 1996 Form 10-K)
10.12 Agreements between Playboy Entertainment Group, Inc. and Bloomfield
Mercantile Inc. related to establishing international networks in Latin
America, Spain and Portugal
# a Agreement outline as of March 29, 1996
# b Letter Agreement dated January 13, 1997
(items (a) and (b) incorporated by reference to Exhibits 10.4(a) and
(b), respectively, from the March 31, 1997 Form 10-Q)
10.13 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 (incorporated by reference to Exhibit 10.4
from the September 30, 1997 Form 10-Q)
@&10.14 Letter Agreement dated October 20, 1997 between Playboy
Entertainment Group, Inc., Bloomfield Mercantile Inc. and White Oak
Enterprises, Ltd related to establishing international networks in
Germany and Scandinavia 178-186
</TABLE>
92
<PAGE>
<TABLE>
<S> <C>
#10.15 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
(incorporated by reference to Exhibit 10.2 from the September 30, 1997
Form 10-Q)
#10.16 Memorandum of Understanding as of February 26, 1997 between Playboy
Entertainment Group, Inc. and Daewoo Corporation related to
establishing international networks in South Korea (incorporated by
reference to Exhibit 10.5 from the March 31, 1997 Form 10-Q)
10.17 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide
and TVN regarding distribution and services related to the AdulTVision
pay television service (incorporated by reference to Exhibit 10.11
from the 1996 Form 10-K)
10.18 Distribution Agreements between Playboy Entertainment Group, Inc.,
Orion Home Video and Metro-Goldwyn-Mayer Studios Inc. regarding the
distribution of certain home video programs and product
a Agreement dated June 27, 1996 (incorporated by reference to
Exhibit 10.12 from the 1996 Form 10-K)
b First Amendment to June 27, 1996 agreement dated July 29, 1996
(incorporated by reference to Exhibit 10.7 from the March 31,
1997 Form 10-Q)
@&c Second Amendment to June 27, 1996 agreement dated December 31,
1997 187-188
@10.19 Letter Agreement dated as of January 5, 1998 between Playboy
Entertainment Group, Inc. and Metro-Goldwyn-Mayer Studios Inc. in
reference to Metro-Goldwyn-Mayer Studios Inc. assuming full right,
power and authority over certain distribution and production
agreements on behalf of other parties 189-190
10.20 Affiliation Agreement between Playboy Entertainment Group, Inc. and
DirecTV, Inc. regarding the satellite distribution of Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 agreement dated as of April
19, 1994
c Second Amendment to November 15, 1993 agreement dated as of July
26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 agreement dated August 26,
1997 (incorporated by reference to Exhibit 10.3 from the
September 30, 1997 Form 10-Q)
10.21 Warner Home Video/Critics' Choice Direct Marketing License Agreements
a Agreement dated February 22, 1994 regarding purchase of Turner
product
b Agreement dated February 22, 1994 regarding purchase of non-
Turner product
(items (a) and (b) incorporated by reference to Exhibits 10.10 and
10.11, respectively, from the 1995 Form 10-K)
c Agreement dated June 28, 1996 regarding purchase of Turner and
non-Turner product (incorporated by reference to Exhibit 10.15(c)
from the 1996 Form 10-K)
10.22 Product License Agreements between Playboy Enterprises, Inc. and
Chaifa Investment, Limited
a Agreement dated September 26, 1989 related to the Hong Kong
territory
</TABLE>
93
<PAGE>
b Agreement dated March 4, 1991 related to the People's Republic of
China territory
c Amendment dated July 21, 1992 related to the March 4, 1991 agreement
d Amendment dated August 17, 1993 related to the agreements dated
September 26, 1989 and March 4, 1991
e Amendment dated January 23, 1996 related to the agreements dated
September 26, 1989 and March 4, 1991
(items (a) through (e) incorporated by reference to Exhibits 10.16(a)
through (e), respectively, from the 1996 Form 10-K)
f Amendment dated May 12, 1997 related to the agreements dated
September 26, 1989 and March 4, 1991 (incorporated by reference to
Exhibit 10.18(f) from the 1997 Form 10-K)
10.23 Revolving Line of Credit
a Credit Agreement dated as of February 10, 1995 by and among Playboy
Enterprises, Inc., Harris Trust and Savings Bank and LaSalle
National Bank
b First Amendment to February 10, 1995 Credit Agreement dated as of
March 31, 1995
(items (a) and (b) incorporated by reference to Exhibits 10.12(a) and
(b), respectively, from the 1995 Form 10-K)
c Second Amendment to February 10, 1995 Credit Agreement dated as of
March 5, 1996 (incorporated by reference to Exhibit 10.17(c) from
the 1996 Form 10-K)
d Third Amendment to February 10, 1995 Credit Agreement dated as of
September 11, 1997 but effective as of July 8, 1997 (incorporated by
reference to Exhibit 10.19(d) from the 1997 Form 10-K)
10.24 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of lease
(items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b),
respectively, from the 1991 Form 10-K)
10.25 Los Angeles Office Lease Documents
a Office lease dated as of July 25, 1991 between Playboy Enterprises,
Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to
Exhibit 10.6(c) from the 1991 Form 10-K)
b Amendment to July 25, 1991 lease dated June 26, 1996
c Amendment to July 25, 1991 lease dated September 12, 1996
(items (b) and (c) incorporated by reference to Exhibits 10.19(b) and
(c), respectively, from the 1996 Form 10-K)
10.26 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between Playboy Enterprises,
Inc. and LaSalle National Bank as Trustee under Trust No. 112912
(incorporated by reference to Exhibit 10.7(a) from the 1993 Form
10-K)
b First Amendment to April 7, 1988 lease dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from the 1995 Form
10-K)
c Second Amendment to April 7, 1988 lease dated June 1, 1992
(incorporated by reference to Exhibit 10.1 from the December 31,
1992 Form 10-Q)
d Third Amendment to April 7, 1988 lease dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995 Form
10-K)
94
<PAGE>
<TABLE>
<S> <C>
e Fourth Amendment to April 7, 1988 lease dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996 Form
10-K)
10.27 New York Office Lease Agreement dated August 11, 1992 between Playboy
Enterprises, Inc. and Lexington Building Co. (incorporated by reference
to Exhibit 10.9(b) from the 1992 Form 10-K)
10.28 Itasca Warehouse Lease Documents - Teachers' Retirement System of the
State of Illinois
a Agreement dated as of October 20, 1992 between Teachers' Retirement
System of the State of Illinois and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.4 from the December 31,
1992 Form 10-Q)
b Lease termination agreement related to the October 20, 1992 lease
agreement dated May 27, 1997 (incorporated by reference to Exhibit
10.24(b) from the 1997 Form 10-K)
@ c Settlement Agreement and Mutual Release dated as of February 23,
1998 related to the October 20, 1992 lease agreement and the lease
termination agreement dated May 27, 1997 191-195
10.29 Itasca Warehouse Lease Documents - Centerpoint Properties Corporation
a Agreement dated as of September 6, 1996 between Centerpoint
Properties Corporation and Playboy Enterprises, Inc. (incorporated
by reference to Exhibit 10.23 from the 1996 Form 10-K)
b Amendment to September 6, 1996 lease dated June 1, 1997
(incorporated by reference to Exhibit 10.25(b) from the 1997 Form
10-K)
*10.30 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990 (incorporated by
reference to Exhibit 10.18(c) from the 1995 Form 10-K)
b Deferred Compensation Plan for Employees effective October 1, 1992
c Deferred Compensation Plan for Nonemployee Directors effective
October 1, 1992
(items (b) and (c) incorporated by reference to Exhibits 10.2(g) and
(h), respectively, from the 1992 Form 10-K)
d First Amendment to Deferred Compensation Plan for Employees
effective December 31, 1993 (incorporated by reference to Exhibit
10.1(f) from the 1994 Form 10-K)
e Second Amendment to Deferred Compensation Plan for Employees
effective April 1, 1996
f First Amendment to Deferred Compensation Plan for Nonemployee
Directors effective April 1, 1996
(items (e) and (f) incorporated by reference to Exhibits 10.24(g) and
(h), respectively, from the 1996 Form 10-K)
g Third Amendment to Deferred Compensation Plan for Employees
effective July 1, 1997
h Second Amendment to Deferred Compensation Plan for Nonemployee
Directors effective July 1, 1997
(items (g) and (h) incorporated by reference to Exhibits 10.26(g) and
(h), respectively, from the 1997 Form 10-K)
*10.31 Selected Employment, Termination and Other Agreements
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For
Key Employees (the "1989 Option Plan") (incorporated by reference
to Exhibit 10.4(mm) from the 1991 Form 10-K)
</TABLE>
95
<PAGE>
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7, 1990
recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits 10.19(c) and
(d), respectively, from the 1995 Form 10-K)
d Consent and Amendment regarding the 1989 Option Plan
e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for
Non-Employee Directors, as amended
f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement
for Non-Employee Directors
(items (d), (e) and (f) incorporated by reference to Exhibits 10.4(aa),
(rr) and (nn), respectively, from the 1991 Form 10-K)
g Playboy Enterprises, Inc. Severance Agreement (incorporated by
reference to Exhibit 10.4(vv) from the 1991 Form 10-K)
h Employment Agreement dated May 21, 1992 between Playboy Enterprises,
Inc. and Anthony J. Lynn (incorporated by reference to Exhibit
10.4(bbb) from the 1992 Form 10-K)
i Amendment dated August 15, 1996 regarding the Employment Agreement
dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J.
Lynn (incorporated by reference to Exhibit 10.25(i) from the 1996
Form 10-K)
j Agreement dated October 16, 1996 amending the Employment Agreement
dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J.
Lynn
k Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J.
Lynn
(items (j) and (k) incorporated by reference to Exhibits 10.3(a) and (b),
respectively, from the March 31, 1997 Form 10-Q)
l Letter Agreement dated February 26, 1993 regarding Special Incentive
Compensation Plan for Herb Laney
m Memorandum dated May 1, 1996 regarding extension of Special
Incentive Compensation Plan for Herb Laney dated February 26, 1993
(items (l) and (m) incorporated by reference to Exhibits 10.25(j) and
(k), respectively, from the 1996 Form 10-K)
n Memorandum dated October 11, 1996 regarding special compensation
plan for Herb Laney
o Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M.
Laney
p Employment Agreement dated April 7, 1997 between Playboy
Enterprises, Inc. and Marianne Howatson
q Letter Agreement dated April 18, 1997 regarding employment of Linda
Havard
(items (n) through (q) incorporated by reference to Exhibits 10.3(c)
through (f), respectively, from the March 31, 1997 Form 10-Q)
r Letter Agreement dated September 6, 1996 regarding employment of Bob
Perkins
s Letter Agreement dated September 4, 1997 regarding Anthony J. Lynn's
waiver of fiscal year 1998 base salary increase
(items (r) and (s) incorporated by reference to Exhibits 10.27(r) and
(s), respectively, from the 1997 Form 10-K)
t Letter Agreement dated September 25, 1997 regarding employment of
Helen Isaacson
u Letter Agreement dated September 26, 1997 regarding employment of
Garry Saunders
(items (t) and (u) incorporated by reference to Exhibits 10.5(a) and (b),
respectively, from the September 30, 1997 Form 10-Q)
96
<PAGE>
*10.32 Form of Nonqualified Option Agreement between Playboy Enterprises,
Inc. and each of Dennis S. Bookshester and Sol Rosenthal (incorporated
by reference to Exhibit 4.4 from the Company's Registration Statement
No. 333-30185 on Form S-8 dated November 13, 1996)
@18 Letter regarding change in accounting principle 196
@21 Subsidiaries 197
@23 Consent of Independent Public Accountants 198
@27 Financial Data Schedules
a Financial Data Schedule for transition period 199
b Restated Financial Data Schedule for fiscal year 1997
due to Statement 128 adoption 200
- -----
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
& Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
@ Filed herewith
97
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
ON FINANCIAL STATEMENT SCHEDULES
--------------------------------
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
Our report on the consolidated financial statements of Playboy Enterprises,
Inc. and its Subsidiaries is included on page 65 of this Form 10-K Transition
Report. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index on page 84
of this Form 10-K Transition Report.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Chicago, Illinois
February 4, 1998
98
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance deducted in the balance sheet
from the asset to which it applies:
Six-Month Transition Period
Ended December 31, 1997:
Allowance for doubtful accounts $ 3,882 $ 1,053 $ 702(a) $ 1,170(b) $ 4,467
======== ======= ======= ======= =========
Allowance for returns $ 22,747 $ - $32,774(c) $28,334(d) $ 27,187
======== ======= ======= ======= =========
Deferred tax asset valuation allowance $ 15,870 $ - $ 634(e) $ - $ 16,504
======== ======= ======= ======= =========
Fiscal Year Ended June 30, 1997:
Allowance for doubtful accounts $ 3,009 $ 1,241 $ 1,522(a) $ 1,890(b) $ 3,882
======== ======= ======= ======= =========
Allowance for returns $ 21,939 $ - $64,197(c) $63,389(d) $ 22,747
======== ======= ======= ======= =========
Deferred tax asset valuation allowance $ 27,971 $ - $ 1,385(e) $13,486(f) $ 15,870
======== ======= ======= ======= =========
Fiscal Year Ended June 30, 1996:
Allowance for doubtful accounts $ 4,837 $ 504 $ 1,632(a) $ 3,964(b) $ 3,009
======== ======= ======= ======= =========
Allowance for returns $ 20,952 $ - $59,718(c) $58,731(d) $ 21,939
======== ======= ======= ======= =========
Deferred tax asset valuation allowance $ 28,573 $ - $ - $ 602(e) $ 27,971
======== ======= ======= ======= =========
Fiscal Year Ended June 30, 1995:
Allowance for doubtful accounts $ 3,155 $ 1,709 $ 2,042(a) $ 2,069(b) $ 4,837
======== ======= ======= ======= =========
Allowance for returns $ 18,612 $ - $57,057(c) $54,717(d) $ 20,952
======== ======= ======= ======= =========
Deferred tax asset valuation allowance $ 28,767 $ - $ - $ 194(e) $ 28,573
======== ======= ======= ======= =========
</TABLE>
Notes:
(a) Represents provisions for unpaid subscriptions charged to net revenues.
Also included in fiscal year 1996 amount was $98 related to the
consolidation of the VIPress balance at the acquisition date in March 1996.
(b) Represents uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents the unrealizable portion of the change in the gross deferred tax
asset during the period.
(f) Represents a federal income tax benefit resulting from a change in the
realizability of the gross deferred tax asset.
99
<PAGE>
EXHIBIT 3.2(b)
Amendment to Bylaws
- -------------------
RESOLVED, that Section 2 of Article II of the Company's
Bylaws be, and hereby is, amended to read in its entirety as follows:
Section 2. Annual meetings of stockholders shall be held on a
date and time designated by the Board of Directors consistent with the
Delaware General Corporation Law, at which meetings they shall elect a
Board of Directors by the vote set forth in Section 8 of this Article
II, and transact such other business as may properly be brought before
the meeting.
<PAGE>
EXHIBIT 10.3(a)
1997 EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS OF
PLAYBOY ENTERPRISES, INC., AS AMENDED
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
1. Purpose................................................................ 1
2. Definitions............................................................ 1
3. Shares Available under the Plan........................................ 3
4. Option Rights.......................................................... 4
5. Common Stock Grants and Restricted Stock............................... 5
6. Mandatory Fee Shares................................................... 6
7. Voluntary Shares....................................................... 6
8. Transferability........................................................ 7
9. Adjustments............................................................ 7
10. Fractional Shares...................................................... 8
11. Withholding Taxes...................................................... 8
12. Certain Terminations of Directorships.................................. 8
13. Administration......................................................... 9
14. Amendment, Suspension, Termination and Other Matters................... 9
15. Termination of the Plan................................................ 10
16. Effective Date......................................................... 10
</TABLE>
<PAGE>
1997 EQUITY PLAN FOR NON-EMPLOYEE
DIRECTORS OF PLAYBOY ENTERPRISES, INC., AS AMENDED
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 calendar 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.
"Calendar Year" means the period beginning on January 1 of each year and
ending on December 31 of each year.
"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.
<PAGE>
"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.
"Employee" means any officer or other employee of the Company or of any
corporation which is then a Subsidiary.
"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 for purposes
of Section 6 of this Plan shall 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 until and unless the Deferred Compensation Plan shall
have been amended to provide for the deferral of compensation payable to Non-
Employee Directors in the form of Common Stock.
"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.
2
<PAGE>
"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.
"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 held, as determined by the Board from
time to time, but for purposes of Section 7 of this Plan shall 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 until and unless the
Deferred Compensation Plan shall have been amended to provide for the deferral
of compensation payable to Non-Employee Directors in the form of Common Stock.
"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 Date" has the meaning set forth in Section 6.
"Voluntary Shares" has the meaning set forth in Section 7(a).
3
<PAGE>
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.
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.
4
<PAGE>
(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.
(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
5
<PAGE>
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 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
6
<PAGE>
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. Anything in this Section 6 to
the contrary notwithstanding, any Mandatory Fee Shares that become subject to
deferral under the Deferred Compensation Plan shall be issued in such form
(including book-entry form), at such times and with such rights and restrictions
as shall be specified in the Deferred Compensation Plan.
7. Voluntary Shares. Each Non-Employee Director shall be eligible to
elect to receive shares of Common Stock in accordance with the following
provisions:
(a) Prior to the commencement of the Company's Calendar 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 Calendar 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
Calendar Year. Once an election has been terminated, another election may
not be made effective until the commencement of the next subsequent full
Calendar 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.
(c) Anything in this Section 7 to the contrary notwithstanding,
any Voluntary Shares that become subject to deferral under the Deferred
Compensation Plan shall be issued in such form (including book-entry
form), at such times and with such rights and restrictions as shall be
specified in the Deferred Compensation Plan.
7
<PAGE>
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 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 compete 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.
8
<PAGE>
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 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
9
<PAGE>
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, (including the administration of this Plan in
conjunction with the Deferred Compensation 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 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
10
<PAGE>
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.
11
<PAGE>
Exhibit 10.4
October 14, 1997
AGREEMENT
---------
AGREEMENT made as of the 22 day of October 1997 between PLAYBOY ENTERPRISES,
INC., a corporation organized and existing under the laws of the State of
Delaware, having its principal place of business at 680 N. Lake Shore Drive,
Chicago, Illinois 60611 (hereinafter called "Publisher"), and QUAD/GRAPHICS,
INC., a corporation organized and existing under the laws of the State of
Wisconsin, having its principal place of business at W224 N3322 Duplainville
Road, Pewaukee, Wisconsin 53072 (hereinafter called "Printer").
WITNESSETH
----------
Publisher and Printer hereby mutually agree as follows:
ARTICLE 1 - EXHIBITS
- --------------------
1.01 This Agreement includes the following Exhibits which are attached
hereto and made a part hereof:
EXHIBIT A - Contract
EXHIBIT B - Manufacturing Specifications
EXHIBIT C - Pricing Specifications
EXHIBIT D - Paper Requirements
EXHIBIT E - Pro Forma
EXHIBIT F - Holiday and Production Schedule
EXHIBIT G - Paper Specifications/Shipping
EXHIBIT H - Sample Issues of Magazines
ARTICLE 2 - TERM AND TERMINATION
- --------------------------------
2.01 This Agreement shall commence on December 1, 1997, covering "the
Work" (as hereinafter defined) on the February, 1998 issue of the "Magazine",
(as hereinafter defined) and shall continue for a term of approximately five (5)
years (from the date of commencement through November 1, 2002, production for
the January, 2003 issue of the "Magazine") unless terminated prior thereto
pursuant the any provisions hereof.
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 2
2.02 If Printer shall fail in any material respect to perform the Work
in accordance with the standards or schedules set forth in the Exhibits, except
for (i) any failure caused by Publisher's failure to meet any of its obligations
under the Production Schedule, or (ii) any failure caused by Publisher's
original material, the Publisher shall have the right to terminate this
Agreement, pursuant and subject to the following provisions: Publisher shall
give Printer written notice specifying in detail the failure or failures it
claims, if such failure or failures are not cured by Printer within completion
of production of the next two (2) issues after receipt of Publisher's notice and
such failure or failures are material, Publisher shall have the right to
terminate this Agreement by giving Printer written notice to that effect, in
which case this Agreement will terminate thirty (30) days thereafter. In the
event of such termination, Publisher shall be obligated to make payments to the
Printer for all undisputed amounts then due and owing and for work in process.
2.03 Upon giving notice of the termination of this Agreement, Publisher
shall be entitled to remove all completed work, work in process, proofs, film,
standing type, plates, paper, and other materials and supplies of Publisher in
Printer's possession and Printer shall assist Publisher in removing same.
ARTICLE 3 - DEFINITIONS
3.01 The following definition shall apply to words used in this Agreement,
unless the context specifically requires otherwise:
(a) The term "composition" means the process of preparing the copy
or text materials for other processes.
(b) The term "binding" means to gather body signatures, furnished
inserts, if any, and covers, saddle wire stitch or perfect bind them and
trim to size.
(c) The term "presswork" means printing in one (1) to five (5) colors
per page produced on offset or gravure presses with the printed pages
delivered from the press in folded sections.
(d) The term "late-closing form" means four (4) color and five (5)
color presswork printing and closing on a date to be mutually agreed upon
for the monthly issue of Magazine.
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 3
(e) The term "Printer's plant" means the existing plants operated by
Printer in Pewaukee, Sussex and Lomira, Wisconsin, including any additions
to such plants as may be mutually agreed upon.
(f) The term "regular issue" means any issue of the Work which is
saddlewire stitched or perfect bound.
ARTICLE 4 - WORK
----------------
4.01 Subject to the provisions of this Agreement, Publisher agrees to pay
Printer for, and Printer agrees to perform for Publisher at Printer's plant the
following (herein collectively referred to as "the Work"): prepress service,
subject to quality, pricing and schedule, (including four (4) color editorial
separations, stripping, ad handling, matchprints, final films) platemaking or
cylinder engraving, press work (including gravure), binding, mailing and
delivery to common carriers in connection with Publisher's magazine entitled,
PLAYBOY (herein referred to as the "Magazine") at the prices set forth in
Exhibit C.
However, Publisher shall, with the exception of minor composition performed
by Printer, arrange for composition to be done by its own employees or third
parties, provided that furnished film and/or digital files are delivered to the
Printer in time to meet the Production Schedule set forth by the Publisher.
4.02 Printer warrants that it has sufficient space and equipment capable
of producing the Work. It is understood that from time to time certain issues of
the Magazine may exceed Printer's press capacity; in which case Publisher, after
consulting with Printer, shall have the option to subcontract such excess to
another printer without liability to Printer under the terms of this Agreement.
4.03 Printer agrees to furnish all necessary materials and supplies for
the Magazine, except those which Publisher specifically agrees to furnish
under this Agreement or in a signed amendment hereto.
4.04 Subject to the limitation of Printer's binding equipment, which
limitation does not apply to or include any of the inserts that may be
specified in Exhibit B, Publisher shall have the right to supply
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 4
Printer, in a form suitable for binding according to Printer's specifications,
one (1) or more pre-printed editorial or advertising inserts supplied by the
Publisher or Publisher's advertisers for insertion into the Magazine. Such
inserts may be furnished up to sixty (60) days prior to scheduled binding at no
additional storage fees. Additional costs resulting from the use of inserts will
be billed to Publisher in accordance with the prices in Exhibit C, or if such
Prices are not included in Exhibit C, at the prices agreed to by Printer and
Publisher in writing prior to the printing of the inserts and their delivery to
Printer. Such prices shall be developed using the same methodology and criteria
as was used to establish the prices set forth in Exhibit C.
4.05 The print size of each issue of the Magazine shall be 8-1/8 inches by
10-7/8 inches with unrestricted bleed design. However, Publisher shall have the
right to change the print size, provided that the new print size is within the
capabilities of Printer's equipment.
4.06 Printer shall have the right, with the prior written approval of
Publisher, to transfer the Work, in whole or in part, to another plant of
Printer. Publisher will give its approval if it is reasonably satisfied that
standards of quality, speed and service will be maintained or improved, and that
such transfer will not increase prices to Publisher or add to the cost or impair
the operating efficiency of Publisher's Editorial and Circulation Departments.
If the transfer or change-over of the Work from one plant to another should
result, in the exercise of Publisher's reasonable judgment, in lowering of
quality, speed or service, Printer agrees promptly to return such Work to the
plant previously producing the same, at no cost to Publisher.
ARTICLE 5 - GUARANTEE AS TO QUALITY
----------------------------------
5.01 Printer guarantees that the Work will be performed in a professional
manner and in accordance with the Exhibit B (Manufacturing Specifications) and
the Exhibit C (Pricing Specifications), subject to the provisions of Article 12
(Unavoidable Delays) hereof. Printer guarantees that the quality of the Work
performed by Printer shall be consistent with the highest standard of commercial
printing and shall be at least equal to the quality evidenced by the sample
issues of the Magazine attached hereto as Exhibit H. Once each calendar year
Publisher may substitute new sample issues to be attached as Exhibit H.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 5
5.02 In the event Publisher must grant a credit or forego billing to an
advertiser for advertising placed because of Printer's error or inferior
printing quality, then Publisher will receive a credit from Printer equivalent
to the cost of producing the page or pages involved. As used herein, the term
"cost" shall include Publisher's and Printer's costs for plates, cylinders,
presswork, ink, binding, labeling, mailing, packaging, postage, shipping, and
paper and Printer's charges to Publisher for composition and preparatory. In no
event shall any credit be less than the costs attributable to the portion of the
page involved and no more than the amount credited to the advertiser.
5.03 Publisher has the right from time to time to have a representative in
Printer's plant to inspect the various products that are manufactured hereunder.
Publisher's representative may inspect the quality of printing and in conference
with Printer's supervisors or others in charge may suggest for Printer's
consideration corrections in any work which, in the opinion of such
representative, does not conform to the standards of quality established
hereunder- Publisher shall neither assume any liability nor be deemed to have
waived any default by any suggestion, or the absence thereof, of its plant
representative.
5.04 All claims for alleged defects shall be made by Publisher within
sixty (60) days of the Publisher's off sale date of the issue containing the
defect. Printer's liability shall be limited to the stated selling prices
contained in Exhibit C based on a cost per page or fractional page for paper,
printing and binding, but in no event will include special or consequential
damages.
ARTICLE 6 - QUANTITIES
6.01 The number of copies to be delivered by Printer shall not be less
than the quantity ordered by Publisher; however, an overrun of up to one-half of
one percent (.5%) for each issue of the Magazine shall be allowed and paid for
by Publisher at the additional per thousand cost set out in Exhibit C. There
will be no underruns.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 6
6.02 Publisher shall furnish to Printer on or about December 1st of each
year a forecast for the following calendar year, including the number of copies,
number of pages, and the number and dates of the issues of the Magazine.
7.01 Printer shall perform the Work hereunder at Printer's plant in
accordance with the procedures, quality standards, and equipment specified in
the Manufacturing Specifications set forth in Exhibit B, as may be amended and
mutually agreed upon from time to time.
7.02 Printer shall produce the Work hereunder in accordance with the time
limits of the Production Schedule set forth by Publisher, as may be amended and
mutually agreed upon from time to time.
7.03 Publisher shall furnish and/or return promptly all copy
specifications, artwork, dummies, sketches, proofs, copies, pasteups, films and
other material necessary for the timely performance of the Work by Printer.
Delay in furnishing or returning said materials necessary to production could
result in an extension of scheduled delivery dates or additional charges for
cost of accelerated production at regular overtime rates.
ARTICLE 8 - PAPER AND INK
-------------------------
8.01 Publisher shall furnish F.O.B. Printer's plant in Wisconsin cover and
text paper in accordance with the paper requirements set forth in Exhibit D in
rolls, prepared and indentified in accordance with the reasonable mechanical
specifications and delivery requirements of Printer as set forth in Exhibit G.
If substandard and/or defective paper is used or received by Printer which
adversely affects or, if used, might reasonably adversely affect runability or
printability, Printer will provide prompt notification to Publisher, by
telephone, upon discovery of such substandard or defective conditions,
confirming such notification to Publisher in writing within five (5) business
days, if, after such telephone notification, Publisher requests Printer to
continue using or to use said paper to perform the Work and Printer incurs extra
cost as a result thereof, said cost will be charged to and paid by Publisher.
Cores shall remain the property of Publisher and, if not damaged so as to be
unusable, shall be loaded in cars and returned to the respective mills by
Printer at Publisher's direction and expense. Printer will act as Publisher's
agent in receiving paper and shall exercise the same diligence as it would in
receiving paper for its own account, including the reporting to Publisher of
apparent defects in or
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 7
damage to such paper and shall file claims on behalf of the Publisher for such
apparent defects or damage.
8.02 Printer will maintain an accurate record of all paper received, used
and on hand, and shall submit a written monthly inventory to Publisher not later
than the tenth (10th) day following the invoice date for each issue of the
Magazine or sooner if possible. Once each contract year, at Printer's sole cost,
Printer will effect a physical inventory of paper and submit to Publisher a
report of said inventory. "Contract year" for the purpose of this Agreement
means the twelve (12) month period beginning with the first day of the calendar
month in which the printing of the first monthly requirement of the Magazine
commences ("Commencement Date"), pursuant to this Agreement, and each twelve
(12) month period thereafter. Printer is committed to use its best efforts to
keep the wastage of paper at a minimum.
8.03 Printer will, at the end of each contract year, pay Publisher for its
average cost of paper consumed in excess of that allowed by Exhibit D; provided,
however, that the value of underconsumption of one kind of paper will be used as
a credit against overconsumption of other kinds of paper. However, Printer shall
have the option to reimburse the Publisher for such excess in kind. If Printer
consumes less paper than allowed by Exhibit D, Publisher shall pay Printer an
amount equal to fifty percent (50%) of the average value of paper underconsumed
during the contract year, and the paper requirements set forth in Exhibit D
shall be amended to reflect fifty percent (50%) of such underconsumption in the
new or revised paper requirements for the next succeeding contract year.
However, Publisher shall have the option to settle such account in kind. Paper
which is damaged, defective or does not conform to the specifications in Exhibit
G shall be excluded from the computation of overconsumption and
underconsumption. The actual basis weight of the paper received and used for
each issue of the Magazine shall be the basis for the calculation of over and
underconsumption. Within ten (10) days of submitting each issue's invoice,
Printer shall submit the calculation of under or over consumption for the issue
of the Magazine to which the invoice applies.
8.04 Printer shall purchase and store for Publisher ink in the amounts and
kinds consistent with Publisher's requirements hereunder. Printer shall invoice
Publisher in accordance with the Specimen Invoices attached hereto as Exhibit E.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 8
ARTICLE 9 - STORAGE
-------------------
9.01 All paper shall be and remain the property of Publisher. Printer
shall store for Publisher, without charge to Publisher, the amount of paper
required for the issue then in production plus the two (2) following issues of
the Magazine in accordance with the Paper Requirements set forth in Exhibit D.
Publisher may reasonably require Printer to store paper in excess of the
foregoing amount, in which case Printer may charge Publisher a reasonable charge
based upon comparable public warehousing rates.
9.02 Printer shall store all excess copies of past issues of the Magazine
for a period of ninety (90) days after publication, without charge to Publisher.
9.03 Printer shall store editorial material in film form for a period of
twelve (12) months after publication, without charge to Publisher. Thereafter,
Printer shall request Publisher's instructions, and in accordance with such
instructions, shall either return such materials to Publisher at Publisher's
expense, or destroy such materials, or store such materials at a mutually agreed
upon cost to Publisher.
9.04 Printer shall store advertising material in film form for possible
reuse for a period of twelve (12) months after the time of last use, without
charge to Publisher. Thereafter, Printer shall request Publisher's instructions,
and in accordance with such instructions, shall either return such materials to
Publisher at Publisher's expense, or destroy such materials, or store such
materials at a mutually agreed upon cost to Publisher.
9.05 Printer shall store preprinted advertising inserts, sub cards, and ad
cards, either blow in or bind in, furnished by Publisher in sufficient number
for at least two (2) issues, without charge to Publisher. Printer may invoice
Publisher for a reasonable charge for storage of preprinted inserts for more
than two (2) issues.
ARTICLE 10 - PRICES AND TERMS
-----------------------------
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 9
10.01 Publisher shall pay Printer for the Work at the prices in effect
from time to time in accordance with the Price Schedule set forth in Exhibit C,
as may be amended from time to time.
10.02 Printer will send Publisher a preliminary invoice in accordance with
the specimen invoices attached hereto as Exhibit E for the Work within five (5)
days after mailing or delivery to common carriers of the newsstand copies of
each issue of the Magazine and will accompany such invoice with a copy of
Printer's newsstand shipping completion notice to Publisher's Magazine
distributor. Printer will provide Publisher with a final invoice (also in
accordance with the specimen invoices attached hereto as Exhibit E) for the Work
within fifteen (15) days after mailing or delivery to common carriers of each
issue of the Magazine. The terms of payment are net cash thirty (30) days from
the date of receipt by Publisher of Printer's final invoice, or at Publisher's
option, ten (10) days after receipt of Printer's preliminary invoice in an
amount net of one and one fourth percent (1 1/4%) cash discount. Such payment
will be made by wire transfer in federal funds unless another form of payment is
mutually agreed upon. Any discrepancies between the preliminary and final
invoices shall be adjusted by the parties within a reasonable time.
10.03 If Publisher shall default in the payment of any invoice which
Publisher has not disputed, and said default shall continue for a period of
thirty (30) days after written notice from Printer, Printer shall be entitled to
charge interest at the rate of one percent (1%) per month (twelve percent (12%)
per annum) on the amount of the unpaid but undisputed invoice.
10.04 There will be no increase in those manufacturing prices (excluding
ink), set forth in Exhibit C for the period from the Commencement Date until
December 1, 1998 including but not limited to increases in costs resulting from
changes in labor rates, fringe benefits, shop rules, manning requirements or
other working conditions experienced by Printer affecting the cost of performing
the Work or due to increases in the cost of materials (excluding ink),
utilities, fuel, operating supplies, service costs or any other materials or
services utilized by Printer in the performance of the Work. Changes in the cost
of ink shall be passed on as incurred. Rates for ink in the price schedule are
based on Printer's cost from its suppliers as of December 1, 1997. Printer will
supply Publisher with documentation on increases from Printer's ink supplier in
a form acceptable to both parties.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 10
10.05 If during the period of this Agreement (or any renewal) there shall
be any change to Printer in the price of materials (excluding ink), or labor
increases or decreases (any change in labor conditions), the prices contained in
Schedule C may be adjusted on December 1, 1998, and on each December 1st
thereafter during the term of this Agreement to reflect said change. Price
increases will be limited to actual cost not to exceed eighty five percent (85%)
of the Consumer Price Index. For purposes of this Article 10.05, the "Consumer
Price Index" means the selected areas, all items index (1967=100) for the
Chicago-Gary-Lake Co. IL-IN-WI Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W) published by the Bureau of Labor Statistics, U.S.
Department of Labor. The increase in the Consumer Price Index applicable as of
any December 1st shall be the increase in the Consumer Price Index of the
previous July over that of the preceding July. (For example, the increase
applicable for December 1, 1998 shall be the increase in the Consumer Price
Index of July, 1998 over that of July, 1997). Printer will notify Publisher as
soon as practical after knowledge of any increase or decrease.
10.06 Overtime work (herein defined to include holidays as defined in
Exhibit F) is not included in the prices set forth in Exhibit C. No overtime
shall be charged unless requested by Publisher. Any overtime work which Printer
schedules to fulfill Printer's commitments per the Production Schedule shall be
at Printer's expense.
10.07 Commencing with the third (3rd) year of this Agreement, (December 1,
1999 for production of the February, 2000 issue of the magazine), a competitive
situation should arise from a reliable and qualified source capable of producing
the volume and quality produced by Printer under this Agreement for the
production of the Magazine in whole and if there is a difference in Publisher's
net over-all cost for substantially identical services of more than five percent
(5%) on such total volume and quality described above in this Article 10.07, and
Printer and Publisher cannot agree on a satisfactory settlement, Publisher shall
have the right to terminate this Agreement by written notice, effective not less
than twelve (12) months after Printer is advised of such competitive situation.
In the event of dispute between the parties hereto as to the "cost for
substantially identical services,": such dispute shall be settled by arbitration
to be held in Chicago, Illinois in accordance with the Rules of the American
Arbitration Association, and judgment upon the award rendered by the arbitrators
shall be entered in any court having jurisdiction.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 11
10.08 In order to verify any increase or decrease in the wage rates or the
actual costs of materials, Printer shall provide Publisher with evidence of such
increase or decrease certified to be correct by a duly certified public
accounting firm using generally accepted accounting principles.
10.09 In the event that Publisher desires to make changes in the
Manufacturing Specifications set forth in Exhibit B or the Production Schedule
set forth by the Publisher, Printer shall use its best efforts and cooperate
with Publisher in putting such changes into effect. In the event that any such
change results in an ascertainable documented material increase or decrease in
the cost of performing the Work, the prices for the Work set forth in Exhibit C
shall be adjusted to reflect a mutually acceptable increase or decrease.
10.10 Printer shall make all reasonable efforts to improve the quality and
efficiency of the Work and to keep abreast of new developments in the printing
industry. The parties recognize that new developments in the printing industry
may result in cost savings, and that Printer with the approval of Publisher is
expected to institute all possible new developments and to adjust the Exhibit C
prices in order to pass along a fair portion of realized savings to Publisher.
Adjustments in Exhibit B (Manufacturing Specifications), Production Schedule,
and Exhibit C (Price Schedule) resulting from any new developments shall be
subject to the mutual agreement of the parties.
ARTICLE 11 - TITLE AND OWNERSHIP - NO LIENS
-------------------------------------------
11.01 All paper, film, plates, proofs, printed pages and bound copies made
or held by Printer for Publisher shall be the property of Publisher. Title and
possession to the Work shall pass to Publisher upon delivery of completed issues
of magazine f.o.b. Printer's plant.
11.02 Printer shall not cause any property of Publisher in Printer's
possession to be subjected to any liens or encumbrances whatsoever, and shall
protect such property from any claims of Printer's creditors. Except to the
extent of unpaid and undisputed invoices as set forth in Article 10.03, Printer
shall have no lien or security interest in any property of Publisher which comes
into Printer's possession and Printer expressly waives any liens or security
interest on such property created by statute.
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 12
ARTICLE 12 - UNAVOIDABLE DELAYS
-------------------------------
12.01 Printer shall not be liable or responsible to Publisher for delays
or failures to perform the Work occasioned by causes beyond its control and not
due to its fault or negligence, including without limitation, war, natural
disaster, fires, strikes, lockouts, complete inability to obtain necessary
materials, energy, utilities or carrier space, and government acts and
regulations. Printer shall, however, use its best efforts to continue to perform
the Work at any of its plants not so effected by such causes or through
subcontracting Publisher's Work to other printers for the duration of any such
occurrence, subject to Publisher's consent, which shall not be unreasonably
withheld. In no event shall Printer be obligated to subcontract Publisher's Work
if the cost of such subcontracting exceeds the price schedule set forth in
Exhibit C unless Publisher consents to the increase in prices. During any such
period while Publisher's Work is being done under subcontract, the Exhibit C
Price Schedule shall remain in effect (subject to the foregoing) and Printer's
obligations with respect to specifications and quality, overruns and underruns
and storage shall remain in effect.
12.02 In the event of delay on the part of Printer due to causes beyond
its control, which delays shall be continuing, Publisher shall have the right
(notwithstanding any other provision of this Agreement) to place the Work
elsewhere, in whole or in part, for the duration of such causes beyond Printer's
control. Publisher shall have the right to remove from Printer's plant any and
all completed work, work-in-progress, proofs, filmboards, artwork and other
material and supplies intended for use in preparing any then uncompleted work.
If Printer objects to Publisher's removal of property from Printer's plant on
the grounds that it does not consider such cause beyond its control to be
continuing. Printer shall, nevertheless, not deter, delay or impede Publisher
from such removal of property, but shall pursue its legal remedies after such
removal has taken place.
12.03 In the event of any delay due to strikes, lockouts or other labor
difficulties, Publisher shall have the right to place the Work elsewhere. If
Printer anticipates any strike, lockout or other labor difficulties which may
cause stoppages or slowdowns of the work on the Magazine, Printer shall notify
Publisher sufficiently in advance so that Publisher can make alternate
arrangements for the production of the Magazine during any such period of
strikes, lockout or other labor difficulties. In such
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 13
circumstances. Printer shall assist Publisher in making such alternate
arrangements and in moving the Work.
12.04 Printer shall resume performance hereunder and Publisher shall
return to Printer's plant all material removed pursuant to Section 12.02 or
12.03 after Printer has furnished assurances of its capacity to so resume
reasonably satisfactory to Publisher.
12.05 Publisher shall not be liable or responsible to Printer for delays
or failures in furnishing materials occasioned by causes beyond its control and
not due to its fault or negligence, including, without limitation, war, natural
disaster, fires, strikes, lockouts, complete inability to obtain necessary
materials, energy, utilities or carrier space, and government acts and
regulations.
12.06 If any of the above-described causes beyond the control of Printer
continues for a period of more than one hundred twenty (120) days. Publisher
shall have the right to terminate this Agreement upon not less than thirty (30)
days prior written notice to Printer.
ARTICLE 13 - INDEMNIFICATION
----------------------------
13.01 Printer agrees to indemnify, defend and save Publisher harmless of
and from any and all loss, claims, damages, including reasonable attorney's
fees, which Publisher may suffer or incur based on a claim, charge or suit
instituted against Publisher as a result of any act or omission or commission of
Printer in performing its services hereunder.
13.02 The Publisher agrees to indemnify, defend, and save Printer harmless
from any and all loss, claims for damages, including reasonably attorney's fees,
which Printer may suffer or incur in the event any claim is made against Printer
by any person or corporation, by reason of libel, slander, infringement of
copyright, violation of privacy, breach of contract or any other cause of
whatsoever nature (and not due to the negligence of Printer) arising from or as
a result of printing the Magazine or any material of whatsoever nature included
therein.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 14
13.03 Notwithstanding Paragraphs 13.01 and 13.02 above, neither party
shall be liable to the other party for any such indemnification unless the party
seeking indemnification has notified the other party of said claim, action,
proceeding or demand as soon as practicable upon receipt of knowledge of same
and afforded the other party the opportunity to defend or participate in the
defense of said claim, action, proceeding or demand, and further, that no
settlement or payment of any claim, action, proceeding or demand shall be
binding on the indemnifying party unless prior approval and consent is obtained
from the indemnifying party, which said consent will not be unreasonably
withheld.
ARTICLE 14 - INSURANCE
----------------------
14.01 Printer shall carry fire and extended coverage insurance including
sprinkler leakage if applicable on all materials and Work in Process, Work
completed and not delivered which is still in Printer's possession and on all
material supplied by Printer and all property of the Publisher including, but
not limited to, paper, transparencies, film inserts, and the like. Such
coverage shall be at Publisher's replacement cost. On or before the
commencement date of this Agreement, Printer will provide Publisher with a
certificate of insurance naming the Printer as well as the Publisher as
additional named insureds as their interests may appear. Such certificate will
evidence the insurers agreement that such insurance will not be modified or
terminated without at least twenty (20) days' prior written notice to Publisher
of such modification or termination.
ARTICLE 15 - JOINT VENTURE
--------------------------
15.01 Nothing contained herein shall in any way constitute a partnership
between or a Joint venture by the parties hereto. Neither of the parties shall
hold itself out as the partner or joint venturer of the other party, and
neither party shall be or become liable or bound by any representation, act or
omission whatsoever of the other party contrary to the provisions of this
Agreement.
ARTICLE 16 - NO ASSIGNMENT
--------------------------
16.01 Subject to the provisions of Articles 17, 18 and 19, this Agreement
shall be binding upon and inure to the benefit of the successors and assigns of
the parties hereto.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 15
16.02 Neither party to this Agreement shall assign, mortgage or otherwise
encumber this Agreement or its rights or responsibilities hereunder without the
prior written consent of the other party, which consent shall not be
unreasonably withheld.
ARTICLE 17 - BANKRUPTCY
-----------------------
17.01 If either party shall be adjudicated a bankrupt, shall make any
assignment for the benefit of creditors, shall institute proceedings for
voluntary bankruptcy, shall apply for or consent to the appointment of a
receiver, or if an order shall be entered approving a petition seeking its
reorganization or appointing a receiver of it or its property, then upon the
happening of any one or more of such events, the other party to this Agreement
shall have the right to terminate this Agreement by giving written notice of its
intention to do so. Any termination of this Agreement pursuant to this Article
17 shall not release either party from any obligation hereunder due and owing
to the other party up to the date of such termination.
ARTICLE 18 - SALE OF MAGAZINE OR DISCONTINUANCE OF PUBLICATION
--------------------------------------------------------------
18.01 If Publisher shall propose to sell the Magazine or any successor
magazine thereto, whether titled the same or not, to a person, firm, or
corporation which is not a subsidiary or affiliate of or controlled by
Publisher, Publisher shall give Printer written notice not less than ninety (90)
days prior to any contemplated sale. Thereafter, Publisher shall keep Printer
advised of the progress of any such proposed sale and Printer shall keep such
information confidential. Within thirty (30) days after receipt of such notice,
Printer shall advise Publisher in writing as to whether Printer will consent to
an assignment of Publisher's rights and obligations under this Agreement to the
prospective purchaser. If Printer is willing to consent to an assignment,
publisher shall use its best efforts to persuade the prospective purchaser to
assume all Publisher's obligations under this Agreement concurrently with the
consummation of such sale by an instrument in writing satisfactory to Printer.
If Printer shall not consent to the assignment by Publisher to such
prospective purchaser or if despite its best efforts Publisher shall be unable
to persuade the prospective purchaser, upon the consummation of such sale the
rights and obligations of the parties hereunder shall terminate without
liability of any kind by either party for the unexpired term of the Agreement.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 16
18.02 If Publisher decides to discontinue the publication of the Magazine,
Publisher shall give Printer ninety (90) days advance written notice of such
decision, specifying the effective date of discontinuance upon which date this
Agreement shall terminate without liability of any kind by either party for the
unexpired term of this Agreement.
18.03 Without limiting the provisions of Articles 18.01 and 18.02,
Publisher shall be obligated to pay all costs for Work done up to the effective
date of termination.
ARTICLE 19 - CHANGE IN CONTROL OF PRINTER
-----------------------------------------
19.01 In the event that the ownership and management of Printer at any
time shall pass out of the majority control of its present owners and
management, by sale of stock or assets, merger or otherwise, Printer shall give
Publisher written notice not less than ninety (90) days prior to the effective
date of any change of control and Publisher shall have the right to terminate
this Agreement upon the effective date of such change of control. If Publisher
does not elect to terminate this Agreement, the new owners and management of
Printer shall assume this Agreement and carry out all of its terms and
provisions.
ARTICLE 20 - DELIVERY AND DISTRIBUTION SERVICES
-----------------------------------------------
20.01 Printer shall cause all copies of the Magazine produced by it to be
tendered for delivery F.O.B. Printer's dock, Lomira, Wisconsin, in care of such
persons, firms or corporations as Publisher may from time to time designate or
as otherwise provided herein. Delivery shall be made in accordance with the
schedule as furnished by Publisher from time to time, which delivery shall
conform to the current Production Schedule.
20.02 Printer shall perform a complete distribution service for the
Magazine which includes, but is not limited to, the maintenance of tariff files,
rate analyses, routing, preparation of shipping documents, arranging for
transportation, auditing freight bills and handling charges submitted by
carriers and breakup agents, tracing shipments, processing and collecting claims
for short or damaged shipments (but assumes no liability for same), preparation
of postal forms, prepayment of freight invoices, and prorating consolidated
shipment charges.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 17
20.03 Printer will, at frequent and regular intervals, review the existing
postal and distribution scheme and determine any savings that might be effected
from changes in availabilities, rate structures, regulations, volume, etc., in
the consolidation of shipments and in the establishment of entry points, and
shall report on these reviews to the Publisher, with any recommendations.
20.04 Printer will provide Publisher's Magazine distributor with a
newsstand shipping completion notice not more than five (5) days after mailing
or delivery to common carriers of the newsstand copies of each issue of the
Magazine.
ARTICLE 21 - NO LIENS
---------------------
Subject to Article 11.02 hereof, Printer shall not cause any property of
Publisher in Printer's possession to be subject to any liens or encumbrances of
whatsoever kind or nature.
ARTICLE 22 - TITLE AND RISK LOSS
--------------------------------
22.01 Title and risk of loss or damage to finished Work shall pass to
Publisher upon delivery to a common carrier, contract carrier or U.S. Postal
service F.O.B., Printer's shipping dock.
22.02 Title to all artwork, mechanicals, proofs, film negatives,
positives, transparencies, paper (excluding waste paper), inserts, etc., and
other materials supplied or furnished by the Publisher shall remain the property
of Publisher. Title to film made or caused to be made by Printer for Publisher
and paid for by Publisher shall become the property of Publisher.
ARTICLE 23 - PROOFS
-------------------
Prior to the press run of any issue of the magazine, Printer shall supply
to Publisher- a blueline proof. Publisher shall approve said proof by
representatives designated by the Publisher in writing, by initialing said proof
with "O.K." or "O.K. With Changes". Any changes required shall be specified by
the Publisher's designated representatives in writing. Printer shall not be
responsible for any errors if printed pursuant to such representatives'
instructions as herein provided.
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Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 18
ARTICLE 24 - LIMITATION OF MATERIALS
------------------------------------
If Printer's materials or supplies shall be limited because of governmental
or supplier allocations or restrictions, such materials or supplies as Printer
shall have will be used and distributed ratably to its customers based upon the
usage of such customers when the allocations or restrictions became effective.
If the materials' shortage materially interferes with the publication of the
Magazine, then Publisher shall have the option to place the Work elsewhere
pursuant to the provisions contained in Article 12 hereof.
ARTICLE 25 - NEW EQUIPMENT
--------------------------
It is recognized that if the parties mutually agree that the Work may be
more economically and efficiently produced on new equipment, the parties will
negotiate in good faith as to the terms for the installation of such equipment,
including prices for Work produced, the terms and conditions of contract and any
other arrangements which appear appropriate in connection with the addition of
such equipment. Costs used in establishing new prices will be computed using
the same framework and criteria as those used to establish the prices set forth
in Exhibit C.
ARTICLE 26 - NEW DEVELOPMENTS IN GRAPHIC ARTS
---------------------------------------------
The Printer agrees to make all reasonable efforts to reduce costs and to
improve the quality and efficiency of the Work and to keep abreast of
developments in the graphic arts comprising technological improvements in
processing, methods and techniques and to advise Publisher from time to time of
its findings. The Printer shall adopt such technological or other innovations
as the parties agree (which agreement shall not be unreasonably withheld) are
necessary or desirable for production of Work hereunder, provided the parties
mutually agree with respect to the methods and conditions of manufacture which
pertain to such innovation. Upon incorporation of any such development, the
Printer shall adjust the prices to reflect as mutually agreed upon any increases
or decreases in cost resulting therefrom. Such increases or decreases in costs
will be computed using the same framework and criteria as those used to
establish the prices set forth in Exhibit C.
ARTICLE 27 - MESSENGER SERVICE
------------------------------
Messenger service between Publisher's offices, and Printer's plant in
Pewaukee, Wisconsin, will be provided daily by Printer at Publisher's cost.
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 19
ARTICLE 28 - ADVERTISING AND EDITORIAL MATERIAL
-----------------------------------------------
Printer agrees to a mechanical inspection of advertising and editorial film
prior to printing. Printer will promptly notify Publisher on the proofs all
apparent defects on all film received. Film is to be repaired when necessary and
charged for as set for in Exhibit C. Printer will not unnecessarily charge for
film repairs. Printer will supply proof with description of work performed when
billing for repair work is submitted. Printer accepts full responsibility for
mechanical defects in film passed by its inspection, including those it repairs
in the event of mishaps within Printer's plant.
ARTICLE 29 - POSTAL REGULATIONS
-------------------------------
Publisher may from time to time wish to take advantage of changes that may
occur in U.S. Postal regulations (e.g., the regulation which permits a
publication to attach certain letters [e.g., renewal notices] or other types of
mail to a magazine, thereby giving that piece of mail the benefit of the
publication's second class mailing rates). Printer agrees to make such tests as
are reasonably required by Publisher and to work with the Publisher towards
determining the benefits of such changes to Publisher.
ARTICLE 30 - CONFIDENTIAL TREATMENT
-----------------------------------
Printer shall use its best efforts to keep confidential the editorial
contents of unpublished issue of the Magazine until the newsstand sales dates
and to keep confidential Publisher's subscriber lists and Printer shall require
its employees to maintain such confidentiality.
ARTICLE 31 - GOVERNING LAW
--------------------------
This Agreement shall be interpreted and construed in accordance with the
laws of the State of Illinois.
ARTICLE 32 - AMENDMENTS
-----------------------
This Agreement constitutes the entire agreement and understanding between
the parties, and cannot be amended, or changed, or supplemented except by a
written instrument signed by both the parties.
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 20
ARTICLE 33 - NOTICES
--------------------
All notices required or permitted to be given under this Agreement shall be
deemed given if sent by registered or certified mail, postage prepaid, addressed
to the parties as follows;
If to Publisher: Playboy Enterprises, Inc.
680 N. Lake Shore Drive
Chicago, Illinois 60611
Attn: Maria Mandis
with an exact copy sent to the same address
marked "Attention: Corporate Secretary"
If to Printer: Quad/Graphics, Inc.
Attn: Janice Fritz, Contract Administrator
W224N3322 Duplainville Road
Pewaukee, WI 53072-4195
Notices shall be deemed conclusively to have been served when actually
received or refused by the addressee or upon notification of non-deliverability
by the postal authorities, as the case may be.
ARTICLE 34 - CAPTIONS
---------------------
The captions to this Agreement have been placed thereon for the convenience
of the parties and shall not be considered in the interpretation or construction
of the Agreement.
ARTICLE 35 - ENTIRE AGREEMENT
-----------------------------
This Agreement represents the entire understanding of the parties. None of
the terms of this Agreement can be waived or modified except by an express
agreement in writing signed by the parties. There are no representations,
promises, warranties, covenants or undertaking other than those contained in
this Agreement. The failure of either party hereto to enforce, or the delay by
either party in enforcing, any of its rights under this Agreement shall not be
deemed as constituting a waiver or a modification
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
October 14, 1997
Page 21
thereof and either party may, within the time provided by applicable law,
commence appropriate proceedings to enforce any or all of such rights.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers.
PLAYBOY ENTERPRISES, INC.
/s/ Maria Mandis
By Maria Mandis
Its Vice President of Magazine Production
QUAD/GRAPHICS, INC.
/s/ Harry V. Quadracci
By Harry V. Quadracci
Its President
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit B - Manufacturing Specifications
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
Exhibit B - Manufacturing Specifications
For: Playboy
- --------------------------------------------------------------------------------
Frequency: Monthly
Quantity: Approximately 4,400,000.
No. of Pages: 178 pages plus a 4 page cover.
Dimensions: Trimmed size 8 1/8" X 10 7/8" full bleed.
Paper: To be furnished by Customer. Paper consumption figures are
outlined in the Paper Requirements included in the attached
Schedule B.
Copy: Publisher to furnish single page film negatives or positives,
one piece per color, right reading, emulsion down with corner
marks, register marks and page identification and/or digital
file acceptable for direct to plate production.
Proofs: Publisher to furnish final corrected Cromalin, Matchprint or
other acceptable proofs to be used as Quad/Graphics' color
guide.
Plates: Quad/Graphics to make the necessary press plates and cylinders
for production, all metal to remain the property of
Quad/Graphics.
Presswork: Quad/Graphics to print and deliver folded signatures. See the
manufacturing prices in Schedule B for form and color
breakdown.
Ink: Invoicing of Ink will be per prices outlined in Schedule B.
Binding: Printed signatures will be gathered in proper sequences with
Publisher-furnished and inserts, perfect bound along the
10-7/8" way and trimmed to size. A dummy of any furnished
insert must be submitted to the plant for approval prior to
manufacture.
Mailing/
Packing: Ink Jet, Mailing, and Packing instructions vary. Invoicing of
Mailing (In-Line and Off-Line), Packing, and Ink Jet
operations will be per prices outlined in Schedule B.
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit C - Pricing Specifications
<PAGE>
QUAD/GRAPHICS, INC.
1996 PREPARATORY CONTRACT PRICING FOR PLAYBOY ENTERPRISES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Prices are based on producing an 8-3/16" x 10-7/8" page size.
PLAYBOY 1996 (Contract Pricing)
Furnished Edit
(Based on 4/C, but includes 2/C or 3/C also)
Any full page stories or cartoons and also partial page cartoons.
Furnished edit - (RREU negatives).........................................***
Furnished edit - (RRED positives without Matchprint proof)................***
Furnished edit - (RRED positives with Matchprint proof)...................***
B&W Type Pages (full page)
Supplied RRED positives (for full page edit)..............................***
Full Page Furnished Ads (2/C, 3/C or 4/C)
Supplied RREU negatives...................................................***
Supplied RRED negatives...................................................***
Supplied RRED positives...................................................***
Full Page B&W Ads
Supplied RREU negatives...................................................***
Supplied RRED positives...................................................***
Partial Page Ads (based upon B&W edit film. If edit has scans, tints, K.O.'s,
handwork, etc. will be billed per the attached price list)
B&W ad (supplied RREU negatives)..........................................***
2/C, 3/C or 4/C ad supplied as RREU negatives (price based on one ad).....***
2/C, 3/C or 4/C ad supplied as RREU negatives (price based on two ads)....***
Pick up ads (partial or full page)
Pick up B&W ad............................................................***
Pick up 2/C, 3/C or 4/C ad................................................***
</TABLE>
- --------------------------------------------------------------------------------
Quad/Imaging March 1, 1996 Page 1
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
QUAD/GRAPHICS, INC.
1996 PREPARATORY CONTRACT PRICING FOR PLAYBOY ENTERPRISES, INC.
- --------------------------------------------------------------------------------
PLAYBOY SPECIALS
Base 4/C Page
(8-3/16" x 10-7/8")
BASE PAGE:
(081) Base 4/C page................................................*** page
Price includes ripping type and line art from a supplied disk, all random
4/C separations, color correction and touching up of skin blemishes or
scratches as noted on each transparency, processing high resolution images
into the desktop page file, outputting film, a composite Matchprint proof,
color correction and retouching as noted on the first proof, reripping a
page file, reprocessing high resolution images into the desktop page file,
outputting a second set of final film and a second composite Matchprint
proof and two blueline proofs.
You can determine the additional cost of items not specified in the estimate
such as silhouettes, drop shadows, versions, color corrections after the second
proof show and author alterations per the attached price list.
Your price estimate is based on the specifications and printed samples
(September/October 1993 Lingerie book, November/December 1993 Lingerie book,
Playboy's Video Playmates, Playboy's Satin, Leather & Lace supplement and the
1993 Centerfold Sensations) that you have provided.
You can help meet the estimated price and complete your project on time by
providing the following:
. Macintosh based QuarkXPress page files created as single pages to be
processed and output as final film.
. Page files containing all type and line art (colored, tinted and built to
butt), EPS files and square finish windows in position with low resolution
images resident on the page.
. Thermal proofs or laser proofs of designed pages containing trim marks,
call outs for color breaks and tint values and low resolution files showing
image position, size, cropping and angling.
. A list of all CTs and fonts used in the document along with a list of the
fonts, software and version used to create EPS files.
- --------------------------------------------------------------------------------
Quad/Imaging March 1, 1996 Page 2
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
QUAD/GRAPHICS, INC.
1996 PREPARATORY CONTRACT PRICE LIST FOR PLAYBOY ENTERPRISES, INC.
- --------------------------------------------------------------------------------
Prices are based on producing an 8-3/16" x 10-7/8" page size.
<TABLE>
<CAPTION>
PLAYBOY 1996 (Contract Price list)
<C> <S> <C>
COLOR SEPARATION
Price includes a random color proof and either positives or negatives.
Each subject will be scanned for a comparable representation of the
original transparency or to the written instructions on the
transparency within scanner limitations. Scans that are, in our
judgement, extremely difficult to reproduce will require handwork.
Color correction is additional.
(356) B & W separation.........................................***
Four color separation
(301) 5" x 7"..................................................***
(302) 9" x 12".................................................***
(303) 14" x 20"................................................***
DESKTOP PAGE PROCESSING
(036) Trap color...............................................***
(297) Black & white line scan..................................***
(134) Page processing, per color, (outputting film additional).***
(489) Digital file output (per color)..........................***
(073) Output film (per color)..................................***
ELECTRONIC SYSTEM
(496) Electronic page assembly, color correction, swatch
matching, retouching, special effects, rotation,
extensive resizing, alteration of desktop page files.....***
CONVENTIONAL FILM ASSEMBLY
(052) Color break mask.........................................***
(053) Tint screen (per value, per color).......................***
(057) Reverse type.............................................***
(059) Knock out mask...........................................***
(032) Cadograph windows and rules..............................***
(069) Dupe film (per color, per item) does not include strips..***
(054) Contact film (per color, per item) does not include
strips...................................................***
(061) Strip film element.......................................***
(168) Pick up with inspection (per color, per item)............***
(021) Handwork (per hour)......................................***
(066) Final film (per color)...................................***
(031) Ad inspection............................................***
* Ad inspection includes checking the screen ruling and angle of films,
inspecting films for holes and scratches, checking each film to the
furnished proof, checking total density of the proof and noting any
potential problems. Proofs are additional.
PROOFING
(065) Position proof (blueline)................................***
(023) Black & white proof (Velox or LOP).......................***
(025) Matchprint proof.........................................***
</TABLE>
- --------------------------------------------------------------------------------
Quad/Imaging March 1, 1996 Page 3
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
OFFSET PRESSWORK DEL. PLATES & RATE
FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M
=========================================================================
<S> <C> <C> <C> <C> <C>
4 Page Flat Cover (4/4) 4's 4 8 *** ***
4 Page Flat Cover (5/5) 4's 4 10 *** ***
4 Page Flat Cover (6/6) 4's 4 12 *** ***
4 Page Flat Cover (7/4) 4's 4 11 *** ***
4 Page Flat Cover (7/5) 4's 4 12 *** ***
4 Page Flat Cover (8/4) 4's 4 12 *** ***
4 Page Flat Cover (8/5) 4's 4 13 *** ***
6 Page Gate Cover (4/4) 6's 2 8 *** ***
6 Page Gate Cover (5/5) 6's 2 10 *** ***
6 Page Gate Cover (6/6) 6's 2 12 *** ***
6 Page Gate Center (4/2) 6's 2 6 *** ***
6 Page Gate Center (4/4) 6's 2 8 *** ***
6 Page Gate Center (5/4) 6's 2 9 *** ***
6 Page Gate Center (5/5) 6's 2 10 *** ***
2 Page Body (1/1) 2's 8 2 *** ***
2 Page Body (2/2) 2's 8 4 *** ***
2 Page Body (4/4) 2's 8 8 *** ***
2 Page Body (5/5) 2's 8 10 *** ***
4 Page Body (1/1) 4's 4 2 *** ***
4 Page Body (2/2) 4's 4 4 *** ***
4 Page Body (4/4) 4's 4 8 *** ***
4 Page Body (5/5) 4's 4 10 *** ***
4 Page Body (6/5) 4's 4 10 *** ***
4 Page Gate Body (1/1) 4's 4 2 *** ***
4 Page Gate Body (2/2) 4's 4 4 *** ***
4 Page Gate Body (4/4) 4's 4 8 *** ***
4 Page Gate Body (5/5) 4's 4 10 *** ***
6 Page Gate Body (4/4+4/4) 6's 4 16 *** ***
8 Page Body (1/1) 8's 2 2 *** ***
8 Page Body (2/2) 8's 2 4 *** ***
8 Page Body (4/4) 8's 2 8 *** ***
8 Page Body (5/5) 8's 2 10 *** ***
8 Page Body (1/1+1/1) 8's 4 4 *** ***
8 Page Body (2/2+2/2) 8's 4 8 *** ***
8 Page Body (4/4+1/1) 8's 4 10 *** ***
8 Page Body (4/4+2/2) 8's 4 12 *** ***
8 Page Body (4/4+4/4) 8's 4 16 *** ***
8 Page Body (5/5+4/4) 8's 4 18 *** ***
8 Page Body (5/5+5/5) 8's 4 20 *** ***
8 Page Gate Body (4/4) 8's 2 8 *** ***
8 Page Gate Body (5/5) 8's 2 10 *** ***
- ---------------------------------------------------------------------------
</TABLE>
Page 1 Quad / Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OFFSET PRESSWORK DEL. PLATES & RATE
FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M
================================================================================
<S> <C> <C> <C> <C> <C>
12 Page Body (1/1+1/1) 12's 2 4 *** ***
12 Page Body (2/2+2/2) 12's 2 8 *** ***
12 Page Body (4/4+1/1) 12's 2 10 *** ***
12 Page Body (4/4+2/2) 12's 2 12 *** ***
12 Page Body (4/4+4/4) 12's 2 16 *** ***
12 Page Body (5/5+4/4) 12's 2 18 *** ***
12 Page Body (5/5+5/5) 12's 2 20 *** ***
16 Page Body (1/1) 8's 1 2 *** ***
16 Page Body (2/2) 8's 1 4 *** ***
16 Page Body (4/4) 8's 1 8 *** ***
16 Page Body (5/5) 8's 1 10 *** ***
16 Page Body (1/1+1/1) 8's 2 4 *** ***
16 Page Body (2/2+2/2) 8's 2 8 *** ***
16 Page Body (4/4+1/1) 8's 2 10 *** ***
16 Page Body (4/4+2/2) 8's 2 12 *** ***
16 Page Body (4/4+4/4) 8's 2 16 *** ***
16 Page Body (5/5+4/4) 8's 2 18 *** ***
16 Page Body (5/5+5/5) 8's 2 20 *** ***
16 Page Body (1/1+1/1) 16's 2 4 *** ***
16 Page Body (2/2+2/2) 16's 2 8 *** ***
16 Page Body (4/4+1/1) 16's 2 10 *** ***
16 Page Body (4/4+2/2) 16's 2 12 *** ***
16 Page Body (4/4+4/4) 16's 2 16 *** ***
16 Page Body (5/5+4/4) 16's 2 18 *** ***
16 Page Body (5/5+5/5) 16's 2 20 *** ***
- --------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
OFFSET PRESSWORK DEL. PLATES & RATE
FORM DESCRIPTION AS OUT PLATES MAKEREADY PER/M
================================================================================
<S> <C> <C> <C> <C> <C>
32 Page Body (1/1+1/1) 8's 1 4 *** ***
32 Page Body (2/2+2/2) 8's 1 8 *** ***
32 Page Body (4/4+1/1) 8's 1 10 *** ***
32 Page Body (4/4+2/2) 8's 1 12 *** ***
32 Page Body (4/4+4/4) 8's 1 16 *** ***
32 Page Body (5/5+4/4) 8's 1 18 *** ***
32 Page Body (5/5+5/5) 8's 1 20 *** ***
32 Page Body (1/1+1/1) 16's 1 4 *** ***
32 Page Body (2/2+2/2) 16's 1 8 *** ***
32 Page Body (4/4+1/1) 16's 1 10 *** ***
32 Page Body (4/4+2/2) 16's 1 12 *** ***
32 Page Body (4/4+4/4) 16's 1 16 *** ***
32 Page Body (5/5+4/4) 16's 1 18 *** ***
32 Page Body (5/5+5/5) 16's 1 20 *** ***
- --------------------------------------------------------------------------------
Rates are guaranteed for 1,500,000 impressions, replacements will be invoiced as
required thereafter. See below for plate and makeready changes.
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
RATE
OFFSET PRESS SUPPLEMENTAL PRICES MAKEREADY PER/M
================================================================================
<S> <C> <C>
Plate Charges, each *** ***
Makeready Changes, each plate *** ***
Rub Off *** ***
Perf signature *** ***
Multiple delivery charges, per delivery *** ***
Press down time, per hour *** ***
- --------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
GRAVURE PRESSWORK DEL. CYLINDERS & RATE
FORM DESCRIPTION AS OUT CYLINDERS MAKEREADY PER/M
- ------------------ ---- --- --------- ----------- ------
12 Page Body (4/4) 12's 4 8 *** ***
12 Page Body (5/5) 12's 4 10 *** ***
16 Page Body (4/4) 16's 4 8 *** ***
16 Page Body (5/5) 16's 4 10 *** ***
20 Page Body (4/4) 20's 2 8 *** ***
20 Page Body (5/5) 20's 2 10 *** ***
24 Page Body (4/4) 24's 2 8 *** ***
24 Page Body (5/5) 24's 2 10 *** ***
28 Page Body (4/4) 28's 2 8 *** ***
28 Page Body (5/5) 28's 2 10 *** ***
32 Page Body (4/4) 32's 2 8 *** ***
32 Page Body (5/5) 32's 2 10 *** ***
36 Page Body (4/4) 36's 2 8 *** ***
36 Page Body (5/5) 36's 2 10 *** ***
40 Page Body (4/4) 20's 1 8 *** ***
40 Page Body (5/5) 20's 1 10 *** ***
48 Page Body (4/4) 16's 2 8 *** ***
48 Page Body (5/5) 16's 2 10 *** ***
48 Page Body (4/4) 24's 1 8 *** ***
48 Page Body (5/5) 24's 1 10 *** ***
56 Page Body (4/4) 28's 1 8 *** ***
56 Page Body (5/5) 28's 1 10 *** ***
60 Page Body (4/4) 20's 2 8 *** ***
60 Page Body (5/5) 20's 2 10 *** ***
64 Page Body (4/4) 32's 1 8 *** ***
64 Page Body (5/5) 32's 1 10 *** ***
72 Page Body (4/4) 24's 1 8 *** ***
72 Page Body (5/5) 24's 1 10 *** ***
72 Page Body (4/4) 12's 1 8 *** ***
72 Page Body (5/5) 12's 1 10 *** ***
84 Page Body (4/4) 28's 1 8 *** ***
84 Page Body (5/5) 28's 1 10 *** ***
96 Page Body (4/4) 32's 1 8 *** ***
96 Page Body (5/5) 32's 1 10 *** ***
96 Page Body (4/4) 16's 1 8 *** ***
96 Page Body (5/5) 16's 1 10 *** ***
Included in makeready charges are bromides, one set of cylinders
with one press proof and the press makeready.
Page 4 Quad/Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
RATE
GRAVURE PRESS SUPPLEMENTAL PRICES MAKEREADY PER/M
- ----------------------------------------------------- --------- ------
Additional bromides, per page, per color *** ***
Cylinder Charges, each *** ***
Makeready Changes, each cylinder *** ***
Additional proofs (per side) *** ***
Supplemental engraving for type only, each *** ***
Cylinder storage 1st month, each cylinder *** ***
Cylinder storage each additional month, each cylinder *** ***
Press down time, per hour *** ***
COVER BODY
OFFSET INK PRICES RATE RATE
- ----------------------------------------------------- --------- ------
4/Color pages, per/M *** ***
3/Color pages, per/M *** ***
2/Color pages, per/M *** ***
Black pages, per/M *** ***
5/Color (non metallic) pages, per/M *** ***
6/Color (non metallic) pages, per/M *** ***
7/Color (non metallic) pages, per/M *** ***
8/Color (non metallic) pages, per/M *** ***
Metallic Color less than 1/2 page, per/M *** ***
Varnish *** ***
UV Coat covers 1 & 4
Makeready *** ***
Rune Rate, per/M *** ***
UV Coat covers of gatefold (one side only)
Makeready *** ***
Run Rate, per/M *** ***
BODY
GRAVURE INK PRICES RATE
- --------------------------------------------------------------------- ------
4/Color pages, per/M ***
3/Color pages, per/M ***
2/Color pages, per/M ***
Black pages, per/M ***
PMS ink will be invoices at cost plus 10% ***
Page 5 Quad/Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
<TABLE>
<CAPTION>
RATE
PERFECT BINDING MAKEREADY PER/M
- --------------------------------------------------------------- --------- -------
<S> <C> <C>
Up to 12 pockets *** ***
13 pockets *** ***
14 pockets *** ***
15 pockets *** ***
16 pockets *** ***
17 pockets *** ***
18 pockets *** ***
19 pockets *** ***
20 pockets *** ***
21 pockets *** ***
22 pockets *** ***
23 pockets *** ***
24 pockets *** ***
25 pockets *** ***
26 pockets *** ***
27 pockets *** ***
28 pockets *** ***
29 pockets *** ***
30 pockets *** ***
31 pockets *** ***
32 pockets *** ***
33 pockets *** ***
34 pockets *** ***
35 pockets *** ***
36 pockets *** ***
</TABLE>
Rate Per/M includes all costs up through the trimming unit.
Makeready prices are based on (3) machines.
<TABLE>
<CAPTION>
RATE
PERFECT BINDING PREMIUMS MAKEREADY PER/M
- --------------------------------------------------------------- --------- -------
<S> <C> <C>
Bind-in and Blow-in cards are counted as pockets *** ***
First pocket change per stop, per machine *** ***
Each additional pocket change per same stop, per machine *** ***
Demographic insertion (body signatures only) (ink jet required) *** ***
Demographic insertion (cover form only) (ink jet required) *** ***
Demographic insertion (body forms and cover) (ink jet required) *** ***
Apply furnished tip-ons *** ***
Label Aire/Dot whacker *** ***
Handwork, per hour *** ***
Binder holding time, per hour *** ***
</TABLE>
Page 6 Quad/Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
IN-LINE POLYWRAP & MAILING RATE
WITH ONE ONE COLOR PRE-PRINTED SITMA PLASTIC PER/M
- -------------------------------------------- ------
Up to 12 pockets on perfect binder ***
13 pockets on perfect binder ***
14 pockets on perfect binder ***
15 pockets on perfect binder ***
16 pockets on perfect binder ***
17 pockets on perfect binder ***
18 pockets on perfect binder ***
19 pockets on perfect binder ***
20 pockets on perfect binder ***
21 pockets on perfect binder ***
22 pockets on perfect binder ***
23 pockets on perfect binder ***
24 pockets on perfect binder ***
25 pockets on perfect binder ***
26 pockets on perfect binder ***
27 pockets on perfect binder ***
28 pockets on perfect binder ***
29 pockets on perfect binder ***
30 pockets on perfect binder ***
31 pockets on perfect binder ***
32 pockets on perfect binder ***
33 pockets on perfect binder ***
34 pockets on perfect binder ***
35 pockets on perfect binder ***
36 pockets on perfect binder ***
RATE
IN-LINE POLYWRAP & MAILING PREMIUMS MAKEREADY PER/M
- ----------------------------------------------- --------- -----
Inserts *** ***
Pocket changes, each *** ***
Ink jet addressing and formatting upcharge
(max 8 lines in one position) *** ***
Ink jet "out of pocket" upcharge (per postion) *** ***
Ink jet code & message or code only *** ***
Demographic insertion *** ***
Additinal colors and versions on poly film will
be invoiced at cost plus 15%
Label Aire/Dot whacker *** ***
Page 7 Quad/Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PRICE SCHEDULES
<TABLE>
<CAPTION>
RATE
NEWSSTAND & BULK PACKING MAKEREADY PER/M
- ----------------------------------------------------- --------- -------
<S> <C> <C>
Shrinkwrap in bundles *** ***
Newsstand label preparation *** ***
Onsert newsstand letter, per bundle *** ***
<CAPTION>
RATE
OFF-LINE MAILING MAKEREADY PER/M
- ----------------------------------------------------- --------- -------
<S> <C> <C>
Off-line mail with paper labels *** ***
List changes, each *** ***
Insert into supplied envelopes *** ***
Insert into quad supplied envelopes *** ***
Handwork, per hour *** ***
<CAPTION>
RATE
PACKING & HANDLING MAKEREADY PER/M
- ----------------------------------------------------- --------- -------
<S> <C> <C>
Off-line Polywrapping base piece *** ***
Off-line polywrapping per insert *** ***
Bulk in cartons, each (with attached shipping label) *** ***
Bulk on skids, each *** ***
Bulk on skids with sleeves, each *** ***
Tearsheets (based on per hour rate) *** ***
Handle funished skids, each *** ***
Handling furnished stock, per cwt (as received) *** ***
</TABLE>
Page 8 Quad/Graphics Inc. May 30, 1996
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit D - Paper Requirements
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
8 1/8" x 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
- ---------------------------- ------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
4 Page Flat Cover (4/4) 33.7500 22.750 100 *** ***
4 Page Flat Cover (5/5) 33.7500 22.750 100 *** ***
4 Page Flat Cover (6/6) 33.7500 22.750 100 *** ***
Press Stops, each 33.7500 22.750 100 *** ***
Plate Changes, per plate 33.7500 22.750 100 *** ***
6 Page Cover (4/4) 24.5000 22.750 80 *** ***
6 Page Cover (5/5) 24.5000 22.750 80 *** ***
6 Page Cover (6/6) 24.5000 22.750 80 *** ***
Press Stops, each 24.5000 22.750 80 *** ***
Plate Changes, per plate 24.5000 22.750 80 *** ***
6 Page Center (4/2) 23.1875 22.750 60 *** ***
6 Page Center (4/4) 23.1875 22.750 60 *** ***
6 Page Center (5/4) 23.1875 22.750 60 *** ***
6 Page Center (5/5) 23.1875 22.750 60 *** ***
Press Stops, each 23.1875 22.750 60 *** ***
Plate Changes, per plate 23.1875 22.750 60 *** ***
2 Page Body (1/1) 33.5000 22.750 50 *** ***
2 Page Body (2/2) 33.5000 22.750 50 *** ***
2 Page Body (4/4) 33.5000 22.750 50 *** ***
2 Page Body (5/5) 33.5000 22.750 50 *** ***
4 Page Body (1/1) 33.5000 22.750 50 *** ***
4 Page Body (2/2) 33.5000 22.750 50 *** ***
4 Page Body (4/4) 33.5000 22.750 50 *** ***
4 Page Body (5/5) 33.5000 22.750 50 *** ***
4 Page Body (1/1) 33.5000 22.750 40 *** ***
4 Page Body (2/2) 33.5000 22.750 40 *** ***
4 Page Body (4/4) 33.5000 22.750 40 *** ***
4 Page Body (5/5) 33.5000 22.750 40 *** ***
4 Page Gatefold (1/1) 30.5000 22.750 60 *** ***
4 Page Gatefold (2/2) 30.5000 22.750 60 *** ***
4 Page Gatefold (4/4) 30.5000 22.750 60 *** ***
4 Page Gatefold (5/5) 30.5000 22.750 60 *** ***
Press Stops, each 30.5000 22.750 60 *** ***
Plate Changes, per plate 30.5000 22.750 60 *** ***
6 Page Gatefold (4/4)(4/4) 19.1250 22.750 60 *** ***
Press Stops, each 19.1250 22.750 60 *** ***
Plate Changes, per plate 19.1250 22.750 60 *** ***
8 Page Body (1/1) 33.5000 22.750 50 *** ***
8 Page Body (2/2) 33.5000 22.750 50 *** ***
8 Page Body (4/4) 33.5000 22.750 50 *** ***
8 Page Body (5/5) 33.5000 22.750 50 *** ***
8 Page Body (1/1) 33.5000 22.750 40 *** ***
8 Page Body (2/2) 33.5000 22.750 40 *** ***
8 Page Body (4/4) 33.5000 22.750 40 *** ***
8 Page Body (5/5) 33.5000 22.750 40 *** ***
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Page 1 Quad/Graphics Inc. September 9, 1996
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
8 1/8" x 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
- ---------------------------- ------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
8 Page Body (1/1+1/1) 33.5000 22.750 50 *** ***
8 Page Body (2/2+2/2) 33.5000 22.750 50 *** ***
8 Page Body (4/4+1/1) 33.5000 22.750 50 *** ***
8 Page Body (4/4+2/2) 33.5000 22.750 50 *** ***
8 Page Body (4/4+4/4) 33.5000 22.750 50 *** ***
8 Page Body (5/5+4/4) 33.5000 22.750 50 *** ***
8 Page Body (5/5+5/5) 33.5000 22.750 50 *** ***
8 Page Body (1/1+1/1) 33.5000 22.750 40 *** ***
8 Page Body (2/2+2/2) 33.5000 22.750 40 *** ***
8 Page Body (4/4+1/1) 33.5000 22.750 40 *** ***
8 Page Body (4/4+2/2) 33.5000 22.750 40 *** ***
8 Page Body (4/4+4/4) 33.5000 22.750 40 *** ***
8 Page Body (5/5+4/4) 33.5000 22.750 40 *** ***
8 Page Body (5/5+5/5) 33.5000 22.750 40 *** ***
8 Page Gatefold (4/4) 31.7500 22.750 60 *** ***
8 Page Gatefold (5/5) 31.7500 22.750 60 *** ***
Press Stops, each 31.7500 22.750 60 *** ***
Plate Changes, per plate 31.7500 22.750 60 *** ***
12 Page Body (1/1+ 33.5000 22.750 40 *** ***
1/1) 16.7500 22.750 40 *** ***
12 Page Body (2/2+ 33.5000 22.750 40 *** ***
2/2) 16.7500 22.750 40 *** ***
12 Page Body (4/4+ 33.5000 22.750 40 *** ***
1/1) 16.7500 22.750 40 *** ***
12 Page Body (4/4+ 33.5000 22.750 40 *** ***
2/2) 16.7500 22.750 40 *** ***
12 Page Body (4/4+ 33.5000 22.750 40 *** ***
4/4) 16.7500 22.750 40 *** ***
12 Page Body (5/5+ 33.5000 22.750 40 *** ***
4/4) 16.7500 22.750 40 *** ***
12 Page Body (5/5+ 33.5000 22.750 40 *** ***
5/5) 16.7500 22.750 40 *** ***
16 Page Body (1/1) 33.5000 22.750 40 *** ***
16 Page Body (2/2) 33.5000 22.750 40 *** ***
16 Page Body (4/4) 33.5000 22.750 40 *** ***
16 Page Body (5/5) 33.5000 22.750 40 *** ***
16 Page Body (1/1+1/1) 33.5000 22.750 40 *** ***
16 Page Body (2/2+2/2) 33.5000 22.750 40 *** ***
16 Page Body (4/4+1/1) 33.5000 22.750 40 *** ***
16 Page Body (4/4+2/2) 33.5000 22.750 40 *** ***
16 Page Body (4/4+4/4) 33.5000 22.750 40 *** ***
16 Page Body (5/5+4/4) 33.5000 22.750 40 *** ***
16 Page Body (5/5+5/5) 33.5000 22.750 40 *** ***
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Page 2 Quad/Graphics Inc. September 9, 1996
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
8 1/8" x 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
- ---------------------------- ------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
32 Page Body (1/1+1/1) 33.5000 22.750 40 *** ***
32 Page Body (2/2+2/2) 33.5000 22.750 40 *** ***
32 Page Body (4/4+1/1) 33.5000 22.750 40 *** ***
32 Page Body (4/4+2/2) 33.5000 22.750 40 *** ***
32 Page Body (4/4+4/4) 33.5000 22.750 40 *** ***
32 Page Body (5/5+4/4) 33.5000 22.750 40 *** ***
32 Page Body (5/5+5/5) 33.5000 22.750 40 *** ***
Press Stops, per web, each 33.5000 22.750 50 *** ***
Press Stops, per web, each 33.5000 22.750 40 *** ***
Plate Changes, per plate 33.5000 22.750 50 *** ***
Plate Changes, per plate 33.5000 22.750 40 *** ***
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Page 3 Quad/Graphics Inc. September 9, 1996
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
8 1/8" x 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
- ---------------------------- ------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
4 Page Flat Cover (4/4) 33.7500 22.750 100 *** ***
4 Page Flat Cover (5/5) 33.7500 22.750 100 *** ***
4 Page Flat Cover (6/6) 33.7500 22.750 100 *** ***
Press Stops, each 33.7500 22.750 100 *** ***
Plate Changes, per plate 33.7500 22.750 100 *** ***
6 Plate Cover (4/4) 24.5000 22.750 100 *** ***
6 Plate Cover (5/5) 24.5000 22.750 100 *** ***
6 Plate Cover (6/6) 24.5000 22.750 100 *** ***
Press Stops, each 24.5000 22.750 100 *** ***
Plate Changes, per plate 24.5000 22.750 100 *** ***
6 Page Center (4/2) 23.1875 22.750 80 *** ***
6 Page Center (4/4) 23.1875 22.750 80 *** ***
6 Page Center (5/4) 23.1875 22.750 80 *** ***
6 Page Center (5/5) 23.1875 22.750 80 *** ***
Press Stops, each 23.1875 22.750 80 *** ***
Plate Changes, per plate 23.1875 22.750 80 *** ***
2 Page Body (1/1) 33.5000 22.750 80 *** ***
2 Page Body (2/2) 33.5000 22.750 80 *** ***
2 Page Body (4/4) 33.5000 22.750 80 *** ***
2 Page Body (5/5) 33.5000 22.750 80 *** ***
2 Page Body (1/1) 33.5000 22.750 60 *** ***
2 Page Body (2/2) 33.5000 22.750 60 *** ***
2 Page Body (4/4) 33.5000 22.750 60 *** ***
2 Page Body (5/5) 33.5000 22.750 60 *** ***
4 Page Body (1/1) 33.5000 22.750 60 *** ***
4 Page Body (2/2) 33.5000 22.750 60 *** ***
4 Page Body (4/4) 33.5000 22.750 60 *** ***
4 Page Body (5/5) 33.5000 22.750 60 *** ***
4 Page Body (1/1) 33.5000 22.750 40 *** ***
4 Page Body (2/2) 33.5000 22.750 40 *** ***
4 Page Body (4/4) 33.5000 22.750 40 *** ***
4 Page Body (5/5) 33.5000 22.750 40 *** ***
4 Page Gatefold (1/1) 30.5000 22.750 80 *** ***
4 Page Gatefold (2/2) 30.5000 22.750 80 *** ***
4 Page Gatefold (4/4) 30.5000 22.750 80 *** ***
4 Page Gatefold (5/5) 30.5000 22.750 80 *** ***
Press Stops, each 30.5000 22.750 80 *** ***
Plate Changes, per plate 30.5000 22.750 80 *** ***
6 Page Gatefold (4/4)(4/4) 19.1250 22.750 80 *** ***
Press Stops, each, per web 19.1250 22.750 80 *** ***
Plate Changes, per plate 19.1250 22.750 80 *** ***
8 Page Body (1/1) 33.5000 22.750 60 *** ***
8 Page Body (2/2) 33.5000 22.750 60 *** ***
8 Page Body (4/4) 33.5000 22.750 60 *** ***
8 Page Body (5/5) 33.5000 22.750 60 *** ***
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Page 4 Quad/Graphics Inc. September 9, 1996
<PAGE>
<TABLE>
<CAPTION>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
- ----------------------------------------------------------------------------------------------------------
8 1/8"X10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
===========================================================================================================
<S> <C> <C> <C> <C> <C>
8 Page Body (1/1+1/1) 33.5000 22.750 60 *** ***
8 Page Body (2/2+2/2) 33.5000 22.750 60 *** ***
8 Page Body (4/4+1/1) 33.5000 22.750 60 *** ***
8 Page Body (4/4+2/2) 33.5000 22.750 60 *** ***
8 Page Body (4/4+4/4) 33.5000 22.750 60 *** ***
8 Page Body (5/5+4/4) 33.5000 22.750 60 *** ***
8 Page Body (5/5+5/5) 33.5000 22.750 60 *** ***
8 Page Gatefold (4/4) 31.7500 22.750 60 *** ***
8 Page Gatefold (5/5) 31.7500 22.750 60 *** ***
Press Stops, each 31.7500 22.750 60 *** ***
Plate Changes, per plate 31.7500 22.750 60 *** ***
Press Stops, per web, each 33.5000 22.750 80 *** ***
Press Stops, per web, each 33.5000 22.750 60 *** ***
Plate Changes, per plate 33.5000 22.750 80 *** ***
Plate Changes, per plate 33.5000 22.750 60 *** ***
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
8 1/8" X 10 7/8" Book Size ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
================================================================================
<S> <C> <C> <C> <C> <C>
12 Page Body (4/4) 66.875 33.500 40 *** ***
12 Page Body (5/5) 66.875 33.500 40 *** ***
16 Page Body (4/4) 89.125 33.500 40 *** ***
16 Page Body (5/5) 89.125 33.500 40 *** ***
20 Page Body (4/4) 55.750 33.500 40 *** ***
20 Page Body (5/5) 55.750 33.500 40 *** ***
24 Page Body (4/4) 66.875 33.500 40 *** ***
24 Page Body (5/5) 66.875 33.500 40 *** ***
28 Page Body (4/4) 78.000 33.500 40 *** ***
28 Page Body (5/5) 78.000 33.500 40 *** ***
32 Page Body (4/4) 89.125 33.500 40 *** ***
32 Page Body (5/5) 89.125 33.500 40 *** ***
36 Page Body (4/4) 66.875 50.250 40 *** ***
36 Page Body (5/5) 66.875 50.250 40 *** ***
40 Page Body (4/4) 55.750 33.500 40 *** ***
40 Page Body (5/5) 55.750 33.500 40 *** ***
48 Page Body (4/4) 89.125 50.250 40 *** ***
48 Page Body (5/5) 89.125 50.250 40 *** ***
48 Page Body (4/4) 66.875 33.500 40 *** ***
?? Page Body (5/5) 66.875 33.500 40 *** ***
?? Page Body (4/4) 78.000 33.500 40 *** ***
56 Page Body (5/5) 78.000 33.500 40 *** ***
60 Page Body (4/4) 55.750 50.250 40 *** ***
60 Page Body (5/5) 55.750 50.250 40 *** ***
64 Page Body (4/4) 89.125 33.500 40 *** ***
64 Page Body (5/5) 89.125 33.500 40 *** ***
72 Page Body (4/4) 66.875 50.250 40 *** ***
72 Page Body (5/5) 66.875 50.250 40 *** ***
84 Page Body (4/4) 78.000 50.250 40 *** ***
84 Page Body (5/5) 78.000 50.250 40 *** ***
96 Page Body (4/4) 89.125 50.250 40 *** ***
96 Page Body (5/5) 89.125 50.250 40 *** ***
Cylinder Changes, per cylinder 55.750 33.500 40 *** ***
Cylinder Changes, per cylinder 66.875 33.500 40 *** ***
Cylinder Changes, per cylinder 78.000 33.500 40 *** ***
Cylinder Changes, per cylinder 89.125 33.500 40 *** ***
Cylinder Changes, per cylinder 55.750 50.250 40 *** ***
Cylinder Changes, per cylinder 66.875 50.250 40 *** ***
Cylinder Changes, per cylinder 78.000 50.250 40 *** ***
Cylinder Changes, per cylinder 89.125 50.250 40 *** ***
- --------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Quad/Graphics Inc. September 9, 1996
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
8 1/8" X 10 7/8" Book Size ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
=============================================================================================
<S> <C> <C> <C> <C> <C>
12 Page Body (4/4) 66.875 33.500 45 *** ***
12 Page Body (5/5) 66.875 33.500 45 *** ***
16 Page Body (4/4) 89.125 33.500 45 *** ***
16 Page Body (5/5) 89.125 33.500 45 *** ***
20 Page Body (4/4) 55.750 33.500 45 *** ***
20 Page Body (5/5) 55.750 33.500 45 *** ***
24 Page Body (4/4) 66.875 33.500 45 *** ***
24 Page Body (5/5) 66.875 33.500 45 *** ***
28 Page Body (4/4) 78.000 33.500 45 *** ***
28 Page Body (5/5) 78.000 33.500 45 *** ***
32 Page Body (4/4) 89.125 33.500 45 *** ***
32 Page Body (5/5) 89.125 33.500 45 *** ***
36 Page Body (4/4) 66.875 50.250 45 *** ***
36 Page Body (5/5) 66.875 50.250 45 *** ***
40 Page Body (4/4) 55.750 33.500 45 *** ***
40 Page Body (5/5) 55.750 33.500 45 *** ***
48 Page Body (4/4) 89.125 50.250 45 *** ***
48 Page Body (5/5) 89.125 50.250 45 *** ***
48 Page Body (4/4) 66.875 33.500 45 *** ***
?? Page Body (5/5) 66.875 33.500 45 *** ***
?? Page Body (4/4) 78.000 33.500 45 *** ***
56 Page Body (5/5) 78.000 33.500 45 *** ***
60 Page Body (4/4) 55.750 50.250 45 *** ***
60 Page Body (5/5) 55.750 50.250 45 *** ***
64 Page Body (4/4) 89.125 33.500 45 *** ***
64 Page Body (5/5) 89.125 33.500 45 *** ***
72 Page Body (4/4) 66.875 50.250 45 *** ***
72 Page Body (5/5) 66.875 50.250 45 *** ***
84 Page Body (4/4) 78.000 50.250 45 *** ***
84 Page Body (5/5) 78.000 50.250 45 *** ***
96 Page Body (4/4) 89.125 50.250 45 *** ***
96 Page Body (5/5) 89.125 50.250 45 *** ***
Cylinder Changes, per cylinder 55.750 33.500 45 *** ***
Cylinder Changes, per cylinder 66.875 33.500 45 *** ***
Cylinder Changes, per cylinder 78.000 33.500 45 *** ***
Cylinder Changes, per cylinder 89.125 33.500 45 *** ***
Cylinder Changes, per cylinder 55.750 50.250 45 *** ***
Cylinder Changes, per cylinder 66.875 50.250 45 *** ***
Cylinder Changes, per cylinder 78.000 50.250 45 *** ***
Cylinder Changes, per cylinder 89.125 50.250 45 *** ***
- ---------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Quad/Graphic Inc. September 9, 1996
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
==============================================================================================================
<S> <C> <C> <C> <C> <C>
12 Page Body (4/4) 66.875 33.500 50 *** ***
12 Page Body (5/5) 66.875 33.500 50 *** ***
16 Page Body (4/4) 89.125 33.500 50 *** ***
16 Page Body (5/5) 89.125 33.500 50 *** ***
20 Page Body (4/4) 55.750 33.500 50 *** ***
20 Page Body (5/5) 55.750 33.500 50 *** ***
24 Page Body (4/4) 66.875 33.500 50 *** ***
24 Page Body (5/5) 66.875 33.500 50 *** ***
28 Page Body (4/4) 78.000 33.500 50 *** ***
28 Page Body (5/5) 78.000 33.500 50 *** ***
32 Page Body (4/4) 89.125 33.500 50 *** ***
32 Page Body (5/5) 89.125 33.500 50 *** ***
36 Page Body (4/4) 66.875 50.250 50 *** ***
36 Page Body (5/5) 66.875 50.250 50 *** ***
40 Page Body (4/4) 55.750 33.500 50 *** ***
40 Page Body (5/5) 55.750 33.500 50 *** ***
48 Page Body (4/4) 89.125 50.250 50 *** ***
48 Page Body (5/5) 89.125 50.250 50 *** ***
48 Page Body (4/4) 66.875 33.500 50 *** ***
48 Page Body (5/5) 66.875 33.500 50 *** ***
56 Page Body (4/4) 78.000 33.500 50 *** ***
56 Page Body (5/5) 78.000 33.500 50 *** ***
60 Page Body (4/4) 55.750 50.250 50 *** ***
60 Page Body (5/5) 55.750 50.250 50 *** ***
64 Page Body (4/4) 89.125 33.500 50 *** ***
64 Page Body (5/5) 89.125 33.500 50 *** ***
72 Page Body (4/4) 66.875 50.250 50 *** ***
72 Page Body (5/5) 66.875 50.250 50 *** ***
84 Page Body (4/4) 78.000 50.250 50 *** ***
84 Page Body (5/5) 78.000 50.250 50 *** ***
96 Page Body (4/4) 89.125 50.250 50 *** ***
96 Page Body (5/5) 89.125 50.250 50 *** ***
Cylinder Changes, per cylinder 55.750 33.500 50 *** ***
Cylinder Changes, per cylinder 66.875 33.500 50 *** ***
Cylinder Changes, per cylinder 78.000 33.500 50 *** ***
Cylinder Changes, per cylinder 89.125 33.500 50 *** ***
Cylinder Changes, per cylinder 55.750 50.250 50 *** ***
Cylinder Changes, per cylinder 66.875 50.250 50 *** ***
Cylinder Changes, per cylinder 78.000 50.250 50 *** ***
Cylinder Changes, per cylinder 89.125 50.250 50 *** ***
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Quad/Graphics Inc September 9, 1990
<PAGE>
PLAYBOY ENTERPRISES
PAPER REQUIREMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
8 1/8" X 10 7/8" BOOK SIZE ROLL CYL. BASIS RATE
PAPER REQUIREMENTS WIDTH SIZE WEIGHT MAKEREADY PER/M
=============================================================================================
<S> <C> <C> <C> <C> <C>
12 Page Body (4/4) 66.875 33.500 60 *** ***
12 Page Body (5/5) 66.875 33.500 60 *** ***
16 Page Body (4/4) 89.125 33.500 60 *** ***
16 Page Body (5/5) 89.125 33.500 60 *** ***
20 Page Body (4/4) 55.750 33.500 60 *** ***
20 Page Body (5/5) 55.750 33.500 60 *** ***
24 Page Body (4/4) 66.875 33.500 60 *** ***
24 Page Body (5/5) 66.875 33.500 60 *** ***
28 Page Body (4/4) 78.000 33.500 60 *** ***
28 Page Body (5/5) 78.000 33.500 60 *** ***
32 Page Body (4/4) 89.125 33.500 60 *** ***
32 Page Body (5/5) 89.125 33.500 60 *** ***
36 Page Body (4/4) 66.875 50.250 60 *** ***
36 Page Body (5/5) 66.875 50.250 60 *** ***
40 Page Body (4/4) 55.750 33.500 60 *** ***
40 Page Body (5/5) 55.750 33.500 60 *** ***
48 Page Body (4/4) 89.125 50.250 60 *** ***
48 Page Body (5/5) 89.125 50.250 60 *** ***
48 Page Body (4/4) 66.875 33.500 60 *** ***
48 Page Body (5/5) 66.875 33.500 60 *** ***
56 Page Body (4/4) 78.000 33.500 60 *** ***
56 Page Body (5/5) 78.000 33.500 60 *** ***
60 Page Body (4/4) 55.750 50.250 60 *** ***
60 Page Body (5/5) 55.750 50.250 60 *** ***
64 Page Body (4/4) 89.125 33.500 60 *** ***
64 Page Body (5/5) 89.125 33.500 60 *** ***
72 Page Body (4/4) 66.875 50.250 60 *** ***
72 Page Body (5/5) 66.875 50.250 60 *** ***
84 Page Body (4/4) 78.000 50.250 60 *** ***
84 Page Body (5/5) 78.000 50.250 60 *** ***
96 Page Body (4/4) 89.125 50.250 60 *** ***
96 Page Body (5/5) 89.125 50.250 60 *** ***
Cylinder Changes, per cylinder 55.750 33.500 60 *** ***
Cylinder Changes, per cylinder 66.875 33.500 60 *** ***
Cylinder Changes, per cylinder 78.000 33.500 60 *** ***
Cylinder Changes, per cylinder 89.125 33.500 60 *** ***
Cylinder Changes, per cylinder 55.750 50.250 60 *** ***
Cylinder Changes, per cylinder 66.875 50.250 60 *** ***
Cylinder Changes, per cylinder 78.000 50.250 60 *** ***
Cylinder Changes, per cylinder 89.125 50.250 60 *** ***
- ---------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
Quad/Graphics Inc. September 9, 1996
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit E - Pro Forma
<PAGE>
[LETTERHEAD OF PLAYBOY ENTERPRISES, INC. APPEARS HERE]
[LOGO OF QUAD/GRAPHICS]
NOVEMBER 1997 ISSUE - 188-PAGES + 2-PAGE INSERT + 2-PAGE INSERT - PRELIMINARY -
4,198,895 COPIES
1,113,354 INSERTS
================================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PREPARATORY OPERATIONS QUANTITY PRICE/M TOTAL
- --------------------------------------------------------- -------- ------- -----
<S> <C> <C> <C>
Enterprise Graphics - ***
-------------
-------------
Total Preparatory Operations...................................... ***
-------------
- ---------------------------------------------------------
PLATES & PRESSWORK
- ---------------------------------------------------------
Cover Form
----------
4-Page (6/6) As 4's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Version Change Plates 31 *** ***
Credit To Run (6/4) (2) *** ***
U.V. Coat Makeready 1 *** ***
U.V. Coat Run 4,198,895 *** ***
Additional Makeready For Color OK 1 *** ***
Credit For Pick-Up Plates (1) *** ***
Offset Body Form's
------------------
Form 4/6/19/20 - (Folios: 25-32/37-44/151-158/159-166)
32-Pages (4/4)(4/4) As 8's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Version Change Plates 4 *** ***
Form 2 - (Folios: 5-20)
16-Pages (4/4)(4/4) As 16's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Form 1/3/5/7 - (Folios: 1-4/21-24/33-36/45-48)
16-Pages (4/4) As 8's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Multiple Delivery As 4's 4,198,895 *** ***
Form 21/23 - (Folios: 167-174/177-184)
16-Pages (4/4)(4/4) As 8's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Form 10 - (Folios: 61-68)
8-Pages (4/4)(4/4) As 8's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Form 8 - (Folios: 49-56)
8-Pages (4/4)(4/4) As 4's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Version Change Plates 2 *** ***
Form 9/18 - (Folios: 57-60/147-150)
8-Page (4/4) As 8's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Version Change Plates 4 *** ***
Multiple Delivery As 4's 4,198,895 *** ***
Form 14 - (Folios: 105-110)
6-Page (5/4) as Gatefold
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Form 22 - (175-176)
2-Pages (4/4) As 2's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Form SWE-PS
2-Pages (4/4) As 2's
Original Makeready 1 *** ***
Run Rate 1,113,354 *** ***
Perf Signature 1 *** ***
Run Rate 1,113,354 *** ***
Form Insert
2-Pages (5/5) As 2's
Original Makeready 1 *** ***
Run Rate 1,113,354 *** ***
Perf Signature 1 *** ***
Run Rate 1,113,354 *** ***
GRAVURE BODY FORMS
------------------
Form 11/12/13/15/16/17 - (Folios: 69-80/81-92/93-104/111-122/123-134/135-146)
72-Pages (4/4) As 12's
Original Makeready 1 *** ***
Run Rate 4,198,895 *** ***
Supplemental Engraving For Type Only
Black Cylinder Side 1 ***
Black Cylinder Side 2 ***
==========
Total Presswork........................................ ***
----------
</TABLE>
*** Confidential information omitted pursuant to request for confidential
treatment filed seperately with Securities and Exchange Commission.
<PAGE>
Page 3 Invoice No. 344727
<TABLE>
<CAPTION>
- --------------------------------------
INK QUANTITY PRICE/M TOTAL
- -------------------------------------- -------- ------- -----
<S> <C> <C> <C> <C>
OFFSET INK COVERS
-----------------
1 6/Color Pages 0.711 4,198,895 *** ***
3 4/Color Pages 0.356 4,198,895 *** ***
OFFSET INK BODY
---------------
1 5/Color Pages 0.533 4,198,895 *** ***
86 4/Color Pages 0.322 4,198,895 *** ***
25 1/Color Pages 0.059 4,198,895 *** ***
3 Varnish Pages 0.592 4,198,895 *** ***
OFFSET INK INSERT
-----------------
2 4/Color Pages 0.322 1,113,354 *** ***
1 Metallic Pages 0.356 1,113,354 *** ***
OFFSET INK INSERT
-----------------
2 4/Color Pages 0.322 1,113,354 *** ***
GRAVURE INK
-----------
58 4/Color Pages 0.540 4,198,895 *** ***
14 1/Color Pages 0.106 4,198,895 *** ***
---------
Total Ink......................... ***
---------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Page 4 Invoice No. 344727
<TABLE>
<CAPTION>
- ------------------------------------
PERFECT BINDING (Bind Only) QUANTITY PRICE/M TOTAL
- ------------------------------------ -------- ------- -----
<S> <C> <C> <C>
32 Pocket Makeready ***
23 Pocket Run - Military 16,254 *** ***
23 Pocket Run - International 179,315 *** ***
24 Pocket Run - Canada 185,504 *** ***
27 Pocket Run - Southwest 70,057 *** ***
27 Pocket Run - Kentucky (GA) 4,825 *** ***
27 Pocket Run - Central/North Dakota 174,223 *** ***
28 Pocket Run - Western 88,433 *** ***
28 Pocket Run - Colorado (SW) 21,325 *** ***
28 Pocket Run - Texas 74,607 *** ***
28 Pocket Run - Gulf Atlantic 42,507 *** ***
28 Pocket Run - South Atlantic 43,207 *** ***
28 Pocket Run - Capital States/Maryland 43,657 *** ***
28 Pocket Run - New England 28,707 *** ***
28 Pocket Run - North Atlantic 99,657 *** ***
28 Pocket Run - Wisconsin (CG) 39,024 *** ***
28 Pocket Run - Chicago 34,522 *** ***
29 Pocket Run - Arizona (WS) 25,475 *** ***
29 Pocket Run - North California 52,107 *** ***
29 Pocket Run - South California 75,187 *** ***
29 Pocket Run - Georgia (SA) 23,150 *** ***
29 Pocket Run - Florida/Georgia 54,132 *** ***
29 Pocket Run - Massachusetts (NG) 40,050 *** ***
29 Pocket Run - New York 78,502 *** ***
------------ ------------
Total Bind Only 1,494,427 Copies ***
- ------------------------------------
SUBSCRIPTION (Bind/Mail)
- ------------------------------------
27 Pocket Run - Scent Free 654 *** ***
27 Pocket Run - New York Comps 2,750 *** ***
27 Pocket Run - Southwest 220,105 *** ***
27 Pocket Run - Central/Kentucky/North Dakota 483,001 *** ***
27 Pocket Run - APD Warren/Pontiac 8,129 *** ***
28 Pocket Run - Western 216,897 *** ***
28 Pocket Run - Colorado (SW) 48,002 *** ***
28 Pocket Run - Texas 167,111 *** ***
28 Pocket Run - Gulf Atlantic/Capital States/
South Atlantic Maryland 397,532 *** ***
28 Pocket Run - New England 65,583 *** ***
28 Pocket Run - North Atlantic 237,201 *** ***
28 Pocket Run - Wisconsin (CE) 55,302 *** ***
28 Pocket Run - Chicago 89,978 *** ***
29 Pocket Run - Arizona (WS) 47,349 *** ***
29 Pocket Run - North California 118,806 *** ***
29 Pocket Run - South California 182,570 *** ***
29 Pocket Run - Georgia (SA) 52,954 *** ***
29 Pocket Run - Florida 151,731 *** ***
29 Pocket Run - Massachusetts (NG) 44,234 *** ***
29 Pocket Run - New York Comps 115,079 *** ***
------------ ------------
Total Subscription 2,704,468 Copies ***
------------
Total Perfect Binding & Mailing............................. ***
------------
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Page 5 Invoice No. 344727
<TABLE>
<CAPTION>
- -------------------------------
PERFECT BINDING PREMIUMS
- -------------------------------
<S> <C> <C> <C>
First Pocket Changes 29 *** ***
Additional Pocket Changes 30 *** ***
Tip-On Mexico Version
Makeready 1 *** ***
Run 7,603 *** ***
Label-Aire - "Brett Farve-Interveiw"
Makeready 1 *** ***
Run 28,762 *** ***
***
----------
Additional To Produce Label-Aire
----------
Total Perfect Binding Premiums............................................ ***
- -------------------------------
INLINE POLY/MAIL PREMIUMS
- -------------------------------
Midnight Playmates And Erotic Sensations Sitma Insert
Makeready 1 *** ***
Run 48,645 *** ***
Locker Room Fantasy
Makeready 1 *** ***
Run 1,246 *** ***
Locker Room Fantasy And Playmates Exposed
Makeready 1 *** ***
Run 58,950 *** ***
Franklin Mint Insert
Makeready 3 *** ***
Run 2,704,468 *** ***
Attached Test (Reply Envelope)
Makeready 1 *** ***
Run (Canada) 48,651 *** ***
Run (Western) 109,367 *** ***
Run (Arizona) 29,108 *** ***
Run (North California) 65,095 *** ***
Run (South California) 99,108 *** ***
Run (Southwest) 116,206 *** ***
Run (Colorado) 30,370 *** ***
Run (Texas) 90,481 *** ***
Run (Kentucky) 282,290 *** ***
Run (Gulf Atlantic / South Atlantic / Capital State 161,203 *** ***
Run (Georgia) 29,603 *** ***
Run (Florida) 83,851 *** ***
Run (Maryland / DC) 30,883 *** ***
Run (Massachussetts) 28,761 *** ***
</TABLE>
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Page 6 Invoice No. 34427
<TABLE>
- ----------------------------------------
INLINE POLY/MAIL PREMIUMS (cont.)
- ----------------------------------------
<S> <C> <C> <C>
Run (New England) 32,471 *** ***
Run (North Atlantic) 133,058 *** ***
Run (New York) 64,120 *** ***
Run (North Dakota) 5,216 *** ***
Run (Wisconsin) 36,606 *** ***
Run (Chicago) 48,137 *** ***
Run (Test #16) 19,731 *** ***
Run (Test #17) 19,693 *** ***
Run (Test #18) 19,674 *** ***
Run (Test #19) 19,686 *** ***
Run (Test #20) 19,733 *** ***
Run (Test #21) 19,689 *** ***
Run (Test #22) 19,655 *** ***
Pocket Changes (Sitma) 26 *** ***
Demographics Insert Insertion
Makeready (Body Forms And Cover) 1 *** ***
Run 2,568,393 *** ***
Inkjet Addressing And Formatting
Upcharge 2,568,072 *** ***
Additional Unit For Attached Mail Piece
Inkjet Addressing And Formatting Upcharge
Makeready 1 *** ***
Run Rate 9,612 *** ***
Offline Polywrapping Base Piece
Makeready 1 *** ***
Run Rate (CDS) 5,000 *** ***
=======
Total Inline Poly/Mail Premiums................ ***
-------
- ----------------------------------------
NEWSSTAND & BULK PACKING
- ----------------------------------------
Shrinkwrap In Bundles 1,382,450 *** ***
Label Preparation 1,382,450 *** ***
Clear Polybag 664,225 *** ***
Version Labels ***
=======
Total Newsstand & Bulk Packing.................. ***
-------
- ----------------------------------------
OFFLINE MAILING
- ----------------------------------------
Off-Line Mail With Paper Labels
Makeready 1 *** ***
Run 93,157 *** ***
Prepare Labels for New York Comps: Invoice # 38926 ***
List Changes 22 *** ***
</TABLE>
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Page 7 Invoice No. 344727
<TABLE>
<CAPTION>
- ----------------------------------------
OFFLINE MAILING (CONT)
- ----------------------------------------
<S> <C> <C> <C>
Offline Polywrapping Base Piece
Makeready 1 *** ***
Run 93,157 *** ***
-------
Total Offline Mailing.................... ***
-------
- ----------------------------------------
PACKAGING & HANDLING
- ----------------------------------------
TV Reader Service Copies
Bulk In Cartons 426 *** ***
McKnight Direct Copies
Bulk In Cartons 243 *** ***
Furnished Inserts, Per Skid 116 *** ***
Furnished Paper, Per Cwt. 3,724,654 *** ***
-------
Total Packing & Handling.............. ***
-------
</TABLE>
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
<TABLE>
Page 8 Invoice No. 344727
- ----------------------------------------------
COST SUMMARY
- ----------------------------------------------
<S> <C>
Preparatory Operations ***
Presswork ***
Ink ***
Perfect Bind And Mailing ***
Perfect Binding Premiums ***
In-Line Poly/Mail Packing ***
Newsstand & Bulk Packing ***
Off-Line Mailing ***
Packing & Handling ***
-------------
-------------
GRAND TOTAL............................ ***
-------------
</TABLE>
cc: Bob Fuller (Sales)
Jackie Luedtke (CSR)
Kasey Luedtke (Billing)
Past-Due Invoices Are Subject To 1 1/2% Service Charge Per Month On Outstanding
Balance.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit F - Holiday and Production Schedule
<PAGE>
SCHEDULE FOR TITLE:PLAYBOY (PLA3)
ISSUE: 97 PLAYBOY
<TABLE>
<CAPTION>
ISSUE Feb-97 FEB BIND-IN Mar-97 Apr-97
<S> <C> <C> <C> <C>
JOB NUMBER 97-0218 97-0219 97-0220
PAGES GRAVURE 64PP 64PP 64PP
PAGES OFFSET 114PP 2PP 114PP 114PP
FINAL PAGE BREAKDOWN DUE 11/27/96-WE 12/26/96-TH 01/23/97-TH
COVER FILM DUE AT QUAD 11/27/96-WE 12/23/96-MO 01/22/97-WE
OFFSET FILM DUE AT QUAD 11/30/96-SA 11/20/96-WE 12/27/96-FR 01/25/97-SA
GRAVURE FILM DUE AT QUAD 12/03/96-TU 12/28/96-SA 01/28/97-TU
BPS OUT 2 12/04/96-WE 12/30/96-MO 01/29/97-WE
GRAV RED-PRINTS SHIP TO PB 12/04/96-WE 12/30/96-MO 01/29/97-WE
PRESS START OFFSET 12/07/96-SA 11/27/96-WE 01/04/97-SA 02/01/97-SA
QUANTITY 1600000
PRESS PROOF SHOWN 12/06/96-FR 01/03/97-FR 01/31/97-FR
PRESS START GRAVURE 12/10/96-TU 01/07/97-TU 02/04/97-TU
BINDING INSTRUCTIONS DUE 12/05/96-TH 01/02/97-TH 01/30/97-TH
GALLEY DUE 11/19/96-TU 12/17/96-TU 01/14/97-TU
INSERTS DUE 12/13/96-FR 01/10/97-FR 02/07/97-FR
INK-JET TAPES DUE (1ST) 12/09/96-MO 01/06/97-MO 02/03/97-MO
INK-JET TAPES DUE (2ND) 12/16/96-MO 01/13/97-MO 02/10/97-MO
BIND START (P) 12/17/96-TU 01/14/97-TU 02/11/97-TU
NEWS STAND START SHIP 12/24/96-TU 01/21/97-TU 02/18/97-TU
NEWS STAND CYCLE# 9704 9708 9712
QUAN NEWS STAND 1550000 1550000 1550000
MAIL START 01/02/97-TH 01/30/97-TH 02/27/97-TH
MAIL COMPLETE 01/09/97-TH 02/06/97-TH 03/06/97-TH
MAIL QUANTITY 2850000 2850000 2850000
ON SALE DATE 01/14/97-TU 02/11/97-TU 03/11/97-TU
</TABLE>
BASED ON PAGES AND QUANTITIES AS INDICATED,
PLUS UV COATED COVER 4/C, (8 1/8 X 10 7/8)
PERFECT BOUND, 600M NEWS STAND
BOOKS POLYBAG WITH CLEAR POLY, ALL SUBS
INKJET ADDRESS AND INLINE POLYBAG WITH PRINTED POLY
** FEBRUARY ISSUE WILL POLY 200M N/S WITH A DISC
AND 900M SUBS WITH A DISC.
ALSO ADDING 1/6MM 2PP BRC 11 1/4 X 8 3/8
FLAT UNTRIMMED FOR DOMESTIC NEWSSTAND
VERT. AND HORIZ. PERFING NEEDED, 75# HI BULK PAPER 11.
SALES BFULLER CSR JMLUEDT
<PAGE>
SCHEDULE FOR TITLE:PLAYBOY (PLA3)
ISSUE: 97 PLAYBOY
<TABLE>
<CAPTION>
ISSUE May-97 Jun-97 Jul-97 Aug-97
<S> <C> <C> <C> <C>
JOB NUMBER 97-0221 97-0222 97-0223 97-0224
PAGES GRAVURE 64PP 64PP 64PP 64PP
PAGES OFFSET 114PP 114PP 114PP 114PP
FINAL PAGE BREAKDOWN DUE 02/20/97-TH 03/20/97-TH 04/24/97-TH 05/22/97-TH
COVER FILM DUE AT QUAD 02/19/97-WE 03/19/97-WE 04/23/97-WE 05/21/97-WE
OFFSET FILM DUE AT QUAD 02/22/97-SA 03/22/97-SA 04/26/97-SA 05/24/97-SA
GRAVURE FILM DUE AT QUAD 02/25/97-TU 03/25/97-TU 04/29/97-TU 05/27/97-TU
BPS OUT 2 02/26/97-WE 03/26/97-WE 04/30/97-WE 05/28/97-WE
GRAV RED-PRINTS SHIP TO PB 02/26/97-WE 03/26/97-WE 04/30/97-WE 05/28/97-WE
PRESS START OFFSET 03/01/97-SA 03/29/97-SA 05/03/97-SA 05/31/97-SA
PRESS PROOF SHOWN 02/28/97-FR 03/28/97-FR 05/02/97-FR 05/30/97-FR
PRESS START GRAVURE 03/04/97-TU 04/01/97-TU 05/06/97-TU 06/03/97-TU
BINDING INSTRUCTIONS DUE 02/27/97-TH 03/27/97-TH 05/01/97-TH 05/29/97-TH
GALLEY DUE 02/11/97-TU 03/11/97-TU 04/15/97-TU 05/13/97-TU
INSERTS DUE 03/07/97-FR 04/04/97-FR 05/09/97-FR 06/06/97-FR
INK-JET TAPES DUE (1ST) 03/03/97-MO 03/31/97-MO 05/05/97-MO 06/02/97-MO
INK-JET TAPES DUE (2ND) 03/10/97-MO 04/07/97-MO 05/12/97-MO 06/09/97-MO
BIND START (P) 03/11/97-TU 04/08/97-TU 05/13/97-TU 06/10/97-TU
NEWS STAND START SHIP 03/18/97-TU 04/15/97-TU 05/20/97-TU 06/17/97-TU
NEWS STAND CYCLE# 9716 9720 9725 9729
QUAN NEWS STAND 1550000 1550000 1550000 1550000
MAIL START 03/27/97-TH 04/24/97-TH 05/29/97-TH 06/26/97-TH
MAIL COMPLETE 04/03-97-TH 05/01/97-TH 05/05/97-TH 07/03/97-TH
MAIL QUANTITY 2850000 2850000 2850000 2850000
ON SALE DATE 04/08/97-TU 05/05/97-TU 06/10/97-TU 07/06/97-TU
</TABLE>
BASED ON PAGES AND QUANTITIES AS INDICATED,
PLUS UV COATED COVER 4/C, (8 1/8 X 10 7/8)
PERFECT BOUND, 600M NEWS STAND
BOOKS POLYBAG WITH CLEAR POLY, ALL SUBS
INKJET ADDRESS AND INLINE POLYBAG WITH PRINTED POLY
** FEBRUARY ISSUE WILL POLY 200M N/S WITH A DISC
AND 900M SUBS WITH A DISC.
ALSO ADDING 1/6MM 2PP BRC 11 1/4 X 8 3/8
FLAT UNTRIMMED FOR DOMESTIC NEWSSTAND
VERT. AND HORIZ. PERFING NEEDED, 75# HI BULK PAPER 11.
SALES BFULLER CSR JMLUEDT
<PAGE>
SCHEDULE FOR TITLE:PLAYBOY (PLA3)
ISSUE: 97 PLAYBOY
<TABLE>
<CAPTION>
ISSUE Sep-97 Oct-97 Nov-97 Dec-97 Jan-98
<S> <C> <C> <C> <C> <C>
JOB NUMBER 97-0225 97-0226 97-0227 97-0228 97-0255
PAGES GRAVURE 64PP 64PP 64PP 96PP 96PP
PAGES OFFSET 114PP 114PP 114PP 114PP 114PP
FINAL PAGE BREAKDOWN DUE 06/19/97-TH 07/17/97-TH 08/21/97-TH 09/18/97-TH 10/23/97-TH
COVER FILM DUE AT QUAD 06/18/97-WE 07/16/97-WE 08/20/97-WE 09/17/97-WE 10/22/97-WE
OFFSET FILM DUE AT QUAD 06/21/97-SA 07/19/97-SA 08/23/97-SA 09/20/97-SA 10/25/97-SA
GRAVURE FILM DUE AT QUAD 06/24/97-TU 07/22/97-TU 08/26/97-TU 09/23/97-TU 10/28/97-TU
BPS OUT 2 06/25/97-WE 07/23/97-WE 08/27/97-WE 09/24/97-WE 10/29/97-WE
GRAV RED-PRINTS SHIP TO PB 06/25/97-WE 07/23/97-WE 08/27/97-WE 09/24/97-WE 10/29/79-WE
PRESS START OFFSET 06/28/97-SA 07/26/97-SA 08/30/97-SA 09/27/97-SA 11/01/97-SA
PRESS PROOF SHOWN 06/27/97-FR 07/25/97-FR 08/29/97-FR 09/26/97-FR 10/31/97-FR
PRESS START GRAVURE 07/01/97-TU 07/29/97-TU 09/02/97-TU 09/30/97-TU 11/04/97-TU
BINDING INSTRUCTIONS DUE 06/26/97-TH 07/24/97-TH 08/28/97-TH 09/25/97-TH 10/30/97-TH
GALLEY DUE 06/10/97-TU 07/08/97-TU 08/12/97-TU 09/09/97-TU 10/14/97-TU
INSERTS DUE 07/03/97-TH 08/01/97-FR 09/05/97-FR 10/03/97-FR 11/07/97-FR
INK-JET TAPES DUE (1ST) 06/30/97-MO 07/28/97-MO 08/30/97-SA 09/29/97-MO 11/03/97-MO
INK-JET TAPES DUE (2ND) 07/07/97-MO 08/04/97-MO 09/06/97-SA 10/06/97-MO 11/10/97-MO
BIND START (P) 07/08/97-TU 08/05/97-TU 09/09/97-TU 10/07/97-TU 11/11/97-TU
NEWS STAND START SHIP 07/15/97-TU 08/12/97-TU 09/16/97-TU 10/14/97-TU 11/18/97-TU
NEWS STAND CYCLE# 9733 9737 9742 9746 9751
QUAN NEWS STAND 1550000 1550000 1550000 1550000 1550000
MAIL START 07/24/97-TH 08/21/97-TH 09/25/97-TH 10/23/97-TH 11/27/97-TH
MAIL COMPLETE 07/31-97-TH 08/28/97-TH 10/02/97-TH 10/30/97-TH 12/04/97-TH
MAIL QUANTITY 2850000 2850000 2850000 2850000 2850000
ON SALE DATE 08/05/97-TU 09/02/97-TU 10/07/97-TU 11/04/97-TU 12/09/97-TU
</TABLE>
BASED ON PAGES AND QUANTITIES AS INDICATED,
PLUS UV COATED COVER 4/C, (8 1/8 X 10 7/8)
PERFECT BOUND, 600M NEWS STAND
BOOKS POLYBAG WITH CLEAR POLY, ALL SUBS
INKJET ADDRESS AND INLINE POLYBAG WITH PRINTED POLY
** FEBRUARY ISSUE WILL POLY 200M N/S WITH A DISC
AND 900M SUBS WITH A DISC.
ALSO ADDING 1/6MM 2PP BRC 11 1/4 X 8 3/8
FLAT UNTRIMMED FOR DOMESTIC NEWSSTAND
VERT. AND HORIZ. PERFING NEEDED, 75# HI BULK PAPER 11.
SALES BFULLER CSR JMLUEDT
<PAGE>
Playboy Enterprises, Inc.
Publication Contract
Exhibit F - Holiday Schedule & Holiday Rate
Quad/Graphics Holiday Schedule**
--------------------------------
New Year's Day 7 a.m. to 7 a.m. January 2nd
Easter 7 p.m. Saturday to 7 p.m. Sunday
Memorial Day 7 p.m. Sunday to 7 p.m. Monday
Independence Day 7 a.m to 7 a.m
Labor Day 7 p.m. Sunday to 7 p.m. Monday
Thanksgiving Day 7 a.m. to 7 a.m.
Christmas Eve Day 7 a.m. to 7 a.m.
Christmas Day 7 a.m. to 7 a.m.
New Year's Eve Day 7 a.m. to 7 a.m.
Founder's Day Second Sunday in January
7 p.m. Saturday to 7 p.m. Sunday
**Holiday periods are subject to change by management. Holiday period will be
celebrated when possible by all employees on the day and night of that holiday,
except for Easter and Founder's Day. Easter will be on 7 p.m. Saturday shift
and Easter Sunday day shift. The Founder's Day holiday will be determined each
year by the President and may change from time to time.
********************************************************************************
Holiday Rate = 20% upcharge applied to the production operations taking place on
a holiday subject to the provisions of Section 10.
February 11, 1997
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit G - Paper Specifications/Shipping
<PAGE>
PLAYBOY ENTERPRISES, INC.
SEPTEMBER 25, 1996
EXHIBIT G - QUAD/GRAPHICS' PAPER AND SHIPPING SPECIFICATIONS
- --------------------------------------------------------------------------------
PRINTABILITY
- --------------------------------------------------------------------------------
Roll-fed paper is to be wound tightly with uniform tension, free of scrap,
slitter dust, slime holes, spots, welts, piling tendencies, edge cracks, or
other defects.
Rolls must be uniform of moisture and caliper across the rolls and from roll to
roll. Offset paper must be suitable for heat set web offset printing with 4 and
5 colors, and drying ovens operating at 325-350 degrees. Gravure paper must be
suitable for printing with 4 and 5 colors using toluene based inks, and steam
dryers operating at 150 degrees.
All mill splices are to be flagged. The maximum allowable number of mill splices
in a 40" diameter roll is three (four splices in a 45" roll and five in a 50"
roll), with an average of no more than one per roll. No mill splices should be
within 2" of each other, the outside of the roll, or the core. Mill splices must
be diagonal and correctly made to run through heat set web offset, or
rotogravure presses. We suggest 3M splice materials. Dispersible type tape must
be used for splices.
WEB BREAKS
- --------------------------------------------------------------------------------
We will accept up to 5 web breaks per 100 rolls due to the condition of the
paper. Breaks beyond this limit are the responsibility of the mill together with
the cost of lost presstime.
WRAPPING, ROLL DIAMETER AND WEIGHT
- --------------------------------------------------------------------------------
Roll stock should be properly wrapped to protect against moisture and mechanical
damage, particularly the edges, in normal handling and warehouse storage.
<TABLE>
<CAPTION>
-------Diameter------ Max
Press Min. Ideal Max Weight
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
OFFSET - M1000 38" 45" 45" 2,400#
OFFSET - M110 38" 45" 45" 2,300#
OFFSET - M3000 45" 50" 50" 5,500#
GRAVURE 40" 45" 50" 8,000#
</TABLE>
CORES
- --------------------------------------------------------------------------------
All paper must be wound tightly on three inch (inside diameter) cores which are
the same width as the paper. Paper must be well fastened to the core to prevent
slipping. For cores requiring keyways, the keyways are 5/8" wide by 3/4" deep
with a maximum width of 3/4"
<TABLE>
<CAPTION>
Press Type of Core Keyways
- --------------------------------------------------------------------------------
<S> <C> <C>
OFFSET - M1000 Fiber Required
OFFSET - M110 Fiber Not Required
OFFSET - M3000 Fiber Required
GRAVURE Fiber or Iron Not Required
</TABLE>
-----------------------------------------------------
NOTIFICATION AND IDENTIFICATION OF ALL STOCK
BEFORE IT'S LOADED FOR SHIPMENT
TO QUAD/GRAPHICS IS ABSOLUTELY REQUIRED.
FAILURE COULD CAUSE SHIPMENT TO BE REFUSED.
-----------------------------------------------------
STOCK IDENTIFICATION
- --------------------------------------------------------------------------------
1). Grade name and type of paper.
2). Basis weight and roll width.
3). Gross weight, net and tare weight.
4). Mill name and mill order number.
5). Mill roll number.
6). Customer name - when purchased by a merchant, the merchant is required
to furnish the Customer's name/order number to the mill.
7). Title and/or purchase order number.
8). Direction of unwind and felt or wire side out.
9). Metered rolls must indicate yardage.
<PAGE>
Continued (Page 2 of 2)
SHIPPING AND RECEIVING BY TRUCK AND RAIL
- --------------------------------------------------------------------------------
Paper is received at all Quad/Graphics facilities 24 hours per day, 7 days per
week, and most holidays By Appointment Only,
-------------------
Appointments for each plant are to be made 24 hours in advance Monday through
-------------------
Friday, 7:00 am through 5:00 pm. Because our Sussex and Pewaukee, WI facilities
and our Thomaston and The Rock, GA facilities are only 5 miles apart each, truck
drivers will be directed to the correct plant, upon arrival.
Railcars must have a minimum door opening of 8 feet and preferably have a
cushioned underframe. Container and truck/trailers are to have a minimum door
opening of 92".
- --------------------------------------------------------------------------------
Most Important! Quad/Graphics requires all paper mills to send advance
notification of all railcars shipped. Although not required,
Quad/Graphics preferred mode of delivery is rail. EDI is the preferred method
of notification. If this computer link has not yet been established, please
contact Peggy Kirby at (414) 691-9200.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE NOTE: PAPER WILL NOT BE ACCEPTED IF DELIVERED MORE THAN FIVE DAYS BEFORE
THE DUE DATE UNLESS NOTIFIED OTHERWISE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PLANT TRUCK ADDRESS RAIL ADDRESS
- ----------------------------------------------------------------------
<S> <C> <C>
PEWAUKEE W224N3322 Duplainville Rd Quad "00" Dist Ctr
Pewaukee, WI 53072 Fond Du Lac, WI
(414) 691-9200 ext: 6259 Wisconsin Central Ltd.
SUSSEX N63 W23075 Highway 74 Quad "02" Dist Ctr
Sussex, WI 53089 Fond Du Lac, WI
(414) 691-9200 ext: 6259 Wisconsin Central Ltd.
LOMIRA 952 Badger Road Quad "04" Dist Ctr
Lomira, WI 53048 Fond Du Lac, WI
(414) 269-4700 ext: 5325 Wisconsin Central Ltd.
HARTFORD 1900 W. Sumner Street Quad "05" Dist Ctr
Hartford, WI 53027 Fond Du Lac, WI
(414) 673-1009 ext: 1121 Wisconsin Central Ltd.
NEW BERLIN 16555 West Rogers St. Quad "09" Dist Ctr
New Berlin, WI 53151 Fond Du Lac, WI
(414) 827-8357 Wisconsin Central Ltd.
WEST ALLIS 555 South 108th St. Quad "13" Dist Ctr
West Allis, WI 53214 Fond Du Lac, WI
(414) 443-3277 Wisconsin Central Ltd.
MARTINSBURG Route 2 Box 145A Quad/Graphics Inc.
PO Box 499 Route 2 Box 145A
Martinsburg, WV 25401 PO Box 499
(304) 264-3791 Martinsburg, WV 2540
CSX Transportation
SARATOGA 56 Duplainville Road Quad/Graphics Inc.
Saratoga Springs, NY 56 Duplainville Rd.
12886 Saratoga Springs, NY
(518) 581-4131 Canadian Pacific RR
THE ROCK 100 Duplainville Rd. Quad/Graphics Inc.
The Rock, GA 30285 100 Duplainville Rd.
(706) 646-8234 The Rock, GA 30285
Norfolk Southern Corp
THOMASTON 100 McIntosh Parkway Quad/Graphics Inc.
Thomaston, GA 30286 100 McIntosh Parkway
(706) 646-8234 Thomaston, GA 3029
Norfolk Southern Corp
</TABLE>
<PAGE>
Playboy Enterprises, Inc. - Quad/Graphics, Inc.
Publication Contract
Exhibit H - Sample Issues of Magazines
QUALITY SAMPLE TO BE SELECTED BY PUBLISHER
<PAGE>
Exhibit 10.6(e)
July 7, 1997
Ms. Phyllis Rotunno
Playboy Enterprises, Inc.
730 Fifth Avenue, 4th Floor
New York, NY 100199
RE: Addendum to Subscription Fulfillment Agreement for CDS Interactive
Subscriber Services
Dear Ms. Rotunno:
As a CDS client with a World Wide Web presence, you may wish to afford your
subscribers the ability to order or renew their subscription via the Internet.
You may also wish to provide them with CDS's Customer Care, the interactive
Customer Service feature enabling subscribers to review the status of their
individual subscription and perform specific transactions.
Should your company wish to have CDS provide one or more of the Interactive
Subscriber Services listed below, we request that you sign and return this
Letter Agreement which will then be deemed an amendment to your company's
Subscription Fulfillment Agreement with CDS to add such CDS Interactive Services
for the fees and charges set forth below.
CDS will provide on-line Services for receiving customer/subscriber orders
or inquiries and sending responses for the following fees and charges:
<TABLE>
<S> <C>
(a) One-time set-up fee*........................ ***** per CDS site
(b) Automated order....................................... *** each
(c) Automated change of address........................... *** each
(d) Automated missed issue................................ *** each
(e) Automated inquiry..................................... *** each
(f) Other automated transactions.......................... *** each
(g) Customer Service request.............................. *** each
(h) Customer Service response............................. *** each
(i) Other manual transactions............................. *** each
(j) Monthly minimum -- to apply each month
that charges for (b) - (i) do not total
*** or more................................. *** per Publisher
*Custom programming not included.
</TABLE>
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
CDS Interactive Services
July 7, 1997
Page 2
While CDS has used and will continue to use its reasonable best efforts to
protect against unauthorized access, breaches of security and privacy, and
misuse of the CDS Web site, CDS makes no representation or warranty and shall
bear no liability to you or any third party for the Internet, your Web site or
for any improper acts by subscribers or other third parties in accessing and
using CDS's Web site.
Except as expressly amended by this Letter Agreement, the Subscription
Fulfillment Agreement remains in full force and effect.
Please indicate your acceptance by signing both copies of this Letter
Agreement and returning one signed copy to my attention at CDS and retaining the
other signed copy for your files.
Sincerely,
Annette M. Duffy
Business Manager
New Media Services
ACCEPTED AND AGREED TO:
Playboy Enterprises, Inc.
Signature: P. Rotunno
------------------------------
Name Printed: P. Rotunno
---------------------------
Title: Circ Director
----------------------------------
Date: 8-19-97
-----------------------------------
<PAGE>
Exhibit 10.14
Cisneros Television Services, Inc.
426 Jefferson Avenue
Miami Beach, FL. 33139
October 20, 1997
Mr. Anthony J. Lynn
President
Playboy Entertainment Group, Inc.
9242 Beverly Blvd.
Beverly Hills, California 90210
RE: New Venture between Playboy Entertainment Group, Inc. ("PEG") and
Bloomfield Mercantile Inc., ("Bloomfield") for the operation of a
Playboy TV service ("PTV") and AdulTVision service ("ATV") in Germany
and Scandinavia
Dear Tony,
Your signature at the space designated below shall confirm the terms and
conditions under which (i) PEG and Bloomfield will form a new venture for the
operation of PTV and ATV in Germany and Scandinavia, and (ii) White Oak
Enterprises Ltd, an affiliate of Bloomfield, will acquire the right to
participate in the operation of PTV and ATV in certain additional territories.
1. Formation of New Venture
a. PEG and Bloomfield shall form a tax efficient venture that will
comply with applicable local laws, such as a limited liability company entity,
(the "Venture") which will own and operate and be the exclusive distributor of
PTV and ATV in Germany, Austria, German speaking Switzerland, Sweden, Finland,
Denmark and Norway (collectively the "GS Territory"). ("Scandinavia" shall mean
Sweden, Norway, Denmark and Finland.)
b. As soon as possible after the execution of this letter agreement,
PEG and Bloomfield (and, where appropriate, certain of their affiliates) intend
to enter into more formal long-form superseding agreements, including: an
Operating Agreement for the Venture; a Program License Agreement between PEG and
the Venture with respect to the PTV programming; a Program License Agreement
between PEG and the Venture with respect to the ATV programming; a Trademark
License Agreement between Playboy Enterprises, Inc. and the Venture for the use
of the Playboy trademarks, tradenames and associated marks; and a Management
Services Agreement between Cisneros Television Services, Inc. and the Venture
for the provision of certain incremental management and back office services
necessary for the Venture in addition to those already provided for in Latin
America and Iberia.
<PAGE>
c. To the extent not specifically provided in this letter agreement,
the terms and conditions of the formation and operation of the Venture for the
purposes of this letter agreement and for the superseding agreements shall be as
set forth in the Agreement Outline dated March 29, 1996, as amended ("PTV
Agreement Outline"), between PEG and Bloomfield for the formation and operation
of Playboy TV - Latin America, LLC ("PTVLA"). Until the superseding agreements
are executed, or in the event they are never executed, this letter agreement
shall be binding upon the parties and their affiliates. Further, the parties
agree to execute, as soon as possible, formal amendments to the relevant
agreements for PTVLA to reflect the modifications to those agreements set forth
herein.
d. The parties will mutually approve a Budget and 10-year Business
Plan, to be attached hereto and incorporated herein, for the operations of the
Venture in the GS Territory, in the same manner as set forth in the PTV
Agreement Outline.
2. Ownership
a. The interests in the Venture initially will be owned ***
Bloomfield and *** PEG, with PEG to have an option to increase to *** at ***
until *** . After the third anniversary of the PTV Hard Launch Date, PEG will
have the option to increase to *** at ***.
b. ***
3. Playboy Television Programming in Scandinavia
Pursuant to that certain letter agreement dated as of July 31, 1997,
("Scandinavia Agreement") between PEG and Bloomfield, PEG granted to the Venture
certain rights regarding PEG's distribution of its programming in Scandinavia.
Pursuant to the Scandinavia Agreement, PEG agrees that all rights and
obligations under that certain agreement between PEG and
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
2
<PAGE>
Modern Times Group, ("Playboy/MTG Distribution Agreement") including those
providing for *** license fee payments from distribution of Playboy programming
by Modern Times Group in Scandinavia shall be assigned to the Venture, which
assignment shall be effective upon the earlier of (i) the PTV Hard Launch Date
in Germany, (as defined herein) or (ii) *** . Any license fees to be paid to the
Venture from distribution of Playboy programming in Scandinavia (the
"Scandiavian License Fees") under the Playboy/MTG Distribution Agreement shall
be paid to the Venture as set forth below and calculated on a pro-rata monthly
basis, the calculation of which shall commence on the commencement date of the
applicable program license. As follows:
a. If the PTV Hard Launch Date occurs prior to *** , the Scandinavian
License Fees shall be paid to the Venture commencing on the PTV Hard
Launch Date.
b. If the PTV Hard Launch Date occurs on or after *** , but on
or prior to *** , the Scandinavian License Fees shall be
paid to the Venture commencing on *** .
c. If the PTV Hard Launch Date occurs after *** , the Scandinavian
License Fees shall be paid to the Venture commencing on *** and
continuing to *** , following which date the payment of the
Scandinavian License Fees to the Venture shall be suspended and
instead the Scandinavian License Fees shall be paid to PEG until the
PTV Hard Launch Date. Then, the Scandinavian License Fees shall be
paid to the Venture from and continuing after the PTV Hard Launch
Date. During said suspension period, the Venture shall execute any
document as may be necessary for PEG to receive the Scandinavian
License Fees under the Playboy/MTG Distribution Agreement during such
suspension period.
It is understood that in under sub-paragraph (b) or (c) above, the Scandinavian
License Fees shall be paid to the Venture commencing on *** .
4. Program Costs
a. PTV:
(1) *** , (paid in accordance with Section 7 below); provided,
however, that after the *** of the PTV Hard Launch Date, *** in any calendar
quarter in which *** .
(2) *** .
(3) *** .
(4) ***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
3
<PAGE>
b. ATV:
***
5. Media/Windows/Holdbacks
a. For PTV:
(1) PEG shall provide, and the Venture shall license, *** hours
of new PTV programming per year, commencing on the earlier of the PTV Hard
Launch or *** ,subject to the suspension of this paragraph as provided in
Section 7 (c) below. *** . PEG will grant to the Venture an exclusive license to
exploit all PTV programming in the GS Territory in the same media, for the same
number of runs and subject to the same windows and dark periods as set forth in
the PTVLA Outline Agreement and PTVLA Program License Agreement; *** . All PTV
programming will be available to the Venture except for the programming already
under license to a third party for television exhibition in any part of the GS
Territory, with respect to that part of the GS Territory, as of the date of the
execution of this agreement, including applicable holdbacks, (with this
exception to not include such programming under license in Scandinavia pursuant
to the exemption for Scandinavia set forth in Paragraph 3). PEG agrees that
contemporaneously upon execution of this Agreement, it shall provide the Venture
with a list of such programming. From the date of execution of this Agreement,
PEG shall not enter into any programming licenses in the GS Territory, except as
set forth in sub-paragraph 5.a.(3) herein. The parties to the Venture
acknowledge that the PEG programming that may be available for PTV in the GS
Territory may not be the same programming that is available to PEG and
Bloomfield in the Latin American territory under the PTV Agreement Outline.
(2) *** . PEG agrees that license fees for each episode
of any program series shall be allocated equally with any other episodes of the
same program series licensed under the same agreement for the same term and
territory. *** . PEG shall be the distributor for post-Venture exploitation of
the PTV programs in the GS Territory
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
4
<PAGE>
*** . It is understood that PEG, in its capacity as distributor, shall
provide for an equitable and reasonable allocation amongst any program it
distributes hereunder so as to in good faith not contravene the intent of the
parties hereto with respect to this provision. Such sales by PEG shall be
conducted on a non-branded basis.
(3) PEG may holdback from the Venture *** .
b. For ATV:
The Venture will acquire from PEG *** new film titles per year
commencing on the ATV Launch Date consistent with the type and quality currently
exhibited on ATV in the United States. The Venture will own or control any and
all rights that PEG owns or controls for such movies *** .
6. Royalty.
PEG will grant the Venture a license to use the Playboy trademarks, service
marks and trade name in the GS Territory for the life of the Venture in exchange
for a royalty payment *** .
7. PTV Launch Date
The "PTV Hard Launch Date" shall be defined as the date on which the
Venture obtains the requisite governmental license(s) to operate PTV in Germany.
If the PTV Hard Launch Date does not occur by *** , then commencing on *** and
continuing until the earlier of the PTV Hard Launch Date or *** , the Venture
shall nevertheless make PTV available in Germany on a limited test basis, ("PTV
Soft Launch"). Payment of the PTV program costs pursuant to Section 4 above and
the supply of the PTV programming pursuant to Section 5.a. above shall be as
follows:
a. If the PTV Hard Launch Date occurs prior to *** , the PTV
program costs and the supply of the PTV programming shall commence on
the PTV Hard Launch Date.
b. If the PTV Hard Launch Date occurs or after *** , but on or prior to
*** , the PTV program costs and the supply of the PTV programming for
the PTV Soft Launch shall commence on *** .
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
5
<PAGE>
c. If the PTV Hard Launch Date occurs after *** , then the PTV program
costs and the supply of the PTV programming for the PTV Soft Launch
shall commence on *** and continue until *** , following which date
the payment of the PTV programming costs and the supply of the PTV
programming shall be suspended until the PTV Hard Launch Date occurs.
On the PTV Hard Launch Date, the PTV program costs and the supply of
the PTV programming shall recommence. The Venture shall have no
obligation to pay for any programming after *** in the event the PTV
Hard Launch Date does not occur.
8. Distribution
The Venture shall handle the sale of the PTV and ATV services to the two
primary distribution platforms in the GS Territory, Deutsche Telekom and
Premier, or their respective affiliates which provide for television
distribution systems. Subject to PEG's approval, which shall not be unreasonably
withheld, Bloomfield, or one of its affiliates, will be responsible for
affiliate sales to other distribution platforms in the GS Territory, *** . This
right of Bloomfield, or its affiliate, will include the distribution to local
operators and agents who operate their platform and distribution systems from
the Deutsche Telekom platform.
9. Governance
The terms for the governance of the Venture (e.g., the role of Management
Committee, matters requiring unanimous consent, etc.) shall be substantially
similar to those terms set forth in the PTV Agreement Outline.
10. ***
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
6
<PAGE>
***
11. White Oak's Right to Participate in Other Territories
a. In the event PEG (or any of its affiliates) decides to operate PTV,
ATV or similar services in all or any territory of France, Italy, Poland,
Hungary, the Czech Republic, Iceland, Slovakia, Bulgaria and Romania via a
venture(s) with a non-PEG affiliate, White Oak Enterprises Limited ("White
Oak"), an affiliate of Bloomfield's, *** .
b. In the event PEG (or any of its affiliates) decides to operate PTV,
ATV or similar services in all or any portion of the People's Republic of China,
via a venture(s) with a non-PEG affiliate, White Oak shall *** .
c. *** .
12. White Oak's Programming License from PEG:
White Oak agrees to license from PEG *** program hours of PEG
produced, co-produced or acquired programming for exhibition up to *** broadcast
days on *** television in the GS territory during the period of *** . Such
programming shall consist of any combination of movies, specials and series to
be determined in PEG discretion in good faith. PEG shall deliver the programming
to White Oak, or its designee, on or before *** . White Oak shall pay to PEG the
sum of *** for each program hour (pro-rata for fractional hours), for a total
aggregate payment of *** . Such total aggregate sum shall be payable on *** .
Bloomfield shall guarantee all payments by White Oak to PEG under the terms in
this paragraph. White Oak may exhibit such programming over PTV (without a
reduction to the Venture's obligation to license PTV programming under paragraph
5.a.(1) herein), or over any other single, encrypted, Non-standard television
service in the GS Territory. All other provisions shall be in accordance with
PEG's standard International Pay Television License Agreement, subject to such
changes, if any, negotiated in good faith by PEG and White Oak.
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
7
<PAGE>
13. Pre-Launch Expenses
All pre-launch Venture expenses (including governmental permits and license
fees, legal and consulting expenses, and the like) shall be paid *** .
14. Playboy TV - Latin America, LLC (including Iberia)
PEG and Bloomfield will amend the PTV Agreement Outline and other relevant PTVLA
agreements as follows.
a. Commencing upon execution of this agreement, *** . PEG agrees that
license fees for each episode of any program series shall be allocated equally
with any other episodes of the same program series licensed under the same
agreement for the same term and territory. *** . It is understood that PEG, in
its capacity as distributor, shall provide for an equitable and reasonable
allocation amongst any program it distributes hereunder so as to in good faith
not contravene the intent of the parties hereto with respect to this provision.
Such sales by PEG shall be conducted on a non-branded basis.
b. Commencing upon execution of this agreement, PTVLA will own and
control any and all rights that PEG owns or controls for all of the programming
provided under the ATV Program Supply Agreement *** .
c. Effective as of the date of execution of this letter agreement, the
license fee for ATV movies for Latin America *** .
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
8
<PAGE>
15. Counterpart Execution
This Agreement may be executed in several counterparts, each of which shall be
deemed an original, and all such counterparts together shall constitute but one
and the same instrument.
Please indicate your approval of the foregoing by signing at the space
designated below.
Very truly yours,
/s/ Marc Zand
Marc Zand
AGREED AND ACCEPTED AGREED AND ACCEPTED
AS TO SECTION 11 and 12
PLAYBOY ENTERTAINMENT WHITE OAK ENTERPRISES, LTD
GROUP, INC.
By /s/ Anthony Lynn By /s/ Mark Zand
----------------------------------- -----------------------------------
Anthony Lynn, President Its Attorney-in-Fact
--------------------------------
BLOOMFIELD MERCANTILE, INC.
By /s/ Mark Zand
-----------------------------------
Its Attorney-in-Fact
9
<PAGE>
Exhibit 10.18(c)
[LETTERHEAD OF METRO-GOLDWYN-MAYER]
December 31, 1997
Bill Asher
Vice President - New Business
Playboy Entertainment Group, Inc.
9242 Beverly Blvd.
Beverly Hills, CA 90210
Dear Bill:
This letter will confirm the material terms of our agreement this date amending
the June 27, 1996 Distribution Agreement, as amended (the "Distribution
Agreement"), between Playboy Entertainment Group, Inc. ("Playboy") and Orion
Home Video ("Orion"), as follows:
1. Orion shall take immediate delivery of *** within 12 business days of full
and satisfactory delivery of each such picture as defined in the Distribution
Agreement. Orion shall have no obligation whatsoever to release, distribute or
account to Playboy for any of the Branded Product.
2. Orion shall take delivery of the *** , as set forth in the Distribution
Agreement, however, Orion will have no obligation whatsoever to release,
distribute or account to Playboy for any of the Unbranded Product. Delivery and
payment of the Guaranteed Advances shall be made in accordance with the delivery
and payment schedule set forth in the Distribution Agreement.
3. In exchange for *** , pursuant to the Production Agreement between Playboy
and Motion Picture Corporation of America ("MPCA") dated February 23, 1994 (the
"MPCA/Playboy Agreement") which amount is represented to be *** as set forth in
the December 17, 1997 statement from Playboy sent by fax to MPCA on December 17,
1997 for the period ending September 30, 1997. The remainder of any and all
amounts owed to MPCA shall be paid to MPCA c/o David Bishop, MGM Home
Entertainment within 5 business days
[LETTERHEAD OF METRO-GOLDWYN-MAYER]
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
from the date of this letter agreement. Playboy shall continue to account and
pay to MPCA on a timely basis any and all amounts, whether in the form of
advances or royalties, which become due and owing to MPCA pursuant to the
MPCA/Playboy Agreement.
The parties agree to prepare and execute a long form agreement, however, this
letter agreement shall constitute a binding contract upon signature by both
parties.
Very truly yours,
/s/ Mary Luppi Basich
----------------------
Mary Luppi Basich
Accepted and agreed to on behalf of
Playboy Entertainment Group, Inc:
By: /s/ William Asher
---------------------------
Its: V.P-New Business
--------------------------
Dated: 12/31/97
------------------------
<PAGE>
EXHIBIT 10.19
As of January 5, 1998
Metro-Goldwyn-Mayer Studios Inc.
2500 Broadway Street
Santa Monica, CA 90404
Attention: Mary Luppi Basich, Esq.
Vice President, Legal Division
RE: Orion Home Entertainment Corporation and Motion Picture Corporation of
America
Ladies and Gentlemen:
Reference is made to the following agreements:
1. That certain distribution agreement dated as of June 27, 1996 between
Playboy Entertainment Group, Inc. ("Playboy") and Orion Home Entertainment
Corporation, doing business as Orion Home Video ("Orion"), relating to,
among other matters, certain "Branded Product" and "Unbranded Product" (as
such terms are defined in such distribution agreement), as such
distribution agreement has been amended, including by that certain letter
agreement dated December 31, 1997, addressed to Bill Asher of Playboy, from
Mary Luppi Basich of Metro-Goldwyn-Mayer Studios Inc. ("MGM") (such
December 31, 1997 letter agreement is referred to as the "MGM Amendment",
and such distribution agreement, as amended, is referred to as the "Orion
Distribution Agreement").
2. That certain production arrangement dated February 23, 1994 between
Playboy and Motion Picture Corporation of America ("MPCA") relating to,
among other matters, the production and distribution of motion pictures in
groups of two, as such production arrangement has been amended (the "MPCA
Production Arrangement").
MGM represents and warrants that MGM has the full right, power and authority to
deal with all matters with respect to the Orion Distribution Agreement on behalf
of Orion, and with respect to the MPCA Production Arrangement on behalf of MPCA,
including entering into the MGM Amendment, and that no other person or entity is
required to approve or consent to MGM's actions in connection therewith.
EXECUTED AGREEMENT
<PAGE>
MGM shall indemnify and hold harmless Playboy and Playboy's successors,
licensees and assigns from and against any and all claims, liabilities, losses
and costs (including reasonable attorneys' fees) in connection with (a) any
claim or allegation that MGM does not have the right to enter into the MGM
Amendment on behalf of Orion and MPCA, or (b) any claim or allegation that any
payment accruing to MPCA or its successor(s) in interest under the MPCA
Production Arrangement that is retained by Playboy or paid by Playboy to MPCA
c/o David Bishop, MGM Home Entertainment, pursuant to the MGM Amendment, instead
should have been paid to a person or entity other than MPCA pursuant to a
written agreement to which MPCA is a party.
Please signify MGM's agreement to the provisions of this letter agreement by
executing this letter agreement in the appropriate space provided below.
Very truly yours,
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ William Asher
---------------------------------------
William Asher, V.P.
---------------------------------------
Name and Title
ACCEPTED AND AGREED TO ON BEHALF OF:
METRO-GOLDWYN-MAYER STUDIOS INC.
By: Robert C. Forest
---------------------------------------
Robert C. Forest, Exec. Dir. Bus. Off.
---------------------------------------
Name and Title
2
<PAGE>
EXHIBIT 10.28(c)
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
---------------------------------------
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE is made as of this 23rd day of
February, 1998, by and between Teachers' Retirement System of the State of
Illinois ("Landlord"), and Playboy Enterprises, Inc., a Delaware corporation
("Tenant").
WITNESSETH:
-----------
WHEREAS, Landlord has made certain claims (the "Claims") concerning tenant
maintenance and code violations (collectively, "Lease Claims") against Tenant
under that certain Industrial Building Lease dated October 20, 1992, and that
certain Lease Termination Agreement dated May 27, 1997 together (the "Lease")
which liability related to such Claims survived the termination of the Lease
and are currently outstanding; and
WHEREAS, Tenant has requested that effective as of the date of this
Settlement Agreement and Mutual Release and upon satisfaction of the terms
contained herein, the Claims which survived the termination of the Lease shall
be terminated; and
WHEREAS, Landlord is willing to terminate Tenant's liability relating to
the surviving Claims and all other obligations and liabilities of Tenant under
the Lease upon the execution of this Settlement Agreement and Mutual Release and
upon satisfaction of the terms contained herein by Tenant; and
WHEREAS, Landlord and Tenant wish to resolve all matters between them,
including those relating to the Claims.
NOW, THEREFORE, in consideration of the foregoing preambles, which by this
reference are incorporated herein, the mutual covenants and agreements contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby irrevocably acknowledged, Landlord and Tenant, each acting with
advice of independent counsel, have agreed to the following:
1. Simultaneously with its execution of this Settlement Agreement and
Mutual Release, Tenant agrees to pay to Landlord the sum of Forty Six Thousand
Dollars ($46,000.00) ("Settlement Sum"), which amount Landlord acknowledges and
agrees represents the full and final payment for any and all monetary and other
obligations owing by Tenant to Landlord for the Claims and any and all other
obligations and liabilities howsoever arising and upon such payment and full
execution of this Settlement Agreement and Mutual Release, Tenant's liability
relating to the Lease, the surviving Claims and any and all other obligations
and liabilities of
<PAGE>
Tenant to Landlord shall terminate. The Landlord's obligations under this
Settlement Agreement and Mutual Release will not become effective until the
Settlement Sum constitutes collected funds.
2. Landlord and Tenant hereby remise, release and forever discharge each
other, and their respective heirs, executors, administrators, officers,
directors, employees, agents, property managers, advisors, owners and
successors-in-interest, as of the effective date of this Settlement Agreement
and Mutual Release, of and from any and al1 actions, causes of action,
contracts, covenants, warranties, suits, debts, sums of money, accounts,
agreements, damages, controversies, claims and demands, costs and expenses,
whatsoever, at law or in equity, whether known or unknown, including, but not
limited to, claims for monetary compensation, contribution or
indemnification, including related or consequential, incidental,
commercial or economic loss of any kind, which either of them ever had, now has,
or will have against the other arising out of any actions occurring on or before
the effective date of this Settlement Agreement and Mutual Release.
3. This Settlement Agreement and Mutual Release may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument, and shall be effective as of the date of the last signature.
4. Unless required by law, neither Landlord nor Tenant shall disclose to
Swiderski Electronics, Inc. the substance of this Settlement Agreement and
Mutual Release (collectively, the "Confidential Information"), and Landlord and
Tenant agree to treat all Confidential Information as confidential. This
obligation of confidentiality shall not apply to disclosures compelled by law,
any order of a court of competent jurisdiction or by a lawful proper subpoena,
in which event Landlord or Tenant, as applicable, shall immediately notify the
other party of the circumstances purporting to require such disclosure and shall
refrain from such disclosure for the maximum period of time allowed by law so
that such other party may take such actions as it may deem appropriate to
protect the Confidential Information being sought.
5. Tenant has executed and delivered to Landlord an Environmental
Questionnaire in the form attached hereto as Exhibit A (the "Questionnaire").
Notwithstanding anything contained in this Settlement Agreement and Mutual
Release to the contrary, in the event any of Tenant's responses contained in the
Questionnaire are incorrect, Tenant acknowledges and agrees that Tenant shall
reimburse Landlord for any and all damages incurred and/or suffered by Landlord
as a result thereof and this reimbursement obligation shall survive the
execution of this Settlement Agreement and Mutual Release.
<PAGE>
IN WITNESS WHEREOF, this Settlement Agreement and Mutual Release has been
executed as of the day and year first above written.
LANDLORD:
TEACHERS' RETIREMENT SYSTEM
OF THE STATE OF ILLINOIS, a
retirement system created pursuant to the
laws of the State of Illinois
By: Capital Associates Realty Advisors
Corp., as Investment Manager, Duly
Authorized Agent and Attorney-in-
Fact
By: /s/ Thomas J. Pabian
---------------------------------
Thomas J. Pabian
Its: Executive Vice President
TENANT:
PLAYBOY ENTERPRISES, INC., a
Delaware Corporation
By: /s/ Howard Shapiro
--------------------------------------
Name: Howard Shapiro
------------------------------------
Its: Ex. VP
-------------------------------------
<PAGE>
EXHIBIT A
ENVIRONMENTAL QUESTIONNAIRE
Site Name: Warehouse Facility
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Site Address: 800 West Thorndale, Itasca, IL
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The following Environmental Questionnaire must be completed in its entirety. Do
not leave any questions unanswered. If a question is not applicable for the
site, please answer "N.A.".
This Questionnaire was completed on January 16, 1998
----------- ----
Signed: /s/ Sue Shoemaker Date: 1-16-98
---------------------------------- --------------------------
Name: Sue Shoemaker Title: Director
------------------------------------- -------------------------
Company: Playboy Enterprises, Inc.
--------------------------------------------------------------------
Please return the completed Questionnaire via facsimile or next day delivery to:
Eckland Consultants Inc.
Three Parkway North, Suite 100
Deerfield, IL 60015
Voice: (847) 948-0100
Fax: (847) 948-0140
Physical Layout
- ---------------
Please attach a drawing or sketch showing the following features:
. Floor plan sketch showing office, warehouse and storage areas N/A
. Areas used for solid waste storage None
Operations Description
- ----------------------
Briefly describe the business operations at this facility: Retail and mail order
---------------------
sale of consumer goods.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Are any products produced or manufactured at this location? No.
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
January, 1998 Copyright Eckland Consultants Inc.
1
<PAGE>
Is vehicle maintenance done at this facility? No
---------
Are there regulatory or safety inspections of the facility? Yes
---------
Materials Handled and Used At This Facility
- -------------------------------------------
Describe the major raw materials used in the manufacturing process:
<TABLE>
<CAPTION>
========================================================================================================================
On-site Storage Solid, Liquid
Material Name Quantity Stored On-site Location or Gas Hazardous or Nonhazardous?
========================================================================================================================
<S> <C> <C> <C> <C>
None
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
========================================================================================================================
</TABLE>
Please attach Material Safety Data Sheets (MSDS) for the major materials
used on site.
Waste and By-Products
- ---------------------
Identify the major waste streams, including those which require regulatory
permits and manifests.
<TABLE>
<CAPTION>
========================================================================================================================
Quantity Generated and/or Solid, Liquid
Waste Material Stored Regulatory Permit? or Gas Hazardous or Nonhazardous?
========================================================================================================================
<S> <C> <C> <C> <C>
None
- ------------------------------------------------------------------------------------------------------------------------
========================================================================================================================
</TABLE>
Response Plans
- --------------
Does the facility have an emergency response plan? No
---------
Does the facility have a Spill Prevention Control and Countermeasure (SPCC)
plan? No
---------
January, 1998 Copyright Eckland Consultants Inc.
2
<PAGE>
EXHIBIT 18
February 4, 1998
Playboy Enterprises, Inc.
680 North Lake Shore Drive
Chicago, Illinois 60611
We are providing this letter to you for inclusion as an exhibit to your Form
10-K filing pursuant to Item 601 of Regulation S-K.
We have read management's justification contained in the Company's Form 10-K for
the six month period ended December 31, 1997 for the change in accounting from
the capitalization of start-up costs to the expensing of start-up costs as
incurred in accordance with the proposed Statement of Position, "Reporting on
the Costs of Start-up Activities". Based on our reading of the data and
discussions with Company officials about the business judgment and business
planning factors relating to the change, we believe management's justification
to be reasonable. Accordingly, we concur that the newly adopted accounting
principle described above is preferable in the Company's circumstances to the
method previously applied.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
<PAGE>
EXHIBIT 21
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES
The accounts of all of the subsidiaries are included in the Company's
Consolidated Financial Statements. Set forth below are the names of certain
active corporate subsidiaries of the Company as of December 31, 1997. Certain
subsidiaries are omitted because such subsidiaries considered individually or in
the aggregate would not constitute a significant subsidiary.
Indented names are subsidiaries of the company under which they are indented:
<TABLE>
<CAPTION>
Percent
Jurisdiction in Ownership
which Incorporated By Immediate
Name of Company or Organized Parent
--------------- ------------------ ----------
<S> <C> <C>
Playboy Enterprises, Inc. (parent) Delaware
Lake Shore Press, Inc. Delaware 100%
Lifestyle Brands, Ltd. Delaware 100%
Playboy Models, Inc. Illinois 100%
Playboy Products and Services
International, B.V. The Netherlands 100%
Playboy Entertainment Group, Inc. Delaware 100%
After Dark Video, Inc. Delaware 100%
Alta Loma Productions, Inc. Delaware 100%
Cameo Films, Inc. Illinois 100%
Impulse Productions, Inc. Delaware 100%
Precious Films, Inc. California 100%
AdulTVision Communications, Inc. Delaware 100%
Mystique Films, Inc. California 100%
Women Productions, Inc. California 100%
Playboy Clubs International, Inc. Delaware 100%
Playboy Preferred, Inc. Illinois 100%
Critics' Choice Video, Inc. Illinois 100%
Special Editions, Ltd. Delaware 100%
Playboy Shows, Inc. Delaware 100%
Telecom International, Inc. Florida 100%
Playboy Gaming International, Ltd. Delaware 100%
Playboy Gaming Greece, Ltd. Delaware 100%
Playboy Properties, Inc. Delaware 100%
VIPress Poland Sp. z o.o Poland 86%
</TABLE>
<PAGE>
EXHIBIT 23
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
on Form S-8 (File Nos. 33-37666, 33-46113, 33-58145, 33-60631, 333-06843,
333-30185, 333-30201 and 333-36737) of our report dated February 4, 1998, on our
audits of the consolidated financial statements and financial statement schedule
of Playboy Enterprises, Inc. as of December 31, 1997, June 30, 1997 and June 30,
1996, and for the six-month transition period ended December 31, 1997 and for
each of the three fiscal years in the period ended June 30, 1997, which report
is included in this Transition Report on Form 10-K.
Coopers & Lybrand L.L.P.
Chicago, Illinois
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 947
<SECURITIES> 0
<RECEIVABLES> 37,791
<ALLOWANCES> 4,467
<INVENTORY> 25,376
<CURRENT-ASSETS> 125,204
<PP&E> 37,945
<DEPRECIATION> 27,892
<TOTAL-ASSETS> 185,947
<CURRENT-LIABILITIES> 98,916
<BONDS> 0
0
0
<COMMON> 221
<OTHER-SE> 78,462
<TOTAL-LIABILITY-AND-EQUITY> 185,947
<SALES> 149,541
<TOTAL-REVENUES> 149,541
<CGS> 126,658
<TOTAL-COSTS> 145,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> 4,290
<INCOME-TAX> 2,148
<INCOME-CONTINUING> 2,142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,077)
<NET-INCOME> 1,065
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,303
<SECURITIES> 0
<RECEIVABLES> 36,208
<ALLOWANCES> 3,882
<INVENTORY> 23,304
<CURRENT-ASSETS> 120,279
<PP&E> 37,831
<DEPRECIATION> 27,524
<TOTAL-ASSETS> 175,542
<CURRENT-LIABILITIES> 91,058
<BONDS> 0
0
0
<COMMON> 220
<OTHER-SE> 75,913
<TOTAL-LIABILITY-AND-EQUITY> 175,542
<SALES> 296,623
<TOTAL-REVENUES> 296,623
<CGS> 245,023
<TOTAL-COSTS> 280,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427
<INCOME-PRETAX> 14,751
<INCOME-TAX> (6,643)
<INCOME-CONTINUING> 21,394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,394
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
</TABLE>
