<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 1998, there were 4,748,954 shares of Class A Common Stock, par
value $0.01 per share, and 15,796,847 shares of Class B Common Stock, par value
$0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Quarters Ended June 30, 1998 and 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Balance Sheets at June 30,
1998 (Unaudited) and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Quarters Ended June 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Net revenues $77,820 $ 77,373
------- --------
Costs and expenses
Cost of sales (63,468) (64,108)
Selling and administrative expenses (10,361) (9,881)
------- --------
Total costs and expenses (73,829) (73,989)
------- --------
Operating income 3,991 3,384
------- --------
Nonoperating income (expense)
Investment income 17 21
Interest expense (345) (41)
Other, net (37) (349)
------- --------
Total nonoperating expense (365) (369)
------- --------
Income before income taxes 3,626 3,015
Income tax benefit (expense) (1,547) 12,007
------- --------
Net income $ 2,079 $ 15,022
======= ========
Weighted average number of common shares outstanding
Basic 20,541 20,362
======= ========
Diluted 21,111 20,855
======= ========
Net income per common share
Basic $ 0.10 $ 0.74
======= ========
Diluted $ 0.10 $ 0.72
======= ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the Six Months Ended June 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net revenues $ 149,582 $ 150,620
--------- ---------
Costs and expenses
Cost of sales (125,228) (122,961)
Selling and administrative expenses (19,119) (19,608)
--------- ---------
Total costs and expenses (144,347) (142,569)
--------- ---------
Operating income 5,235 8,051
--------- ---------
Nonoperating income (expense)
Investment income 51 38
Interest expense (560) (128)
Other, net (456) (542)
--------- ---------
Total nonoperating expense (965) (632)
--------- ---------
Income before income taxes 4,270 7,419
Income tax benefit (expense) (2,131) 10,113
--------- ---------
Net income $ 2,139 $ 17,532
========= =========
Weighted average number of common shares outstanding
Basic 20,536 20,346
========= =========
Diluted 21,073 20,843
========= =========
Net income per common share
Basic $ 0.10 $ 0.86
========= =========
Diluted $ 0.10 $ 0.84
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, Dec. 31,
1998 1997
----------- --------
<S> <C> <C>
Assets
Cash and cash equivalents $ 980 $ 947
Receivables, net of allowance for doubtful accounts of
$5,551 and $4,467, respectively 38,086 33,324
Inventories 27,896 25,376
Programming costs 41,703 41,504
Deferred subscription acquisition costs 11,455 12,143
Other current assets 11,963 11,910
-------- --------
Total current assets 132,083 125,204
-------- --------
Property and equipment, at cost 38,663 37,945
Accumulated depreciation (28,879) (27,892)
-------- --------
Property and equipment, net 9,784 10,053
-------- --------
Programming costs - noncurrent 9,398 8,329
Trademarks 15,853 14,978
Net deferred tax assets 12,993 13,688
Other noncurrent assets 16,404 13,695
-------- --------
Total assets $196,515 $185,947
======== ========
Labilities
Short-term borrowings $ 21,500 $ 10,000
Accounts payable 30,670 32,258
Accrued salaries, wages and employee benefits 3,178 4,499
Reserves for losses on disposals of discontinued operations 609 610
Income taxes payable 984 627
Deferred revenues 42,531 43,216
Other liabilities and accrued expenses 7,344 7,706
-------- --------
Total current liabilities 106,816 98,916
Other noncurrent liabilities 8,642 8,348
-------- --------
Total liabilities 115,458 107,264
-------- --------
Shareholders' Equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 5,042,381 issued 50 50
Class B non-voting - 30,000,000 shares authorized; 17,103,810
and 17,076,518 issued, respectively 171 171
Capital in excess of par value 44,057 43,539
Retained earnings 47,396 45,257
Foreign currency translation adjustment (141) (131)
Unearned compensation restricted stock (3,823) (3,511)
Less cost of treasury stock (6,653) (6,692)
-------- --------
Total shareholders' equity 81,057 78,683
-------- --------
Total liabilities and shareholders' equity $196,515 $185,947
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,139 $ 17,532
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 1,002 1,075
Amortization of intangible assets 870 990
Amortization of investments in entertainment programming 11,064 11,736
Investments in entertainment programming (12,332) (15,229)
Net change in operating assets and liabilities (12,437) (8,122)
Net cash used for discontinued operations (1) (61)
Other, net 6 744
-------- --------
Net cash provided by (used for) operating activities (9,689) 8,665
-------- --------
Cash Flows From Investing Activities
Additions to property and equipment (756) (240)
Acquisitions and funding of equity
interests in international ventures (1,274) (1,174)
Other, net 23 21
-------- --------
Net cash used for investing activities (2,007) (1,393)
-------- --------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings 11,500 (7,500)
Proceeds from exercise of stock options 123 369
Proceeds from sales under employee stock purchase plan 106 101
-------- --------
Net cash provided by (used for) financing activities 11,729 (7,030)
-------- --------
Net increase in cash and cash equivalents 33 242
Cash and cash equivalents at beginning of period 947 1,061
-------- --------
Cash and cash equivalents at end of period $ 980 $ 1,303
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included herein is unaudited, but in the opinion of
management, reflects all normal recurring adjustments necessary for a fair
presentation of the results for the interim periods. The interim results of
operations and cash flows are not necessarily indicative of such results and
cash flows for the entire year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Transition Report on Form 10-K for the period from July 1, 1997 through
December 31, 1997 (the "Transition Report") of Playboy Enterprises, Inc. and
its subsidiaries (the "Company").
(B) INCOME TAXES
The Company's net deferred tax asset declined to $13.3 million at June 30,
1998 based on taxable income for the current six-month period and
management's projection of calendar year 1998 taxable income. As reported in
the Company's Transition Report, the deferred tax asset includes principally
the anticipated benefit of net operating loss carryforwards ("NOLs"). Of the
$13.3 million and $14.0 million net deferred tax assets included in the
Condensed Consolidated Balance Sheets at June 30, 1998 and December 31, 1997,
respectively, $0.3 million is included in "Other current assets" with the
remainder segregated as "Net deferred tax assets."
Realization of the net deferred tax asset is dependent upon the Company's
ability to generate taxable income in future years. The recognition of
benefits in the financial statements is based upon projections by management
of future operating income and the anticipated reversal of temporary
differences that will result in taxable income. Projections of future
earnings were based on adjusted historical earnings.
In order to fully realize the net deferred tax asset of $14.0 million at
December 31, 1997, the Company will need to generate future taxable income of
approximately $41.2 million prior to the expiration, beginning in 2004, 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.
7
<PAGE>
(C) INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") (in thousands, except per share amounts):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Six Months Ended
June 30, June 30,
-------------- -----------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted EPS--net income
available to common shareholders $ 2,079 $15,022 $ 2,139 $17,532
=================================================================================================
Denominator:
Denominator for basic EPS--
weighted-average shares 20,541 20,362 20,536 20,346
- -------------------------------------------------------------------------------------------------
Effect of dilutive potential common shares:
Stock options 570 377 537 377
Nonvested restricted stock awards - 116 - 120
- -------------------------------------------------------------------------------------------------
Dilutive potential common shares 570 493 537 497
- -------------------------------------------------------------------------------------------------
Denominator for diluted EPS--
adjusted weighted-average shares 21,111 20,855 21,073 20,843
=================================================================================================
Basic EPS $ 0.10 $ 0.74 $ 0.10 $ 0.86
=================================================================================================
Diluted EPS $ 0.10 $ 0.72 $ 0.10 $ 0.84
=================================================================================================
</TABLE>
During the quarter and six months ended June 30, 1998, approximately 340,000
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 those
periods. Additionally, an option to purchase approximately 7,500 and 3,750
weighted-average shares of Class B common stock was outstanding during the
quarter and six months ended June 30, 1998, respectively, but was not
included in the computation of diluted EPS as the option's exercise price was
greater than the average market price of the Class B common stock, the effect
of which was antidilutive.
(D) INVENTORIES
Inventories, which are stated at the lower of cost (average cost and
specific cost) or market, consisted of the following (in thousands):
<TABLE>
<CAPTION>
(Unaudited)
June 30, Dec. 31,
1998 1997
---- ----
<S> <C> <C>
Paper $ 9,618 $ 7,573
Editorial and other prepublication costs 6,825 6,002
Merchandise finished goods 11,453 11,801
------- -------
Total inventories $27,896 $25,376
======== =======
</TABLE>
(E) TREASURY STOCK
Treasury stock consisted of 293,427 Class A common shares and 966,601 Class B
common shares at June 30, 1998. At December 31, 1997, treasury stock
consisted of 293,427 Class A common shares and 974,227 Class B common shares.
8
<PAGE>
(F) ACCOUNTING STANDARDS
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("Statement 133"), for financial statements issued for fiscal
years beginning after June 15, 1999. Statement 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives
and hedging activities. Management is currently evaluating the effect that
adoption of Statement 133 will have on the Company's financial statements.
(G) CONTINGENCIES
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, 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 million at June 30, 1998, to cover the
eventual cost of its anticipated share (based on an agreement with one of
the other PRPs) of any agreed upon remediation.
(H) SUBSEQUENT EVENT
On July 29, 1998, the Company and Spice Entertainment Companies, Inc.
("Spice") filed with the Securities and Exchange Commission ("SEC")
preliminary proxy materials in connection with the Company's proposed
acquisition of Spice, announced on February 3, 1998. The Company is
awaiting comments on the preliminary proxy materials from the staff of the
SEC and expects this transaction to close in the fourth quarter of calendar
year 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions of dollars, except per share amounts)
RESULTS OF OPERATIONS
The Company's revenues increased to $77.8 for the quarter ended June 30,
1998 compared to $77.4 for the quarter ended June 30, 1997. For the six months
ended June 30, 1998, revenues decreased to $149.6 compared to $150.6 for the six
months ended June 30, 1997. Revenues for the Entertainment and Playboy Online
Groups were higher for both the current year quarter and six-month period. These
increases were mostly offset in the current year quarter and more than offset in
the six-month period by lower Publishing and Catalog Group revenues.
The Company reported operating income of $4.0 for the quarter ended June
30, 1998 compared to $3.4 in the prior year quarter. For the six months ended
June 30, 1998, the Company's operating income was $5.2 compared to $8.1 in the
prior year. The current year quarter reflected higher operating income for the
Entertainment Group, which was partially offset by planned increased investments
in the Playboy Online Group, lower operating income for the Publishing Group and
higher Corporate Administration and Promotion expenses. The six-month period
also reflected higher operating income for the Entertainment Group which was
more than offset by planned increased investments in the Playboy Online Group
and lower operating income for the Publishing Group.
Net income for the quarter ended June 30, 1998 was $2.1, or basic and
diluted EPS of $0.10, compared to $15.0, or basic EPS of $0.74 and diluted EPS
of $0.72, for the prior year quarter. Net income for the quarter ended June 30,
1997 included a federal income tax benefit of $13.5 related to NOLs and tax
credit carryforwards. Excluding the impact of the $13.5 federal income tax
benefit, net income for the quarter ended June 30, 1997 was $1.5, or basic EPS
of $0.08 and diluted EPS of $0.07. Net income for the six months ended June 30,
1998 was $2.1, or basic and diluted EPS of $0.10, compared to $17.5, or basic
EPS of $0.86 and diluted EPS of $0.84, for the prior year. Excluding the impact
of the federal income tax benefit, net income for the six months ended June 30,
1997 was $4.0, or basic EPS of $0.20 and diluted EPS of $0.19.
Net income for the quarters ended June 30, 1998 and 1997, adjusted to
eliminate noncash federal income tax expense and a noncash net federal income
tax benefit, respectively, due to the Company's NOLs and tax credit
carryforwards ("tax-adjusted net income"), was $2.6, or basic EPS of $0.13 and
diluted EPS of $0.12, and $2.3, or basic and diluted EPS of $0.11, respectively.
For the six months ended June 30, 1998, tax-adjusted net income was $2.8, or
basic EPS of $0.14 and diluted EPS of $0.13, compared to $6.1, or basic EPS of
$0.30 and diluted EPS of $0.29, for the six months ended June 30, 1997.
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
international sales.
Publishing Group
The revenues and operating income of the Publishing Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
Quarters Six Months
Ended Ended
June 30, June 30,
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Playboy Magazine...................... $27.2 $28.9 $51.2 $53.2
Other Domestic Publishing............. 4.6 5.3 8.4 10.3
International Publishing.............. 3.0 2.3 5.2 4.7
----- ----- ----- -----
Total Revenues....................... $34.8 $36.5 $64.8 $68.2
===== ===== ===== =====
Operating Income...................... $2.9 $ 3.4 $ 3.1 $ 5.0
===== ===== ===== =====
</TABLE>
10
<PAGE>
Publishing Group revenues decreased $1.7, or 5%, and $3.4, or 5%,
respectively, for the quarter and six months ended June 30, 1998 compared to the
prior year. These decreases were primarily due to lower revenues from Playboy
magazine and newsstand specials, partially offset by higher international
publishing revenues.
For the quarter and six months ended June 30, 1998, Playboy magazine
revenues declined $1.7, or 6%, and $2.0, or 4%, respectively, compared to the
prior year. Playboy magazine circulation revenues decreased $1.3 for both the
quarter and six months ended June 30, 1998 primarily due to $0.9, or 17%, and
$2.2, or 23%, decreases, respectively, in newsstand revenues principally as a
result of 23% fewer U.S. and Canadian newsstand copies sold in both periods.
These lower newsstand revenues are due in part to the consolidation taking place
nationally in the single-copy magazine distribution system which the Company
expects will continue to adversely affect newsstand revenues. For the quarter
and six-month period, subscription revenues decreased $0.4, or 3%, and increased
$0.9, or 3%, respectively. Advertising revenues were $0.3, or 4%, lower for the
quarter and $1.1, or 7%, lower for the six-month period primarily due to 5% and
8% fewer ad pages, respectively. Advertising sales for the calendar year 1998
third quarter issues of the magazine are closed, and the Company expects to
report 5% more ad pages and 1% higher ad revenues compared to the quarter ended
September 30, 1997. Licensing revenues of $0.6 favorably impacted the current
year six-month period.
Revenues from other domestic publishing businesses decreased $0.7, or 13%,
and $1.9, or 19%, for the quarter and six months ended June 30, 1998,
respectively, compared to the prior year. These decreases were primarily due to
lower revenues from newsstand specials principally due to fewer copies sold in
the current year periods due in part to the previously mentioned consolidation
in the single-copy distribution system.
International publishing revenues increased $0.7, or 27%, and $0.5, or 10%,
for the quarter and six months ended June 30, 1998, respectively, compared to
the prior year primarily due to higher royalties from Brazil and Russia combined
with higher revenues from the Polish edition of Playboy magazine, in which the
Company owns a majority interest.
For the quarter and six months ended June 30, 1998, Publishing Group
operating income decreased $0.5, or 14%, and $1.9, or 38%, respectively,
compared to the prior year primarily due to the net decreases in revenues
discussed above combined with higher average paper prices. Operating income in
calendar year 1998 is expected to be materially adversely impacted by an average
paper price increase of approximately 5%. Partially offsetting the above were
lower editorial costs combined with lower group administrative expenses which
were primarily due to performance-related variable compensation expenses in the
prior year periods.
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 district court found the Military Act to be
unconstitutional and permanently enjoined its enforcement. The district court's
decision also prohibited the Department of Defense from modifying its
acquisition and stocking practices as a result of the Military Act. The
government appealed the district court's decision and the decision was stayed
during this appeal. On November 21, 1997, the United States Court of Appeals
(the "Court of Appeals") vacated the district court's decision and ordered the
district court to hold the Military Act constitutional. The Court of Appeals'
decision was stayed pending appeal to the United States Supreme Court (the
"Supreme Court"). On June 27, 1998, the Supreme Court, without comment, refused
to hear the appeal and the stay was lifted. The Military Act, if found
applicable to the Company's products, would prohibit the sale of Playboy
magazine, newsstand specials and some videos at commissaries, PX's and ship
stores, and would adversely affect the 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.
11
<PAGE>
Entertainment Group
The revenues and operating income of the Entertainment Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Six Months
Ended Ended
June 30, June 30,
----------- ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Playboy TV
Cable.................................... $ 5.1 $ 5.1 $ 10.5 $ 10.8
Satellite Direct-to-Home................. 8.4 7.1 16.3 13.1
Off-Network Productions and Other........ 0.3 0.8 0.5 1.1
----- ----- ------ ------
Total Playboy TV......................... 13.8 13.0 27.3 25.0
Domestic Home Video...................... 4.3 1.5 5.8 4.6
International TV and Home Video.......... 4.1 5.6 5.8 7.9
----- ----- ------ ------
Total Playboy Businesses................. 22.2 20.1 38.9 37.5
AdulTVision.............................. 1.4 1.0 2.8 2.1
Movies and Other......................... 1.2 0.5 1.4 1.2
----- ----- ------ ------
Total Revenues.......................... $24.8 $21.6 $ 43.1 $ 40.8
===== ===== ====== ======
Operating Income
Profit Contribution Before
Playboy Businesses Programming Expense.. $13.1 $10.9 $ 22.6 $ 21.7
Playboy Businesses Programming Expense... (5.5) (6.6) (10.1) (11.1)
----- ----- ------ ------
Total Operating Income.................. $ 7.6 $ 4.3 $ 12.5 $ 10.6
===== ===== ====== ======
</TABLE>
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").
Playboy TV
Revenues from the Company's branded domestic pay television service,
Playboy TV, were $0.8, or 6%, and $2.3, or 9%, higher, respectively, for the
quarter and six months ended June 30, 1998 compared to the prior year.
Cable revenues remained stable for the quarter ended June 30, 1998. For the
six months ended June 30, 1998, cable revenues decreased $0.3, or 3%, primarily
due to the estimated negative effect of the enforcement of Section 505 of the
Telecommunications Act of 1996 (the "Telecommunications Act"), including a
decline in the average number of subscribing households due to some system
drops, partially offset by higher retail rates. In addition, the prior year
included revenues from a pay-per-view special event featuring Farrah Fawcett. At
June 30, 1998, Playboy TV was available to approximately 12.1 million cable
addressable households, an 8% and 7% increase compared to June 30, 1997 and
March 31, 1998, respectively.
Management believes that the Company's revenues attributable to its
domestic pay television cable services may continue to be materially adversely
affected as a result of enforcement of Section 505 of the Telecommunications Act
("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 (discounted to present value at a rate
of 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. There can be no assurance that the Delaware District Court
will grant an injunction. See "Legal Proceedings."
Additionally, management believes that the growth in cable access for the
Company's domestic pay television businesses has slowed in recent years due to
the effects of cable reregulation by the Federal Communications Commission
12
<PAGE>
(the "FCC"), including the "going-forward rules" 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. As
digital technology (which is unaffected by the relevant sections of the
Telecommunications Act) becomes more available, however, the Company believes
that ultimately its pay television networks will be available to the majority of
cable households on a 24-hour basis.
Satellite direct-to-home ("DTH") revenues increased $1.3, or 19%, and $3.2,
or 24%, respectively, for the quarter and six months ended June 30, 1998. These
improvements were primarily due to significant increases in addressable
universes for DirecTV and PrimeStar, combined with revenues in the current year
periods as a result of recent launches on EchoStar and two Canadian DTH
services, ExpressVu and Star Choice. DTH is unaffected by Section 505. Revenues
from TVRO, or the big-dish market, continued to decline, as expected, due to the
maturity of this platform. Playboy TV was available to approximately 8.7 million
DTH households, including approximately 0.3 million monthly subscribers, at June
30, 1998, an increase of 38% and 4% compared to June 30, 1997 and March 31,
1998, respectively.
Revenues from off-network productions and other decreased $0.5 and $0.6,
respectively, for the quarter and six months ended June 30, 1998 primarily due
to revenues in the prior year periods from licensing episodes of Women: Stories
of Passion, one of the Company's series, to Showtime Networks Inc.
Profit contribution for Playboy TV increased $0.7 and $1.4, respectively,
for the quarter and six months ended June 30, 1998, primarily due to the net
increases in revenues discussed above. Expenses in the prior year related to the
Section 505 lawsuit and the special event featuring Farrah Fawcett were offset
by higher marketing costs in the current year, principally related to DTH
services, and a favorable adjustment to bad debt expense in the prior year. Also
unfavorably impacting the six-month comparison were favorable music licensing
settlements in the prior year.
Domestic Home Video
Domestic home video revenues and profit contribution increased $2.8 and
$2.7, respectively, for the quarter ended June 30, 1998, and increased $1.2 and
$1.1, respectively, for the six months ended June 30, 1998, compared to the
prior year. The increases in the current year quarter were primarily due to a
guarantee related to a backlist distribution agreement with Universal Music &
Video Distribution, Inc. ("Uni") which was recently renewed, extending the
agreement through June 2001. Both the current year quarter and six-month period
reflected higher sales of new releases, including sales in the current year of
The Eros Collection, non-Playboy-branded movies.
International TV and Home Video
For the quarter and six months ended June 30, 1998, profit contribution
from the international TV and home video business decreased $1.3 and $2.0,
respectively, primarily due to revenue decreases of $1.5 and $2.1, respectively.
These decreases were primarily due to lower international television and home
video sales, partially offset by higher sales and contractual revenues related
to international networks. Variations in quarterly performance are caused in
part by revenues and profit contribution from tier sales being recognized
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 decreased $1.1 and $1.0, respectively, for
the quarter and six months ended June 30, 1998, primarily due to the net
decreases in international revenues.
AdulTVision
AdulTVision revenues increased $0.4 and $0.7, respectively, for the quarter
and six months ended June 30, 1998 compared to the prior year. These increases
were primarily due to higher revenues from the domestic network principally as a
result of an increase in the addressable universe, despite the estimated
negative effect of the enforcement of Section 505 as previously discussed. At
June 30, 1998, the network was available domestically to approximately 9.5
million cable addressable and DTH households, a 79% and 8% increase from June
30, 1997 and March 31, 1998, respectively. Operating income remained stable for
both the quarter and six months ended June 30, 1998 as the increases in revenues
were offset by higher marketing and distribution costs.
13
<PAGE>
Movies and Other
Operating income from movies and other businesses remained relatively
stable for both the quarter and six months ended June 30, 1998, primarily due to
higher revenues of $0.7 and $0.2, respectively, principally related to feature
films, which were offset by higher related costs. The Entertainment Group's
administrative expenses remained stable for the quarter ended June 30, 1998 and
decreased $0.3 for the six months ended June 30, 1998 compared to the prior
year. The lower expenses for the six-month period were primarily due to lower
performance-related variable compensation expense, partially offset by higher
expenses related to new business development.
Product Marketing Group
The revenues and operating income of the Product Marketing Group were as
follows for the periods indicated below:
<TABLE>
<CAPTION>
Quarters Six Months
Ended Ended
June 30, June 30,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ $1.6 $1.7 $4.2 $3.7
==== ==== ==== ====
Operating Income........................ $0.4 $0.3 $1.1 $1.3
==== ==== ==== ====
</TABLE>
Revenues for the quarter and six months ended June 30, 1998 decreased $0.1,
or 5%, and increased $0.5, or 14%, respectively, compared to the prior year.
Both the current year quarter and six-month period reflect lower international
product licensing royalties, principally from China. The increase in revenues
for the six-month period is principally due to higher revenues from Special
Editions, Ltd. ("SEL") as a result of a barter agreement related to the sale of
prints and posters from the Company's art publishing inventory.
Operating income of $0.4 for the quarter ended June 30, 1998 increased
$0.1, or 22%, compared to the prior year quarter due to lower expenses.
Operating income of $1.1 for the six months ended June 30, 1998 decreased $0.2,
or 14%, due to the lower international royalties. The higher SEL revenues were
mostly offset by higher associated costs.
Catalog Group
The revenues and operating income of the Catalog Group were as follows for
the periods indicated below:
<TABLE>
<CAPTION>
Quarters Six Months
Ended Ended
June 30, June 30,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................ $15.1 $16.8 $34.5 $36.3
===== ===== ===== =====
Operating Income........................ $ 0.5 $ 0.6 $ 1.6 $ 1.8
===== ===== ===== =====
</TABLE>
Revenues for the quarter and six months ended June 30, 1998, decreased
$1.7, or 10%, and $1.8, or 5%, respectively, compared to the prior year. These
decreases were largely due to a shortened sales cut-off in the current year
periods for all of the catalogs as a result of changing the Company's fiscal
year end. Sales volume for the Critics' Choice Video catalog was also lower as a
result of planned lower circulation as well as slightly lower response rates,
partially offset by sales in the current year periods from the The Big Book of
Movies catalog, first available in October 1997. Higher sales volume for the
Collectors' Choice Music spring catalog partially offset the above for the six-
month comparison.
For the quarter and six months ended June 30, 1998, operating income
decreased $0.1, or 15%, and $0.2, or 12%, respectively, compared to the prior
year. These decreases were primarily due to the lower revenues which were mostly
offset by lower related costs and lower administrative expenses for the group as
a result of expenses in the prior year related to the group's move to a new
facility. In July 1998, under license from Spice, the Company launched its new
Spice catalog containing quality video entertainment for adults.
14
<PAGE>
Casino Gaming Group
The Company anticipates the opening of the Playboy Casino and Beach Hotel
in Rhodes, Greece in the fourth quarter of calendar year 1998. The Company is
also exploring additional casino gaming opportunities. Expenses of $0.2 and
$0.4, respectively, were incurred in the quarter and six months ended June 30,
1998, principally related to executive staffing and legal costs.
Playboy Online Group
Beginning with the quarter ended March 31, 1998, Playboy Online results,
which were previously reported in the Publishing and Catalog Groups, are now
reported as a separate operating group. The group's results include advertising
sales from Playboy.com, the Company's free site on the Internet; subscription
sales to Playboy Cyber Club, the Company's pay site on the Internet; and e-
commerce sales from all of the Company's online catalog offerings. The revenues
and operating loss of the Playboy Online Group were as follows for the periods
indicated below:
<TABLE>
<CAPTION>
Quarters Six Months
Ended Ended
June 30, June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................ $ 1.6 $ 0.8 $ 3.0 $ 1.6
===== ===== ===== =====
Operating Loss.................. $(1.5) $(0.2) $(2.2) $(0.2)
===== ===== ===== =====
</TABLE>
For the quarter and six months ended June 30, 1998, Playboy Online Group
revenues increased $0.8 and $1.4, respectively, compared to the prior year
primarily due to higher subscription revenues related to Playboy Cyber Club,
which launched in the summer of 1997. Additionally, e-commerce revenues
increased compared to the prior year periods primarily due to the launches of
CCMusic and CCVideo, online versions of the Collectors' Choice Music and
Critics' Choice Video catalogs, in the summer and fall of 1997, respectively.
For the quarter and six months ended June 30, 1998, the Playboy Online
Group reported operating losses of $1.5 and $2.2, respectively, compared to an
operating loss of $0.2 in both the prior year quarter and six-month period. The
current year quarter and six-month period included higher planned investments
related to the group's continued growth and development.
Corporate Administration and Promotion
Corporate administration and promotion expenses of $5.7 and $10.3 for the
quarter and six months ended June 30, 1998 increased $0.6 and remained stable,
respectively, compared to the prior year periods. Both the current year quarter
and six-month period were impacted by increased investments in systems
technology, Year 2000 and higher consulting expenses and significantly lower
performance-related variable compensation expense.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $1.0 in cash and cash equivalents and
$21.5 in short-term borrowings, compared to $0.9 in cash and cash equivalents
and $10.0 in short-term borrowings at December 31, 1997. The Company expects to
finance its short- and long-term cash requirements through a revolving credit
agreement, cash generated from operations and additional facilities.
Cash Flows From Operating Activities
Net cash used for operating activities was $9.7 for the six months ended
June 30, 1998 compared to net cash provided of $8.7 for the prior year. The
Company's net income declined $1.9, excluding the $13.5 federal income tax
benefit recorded in the prior year. Cash used for operating assets and
liabilities was $12.4 in the current year compared to $8.1 in the prior year,
despite the increase in net deferred tax assets in the prior year which offset
the federal income tax benefit. Cash used for accounts receivable in the current
year compared to cash provided in the prior year was largely due to the timing
of the Uni contract extension and the higher international television network
revenues previously discussed. Cash used for accrued employee costs in the
current year compared to cash provided in the prior year was largely due to the
Company's change in fiscal year end. Cash used for accounts payable in the
current year compared to cash provided in the prior year was primarily related
to Collectors' Choice Music catalog inventory and feature film profit
participants. The Company invested $12.3 in Company-produced and licensed
entertainment programming during the current year compared to $15.2 in the prior
year, and expects to invest approximately $14.4 in such programming during the
remainder of calendar year 1998.
Cash Flows From Investing Activities
Net cash used for investing activities was $2.0 for the six months ended
June 30, 1998 compared to $1.4 in the prior year.
Cash Flows From Financing Activities
Net cash provided by financing activities was $11.7 for the six months
ended June 30, 1998 compared to net cash used of $7.0 for the prior year. This
increase was principally due to an $11.5 increase in the level of short-term
borrowings under the Company's revolving line of credit in the current year to
finance ongoing operations, compared to a $7.5 decrease in the level of short-
term borrowings in the prior year.
Income Taxes
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. The Company's net deferred tax
asset declined to $13.3 at June 30, 1998 based on taxable income for the current
six-month period and management's projection of calendar year 1998 taxable
income. 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.
. The Company continues to generate meaningful earnings, particularly from
the Entertainment Group, and the Company's substantial investments in this
group are anticipated to lead to increased earnings in future years.
16
<PAGE>
. 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 EPA as a
PRP in connection with a site identified as the Southern Lakes Trap & Skeet
Club, 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 $0.6 at June 30, 1998, to cover
the eventual cost of its anticipated share (based on an agreement with one of
the other PRPs) of any agreed upon remediation.
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 had advised BrandsElite that it had
determined not to proceed with the transaction and 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. 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. The action is scheduled to go to trial in September 1998.
BrandsElite's expert reports on damages assert future lost profits damages
ranging from $3.5 to $12.5.
The Company will adopt the provisions of Statement 133, Accounting for
Derivative Instruments and Hedging Activities, for financial statements issued
for fiscal years beginning after June 15, 1999. Statement 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. Management is currently evaluating the
effect that adoption of Statement 133 will have on the Company's financial
statements.
In response to the Year 2000 problem, 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
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 problem 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 Playboy Online
operations. Although the Company is still quantifying the impact, the early
estimate of the costs associated with required modifications and conversions are
expected to total approximately $2.0, of which approximately $1.0 is expected to
be expensed in calendar year 1998. All of these costs are being expensed as
incurred.
17
<PAGE>
Forward-Looking Statements
This Form 10-Q Report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. Such forward-looking statements involve risks and uncertainties which
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. The following are some of the important
factors that could cause actual results or outcomes to differ materially from
those discussed in the forward-looking statements: (1) government actions or
initiatives, including (a) attempts to limit or otherwise regulate the sale of
adult-oriented materials, including print, video and online materials or
businesses such as casino gaming, (b) regulation of the advertisement of tobacco
products, or (c) substantive changes in postal regulations or rates, (2) further
increases in paper prices, (3) changes in distribution technology and/or
unforeseen delays in the implementation of that technology by the cable and
satellite industries, which 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, (5)
increased competition for transponders and channel space and any decline in the
Company's access to, and acceptance by, cable and DTH systems, (6) the effects
of the consolidation taking place nationally in the single-copy magazine
distribution system, and (7) new competition in the adult cable television
market.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This disclosure is currently not required as the Company's market
capitalization was less than $2.5 billion as of January 28, 1997.
18
<PAGE>
LEGAL PROCEEDINGS
In February 1996, the Telecommunications Act was enacted. 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 to prevent any
possibility of bleeding, or to restrict the period during which adult
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.
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 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 may 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 (discounted to present value at a rate of 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.
There can be no assurance that the Delaware District Court will grant an
injunction.
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 had
advised BrandsElite that it had determined not to proceed with the transaction
and 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. 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. The action is scheduled to go to trial in September 1998.
BrandsElite's expert reports on damages assert future lost profits damages
ranging from $3.5 million to $12.5 million.
19
<PAGE>
OTHER INFORMATION
The Company in the past has held an annual stockholders' meeting in
November of each year, in preparation for which an annual report reflecting June
30 fiscal year-end results and a proxy statement were circulated (typically in
late September). In November 1997, the Company's fiscal year end was changed
from June 30 to December 31. As a result of the change in fiscal year, the
Company will not hold an annual stockholders' meeting in November 1998 and,
instead, will hold an annual stockholders' meeting in May 1999 (the "1999 Annual
Meeting"). Proposals of stockholders intended to be included in the Company's
proxy statement for the 1999 Annual Meeting pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934 (the "Exchange Act") must be received by the
Company no later than November 1, 1998 (which the Company believes is a
reasonable period of time before April 1, 1999, the date on which the Company
intends to begin to print and mail its proxy materials for the 1999 Annual
Meeting), to be considered for inclusion in the Company's proxy statement and
proxy for the 1999 Annual Meeting. Proposals of stockholders submitted outside
the processes of Rule 14a-8 of the Exchange Act in connection with the 1999
Annual Meeting ("Non-Rule 14a-8 Proposals") must be received by the Company by
January 1, 1999 or such proposals will be considered untimely. The Company's
proxy will give discretionary authority to the proxy holders to vote with
respect to all Non-Rule 14a-8 Proposals received after January 1, 1999 in
connection with the 1999 Annual Meeting. Such proposals and notices should be
addressed to the Secretary, Playboy Enterprises, Inc., 680 North Lake Shore
Drive, Chicago, Illinois 60611 and should be so transmitted by certified mail-
return receipt requested to eliminate controversy as to the date of receipt by
the Company.
20
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
#10.1 Distribution Agreement dated June 5, 1998 between Playboy Entertainment
Group, Inc. and Universal Music & Video Distribution, Inc. regarding
licensing and sale of domestic home video product
10.2 Selected Company Remunerative Plans
a Amended and Restated Deferred Compensation Plan for Employees
effective January 1, 1998
b Amended and Restated Deferred Compensation Plan for Board of
Directors' effective January 1, 1998
10.3 Selected Employment, Termination and Other Agreements
#a Letter Agreements dated March 16, 1998 and July 20, 1998 regarding
employment of Buford Smith
b Letter Agreement dated March 27, 1998 regarding employment of
Apostolos D. Kallis
27 Financial Data Schedule
- ----------
# Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
(b) Reports on Form 8-K
During the quarter ended June 30, 1998, the Company filed a Current Report
on Form 8-K dated June 1, 1998 under Item 5 of such report. The purpose of
this report was for the Company and Spice to announce a definitive merger
agreement whereby the Company will acquire all of the outstanding shares of
Spice, subject to the satisfactory completion of various items.
21
<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.
-------------------------
(Registrant)
Date August 12, 1998 By /s/ Linda Havard
------------------- ----------------------
Linda Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
22
<PAGE>
As of June 5, 1998
Universal Music & Video Distribution, Inc.
70 Universal City Plaza
Universal City, CA 91608
RE: Extension and Third Amendment to Playboy Entertainment Group, Inc.
Distribution Agreement
Ladies and Gentlemen:
Reference is made to that certain letter agreement (the "Original Agreement")
dated as of August 22, 1991 between Uni Distribution Corp., now known as
Universal Music & Video Distribution, Inc. ("UMVD"), and Playboy Video
Enterprises, Inc., the predecessor in interest to Playboy Entertainment Group,
Inc. ("Playboy"), as such letter agreement has been supplemented and amended,
including by (i) that certain letter amendment dated as of March 24, 1995
between UMVD and Playboy (the "First Amendment"), and (ii) that certain letter
amendment dated as of February 28, 1997 between UMVD and Playboy (the "Second
Amendment"; such August 22, 1991 letter agreement, as it has been supplemented
and amended, is referred to as the "Agreement"). All defined terms used in this
third letter amendment (the "Third Amendment") and not defined in this Third
Amendment are defined in the Agreement. UMVD and Playboy desire further to
extend and supplement the Agreement, as follows:
1. Term. The Term of the Agreement shall be extended to ***, subject
to extension of the Term for only the New Release Programs pursuant to
subparagraph 3(a) of the First Amendment, with respect to each contract year
of the Agreement commencing June 16, 1998.
2. Distribution Fee. Commencing June 16, 1998, UMVD's Distribution Fee for the
New Release Programs and the Catalog Programs distributed under the
Agreement from and after such date, shall be *** (as defined in the
Agreement), *** , as follows:
(a) *** If the *** for the New Release Programs (which for purposes of this
Paragraph 2 shall include *** for the CD-ROMs entitled "Pamela Anderson
Playmate Portfolio," "Jenny McCarthy Playmate Portfolio," and "Playboy's
Babes of Baywatch," respectively) and the Catalog Programs for the
period ***
- --------------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
1
<PAGE>
under the Agreement for the New Release Programs and the Catalog
Programs for the period ***, then UMVD's Distribution Fee for *** under
the Agreement for the period ***.
(b) ***. If the *** for the New Release Programs and the Catalog Programs
for the period ***, then UMVD's Distribution Fee for *** under the
Agreement for the period ***.
(c) ***. If the *** for the New Release Programs and the Catalog Programs
for the period ***, then UMVD's Distribution Fee for *** under the
Agreement for the period ***.
----
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
2
<PAGE>
(d) *** for a particular contract year of the Agreement under this
Paragraph 2, shall be paid from the gross revenues otherwise
payable to Playboy for the New Release Programs and (to the extent
UMVD has recouped its then-paid Advances, and therefore gross
revenue overages for the Catalog Programs are then payable to
Playboy) the Catalog Programs, for the *** under the Agreement for
the New Release Programs and the Catalog Programs for a particular
period ***, so that UMVD shall be entitled to retain such portion
of such gross revenues otherwise payable to Playboy in discharge
of and as payment for the applicable ***. If such gross revenues
payable to Playboy for the applicable month are insufficient to
discharge fully the applicable *** in the Distribution Fee, then
the balance of such *** shall be payable from the gross revenues
otherwise payable to Playboy for the New Release Programs and (to
the extent of such overages) the Catalog Programs for subsequent
months until such balance is fully discharged and paid, and in
this regard, UMVD shall be entitled to retain such portion of such
gross revenues otherwise payable to Playboy until such *** is
fully discharged and paid.
3. Catalog Program Advances. UMVD shall pay to Playboy by wire transfer
to an account designated by Playboy the following non-returnable, but
recoupable advances (collectively, the "Advances") against Playboy's
share of gross revenues from the Catalog Programs ***, as follows:
(a) For ***, payable promptly following the execution of this Third
Amendment by Playboy (the "*** Advance").
(b) For ***, not reduced by any unrecouped portion of the ***
Advance, payable on or before *** (the "*** Advance").
*** Confidential information omitted pursuant to a request for
confidential treatment filed separately with the Securities and
Exchange Commission.
3
<PAGE>
(c) For ***, not reduced by any unrecouped portion of the *** Advance or
the *** Advance, payable on or before *** (the "*** Advance").
4. Recoupment.
-----------
(a) UMVD shall report to Playboy on a monthly basis all gross revenues
from the Catalog Programs for the previous month of the Term, and pay
to Playboy such gross revenues minus allowable deductions in
accordance with subparagraph 6(b) of the First Amendment, but with the
following replacement for subparagraph 6(b)(vii) of such First
Amendment: "With respect to a particular contract year of the Term for
the Catalog Programs, commencing June 16, 1998, UMVD may deduct from
the gross revenues from the Catalog Programs payable to Playboy, the
total amount of the Advances then paid to Playboy under Paragraph 3
above that have not already been deducted from the gross revenues from
the Catalog Programs payable to Playboy, such deductions to be applied
towards recoupment of the Advances. If for any month of the Term for
the Catalog Programs, the total gross revenues from the Catalog
Programs exceed the allowable deductions, in accordance with
subparagraph 6(b) of the First Amendment, as modified by this
subparagraph 4(a), then UMVD shall pay to Playboy the amount of such
excess (collectively, "Overages"). Overages may not be used to reduce
the amount of any future Advances that have not been paid at the time
the Overages are paid."
(b) No sums payable to Playboy in connection with the New Release Programs
may be used to reduce the amount of gross revenues payable to Playboy
in connection with the Catalog Programs, and no portion of any Advance
may be used to reduce the amount of gross revenues payable to Playboy
in connection with the New Release Programs or may be applied towards
any payment by UMVD for Playboy's inventory. Furthermore, no
unrecouped portion of any Advance may be used to reduce the ***
Advance or the *** Advance.
5. DVD Termination Date, Grace Period, *** and UMVD Purchase of Catalog
--------------------------------------------------------------------
Program Inventory.
------------------
(a) DVD Termination Date. The DVD Termination Date under the Agreement
shall now be the first to occur of (i) ***, or (ii) the date on which
UMVD notifies Playboy (or Playboy notifies UMVD) in writing,
accompanied by reasonably satisfactory written evidence, ***. If the
DVD
*** Confidential information omitted pursuant to a request for
confidential treatment filed separately with the Securities and
Exchange Commission.
4
<PAGE>
Termination Date is prior to ***, then as of the DVD Termination Date,
the authorized formats under the Agreement shall include DVDs.
(b) Grace Period. If the DVD Termination Date is prior to *** then Playboy
shall have the right to grant to Image the Grace Period following the
DVD Termination Date, in accordance with subparagraph 4(b) of the
Second Amendment.
(c) ***
(d) UMVD Purchase of Catalog Program Inventory. Commencing June 16, 1998,
UMVD's obligation to purchase some or all of Playboy's then-existing
inventory of finished videocassettes of a New Release Program that
becomes a Catalog Program during the Term for Catalog Programs,
pursuant to subparagraph 5(b) of the First Amendment, shall be modified
such that UMVD's purchase price for each finished videocassette unit
shall be *** attached to this Third Amendment as Exhibit A. Such
purchase prices for UMVD shall be effective for *** are for (i) new
Fuji, BASF, SKC or comparable duplication grade tape stock with fewer
than 8 dropouts per minute and meeting all ITSC standards, (ii) face
label printing and materials, affixing the face label, inserting the
videocassette into a sleeve, shrink wrapping the packaged videocassette
and packing the finished videocassettes in 50 unit cartons, (iii) the
corresponding length of program to be duplicated, (iv)
- -----
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
5
<PAGE>
a minimum duplication quantity of no greater than 1,000, and (v) a 7-
day duplication turnaround time, and that such ***. All other
provisions regarding UMVD's purchase of Catalog Program Inventory from
Playboy shall be in accordance with subparagraph 5(b) of the First
Amendment.
(e) Catalog Program Duplication. Commencing June 16, 1998, so long as
Marina Beach is reasonably meeting UMVD's manufacturing and packaging
requirements and there is no interruption in the flow of product, UMVD
shall manufacture and package all copies of all Catalog Programs at
Marina Beach, using videotape masters and other master materials stored
at Marina Beach and furnished by Playboy, instead of Playboy's
furnishing to UMVD any videotape masters or other master materials for
Catalog Programs. *** If Marina Beach is not reasonably meeting UMVD's
manufacturing or packaging requirements or there is an interruption in
the flow of product on account of Marina Beach's acts or omissions,
UMVD shall notify Playboy in writing of such fact, specifying the
problem, and if Playboy is not able to resolve the problem to *** of
UMVD's notice to Playboy, ***.
(f) Playboy's Inventory Repurchase Obligation. Playboy's repurchase
obligation for videocassette copies and videocassette sleeves of the
Catalog Programs manufactured by UMVD, in accordance with the fourth
sentence of subparagraph 5(e) of the First Amendment, shall not be
determined by such number of copies and sleeves that Playboy has
- ----------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
6
<PAGE>
reasonably advised UMVD to manufacture, as provided in such fourth
sentence of subparagraph 5(e) of the First Amendment, but rather, UMVD
shall be entitled to manufacture, and Playboy shall be deemed to have
approved, such number of copies and sleeves of each Catalog Program
that allows UMVD to maintain up to a *** supply of such program, until
the last *** of the Term for the Catalog Programs, based on the sales
history for the particular Catalog Program during the preceding *** of
the Term. During the last *** of the Term for the Catalog Programs,
UMVD and Playboy shall mutually determine the number of videocassette
copies and sleeves to manufacture for each Catalog Program, with the
goal of minimizing the remaining inventory while still sufficiently
servicing all accounts and sales. As of June 15, 1998, Playboy
acknowledges that the number of videocassette copies of the Catalog
Programs manufactured by UMVD is reasonable, and upon the termination
of the Term for Catalog Programs, Playboy shall be obligated to
purchase from UMVD such number of copies of the Catalog Programs
manufactured by UMVD as of such date that remain in UMVD's inventory
at termination.
6. Formats.
(a) As of June 16, 1998, the only authorized formats under the Agreement
for the New Release Programs and the Catalog Programs are as follows:
(i) One-half inch (1/2") VHS videocassettes.
(ii) If the DVD Termination Date is prior to ***, then as of the DVD
Termination Date, the authorized formats under the Agreement
for the New Release Programs and the Catalog Programs shall
include DVDs.
(iii) If prior to ***, UMVD notifies Playboy (or Playboy notifies
UMVD) in writing, accompanied by reasonably satisfactory
written evidence, that ***, then as of the date of such notice,
the authorized formats under the Agreement for the New Release
Programs and the Catalog Programs shall include ***. In such
event, Playboy and UMVD shall negotiate the Distribution Fee
applicable to ***, taking into account the nature of the
format.
(b) The following formats are expressly not authorized or included under
the Agreement for any program at any time:
----
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
7
<PAGE>
(i) Linear, non-interactive, digital video discs (other than DVDs
pursuant to subparagraph 6(a)(ii) above and *** pursuant to
subparagraph 6(a)(iii) above);
(ii) DVD-ROM;
(iii) CD-I;
(iv) CD-ROM (except and to the extent agreed to by Playboy and UMVD
on a case-by-case basis for individual New Release Programs
that shall not become Catalog Programs for the CD-ROM format
(unless otherwise agreed), as is the case with the CD-ROMs
entitled "Pamela Anderson Playmate Portfolio," "Jenny McCarthy
Playmate Portfolio," and "Playboy's Babes of Baywatch,"
respectively);
(v) SEGA-CD;
(vi) 3DO;
(vii) 8mm;
(viii) S-VHS; and
(ix) All analog laser discs (including 12") and all interactive
formats that allow the consumer more interactivity than
selecting start/stop/fast forward/reverse/freeze frame/slow
motion and the like.
7. Brand Manager for Playboy Programs. Promptly after the execution of this
Third Amendment by Playboy, UMVD will designate to Playboy in writing a
UMVD employee of at least the Manager or Director level: (a) who will serve
as the principal liaison between Playboy and UMVD for all aspects of the
sales of the New Release Programs and the Catalog Programs; (b) who will
dedicate *** of his time to the New Release Programs and the Catalog
Programs; and (c) whose bonus or incentive compensation will be based ***
on sales of the New Release Programs and the Catalog Programs (the "Brand
Manager"). The Brand Manager will be reasonably available to Playboy for
telephonic and in-person consultation. UMVD will notify Playboy in writing
as soon as is practicable in the event UMVD designates a different UMVD
employee as the Brand Manager.
8. Quarterly Sales Meetings. UMVD shall organize, conduct and pay UMVD
personnel costs for calendar quarterly sales meetings for the Playboy and
applicable UMVD sales staffs. *** of the quarterly sales meetings per
contract year shall include Los Angeles and non-Los Angeles-based personnel
from UMVD's sales staff, and these meetings may be in conjunction with
UMVD's regional or national sales meetings. The other *** quarterly sales
meetings
----
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
8
<PAGE>
per contract year may be limited to Los Angeles-based personnel from UMVD's
sales staff. Within the parameters of this Paragraph 8, *** shall
reasonably determine the participants in the quarterly sales meetings from
UMVD's sales staff. Playboy shall have the opportunity to present
information, including about upcoming releases or promotions, and conduct
training at the meetings. The meetings also shall include an account-by-
account review of actual sales and potential sales opportunities and sales
execution and cooperation by and between UMVD and Playboy personnel.
9. Direct Response Marketing. Playboy shall continue itself to handle all
direct response marketing, which shall include all internet sales of New
Release Programs, Catalog Programs and all other Playboy programs. Except
for specific accounts that Playboy has authorized UMVD in writing to
service, UMVD will not participate in any direct response marketing of the
New Release Programs, the Catalog Programs or any other Playboy program.
10. VSDA Conventions. For each VSDA Convention (or other principal home video
convention in the U.S. that might replace the VSDA convention as the
principal U.S. home video convention) that occurs during the Term, UMVD
shall pay to Playboy at least two (2) months prior to the beginning date of
the convention (except with respect to the 1998 convention, for which UMVD
shall pay Playboy promptly after Playboy's execution of this Third
Amendment), ***. Playboy shall have no obligation to account to UMVD for
any of such payments.
11. No Precondition to Effectiveness. Paragraph 12 of the First Amendment
shall not be applicable to the Agreement, and therefore there are no
preconditions to the effectiveness of this Third Amendment other than the
execution of it by Playboy and UMVD.
Except as set forth in this Third Amendment, the Agreement is not otherwise
modified in any respect, and the Agreement, as extended and supplemented by this
Third Amendment, is ratified and confirmed.
If this Third Amendment accurately reflects the agreement between UMVD and
Playboy, please so indicate by signing this Third Amendment in the appropriate
space provided below.
- ----
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
9
<PAGE>
Very truly yours,
PLAYBOY ENTERTAINMENT GROUP, INC.
By: /s/ William Asher
-------------------------
VP New Business
-------------------------
Name and Title
ACCEPTED AND AGREED TO:
UNIVERSAL MUSIC & VIDEO DISTRIBUTION, INC.
By: /s/ Larry Kenswil
-------------------------
Exec VP
-------------------------
Name and Title
<PAGE>
Exhibit A
MARINA BEACH VIDEO, INC.
June 18, 1998
re: *** for PlayboY Catalog ***
Att.: John Reese
Universal Video and Music Distribution
60 Universal City Plaza
Universal City, CA 91608
Dear John,
Below is *** you requested.
***
<TABLE>
<CAPTION>
LENGTH ***
<S> <C>
T-5
T-10
T-15
T-20
T-25
T-30
T-35
T-40
T-45
T-50
T-55
T-60
T-65
T-70
T-75
T-80
T-85
T-90
T-95
T-100
T-105
T-110
T-115
</TABLE>
Please contact me if you have any questions.
Regards,
/s/ Jerry Borreson
Jerry Borreson
Operations Officer
11811 W. OLYMPIC BLVD., SUITE 111, W. LOS ANGELES, CA 90064
(310) 478-3839 . FAX (310) 477-8494
<PAGE>
PLAYBOY ENTERPRISES INC.
Deferred Compensation Plan
Effective: October 1, 1992
Amended and Restated: January 1, 1998
<PAGE>
PLAYBOY ENTERPRISES, INC.
Deferred Compensation Plan
I. PURPOSE
II. DEFINITIONS
III. ELIGIBILITY; PARTICIPATION LIMITS
IV. DISTRIBUTIONS
V. CLAIM FOR BENEFITS PROCEDURE
VI. ADMINISTRATION
VII. AMENDMENT AND TERMINATION
VIII. MISCELLANEOUS
<PAGE>
PLAYBOY ENTERPRISES, INC.
Deferred Compensation Plan
Playboy Enterprises, Inc. hereby amends and restates in its entirety,
effective as of January 1, 1998, the Playboy Enterprises, Inc. Deferred
Compensation Plan, which was originally established October 1, 1992.
I. PURPOSE
The purpose of the Playboy Enterprises, Inc. Deferred Compensation Plan is
to provide a means whereby the Company may afford certain employees and
senior management with an opportunity to build additional financial
security, by providing a vehicle to defer compensation amounts in excess of
the dollar limitation of IRC (S)402(g) applicable to the amount of
compensation which may be deferred under the Company's Savings Plan.
By providing a means whereby Salary, Incentive Award, and/or Sales
Commissions may be deferred into the future, the Plan will aid in
attracting and retaining managers of exceptional ability. In addition, the
Company may credit the Deferred Compensation Account of certain
Participants with an amount equivalent to the "annual addition" which would
be credited to a Participant's account under the Savings Plan but for the
limits of IRC Sections 401(a)(17) and 415(c).
The Plan is a defined contribution plan. Deferrals of Salary, Incentive
Award, and/or Sales Commissions, together with Company Allocations made
pursuant to the Plan, will be credited with investment gains or losses, in
accordance with the Plan, and paid to the Participant (or his Beneficiary)
as described herein. The Plan is also designed to provide additional
financial security at the time of Retirement, and to supplement other
Company-sponsored benefits in the event of death or Disability.
II. DEFINITIONS
2.01 "Administrative Committee" and "Committee" mean the Plan Committee
appointed pursuant to Article VI to manage and administer the Plan.
2.02 "Age" means the Participant's chronological age on the relevant date.
2.03 "Agreement" means the Playboy Enterprises, Inc. Deferred Compensation
Election Agreement, executed between a Participant and the Company,
whereby a Participant agrees to defer a portion of his Salary and
Incentive Award (or Sales Commissions, as the case may be), or both,
pursuant to the provisions of the Plan, and the Company agrees to make
benefit payments in accordance with the provisions of the Plan.
2.04 "Beneficiary" means the person, persons or trust designated
Beneficiary pursuant to Section 4.11.
2
<PAGE>
2.05 "Change in Control" means the occurrence of any one of the following
events:
a) Hugh M. Hefner and Christie Ann Hefner cease, collectively, to
beneficially own at least fifty percent (50%) of the combined
voting power of the then-outstanding securities entitled to vote
generally in the election of Directors of the Company ("Voting
Stock") (for purposes of this Subsection, Voting Stock
beneficially owned [as such term is defined under Rule 13d-3, or
any successor rule or regulation, under the Securities Exchange
Act of 1943, as amended] by the Hugh M. Hefner Foundation shall be
deemed to be beneficially owned by Christie Ann Hefner if and so
long as she has sole voting power with respect to such Voting
Stock); or
b) except as provided in Section 2.05(f), a sale, exchange, or other
disposition of Playboy Magazine; or
c) except as provided in Section 2.05(f), any liquidation or
dissolution of the Company; or
d) except as provided in Section 2.05(f), the Company is merged,
consolidated, or reorganized into or with another corporation or
other legal person; or
e) except as provided in Section 2.05(f), the Company sells or
otherwise transfers all or substantially all of its assets to
another corporation or other legal person;
f) provided, however, that no such merger, consolidation,
reorganization, sale, or transfer will constitute a Change in
Control if the merger, consolidation, reorganization, sale, or
transfer is initiated by the Company and as a result of such
merger, consolidation, reorganization, sale, or transfer not less
than a majority of the combined voting power of the then-
outstanding securities of the surviving, resulting, or ultimate
parent corporation or other legal person, as the case may be,
immediately after such transaction, is held in the aggregate by
persons who held not less than a majority of the combined
voting power of the outstanding Voting Stock of the Company
immediately prior to such merger, consolidation, reorganization,
sale, or transfer.
2.06 "Company" means Playboy Enterprises, Inc., a Delaware corporation, and
its successors and assigns.
2.07 "Company Allocation" means an amount added to a Participant's Deferred
Compensation Account, as provided in Section 3.06.
2.08 "Compensation" means Eligible Earnings as that term is defined in the
Savings Plan.
3
<PAGE>
2.09 "Deferred Compensation Account" means the accounting record(s)
maintained by the Company for each Participant, pursuant to Article
III. Separate Deferred Compensation Account(s) shall be utilized
solely as a device for the measurement and determination of the amount
to be paid to the Participant pursuant to this Plan, and shall be
subject to Section 7.02 hereof. Notwithstanding the provisions of
Section 8.10, a Participant's Deferred Compensation Account shall
not constitute or be treated as a trust fund or escrow arrangement of
any kind.
2.10 "Deferred Compensation Plan Trust" and "Trust" mean the Deferred
Compensation Plan Trust, an irrevocable grantor trust or trusts
established by the Company, in accordance with Section 8.10, with an
independent trustee for the benefit of persons entitled to receive
payments under this Plan and any other deferred compensation plan or
plans which the Company chooses, from time to time, to operate through
the Trust.
2.11 "Determination Date" means the date on which the amount of a
Participant's Deferred Compensation Account is determined as provided
in Article III hereof. For Plan Years beginning prior to January 1,
1998, the last day of each fiscal quarter and the date of a
Participant's Termination of Service shall be a Determination Date.
For Plan Years beginning on or after January 1, 1998, the last day of
each calendar quarter and the date of a Participant's Termination of
Service shall be a Determination Date.
2.12 "Disability" shall have the same meaning and shall be determined in
the same manner as in the Company's Group Long-Term Disability
Insurance Plan. In the absence of such a plan, Disability means any
sickness or accidental bodily injury which, in the sole determination
of the Committee, prevents a Participant from performing the material
and substantial duties of his own occupation for a period of six (6)
months and from engaging in any other activity for remuneration or
profit. The determination of whether a Disability constitutes a
Termination of Service shall be made by the Committee, in its sole
discretion.
2.13 "ERISA Funded" means that the Plan is prevented from meeting the
"unfunded" criterion of the exceptions to the application of Parts 2
through 4 of Subtitle B of Title I of the Employee Retirement Income
Security Act of 1974 (ERISA).
2.14 "Incentive Award" means the Participant's Management Incentive Plan
Award, if any, for the Company fiscal year coinciding with the Plan
Year (but payable after the end of the Plan Year) otherwise payable in
cash, and considered "wages" for FICA and federal income tax
withholding, but before any deferrals made pursuant to this Plan.
2.15 "IRC" means the Internal Revenue Code of 1986, as amended.
2.16 "Participant" means an employee of the Company who is eligible to
participate in the Plan pursuant to Section 3.01, and who enters into
an Agreement.
2.17 "Plan" means the Playboy Enterprises, Inc. Deferred Compensation Plan,
as in effect and amended from time to time.
4
<PAGE>
2.18 "Plan Year" means the Company's fiscal year, for the period from October
1, 1992 to June 30, 1997. For the period from July 1, 1997 to December 31,
1997, Plan Year shall mean a six month period beginning on July 1, 1997
and ending on December 31, 1997. For periods beginning on or after January
1, 1998, Plan Year shall mean a calendar year.
2.19 "Retirement Date" and "Retirement" mean the date of termination of service
of a Participant for reasons other than death or Disability after
he (i) attains age sixty-five (65), (ii) attains age fifty-five (55)
and has fifteen (15) Years of Service, or (iii) terminates service under
circumstances which the Committee elects to treat as a Retirement under
this Plan.
2.20 "Salary" for purposes of the Plan shall be the total of the Participant's
base salary paid during a Plan Year, and considered "wages" for FICA and
federal income tax withholding, but before any deferrals made pursuant to
this or any other plan. For purposes of the Plan, Salary shall not include
severance or other payments made in connection with a Participant's
Termination of Service.
2.21 "Sales Commissions" means the earnings of a Participant which are
attributable to sales results, payable at the end of each month, and
considered "wages" for FICA and federal income tax withholding, but before
any deferrals made pursuant to this or any other plan.
2.22 "Savings Plan" means the Playboy Enterprises, Inc. Employees Investment
Savings Plan, as in effect and amended from time to time.
2.23 "Tax Funded" means that the interest of a Participant in the Plan will be
includable in the gross income of the Participant for federal income tax
purposes prior to actual receipt of Plan benefits by the Participant.
2.24 "Termination of Service" means the Participant's ceasing his/her
employment with the Company for any reason whatsoever, whether voluntarily
or involuntarily, including by reason of Retirement, death, or Disability.
2.25 "Year of Service" means a Plan Year in which an employee is credited with
at least 1,000 hours of service as defined and measured under the Savings
Plan.
5
<PAGE>
III. ELIGIBILITY; PARTICIPATION LIMITS
3.01 Participation. Participation in the Plan for any Plan Year shall be
limited to Employees of the Company (including any Employee serving as a
Director of the Company) who satisfy either of the minimum compensation
requirements set forth below:
a) The Participant is expected to receive Salary for the Plan Year of not
less than $100,000; or
b) The Participant's actual earnings as reported on his or her Form W-2,
plus any amounts deferred by the Participant under Section 125 and/or
Section 401(k) of the Internal Revenue Code of 1986 and/or pursuant
to the terms of this Plan for the immediately preceding complete
calendar year equaled or exceeded $100,000.
c) An employee of the Company who is a non-resident alien whose primary
work domicile is outside the United States shall not be eligible to
participate in this Plan.
3.02 Deferral of Salary and Incentive Award or Sales Commissions. Individuals
who elect to participate in the Plan must file an Agreement with the
Company as follows:
a) Plan Year First Eligible. In the initial year of eligibility, an
eligible employee who elects to participate in the Plan must file an
Agreement with the Company within sixty (60) days from the date he or
she first becomes eligible to participate in the Plan. The Agreement to
defer Salary must be filed with the Company at least ten (10) days
prior to the beginning of the calendar quarter in which Salary to be
deferred is otherwise payable; a Participant's Agreement to defer a
portion of his or her Incentive Award must be filed with the Company at
least six (6) months prior to the end of the calendar year to which the
Incentive Award to be deferred relates; a Participant's Agreement to
defer Sales Commissions must be filed with the Company at least thirty
(30) days prior to the end of the first month of a calendar quarter to
which Sales Commissions to be deferred relate. An eligible employee who
fails to file an Agreement before such time shall be eligible to
participate in a subsequent Plan Year.
b) Subsequent Years of Eligibility. In any Plan Year subsequent to a
Participant's first year of eligibility, a Participant's Agreement to
defer Salary, Incentive Award, or Sales Commissions must be filed with
the Company at least thirty (30) days prior to the beginning of the
Plan Year.
Subject to the limitations of Section 3.02(b) immediately above, a
Participant who does not file an Agreement for a Plan Year may file an
Agreement for any subsequent Plan Year.
6
<PAGE>
3.03 Deferral Limitations. A Participant's Agreement to defer Salary, Incentive
Award, or Sales Commissions shall be subject to the following limitations:
a) A Participant may elect to defer no less than six percent (6%) and no
more than twenty-five percent (25%) of Salary, in increments of one
percentage point (1%),
b) A Participant may elect to defer no less than ten percent (10%) and up
to one hundred percent (100%) of his or her Incentive Award or Sales
Commissions, in increments of ten percentage points (10%); and
c) A Participant may elect to defer under a) or b) above or both. The
Agreement shall be irrevocable upon acceptance by the Company.
3.04 Suspension of Agreement to Defer Salary, Incentive Award, or Sales
Commissions.
a) A Participant's Agreement to defer Salary, Incentive Award, or Sales
Commissions shall be suspended in the event that the Administrative
Committee, in its sole discretion, reasonably determines that a
Participant ceases to meet the eligibility requirements of the Plan.
b) In the event a Participant who resides in the United States is
transferred to a work domicile outside the United States, the
Participant shall have a one-time option to elect to suspend his/her
participation in the Plan until he/she returns to his/her employment
with the Company in the United States on a full-time basis. In the
event that a Participant elects to suspend his/her participation in
the Plan under this Section 3.04(c), he/she shall be eligible to begin
making deferrals into this Plan upon his/her return to the United
States and upon the filing of a new Agreement with the Company. The
new Agreement must be filed with the Company at least thirty (30) days
prior to the calendar quarter in which deferrals are to commence. In
the event a Participant does not elect to suspend his/her
participation pursuant to this Section 3.04(c), his/her participation
shall continue as elected under the Agreement.
Except as otherwise provided in Section 7.03(a)(iv), a Participant whose
Agreement has been suspended pursuant to this Section 3.04, shall not be deemed
to have incurred a Termination of Service, and his or her Deferred Compensation
Account shall continue to be maintained under the terms of the Plan. In
addition, no additional Company Allocations shall be made to a Participant's
Deferred Compensation Account during the period the Participant's Agreement is
suspended.
3.05 Timing of Deferral Credits. The amount of Salary, Incentive Award, or Sales
Commission that a Participant elects to defer in the Agreement shall cause
an equivalent reduction in Salary, Incentive Award, or Sales Commission
payment, and shall be credited to the Participant's Deferred Compensation
Account throughout the Plan Year as the Participant otherwise would have
been paid the deferred portion of Salary, Incentive Award or Sales
Commission in each Plan Year.
7
<PAGE>
3.06 Company Allocation. The Company shall credit a Company Allocation to a
Participant's Deferred Compensation Account as of December 31/st/ of a
Plan Year as set forth in this Section 3.06.
a) Participant Eligible to Participate in the Company's Savings Plan.
If a Participant is eligible to participate in the Company's Savings
Plan and is contributing at least six percent (6%) to the Savings
Plan and is also deferring an amount (including all amounts deferred
in a Plan Year from his/her Salary, Incentive Award and Sales
Commissions pursuant to this Plan) at least equal to at least six
percent (6%) of his/her Salary, then the Company Allocation credited
to the Participant's Deferred Compensation Account shall be equal to
three and one-half percent (3 1/2%) of the Participant's annual
compensation (including amounts deferred pursuant to this Plan) that
is in excess of the annual compensation limit prescribed in IRC
Section 401(a) (17) for the current Plan Year.
If a Participant satisfies all the provisions of this Section 3.06(a)
except that the Participant is deferring an amount into this Plan
which is less than six percent (6%) of his/her Salary, then the
Participant will not be entitled to the full Company Allocation
available under this Section 3.06(a). Instead, the amount of the
Company Allocation will be based on the matching formula provided for
in the Company's Savings Plan but counting all compensation in excess
of the Savings Plan's legal limits.
If a Participant under this Plan becomes eligible to be a
Participant in the Savings Plan after the beginning of a Plan Year,
the Company Allocation under this Plan shall equal the Company
Allocation based on the Participant's total Compensation for the Plan
Year less the Company Allocation contributed to the Savings Plan.
If a Participant is eligible to participate in the Savings Plan but
chooses not to participate in the Savings Plan, no Company Allocation
shall be credited to the Participant's Deferred Compensation Account
regardless of the amount deferred pursuant to this Plan.
b) Participant Not Currently Eligible to Participate in the Company's
Savings Plan. If a Participant is not eligible to participate in the
Company's Savings Plan but is contributing to this Plan an amount
(including all amounts deferred in a Plan Year from his/her Salary,
Incentive Award and Sales Commissions) equal to or greater than six
percent (6%) of his/her Salary, then the Company Allocation credited
to the Participant's Deferred Compensation Account shall be equal to
three and one-half percent (3 1/2%) of the Participant's annual
Compensation (including amounts deferred pursuant to this Plan). For
purposes of this Section 3.06(b), the amount of Compensation utilized
in calculating the amount of the Company Allocation shall not be
limited to the excess of the annual compensation limit prescribed in
IRC Section 401(a)(17), but instead shall include all Compensation
earned by the Participant in a Plan Year.
8
<PAGE>
If a Participant's contribution to this Plan is less than 6% of
Salary, the Participant will receive a Company Allocation based on the
matching formula provided for in the Company's Savings Plan, but
counting all compensation for the Plan Year, without regard to limits
in the Savings Plan.
c) If a Participant incurs a Termination of Service prior to December
31/st/ of a specific Plan Year, the Participant shall forfeit the
right to any Company Allocation for the current Plan Year.
3.07 Vesting. A Participant shall be one hundred percent (100%) vested in
his/her Deferred Compensation Account equal to the amount of Salary,
Incentive Award and Sales Commission he/she deferred into his/her Deferred
Compensation Account and the investment gains or losses credited thereon.
The Company Allocation and the investment gains or losses credited thereon
shall vest in the same manner as under the Company's Savings Plan, but any
unvested portion of a Participant's Deferred Compensation Account shall
become 100% vested in the event of Retirement, death or Disability.
3.08 Determination of Account. Each Participant's Deferred Compensation
Account as of each Determination Date shall consist of the balance of the
Participant's Deferred Compensation Account as of the immediately
preceding Determination Date adjusted for
. additional deferrals pursuant to Section 3.02,
. Company Allocations made pursuant to Section 3.06,
. distributions (if any); and
. the appropriate investment earnings and gains and/or losses and
expenses pursuant to Section 3.09.
All adjustments and earnings related thereto, will be determined on a
daily basis.
3.09 Deferred Compensation Account Investment Options. The Administrative
Committee shall designate from time to time one or more investment options
in which Deferred Compensation Accounts may be deemed invested. A
Participant (or Beneficiary of a deceased Participant) shall allocate his
or her Deferred Compensation Account among the deemed investment options
(in 1% increments) by filing with the Administrative Committee an
investment allocation election. For the Plan Year beginning January 1,
1998 and until changed by the Administrative Committee, the Administrative
Committee has designated the following phantom investment options:
a) Moody's Bond Index Option
b) Balanced Equity/Bond Option
c) Growth & Income Equity Option
9
<PAGE>
d) Large Cap Equity Option
e) Aggressive Growth Equity Option
f) International Equity Option
Any such investment allocation election shall be made initially in the
Agreement and shall be subject to such rules as the Administrative
Committee may prescribe, including, without limitation, rules concerning
the manner of making investment allocation elections and, the frequency
and timing of changing such investment allocation elections.
The Administrative Committee shall have the sole discretion to determine
the number of investment options to be designated hereunder and the nature
of the options and may change or eliminate the investment options provided
hereunder from time to time. For each investment option, other than the
Moody's Bond Index Option, the Administrative Committee shall, in its sole
discretion, select a mutual fund, or an investment index, or shall create
a phantom portfolio of such investments as it deems appropriate, to
constitute the investment option. The Company may, but is under no
obligation to, acquire any investment or otherwise set aside assets for
the deemed investment of Deferred Compensation Accounts hereunder. The
Administrative Committee shall determine the amount and rate of investment
gains or losses with respect to any such investment option for any period,
and may take into account deemed expenses which would be incurred if
actual investments were made.
3.10 Change of Investment Election. Effective as of any January 1, April 1,
July 1 October 1 (or if the New York Stock Exchange is not open for
trading on such day, the close of the last business day of the prior month
on which the New York Stock Exchange was open for trading), a Participant
may elect by a written notice delivered to the Administrative Committee no
later than the 20th day of the prior calendar month, to transfer all or
any portion of his or her deemed investment and/or change the manner in
which his or her future deferrals are deemed invested among the then-
available investment options.
IV. DISTRIBUTIONS
4.01 Distribution on Retirement. Upon a Participant's Termination of Service on
or after a Retirement Date, distribution of the Participant's Deferred
Compensation Account, determined under Section 3.08, as of the
Determination Date coincident with or next following such Retirement
Date, shall be made or commence. The distribution shall be made as
designated by the Participant in his/her Agreement, subject to Section
4.05. In the event a distribution is made pursuant to this Section 4.01,
the Participant shall immediately cease to be eligible for any other
benefit provided under this Plan.
10
<PAGE>
4.02 Distribution on Death. Upon the death of a Participant prior to the
distribution of all of his or her Deferred Compensation Account,
distribution of the unpaid balance of the Deferred Compensation Account
shall be made or continue to be made to such Participant's Beneficiary.
If the distribution of the Participant's Deferred Compensation Account had
not yet commenced as of the date of his or her death, distribution to the
Beneficiary shall be made or commence as soon as practical and in any
event within ninety (90) days following the Participant's death. The
method of distribution shall be as designated by the Participant in
his/her Agreement, subject to Section 4.05.
4.03 Distribution on Termination of Service. Unless otherwise directed by the
Administrative Committee, upon the Termination of Service of a Participant
prior to his or her Retirement Date for reasons other than death or
Disability, distribution of the vested portion of the Participant's
Deferred Compensation Account shall be made as soon as practical after
such Termination of Service, in a single lump sum, notwithstanding the
provisions of Section 4.05(a) and (b). Upon a Termination of Service prior
to his or her Retirement Date or death or Disability, the Participant
shall immediately cease to be eligible for any other benefit provided
under this Plan.
4.04 Disability Benefit. In the event a Participant incurs a Disability which
first manifests itself after the Participant's initial participation in
the Plan but prior to his or her Retirement Date, distribution of the
Participant's Deferred Compensation Account shall be made or commence as
soon as practicable after the Participant incurs the Disability. The
distribution shall be made as designated by the Participant in the
Agreement, subject to Section 4.05. Such benefit shall be payable until
the earliest of the following events: (i) there is no longer any balance
in the Participant's Deferred Compensation Account; (ii) the Participant
ceases to be Disabled and resumes employment with the Company; or (iii)
the Participant dies. Disability benefits shall be treated as
distributions from a Participant's Deferred Compensation Account.
If a Disability occurs during the period elected in the Agreement, the
Disabled Participant's Agreement shall be suspended, and further deferrals
shall not be required during the period of Disability.
4.05 Method of Timing of Distribution.
a) Election in Agreement. Except in the case of a Termination of
Service prior to the Participant's Retirement Date for reasons other
than death or Disability, distribution of a Participant's Deferred
Compensation Account shall be made in a lump sum or installments, as
elected by the Participant in the Agreement relating to each
respective Deferred Compensation Account. Installment payments shall
be made quarterly over a period of either ten (10) years or fifteen
(15) years, as elected by the Participant in the Agreement. The
amount of each installment shall be equal to the quotient obtained by
dividing the balance of the Deferred Compensation Account being
distributed in installments by the number of installments remaining
to be paid, including the current installment.
11
<PAGE>
b) Election to Change Method of Distribution. A Participant may, by
written request filed with the Administrative Committee at least
thirteen (13) months prior to the distribution or commencement of
distribution of a Deferred Compensation Account, change the method of
distribution elected with respect to a Deferred Compensation Account
to any other method permitted under Section 4.05(a), provided that
such request shall not be effective unless and until approved by the
Committee. After a Participant's death, the Participant's Beneficiary
may petition the Administrative Committee requesting an acceleration
of benefit payments otherwise due to be paid to the Beneficiary. The
Administrative Committee, in its sole discretion, but taking into
account the cash needs of the Beneficiary, may grant such request.
c) Notwithstanding any payment method elected by a Participant or
Beneficiary, the Company may, in its sole discretion, elect to pay any
Deferred Compensation Account whose balance is less than $10,000 in a
lump sum.
4.06 Interim Distribution. At the time a Participant executes an Agreement,
he/she may elect to receive an interim distribution. The interim
distribution election does not apply to the investment earnings credited
to the Participant's Deferred Compensation Account. A Participant may
elect to receive, as an interim distribution, an amount equal to a
specified percentage (up to 100%) of the amount of Salary, Incentive Award
and Sales Commissions deferred during the specific Plan Year. Pursuant to
the Participant's election at the time he/she executes an Agreement, each
such interim distribution shall be made in a lump sum on January 2/nd/, or
as soon as reasonably practicable thereafter, of the year elected by the
Participant in his/her Agreement, subject to earlier distribution upon
Termination of Employment. In no event may the interim distribution be
paid prior to four full Plan Years after the Plan Year in which the
deferral was originally made. Once a Participant elects to receive an
interim distribution, the election shall be irrevocable. Any interim
distribution paid shall be deemed a distribution, and shall be deducted
from the Participant's Deferred Compensation Account. A separate interim
distribution election shall be made for each Plan Year in which amounts
are deferred.
If a Participant is not currently deferring any portion of his/her
Compensation pursuant to the terms of this Plan at the time he/she is
scheduled to receive an interim distribution, and his/her Deferred
Compensation Account balance is less than $3,500, the Participant will be
paid his/her total Deferred Compensation Account balance at the time the
interim, distribution is due to be paid.
12
<PAGE>
4.07 Hardship Distributions; Cessation of Deferrals. In the event that the
Administrative Committee, upon written petition of the Participant (or,
after the Participant's death, the written petition of his or her
Beneficiary), determines in its sole discretion that the Participant (or
his or her Beneficiary) has suffered a Hardship, the Company may
distribute to the Participant (or his or her Beneficiary) as soon as
reasonably practicable following such determination, an amount, not in
excess of the value of the Participant's Deferred Compensation Account,
necessary to satisfy the Hardship. For purposes of this Plan, "Hardship"
is a sudden and immediate financial need that could not reasonably have
been foreseen by the Participant (or his or her Beneficiary), caused by an
event beyond the control of the Participant (or Beneficiary), and which
would result in severe financial hardship which the Participant (or
Beneficiary) cannot satisfy from other resources reasonably available to
the Participant (or Beneficiary), such as the financial hardship which may
result from accident, sudden illness or death of an immediate family
member, or casualty loss. Financial needs arising from foreseeable events,
such as the purchase of a residence or educational expenses, shall not be
considered Hardships. A Participant who receives a Hardship distribution
pursuant to this Section 4.07, shall also cease making deferrals, pursuant
to this Plan, until the calendar quarter next following or coincident with
a twelve (12) month period which begins on the date the Hardship
distribution is made. A Participant who is required to cease making
deferrals due to the receipt of a Hardship distribution, shall be
permitted to begin making deferrals into this Plan by filing a new
Agreement with the Company. The new Agreement must be filed with the
Company at least thirty (30) days prior to the calendar quarter in which
deferrals are to commence.
For the purposes of determining the order of Hardship withdrawals under
this Plan and the Savings Plan, exhaustion of the loan and hardship
withdrawal rights under the Savings Plan shall be required as a condition
for receiving a benefit under this Section 4.07.
4.08 Withholding; Employment Taxes. To the extent required by the law in effect
at the time payments are made, the Company shall withhold any taxes
required to be withheld by the federal, or any state or local, government.
4.09 Commencement of Payments. Unless otherwise provided, payments under this
Plan shall commence as soon as practicable following the Participant's
eligibility for payment, but in no event later than ninety (90) days
following receipt of notice by the Administrative, Committee of an event
which entitles a Participant or a Beneficiary to payments under this Plan,
or at such other date as may be determined by the Administrative Committee
in its sole discretion.
13
<PAGE>
4.10 Change in Control Distribution Election. If there is a Change in Control
then, notwithstanding any other provision of this Plan:
a) Any Participant may, at any time during the thirty-six (36) month
period immediately following such Change in Control, elect to receive
an immediate lump sum payment of the balance of his or her Deferred
Compensation Account, reduced by a penalty equal to ten percent (10%)
of the value of the Participant's remaining Deferred Compensation
Account. The ten percent (10%) penalty amount shall be permanently
forfeited. In the event no such request is made by a Participant, the
Participant's Deferred Compensation Account shall be paid in
accordance with the provisions of this Article IV. Any Participant
who elects to receive an immediate lump sum payment pursuant to this
Section 4.10, shall not be eligible to make any additional deferrals
into this Plan until the calendar quarter next following or coincident
with a twelve (12) month period which begins on the date a lump sum
payment is received.
b) Any retired Participant or any Beneficiary of a deceased Participant
may, at any time during the thirty-six (36) month period immediately
following such Change in Control, elect to receive an immediate lump
sum payment of the balance of his or her Deferred Compensation
Account, reduced by a penalty equal to five percent (5%) of the value
of the remaining Deferred Compensation Account. The five percent (5%)
penalty amount shall be permanently forfeited. In the event no such
request is made by a retired Participant or Beneficiary, the Deferred
Compensation Account shall be paid in accordance with the provisions
of this Article IV.
c) Notwithstanding the foregoing, no election under Section 4.10(a) or
4.10(b) shall be effective until at least six months after the most
recent election made by such Participant under Section 4.05(a) or
4.05(b).
4.11 Recipients of Payments: Designation of Beneficiary. All payments to be
made by the Company under the Plan shall be made to the Participant during
his lifetime, provided that if the Participant dies prior to the
commencement or completion of such payments, then all subsequent payments
under the plan shall be made by the Company to the Beneficiary or
Beneficiaries determined in accordance with this Section 4.11. The
Participant shall designate a Beneficiary by filing a written notice of
such designation with the Committee in such form as the Committee requires
and may include contingent Beneficiary or Beneficiaries without the
consent of such Beneficiary or Beneficiaries by filing a new designation
in writing with the Committee. (In community property states, the spouse
of a married Participant shall join in any designation of a Beneficiary
other than the spouse.) If no designation is in effect at the time any
benefits payable under this Plan become due, the Beneficiary shall be the
Beneficiary designated by the Participant in the Savings Plan, if any, or
the Participant's estate.
4.12 Distributions in Cash. All distributions of Deferred Compensation
Accounts shall be paid in United States dollars.
14
<PAGE>
V. CLAIM FOR BENEFITS PROCEDURE
5.01 Claim for Benefits. Any claim for benefits under the Plan shall be made
in writing to the Committee. If such claim for benefits is wholly or
partially denied by the Committee, the Committee shall, within a
reasonable period of time, but not later than sixty (60) days after
receipt of the claim, notify the claimant of the denial of the claim. Such
notice of denial shall be in writing and shall contain:
a) The specific reason or reasons for the denial of the claim;
b) A reference to the relevant Plan provisions upon which the denial is
based;
c) A description of any additional material or information necessary for
the claimant to perfect the claim, together with an explanation of why
such material or information is necessary; and
d) An explanation of the Plan's claim review procedure.
5.02 Request for Review of a Denial of a Claim for Benefits. Upon the receipt
by the claimant of written notice of the denial of a claim, the claimant
may within ninety (90) days file a written request to the Committee,
requesting a review of the denial of the claim, which review shall include
a hearing if deemed necessary by the Committee. In connection with the
claimant's appeal of the denial of his/her claim, he/she may review
relevant documents and may submit issues and comments in writing. To
provide for fair review and a full record, the claimant must submit in
writing all facts, reasons and arguments in support of his/her position
within the time allowed for filing a written request for review. All
issues and matters not raised for review will be deemed waived by the
claimant.
5.03 Decision Upon Review of a Denial of a Claim for Benefits. The Committee
shall render a decision on the claim review promptly, but no more than
sixty (60) days after the receipt of the claimant's request for review,
unless special circumstances (such as the need to hold a hearing) require
an extension of time, in which case the sixty (60) day period shall be
extended to one hundred-twenty (120) days. Such decision shall:
a) Include specific reasons for the decision;
b) Be written in a manner calculated to be understood by the claimant;
and
c) Contain specific references to the relevant Plan provisions upon which
the decision is based.
15
<PAGE>
The decision of the Committee shall be final and binding in all respects
on the Company, the claimant and any other person claiming an interest in
the Plan through or on behalf of the claimant. No litigation may be
commenced by or on behalf of a claimant with respect to this Plan until
after the claim and review process described in this Article V has been
exhausted. Judicial review of Committee action shall be limited to whether
the Committee acted in an arbitrary and capricious manner.
VI. ADMINISTRATION
6.01 Plan Administrative Committee. The Plan shall be administered by the
Compensation Committee of the Board, except to the extent that action is
required by a committee of non-employee Directors under Rule 16 b-3 under
the Securities Exchange Act of 1934. The Administrative Committee may
assign duties to an officer or other employees of the Company, and may
delegate such duties as it sees fit. A member of the Administrative
Committee who is also a Participant shall not be involved in the decisions
of the Administrative Committee regarding any determination of any
specific claim for benefit with respect to himself or herself.
6.02 General Rights, Powers and Duties of Administrative Committee. The
Administrative Committee shall be responsible for the management,
operation and administration of the Plan. In addition to any powers,
rights and duties set forth elsewhere in the Plan, it shall have complete
discretion to exercise the following powers and duties:
a) To adopt such rules and regulations consistent with the provisions of
the Plan as it deems necessary for the proper and efficient
administration of the Plan;
b) To administer the Plan in accordance with its terms and any rules and
regulations it establishes;
c) To maintain records concerning the Plan sufficient to prepare reports,
returns, and other information required by the Plan or by law;
d) To construe and interpret the Plan, and to resolve all questions
arising under the Plan;
e) To direct the Company to pay benefits under the Plan, and to give such
other directions and instructions as may be necessary for the proper
administration of the Plan;
f) To employ or retain agents, attorneys, actuaries, accountants or other
persons, who may also be Participants in the Plan or be employed by or
represent the Company, as it deems necessary for the effective
exercise of its duties, and may delegate to such persons any power and
duties, both ministerial and discretionary, as it may deem necessary
and appropriate, and the Committee shall be responsible for the
prudent monitoring of their performance; and
16
<PAGE>
g) To be responsible for the preparation, filing, and disclosure on
behalf of the Plan of such documents and reports as are required by
any applicable federal or state law.
6.03 Information to be Furnished to Committee. The records of the Company
shall be determinative of each Participant's period of employment,
Termination of Service and the reason therefor, Disability, leave of
absence, reemployment, Years of Service, personal data, and Salary,
Incentive Award, or Sales Commissions. Participants and their
Beneficiaries shall furnish to the Committee such evidence, data or
information, and execute such documents as the Committee requests.
6.04 Responsibility. No member of the Administrative Committee shall be
liable to any person for any action taken or omitted in connection with
the administration of this Plan unless attributable to his/her own fraud
or willful misconduct (or that of the Committee, in which he/she
participated); nor shall the Company be liable to any person for any such
action unless attributable to fraud or willful misconduct on the part of a
Director, officer or employee of the Company. Further, the Company shall
hold harmless and defend any individual in the employment of the Company,
and any director of the Company who has or exercises any administrative
responsibility with respect to the Plan against any claim, action, or
liability asserted against him/her in connection with any action or
failure to act regarding the Plan, except as and to the extent such
liability may be based upon the individual's own willful misconduct or
fraud; provided, however, that to the extent required by Delaware General
Corporation law, the payment by the Company of such defense-related
expenses under this Section to any such person shall be made prior to the
final disposition of the subject proceeding only upon delivery to the
Company of an undertaking, by or on behalf of such person, to repay all
amounts so advanced if it shall ultimately be determined that such person
is not entitled to this indemnification. This indemnification shall not
duplicate, but may supplement, any coverage available under any applicable
insurance coverage.
VII. AMENDMENT AND TERMINATION
7.01 Amendment. The Plan may be amended in whole or in part by a written
instrument adopted by the Board of Directors of the Company at any time.
Notice of any material amendment shall be given in writing to the
Administrative Committee and to each Participant, retired Participant and
each Beneficiary of a deceased Participant. No amendment shall
retroactively decrease either the balance of a Participant's Deferred
Compensation Account or a Participant's interest in his/her Deferred
Compensation Account as existing immediately prior to the later of the
effective date or adoption date of such amendment.
17
<PAGE>
7.02 Company's Right to Terminate. The Company reserves the sole right to
terminate, by action of its Board of Directors, the Plan and/or the
Agreement pertaining to a Participant at any time prior to the commencement
of payment of his/her benefits. In the event of any such termination, a
Participant shall be deemed to have incurred a Termination of Service, and
his/her Deferred Compensation Account shall be paid in the manner provided
in Section 4.03.
7.03 Special Termination. Any other provision of the Plan to the contrary
notwithstanding, the Plan shall terminate:
a) If the Plan is held to be ERISA Funded or Tax Funded by a federal
court, and appeals from that holding are no longer timely or have been
exhausted. The Company may terminate the Plan if it determines, based
on a legal opinion which is satisfactory to the Company, that either
judicial authority or the opinion of the U.S. Department of Labor,
Treasury Department or Internal Revenue Service (as expressed in
proposed or final regulations, advisory opinions or rulings, or
similar administrative announcements) creates a significant risk that
the Plan will be held to be ERISA Funded or Tax Funded, and failure to
so amend the Plan could subject the Company or the Participants to
material penalties. Upon any such termination, the Company may:
i) Transfer the rights and obligations of the Participants and the
Company to a new plan established by the Company, which is not
deemed to be ERISA Funded or Tax Funded, but which is
substantially similar in all other respect to this Plan, if the
Company determines that it is possible to establish such a
Plan;
ii) If the Company, in its sole discretion, determines that it is
not possible to establish the Plan in (a) above, each
Participant shall be paid a lump sum equal to the value of
his/her Deferred Compensation Account;
iii) Pay to a Participant a lump sum benefit equal to the value of
his/her Deferred Compensation Account to the extent that a
federal court has held that the interest of the Participant in
the Plan is includable in the gross income of the Participant
for federal income tax purposes prior to actual payment of Plan
benefits;
iv) Pay to a Participant a lump sum benefit equal to the value of
his/her Deferred Compensation Account if, based on a legal
opinion satisfactory to the Company, there is a significant
risk that such Participant will be determined not to be part of
a "select group of management or highly compensated employees"
for purposes of ERISA.
18
<PAGE>
b) In the event of a Change in Control. Upon such termination, each
Participant shall be deemed to have incurred a Termination of Service,
and the value of his/her Deferred Compensation Account shall be paid
to him in the manner provided in Section 4.03.
A lump sum payment to be made in accordance with this Section shall be
subject to the provisions of Section 4.09.
VIII. MISCELLANEOUS
-------------
8.01 Separation of Plan: No Implied Rights. The Plan shall not operate to
increase any benefit payable to or on behalf of a Participant (or his
Beneficiary) from any other Plan maintained by the Company. Neither the
establishment of the Plan nor any amendment thereof shall be construed as
giving any Participant, Beneficiary, or any other person any legal or
equitable right unless such right shall be specifically provided for in
the Plan or conferred by specific action of the Company in accordance with
the terms and provisions of the Plan. Except as expressly provided in this
Plan, the Company shall not be required or be liable to make any payment
under this Plan.
8.02 No Right to Company Assets. Neither the Participant nor any other person
shall acquire by reason of the Plan any right in or title to any assets,
funds or property of the Company whatsoever, including, without limiting
the generality of the foregoing, any specific funds, assets or other
property which the Company, in its sole discretion, may set aside in
anticipation of a liability hereunder. Any benefits which become payable
hereunder shall be paid from the general assets of the Company. The
Participant and his/her Beneficiary shall have only a contractual right to
the amounts, if any, payable hereunder, unsecured by any asset of the
Company. Nothing contained in the Plan constitutes a guarantee by the
Company that the assets of the Company shall be sufficient to pay any
benefits to any person.
8.03 No Employment Rights. Nothing herein shall constitute a contract of
employment or of continuing service or in any manner obligate the Company
to continue the services of the Participant, or obligate the Participant
to continue in the service of the Company, or as a limitation of the right
of the Company to discharge any of its employees, with or without cause.
Nothing herein shall be construed as fixing or regulating the Salary,
Incentive Award, or Sales Commissions payable to the Participant.
8.04 Offset. If, at the time payments or installments of payments are to be
made hereunder, the Participant, retired Participant or the Beneficiary is
indebted or obligated to the Company, then the payments remaining to be
made to the Participant, retired Participant or the Beneficiary may, at
the discretion of the Company, be reduced by the amount of such
indebtedness or obligation. However, an election by the Company not to
reduce any such payment or payments shall not constitute a waiver of its
claim, or prohibit or otherwise impair the Company's right to offset
future payments for such indebtedness or obligation.
19
<PAGE>
8.05 Protective Provisions. In order to facilitate the payment of benefits
hereunder, each employee designated eligible to participate in the Plan,
shall cooperate with the Company by furnishing any and all information
requested by the Company, including taking such physical examinations as
the Company may deem necessary, and taking such other action as my be
requested by the Company. If the employee refuses to cooperate, he/she
shall not become a Participant in the Plan and the Company shall have no
further obligation to him/her under the Plan. In such event, the
Participant or his/her Beneficiary shall receive a benefit equal to his/her
Deferred Compensation Account determined pursuant to Section 3.08 and paid
in accordance with Section 4.03.
8.06 Non-assignability. Neither the Participant nor any other person shall have
any voluntary or involuntary right to commute, sell, assign, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate, or
convey in advance of actual receipt the amounts, if any, payable hereunder,
or any part thereof, which are expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall be, prior to actual
payment, subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by the Participant or any
other person, or be transferable by operation of law in the event of the
Participant's or any other person's bankruptcy or insolvency.
8.07 Gender and Number. Wherever appropriate herein, the masculine may mean
feminine and the singular may mean the plural, or vice versa.
8.08 Notice. Any notice required or permitted to be given under the Plan shall
be sufficient if in writing and hand delivered, or sent by registered or
certified mail, and if given to the Company, delivered to the principal
office of the Company, directed to the attention of the Administrative
Committee. Such notice shall be deemed given as of the date of delivery,
or, if delivery is made by mail, as of the date shown on the postmark or
the receipt for registration or certification.
8.09 Governing Laws. The Plan shall be construed and administered according to
the laws of the State of Illinois.
20
<PAGE>
8.10 Deferred Compensation Plan Trust. The Company may establish a Trust with
(an) independent trustee(s), and shall comply with the terms of the Trust.
The Company may transfer to the trustee(s) an amount of cash, marketable
securities, or other property acceptable to the trustee(s) ("Trust
Property") equal in value to all or a portion of the amount necessary,
calculated in accordance with the terms of the Trust, to pay the Company's
obligations under the Plan (the "Funding Amount"), and may make additional
transfers to the trustee(s) as may be necessary in order to maintain the
Funding Amount. Trust Property so transferred shall be held, managed, and
disbursed by the trustee(s) in accordance with the terms of the Trust. To
the extent that Trust Property shall be used to pay the Company's
obligations under the Plan, such payments shall discharge obligations of
the Company; however, the Company shall continue to be liable for amounts
not paid by the Trust. Trust Property will nevertheless be subject to
claims of the Company's creditors in the event of bankruptcy or insolvency
of the Company, and the Participant's rights under the Plan and Trust shall
at all times be subject to the provisions of Section 8.02.
IN WITNESS WHEREOF, the Company has adopted and restated the Playboy
Enterprises, Inc. Deferred Compensation Plan originally effective October 1,
1992, as of January 1, 1998.
PLAYBOY ENTERPRISES, INC.
By: /s/ Robert D. Campbell
-------------------------------------
Its: V.P., Treasurer
-------------------------------------
21
<PAGE>
PLAYBOY ENTERPRISES, INC.
Board of Directors'
Deferred Compensation Plan
Effective: October 1, 1992
Amended and Restated: January 1, 1998
<PAGE>
PLAYBOY ENTERPRISES' INC.
Board of Directors'
Deferred Compensation Plan
I. PURPOSE
II. DEFINITIONS
III. ELIGIBILITY; PARTICIPATION LIMITS
IV. BENEFITS
V. CLAIM FOR BENEFITS PROCEDURE
VI. ADMINISTRATION
VII. AMENDMENT AND TERMINATION
VIII. MISCELLANEOUS
<PAGE>
PLAYBOY ENTERPRISES, INC.
Board of Directors
Deferred Compensation Plan
Playboy Enterprises, Inc. hereby amends and restates in its entirety,
effective as of January 1, 1998, the Playboy Enterprises, Inc. Board of
Directors' Deferred Compensation Plan, which was originally established
effective October 1, 1992.
I. PURPOSE
The purpose of the Playboy Enterprises, Inc. Board of Directors' Deferred
Compensation Plan is to provide a means whereby the Company may afford
certain members of the Board of Directors an opportunity to defer Director
Fees otherwise payable in cash or stock, and thereby encourage their
productive efforts on behalf of the Company. By providing a means whereby
Director Fees may be deferred into the future, the Plan will further the
growth and development of the Company and aid in attracting and retaining
Directors of exceptional ability.
II. DEFINITIONS
2.01 "Administrative Committee" and "Committee" mean the Committee
appointed pursuant to Article VI to manage and administer the Plan.
2.02 "Age" means the Director's chronological age on the relevant date.
2.03 "Agreement" means the Playboy Enterprises, Inc. Deferred Compensation
Election Agreement, executed between a Director and the Company,
whereby a Director agrees to defer all or a portion of his/her
Director Fees pursuant to the provisions of the Plan, and the Company
agrees to make benefit payments in accordance with the provisions of
the Plan.
2.04 "Beneficiary" means the person, persons or trust designated
Beneficiary pursuant to Section 4.09.
2.05 "Change in Control" means the occurrence of any one of the following
events:
a) Hugh M. Hefner and Christie Ann Hefner cease, collectively, to
beneficially own at least fifty percent (50%) of the combined
voting power of the then-outstanding securities entitled to vote
generally in the election of Directors of the Company ("Voting
Stock") (for purposes of this Subsection, Voting Stock
beneficially owned [as such term is defined under Rule 13d-3, or
any successor rule or regulation, under the Securities Exchange
Act of 1943, as amended] by the Hugh M. Hefner Foundation shall be
deemed to be beneficially owned by Christie Ann Hefner if and so
long as she has sole voting power with respect to such Voting
Stock); or
2
<PAGE>
b) except as provided in Section 2.05(f), a sale, exchange, or other
disposition of Playboy Magazine; or
c) except as provided in Section 2.05(f), any liquidation or dissolution of
the Company; or
d) except as provided in Section 2.05(f), the Company is merged,
consolidated, or reorganized into or with another corporation or other
legal person; or
e) except as provided in Section 2.05(f), the Company sells or otherwise
transfers all or substantially all of its assets to another corporation
or other legal person;
f) provided, however, that no such merger, consolidation, reorganization,
sale, or transfer will constitute a Change in Control if the merger,
consolidation, reorganization, sale, or transfer is initiated by the
Company and as a result of such merger, consolidation, reorganization,
sale, or transfer not less than a majority of the combined voting power
of the then-outstanding securities of the surviving, resulting, or
ultimate parent corporation or other legal person, as the case may be,
immediately after such transaction, is held in the aggregate by persons
who held not less than a majority of the combined voting power of the
outstanding Voting Stock of the Company immediately prior to such
merger, consolidation, reorganization, sale, or transfer.
2.06 "Company" means Playboy Enterprises, Inc., a Delaware corporation, and its
successors and assigns.
2.07 "Compensation" means cash remuneration paid pursuant to this Plan for
services rendered prior to the date paid.
2.08 "Deferred Compensation Account" means the accounting record(s) maintained
by the Company for each Participant, pursuant to Article III. Separate
Deferred Compensation Account(s) shall be utilized solely as a device for
the measurement and determination of the amount to be paid to the
Participant pursuant to this Plan, and shall be subject to Section 7.02
hereof. Notwithstanding the provisions of Section 8.09, a Participant's
Deferred Compensation Account shall not constitute or be treated as a trust
fund or escrow arrangement of any kind.
2.09 "Deferred Compensation Plan Trust" and "Trust" mean the Deferred
Compensation Plan Trust, an irrevocable grantor trust or trusts established
by the Company, in accordance with Section 8.09, with an independent
trustee for the benefit of persons entitled to receive payments under this
Plan and any other deferred compensation plan or plans which the Company
chooses, from time to time, to operate through the Trust.
3
<PAGE>
2.10 "Determination Date" means the date on which the amount of a Participant's
Deferred Compensation Account is determined as provided in Article III
hereof. For Plan Years beginning prior to January 1, 1998, the last day of
each fiscal quarter and the date of a Participant's Termination of Service
shall be a Determination Date. For Plan Years beginning on or after January
1, 1998, the last day of each calendar quarter and the date of
a Participant's Termination of Service shall be a Determination Date.
2.11 "Director Fees" for purposes of this Plan shall be the total of the
Director's fees and other remuneration for services rendered as a member of
the Board of Directors during a Plan Year, including Retainer Fees and
Meeting Fees. Director Fees shall not include any amounts paid that are not
strictly for personal services, such as expense reimbursements.
2.12 "Fair Market Value" 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.
2.13 "Interest Crediting Rate," "Interest" and "Moody's" mean the average yield
on corporate bonds for the preceding calendar quarter. For purposes of this
Section, the average yield on corporate bonds means the composite average
yield of industrial and public utility bonds, rated Aaa through Baa, as
determined from Moody's Bond Record published monthly by Moody's Investor's
Service, Inc. (or any successor thereto), or, if such yield is no longer
available, a substantially similar average selected by the Committee.
2.14 "IRC" means the Internal Revenue Code of 1986, as amended.
2.15 "Meeting Fees" means the compensation payable to a 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.
2.16 "Participant" means a member of the Board of Directors of the Company who
is not an employee of the Company who is eligible to participate in the
Plan pursuant to Section 3.01, and who enters into an Agreement.
2.17 "Plan" means the Playboy Enterprises, Inc. Board of Directors' Deferred
Compensation Plan, as in effect and amended from time to time.
2.18 "Plan Year" means the Company's fiscal year, for the period from October 1,
1992, to June 30, 1997. For the period from July 1, 1997, to December 31,
1997, Plan Year shall mean a six month period beginning on July 1, 1997,
and ending on December 31, 1997. For periods beginning on or after January
1, 1998, Plan Year shall mean a calendar year.
4
<PAGE>
2.19 "Retainer Fees" means the portion of a Director's annual compensation
that is payable without regard to the number of Board or committee
meetings attended or committee positions, as determined by the Board
from time to time.
2.20 "Retirement Date" and "Retirement" mean the date of termination of
service of a Director for reasons other than death but after he/she
(i) attains age sixty (60) and has five (5) or more years of service
as a Director of the Company.
2.21 "Tax Funded" means that the interest of a Participant in the Plan will
be includable in the gross income of the Participant for federal
income tax purposes prior to actual receipt of Plan benefits by the
Participant.
2.22 "Termination of Service" means the Director's ceasing his/her service
as a member of the Board of Directors of the Company (the "Board") for
any reason whatsoever, including by reason of Retirement or death.
III. ELIGIBILITY; PARTICIPATION LIMITS
3.01 Eligibility and Participation. A Director who is not an employee of
the Company may elect to participate in the Plan by filing an
Agreement with the Company as follows:
a) In the initial year of eligibility, a Director who elects to
participate in the Plan must file an Agreement with the Company
at least ten (10) days prior to the beginning of the calendar
quarter in which the Director's Fees to be deferred are otherwise
earned. For all years subsequent to the initial year of
eligibility, a director who elects to participate in the Plan
must file an Agreement with the Company at least ten (10) days
prior to the beginning of the Plan Year in which the Director's
Fees to be deferred are otherwise earned;
b) A Director may elect to defer any component of his or her
Director Fees. A Director who elects to defer the Meeting Fees
component of his or her Director Fees, must defer one hundred
percent (100%) of his or her Meeting Fees. A deferral of any
amount less than one hundred percent (100%) of the Participant's
Meeting Fees is not permitted under the Plan. A Director may
also elect to defer all or a portion of the Retainer Fees
component of his or her Director Fees. A Director may elect to
defer in twenty-five percent (25%) increments up to one hundred
percent (100%) of the Retainer Fees component of his or her
Director Fees; and
c) The Agreement shall be irrevocable upon acceptance by the
Company.
5
<PAGE>
A Director who does not file an Agreement for a Plan Year shall be eligible
to participate in a subsequent Plan Year. Notwithstanding the foregoing,
the amount credited to the Deferred Compensation Account of a Director who
was previously a participant in the executives' Deferred Compensation Plan
will be automatically transferred into this Plan, unless such transfer is
expressly prohibited by the terms of such other plan, whether or not such
Director shall otherwise elect to make deferral contributions hereunder.
3.02 Timing of Deferral Credits. The amount of Director Fees that a Participant
elects to defer in the Agreement shall cause an equivalent reduction in
his/her Director Fees, and shall be credited to the Director's Deferred
Compensation Account throughout the Plan Year as the Participant is paid
(or would have been paid) any remaining non-deferred portion of his/her
Director Fees for the Plan Year.
3.03 Vesting. A Participant shall be one hundred percent (100%) vested in
his/her Deferred Compensation Account.
3.04 Determination of Account. Each Director's Deferred Compensation Account as
of each Determination Date shall consist of the balance of the
Participant's Deferred Compensation Account as of the immediately preceding
Determination Date, adjusted for:
. additional Director Fees deferrals pursuant to Section 3.01,
. distributions (if any); and
. the appropriate investment earnings and gains and/or losses and expenses
pursuant to Section 3.05.
All adjustments and earnings related thereto, will be determined on a daily
basis.
3.05 Deferred Compensation Account Investment Options. The Administrative
Committee shall designate from time to time one or more investment options
in which Deferred Compensation Accounts may be deemed invested. A
Participant (or Beneficiary of a deceased Participant) shall allocate his
or her Deferred Compensation Account among the deemed investment options
(in 1% increments) by filing with the Administrative Committee an
investment allocation election. For the Plan Year beginning January 1, 1998
and until changed by the Administrative Committee, the Administrative
Committee has designated the following phantom investment options:
a) Moody's Bond Index Option.
b) Balanced Equity/Bond Option.
c) Growth & Income Equity Option.
d) Large Cap Equity Option.
e) Aggressive Growth Equity Option.
6
<PAGE>
f) International Equity Option.
g) Playboy Enterprises, Inc. Common Stock Units Option
Any such investment allocation election shall be made initially in the
Agreement and shall be subject to such rules as the Administrative
Committee may prescribe, including, without limitation, rules concerning
the manner of making investment allocation elections and, subject to
Section 3.06, the frequency and timing of changing such investment
allocation elections. Meeting Fees deferred pursuant to Section 3.01 must
be deemed invested in the Playboy Enterprises, Inc. Common Stock Units
Option. Retainer Fees deferred pursuant to Section 3.01 may be deemed
invested in any of the phantom investment options available in this Section
3.05.
The Administrative Committee shall have the sole discretion to determine
the number of investment options to be designated hereunder and the nature
of the options and may change or eliminate the investment options provided
hereunder from time to time. For each investment option, other than the
Moody's Bond Index Option and the Playboy Enterprises, Inc. Common Stock
Units Option, the Administrative Committee shall, in its sole discretion,
select a mutual fund, or an investment index, or shall create a phantom
portfolio of such investments as it deems appropriate, to constitute the
investment option. The Company may, but is under no obligation to acquire
any investment or otherwise set aside assets for the deemed investment of
Deferred Compensation Accounts hereunder. The Administrative Committee
shall determine the amount and rate of investment gains or losses with
respect to any such investment option for any period, and may take into
account deemed expenses which would be incurred if actual investments were
made.
3.06 Playboy Enterprises, Inc. Common Stock Units Option. Amounts deemed
invested in the Playboy Enterprises Inc. Common Stock Units Option shall
initially be deemed invested in a number of phantom shares (the "Stock
Units") of Class B Common Stock of the Company ("Shares") equal to the
quotient of (i) the amount deemed invested divided by (ii) the Fair
Market Value on the date the amount is deemed so invested. Whenever a
dividend (other than a dividend payable in the form of Shares) is declared
with respect to the outstanding Shares, the number of Stock Units credited
to the Participant shall be increased by the number of Stock Units,
determined by dividing (i) the product of (A) the number of Stock Units
credited to the Participant under the Plan on the related dividend record
date and (B) the amount of any cash dividend declared by the Company on a
Share (or, in the case of any dividend distributable in property other than
Shares, the per share value of such dividend, as determined by the Company
for purposes of income tax reporting) by (ii) the Fair Market Value on the
related dividend payment date. In the case of any dividend declared on
Shares which is payable in Shares, the amount credited to a Participant's
deemed investment in the Playboy Enterprises, Inc. Common Stock Units
Option shall be increased by the number of Stock Units equal to the product
of (i) the number of Stock Units credited to the Participant
7
<PAGE>
under the Plan on the related dividend record date and (ii) the number
of Shares distributable as a dividend on a Share. In the event of any
change in the number or kind of outstanding Shares by reason of any
recapitalization, reorganization, merger, consolidation, stock split
or any similar change affecting the Shares, other than a stock
dividend as provided above, the Committee shall make an appropriate
adjustment in the number of Stock Units credited to the Participant.
No shares of Class B Common Stock will actually be held (either by
issuance or purchase) with respect to any investment in the Playboy
Enterprises, Inc. Common Stock Units Option.
3.07 Change of Investment Election. Effective as of any January 1, April 1,
July 1, October 1 (or if the New York Stock Exchange is not open for
trading on such day, the close of the last business day of the prior
month on which the New York Stock Exchange was open for trading) a
Participant may elect by a written notice delivered to the
Administrative Committee no later than the 20th day of the prior
calendar month, to transfer all or any portion of his or her deemed
investment and/or change the manner in which his or her future
deferrals are deemed invested among the then-available investment
options. However, once deferrals are made or investment earnings are
credited into the Playboy Enterprises, Inc. Common Stock Units
investment alternative, such amounts may not be transferred out of
this investment option.
IV. DISTRIBUTIONS
4.01 Distribution on Retirement. Upon a Participant's Termination of
Service on or after a Retirement Date, distribution of the
Participant's Deferred Compensation Account, determined under Section
3.04, as of the Determination Date coincident with or next following
such Retirement Date, shall be made or commence. The distribution
shall be made as designated by the Participant in his/her Agreement,
subject to Section 4.04. In the event a distribution is made pursuant
to this Section 4.01, the Participant shall immediately cease to be
eligible for any other benefit provided under this Plan.
4.02 Distribution on Death. Upon the death of a Participant prior to the
distribution of all of his or her Deferred Compensation Accounts,
distribution of the unpaid balance of the Deferred Compensation
Accounts shall be made or continue to be made to such Participant's
Beneficiary. If the distribution of the Participant's Deferred
Compensation Accounts had not yet commenced as of the date of his or
her death, distribution to the Beneficiary shall be made or commence
as soon as practical and in any event within 90 days following the
Participant's death. The method of distribution shall be as
designated by the Participant in his/her Agreement, subject to
Section 4.04.
8
<PAGE>
4.03 Distribution on Termination of Service. Unless otherwise directed by
the Administrative Committee, upon the Termination of Service of a
Participant prior to his or her Retirement Date for reasons other than
death, distribution of the Participant's Deferred Compensation
Accounts shall be made as soon as practical after such Termination of
Service, in a single lump sum, notwithstanding the provisions of
Section 4.04(a) and (b). Upon a Termination of Service prior to his or
her Retirement Date or death, the Participant shall immediately cease
to be eligible for any other benefit provided under this Plan.
4.04 Method of Timing of Distribution.
a) Election-in Agreement. Except in the case of a Termination of
Service prior to the Participant's Retirement Date for reasons
other than death or Disability, distribution of a Participant's
Deferred Compensation Accounts shall be made in a lump sum or
installments, as elected by the Participant in the Agreement
relating to each respective Deferred Compensation Account.
Installment payments shall be made quarterly over a period of
either ten (10) years or fifteen (15) years, as elected by the
Participant in the Agreement. The amount of each installment shall
be equal to the quotient obtained by dividing the balance of the
Deferred Compensation Account being distributed in installments by
the number of installments remaining to be paid, including the
current installment.
b) Election to Change Method of Distribution. A Participant may, by
written request filed with the Administrative Committee at least
thirteen (13) months prior to the distribution or commencement of
distribution of a Deferred Compensation Account, change the method
of distribution elected with respect to a Deferred Compensation
Account to any other method permitted under Section 4.04(a),
provided that such request shall not be effective unless and until
approved by the Committee. After a Participant's death, the
Participant's Beneficiary may petition the Administrative
Committee requesting an acceleration of benefit payments otherwise
due to be paid to the Beneficiary. The Administrative Committee,
in its sole discretion, but taking into account the cash needs of
the Beneficiary, may grant such request.
c) Notwithstanding any payment method elected by a Participant or
Beneficiary, the Company may, in its sole discretion, elect to pay
any Deferred Compensation Account whose balance is less than
$10,000 in a lump sum.
4.05 Withholding; Employment Taxes. To the extent required by the law in
effect at the time payments are made, the Company shall withhold any
taxes required to be withheld by the federal, or any state or local,
government.
9
<PAGE>
4.06 Commencement of Payments. Unless otherwise provided, payments under
this Plan shall commence as soon as practicable following the
Participant's eligibility for payment, but in no event later than
ninety (90) days following receipt of notice by the Administrative
Committee of an event which entitles a Participant or a Beneficiary to
payments under this Plan, or at such other date as may be
determined by the Administrative Committee in its sole discretion.
4.07 Hardship Distributions; Cessation of Deferrals. In the event that the
Administrative Committee, upon written petition of the Participant
(or, after the Participant's death, the written petition of his or her
Beneficiary), determines in its sole discretion that the Participant
(or his or her Beneficiary) has suffered a Hardship, the Company may
distribute to the Participant (or his or her Beneficiary) as soon as
reasonably practicable following such determination, an amount, not in
excess of the value of the Participant's Deferred Compensation
Accounts, necessary to satisfy the Hardship. Notwithstanding the
foregoing, the Administrative Committee will not make any distribution
under this Section 4.07 if such distribution would subject the
Participant to liability under Section 16(b) of the Securities
Exchange Act of 1934. For purposes of this Plan, "Hardship" is a
sudden and immediate financial need that could not reasonably have
been foreseen by the Participant (or his or her Beneficiary), caused
by an event beyond the control of the Participant (or Beneficiary),
and which would result in severe financial hardship which the
Participant (or Beneficiary) cannot satisfy from other resources
reasonably available to the Participant (or Beneficiary), such as may
result from accident, sudden illness or death of an immediate family
member, or casualty loss. Financial needs arising from foreseeable
events, such as the purchase of a residence or educational expenses,
shall not be considered Hardships. A Participant who receives a
Hardship distribution pursuant to this Section 4.07, shall also cease
making deferrals of Director Fees until the calendar quarter next
following or coincident with a twelve (12) month period which begins
on the date the Hardship distribution is made. A Director who is
required to cease making deferrals due to the receipt of a Hardship
distribution, shall be permitted to begin making deferrals into this
Plan by filing a new Agreement with the Company. The new Agreement
must be filed with the Company at least thirty (30) days prior to the
calendar quarter in which deferrals are to commence.
4.08 Change in Control Distribution Election. If there is a Change in
Control, there notwithstanding any other provision of this Plan:
a) Any active non-employee Director may, at any time during the
thirty-six (36) month period immediately following such Change in
Control, elect to receive an immediate lump sum payment of the
balance of his or her Deferred Compensation Accounts, reduced by a
penalty equal to ten percent (10%) of the value of the
Participant's remaining Deferred Compensation Accounts. The ten
percent (10%) penalty amount shall be permanently forfeited. In the
event no such request is made by a Participant, the Participant's
Deferred Compensation Accounts shall be paid in accordance with the
provisions of this Article IV. Any active non-employee Director who
elects to receive an
10
<PAGE>
immediate lump sum payment pursuant to this Section 4.08, shall not
be eligible to make any additional deferrals into this Plan until the
calendar quarter next following or coincident with a twelve (12)
month period which begins on the date a lump sum payment is received.
b) Any retired non-employee Director or any Beneficiary of a deceased
Participant may, at any time during the thirty-six (36) month period
immediately following such Change in Control, elect to receive an
immediate lump sum payment of the balance of his or her Deferred
Compensation Accounts, reduced by a penalty equal to five percent
(5%) of the value of the remaining Deferred Compensation Accounts.
The five percent (5%) penalty amount shall be permanently forfeited.
In the event no such request is made by a retired non-employee
Director or Beneficiary, the Deferred Compensation Accounts shall be
paid in accordance with the provisions of this Article IV.
c) Notwithstanding the foregoing, no election under Section 4.08(a) or
4.08(b) shall be effective until at least six months after the most
recent election made by such Participant under Section 4.04(a) or
4.04(b).
4.09 Recipients of Payments; Designation of Beneficiary. All payments to be
made by the Company under the Plan shall be made to the Participant during
his/her lifetime, provided that if the Participant dies prior to the
commencement or completion of such payments, then all subsequent payments
under the Plan shall be made by the Company to the Beneficiary determined
in accordance with this Section 4.09. The Participant shall designate a
Beneficiary by filing a written notice of such designation with the
Administrative Committee in such form as the Committee requires and may
include contingent Beneficiaries The Participant may from time-to-time
change the designated Beneficiaries by filing a new designation in writing
with the Committee. (In community property states, the spouse of a married
Participant shall join in any designation of a Beneficiary other than the
spouse). If no designation is in effect at the time any benefits payable
under this Plan become due, the Beneficiary shall be the spouse of the
Participant, or if no spouse is then living, the executor(s) or
administrator(s) of the Participant's estate.
4.10. Preservation of Interim Distribution Benefit Elections. If a Participant
who had been a participant in the Company's Deferred Compensation Plan,
and whose account balance under such plan has been transferred to this
Plan under Section 3.01 hereof, has made a valid election or elections
with respect to all or a portion of the amounts so transferred under
Section 4.05 (Interim Distribution Benefit) of such Deferred Compensation
Plan, such election(s) shall be preserved and given effect by the
Administrative Committee. For purposes of applying this provision: (a) the
Administrative Committee shall refer to Section 4.05 of the Deferred
Compensation Plan; and (b) references in such Section to the
"Administrative Committee" shall be deemed to refer to this Plan's
Administrative Committee. Nothing in this Section 4.10 shall be
interpreted so as to permit any Participant, including a former
participant in the Company's Deferred Compensation Plan, to
11
<PAGE>
make any similar election with respect to any amounts subject to
deferral under this Plan.
4.11. Distributions in Cash. All distributions of Deferred Compensation
Accounts shall be paid in United States dollars.
V. CLAIM FOR BENEFITS PROCEDURE
5.01 Claim for Benefits. Any claim for benefits under the Plan shall be
made in writing to the Committee. If such claim for benefits is
wholly or partially denied by the Committee, the Committee shall,
within a reasonable period of time, but not later than sixty (60)
days after receipt of the claim, notify the claimant of the denial
of the claim. Such notice of denial shall be in writing and shall
contain:
a) The specific reason or reasons for the denial of the claim;
b) A reference to the relevant Plan provisions upon which the
denial is based;
c) A description of any additional material or information
necessary for the claimant to perfect the claim, together with
an explanation of why such material or information is necessary;
and
d) An explanation of the Plan's claim review procedure.
5.02 Request for Review of a Denial of a Claim for Benefits. Upon the
receipt by the claimant of written notice of the denial of a claim,
the claimant may within ninety (90) days file a written request to
the Committee, requesting a review of the denial of the claim, which
review shall include a hearing if deemed necessary by the Committee.
In connection with the claimant's appeal of the denial of his/her
claim, he/she may review relevant documents and may submit issues
and comments in writing. To provide for fair review and a full
record, the claimant must submit in writing all facts, reasons and
arguments in support of his/her position within the time allowed for
filing a written request for review. All issues and matters not
raised for review will be deemed waived by the claimant.
5.03 Decision Upon Review of a Denial of a Claim for Benefits. The
Committee shall render a decision on the claim review promptly, but
no more than sixty (60) days after the receipt of the claimant's
request for review, unless special circumstances (such as the need
to hold a hearing) require an extension of time, in which case the
sixty (60) day period shall be extended to one hundred-twenty (120)
days. Such decision shall:
a) Include specific reasons for the decision;
b) Be written in a manner calculated to be understood by the
claimant; and
c) Contain specific references to the relevant Plan provisions upon
which the decision is based.
12
<PAGE>
The decision of the Committee shall be final and binding in all
respects on the Company, the claimant and any other person claiming an
interest in the Plan through or on behalf of the claimant. No
litigation may be commenced by or on behalf of a claimant with respect
to this Plan until after the claim and review process described in
this Article V has been exhausted. Judicial review of Committee action
shall be limited to whether the Committee acted in an arbitrary and
capricious manner.
VI. ADMINISTRATION
--------------
6.01 Plan Administrative Committee. The Plan shall be administered by the
Compensation Committee of the Board, except to the extent that action
is required by a committee of non-employee Directors under Rule 16b-3
under the Securities Exchange Act of 1934. The Administrative
Committee may assign duties to an officer or other employees of the
Company, and may delegate such duties as it sees fit. A member of the
Administrative Committee who is also a Participant shall not be
involved in the decisions of the Administrative Committee regarding
any determination of any specific claim for benefit with respect to
himself or herself.
6.02 General Rights, Powers and Duties of Administrative Committee. The
Administrative Committee shall be responsible for the management,
operation and administration of the Plan. In addition to any powers,
rights and duties set forth elsewhere in the Plan, it shall have
complete discretion to exercise the following powers and duties:
a) To adopt such rules and regulations consistent with the
provisions of the Plan as it deems necessary for the proper and
efficient administration of the Plan;
b) To administer the Plan in accordance with its terms and any rules
and regulations it establishes;
c) To maintain records concerning the Plan sufficient to prepare
reports, returns, and other information required by the Plan or
by law;
d) To construe and interpret the Plan, and to resolve all questions
arising under the Plan;
e) To direct the Company to pay benefits under the Plan, and to give
such other directions and instructions as may be necessary for
the proper administration of the Plan;
13
<PAGE>
f) To employ or retain agents, attorneys, actuaries, accountants or other
persons, who may also be Participants in the Plan or be employed by or
represent the Company, as it deems necessary for the effective
exercise of its duties, and may delegate to such persons any power and
duties, both ministerial and discretionary, as it may deem necessary
and appropriate, and the Committee shall be responsible for the
prudent monitoring of their performance; and
g) To be responsible for the preparation, filing, and disclosure on
behalf of the Plan of such documents and reports as are required by
any applicable federal or state law.
6.03 Information to be Furnished to Committee. The records of the Company shall
be determinative of each Participant's period of service as a Director,
Termination of Service, personal data, and Director Fees. Participants and
their Beneficiaries shall furnish to the Committee such evidence, data or
information, and execute such documents as the Committee requests.
6.04 Responsibility. No member of the Administrative Committee shall be liable
to any person for any action taken or omitted in connection with the
administration of this Plan unless attributable to his/her own fraud or
willful misconduct (or that of the Committee, in which he/she
participated); nor shall the Company be liable to any person for any such
action unless attributable to fraud or willful misconduct on the part of a
Director, officer or employee of the Company. Further, the Company shall
hold harmless and defend any individual in the employment of the Company,
and any Director of the Company who has or exercises any administrative
responsibility with respect to the Plan against any claim, action, or
liability asserted against him/her in connection with any action or failure
to act regarding the Plan, except as and to the extent such liability may
be based upon the individual's own willful misconduct or fraud; provided,
however, that to the extent required by Delaware General Corporation law,
the payment by the Company of such defense-related expenses under this
Section to any such person shall be made prior to the final disposition of
the subject proceeding only upon delivery to the Company of an undertaking,
by or on behalf of such person, to repay all amounts so advanced if it
shall ultimately be determined that such persons is not entitled to this
indemnification. This indemnification shall not duplicate, but may
supplement, any coverage available under any applicable insurance coverage.
14
<PAGE>
VII. AMENDMENT AND TERMINATION
-------------------------
7.01 Amendment. The Plan may be amended in whole or in part by a written
instrument adopted by the Board of Directors of the Company at any
time. Notice of any material amendment shall be given in writing to
the Administrative Committee and to each Participant, retired
Participant and each Beneficiary of a deceased Participant. No
amendment shall retroactively decrease either the balance of a
Participant's Deferred Compensation Account or a Participant's
interest in his/her Deferred Compensation Account as existing
immediately prior to the later of the effective date or adoption date
of such amendment.
7.02 Company's Right to Terminate. The Company reserves the sole right
to terminate, by action of its Board of Directors, the Plan and/or the
Agreement pertaining to a Participant at any time prior to the
commencement of payment of his/her benefits. In the event of any such
termination, a Participant shall be deemed to have incurred a
Termination of Service, and his/her Deferred Compensation Account
shall be paid in the manner provided in Section 4.03.
7.03 Special Termination. Any other provision of the Plan to the contrary
notwithstanding, the Plan shall terminate:
a) If the Plan is held to be Tax Funded by a federal court, and
appeals from that holding are no longer timely or have been
exhausted. The Company may terminate the Plan if it determines,
based on a legal opinion which is satisfactory to the Company,
that either judicial authority or the opinion of the U.S.
Treasury Department or Internal Revenue Service (as expressed in
proposed or final regulations, advisory opinions or rulings, or
similar administrative announcements) creates a significant risk
that the Plan will be held to be Tax Funded, and failure to
amend or terminate the Plan could subject the Company or the
Participant to material penalties. Upon any such termination, the
Company may:
i. Transfer the rights and obligations of the Participants and
the Company to a new plan established by the Company, which
is not deemed to be Tax Funded, but which is substantially
similar to this Plan, if the Company determines that it is
possible to establish such a Plan;
ii. If the Company, in its sole discretion, determines that it
is not possible to establish the Plan in (a) above, each
Participant shall be paid a lump sum equal to the value of
his/her Deferred Compensation Account;
15
<PAGE>
iii. Pay a lump sum benefit equal to the value of the Deferred
Compensation Account to a Participant to the extent that a
federal court has held that the interest of the Participant
in the Plan is includable in the gross income of the
Participant for federal income tax purposes prior to actual
payment of Plan benefits.
b) In the event of a Change in Control. Upon such termination, each
Participant shall be deemed to have incurred a Termination of
Service, and the value of his/her Deferred Compensation Account
shall be paid to him in the manner provided in Section 4.03.
A lump sum payment to be made in accordance with this Section shall be
subject to the provisions of Section 4.06.
VIII. MISCELLANEOUS
-------------
8.01 No Implied Rights. Neither the establishment of the Plan nor any
amendment thereof shall be construed as giving any Participant,
Beneficiary, or any other person any legal or equitable right unless
such right shall be specifically provided for in the Plan or conferred
by specific action of the Company in accordance with the terms and
provisions of the Plan. Except as expressly provided in this Plan,
the Company shall not be required or be liable to make any payment
under this Plan.
8.02 No Right to Company Assets. Neither the Participant nor any other
person shall acquire by reason of the Plan any right in or title to
any assets, funds or property of the Company whatsoever, including,
without limiting the generality of the foregoing, any specific funds,
assets or other property which the Company, in its sole discretion,
may set aside in anticipation of a liability hereunder. Any benefits
which become payable hereunder shall be paid from the general assets
of the Company. The Participant and his/her Beneficiary shall have
only a contractual right to the amounts, if any, payable hereunder,
unsecured by any asset of the Company. Nothing contained in the Plan
constitutes a guarantee by the Company that the assets of the Company
shall be sufficient to pay any benefits to any person.
8.03 No Right to Continuing Service. Nothing herein shall constitute a
contract of continuing service or in any manner obligate the Company
to continue the personal services of the Participant, or obligate the
Participant to continue as a member of the Board of Directors of the
Company, or as a limitation of the right of Company shareholders to
terminate the services of the Participant. Nothing herein shall be
construed as fixing or regulating the Director Fees or other
remuneration payable to the Participant.
16
<PAGE>
8.04 Offset. If at the time payments or installments of payments are to be
made hereunder, the Participant, retired Participant or Beneficiary is
indebted or obligated to the Company, then the payments remaining to
be made to the Participant, retired Participant or Beneficiary may, at
the discretion of the Company, be reduced by the amount of such
indebtedness or obligation. However, an election by the Company not to
reduce any such payment or payments will not constitute a waiver of
its claim, or prohibit or otherwise impair the Company's right to
offset future payments for such indebtedness or obligation.
8.05 Non-assignability. Neither the Participant nor any other person shall
have any voluntary or involuntary right to commute, sell, assign,
pledge, anticipate, mortgage or otherwise encumber, transfer,
hypothecate, or convey in advance of actual receipt the amounts, if
any, payable hereunder, or any part thereof, which are expressly
declared to be unassignable and non-transferable. No part of the
amounts payable shall be, prior to actual payment, subject to seizure
or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by the Participant or any other person, or
be transferrable by operation of law in the event of the Participant's
or any other person's bankruptcy or insolvency.
8.06 Gender and Number. Wherever appropriate herein, the masculine may mean
feminine and the singular may mean the plural, or vice versa.
8.07 Notice. Any notice required or permitted to be given under the Plan
shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, and if given to the Company, delivered
to the principal office of the Company, directed to the attention of
the Administrative Committee. Such notice shall be deemed given as of
the date of delivery, or, if delivery is made by mail, as of the date
shown on the postmark or the receipt for registration or
certification.
8.08 Governing Laws. The Plan shall be construed and administered according
to the laws of the State of Illinois.
17
<PAGE>
8.09 Deferred Compensation Plan Trust. The Company may establish a Trust
with (an) independent trustee(s), and shall comply with the terms of
the Trust. The Company may transfer to the trustee(s) an amount of
cash, marketable securities, or other property acceptable to the
trustee(s) ("Trust Property") equal in value to all or a portion of
the amount necessary, calculated in accordance with the terms of the
Trust, to pay the Company's obligations under the Plan (the "Funding
Amount"), and may make additional transfers to the trustees as may be
necessary in order to maintain the Funding Amount. Trust Property so
transferred shall be held, managed, and disbursed by the trustee(s) in
accordance with the terms of the Trust. To the extent that Trust
Property shall be used to pay the Company's obligations under the
Plan, such payments shall discharge obligations of the Company;
however, the Company shall continue to be liable for amounts not paid
by the Trust. Trust Property will nevertheless be subject to the
claims of the Company's creditors in the event of bankruptcy or
insolvency of the Company, and the Director's rights under the Plan
and Trust shall at all times be subject to the provisions of Section
8.02.
IN WITNESS WHEREOF, the Company has adopted and restated the Playboy
Enterprises, Inc. Board of Directors' Deferred Compensation Plan originally
effective October 1, 1992, as of January 1, 1998.
PLAYBOY ENTERPRISES, INC.
By: /s/ Robert D. Campbell
-------------------------------------------
Its: Vice President, Treasurer and
Assistant Secretary
-------------------------------------------
18
<PAGE>
PLAYBOY ENTERPRISES, INC.
CHRISTIE HEFNER
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
March 16, 1998
Mr. Buford Smith
12 River's Bend Drive
Gulfport, MS 39507
Dear Buford:
This letter confirms our offer of employment for the position of President - New
Media at Playboy Enterprises, Inc. Enclosed is a comprehensive job description
that we have drafted, consistent with discussions we have had. Also as we have
discussed, the compensation package detailed below, consists of a base salary
but also provides you with high upside potential in both variable cash and
stock.
Your base compensation would be $250,000 gross per annum paid on a biweekly
basis and you will have an annual incentive plan which will be customized and
designed around the growth of the New Media business. Given the startup nature
of the business, for years 1998 through 2000, the plan will be uncapped and
based on 2% of revenue generated by New Media where the operating loss cannot
exceed $7 million in 1998 and for years 1999 and 2000, the loss triggers will be
determined as the budgets are set.*** In subsequent years, the plan will be 5%
of Operating Income with targets based upon the New Media operating plan and
will be capped at $1,000,000. To recognize your role and impact as a senior
corporate executive, the incentive plan will have a corporate trigger (if the
Company does not achieve its annual operating plan, your plan pays out at 90%
vs. 100%). Also, you will receive 1% of the equity issued as part of a private
placement or public equity offering for the New Media business with a cap of $5
million in equity value.
- ---------
*** Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.
<PAGE>
Buford Smith
March 16, 1998
Page 2.
You will also be entitled to participate in the Company's long-term executive
stock program which will include 50,000 shares of stock options which vest in
25% increments over a four year period. The strike price of the options is the
closing price of the Class B stock the business day preceding your start date.
You will also be entitled to 15,000 shares of Class B restricted stock with
accelerated vesting based upon financial performance achievement.
Under the restricted stock plan, your first payout of 2,500 shares will be
earned upon the Company's achievement of a $15 million Operating Income and the
second traunch of 12,500 shares upon the achievement of a $20 million Operating
Income target. The plan, which was implemented in FY'95, has already paid out
its first two traunches as the initial two targets have been achieved. It is my
expectation that once this plan successfully ends, it will be replaced by
another similar plan. You will also participate in the Company's parachute plan,
as described in the attached.
You will be based in Chicago and expected to do as much travel as necessary to
complete the duties of the position. You will be reimbursed for all travel, in
accordance with the Company's Travel and Entertainment policy (a copy of which
will be forwarded to you).
The Company will also reimburse you for all reasonable moving expenditures
related to your relocation to Chicago, in accordance with our relocation policy.
You will be entitled to the Company's health benefits plans (effective on the
first day of your employment) as well as participation in the Company's
executive vacation policy (four weeks), matching 401k plan, deferred
compensation plan employee stock purchase plan and profit-sharing plan. Details
of all of these plans/benefits will be sent to you.
If you should be terminated at any time not for cause (as defined below), you
will be entitled to receive six months guaranteed severance and up to an
additional six months if you remain unemployed during that period ("unemployed"
excludes major consulting work). "For cause" is defined as conviction of a crime
involving dishonesty, fraud or breach of trust, or engaging in conduct
materially injurious to Playboy.
<PAGE>
Buford Smith
March 16, 1998
Page 3.
Given our recent discussions regarding your participation in upcoming New Media
related meetings, I'd like to agree to a start date as soon as possible.
Buford, everyone here looks forward to having you join the Playboy family and
having you share in the success of PEI's New Media future.
Sincerely,
/s/ Christie Hefner
Christie Hefner
ACCEPTED:
/s/ Buford Smith
- -----------------------
Buford Smith
6/24/98
- -----------------------
Date
<PAGE>
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, Perkins and
Rosenzweig are beneficiaries of this program. 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 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 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 Agreement, "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 Agreement also provides 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.
<PAGE>
[LOGO] PLAYBOY ENTERPRISES, INC. INTEROFFICE CORRESPONDENCE
CONFIDENTIAL
------------
DATE: July 20, 1998
TO: Buford Smith
FROM: Howard Shapiro
SUBJECT: Your Contract
- --------------------------------------------------------------------------------
Christie asked that I confirm your conversation concerning the equity
"kicker" in your contract.
The kicker applies to valuation (and not money raised) and will apply
to each relevant New Media transaction, with a cap of $5 million.
In other words, if Playboy did an initial transaction that established
a value of $150 million, you would receive $1.5 million on closing. If
Playboy did a second transaction that established a value of $350
million, you would receive $2 million on closing; i.e. 1% of the $200
million in increased value.
If this conforms to your understanding, please sign, date and return
the enclosed copy of this memo to me.
/s/ Buford Smith
-----------------------
Buford Smith
Date 7/21/98
-------------------
<PAGE>
PLAYBOY ENTERPRISES, INC.
LINDA G. HAVARD
EXECUTIVE VICE PRESIDENT
& CHIEF FINANCIAL OFFICER
March 27, 1998
Mr. Paul Kallis
549 Colonial Road
River Vale, NJ 07675
Dear Paul:
It is with great pleasure that I offer you the position of Senior Vice
President/Chief Technology Officer for Playboy Enterprises, Inc.
You will be reporting directly to me. You will be domiciled at the Playboy
offices in Chicago, although you will be expected to do such traveling as may be
necessary and appropriate for the performance of your duties.
You will be paid a base salary of $180,000 per year, to be paid on a biweekly
basis on our normal payroll dates. In addition, you are entitled to participate
in a Board approved incentive plan with a maximum potential of 40% of your base
salary based upon Company financial performance (prorated in '98 based on start
date).
You will be a member of the Executive Committee of the Company. You will be
entitled to four weeks' paid vacation (prorated in '98 based on start date). In
Fiscal years 1998 and 1999 you are guaranteed to receive no less than $20,000 in
incentive compensation.
You will also be granted an option to purchase 7,500 shares of Playboy's Class B
stock and the right to receive up to 5,000 shares of Class B stock under the
Company's restricted stock plan, vesting 2,500 shares upon the Company's
achieving operating income of $15 million and 2,500 shares on the Company's
achieving operating income of $20 million according to the terms and conditions
of the 1995 Playboy Enterprises, Inc. Stock Incentive Plan.
<PAGE>
March 27, 1998
Paul Kallis
Page Two
You will be entitled to the Company's health benefits plans (effective on the
first day of your employment) as well as participation in the Company's
executive vacation policy (four weeks), matching 401k plan, deferred
compensation plan employee stock purchase plan and profit-sharing plan. Details
of all of these plans/benefits will be sent to you.
If you should be terminated at any time not for cause (as defined below), you
will be entitled to receive six months guaranteed severance and up to an
additional three months if you remain unemployed. "For cause" is defined as
conviction of a crime involving dishonesty, fraud or breach of trust, or
engaging in conduct materially injurious to Playboy.
To facilitate your relocation to Chicago, the Company will reimburse or prepay
reasonable and customary moving expenses, in accordance with the Company's
relocation policy.
If the above is acceptable, please sign, date and return the enclosed copy of
this letter.
Once again, welcome to the Playboy family. We look forward to working with
you.
Sincerely,
/s/ Linda Havard
Linda Havard
ACCEPTED:
/s/ Apostolos D. Kallis
- ----------------------------------
Paul Kallis (Apostolos D. Kallis)
4/1/98
- ----------------------------------
Date
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 980
<SECURITIES> 0
<RECEIVABLES> 43,637
<ALLOWANCES> 5,551
<INVENTORY> 27,896
<CURRENT-ASSETS> 132,083
<PP&E> 38,663
<DEPRECIATION> 28,879
<TOTAL-ASSETS> 196,515
<CURRENT-LIABILITIES> 106,816
<BONDS> 0
0
0
<COMMON> 221
<OTHER-SE> 80,836
<TOTAL-LIABILITY-AND-EQUITY> 196,515
<SALES> 149,582
<TOTAL-REVENUES> 149,582
<CGS> 125,228
<TOTAL-COSTS> 144,347
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 560
<INCOME-PRETAX> 4,270
<INCOME-TAX> 2,131
<INCOME-CONTINUING> 2,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,139
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
