-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcZp9UWXowlCRxYLP6Fh8THDCyWDpIbxRDfkluXMvqnn0rz4K6aXMV0x2dU4OgCg UhFQdI9sZCnuIYMujZIjQw== 0000950131-98-004745.txt : 19980813 0000950131-98-004745.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950131-98-004745 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAYBOY ENTERPRISES INC CENTRAL INDEX KEY: 0000079114 STANDARD INDUSTRIAL CLASSIFICATION: PERIODICALS: PUBLISHING OR PUBLISHING AND PRINTING [2721] IRS NUMBER: 362258830 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06813 FILM NUMBER: 98683157 BUSINESS ADDRESS: STREET 1: 680 N LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 10-Q 1 FORM 10-Q 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) Delaware 36-2258830 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 680 North Lake Shore Drive, Chicago, IL 60611 (Address of principal executive offices) (Zip Code)
(312) 751-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of 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. PLAYBOY ENTERPRISES, INC. FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION
Page ---- 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
2 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Quarters Ended June 30 (Unaudited) (In thousands, except per share amounts)
1998 1997 ------- -------- 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 ======= ========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the Six Months Ended June 30 (Unaudited) (In thousands, except per share amounts)
1998 1997 --------- --------- 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 ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
(Unaudited) June 30, Dec. 31, 1998 1997 ----------- -------- 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 ======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the Six Months Ended June 30 (Unaudited) (In thousands)
1998 1997 --------- --------- 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 ======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 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 (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):
(Unaudited) (Unaudited) Quarters Ended Six Months Ended June 30, June 30, -------------- ----------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
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):
(Unaudited) June 30, Dec. 31, 1998 1997 ---- ---- 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 ======== =======
(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 (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 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:
Quarters Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 ----- ---- ---- ---- 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 ===== ===== ===== =====
10 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 Entertainment Group The revenues and operating income of the Entertainment Group were as follows for the periods indicated below:
Quarters Six Months Ended Ended June 30, June 30, ----------- ------------ 1998 1997 1998 1997 ---- ---- ---- ---- 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 ===== ===== ====== ======
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 (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 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:
Quarters Six Months Ended Ended June 30, June 30, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Revenues................................ $1.6 $1.7 $4.2 $3.7 ==== ==== ==== ==== Operating Income........................ $0.4 $0.3 $1.1 $1.3 ==== ==== ==== ====
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:
Quarters Six Months Ended Ended June 30, June 30, ----------- ----------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues................................ $15.1 $16.8 $34.5 $36.3 ===== ===== ===== ===== Operating Income........................ $ 0.5 $ 0.6 $ 1.6 $ 1.8 ===== ===== ===== =====
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 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:
Quarters Six Months Ended Ended June 30, June 30, -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- Revenues........................ $ 1.6 $ 0.8 $ 3.0 $ 1.6 ===== ===== ===== ===== Operating Loss.................. $(1.5) $(0.2) $(2.2) $(0.2) ===== ===== ===== =====
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 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 . 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 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 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 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 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 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 EX-10.1 2 DISTRIBUTION AGREEMENT DATED 6/5/98 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 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 (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 (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 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 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 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 (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 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 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 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. ***
LENGTH *** 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
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 EX-10.2A 3 AMENDED & RESTATED EMPLOYEES DEFERRED COMP. PLAN PLAYBOY ENTERPRISES INC. Deferred Compensation Plan Effective: October 1, 1992 Amended and Restated: January 1, 1998 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-10.2B 4 AMENDED & RESTATED DIRECTORS' DEFERRED COMP. PLAN PLAYBOY ENTERPRISES, INC. Board of Directors' Deferred Compensation Plan Effective: October 1, 1992 Amended and Restated: January 1, 1998 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-10.3A 5 BUFORD SMITH EMPLOYMENT LETTER AGREEMENTS 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. 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. 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 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. [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 ------------------- EX-10.3B 6 APOSTOLOS D. KALLIS EMPLOYMENT LETTER AGREEMENT 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. 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 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 980 0 43,637 5,551 27,896 132,083 38,663 28,879 196,515 106,816 0 0 0 221 80,836 196,515 149,582 149,582 125,228 144,347 0 0 560 4,270 2,131 2,139 0 0 0 2,139 0.10 0.10
-----END PRIVACY-ENHANCED MESSAGE-----