-----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, UbS1QTnQO43oSNsEu2B9XE+OeFqEcvZsi0xqGaWScHYOFb3goK/NCuS+QykS2tmL Fyjc1kG3XhApw5KSjfm3pg== 0000950131-97-005816.txt : 19970925 0000950131-97-005816.hdr.sgml : 19970925 ACCESSION NUMBER: 0000950131-97-005816 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970924 SROS: NYSE SROS: PSE 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: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06813 FILM NUMBER: 97684904 BUSINESS ADDRESS: STREET 1: 680 N LAKE SHORE DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3127518000 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .................... to .................... COMMISSION FILE NUMBER 1-6813 PLAYBOY ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2258830 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 680 NORTH LAKE SHORE DRIVE, CHICAGO, IL 60611 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (312) 751-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange Title of each class on which registered ------------------- -------------------- Class A Common Stock, par value $0.01 per share............................ New York Stock Exchange Pacific Stock Exchange Class B Common Stock, par value $0.01 per share............................ New York Stock Exchange Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of Class A Common Stock, par value $0.01 per share, held by nonaffiliates (based upon the closing sale price on the New York Stock Exchange) on August 31, 1997 was $16,038,372. The aggregate market value of Class B Common Stock, par value $0.01 per share, held by nonaffiliates (based upon the closing sale price on the New York Stock Exchange) on August 31, 1997 was $94,182,790. As of August 31, 1997, there were 4,748,954 shares of Class A Common Stock, par value $0.01 per share, and 15,753,594 shares of Class B Common Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Annual Report to Shareholders for the Part I, Item 1, to the extent indicated fiscal year ended June 30, 1997 under such item Part II, Items 5-8, to the extent indicated under such items Notice of Annual Meeting of Stockholders and Proxy Part III, Items 10-13, to the extent Statement (to be filed) relating to the Annual described therein Meeting of Stockholders to be held in November 1997
PLAYBOY ENTERPRISES, INC. 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I Item 1. Business............................................................................................ 3 Item 2. Properties.......................................................................................... 21 Item 3. Legal Proceedings................................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders................................................. 23 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................................ 26 Item 6. Selected Financial Data............................................................................. 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................... 26 Item 8. Financial Statements and Supplementary Data......................................................... 26 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................ 26 PART III Item 10. Directors and Executive Officers of the Registrant.................................................. 27 Item 11. Executive Compensation.............................................................................. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 27 Item 13. Certain Relationships and Related Transactions...................................................... 27 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 27
2 PART I Item 1. Business - ---------------- Playboy Enterprises, Inc. was organized in 1953 to publish Playboy magazine. The term "Company" means Playboy Enterprises, Inc., together with its subsidiaries, unless the context otherwise requires. Since its inception, the Company has expanded its publishing operations and has engaged in entertainment businesses that are related to the content and style of Playboy magazine. Additionally, the Company licenses its trademarks for use on various consumer products and operates a direct marketing business. The Company's businesses are classified into four industry segments: Publishing, Entertainment, Product Marketing and Catalog. The net revenues, income before income taxes and identifiable assets of each industry segment are set forth in the section "Financial Information Relating to Industry Segments" on page 24 of the Company's fiscal 1997 Annual Report to Shareholders ("fiscal 1997 Annual Report") and are incorporated herein by reference. The Company's trademarks are vital to the success and future growth of all of the Company's businesses. The trademarks, which are renewable periodically and which can be renewed indefinitely, include Playboy, Playmate, Rabbit Head Design, Sarah Coventry, Critics' Choice Video, Collectors' Choice Music and AdulTVision. PUBLISHING GROUP The Company's Publishing Group operations include the publication of Playboy magazine, other domestic publishing businesses (including newsstand specials, calendars, books and new media) and international editions of Playboy magazine. The revenues and operating income of the Publishing Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, ------------------------------ 1997 1996 1995 ------- ------- -------- REVENUES Playboy Magazine............................ $105.0 $105.3 $104.4 Other Domestic Publishing................... 22.7 21.4 18.7 International Publishing.................... 10.0 6.2 4.2 ------ ------ ------ Total Revenues............................ $137.7 $132.9 $127.3 ------ ------ ------ OPERATING INCOME............................ $ 8.4 $ 9.2 $ 10.7 ====== ====== ======
PLAYBOY MAGAZINE Founded by Hugh M. Hefner in 1953, Playboy magazine is the best-selling men's magazine in the world. Worldwide monthly circulation, which includes international editions, is approximately 4.5 million copies. Approximately 3.2 million copies of the U.S. edition are sold monthly. International sales of the U.S. edition of Playboy magazine and 15 licensed international editions extend the magazine's reach to approximately 45 countries worldwide. According to Spring 1997 data published by Mediamark Research, Inc. ("MRI"), in the United States Playboy magazine is read by approximately one in every seven men aged 18 to 34. 3 Playboy magazine is a general-interest magazine for men and offers a balanced variety of features. It has gained a loyal customer base and a reputation for excellence by providing quality entertainment and informative articles on current issues and trends. Each issue of Playboy magazine includes an in-depth, candid interview with a well-known, thought-provoking personality. Over the magazine's 44-year history, exclusive interviews have included prominent public figures (e.g., Martin Luther King, Jr., Jimmy Carter, Fidel Castro, Mike Wallace, Rush Limbaugh), business leaders (e.g., Bill Gates, David Geffen, Tommy Hilfiger, Ted Turner), entertainers (e.g., Steve Martin, Jerry Seinfeld, David Letterman, Jay Leno, Mel Gibson, Bruce Willis, John Travolta), authors (e.g., Salman Rushdie, Anne Rice, Ray Bradbury, Alex Haley, James Michener) and sports figures (e.g., Michael Jordan, Muhammad Ali, Brett Favre). The magazine also regularly publishes the works of leading journalists, authors and other prominent individuals. For example, Playboy magazine has published fiction by Scott Turow, Jay McInerney, John Updike and Margaret Atwood, articles by Michael Crichton, Bill Maher and William F. Buckley, and book adaptations by Tony Horwitz (Middle East correspondent for The Wall Street Journal) and Pulitzer Prize winning author William Kennedy. It has long been known for its graphic excellence and features, and publishes the work of top artists and photographers. Playboy magazine also features lifestyle and service articles on consumer products, fashion, automobiles and consumer electronics and covers the worlds of sports and entertainment. It is also renowned for its pictorials of beautiful women and frequently features celebrities on its cover and in exclusive pictorials (among them Farrah Fawcett, Pamela Anderson, Elle Macpherson, Jenny McCarthy, Cindy Crawford, Sharon Stone, Madonna and Stephanie Seymour). The net circulation revenues of the U.S. edition of Playboy magazine for the years ended June 30, 1997, 1996 and 1995 were $74.9 million, $76.2 million and $75.4 million, respectively. Net circulation revenues are gross revenues less provisions for newsstand returns and unpaid subscriptions, and commissions. Circulation revenue comparisons may be materially impacted with respect to any period which includes one or more issues of unusually high public interest. According to the Audit Bureau of Circulations ("ABC"), an independent audit agency, Playboy magazine's circulation rate base (the total newsstand and subscription circulation guaranteed to advertisers) at June 30, 1997 was larger than Newsweek and Cosmopolitan, and also greater than the combined circulation rate bases of Rolling Stone, Esquire and GQ, which have substantial adult male audiences. Playboy magazine's rate base compares to that of other selected publications as noted in the following table:
Selected U.S. Consumer Publications Rate Base(1) Ranking(2) ----------------------------------- ------------ ---------- Reader's Digest................................................... 15.00 1 TV Guide.......................................................... 13.00 2 National Geographic............................................... 8.50 3 Time.............................................................. 4.00 10 PLAYBOY........................................................... 3.15 12 People............................................................ 3.15 12 Sports Illustrated................................................ 3.15 12 Newsweek.......................................................... 3.10 15 Cosmopolitan...................................................... 2.25 20 Rolling Stone..................................................... 1.25 46 Business Week..................................................... 0.88 81 Esquire........................................................... 0.65 111 GQ................................................................ 0.65 111
______________________ (1) Represents rate base at June 30, 1997 (in millions) as reported by ABC. (2) Based on rate base at June 30, 1997 as reported by ABC. 4 Effective with the January 1996 issue, the Company reduced the rate base 7% to 3.15 million in response to extraordinary paper price increases plus a postal rate increase in order to enable the Company to manage circulation more profitably, while maintaining the magazine's circulation leadership as the best- selling men's magazine. A number of other magazine publishers have also reduced their rate bases in the recent past. From fiscal 1987 until the January 1996 issue, the U.S. edition of Playboy magazine reported a circulation rate base of 3.40 million, which it met or exceeded in most of the six-month periods over which it was averaged in each fiscal year, and which it did not meet by less than 5% in the other periods, including the six-month period leading up to the rate base reduction. Playboy magazine has historically generated over two-thirds of its revenues from subscription and newsstand circulation, with the remainder from advertising. Subscription copies as a percentage of total copies sold were approximately 80% for the year ended June 30, 1997. The Company believes that managing Playboy's circulation to be primarily subscription driven, like most major magazines, provides a stable and desirable circulation base, which is also attractive to advertisers. According to the MRI data previously mentioned, the median age of male Playboy subscribers is 32, with a median annual household income of approximately $40,000. The Company also derives meaningful income from the rental of Playboy magazine's subscriber list, which consists of the subscriber's name, address and other information maintained by the Company. The price of a one-year subscription ranges from $19.97 to $34.96, depending on the source of the subscription and the length of time the subscription has been held. The Company continually tests a variety of subscription pricing strategies. The Company attracts new subscribers to the magazine through its own direct mail advertising campaigns, and through subscription agent campaigns. The Company recognizes revenues from magazine subscriptions over the terms of the subscriptions. Subscription copies of the magazine are delivered through the U.S. Postal Service as second class mail. The Company attempts to contain these costs through presorting and other methods. The Company experienced a general postal rate increase of 14% in January 1995. The next increase in postal rates is not expected to occur until, at the earliest, late fiscal 1998. Distribution of the magazine to newsstands and other retail outlets is accomplished through Warner Publisher Services, a national distributor that maintains a network of approximately 250 wholesale distributors. Copies of the magazine are shipped in bulk to the wholesalers, who are responsible for local retail distribution. The Company receives a substantial cash advance from its national distributor at the time each issue goes on sale. The Company recognizes revenues from newsstand sales based on estimated copy sales at the time each issue goes on sale, and adjusts for actual sales upon settlement with its national distributor. These revenue adjustments generally are not material. Retailers return unsold copies to the wholesalers who count and then shred the returned magazines and report the returns via affidavit. The Company then settles with its national distributor based on the number of magazines that actually were sold compared to the number that initially were projected to be sold. The number of issues sold on newsstands varies from month to month, depending in part on the cover, the pictorials and the editorial features. Playboy magazine is one of the highest priced magazines in the United States. The basic U.S. newsstand cover price has been $4.95, $5.95 for holiday issues, since fiscal 1993. The Company increased the Canadian cover price to C$5.95, C$6.95 for holiday issues, in fiscal 1995. The Company regularly price tests, but no newsstand price increases are planned for copies sold in the U.S. or Canada in fiscal 1998. 5 Advertising by category, as a percent of total ad pages, was as follows:
Advertising Category Years Ended June 30, -------------------- ---------------------------- 1997 1996 1995 ------ ------ ------ Beer/Wine/Liquor...................... 24% 19% 18% Retail/Direct Mail.................... 23 25 31 Tobacco............................... 21 24 20 Toiletries/Cosmetics.................. 7 9 9 Jewelry/Optical/Photo................. 4 3 3 Home Electronics...................... 4 1 4 Apparel/Footwear/Accessories.......... 4 3 4 Automotives........................... 4 8 4 Entertainment......................... 3 2 1 Drugs/Remedies........................ 3 3 4 All Other............................. 3 3 2 ---- ---- ---- 100% 100% 100% ==== ==== ====
Playboy magazine targets a wide range of advertisers and continues to focus on securing new advertisers from underdeveloped categories. The Company utilizes information from its database of approximately 11 million names, including Playboy magazine subscribers and catalog customers, to offer advertisers new ways to reach Playboy readers. In fiscal 1996 the Company implemented a national trade campaign, Growing Up, I never thought I'd be in Playboy, which features top executives from top advertisers talking about the power and appeal of the magazine and the Playboy brand. The campaign was expanded in fiscal 1997. The thrust of the campaign is to reinforce the mainstream, upscale nature of the publication and its readership to the advertising community, specifically targeting the fashion, fragrance and consumer electronics categories. In fiscal 1995, Playboy's advertising pages remained stable compared to the prior year at 595 pages, while advertising revenues declined by 1% based on higher frequency discounts, special pricing and a change in the mix of advertising pages sold. Net advertising income increased by 8%. In fiscal 1996, Playboy's advertising pages decreased 4% from the prior year to 569 pages, while advertising revenues declined by 1% primarily due to the effect of a 2% cost per thousand ("CPM") increase in advertising rates effective with the January 1996 issue. Net advertising income increased by 5%. In fiscal 1997, Playboy's advertising pages decreased 2% from the prior year to 558 pages, while advertising revenues increased by 4% primarily due to the mix of advertising pages sold combined with the effect of rate increases effective with the January 1997 and 1996 issues. Net advertising income increased by 5%. Advertising sales for the fiscal 1998 first quarter issues of the magazine are closed, and the Company expects to report 9% increases in the number of advertising pages and revenues compared to the fiscal 1997 first quarter. The Company plans to implement a 6% CPM increase in advertising rates effective with the January 1998 issue. The Company does not believe that it will be impacted by the Food and Drug Administration (the "FDA") regulation announced in August 1996 which prohibits the publication of tobacco advertisements containing drawings, colors or pictures. The regulation does not apply to a magazine which is demonstrated to be an "adult publication," which means a publication (i) whose readers younger than 18 years of age constitute no more than 15% of total readership, and (ii) is read by fewer than two million persons younger than 18 years of age, in each case as measured by competent and reliable survey evidence. Based on information available to the Company on its readership, the Company believes that Playboy magazine qualifies as an "adult publication" and that the regulation is not applicable to the magazine. On April 25, 1997, the Federal District Court for the Middle District of North Carolina ruled that the FDA has no authority under existing law to restrict the advertising and promotion of tobacco products and ordered the FDA not to implement any of the advertising and promotion restrictions contained in the regulation. The Government has appealed this ruling and a decision is pending. 6 The Company publishes the U.S. edition of Playboy magazine in 15 advertising editions: eight regional, two state, four metro and one upper income zip-coded edition. All contain the same editorial material but provide targeting opportunities for advertisers. The net advertising revenues of the U.S. edition of Playboy magazine for the years ended June 30, 1997, 1996 and 1995 were $28.4 million, $27.4 million and $27.6 million, respectively. Net advertising revenues are gross revenues less advertising agency commissions, frequency and cash discounts and rebates. Levels of advertising revenues may be affected by, among other things, general economic activity and governmental regulation of advertising content. The Playboy Jazz Festival provides advertisers sponsorship and advertising opportunities through the Festival at the Hollywood Bowl, the published Jazz Festival program, free community concerts, and a national public radio broadcast. The Company has produced this music event on an annual basis in Los Angeles at the Hollywood Bowl since 1979. Playboy magazine and newsstand specials are printed at Quad/Graphics, Inc., located in Wisconsin. The actual print run varies each month and is determined with input from the Company's national distributor. Paper is the principal raw material used in the production of Playboy magazine. The Company uses a variety of types of high-quality coated paper that is purchased from a number of suppliers. Manufacturing costs for the year ended June 30, 1997 decreased 5% compared to the prior year principally as a result of lower average paper prices, partially offset by an increase in the average book size. As expected, average paper prices for the year ended June 30, 1997 were 15%, or $3.9 million, lower compared to the prior year principally due to a decline in paper prices which began impacting the Company in the second quarter of fiscal 1997. The Company expects average paper prices to continue to decrease in fiscal 1998, principally as the result of the extremely high levels of paper prices at the beginning of fiscal 1997. Magazine publishing companies face intense competition for both readers and advertising. Magazines primarily aimed at men are Playboy magazine's principal competitors. In addition, other types of media that carry advertising, such as newspapers, radio, television and Internet sites, compete for advertising revenues with Playboy magazine. From time to time, Playboy magazine, and certain of its distribution outlets and advertisers, have been the target of certain groups who seek to limit its availability because of its content. In its 44-year history, the Company has never sold a product that has been judged to be obscene or illegal in any U.S. jurisdiction. The National Defense Authorization Act of 1997 was signed into law in September 1996. One section of that legislation that began as the Military Honor and Decency Act (the "Military Act") bans the sale or rental of sexually oriented written or videotaped material on property under the jurisdiction of the Department of Defense. A Federal Court has permanently enjoined enforcement of the Military Act and has prohibited the Department of Defense from changing its acquisition and stocking practices based on the Military Act. The government has filed an appeal and a decision by the Appellate Court is pending. The Military Act, if applicable to the Company's products and enforceable, would prohibit the sale of Playboy magazine, newsstand specials and videos at commissaries, PX's and ship stores, and would adversely affect a portion of the Company's sales attributable to such products. Based on preliminary estimates and current sales levels at such locations, the Company believes that any such impact would be immaterial. OTHER DOMESTIC PUBLISHING The Publishing Group has also created media extensions, taking advantage of the magazine's reputation for quality and its libraries of art, photography and editorial text. These products include photo newsstand specials and calendars, which are primarily sold in newsstand outlets and use both original photographs and photographs from the Company's library. In fiscal 1995 and 1996, the group published 18 and 21 newsstand specials, respectively. In fiscal 1997, the Company published 22 newsstand specials, and expects to publish 22 newsstand specials in fiscal 1998. The last increase in the newsstand cover price (to $6.95) was implemented in fiscal 1996. The Publishing Group also generates revenues from various media businesses which include 900-number Playboy-related audiotext services, Playboy Collectible Trading Cards and books. In conjunction with General Publishing Group, an unaffiliated third party, the Company published The Playmate Book: Five Decades of Centerfolds in fiscal 1997, which features photographs and capsule biographies of 514 Playmates. 7 In fiscal 1995, the Company launched a free site on the Internet. Playboy.com is one of the Internet's most visited destination sites, averaging approximately 1.3 million page impressions per day in June 1997 according to unaudited information from Nielsen I/PRO. A "page impression" is recorded each time an Internet page is seen by a user, regardless of the number of files contained on the page. Taking full advantage of the technological capabilities of the medium, Playboy.com contains popular editorial features from Playboy magazine, such as excerpts of Playboy Interviews, articles and Playboy Advisor columns, and select photos from Playmate pictorials. Playboy.com also promotes Playboy TV's monthly programming schedule and sells Playboy magazine subscriptions. New features added in fiscal 1997 included French, German, Italian and Spanish translations. The Company also implemented two additional mirror servers in fiscal 1997 (one in the U.S. and one in the U.K.) to handle increased traffic on Playboy.com. These new servers may also help attract additional advertisers to the site by providing an opportunity to target a focused market. In fiscal 1996, the Company began generating revenues from the sale of advertising on Playboy.com which resulted in the site realizing a net profit in fiscal 1996. The site nearly tripled advertising revenues in fiscal 1997. Advertising on Playboy.com is priced on a cost-per-thousand basis determined by page impressions. Advertising is sold by the Company as well as a division of Softbank, Interactive Media Sales. Advertising revenues for fiscal 1998 are again expected to be significantly higher than advertising revenues in the prior year. Late in fiscal 1996 the Company added an online version of the Company's Playboy catalog to Playboy.com, called the Playboy Store, which is discussed more fully in the Catalog Group. In July 1997, the Company launched a pay site on the Internet which is currently offered on a subscription basis. Pay-per-visit access is expected to be available by the end of calendar 1997. Playboy Cyber Club allows members to peruse more than 50,000 pages on the site. Major attractions include individual home pages for every Playboy Playmate; every Playboy Interview published in the magazine; Playboy Advisor columns; video clips of Playboy home videos and Playboy TV shows; the Playboy Photo Library, which includes never-before- published images from Playboy magazine's 9-million-image photo library; the Playboy Art Gallery, which features images from the Company's extensive art collection; and the Playboy Sports Page, which includes real-time sports scores and sports-related features. Playboy Cyber Club also features six chat rooms and five exclusive newsgroups. The free and pay sites combined will offer the Company four sources of revenue: advertising, merchandising, subscription and pay-per-visit. The Company also enters into partnerships with companies to create multimedia products, such as the fiscal 1997 releases of the following CD-ROM titles: The Art of Playboy, showcasing images from the Company's extensive art collection produced with Corel Corporation, and Jenny McCarthy: Playmate Portfolio, the second celebrity Playmate title produced with Anomaly Corporation. INTERNATIONAL PUBLISHING The Company licenses the right to publish 15 international editions of Playboy magazine in the following countries: Australia, Brazil, Croatia, the Czech Republic, France, Germany, Greece, Italy, Japan, Mexico, Netherlands, Poland, Russia, Spain and Taiwan. In fiscal 1997, the Company launched an edition in Croatia and discontinued the South African edition. The Company recently announced plans to launch a sixteenth edition in Scandinavia, that initially will circulate in Norway, expanding later to Sweden, Finland and Denmark. The Polish edition is the first in which the Company has had an equity interest, which was increased from 45% to a majority interest in March 1996. Combined average circulation of the international editions is approximately 1.3 million copies monthly. Local publishing licensees tailor their international editions by mixing the work of their national writers and artists with editorial and pictorial material from the U.S. edition. The Company monitors the content of the international editions so that they retain the distinctive style, look and quality of the U.S. edition, while meeting the needs of their respective markets. The terms of the license agreements for Playboy magazine's international editions vary, but in general are for terms of three or five years and carry a guaranteed minimum royalty as well as a formula for computing earned royalties in excess of the minimum. Royalty computations are generally based on both circulation and advertising revenues. In fiscal 1997, three editions -- Brazil, Germany and Japan -- accounted for approximately 55% of the total licensing revenues from international editions. 8 OTHER PUBLICATIONS The Company owns a 20% interest in duPont Publishing, Inc. ("duPont"), publisher of duPont Registry, A Buyers Gallery of Fine Automobiles; duPont Registry, A Buyers Gallery of Fine Homes; and, beginning in February 1997, duPont Registry, A Buyers Gallery of Fine Boats. The Company has an option to acquire the remaining 80% interest in duPont at a price based on fair market value as of December 31, 1999, and receives management fees. This investment is accounted for on the equity method and the Company's proportionate share of duPont's net income or loss is included in nonoperating income or expense. ENTERTAINMENT GROUP The Company's Entertainment Group operations include the production and marketing of programming through Playboy TV, other domestic television, international television and worldwide home video businesses as well as the worldwide distribution of programming through AdulTVision and the co-production and distribution of feature films. The revenues and operating income of the Entertainment Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, ------------------------- 1997 1996 1995 ------ ------ ------ REVENUES Playboy TV Cable....................................... $ 21.2 $ 21.2 $ 18.9 Satellite Direct-to-Home.................... 23.1 16.4 9.6 Off-Network Productions and Other........... 3.0 1.7 0.4 ------ ------ ------ Total Playboy TV.............................. 47.3 39.3 28.9 Domestic Home Video........................... 8.5 9.4 9.5 International TV and Home Video............... 12.2 11.9 11.2 ------ ------ ------ Total Playboy Businesses...................... 68.0 60.6 49.6 AdulTVision................................... 4.5 1.9 - Movies and Other.............................. 2.2 2.3 2.1 ------ ------ ------ Total Revenues.............................. $ 74.7 $ 64.8 $ 51.7 ====== ====== ====== OPERATING INCOME Profit Contribution Before Programming Expense $ 39.7 $ 30.5 $ 21.1 Programming Expense (a)....................... (21.4) (21.3) (20.1) ------ ------ ------ Total Operating Income...................... $ 18.3 $ 9.2 $ 1.0 ====== ====== ======
(a) Includes amortization expense for all businesses listed above, including AdulTVision and movies. PROGRAMMING The Entertainment Group develops, produces and distributes programming for Playboy TV, other domestic pay television, domestic home video and international television and home video markets. Its productions have included feature films, magazine-format shows, dramatic series, game shows, anthologies of sexy short stories and celebrity and Playmate features. The Company invests in Playboy-style, original quality programming to support its expanding businesses. The Company invested $30.7 million, $25.5 million and $21.3 million in entertainment programming in fiscal 1997, 1996 and 1995, respectively. These amounts, which include expenditures for Playboy- branded programming, AdulTVision and feature films, resulted in 166, 120 and 86 hours of original programming being produced in fiscal 1997, 1996 and 1995, respectively. At June 30, 1997, the Company's library of exclusive, Playboy- brand original programming exceeded 1,000 hours. The increase in investments in programming for fiscal 1997 compared to the prior year primarily reflects spending for series, films and a celebrity pay-per-view event and home video. In fiscal 1998, the Company expects to invest approximately $30.8 million in Company-produced and licensed programming, which would result in approximately 175 hours of original programming being produced. These amounts could vary based on the timing of completion of productions. 9 The following tables list movies produced or co-produced by the Company and the series still in distribution, each generally containing 26 episodes, and certain information related to each:
MOVIES NUMBER OF RELEASES ------ ------------------ Playboy Films 1995.................................. Three 1996.................................. Four 1997.................................. Three The Eros Collection 1995.................................. Six 1996.................................. Twelve 1997.................................. Seventeen
TITLE OF SERIES GENRE --------------- ----- Playboy Late Night........................... magazine-format Inside Out................................... anthology Eden......................................... dramatic series Playboy's Secret Confessions and Fantasies... hosted series Playboy's Love & Sex Test.................... game show Erotic Fantasies............................. anthology Women: Stories of Passion................... anthology Red Shoe Diaries............................. anthology
In fiscal 1995, the Company began releasing feature films in the $1 million to $2 million range under the Playboy Films label. These films are completed under co-production and distribution agreements with, among others, the Motion Picture Corporation of America. In fiscal 1997, the Company signed a co- production agreement with Zalman King Entertainment, Inc. ("Zalman King"). The agreement provides for the Company and Zalman King to co-produce feature films, two of which were completed in fiscal 1997 and released in early fiscal 1998. Because of the strong demand for this genre of programming, the Company is able to presell international distribution rights and earn a quicker return on its programming investment. All of these films have also aired or will air on Playboy TV. Also in fiscal 1995, the Company created and began marketing The Eros Collection, a line of small-budget, non-Playboy-branded movies. These movies are released internationally through home video and television and air on Playboy TV. In fiscal 1997, seven co-produced films were also included under the Eros label, bringing the total Eros Collection films released to 17. In fiscal 1996, the Company and Orion Home Video ("Orion") signed an agreement to release both Playboy Films and The Eros Collection films in the domestic home video market. In 1997, Orion was purchased by a division of MGM/UA Home Entertainment ("MGM"). The Company is currently discussing future release schedules and contract obligations with MGM. The Company's series air on the Company's Playboy TV networks and are marketed internationally. Additionally, some episodes have been released as Playboy Home Video titles and have been licensed to other networks. In fiscal 1996, the Company began production of Women: Stories of Passion ("Women"), a series of 30-minute erotic anthologies written, produced and directed by women. In fiscal years 1997 and 1996 combined, the Company licensed 39 episodes of the Women series to Showtime Networks Inc. ("Showtime"), six of which are to be delivered in fiscal 1998. Broadcast initially by Showtime, the series is then distributed worldwide by Playboy. As part of the co-production agreement with Zalman King discussed above, the Company and Zalman King are also co-producing 18 new episodes of the popular cable television series Red Shoe Diaries, 12 of which were completed during fiscal 1997. The production of the series is co-financed by the Company and Showtime. The agreement grants the Company international distribution rights to the new episodes of Red Shoe Diaries, plus 48 episodes previously aired on Showtime. 10 During fiscal 1997, Farrah Fawcett became the subject of the Company's first multimedia celebrity production. Early in June, Farrah's second Playboy magazine cover and pictorial went on sale and she starred in a cable and direct-to-home ("DTH") pay-per-view special event. A Playboy home video of the event was released in August 1997. The Company's Playboy-branded programming is available in the United States through Playboy TV, and internationally through the Company's networks and, on a tier or program-by-program basis, by foreign broadcasters. Playboy TV is offered on cable and through the DTH market on a pay-per-view and monthly subscription basis. The Company currently has three international Playboy TV networks in the United Kingdom, Japan and Latin America. Additionally, the Company has an AdulTVision network in Latin America. The Company has also announced plans to launch networks in Spain, Portugal and South Korea during fiscal 1998. The Company also distributes its programming on videocassettes, laserdiscs and digital video discs ("DVDs"), which are sold or rented through retail outlets worldwide and sold through direct mail in domestic markets. The Company's Playboy-branded programming for television and home video features stylized eroticism in a variety of entertaining formats for men and women, with an emphasis on programming for couples. The programming does not contain depictions of explicit sex or scenes that link sexuality with violence, and is consistent with the level of taste and quality established by Playboy magazine. PLAYBOY TV When the Company introduced its national pay cable network, Playboy TV, in 1982, it was available only through monthly subscriptions. In December 1989, the Company began to focus on the then-emerging pay-per-view market by promoting the pay-per-view option in addition to the monthly subscription option. Pay-per-view services are available in cable systems that are equipped with addressable hardware that allows cable subscribers to order specific programs. In recent years, Playboy TV has added viewers through the DTH business, which is the fastest-growing segment of the pay television business. Cable In May 1994, the Company expanded Playboy TV from a 10-hour per night schedule to 24-hour availability. This change has enabled the Company to increase revenues through maximum utilization of its transponder on Hughes Communications' Galaxy V satellite by offering more buying opportunities to the consumer. At June 30, 1997, Playboy TV was available to 11.2 million cable addressable households, a 1% decrease compared to June 30, 1996, while households with 24-hour availability decreased 1.1 million, or 28%, to 2.8 million over the same period. The drop in households with 24-hour availability occurred in the fourth quarter of fiscal 1997 after the enforcement of Section 505 of the Telecommunications Act of 1996 (the "Telecommunications Act"), as discussed below. The performance of Playboy TV in individual cable systems varies based principally on the ordering technology and the quantity and quality of marketing done by affiliated cable systems ("Cable Affiliates"). Pay-per-view permits customers to purchase only as much of the Company's programming as they wish and only when they desire to watch the programming. Pay-per-view also permits customers to control the viewing of the programming within their households. In addition, the relatively low price of an evening of pay-per-view programming competes well with many other forms of entertainment. Individual cable system operators determine the retail price of the pay-per-view service, although prices average approximately $5.25 for a block of programming. The number of monthly cable subscribers has declined, as expected. As of June 30, 1997, Playboy TV had approximately 157,000 monthly subscribing households, down from 192,000 at June 30, 1996 and 201,000 at June 30, 1995. Individual Cable Affiliates determine the retail price of the monthly subscription service, although prices average approximately $9.00, largely dependent on the number of premium services to which a household subscribes. 11 The following table illustrates certain information regarding cable households in general, and Playboy TV (in thousands):
Playboy TV Total Cable Cable Addressable Cable Addressable Households(a) Households(a) Households(b) ------------- ------------- ------------- June 30, 1995 60,350 23,450 10,600 June 30, 1996 62,850 26,400 11,300 June 30, 1997 64,000 29,350 11,200 Compound Annual Growth Rate (1995-1997) 3.0% 11.9% 2.8%
_______________ (a) Source: Estimated by the Company based on information reported in 1997 by Paul Kagan Associates, Inc. ("Kagan") for December 31 of each respective year. Kagan projects less than 1% and 9% average annual increases in total cable households and total cable addressable households, respectively, through calendar 2000. (b) Represents the number of cable addressable households to which Playboy TV was available as of the end of the fiscal year. Most cable service in the United States is distributed through large multiple system operators ("MSOs"). At June 30, 1997, the Company had arrangements with 18 of the nation's 20 largest MSOs. These 18 MSOs, through Cable Affiliates, controlled access to approximately 56.0 million, or 88%, of the 64.0 million total cable households. Once arrangements are made with an MSO, the Company is able to negotiate channel space for Playboy TV with the Cable Affiliates controlled by that MSO, and acceptance by Cable Affiliates provides the basis for expanding the Company's access to individual cable households. Four of these 18 MSOs served approximately 8.7 million, or 78%, of the 11.2 million cable addressable households to which Playboy TV was available at June 30, 1997. Consistent with industry practice, the Company's agreements with Cable Affiliates are generally cancelable upon 60 or 90 days' notice by either party. At June 30, 1997, the cable systems in which Playboy TV was offered included approximately 22.1 million cable households which either had access, or could obtain access, to the network. Of these households, 11.7 million could purchase Playboy TV only on a pay-per-view basis, 0.7 million could purchase only on a monthly subscription basis and 9.7 million could purchase the programming on either basis. Management believes that the Telecommunications Act discussed below has slowed growth in cable access for the Company's domestic pay television businesses. Additionally, management believes that the growth has slowed in recent years due to the effects of cable reregulation by the Federal Communications Commission ("FCC"), including the "going-forward rules" announced in fiscal 1995 which provide cable operators with incentives to add basic services. As cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions, competition for channel space has increased. Additionally, the delay of new technology, primarily digital set-top converters which would dramatically increase channel capacity, has contributed to the slowdown. Management believes that growth will continue to be affected in the near term as the cable television industry responds to the FCC's rules and subsequent modifications, and develops new technology. However, as digital technology (which is unaffected by Section 505) becomes more available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable households on a 24-hour basis. 12 In February 1996, Congress passed the Telecommunications Act, and President Clinton signed it into law. Certain provisions of the Telecommunications Act are directed exclusively at cable programming in general and adult cable programming in particular. In some cable systems, audio or momentary bits of video of premium or pay-per-view channels may accidentally become available to nonsubscribing cable customers. This is called "bleeding." The practical effect of Section 505 of the Telecommunications Act ("Section 505") is to require many existing cable systems to employ additional blocking technology in every household in every cable system that offers adult programming, whether or not customers request it or need it, to prevent any possibility of bleeding, or to restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Telecommunications Act are significant and include fines and imprisonment. Surveying of cable operators and initial results indicate that most will choose to comply with Section 505 by restricting the hours of transmission. See Part I. Item 3. "Legal Proceedings." Management believes that the Company's revenues attributable to its domestic pay television cable services will continue to be materially adversely affected as a result of enforcement of Section 505 due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers. However, the impact on the fiscal year ended June 30, 1997 was not material as enforcement of Section 505 did not commence until May 18, 1997. Preliminary results which the Company has received from the cable operators indicate that the Entertainment Group's annual revenue decline will be approximately $5 million. The Company intends to pursue in the United States District Court in Wilmington, Delaware (the "Court") its case challenging on constitutional grounds the validity of Section 505 and to seek a permanent injunction against the enforcement of Section 505. There can be no assurance that the Court will grant such an injunction. The Company's full case on the merits will not be heard or decided by the Court until calendar 1998. Additionally, from time to time, certain groups have sought to exclude the Company's programming from local pay television distribution because of the adult-oriented content of the programming. Management does not believe that any such attempts will materially affect the Company's access to cable systems, but the nature and impact of any such limitations in the future cannot be determined. Growth in the pay-per-view market is expected to result in part from cable systems upgrades, utilizing fiber-optic, compression technologies or other bandwidth expansion methods that provide cable operators additional channel capacity. When implemented, compression technology, where employed, will dramatically increase channel capacity. Industry analysts expect a large percentage of this additional channel capacity to be dedicated to pay-per-view programming. The timing and extent of these developments and their impact on the Company cannot yet be determined. Playboy TV's cable programming is delivered primarily through a communications satellite transponder. Playboy TV's current transponder lease, effective January 1, 1993, contains protections typical in the industry against transponder failure, including access to spare transponders on the same satellite as well as transponders on another satellite currently in operation. Access to the transponder may be denied under certain narrowly defined circumstances relating to violations of law or threats to revoke the license of the satellite owner to operate the satellite based on programming content. However, the Company has the right to challenge any such denial and believes that the transponder will continue to be available to it through the end of the expected life of the satellite (currently estimated to be in 2004). The Company's current lease term expires October 30, 2001. As of April 30, 1996, the Company was no longer obligated to make monthly royalty payments that the Company had paid under a termination agreement with the former distributor of its pay television service. As a result, the profit contribution of Playboy TV and the operating performance of the Entertainment Group have been favorably impacted by the termination of such royalty payments. 13 Competition among providers of cable services for channel space and viewer spending is intense and the Company competes in this segment of its business primarily on the basis of its brand name and its original unique quality programming. Playboy TV's competition varies in the type and quality of programming offered, and includes adult movie services which offer primarily third party programming. As the Company's agreements with cable operators have come up for renewal or renegotiation, the Company has experienced significant competition from these lower cost competitors with respect to the revenue split between the cable operator and the Company. The Company believes that a majority of its current fee arrangements with its Cable Affiliates with respect to Playboy TV are generally more favorable to it as a service provider than fee arrangements offered by its adult movie service competitors and less favorable to the Company as a service provider than fee arrangements offered by general interest movie service competitors. While there can be no assurance that the Company will be able to maintain its current fee structures in the face of price competition, the Company believes that strong Playboy brand recognition, the quality of its programming and its resulting ability to appeal more effectively to a broader range of adult audiences are critical factors which will continue to differentiate Playboy TV from its competitors. In fiscal 1996, in part as a response to such price competition, the Company launched a flanker channel, AdulTVision, to provide a lower-cost product that, in combination with Playboy TV, can result in a more attractive overall fee arrangement for cable operators. DTH The Company also provides Playboy TV via encrypted signal, on both a pay- per-view and subscription basis, to home satellite dish viewers. The DTH market, which is not impacted by Section 505, is the fastest growing segment of Playboy TV, with fiscal 1997 DTH revenues exceeding cable revenues for the first time. As of June 30, 1997, 1996 and 1995, Playboy TV was available on a monthly subscription and/or pay-per-view basis to approximately 6,277,000, 4,867,000 and 3,282,000 DTH viewers, respectively. At the end of fiscal 1994, Playboy TV became one of the first networks to be launched on DirecTV, the first commercial digital broadcast satellite ("DBS") service. This service provides exceptional improvements in program delivery and consumer interface to households equipped with Digital Satellite System receiving units, consisting of an 18-inch satellite antenna, a digital receiver box and a remote control. Playboy TV expanded from 10-hour to 24-hour programming on DirecTV in August 1995. Playboy TV was added to a second DBS service, PrimeStar, at the end of fiscal 1995 and was expanded from 10-hour to 24-hour programming and became available on a subscription (as well as a pay-per-view) basis beginning in April 1997. The significant growth in the DTH market has provided the Company with an expanded customer base via a digital transmission which has produced higher buy rates than analog cable markets. DOMESTIC HOME VIDEO The Company also distributes its original programming domestically via videocassettes, laserdiscs and DVDs that are sold or rented in video stores, music and other retail outlets and through direct mail, including two of the Company's catalogs. Playboy Home Video is one of the largest-selling brands of nontheatrically released, special-interest videos in the United States. Playboy Home Video was named as Billboard magazine's "Top Video Sales Label" for calendar years 1996 and 1995. The format of Playboy Home Videos is consistent with the style, quality and focus of Playboy magazine. During fiscal 1995, the Company released 14 new Playboy Home Video titles, including the release of The Best of Pamela Anderson in June 1995, which became the first Playboy Home Video title ever to reach the number one spot on Billboard magazine's weekly Top Video Sales Chart ("Sales Chart"), a position that it maintained for 12 weeks in fiscal 1996. Additionally, three other fiscal 1995 releases were in the top five on the Sales Chart. In addition, the Company released four other titles in fiscal 1995, including a documentary and a workout video. Also in fiscal 1995, a new product line, The Eros Collection, was introduced. As previously discussed, these are small-budget, non-Playboy-branded movies. In fiscal 1996, the Company released 14 new Playboy Home Video titles, including The Best of Anna Nicole Smith which reached the number two spot on the Sales Chart. Eight of the 14 new titles entered the top five on the Sales Chart in fiscal 1996. The Best of Jenny McCarthy was released in June 1996 and became the second Playboy title to reach the number one spot on the Sales Chart, a position it held for five weeks in the summer of 1996. Due to its outstanding performance throughout the year, this title held the number four position in Billboard magazine's 1996 Year in Video Chart. 14 The Company also released 14 new Playboy Home Video titles in fiscal 1997, all of which entered the top 20 on the Sales Chart during the fiscal year, with 11 of the 14 also reaching the top ten. The Company plans to release 16 Playboy Home Video titles in fiscal 1998. In addition to retail sales, the Company also sells its videos through direct-marketing channels, including Playboy magazine, Playboy catalog, Critics' Choice Video catalog and the Playboy Store, on Playboy.com. The Company has also entered into various direct marketing alliances for the sales of its continuity series. In fiscal 1997, the Company introduced a second continuity series featuring new products with Sony Music Direct. As of June 1997, Sony Music Direct also took over from Time Life Inc. the marketing and distribution of the first continuity series representing the core retail product line to new direct response customers. Time Life Inc. will continue to market and distribute the core retail product to the existing customer base through June 1998. Also, the Company entered into an agreement with Real Entertainment, Inc. in May 1997 for a separate direct response program representing the Playboy Home Video product line. The Company's Playboy Home Video products have been distributed in the United States and Canada by Universal Music & Video Distribution ("Uni"; formerly Uni Distribution Corp.) whereby, until the fourth quarter of fiscal 1995, the Company was responsible for manufacturing the video product and for certain marketing and sales functions. The Company's new release titles are still distributed in this manner, however, in the fourth quarter of fiscal 1995 the Company entered into a three-year distribution agreement with Uni related to backlist titles (titles in release for longer than a year) that shifted manufacturing and marketing responsibilities to Uni. The Company has received annual guarantees for the backlist titles, the first two years of which were subject to certain earn-out provisions. During fiscal 1997, the third and final year of the agreement was extended through June 1998. The Company also distributes its video programming via laserdiscs and, beginning in fiscal 1997, the new DVD format, through agreements with Image Entertainment, Inc. INTERNATIONAL TV AND HOME VIDEO Internationally, Playboy programming is available in approximately 150 countries, either on a tier or program-by-program basis or, in the United Kingdom, Japan and Latin America, through a local Playboy network in which the Company owns an equity interest and from which it receives licensing fees for programming and the use of the Playboy brand name. The Company markets its programming to foreign broadcasters and pay television services. As appropriate, typically the licensees then customize, dub or subtitle the programming to meet the needs of individual markets. In countries that can support a Playboy programming tier, the Company has expanded its relationships with foreign broadcasters by entering into exclusive multiyear multiproduct output agreements with international pay television distributors. These agreements enable the Company to have an ongoing branded presence in international markets and generate higher and more consistent revenues than selling programs on a show-by-show basis. In fiscal 1995, the Company launched the first international Playboy TV network in the United Kingdom in a joint-venture agreement with Flextech plc, a U.K. entertainment company that is majority-owned by a subsidiary of Tele- Communications, Inc. ("TCI") and British Sky Broadcasting Ltd. ("BSKyB"). The Company owns 19% of the network, with an option to acquire an additional 10% equity interest, and receives license fees for programming and the use of the Playboy brand name. During fiscal 1996, a second international Playboy TV network was launched in Japan in partnership with Tohokushinsha Film Corp. in which the Company owns less than a 20% interest. Additionally, the Company entered into a long term program supply agreement under which it will provide 700 hours of programming over the first five years of the venture and receives a royalty for use of its brand name. During fiscal 1997, the venture was granted a license to distribute to the DTH market in Japan. 15 A third international Playboy TV network and the first international AdulTVision network were launched in Latin America in the fall of 1996. The Company holds a 19% interest in the venture, with an option to acquire up to 49.9% of all equity interests. The Company also receives licensing fees for its programming and royalty payments for use of its brand name. The venture is with an affiliate of the Cisneros Group of Companies ("Cisneros"), one of Latin America's most prominent conglomerates and broadcasters. The two Latin American networks are on Galaxy Latin America, a DTH service majority-owned by Hughes Electronics, which owns DirecTV in the United States. The Company's partnership with Cisneros has been expanded to encompass Playboy TV and AdulTVision networks in Spain and Portugal, which are expected to be launched during fiscal 1998. In March 1997, the Company announced that it will launch a Playboy TV network in South Korea through a partnership with Daewoo Corporation. The Company will own 15% of the venture; the highest equity position a foreign entity can hold. The South Korean network, expected to be launched during fiscal 1998, will initially be offered on a 24-hour basis in hotels and motels. The Company continues to explore opportunities for additional international networks. As the Company's international networks grow, the Company intends to produce programming specifically targeted to the local markets in order to maximize the appeal of Playboy TV among the Company's new customers. For example, the U.S. popularity of Night Calls, the Company's live call-in talk show, prompted the creation of Night Calls U.K. in fiscal 1997, and the Company also plans to develop a Latin American version of the show. Through separate distribution agreements, the Company also distributes its U.S. home video products to more than 50 countries in South America, Europe, Australia, Asia and Africa. These products are based on the videos produced for the U.S. market, with dubbing or subtitling into the local language where necessary. ADULTVISION In July 1995, the Company launched a second pay television network, AdulTVision, as a flanker network to Playboy TV. The new network allows the Company to appeal more effectively to a broader range of adult audiences. AdulTVision is principally offered on a pay-per-view basis and is sold primarily in combination with Playboy TV through cable operators, and to the DTH market. At June 30, 1997, the network was available in approximately 5.3 million cable addressable and DTH households. The network reported an operating loss for fiscal 1996 but was profitable in fiscal 1997. As previously discussed, the Company launched the network internationally in Latin America in the fall of 1996 and expects to launch an additional AdulTVision network in Spain and Portugal during fiscal 1998. AdulTVision's programming is available through a full-service distribution agreement with a third-party provider until June 1998. Under the terms of this agreement, uplink, encoding, access to a transponder and other services are provided. Management believes that upon expiration of the current agreement it will be able to continue with its current provider or locate another transponder for the transmission of AdulTVision. PRODUCT MARKETING GROUP The Product Marketing Group licenses the Playboy name, Rabbit Head Design and other trademarks and artwork owned by the Company for the worldwide manufacture, sale and distribution of a variety of consumer products. The revenues and operating income of the Product Marketing Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, ------------------------ 1997 1996 1995 ---- ---- ---- REVENUES............................... $8.0 $7.1 $6.8 ==== ==== ==== OPERATING INCOME....................... $3.5 $3.7 $3.4 ==== ==== ====
16 The Product Marketing Group works with licensees to develop, market and distribute high-quality, branded merchandise. The Company's licensed product lines include men's clothing, accessories, watches, jewelry, fragrances, small leather goods, stationery, eyewear, home fashions and condoms. These products are marketed principally in countries in Asia, primarily through retail outlets, including department and specialty stores. The Company's Hong Kong-based apparel licensee operates approximately 450 freestanding Playboy stores and boutiques within department stores in China and Hong Kong. To control more effectively sales and distribution in mainland China, this licensee has five distribution and sales offices throughout the country and is expected to complete construction of a new factory by the end of calendar 1997. Continuing its alliance with Consolidated Cigar Corporation, a second Playboy cigar line was launched in fiscal 1997, the limited-edition LeRoy Neiman Selection. Neiman, whose artwork has been featured in Playboy magazine for more than 40 years, created an original work of art for the cigar box and his image appears on the cigar band. In fiscal 1998, Playboy by Don Diego cigars, the Company's first cigar line, will be marketed internationally for the first time, with initial rollouts in Germany, Japan and the United Kingdom. Royalties are based on a fixed or variable percentage of the licensee's total net sales, in many cases against a guaranteed minimum. In fiscal 1997, approximately 72% of the royalties earned from licensing the Company's trademarks was derived from licensees in Asia, 13% from the United States and 12% from Europe. The Company maintains control of the design and quality specifications of its licensed products to ensure that products are consistent with the quality of the Playboy image. To project a consistent image for Playboy-branded products throughout the world, a global advertising campaign and brand strategy was launched in fiscal 1995 to integrate all of the marketing efforts of the product licensees and to control the brand more effectively. Significant investments in brand marketing and product design were also made during fiscal 1997 to further promote a cohesive brand image. To capitalize on its international name recognition, the Company continues to increase its international product marketing activities, specifically targeting growth for its licensing business in South America and Europe. Special Editions, Ltd. primarily licenses art-related products based on the Company's extensive collection of artwork, many of which were commissioned as illustrations for Playboy magazine and for use in the Company's other businesses. These include posters, limited-edition prints, art watches, art ties and collectibles. Prominent artists represented have included Salvador Dali, Keith Haring, LeRoy Neiman, Patrick Nagel, Alberto Vargas, Ed Paschke, Andy Warhol, Bas Van Reek, Karl Wirsum and Roger Brown. Additionally, the Company owns all of the trademarks and service marks of Sarah Coventry, Inc., which it licenses primarily domestically. Costume jewelry and watches are the principal product lines distributed by Sarah Coventry licensees. To protect the success and potential future growth of the Company's product marketing and other businesses, the Company actively defends its trademarks throughout the world and monitors the marketplace for counterfeit products. Consequently, it initiates legal proceedings from time to time to prevent unauthorized use of the trademarks. The Company uses a hologram on Playboy packaging as a mark of authenticity. While the trademarks differentiate the Company's products, the marketing of apparel and jewelry is an intensely competitive business that is extremely sensitive to shifts in consumer buying habits and fashion trends, as well as changes in the retail sales environment. 17 CATALOG GROUP The Company's Catalog Group operations include the direct marketing of products through Critics' Choice Video, Collectors' Choice Music and Playboy catalogs, combined with the marketing of products through sites on the Internet. The revenues and operating income of the Catalog Group were as follows for the periods indicated in the following table (in millions):
Years Ended June 30, ------------------------ 1997 1996 1995 ------ ------ ------ REVENUES.......................... $ 76.3 $ 71.7 $ 61.4 ====== ====== ====== OPERATING INCOME.................. $ 4.8 $ 5.2 $ 5.2 ====== ====== ======
The Critics' Choice Video catalog, one of the largest-circulation catalogs of classic, popular and hard-to-find movies, is published quarterly and includes movies from all of the major film studios and hundreds of special-interest videos. The catalog has expanded through alternative distribution methods such as package inserts, solo mailings and ads in specialty publications. Critics' Choice Video was challenged in fiscal 1997 by a softness in prospect catalog response rates and, as a result, is planning new initiatives for fiscal 1998 to counter this softness. In the fall of 1997, the catalog is planning to launch CCVideo, an online version of the catalog, and The Big Book of Movies, a 324- page, perfect-bound oversize catalog featuring 10,000 in-stock videos, of which over 2,000 will be offered at a 25% discount. This catalog is expected to help establish Critics' Choice Video as the ultimate catalog authority in home video. The Collectors' Choice Music catalog currently offers more than 1,500 titles from all music genres on CDs and cassettes, including imports and hard-to-find reissues. The Collectors' Choice Music catalog is published three times annually. Since the catalog's inception in fiscal 1994, the Company has successfully increased the circulation and product offerings of the catalog, resulting in year-over-year increases in revenues and operating income. In a continuing effort to provide superior customer service, the Critics' Choice Video and Collectors' Choice Music catalogs operate telephone search lines through which customers can inquire about the availability of any film or musical recording, including those not in the catalogs. This service not only provides immediate assistance to the customer, but information on the interests of the customers. Also, in fiscal 1997 the Company produced, under its own labels, 24 exclusive releases under each of the Critics' Choice Video and Collectors' Choice Music catalogs, more than double the number of exclusive titles offered in fiscal 1996. Both catalogs plan to continue to expand their exclusive offerings in fiscal 1998. Playboy catalog products include Playboy-branded fashions, cigars and gifts, Playboy Home Video titles, Playboy collectibles, such as calendars, back issues of the magazine and newsstand specials, and CD-ROM products. The Playboy catalog is published three times annually and, beginning in fiscal 1998, has been reformatted to a larger (81/2" x 11"), more upscale catalog which will expand on Playboy-branded and licensed product offerings. To expand the reach of the group's products, in April 1996 an online version of the Playboy catalog, called the Playboy Store, was added to the Company's Internet site (http://www.playboy.com). The Playboy Store offers, at 20% less than through the mail, the same products as the printed version. In fiscal 1997, sales from the Playboy Store equaled approximately 9% of the print catalog sales, of which 80% were from first-time buyers, and orders were received from approximately 40 countries. In fiscal 1998, the group is planning to expand the Playboy Store, including adding more interactive features. Based on this performance and consumer interest in purchasing music and videos online, the group launched CCMusic, an online version of the Collectors' Choice Music catalog, in the summer of 1997 at http://www.ccmusic.com. As previously discussed, the group is also planning to launch CCVideo, the online version of the Critics' Choice Video catalog, in the fall of 1997 at http://www.ccvideo.com. 18 Paper is the principal raw material used in publishing the Company's catalogs. In fiscal 1997, all three of the catalogs were favorably impacted by lower paper prices, which had been significantly higher in fiscal 1996. The Company plans to continue to increase overall circulation for the catalogs in fiscal 1998. In the summer of 1997, near the end of a five-year lease, the catalog operations began moving from its former facility to a larger facility, under terms of a built-to-suit lease, to meet additional space requirements resulting from growth in the business. The new facility is located in the same Chicago suburb and constitutes the group's second expansion in five years. The facility features an automated inventory management system and houses the group's merchandising, marketing, customer service and order fulfillment divisions. The Company will initially occupy 106,000 square feet of space and has an option to lease an additional 23,000 square feet commencing in December 2002. The catalog business is subject to competition from other catalogs and distributors and retail outlets selling similar merchandise. The Company continuously reviews potential catalog acquisitions and joint ventures to publish catalogs that would offer products, especially entertainment software, that would appeal to customers who buy the Company's other merchandise. In fiscal 1997, the Company purchased from the trustee in bankruptcy selected assets of the Time Warner Viewer's Edge videocassette catalog. CASINO GAMING In fiscal 1996, the Company announced plans to reenter the casino gaming business. The Company, with a consortium of Greek investors, bid for and won an exclusive casino gaming license on the island of Rhodes, Greece. The Company's consortium executed the contract with the government in October 1996 and is presently renovating the historic Hotel des Roses that will be the Playboy Casino and Beach Hotel, which is expected to open in calendar 1998. The Company is continuing to explore other casino gaming opportunities with a strategy to form joint ventures, with strong local partners, in which the Company would receive license fees for the use of the Playboy name and trademarks and would consider taking equity positions. SEASONALITY The Company's businesses are generally not seasonal in nature. However, second quarter revenues and operating income are typically impacted by higher newsstand cover prices of holiday issues. This, coupled with higher sales of subscriptions of Playboy magazine, also results in an increase in accounts receivable. PROMOTIONAL AND OTHER ACTIVITIES The Company believes that its sales of products and services are enhanced by the public recognition of Playboy as a lifestyle. To establish such public recognition, the Company, among other activities, acquired in 1971, a mansion in Holmby Hills, California known as the "Playboy Mansion" where the Company's founder, Hugh M. Hefner, lives. The Playboy Mansion is used for various corporate activities, including serving as a valuable location for video production and magazine photography, business meetings, enhancing the Company's image, charitable functions and a wide variety of promotional and marketing purposes. The Playboy Mansion generates substantial publicity and recognition which increase public awareness of the Company and its products and services. As indicated in Part III. Item 13., Mr. Hefner pays rent to the Company for that portion of the Playboy Mansion used exclusively for his and his family's residence as well as the value of meals and other benefits received by him, his family and personal guests. The Playboy Mansion is included in the Company's financial statements as of June 30, 1997 at a cost, including all improvements and after accumulated depreciation, of approximately $2,740,000. The operating expenses of the Playboy Mansion, including depreciation, taxes and security (but excluding video taping which is now reflected as a direct controllable expense in the Office of the Chairman Emeritus), net of rent received from Mr. Hefner were approximately $3,635,000, $3,615,000 and $3,530,000 for the years ended June 30, 1997, 1996 and 1995, respectively. Through the Playboy Foundation, the Company supports not-for-profit organizations and projects concerned with issues historically of importance to Playboy magazine and its readers, including anti-censorship efforts, civil rights, AIDS education, prevention and research, and reproductive freedom. The Playboy Foundation provides financial support to many organizations and also donates public service advertising space in Playboy magazine and in-kind printing and design services. 19 EMPLOYEES At August 31, 1997, the Company employed 684 full-time employees compared to 636 at August 31, 1996. No employees are represented by collective bargaining agreements. The Company believes it maintains a satisfactory relationship with its employees. 20 Item 2. Properties - ------------------- The Company leases office space at the following locations: The Company was lessee under an initial fifteen-year lease effective September 1989 of approximately 100,000 square feet of corporate headquarters space located at 680 North Lake Shore Drive, Chicago, Illinois. In August of 1996, the Company renegotiated this lease on more favorable terms, including a lower base rent which will result in savings of approximately $2.0 million over the initial term of the lease, combined with the Company obtaining certain expansion options in the building. Further, the lease term was extended three years to August 2007, with a renewal option for an additional five years. Subsequent to the renegotiation of the lease, average annual base rental expense is approximately $985,000. The Company was granted a rent abatement for the first two years of the initial lease; however, rent expense is being charged to operations on a straight-line basis over the extended term of the lease. Additionally, the lease requires the Company to pay its proportionate share of the building's real estate taxes and operating expenses. The majority of this space is used by all of the Company's operating groups, primarily Publishing. The Company's Publishing Group headquarters in New York City consists of approximately 50,000 square feet of space in the Crown Building, 730 Fifth Avenue, Manhattan. The Crown Building lease expires in August 2004, has an average annual base rental expense of approximately $1,380,000, and is subject to periodic increases to reflect rising real estate taxes and operating expenses. The Company was granted a rent abatement under this lease; however, rent expense is being charged to operations on a straight-line basis over the term of the lease. A limited amount of this space is utilized by the Entertainment and Product Marketing Groups and executive and administrative personnel. The Company's principal Entertainment Group offices are located at 9242 Beverly Boulevard, Beverly Hills, California ("Beverly Building"). The Company holds a lease for approximately 40,000 square feet in the Beverly Building through March 2002, with an average annual base rental expense of approximately $1,550,000, which is subject to annual increases calculated on a formula involving tax and operating expense increases. The Company was granted a partial rent abatement for the first two years of the lease; however, rent expense is being charged to operations on a straight-line basis over the term of the lease. Additionally, a limited amount of space is utilized by the Publishing Group and executive and administrative personnel. The Company leases space for its operations facilities at the following locations: In fiscal 1993, the Company entered into a five-year lease for a 64,000 square foot warehouse facility in Itasca, Illinois, which has been used primarily for Catalog Group operations. Due to the growth of the catalog business, beginning June 1997, the Company began leasing a new larger facility in the same Chicago suburb under a 10 1/2 year lease, with a renewal option for an additional five years. The purpose of the catalog operations facility is to provide order fulfillment and related activities, and also house a portion of the Company's data processing operations and serve as a storage facility for the entire Company. The Company will initially utilize 106,000 square feet of space in the new facility and has an option to lease an additional 23,000 square feet commencing December 2002. The lease under the previous facility was terminated early as of August 1997. The average annual base rental expense under the previous lease was approximately $300,000, and will be approximately $775,000 under the new lease agreement. Additionally, the lease terms require the Company to pay real estate taxes and operating expenses. The Company's West Coast photography studio is located in Santa Monica, California, under terms of a ten-year lease, which commenced January 1994. The lease is for approximately 9,800 square feet of space, with an average annual base rental expense of approximately $180,000. The Company was granted a rent abatement under this lease; however, rent expense is being charged to operations on a straight-line basis over the term of the lease. Additionally, the lease requires the Company to pay its proportionate share of the building's real estate taxes and operating expenses. In June 1995, the Company entered into a two-year lease effective July 1995 for a motion picture production facility to be used by its Entertainment Group located in Los Angeles, California. In March 1997, this lease was extended an additional year until June 1998. The lease is for 11,600 square feet, with an annual base rental expense of approximately $105,000 for the first two years, which increases three percent in the third year. The Company owns a Holmby Hills, California mansion property comprised of 5-1/2 acres. See "Promotional and Other Activities" under Part I. Item 1. 21 Item 3. Legal Proceedings - -------------------------- The Company is from time to time a defendant in suits for defamation and violation of rights of privacy, many of which allege substantial or unspecified damages, which are vigorously defended by the Company. The Company is presently engaged in other litigation, most of which is generally incidental to the normal conduct of its business and is immaterial in amount. Management believes that its reserves are adequate and that no such action will have a material adverse impact on the Company's financial condition. However, there can be no assurance that the Company's ultimate liability will not exceed its reserves. See Note O of Notes to Consolidated Financial Statements. In February 1996, Congress passed the Telecommunications Act, and President Clinton signed it into law. Certain provisions of the Telecommunications Act are directed exclusively at cable programming in general and adult cable programming in particular. In some cable systems, audio or momentary bits of video of premium or pay-per-view channels may accidentally become available to nonsubscribing cable customers. This is called "bleeding." The practical effect of Section 505 of the Telecommunications Act is to require many existing cable systems to employ additional blocking technology in every household in every cable system that offers adult programming, whether or not customers request it or need it, to prevent any possibility of bleeding, or to restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Telecommunications Act are significant and include fines and imprisonment. Surveying of cable operators and initial results indicate that most will choose to comply with Section 505 by restricting the hours of transmission. On February 26, 1996, one of the Company's subsidiaries filed a civil suit challenging Section 505 on constitutional grounds. On March 7, 1996, the Company was granted a Temporary Restraining Order ("TRO") staying the implementation and enforcement of Section 505. In granting the TRO, the court found that the Company had demonstrated it was likely to succeed on the merits of its claim that Section 505 is unconstitutional. On November 8, 1996, eight months after the TRO was granted, a three-judge panel in the Court denied the Company's request for preliminary injunction against enforcement of Section 505 of the Act and, in so denying, found that the Company was not likely to succeed on the merits of its claim. The Company appealed the Court's decision to the United States Supreme Court and enforcement of Section 505 was stayed pending that appeal. On March 24, 1997, without opinion, the Supreme Court summarily affirmed the Court's denial of the Company's request for a preliminary injunction. On July 22, 1997, the Company filed a motion for summary judgment on the ground that Section 505 is unconstitutionally vague based on the Supreme Court's decision on June 26, 1997 that certain provisions of the Telecommunications Act regulating speech on the Internet were invalid for numerous reasons, including vagueness. The Company is awaiting a decision on its motion by the Court. Management believes that the Company's revenues attributable to its domestic pay television cable services will continue to be materially adversely affected as a result of enforcement of Section 505 due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers. However, the impact on the fiscal year ended June 30, 1997 was not material as enforcement of Section 505 did not commence until May 18, 1997. Preliminary results which the Company has received from the cable operators indicate that the Entertainment Group's annual revenue decline will be approximately $5 million. The Company intends to pursue in the Court its case challenging on constitutional grounds the validity of Section 505 and to seek a permanent injunction against the enforcement of Section 505. There can be no assurance that the Court will grant such an injunction. The Company's full case on the merits will not be heard or decided by the Court until calendar 1998. 22 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. In the complaint, BrandsElite, an international distributor of premium merchandise, including liquor, perfume, cosmetics and luxury gifts, principally to duty-free retailers, alleges that the Company breached a product license agreement, shortly after its execution by the Company in October 1995. The agreement provided for the appointment of BrandsElite as the exclusive, worldwide licensee of the Playboy trademark and tradename with respect to the sale of cognac and possibly some deluxe whiskeys. The Company has admitted that it advised BrandsElite that it had determined not to proceed with the transaction but disputes strongly BrandsElite's allegation that as a result of the Company's breach, BrandsElite has suffered millions of dollars of damages in future lost profits and diminished value of its stock. BrandsElite also seeks to recoup alleged out-of-pocket expenses, fees and costs incurred in bringing the action, and specific performance of the agreement. The license agreement provides for recovery by a party in any judgment entered in its favor of attorneys' fees and litigation expenses, together with such court costs and damages as are provided by law. The action is currently in discovery. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. 23 EXECUTIVE OFFICERS - ------------------ The following table sets forth information with respect to the Company's executive officers: Name, Age and Position Business Experience During Past 5 Years - ---------------------- --------------------------------------- Hugh M. Hefner, 71 Founded the Company in 1953. Has been Chairman Chairman Emeritus and Emeritus and Editor-in-Chief since November Editor-in-Chief 1988. From October 1976 to November 1988 served as Chairman of the Board and Chief Executive Officer, and before that served as Chairman, President and Chief Executive Officer. Christie Hefner, 44 Appointed to present position in November Chairman of the Board and 1988. From September 1986 to November 1988 Chief Executive Officer served as Vice Chairman of the Board, President and Chief Operating Officer. From February 1984 to September 1986 served as President and Chief Operating Officer; had been President since April 1982. From January 1978 to April 1982 was a Corporate Vice President. She joined the Company in 1975 as Special Assistant to the Chairman of the Board. Linda G. Havard, 42 Appointed to present position in May 1997. Executive Vice President, From August 1982 to May 1997 held various Finance and Operations, financial and management positions at Atlantic and Chief Financial Officer Richfield Company ("ARCO"). From October 1996 to May 1997 served as ARCO's Senior Vice President in the Global Energy Ventures division. She also served as ARCO's Vice President of Corporate Planning from January 1994 to December 1996. Her other positions with ARCO have included Vice President, Finance, Planning and Control, ARCO Transportation Co. and President, ARCO Pipe Line Co. Marianne Howatson, 49 Appointed to present position in April 1997. Executive Vice President and From January 1995 to April 1997 served as Vice President, Publishing Group President and General Manager of the retail division of Cardinal Business Media. From April 1992 to July 1994 served as Group Publisher at Gruner + Jahr USA Publishing. From March 1987 to December 1991 served as Publisher of Conde Nasts' Self magazine. From March 1986 to March 1987 was Vice President and Publisher of American Express Publishing's Travel & Leisure magazine, and from January 1983 to March 1986 served as Senior Vice President and Director of Marketing for the Magazine Publishers of America, the industry's preeminent trade association. Herbert M. Laney, 52 Appointed to present position in December Executive Vice President and 1996. From September 1995 to December 1996 President, Catalog Group served as Senior Vice President and President, Catalog Group. From June 1993 to September 1995 served as President, Catalog Group. From August 1990 to June 1993 served as Senior Vice President, Catalog Group. From June 1988 to August 1990 served as Senior Vice President, Direct Marketing. 24 Name, Age and Position Business Experience During Past 5 Years - ---------------------- --------------------------------------- Anthony J. Lynn, 45 Appointed to present position in June 1992. Executive Vice President and From 1991 to 1992 served as President of President, Entertainment Group international television distribution and worldwide pay television at MGM-Pathe Communications Co., where he was Executive Vice President since 1987. Robert J. Perkins, 50 Appointed to present position in October 1996. Executive Vice President, From March 1995 to September 1996 served as Chief Marketing Officer Senior Vice President of licensing and marketing at Calvin Klein, Inc., a leading producer of designer apparel. From March 1994 to February 1995 served as President of Q Direct, a data base marketing subsidiary of QVC Inc. From March 1991 to March 1994 was Senior Vice President of Marketing at Pizza Hut Inc. and from April 1985 to March 1991 held a variety of positions, finally as President and Chief Operating Officer, at the New York office of Chiat/Day/Mojo, a distinguished advertising agency. Richard S. Rosenzweig, 62 Appointed to present position in November Executive Vice President 1988. From May 1982 to November 1988 served as Executive Vice President, Office of the Chairman. From July 1980 to May 1982 served as Executive Vice President, Corporate Affairs. From January 1977 to June 1980 he was Executive Vice President for West Coast Operations. His other positions with the Company have included Executive Vice President, Publications Group, and Associate Publisher, Playboy magazine. He has been with the Company since 1958. Howard Shapiro, 50 Appointed to present position in May 1996. Executive Vice President, From September 1989 to May 1996, served as Law and Administration, Executive Vice President, Law and General Counsel and Secretary Administration and General Counsel. From May 1985 to September 1989 served as Senior Vice President, Law and Administration and General Counsel. From July 1984 to May 1985 served as Senior Vice President and General Counsel. From September 1983 to July 1984 served as Vice President and General Counsel. From May 1981 to September 1983 served as Corporate Counsel. From June 1978 to May 1981 served as Division Counsel. From November 1973 to June 1978 served as Staff Counsel. Martha O. Lindeman, 46 Appointed to present position in March 1992. Vice President, Corporate From 1986 to 1992 served as Manager of Communications and Communications at the Tribune Company, a Investor Relations leading information and entertainment company. 25 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters - ----------------------------------------------------------------------------- The stock price information, as reported in the New York Stock Exchange Composite Listing, set forth in Note P of Notes to Consolidated Financial Statements on pages 41 and 42 of the fiscal 1997 Annual Report is incorporated herein by reference. The registrant's securities are traded on the exchanges listed on the cover page of this Form 10-K Report. As of August 31, 1997, there were 8,341 and 9,001 record holders of Class A Common Stock and Class B Common Stock, respectively. There were no cash dividends declared during either of the last two fiscal years. The Company's revolving credit agreement prohibits the payment of cash dividends. Item 6. Selected Financial Data - -------------------------------- The net revenues, income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle, total assets, long-term financing obligations, income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle per common share and cash dividends declared per common share for each of the five fiscal years in the period ended June 30, 1997, set forth under the caption "Selected Financial and Operating Data" on page 23 of the fiscal 1997 Annual Report are incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 25 - 31 of the fiscal 1997 Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- Not required for fiscal 1997 because the Company's market capitalization was less than $2.5 billion as of January 28, 1997. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The following consolidated financial statements of the registrant and report of independent accountants set forth on pages 32 - 43 of the fiscal 1997 Annual Report are incorporated herein by reference: Consolidated Statements of Operations - Years ended June 30, 1997, 1996 and 1995 Consolidated Balance Sheets - June 30, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants The supplementary data regarding quarterly results of operations set forth in Note P of Notes to Consolidated Financial Statements on pages 41 and 42 of the fiscal 1997 Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None 26 PART III Information required by Items 10, 11, 12 and 13 is contained in the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual Meeting of Stockholders to he held in November 1997, which will be filed within 120 days after the close of the registrant's fiscal year ended June 30, 1997, and is incorporated herein by reference. Information regarding executive officers is contained on pages 24 and 25 of this Form 10-K Report. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - ------------------------------------------------------------------------- (a) Certain Documents Filed as Part of the Form 10-K Financial Statements of the registrant and report of independent accountants following as set forth under Item 8 of this Form 10-K Report and which have been incorporated by reference from pages 32 - 43 of the fiscal 1997 Annual Report: Consolidated Statements of Operations - Years ended June 30, 1997, 1996 and 1995 Consolidated Balance Sheets - June 30, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended June 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants Financial Statement Schedule of the registrant not included in the fiscal 1997 Annual Report but filed herewith: Page ---- Report of Independent Accountants on Financial Statement Schedule 39 Schedule II - Valuation and Qualifying Accounts 40 (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the fourth quarter of fiscal 1997. (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 from the Company's annual report on Form 10-K for the year ended June 30, 1995 (the "1995 Form 10-K")) 3.2 Restated bylaws of the Company (incorporated by reference to Exhibit 3.2 from the Company's annual report on Form 10-K for the year ended June 30, 1994 (the "1994 Form 10-K")) 10.1 Stock Incentive Plan *a Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 from the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1997 (the "Third Quarter 1997 Form 10-Q")) *b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock Options which may be granted under the Plan *c Form of Incentive Stock Option Agreement for Incentive Stock Option granted under the Plan *d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (items (b), (c) and (d) incorporated by reference to Exhibits 4.3, 4.4 and 4.5, respectively, from the Company's Registration Statement No. 33- 58145 on Form S-8 dated March 20, 1995) *e Form of Section 162(m) Restricted Stock Agreement for Section 162(m) Restricted Stock issued under the Plan *10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.2 from the Third Quarter 1997 Form 10-Q) 27 10.3 Playboy Magazine Printing and Binding Agreements a May 15, 1990 agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. regarding printing of Playboy Magazine b Letter agreement dated April 11, 1990 between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1995 Form 10-K) c First Amendment dated August 15, 1996 to May 15, 1990 agreement (incorporated by reference to Exhibit 10.3(c) from the Company's annual report on Form 10-K for the year ended June 30, 1996 (the "1996 Form 10-K")) 10.4 Playboy Magazine Distribution Agreement dated as of May 27, 1997 between Playboy Enterprises, Inc. and Warner Publisher Services, Inc. 10.5 Playboy Magazine Subscription Fulfillment Agreement a July 1, 1987 agreement between Communication Data Services, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.12(a) from the Company's annual report on Form 10-K for the year ended June 30, 1992 (the "1992 Form 10-K")) b Amendment dated as of June 1, 1988 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(b) from the Company's annual report on Form 10-K for the year ended June 30, 1993 (the "1993 Form 10-K")) c Amendment dated as of July 1, 1990 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(c) from the Company's annual report on Form 10-K for the year ended June 30, 1991 (the "1991 Form 10-K")) d Amendment dated as of July 1, 1996 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.5(d) from the 1996 Form 10- K) 10.6 Transponder Lease Agreement dated as of December 31, 1992 between Playboy Entertainment Group, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.3 from the Company's quarterly report on Form 10-Q for the quarter ended December 31, 1992 (the "Second Quarter 1993 Form 10-Q")) 10.7 Distribution License to Exploit Home Video Rights effective October 1, 1991 between Playboy Video Enterprises, Inc. and Uni Distribution Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form 10-K) 10.8 Distribution Agreement between Playboy Entertainment Group, Inc. and Universal Music & Video Distribution (formerly Uni Distribution Corp.) regarding licensing and sale of domestic home video product a Agreement dated as of March 24, 1995 (incorporated by reference to Exhibit 10.8 from the 1995 Form 10-K) b Amendment to March 24, 1995 agreement dated February 28, 1997 (incorporated by reference to Exhibit 10.6 from the Third Quarter 1997 Form 10-Q) 10.9 Agreements effective November 1, 1995 between Playboy Entertainment Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and Playboy TV/Benelux Limited regarding the establishment of a Playboy TV pay television service in the United Kingdom (incorporated by reference to Exhibit 10.9 from the 1996 Form 10-K) 10.10 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha Film Corporation regarding the establishment of a Playboy TV pay television service in Japan a Memorandum of Agreement and Amendment dated July 31, 1995 b Amendment to July 31, 1995 agreement dated March 26, 1996 (items (a) and (b) incorporated by reference to Exhibits 10.10(a) and (b), respectively, from the 1996 Form 10-K) 10.11 Agreements between Playboy Entertainment Group, Inc. and Bloomfield Mercantile Inc. related to establishing international networks in Latin America, Spain and Portugal #a Agreement outline as of March 29, 1996 #b Letter agreement dated January 13, 1997 (items (a) and (b) incorporated by reference to Exhibits 10.4(a) and (b), respectively, from the Third Quarter 1997 Form 10-Q) #10.12 Memorandum of Understanding as of February 26, 1997 between Playboy Entertainment Group, Inc. and Daewoo Corporation related to establishing international networks in South Korea (incorporated by reference to Exhibit 10.5 from the Third Quarter 1997 Form 10-Q) 10.13 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide and TVN regarding distribution and services related to the AdulTVision pay television service (incorporated by reference to Exhibit 10.11 from the 1996 Form 10-K) 28 10.14 Distribution Agreement between Playboy Entertainment Group, Inc. and Orion Home Video regarding the distribution of certain home video programs and product a Agreement dated June 27, 1996 (incorporated by reference to Exhibit 10.12 from the 1996 Form 10-K) b Amendment to June 27, 1996 agreement dated July 29, 1996 (incorporated by reference to Exhibit 10.7 from the Third Quarter 1997 Form 10-Q) 10.15 Affiliation Agreement between Playboy Entertainment Group, Inc. and DirecTV regarding the satellite distribution of Playboy TV a Agreement dated November 15, 1993 b First Amendment to November 15, 1993 agreement dated as of April 19, 1994 c Second Amendment to November 15, 1993 agreement dated as of July 26, 1995 (items (a), (b) and (c) incorporated by reference to Exhibits 10.13(a), (b) and (c), respectively, from the 1996 Form 10-K) 10.16 Affiliation Agreement dated February 29, 1996 between Playboy Entertainment Group, Inc. and PrimeStar Partners, L.P. regarding the satellite distribution of Playboy TV (incorporated by reference to Exhibit 10.14 from the 1996 Form 10-K) 10.17 Warner Home Video/Critics' Choice Direct Marketing License Agreements a Agreement dated February 22, 1994 regarding purchase of Turner product b Agreement dated February 22, 1994 regarding purchase of non-Turner product (items (a) and (b) incorporated by reference to Exhibits 10.10 and 10.11, respectively, from the 1995 Form 10-K) c Agreement dated June 28, 1996 regarding purchase of Turner and non-Turner product (incorporated by reference to Exhibit 10.15(c) from the 1996 Form 10-K) 10.18 Product License Agreements between Playboy Enterprises, Inc. and Chaifa Investment, Limited a Agreement dated September 26, 1989 related to the Hong Kong territory b Agreement dated March 4, 1991 related to the People's Republic of China territory c Amendment dated July 21, 1992 related to the March 4, 1991 agreement d Amendment dated August 17, 1993 related to the agreements dated September 26, 1989 and March 4, 1991 e Amendment dated January 23, 1996 related to the agreements dated September 26, 1989 and March 4, 1991 (items (a) through (e) incorporated by reference to Exhibits 10.16(a) through (e), respectively, from the 1996 Form 10-K) f Amendment dated May 12, 1997 related to the agreements dated September 26, 1989 and March 4, 1991 10.19 Revolving Line of Credit a Credit Agreement dated as of February 10, 1995 by and among Playboy Enterprises, Inc., Harris Trust and Savings Bank and LaSalle National Bank b First Amendment to February 10, 1995 Credit Agreement dated as of March 31, 1995 (items (a) and (b) incorporated by reference to Exhibits 10.12(a) and (b), respectively, from the 1995 Form 10-K) c Second Amendment to February 10, 1995 Credit Agreement dated as of March 5, 1996 (incorporated by reference to Exhibit 10.17(c) from the 1996 Form 10-K) d Third Amendment to February 10, 1995 Credit Agreement dated as of September 11, 1997 but effective as of July 8, 1997 10.20 Playboy Mansion West Lease Agreement, as amended, between Playboy Enterprises, Inc. and Hugh M. Hefner a Letter of Interpretation of Lease b Agreement of lease (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1991 Form 10-K) 10.21 Los Angeles Office Lease Documents a Office lease dated as of July 25, 1991 between Playboy Enterprises, Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to Exhibit 10.6(c) from the 1991 Form 10-K) b Amendment to July 25, 1991 lease dated June 26, 1996 c Amendment to July 25, 1991 lease dated September 12, 1996 (items (b) and (c) incorporated by reference to Exhibits 10.19(b) and (c), respectively, from the 1996 Form 10-K) 10.22 Chicago Office Lease Documents a Office Lease dated April 7, 1988 by and between Playboy Enterprises, Inc. and LaSalle National Bank as Trustee under Trust No. 112912 (incorporated by reference to Exhibit 10.7(a) from the 1993 Form 10- K) 29 b First Amendment to April 7, 1988 lease dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from the 1995 Form 10-K) c Second Amendment to April 7, 1988 lease dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from the Second Quarter 1993 Form 10-Q) d Third Amendment to April 7, 1988 lease dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) e Fourth Amendment to April 7, 1988 lease dated August 6, 1996 (incorporated by reference to Exhibit 10.20(e) from the 1996 Form 10-K) 10.23 New York Office Lease Agreement dated August 11, 1992 between Playboy Enterprises, Inc. and Lexington Building Co. (incorporated by reference to Exhibit 10.9(b) from the 1992 Form 10-K) 10.24 Itasca Warehouse Lease Documents - Teachers' Retirement System of the State of Illinois a Agreement dated as of October 20, 1992 between Teachers' Retirement System of the State of Illinois and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the Second Quarter 1993 Form 10-Q) b Lease termination agreement related to the October 20, 1992 lease agreement dated May 27, 1997 10.25 Itasca Warehouse Lease Documents - Centerpoint Properties Corporation a Agreement dated as of September 6, 1996 between Centerpoint Properties Corporation and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.23 from the 1996 Form 10-K) b Amendment to September 6, 1996 lease dated June 1, 1997 10.26 Selected Company Remunerative Plans *a Executive Protection Program dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) *b Deferred Compensation Plan for Employees effective October 1, 1992 *c Deferred Compensation Plan for Nonemployee Directors effective October 1, 1992 (items (b) and (c) incorporated by reference to Exhibits 10.2(g) and (h), respectively, from the 1992 Form 10-K) *d First Amendment to Deferred Compensation Plan for Employees effective December 31, 1993 (incorporated by reference to Exhibit 10.1(f) from the 1994 Form 10-K) *e Second Amendment to Deferred Compensation Plan for Employees effective April 1, 1996 *f First Amendment to Deferred Compensation Plan for Nonemployee Directors effective April 1, 1996 (items (e) and (f) incorporated by reference to Exhibits 10.24(g) and (h), respectively, from the 1996 Form 10-K) *g Third Amendment to Deferred Compensation Plan for Employees effective July 1, 1997 *h Second Amendment to Deferred Compensation Plan for Nonemployee Directors effective July 1, 1997 10.27 Selected Employment, Termination and Other Agreements *a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For Key Employees (the "1989 Option Plan") (incorporated by reference to Exhibit 10.4(mm) from the 1991 Form 10-K) *b Playboy Enterprises, Inc. 1989 Stock Option Agreement *c Letter dated July 18, 1990 pursuant to the June 7, 1990 recapitalization regarding adjustment of options (items (b) and (c) incorporated by reference to Exhibits 10.19(c) and (d), respectively, from the 1995 Form 10-K) *d Consent and Amendment regarding the 1989 Option Plan *e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors, as amended *f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement for Non-Employee Directors (items (d), (e) and (f) incorporated by reference to Exhibits 10.4(aa), (rr) and (nn), respectively, from the 1991 Form 10-K) *g Playboy Enterprises, Inc. Severance Agreement (incorporated by reference to Exhibit 10.4(vv) from the 1991 Form 10-K) *h Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.4(bbb) from the 1992 Form 10-K) *i Amendment dated August 15, 1996 regarding the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.25(i) from the 1996 Form 10-K) *j Agreement dated October 16, 1996 amending the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn 30 *k Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn (items (j) and (k) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the Third Quarter 1997 Form 10-Q) *l Letter Agreement dated February 26, 1993 regarding Special Incentive Compensation Plan for Herb Laney *m Memorandum dated May 1, 1996 regarding extension of Special Incentive Compensation Plan for Herb Laney dated February 26, 1993 (items (l) and (m) incorporated by reference to Exhibits 10.25(j) and (k), respectively, from the 1996 Form 10-K) *n Memorandum dated October 11, 1996 regarding special compensation plan for Herb Laney *o Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M. Laney *p Employment Agreement dated April 7, 1997 between Playboy Enterprises, Inc. and Marianne Howatson *q Letter Agreement dated April 18, 1997 regarding employment of Linda Havard (items (n) through (q) incorporated by reference to Exhibits 10.3(c) through (f), respectively, from the Third Quarter 1997 Form 10-Q) *r Letter Agreement dated September 6, 1996 regarding employment of Bob Perkins *s Letter Agreement dated September 4, 1997 regarding Anthony J. Lynn's waiver of fiscal 1998 base salary increase *10.28 Form of Nonqualified Option Agreement between Playboy Enterprises, Inc. and each of Dennis S. Bookshester and Sol Rosenthal (incorporated by reference to Exhibit 4.4 from the Company's Registration Statement No. 333-30185 on Form S-8 dated November 13, 1996) 11 Computation of Net Income Per Share 13 Annual Report to Security Holders Herewith filed as an exhibit only with respect to the parts incorporated by reference in this Form 10-K. The report, except for portions expressly incorporated by reference, is furnished for the information of the Commission only and is not to be deemed "filed" as part of the filing. 21 Subsidiaries 23 Consent of Independent Public Accountants 27 Financial Data Schedule ______ * Indicates management compensation plan # Certain information omitted pursuant to a request for confidential treatment filed separately with and granted by the Securities and Exchange Commission (d) Financial Statement Schedules See Item 14(a) above 31 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. September 23, 1997 By /s/ Linda G. Havard ----------------------------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Christie Hefner September 20, 1997 - --------------------------------------- Christie Hefner Chairman of the Board, Chief Executive Officer and Director /s/Richard S. Rosenzweig September 22, 1997 - --------------------------------------- Richard S. Rosenzweig Executive Vice President and Director /s/Dennis S. Bookshester September 20, 1997 - --------------------------------------- Dennis S. Bookshester Director /s/David I. Chemerow September 21, 1997 - --------------------------------------- David I. Chemerow Director /s/Donald G. Drapkin September 19, 1997 - --------------------------------------- Donald G. Drapkin Director /s/Sol Rosenthal September 22, 1997 - --------------------------------------- Sol Rosenthal Director /s/Sir Brian Wolfson September 24, 1997 - --------------------------------------- Sir Brian Wolfson Director /s/Linda G. Havard September 23, 1997 - --------------------------------------- Linda G. Havard Executive Vice President, Finance and Operations, and Chief Financial Officer 32 EXHIBIT INDEX ------------- All agreements listed below may have additional exhibits which are not attached. All such exhibits are available upon request, provided the requesting party shall pay a fee for copies of such exhibits, which fee shall be limited to the Company's reasonable expenses incurred in furnishing these documents.
Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 from the 1995 Form 10-K) 3.2 Restated bylaws of the Company (incorporated by reference to Exhibit 3.2 from the 1994 Form 10-K) 10.1 Stock Incentive Plan *a Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 from the Third Quarter 1997 Form 10-Q) *b Form of Non-Qualified Stock Option Agreement for Non-Qualified Stock Options which may be granted under the Plan *c Form of Incentive Stock Option Agreement for Incentive Stock Option granted under the Plan *d Form of Restricted Stock Agreement for Restricted Stock issued under the Plan (items (b), (c) and (d) incorporated by reference to Exhibits 4.3, 4.4 and 4.5, respectively, from the Company's Registration Statement No. 33- 58145 on Form S-8 dated March 20, 1995) *@e Form of 162(m) Restricted Stock Agreement for Section 162(m) Restricted Stock issued under the Plan 41-50 *10.2 Playboy Enterprises, Inc. Employee Stock Purchase Plan, as amended and restated (incorporated by reference to Exhibit 10.2 from the Third Quarter 1997 Form 10-Q) 10.3 Playboy Magazine Printing and Binding Agreements a May 15, 1990 agreement between Playboy Enterprises, Inc. and Quad/Graphics, Inc. regarding printing of Playboy Magazine b Letter agreement dated April 11, 1990 between Playboy Enterprises, Inc. and Quad/Graphics, Inc. (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1995 Form 10-K) c First Amendment dated August 15, 1996 to May 15, 1990 agreement (incorporated by reference to Exhibit 10.3(c) from the 1996 Form 10- K) @10.4 Playboy Magazine Distribution Agreement dated as of May 27, 1997 between Playboy Enterprises, Inc. and Warner Publisher Services, Inc. 51-80 10.5 Playboy Magazine Subscription Fulfillment Agreement a July 1, 1987 agreement between Communication Data Services, Inc. and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.12(a) from the 1992 Form 10-K) b Amendment dated as of June 1, 1988 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(b) from the 1993 Form 10-K) c Amendment dated as of July 1, 1990 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.12(c) from the 1991 Form 10-K) d Amendment dated as of July 1, 1996 to said Fulfillment Agreement (incorporated by reference to Exhibit 10.5(d) from the 1996 Form 10- K)
33 10.6 Transponder Lease Agreement dated as of December 31, 1992 between Playboy Entertainment Group, Inc. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.3 from the Second Quarter 1993 Form 10-Q) 10.7 Distribution License to Exploit Home Video Rights effective October 1, 1991 between Playboy Video Enterprises, Inc. and Uni Distribution Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form 10-K) 10.8 Distribution Agreement between Playboy Entertainment Group, Inc. and Universal Music & Video Distribution (formerly Uni Distribution Corp.) regarding licensing and sale of domestic home video product a Agreement dated as of March 24, 1995 (incorporated by reference to Exhibit 10.8 from the 1995 Form 10-K) b Amendment to March 24, 1995 agreement dated February 28, 1997 (incorporated by reference to Exhibit 10.6 from the Third Quarter 1997 Form 10-Q) 10.9 Agreements effective November 1, 1995 between Playboy Entertainment Group, Inc., Continental Shelf 16 Limited, Precis (1378) Limited and Playboy TV/Benelux Limited regarding the establishment of a Playboy TV pay television service in the United Kingdom (incorporated by reference to Exhibit 10.9 from the 1996 Form 10-K) 10.10 Agreements between Playboy Entertainment Group, Inc. and Tohokushinsha Film Corporation regarding the establishment of a Playboy TV pay television service in Japan a Memorandum of Agreement and Amendment dated July 31, 1995 b Amendment to July 31, 1995 agreement dated March 26, 1996 (items (a) and (b) incorporated by reference to Exhibits 10.10(a) and (b), respectively, from the 1996 Form 10-K) 10.11 Agreements between Playboy Entertainment Group, Inc. and Bloomfield Mercantile Inc. related to establishing international networks in Latin America, Spain and Portugal #a Agreement outline as of March 29, 1996 #b Letter agreement dated January 13, 1997 (items (a) and (b) incorporated by reference to Exhibits 10.4(a) and (b), respectively, from the Third Quarter 1997 Form 10-Q) #10.12 Memorandum of Understanding as of February 26, 1997 between Playboy Entertainment Group, Inc. and Daewoo Corporation related to establishing international networks in South Korea (incorporated by reference to Exhibit 10.5 from the Third Quarter 1997 Form 10-Q) 10.13 Deal Memorandum dated June 22, 1995 between Playboy Networks Worldwide and TVN regarding distribution and services related to the AdulTVision pay television service (incorporated by reference to Exhibit 10.11 from the 1996 Form 10-K) 10.14 Distribution Agreement between Playboy Entertainment Group, Inc. and Orion Home Video regarding the distribution of certain home video programs and product a Agreement dated June 27, 1996 (incorporated by reference to Exhibit 10.12 from the 1996 Form 10-K) b Amendment to June 27, 1996 agreement dated July 29, 1996 (incorporated by reference to Exhibit 10.7 from the Third Quarter 1997 Form 10-Q)
34 10.15 Affiliation Agreement between Playboy Entertainment Group, Inc. and DirecTV regarding the satellite distribution of Playboy TV a Agreement dated November 15, 1993 b First Amendment to November 15, 1993 agreement dated as of April 19, 1994 c Second Amendment to November 15, 1993 agreement dated as of July 26, 1995 (items (a), (b) and (c) incorporated by reference to Exhibits 10.13(a), (b) and (c), respectively, from the 1996 Form 10-K) 10.16 Affiliation Agreement dated February 29, 1996 between Playboy Entertainment Group, Inc. and PrimeStar Partners, L.P. regarding the satellite distribution of Playboy TV (incorporated by reference to Exhibit 10.14 from the 1996 Form 10-K) 10.17 Warner Home Video/Critics' Choice Direct Marketing License Agreements a Agreement dated February 22, 1994 regarding purchase of Turner product b Agreement dated February 22, 1994 regarding purchase of non-Turner product (items (a) and (b) incorporated by reference to Exhibits 10.10 and 10.11, respectively, from the 1995 Form 10-K) c Agreement dated June 28, 1996 regarding purchase of Turner and non- Turner product (incorporated by reference to Exhibit 10.15(c) from the 1996 Form 10-K) 10.18 Product License Agreements between Playboy Enterprises, Inc. and Chaifa Investment, Limited a Agreement dated September 26, 1989 related to the Hong Kong territory b Agreement dated March 4, 1991 related to the People's Republic of China territory c Amendment dated July 21, 1992 related to the March 4, 1991 agreement d Amendment dated August 17, 1993 related to the agreements dated September 26, 1989 and March 4, 1991 e Amendment dated January 23, 1996 related to the agreements dated September 26, 1989 and March 4, 1991 (items (a) through (e) incorporated by reference to Exhibits 10.16(a) through (e), respectively, from the 1996 Form 10-K) @f Amendment dated May 12, 1997 related to the agreements dated September 26, 1989 and March 4, 1991 81-82 10.19 Revolving Line of Credit a Credit Agreement dated as of February 10, 1995 by and among Playboy Enterprises, Inc., Harris Trust and Savings Bank and LaSalle National Bank b First Amendment to February 10, 1995 Credit Agreement dated as of March 31, 1995 (items (a) and (b) incorporated by reference to Exhibits 10.12(a) and (b), respectively, from the 1995 Form 10-K) c Second Amendment to February 10, 1995 Credit Agreement dated as of March 5, 1996 (incorporated by reference to Exhibit 10.17(c) from the 1996 Form 10-K) @d Third Amendment to February 10, 1995 Credit Agreement dated as of September 11, 1997 but effective as of July 8, 1997 83-85 10.20 Playboy Mansion West Lease Agreement, as amended, between Playboy Enterprises, Inc. and Hugh M. Hefner a Letter of Interpretation of Lease b Agreement of lease (items (a) and (b) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the 1991 Form 10-K)
35 10.21 Los Angeles Office Lease Documents a Office lease dated as of July 25, 1991 between Playboy Enterprises, Inc. and Beverly Mercedes Place, Ltd. (incorporated by reference to Exhibit 10.6(c) from the 1991 Form 10-K) b Amendment to July 25, 1991 lease dated June 26, 1996 c Amendment to July 25, 1991 lease dated September 12, 1996 (items (b) and (c) incorporated by reference to Exhibits 10.19(b) and (c), respectively, from the 1996 Form 10-K) 10.22 Chicago Office Lease Documents a Office Lease dated April 7, 1988 by and between Playboy Enterprises, Inc. and LaSalle National Bank as Trustee under Trust No. 112912 (incorporated by reference to Exhibit 10.7(a) from the 1993 Form 10- K) b First Amendment to April 7, 1988 lease dated October 26, 1989 (incorporated by reference to Exhibit 10.15(b) from the 1995 Form 10-K) c Second Amendment to April 7, 1988 lease dated June 1, 1992 (incorporated by reference to Exhibit 10.1 from the Second Quarter 1993 Form 10-Q) d Third Amendment to April 7, 1988 lease dated August 30, 1993 (incorporated by reference to Exhibit 10.15(d) from the 1995 Form 10-K) e Fourth Amendment to April 7, 1988 lease dated August 6, 1996 (incorporated by reference to Exhibit 10.20(e) from the 1996 Form 10-K) 10.23 New York Office Lease Agreement dated August 11, 1992 between Playboy Enterprises, Inc. and Lexington Building Co. (incorporated by reference to Exhibit 10.9(b) from the 1992 Form 10-K) 10.24 Itasca Warehouse Lease Documents - Teachers' Retirement System of the State of Illinois a Agreement dated as of October 20, 1992 between Teachers' Retirement System of the State of Illinois and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.4 from the Second Quarter 1993 Form 10-Q) @b Lease termination agreement related to the October 20, 1992 lease agreement dated May 27, 1997 86-88 10.25 Itasca Warehouse Lease Documents - Centerpoint Properties Corporation a Agreement dated as of September 6, 1996 between Centerpoint Properties Corporation and Playboy Enterprises, Inc. (incorporated by reference to Exhibit 10.23 from the 1996 Form 10-K) @b Amendment to September 6, 1996 lease dated June 1, 1997 89-91 10.26 Selected Company Remunerative Plans *a Executive Protection Program dated March 1, 1990 (incorporated by reference to Exhibit 10.18(c) from the 1995 Form 10-K) *b Deferred Compensation Plan for Employees effective October 1, 1992 *c Deferred Compensation Plan for Nonemployee Directors effective October 1, 1992 (items (b) and (c) incorporated by reference to Exhibits 10.2(g) and (h), respectively, from the 1992 Form 10-K) *d First Amendment to Deferred Compensation Plan for Employees effective December 31, 1993 (incorporated by reference to Exhibit 10.1(f) from the 1994 Form 10-K) *e Second Amendment to Deferred Compensation Plan for Employees effective April 1, 1996
36 *f First Amendment to Deferred Compensation Plan for Nonemployee Directors effective April 1, 1996 (items (e) and (f) incorporated by reference to Exhibits 10.24(g) and (h), respectively, from the 1996 Form 10-K) *@g Third Amendment to Deferred Compensation Plan for Employees effective July 1, 1997 92-94 *@h Second Amendment to Deferred Compensation Plan for Nonemployee Directors effective July 1, 1997 95 10.27 Selected Employment, Termination and Other Agreements *a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended, For Key Employees (the "1989 Option Plan") (incorporated by reference to Exhibit 10.4(mm) from the 1991 Form 10-K) *b Playboy Enterprises, Inc. 1989 Stock Option Agreement *c Letter dated July 18, 1990 pursuant to the June 7, 1990 recapitalization regarding adjustment of options (items (b) and (c) incorporated by reference to Exhibits 10.19(c) and (d), respectively, from the 1995 Form 10-K) *d Consent and Amendment regarding the 1989 Option Plan *e Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors, as amended *f Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Agreement for Non-Employee Directors (items (d), (e) and (f) incorporated by reference to Exhibits 10.4(aa), (rr) and (nn), respectively, from the 1991 Form 10-K) *g Playboy Enterprises, Inc. Severance Agreement (incorporated by reference to Exhibit 10.4(vv) from the 1991 Form 10-K) *h Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.4(bbb) from the 1992 Form 10-K) *i Amendment dated August 15, 1996 regarding the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn (incorporated by reference to Exhibit 10.25(i) from the 1996 Form 10-K) *j Agreement dated October 16, 1996 amending the Employment Agreement dated May 21, 1992 between Playboy Enterprises, Inc. and Anthony J. Lynn *k Playboy Enterprises, Inc. Incentive Compensation Plan for Anthony J. Lynn (items (j) and (k) incorporated by reference to Exhibits 10.3(a) and (b), respectively, from the Third Quarter 1997 Form 10-Q) *l Letter Agreement dated February 26, 1993 regarding Special Incentive Compensation Plan for Herb Laney *m Memorandum dated May 1, 1996 regarding extension of Special Incentive Compensation Plan for Herb Laney dated February 26, 1993 (items (l) and (m) incorporated by reference to Exhibits 10.25(j) and (k), respectively, from the 1996 Form 10-K) *n Memorandum dated October 11, 1996 regarding special compensation plan for Herb Laney *o Playboy Enterprises, Inc. Incentive Compensation Plan for Herbert M. Laney *p Employment Agreement dated April 7, 1997 between Playboy Enterprises, Inc. and Marianne Howatson *q Letter Agreement dated April 18, 1997 regarding employment of Linda Havard (items (n) through (q) incorporated by reference to Exhibits 10.3(c) through (f), respectively, from the Third Quarter 1997 Form 10-Q) *@r Letter Agreement dated September 6, 1996 regarding employment of Bob Perkins 96-98 *@s Letter Agreement dated September 4, 1997 regarding Anthony J. Lynn's waiver of fiscal 1998 base salary increase 99
37 *10.28 Form of Nonqualified Option Agreement between Playboy Enterprises, Inc. and each of Dennis S. Bookshester and Sol Rosenthal (incorporated by reference to Exhibit 4.4 from the Company's Registration Statement No. 333-30185 on Form S-8 dated November 13, 1996) @11 Computation of Net Income Per Share 100 @13 Annual Report to Security Holders 101-122 Herewith filed as an exhibit only with respect to the parts incorporated by reference in this Form 10-K. The report, except for portions expressly incorporated by reference, is furnished for the information of the Commission only and is not to be deemed "filed" as part of the filing. @21 Subsidiaries 123 @23 Consent of Independent Public Accountants 124 @27 Financial Data Schedule 125
_________________ * Indicates management compensation plan # Certain information omitted pursuant to a request for confidential treatment filed separately with and granted by the Securities and Exchange Commission @ Filed herewith 38 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- ON FINANCIAL STATEMENT SCHEDULES -------------------------------- To the Shareholders and Board of Directors Playboy Enterprises, Inc. Our report on the consolidated financial statements of Playboy Enterprises, Inc. and its Subsidiaries has been incorporated by reference in this Form 10-K from page 43 of the fiscal 1997 Annual Report to Shareholders of Playboy Enterprises, Inc. and its Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 27 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Chicago, Illinois August 5, 1997 39 PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS)
========================================================================================================== COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------------------------------------------------------------------------------------- Additions ---------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Description of Period Expenses Accounts Deductions of Period - ------------------------------- ---------- ---------- ---------- ---------- ---------- Allowance deducted in the balance sheet from the asset to which it applies: Year ended June 30, 1997: Allowance for doubtful accounts $ 3,009 $ 1,241 $ 1,522(a) $ 1,890(b) $ 3,882 ========== ========== ======== ========== ========= Allowance for returns $ 21,939 $ - $ 64,197(c) $ 63,389(d) $ 22,747 ========== ========== ======== ========== ========= Year ended June 30, 1996: Allowance for doubtful accounts $ 4,837 $ 504 $ 1,632(a) $ 3,964(b) $ 3,009 ========== ========== ======== ========== ========= Allowance for returns $ 20,952 $ - $ 59,718(c) $ 58,731(d) $ 21,939 ========== ========== ======== ========== ========= Year ended June 30, 1995: Allowance for doubtful accounts $ 3,155 $ 1,709 $ 2,042(a) $ 2,069(b) $ 4,837 ========== ========== ======== ========== ========= Allowance for returns $ 18,612 $ - $ 57,057(c) $ 54,717(d) $ 20,952 ========== ========== ======== ========== =========
Notes: (a) Represents provisions for unpaid subscriptions charged to net revenues. Also included in fiscal 1996 amount was $98 related to the consolidation of the VIPress Poland Sp. z o.o. balance at the acquisition date in March 1996. (b) Represents uncollectible accounts less recoveries. (c) Represents provisions charged to net revenues for estimated returns of Playboy magazine, other domestic publishing products and domestic home videos. (d) Represents settlements on provisions previously recorded. 40 EX-10.1(E) 2 FORM OF 162(M) RESTRICTED STOCK AGREEMENT EXHIBIT 10.1 (e) PLAYBOY ENTERPRISES, INC. SECTION 162(m) RESTRICTED STOCK AGREEMENT ----------------------------------------- THIS SECTION 162(m) RESTRICTED STOCK AGREEMENT (the "Agreement"), dated _______ (the "Award Date"), is made by and between PLAYBOY ENTERPRISES, INC., a Delaware corporation (the Company"), and __________, an employee of the Company or a Subsidiary (the "Employee"): WHEREAS, the Company has established the Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan (the "Plan"); and WHEREAS, the Company wishes to carry out the Plan (the terms of which are hereby incorporated by reference and made a part of this Agreement, and which shall control in the event of any inconsistency between this Agreement and the Plan or any interpretation of this Agreement); and WHEREAS, the Plan provides for the issuance of shares of the Company's Common Stock (as defined hereunder), subject to certain restrictions thereon (hereinafter referred to as "Section 162(m) Restricted Stock"; and WHEREAS, the Compensation Committee of the Company's Board of Directors (the "Committee"), appointed to administer the Plan, has determined that it would be in the best interest of the Company to issue the shares of Section 162(m) Restricted Stock provided for herein to the Employee in partial consideration of past services to the Company and/or its Subsidiaries and to provide further incentives for performance and continued service during the vesting periods provided herein, and has advised the Company thereof and instructed the undersigned Officers (as defined hereunder) to issue said Section 162(m) Restricted Stock; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS ----------- Whenever the following terms are used below in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan. Section 1.1 - Change of Control - ----------- ----------------- "Change of Control" shall mean the occurrence of any of the following events: (i) except in a transaction described in clause (iii) below, Hugh M. Hefner, Christie Hefner, the Hugh M. Hefner 1991 Trust (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee), and the Hugh M. Hefner Foundation (for so long as Hugh M. Hefner and Christie Hefner are joint trustees or one of them is sole trustee) cease collectively to own a majority of the total number of votes that may be cast for the election of directors of the Company; or (ii) a sale of Playboy ------- magazine by the Company; or (iii) the liquidation or dissolution of the Company, or any merger, consolidation or other reorganization involving the Company unless (x) the merger, consolidation or other reorganization is initiated by the Company, and (y) is one in which the stockholders of the Company immediately prior to such reorganization become the majority stockholders of a successor or ultimate parent corporation of the Company resulting from such reorganization and (z) in connection with such event, provision is made for an assumption of outstanding Options and rights or a substitution thereof of a new Option or right in such successor or ultimate parent of substantially equivalent value. SECTION 1.2 - Common Stock - ----------- ------------ "Common stock" shall mean the Class B Common Stock, par value $.01 per share, of the Company. Section 1.3 - Exchange Act - ----------- ------------ "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. Section 1.4 - Plan - ----------- ---- "Plan" shall mean the Amended and Restated Playboy Enterprises, Inc. 1995 Stock Incentive Plan. Sections 1.5 - RESTRICTIONS - ------------ ----------- "Restrictions" shall mean the transferability restrictions imposed upon Section 162(m) Restricted Stock under this Agreement. Section 1.6 - Rule 16b-3 - ----------- ---------- "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended in the future. 2 Section 1.7 - Secretary - ----------- --------- "Secretary" shall mean the Secretary of the Company. Section 1.8 - Section 162(m) Restricted Stock - ----------- ------------------------------- "Section 162(m) Restricted Stock" shall mean Common Stock of the Company issued under this Agreement and subject to the Restrictions imposed hereunder. Section 1.9 - Securities Act - ----------- -------------- "Securities Act" shall mean the Securities Act of 1933, as amended. Section 1.10 - Termination of Employment - ----------- ------------------------- "Termination of Employment" shall mean the time when the employee-employer relationship between the Section 162(m) Restricted Stockholder and the Company or any Subsidiary is terminated, voluntarily or involuntarily, for any reason, with or without Cause (as defined below), including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement, but excluding any termination where there is simultaneous reemployment by the Company or a Subsidiary. The Committee, subject to the definition of Cause below, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether particular leaves of absence constitute Terminations of Employment. For purposes of the Plan, "Cause" shall mean an Employee's (a) gross negligence in the performance of the responsibilities of such Employee's office or position; (b) any act of dishonesty or moral turpitude materially adversely affecting the Company or the Company's reputation; (c) commission of any other willful or intentional act that could reasonably be expected to injure materially the reputation, business or business relationships of the Company or any Subsidiary; or (d) conviction of a felony or of any crime involving moral turpitude, fraud or misrepresentation. Section 1.11 - Vested Stock - ------------ ------------ "Vested Stock" shall mean Section 162(m) Restricted Stock with respect to which the Employee has satisfied the performance vesting standards of the Agreement as specified in Article III. ARTICLE II ISSUANCE OF SECTION 162(m) RESTRICTED STOCK ------------------------------------------- Section 2.1 - Issuance of Section 162(m) Restricted Stock - ----------- ------------------------------------------- In consideration for past services rendered to the Company and for other good and valuable consideration which the Committee has determined to be equal to not less than 3 the par value of the Section 162(m) Restricted Stock issued hereunder, on October 1, 1996, the Company issued to the Employee 15,000 shares of its Class B Common Stock, par value $.01 per share, which have not vested as of the date hereof and which shall be subject to the terms, conditions and restrictions set forth in this Agreement. Section 2.2 - No Right to Continued Employment - ----------- -------------------------------- Nothing in this Agreement or in the Plan shall confer upon the Employee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company or any Subsidiary, which are hereby expressly reserved, to discharge the Employee at any time for any reason whatsoever, with or without Cause. ARTICLE III RESTRICTIONS ------------ Section 3.1 - Performance Criteria - ----------- -------------------- Performance Criteria have been established as a condition to vesting of the Section 162(m) Restricted Stock. The Performance Criteria are based on the Company's "Operating Income" as such term is used and determined by the Company for purposes of the Company's financial reports filed with the Securities and Exchange Commission under the Exchange Act. Operating Income will be measured before any unusual or "one-time" economic or accounting instances which would distort the actual Operating Income of the Company, identified as the Company's publicly reported "Operating Income Before One-Time Items." The Restrictions will lapse with respect to the specified number of shares of Section 162(m) Restricted Stock subject to this award, without duplication, on the second business day following the issuance by the Company's independent auditors of their audit report after the end of any fiscal year of the Company, beginning with the fiscal year ended June 30, 1997, during which Operating Income first equals or exceeds each of the following thresholds: Annual Operating Number of Shares ---------------- ---------------- Income Goal of Section 162(m) ----------- ----------------- ($million) Restricted Stock ---------- ---------------- 15.0 5,000 20.0 10,000 For example, if no Restrictions have yet lapsed, and the Company's Operating Income equals $16.0 million in a given year, the restrictions would lapse with respect to 5,000 shares of the Section 162(m) Restricted Stock. If in a subsequent fiscal year, Operating Income equals $21.0 million, the restrictions would lapse with respect to the additional 10,000 shares of the Section 162(m) Restricted Stock. 4 The lapse of the Restrictions shall be effective on the second business day following the issuance by the Company's independent auditors of their audit report with respect to the prior fiscal year. However, notwithstanding anything in this Agreement to the contrary, the lapse of the Restrictions shall be effective only after the Committee has certified in writing that performance goals specified in this Section 3.1 and any other material terms were satisfied. Section 3.2 - Right to Payment of Section 162(m) Restricted Stock - ------------ --------------------------------------------------- Upon issuance of an independent auditor's report with respect to each fiscal year, a determination will be made as to the amount of Section 162(m) Restricted Stock earned, if any, on the basis of the vesting guidelines in Section 3.1 and what Section 162(m) Restricted Stock has thereby become Vested Stock. Participants must be employed the Company or by a Subsidiary on the second business day following the issuance by the Company's independent auditors of their audit report with respect to such year in order to receive any Vested Stock. Unlegended stock certificates will be issued to participants only after the independent audit report confirms and the Committee has certified in writing that vesting requirements have been satisfied; pending such issuance, Section 162(m) Restricted Stock will be held in book entry form by the Company as custodian for the Employee. Unless the Secretary determines that certificates must be issued pursuant to applicable law or contractual obligations, Section 162(m) Restricted Stock shall not be issued to the Employee in certificated form. The Secretary of the Company shall establish book entry procedures sufficient to prevent unauthorized transfers of the Section 162(m) Restricted Stock. Section 3.3 - Legend - ----------- ------ The Secretary shall, or shall instruct the Company's transfer agent to, provide stop transfer instructions in the Company's stock records to prevent any transfer of the Section 162(m) Restricted Stock for any purpose until the stock is vested. Any certificate that the Secretary or the transfer agent deems necessary to issue to represent shares of Section 162(m) Restricted Stock shall, until all restrictions lapse and new certificates are issued pursuant to Section 3.4, bear the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN VESTING REQUIREMENTS AND MAY BE SUBJECT TO REACQUISITION BY THE COMPANY UNDER THE TERMS OF THAT CERTAIN SECTION 162(m) RESTRICTED STOCK AGREEMENT BY AND BETWEEN PLAYBOY ENTERPRISES, INC. (THE "COMPANY") AND THE HOLDER OF THE SECURITIES. PRIOR TO VESTING OF OWNERSHIP IN THE SECURITIES, THEY MAY NOT BE, DIRECTLY OR INDIRECTLY, OFFERED, TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNDER ANY CIRCUMSTANCES. COPIES OF THE ABOVE REFERENCED AGREEMENT ARE ON FILE AT THE OFFICES OF THE COMPANY AT 680 NORTH LAKE SHORE DRIVE, CHICAGO, IL 60611. 5 Section 3.4 - Lapse of Restrictions - ----------- --------------------- Upon the vesting of the shares of Section 162(m) Restricted Stock as provided in Sections 3.1 and 3.2 and subject to Sections 4.2 and 4.3, the Company shall cause new certificates to be issued with respect to such Vested Stock and delivered to the Employee or his legal representative, free from the legend provided for in Section 3.3 and any of the other Restrictions. Such Vested Stock shall thereupon cease to be considered Section 162(m) Restricted Stock subject to the terms and conditions of this Agreement. Section 3.5 - Section 162(m) Restricted Stock Not Transferable - ----------- ------------------------------------------------ Prior to the issuance of Vested Stock, no Section 162(m) Restricted Stock or any interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Employee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect. Section 3.6 - Termination of Employment - ----------- ------------------------- If there is a Termination of Employment for any reason, whether voluntarily or involuntarily, with or without Cause, by retirement or by reason of death or disability or otherwise, the Employee shall forfeit all unvested Section 162(m) Restricted Stock, and all Section 162(m) Restricted Stock shall on the effective date of such Termination of Employment, be immediately canceled and returned to the status of authorized and unissued Common Stock. If an Employee was employed on the last day of a fiscal year and there is a Termination of Employment of such Employee prior to the second business day following the issuance of an independent audit report that shows that Restrictions have lapsed with respect to any unvested Section 162(m) Restricted Stock, such Employee shall not receive (and shall forfeit all rights to) such Section 162(m) Restricted Stock. Section 3.7 - Change of Control - ----------- ----------------- Upon a Change of Control specified in clause (iii) of the definition thereof, any Section 162(m) Restricted Stock that has not vested shall be forfeited on the effective date of such Change of Control, and all Section 162(m) Restricted Stock shall, on the effective date of such Change of Control, be immediately canceled and returned to the status of authorized and unissued Common Stock; provided, however, that a Change of Control specified in clause (i) or (ii) of the definition thereof occurs, such Section 162(m) Restricted Stock shall remain outstanding, subject to any remaining Restrictions. Section 3.8 - Changes in Common Stock - ----------- ----------------------- In the event that the outstanding shares of the Company's Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the 6 Company pursuant to a recapitalization, reclassification, stock split-up, stock dividend, or other combination of shares or similar transaction, any new, additional or different shares or securities which are issued in the name of the Employee as a holder of Section 162(m) Restricted Stock shall be considered to be Section 162(m) Restricted Stock and shall be subject to all of the Restrictions. ARTICLE IV MISCELLANEOUS ------------- Section 4.1 - Administration - ------------ -------------- The Committee shall have the power to interpret the Plan, this Agreement and all other documents relating to Section 162(m) Restricted Stock and to adopt such rules for the administration, interpretation and application of the Plan as are consistent herewith and to interpret, amend or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or Section 162(m) Restricted Stock and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Internal Revenue Code of 1986, as amended, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Section 4.2 - Approval of Plan by Stockholders - ----------- -------------------------------- The Section 162(m) Restricted Stock will not vest prior to the approval of the Plan by the stockholders, and, if such approval has not been obtained 12 months after the date of the Board's adoption of the Plan, such Section 162(m) Restricted Stock shall thereupon be canceled and become null and void. Section 4.3 - Conditions to Issuance of Stock Certificates - ----------- -------------------------------------------- The Company shall not be required to issue or deliver any certificate or certificates for Vested Stock pursuant to this Agreement prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or Federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental 7 regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or Federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) Subject to the provisions of Section 4.8 the payment by the Employee of all amounts required to be withheld, under federal, state and local tax laws, with respect to the issuance of Section 162(m) Restricted Stock and/or the lapse or removal of any of the Restrictions; and (e) The lapse of such reasonable period of time as the Committee may establish from time to time for reasons of administrative convenience. Section 4.4 - Notices - ---------- ------- Any notice to be given under the terms of this Agreement will be by registered mail, return receipt requested and if to the Company shall be addressed in care of its Secretary at 680 N. Lake Shore Drive, Chicago, Illinois 60611, and any notice to be given to the Employee shall be addressed to the Employee at the address given beneath the Employee's signature hereto. By a notice given pursuant to this Section 4.4, either party may hereafter designate a different address for notices to be given to the Company or such Employee. Any notice which is required to be given to the Employee shall, if the Employee is then deceased, be given to the Employee's personal representative if such representative has previously informed the Company of such Employee's status and address by written notice under this Section 4.4. Any notice shall have been deemed duly given when received. Section 4.5 - Rights as Stockholder - ----------- --------------------- Upon issuance of the Section 162(m) Restricted Stock in the name of the Employee, the Employee shall have all the rights of a stockholder with respect to said shares including the right to receive all dividends and other distributions paid or made with respect to the shares. Section 4.6 - Titles - ----------- ------ Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. Section 4.7 - Amendment - ----------- --------- This Agreement may be amended only by a writing executed by the parties hereto which specifically states that it is amending this Agreement. 8 Section 4.8 - Tax Withholding - ----------- --------------- The Company's obligation (i) to issue or deliver to the Employee any certificate or certificates for Vested Stock or (ii) to pay to the Employee any dividends or make any distributions with respect to the Section 162(m) Restricted Stock, is expressly conditioned upon receipt from the Employee, on or prior to the date the same is required to be withheld, of: (a) Full payment (in cash or by check) of any amount that must be withheld by the Company for federal, state and/or local tax purposes; or (b) Subject to the Committee's consent and Section 4.8(c), full payment by delivery to the Company of unrestricted shares of the Company's Common Stock previously owned by the Employee duly endorsed for transfer to the Company by the Employee with an aggregate fair market value equal to the amount that must be withheld by the Company for federal, state and/or local tax purposes; or (c) With respect to the withholding obligation for shares of Section 162(m) Restricted Stock that become unrestricted shares of stock as of a certain date (the "Vesting Date"), subject to the Committee's consent and to the timing requirements set forth in this Section 4.8(c), full payment by retention by the Company of a portion of such shares of Section 162(m) Restricted Stock which become Vested Stock with an aggregate fair market value (determined as of the Vesting Date) equal to the amount that must be withheld by the Company for federal, state and/or local tax purposes; or (d) Subject to the Committee's consent, any combination of payments provided for in the foregoing subsections (a), (b) or (c). Section 4.9 - Governing Law - ---------- ------------- The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws. Section 4.10 - Prior Agreement - ------------ -------------- This Agreement supersedes and replaces all of Employee's rights and benefits under that certain Restricted Stock Agreement dated October 1, 1996 by and between the Company and the Employee (the "Prior Agreement"). From and after the date of this Agreement, the Prior Agreement shall be of no further force or effect. 9 IN WITNESS HEREOF, this Agreement has been executed and delivered by the parties hereto. PLAYBOY ENTERPRISES, INC. By _______________________ Its ______________________ _____________________________ _____________________________ _____________________________ Address _____________________________ Employee Tax I.D Number Section 162(m) Restricted Stock Issued: 15,000 shares Par Value of Stock: $.01 per share Date Issued: _________________ 10 EX-10.4 3 PLAYBOY MAGAZINE DISTRIBUTION AGREEMENT EXHIBIT 10.4 This agreement dated as of May 27, 1997 between Warner Publisher Services, Inc., a New York corporation (herein called "Warner") and Playboy Enterprises, Inc., a Delaware corporation (herein called "Publisher"), WITNESSETH: In consideration of the premises and of the mutual covenants and agreements herein set forth, the parties hereto hereby agree as follows: 1. Definitions ----------- As used in this agreement, the following terms shall have the following respective meanings: a. "Publication(s)" shall mean the English language United States edition of PLAYBOY Magazine, all PLAYBOY denominated magazine titles, including PLAYBOY Specials, PLAYBOY Presents, PLAYBOY Lingerie, PLAYBOY Private Collection and one-shots (as that term is generally understood in the publishing industry) and PLAYMATE wall and desk calendars. b. "Territory" shall mean the United States, its territories and possessions and Canada. c. "Printer's Completion Notice" shall mean a notice delivered to Warner and executed by the traffic manger shipping manager of the printer of each issue of the Publication(s) specifying the number of copies of the Publication(s) shipped in accordance with Warner's instructions. d. "Net Sales" shall mean [with respect to each issue of the Publication(s)] the number of copies of the Publication(s) specified in each Printer's Completion Notice (as the same may be modified or amended by additional information furnished by the printer or Publisher) less the number of copies of that issue of the Publication(s) returned to Warner pursuant to the provisions of paragraph 8. 1 e. "Cover Price" shall mean the suggested retail selling price of the Publication(s) (as specified by Publisher on the cover of each copy thereof), as the same may be increased or decreased by Publisher during the term of this agreement. f. (i) "Warner's Commission" shall mean a sum equal to a flat rate per net sale copy multiplied by all Net Sales of the Publications as follows: Flat Rate Per Net Sale Copy Warner's Commission --------------------------- ------------------- PLAYBOY Magazine Twelve (12) Cents $0.12 USD All other PLAYBOY Fifteen (15) Cents Publications $0.15 USD (ii) Except as provided in paragraph 1.f.(iii), a minimum commission of $46,200 per issue will apply for PLAYBOY Magazine. (iii) For issues with Net Sales less than 385,000 units and on sale after the loss of authorized status in any one of the following chains: AAFES Barnes & Noble Bookstar Bookstop Border's Circle K Cumberland Farms B. Dalton Nexcom or Waldenbooks, Warner's commission shall be the sum equal to 2.4% of the United States Cover Price of all Net Sales of PLAYBOY or the minimum commission of $46,200, whichever is lower. 2 g. "Wholesaler Discount" shall mean the discount off the cover price at which Warner bills wholesalers for copies of the Publication(s). h. "Gross Billings" shall mean the cover price, less the Wholesaler Discount, multiplied by the number of copies of the Publication(s) specified on a Printer's Completion Notice and less Warner's Commission with respect to such number of copies. i. "Final Billings" shall mean the cover price, less the Wholesaler Discount, multiplied by the Net Sales and less Warner's Commission. j. "On-Sale Date" shall mean the date (designated by Publisher) on which each issue of the Publication(s) is to be placed for initial sale at retail outlets. k. "Off-Sale Date" shall mean the date (designated by Publisher) for recall of issues of the Publication(s) from sale at retail outlets, provided, however, that the Off-Sale Date shall not be later than one (1) day prior to the On-Sale Date of the next succeeding issue of the Publication(s). 1. (i) "Term" shall mean the period commencing with the On-Sale Date of the August, 1997 issue of PLAYBOY Magazine and shall continue thereafter for a period of two (2) years, terminating on the Off-Sale Date of the July, 1999 issue of PLAYBOY Magazine, unless earlier terminated as hereinafter provided. (ii) Notwithstanding any termination of the Term, this agreement shall continue in full force and effect after the termination date for the purposes, and only for the purposes, of distributing the last issue of the Publication(s) and of handling and crediting returns of unsold copies and making payments, adjustments and credits, with respect to such termination date, until the same are completed, made and settled. 3 (iii) Publisher shall send Warner written notice of termination at least ninety (90) days prior to the end of the Term (the "Notice Date"). Warner shall have the right, upon the Notice Date, to suspend any further payments to Publisher relating to the Publication(s) in an amount not to exceed the total of (A) the "Overdraft" (as hereinafter defined) as reported on the last payment statement issued to Publisher pursuant to sub-paragraph 7.h. prior to the Notice Date and (B) the Overdraft as calculated by Warner based upon the sales performance statement last issued to Publisher pursuant to subparagraph 7.g. prior to the Notice Date. The total amount of the Overdrafts as calculated in accordance with (A) and (B) above, shall be recalculated for each payment and sales performance statement thereafter issued to Publisher until the parties are able to effect a final settlement hereunder, provided, however, the parties shall, in the event of such termination, effect final settlement hereunder not later than one hundred fifty (150) days after the Off-Sale Date of the last issue of PLAYBOY Magazine, flat or special, and not later than one hundred eighty (180) days after the Off-Sale Date of the last calendar distributed by Warner hereunder. (iv) The termination provisions set forth in this subparagraph 1.1., including the settling of accounts and suspension of payments, shall be applicable to any termination of this agreement, including any termination pursuant to subparagraphs 14.b., 14.c. and 24. hereof. 2. Rights Granted -------------- a. Publisher hereby agrees to grant, and does hereby grant, to Warner for the Term of this agreement and throughout the Territory, the exclusive right to sell and distribute the Publication(s). b. The provisions of subparagraph 2.a. shall not apply to: 4 (i) copies of the Publication(s) furnished by Publisher to Publisher's entertainment operations and (ii) Publications, whether in magazine or pamphlet form, prepared by Publisher for third parties and not distributed in the normal channels of the magazine distribution industry. c. Anything in this agreement to the contrary notwithstanding, Publisher shall have the right to service retailers with Publication(s), either directly or through national jobbers, wholesalers and jobbers, should Warner refuse to do so, subject to the following conditions: (i) For any new retailer account (retail stores not serviced by Warner's wholesale distributors), Publisher, to the extent it is not prohibited from doing so, shall supply Warner with a list of such accounts and shall allow Warner to submit a proposal to compete for such business on a competitive service and cost basis. (ii) If Publisher shall be unable to reach an agreement with Warner with respect to the servicing of any such new retailer accounts, Publisher shall not grant the right to service any such accounts to any third party on terms equal to or less favorable than those offered by Warner, and shall give Warner the opportunity to acquire said rights on the best terms offered to Publisher by any third party [such matching right to apply whether or not Warner submits a proposal as set forth in paragraph 2.c.(i) above]. Warner shall have two (2) business days after notice from Publisher to make a proposal which meets or exceeds such third party terms. If Warner and Publisher agree that Warner shall acquire said rights, then any such account shall be serviced by Warner pursuant to the terms hereof, except as such terms may be expressly modified or replaced in a fully 5 executed written amendment hereto. In the event that Warner cannot, does not or will not meet such third party terms, Publisher may grant such rights to the third party, but in no event may Publisher grant such rights to Curtis Circulation Co., Eastern News Distributors, Inc., ICD/Hearst Corporation, Kable News Co., Inc., Murdoch Magazines Distribution Division, or a current subsidiary or current affiliate of any such companies, unless no other means of distribution are available. (iii) For retail accounts that wholesaler(s) refuse to serve, or retail accounts that refuse service from wholesaler(s), Publisher, if it chooses to award the service of such business, shall award such service on the same basis as set forth in subparagraphs 2.c.(i) and 2.c.(ii) above, except as provided otherwise in paragraph 23. d. Publisher shall not be obligated to maintain the publication of any of the Publication(s). Publisher shall have the sole discretion to determine the frequency of any of the Publication(s). e. In the event Publisher decides to distribute PLAYBOY denominated non- magazine products through I.D. wholesalers, it will first negotiate with Warner for such rights. If within thirty (30) days after notice from Publisher that Publisher desires such distribution, Publisher and Warner have not concluded an agreement, it will be conclusively presumed that the parties cannot reach an agreement and Publisher will be free to pursue such distribution free from obligation or liability to Warner on the condition that if Publisher grants such distribution rights it will be on terms more favorable to Publisher than the terms offered by Warner. 3. The Publisher Agrees -------------------- a. That upon receipt from Warner of the lists of wholesale distributors to whom copies of the Publication(s) are to be shipped and the number of copies, Publisher shall 6 cause to be shipped such designated number of copies in accordance with said lists and shall cause to be shipped as far enough in advance of the On-Sale Date of the respective issues of the Publication(s) as will enable distribution to and by wholesale distributors by the On- Sale Dates. Publisher shall pay all transportation charges relating to the shipment of the Publication(s) to wholesale distributors as aforesaid, provided that if Publisher shall so request, Warner shall advance such transportation charges, which transportation charges shall be recovered by Warner as provided in subparagraph 9.b.(iv) hereof. b. That Warner may deduct from the payments due Publisher, as provided in subparagraph 9.b.(ii) hereof, amounts attributable to any and all copies of the Publication(s) lost or damaged in shipment to wholesale distributors. Subject to the provisions of paragraph 16. hereof, all such loss or damage adjustments made by Warner for the benefit of said wholesale distributors shall be conclusive on the question of loss and/or damage and binding upon Publisher. c. That Warner shall allow wholesale distributors the privilege of returning all unsold copies of the Publication(s) and receiving credit at the rate charged therefor, in accordance with the terms, conditions and limitations of paragraph 8. hereof. 4. Billings and Collections ------------------------ Publisher hereby grants and assigns to Warner a continuing security interest in and to all sums which may be paid or are payable to Warner by wholesalers or other parties as Gross Billings, Final Billings or otherwise in connection with the exercise by Warner of its rights pursuant to this agreement. Although Warner shall not be obligated to segregate any of the aforesaid sums from any of its other funds, or to pay any interest thereon to Publisher (other than as may be awarded to Publisher in the event of non-payment or late payment of such amounts by Warner), Warner shall be considered a trustee, pledgeholder or fiduciary of Publisher as to such collected funds. 7 5. Retail Display Allowance ------------------------ a. Warner shall perform the work of receiving and collating information from retail magazine dealers and issuing payments on behalf of Publisher to them for amounts due to them under retail or checkout display allowance ("RDA") programs conducted by the Publisher in reference to the Publication(s) as previously authorized by Publisher in writing for each retail outlet. Such payment to such dealers for retail or checkout display allowances shall be charged to the Publisher's account and recovered and received by Warner as provided in subparagraph 9.b.(iii) hereof. Warner will perform such services pursuant to the terms and conditions of the Publisher's RDA contracts on a timely basis and will make such payments to such dealers on not less than a calendar quarterly basis. b. (i) For the services to be performed under subparagraph 5.b. and Exhibit A attached hereto and made a part hereof, Publisher agrees to pay Warner an annual fee of twenty-two thousand two hundred dollars ($22,200 USD) for up to thirty-four (34) issues with an average retailer base of four thousand (4,000) retailers per issue. In addition, Warner is entitled to receive a pro rata portion of the annual fee amount for any issue and/or retailer in excess of the thirty-four (34) issues and the retailer base of four thousand (4,000) retailers average per issue. Such annual fee shall be adjusted annually for an amount equal to fifty percent (50%) of the increase in the Consumer Price Index for Urban New York and shall be paid to Warner in twelve (12) equal monthly payments. (ii) As a result of Warner's performing auditing services of RDA claims, Warner is entitled to receive one-third (1/3) of the total savings recovered by Warner on behalf of the Publisher from such audits. 8 c. Publisher, on not less than four (4) months prior written notice to Warner to the claim form mail date for the final RDA quarter to be administered by Warner, shall have the right to perform the work related to and to administer its RDA program or use the services of a third party to perform such work. In which case the payments to be made under subparagraph 5.b.(i) will continue for four (4) months after mailing of the claim forms for the final Warner administered RDA quarter, but will in no event exceed eight (8) monthly payments after such notice. 6. Credit to Wholesale Distributors -------------------------------- a. Warner may extend such credit to wholesale distributors as it may determine, and in connection therewith may take such collection measures, including, among other things, stopping or holding up shipment as it may deem advisable with respect to delinquent accounts. Warner shall bear all losses from uncollectable accounts and any and all legal fees or other costs or expenses of whatever nature whatsoever incurred in respect of the Publication(s) for collection or attempted collection, provided that in the event Warner gives reasonable notice to Publisher in writing prior to shipment to stop or hold up shipments to any wholesale distributor and Publisher nevertheless directs such shipments, Publisher shall bear the resulting losses of the uncollectable amount only and such amounts shall be charged to Publisher's account and recovered by Warner as provided in subparagraph 9.b.(v) hereof. b. In the event Publisher shall direct shipment of the Publication(s) as aforesaid, Publisher shall have the right, in its own name and at its own expense, to institute collection proceedings for such sums against any such wholesale distributor and to retain any sums so collected. Nothing herein contained, however, shall require Warner to institute any such legal action. 7. Warner Agrees ------------- 9 a. To furnish shipping instructions and addressed labels to Publisher a reasonable time prior to the shipping date for distribution of the Publication(s). b. To bill and collect from wholesale distributors for Warner's own account and to designate wholesale distributors and other customers. c. To pay to Publisher the sums specified in paragraph 9. d. To in good faith consult fully with Publisher's designated representative(s) with respect to the following, it being understood, however, that Publisher shall have the final decision with respect to such matters: (i) the number of copies of each issue of the Publication(s) to be printed; (ii) the number of copies of each issue of the Publication(s) to be allotted to each wholesale distributor; (iii) the advertising and promotion campaign for the Publication(s). e. To designate an employee as the "limited" exclusive Marketing Director or Marketing Manager for Publisher's Publication(s) and to designate such employee of Warner to work primarily on coordinating all distribution relating to Publisher's Publication(s); it being understood that such designated employee shall perform such services under Warner's direction and control, that the designation of such employee shall be in Warner's sole and absolute discretion, that Warner shall have the sole right to change the employee so designated and that such employee shall be subject to Publisher's reasonable right of approval. Additional activities for other Publishers or other projects shall be assigned under Warner's direction, control and discretion, but not to exceed more than twenty percent (20%) of such employee's total activities. 10 f. To have Warner's field personnel monitor the sales performance of the Publication(s) by wholesale distributors. g. To render to Publisher a sales performance statement for each issue of the Publication(s) setting forth, in summary form, the issue date, On- Sale Date and Off-Sale Date, number of copies distributed, returns received, Net Sales (in both numerical and percentage terms) and the sales trend of the Publication(s) by comparing, in numerical form, the Net Sales of the issue of the Publication(s) for which such statement is being rendered versus that of the one prior issue and the issue of one year previous. h. To render to Publisher a payment statement for each issue of the Publication(s) setting forth, in summary form, the appropriate calculations pursuant to this agreement. i. Unless modified by Warner's marketing plan as agreed to by Publisher, to make annual marketing calls on not less than three hundred (300) retailer chains. Results of these marketing calls will be reported to Publisher within seven (7) days of the time the calls are made. j. That neither Warner nor any person, firm or corporation controlling, controlled by or under common control with Warner, shall, during the Term hereof, distribute the publication entitled Hustler or Penthouse and/or any Hustler or Penthouse denominated products. For purposes of this paragraph 7.j., any publication published by the publisher of Penthouse or Hustler magazine which bears the name "Penthouse" or "Hustler," as applicable, on its cover, shall be deemed to be a Penthouse or Hustler denominated publication. k. That Warner shall endeavor to require its wholesalers to promptly notify Warner of any censorship claims regarding the Publication(s) and Warner agrees to promptly so notify Publisher of such censorship claims. 11 l. To use all reasonable efforts to perform the specific distribution services set forth in subparagraphs 7.i. and 7.k. above and the Circulation Commitments attached as Exhibit A hereto and made a part hereof, some of which services have already been implemented. Upon Warner's receipt of a written notice by Publisher of Warner's failure to adhere to a particular obligation set forth in subparagraphs 7.i. and 7.k. above or Exhibit A hereto, Warner shall immediately commence the cure of any such failure and shall complete such cure in accordance with a mutually agreed upon timetable. Neither any failure by Warner that is cured in accordance with the preceding sentence, nor any such failure by Warner with respect to which Publisher does not send Warner a written notice, shall be considered a material breach of this agreement. 8. Returns ------- a. In determining the sums payable to Publisher, Warner shall be entitled to deduct returns of each issue of the Publication(s) shipped to Warner from wholesalers located in the United States of America and the Dominion of Canada at any time within one hundred twenty (120) days of the Off-Sale Date of each Publication(s), but as to the last issue of the Publication(s) distributed pursuant to this agreement, or any one-shots or special issues which may hereafter be published by Publisher and distributed by Warner, Warner may accept returns shipped at any time within one hundred fifty (150) days of the Off- Sale Date of such issues of the Publication(s). The aforesaid one hundred twenty (120) and one hundred fifty (150) day periods shall be subject to extension, if agreed to by Publisher in advance, by reason of delay or delays in mail delivery, "acts of God" or any other cause beyond the reasonable control of Warner and shall also be subject to extension if Publisher shall consent in writing to such extension. b. Accordingly, in the event Warner shall receive returns of any issue of the Publication(s) after final payment of such issue has been determined and paid pursuant to 12 subparagraph 9.b. hereof, Warner shall be entitled to deduct such return at the rate charged therefor from any remittance due Publisher for any later issues (if any) of the Publication(s) or, if after termination of this agreement, the Publisher shall make prompt payment to Warner upon receipt of Warner's statement regarding such returns. It is the intent and agreement of the parties that returns of a prior issue can be deducted from payments made by Warner to Publisher, but only if such returns are received by Warner within one hundred fifty (150) days of the Off-Sale Dates of the Publication(s) for which such deductions are made. c. Warner may accept returns of unsold copies of the Publication(s) by means of front covers, headings, affidavits or electronic notification in form satisfactory to Warner. If Publisher shall request, in writing, full copy returns, Warner shall use its reasonable efforts to obtain same and, in such case, Publisher agrees to pay for return transportation and such handling charges as are required, provided that if Warner shall be unable to obtain such full copy returns from any wholesaler or other customer, Publisher shall have the right to require Warner to stop or hold up shipments of the Publication(s) and subject to paragraph 16. hereof, same shall be accepted by Publisher as conclusive evidence thereof and Warner is hereby authorized at its sole cost and expense to destroy any and all front covers or headings representing such returns. 9. Payment to Publisher -------------------- In consideration of the rights granted to Warner by Publisher hereunder and in consideration of Publisher's warranties and representations, Warner shall make payment to Publisher of the following: a. (i) As an advance against any and all sums which may become payable to Publisher pursuant to subparagraph 9.b. with respect to each issue of each Publication, except, as set forth in subparagraph 9.a.(ii) below, an amount equal to sixty-five percent (65%) of the estimated Net 13 Sales of the average of the last three (3) issues of such Publication for which Final Billings have been determined, payable not later than seven (7) days after the On-Sale Date of the issue and upon receipt by Warner of the Printer's Completion Notice. Warner may also withhold an amount equal to the actual charges of the last three (3) net issues for which Final Billings have been determined, for the items in subsections 9.b.(ii) through 9.b.(vi) below. (ii) As an advance against any and all sums which may become payable to Publisher pursuant to subparagraph 9.b. with respect to any particular issue of the Publication(s) for which there is a substantial increase in both the print run and the projected Net Sales, an amount to be mutually agreed upon by Warner and Publisher, payable at a mutually agreed upon time. b. An amount equal to one hundred percent (100%) of Warner's estimate of Final Billings [which estimate of Final Billings shall not project estimated returns or other charges for the period sixty (60) to one hundred twenty (120) days after the Off-Sale Date of the Publication(s) not later than sixty (60) days from and after the Off- Sale Date of that issue of the Publication(s)] after Warner shall have deducted and retained from such Final Billings (to the extent that such amounts have not previously been deducted and retained by Warner) an amount equal to: (i) All sums advanced to Publisher pursuant to subparagraph 9.a. above; (ii) All loss and damage adjustments made by Warner pursuant to subparagraph 3.c. above; (iii) All amounts allowed as retail display allowances and related administrative fees pursuant to paragraph 5.b. above, if applicable; 14 (iv) All transportation charges advanced by Warner pursuant to subparagraph 3.a. above; (v) All uncollectable amounts and other items properly chargeable to Publisher referred to in paragraph 6. above; (vi) The following special allowances which may be granted by Warner: I. With respect to Reshipping Wholesaler Agencies [defined as those wholesalers who deliver Publisher's Publication(s) to retailers via mail or common carrier]: 1) there will be a charge of $14.25 USD per cwt. on all second class and non-second class entry magazines delivered via common carrier to retailers for US and Canada Reshipping Wholesaler Agencies; 2) there will be a charge of $6.40 USD per cwt. on all second class entry magazines delivered by mail for U.S. and Canada Reshipping Wholesaler Agencies. The charges referred to in subdivision 1) and 2) above are subject to change only with Publisher's prior written approval. Publisher shall have the right to approve any Wholesaler Agency defined as a Reshipping Wholesaler Agency for Publisher's Publication(s) prior to any charges being incurred by Publisher. Warner will document all reshipping charges by publication issue and Reshipping Wholesaler Agency. Warner agrees to monitor the accuracy of Reshipping Wholesaler Agency claims by auditing each claiming Reshipping Wholesaler Agency's records not less than every 15 six (6) months. All reshipping charges determined by such audit to be inaccurate will be adjusted within thirty (30) days of the audit. Such adjustments may be waived only with Publisher's prior written approval. II. A charge of $2,000 USD will be made if any analysis of circulation by population for the Publication(s) is requested and required for the Audit Bureau of Circulation report. No charge will be made for the State Circulation analyses which are customarily made twice a year for the Publication(s). (vii) All other proper charges, payments or other reimbursements due Warner pursuant to the terms of this agreement, including all returns and other charges of the Publication(s) not charged to Publisher's account at the time of the payment specified in this paragraph 9.b. is made, shall be charged against any subsequent payment pursuant to this paragraph 9.b.; provided, however, that without Publisher's prior approval no such charges may be deducted from any payment made more than one hundred twenty (120) days after the Off-Sale Date of the issue to which the charges relate. 10. New Titles ---------- In the event that during the Term hereof Publisher enters into any third party agreements for non-PLAYBOY denominated English language publications, or Publisher itself publishes such a publication, then such publication(s) shall be included under the terms and conditions of this agreement, provided that Publisher has the right to so include the publication(s) in question. Warner's Commission on such publications will be a sum equal to 2.4% of the U.S. Cover price of all Net Sales. 11. Cross-Collateralization/Overdrafts ---------------------------------- 16 The estimated Final Billings of each issue of all Publication(s) distributed by Warner pursuant to this agreement shall be treated as a unit, it being the intention hereof that if the total of the advance payments made by Warner pursuant to subparagraph 9.a. with respect to any Publication(s) and the deductible distribution expenses incurred by Warner pursuant to subdivisions (ii) through (vii) of subparagraph 9.b. with respect to any issue of such Publication(s) shall exceed the Estimated Final Billings for the same issue of that Publication(s) (the "Overdraft"), the Overdraft may be deducted by Warner from any advance and/or payment of Final Billings which Warner may be required to make on any succeeding issue or issues of the same Publication(s), or any other Publication(s), the distribution rights to which have been granted to Warner by Publisher under this agreement between Warner and Publisher, or shall be refunded or paid by Publisher immediately upon demand. 12. Publisher's Warranties; Indemnity --------------------------------- a. Publisher represents and warrants that the rights herein granted to Warner have not been granted to any other person, firm or corporation; that it has the right and authority to enter into this agreement and to perform the obligations hereunder to be performed by Publisher; and that to the best of Publisher's knowledge, there are no suits or proceedings pending or threatened against or affecting Publisher which, if adversely determined, would impair the rights granted to Warner. b. Publisher undertakes to indemnify and hold harmless Warner and its officers, agents or representatives and its wholesalers and retailers from and against any damages, costs, expenses, judgments, settlements, penalties, liabilities or losses of any kind or nature (excluding consequential damages, but including reasonable attorneys' fees) resulting from any claim, cause of action, suit or other proceedings, arising out of claims of copyright or trademark infringement, libel, violations of rights of privacy, publicity or other proprietary rights in the title, contents or any printed matter of the Publication(s), including, but not limited to, 17 advertisements, pictures, photographs, cartoons, caricatures, either on the cover or in the text thereof or arising out of the breach or alleged breach of any of the foregoing representations or warranties. If any such suit, proceeding, claim or demand is brought or made against Warner, Publisher shall undertake the defense thereof at its expense, provided that if Publisher shall fail so to do, Warner shall undertake the defense thereof at Publisher's expense. c. Warner represents and warrants that it has the right and authority to enter into this agreement and to perform the obligations hereunder to be performed by Warner; and that to the best of Warner's knowledge, there are no suits or proceedings pending or threatened against or affecting Warner which, if adversely determined, would impair the services herein to be provided to Publisher. d. Warner agrees to indemnify, defend and save Publisher harmless of and from any and all loss, claims, damages, excluding consequential damages, but including reasonable attorneys' fees, which Publisher may suffer or incur based on a claim, charge or suit instituted against Publisher as a result of any act or omission or commission of Warner in performing its services hereunder, other than acts, omissions or commissions of Warner undertaken in accordance with Publisher's instructions. e. Anything in this paragraph 12. to the contrary notwithstanding, neither party shall be liable to the other party for any such indemnification unless the party seeking indemnification has notified the other party of said claim, action, proceeding or demand as soon as practicable upon receipt of knowledge of same and afforded the other party the opportunity to defend or participate in the defense of said claim, action, proceeding or demand, and further, that no settlement or payment of any claim, action, proceeding or demand shall be binding on the indemnifying party unless prior approval and consent is obtained from the indemnifying party, which said consent will not be unreasonably 18 withheld. Each of the parties agrees to cooperate with the other in the defense of any said claim, action, proceeding or demand. 13. Wholesaler/Customer Bankruptcy -- Computation of Net Sales ---------------------------------------------------------- In the event that a designated wholesale distributor or other customer to which Warner distributes the Publication(s) on Publisher's behalf shall take advantage of any federal or state insolvency laws for relief of debtors, including reorganization, or shall cease its business operation with the effect that such wholesale distributor or other customer shall not return its unsold copies of the Publication(s), Warner shall use the average percent of Net Sales of the Publication(s) as reported by such wholesale distributor or customer for the twelve (12) months (or such lesser period if applicable) prior to those months for which such wholesale distributor or customer shall not return unsold copies of the Publication(s) shipped to such wholesale distributor or customer for said months. 14. Assignment ---------- a. This agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no assignment of this agreement, voluntary or by operation of law, shall be binding upon either of the parties hereto without the prior written consent of the other, which consent shall not be unreasonably withheld. b. Notwithstanding the above, Publisher shall have the right, upon one hundred twenty (120) days' written notice to Warner, to terminate this agreement subject to the provisions of subparagraph 1.l. above, in the event of a sale or transfer (by merger or otherwise) of: (i) any portion of the stock of Warner to the business entity that publishes or distributes Penthouse or Hustler magazines or anyone holding a direct or indirect equity interest in such business entity; or 19 (ii) all or substantially all of the assets of Warner or more than fifty percent (50%) of the stock of Warner to a third party whose relationship to Warner immediately prior to such sale or transfer is other than that of a parent, subsidiary, affiliated or related company. If Publisher does not elect to terminate this agreement, the new owners of Warner shall assume this agreement and carry out all of its terms and provisions. c. Notwithstanding subparagraphs 14.a. and b. above, Publisher shall have the right to terminate this agreement if: (i) Warner's business operations and organization is acquired, merged or otherwise combined with another national distributor; or (ii) Warner combines its "back room" functions (e.g., billing, collections, RDA processing, data processing) with another national distributor other than Time Distribution Services. Warner shall notify Publisher not less than thirty (30) days prior to the effective date of (i) or (ii) above. Publisher may terminate this agreement at any time within the six (6) month period after the ninety (90) days immediately following the effective date of (i) or (ii) above. The effective date of such termination will be the Off-Sale Date of that issue of PLAYBOY Magazine closest to ninety (90) days following the date of such notification by Publisher. 15. Notices ------- All notices which either party hereto is required or may desire to give to the other shall be in writing and sent to the address hereinafter in this paragraph set forth, or at such other address as may be designated in writing by any such party in a notice to the other given in the manner prescribed in this paragraph. 20 Any notice sent by facsimile shall be deemed received on the date that is set forth on the confirmation of receipt obtained by the sender, unless within two (2) business days thereafter the recipient shall have sent to the sender notice that the facsimile was illegible, in which event the facsimile shall not be deemed received until the facsimile has been resent and a new confirmation of receipt has been received by the sender. Any notice sent by registered mail, return receipt requested, DHL, or other similar express mail courier, shall be deemed conclusively to have been given when actually received or refused or upon notification of non- deliverability by the postal authorities, as the case may be. To Warner: To Publisher: Warner Publisher Services, Inc. Playboy Enterprises, Inc. Attention: President Attention: Publisher 1271 Avenue of the Americas 730 Fifth Avenue New York, NY 10020 New York, NY 10019 With a copy to: With a copy to: Warner Publisher Services, Inc. Playboy Enterprises, Inc. Attention: Vice President and Attention: General Counsel General Counsel 680 North Lake Shore Drive 1271 Avenue of the Americas Chicago, IL 60611 New York, NY 10020 16. Audit Rights ------------ Publisher may, at its own expense, audit the books and records of Warner relative to the distribution of the Publication(s) pursuant to this agreement at the place where Warner maintains such books and records in order to verify statements rendered to Publisher hereunder. Any such audit shall be conducted by a reputable public accountant or Publisher's accountant during reasonable business hours in such manner as not to interfere with Warner's normal business activities. As true copy of all reports made by Publisher's accountant shall be delivered to Warner at the same time as such respective reports are delivered to Publisher by said accountant. In no event shall audits be made hereunder more frequently than twice annually. 17. Integration; Waiver; Modification --------------------------------- 21 This agreement, including Exhibit A, sets forth the full understanding of the parties and supersedes all earlier understandings and agreements with respect to the subject matter hereof. No waiver, modification or cancellation of any term or condition of this agreement shall be effective unless executed in writing by the party charged therewith. No written waiver shall excuse the performance of any act other than those specifically referred to therein. 18. No Partnership, Etc. -------------------- This agreement does not constitute and shall not be construed as constituting a partnership or joint venture between Warner and Publisher. Neither party shall have any right to obligate or bind the other party in any manner whatsoever, and nothing herein contained shall give, or is intended to give, any rights of any kind to any third persons. 19. Force Majeure ------------- Neither party shall be liable to the other for the failure to fulfill their obligations hereunder due to reasons beyond their control, including, by way of example, governmental restrictions, strikes, war, invasions, civil riot, breakdown of market distribution facilities or shortages of labor or material. If any such force majeure event shall prohibit either party from publishing or distributing (as the case may be) six (6) consecutive issues of the Publication(s), either party shall have the right to terminate this agreement upon ten (10) business days' written notice, which notice shall be in accordance with paragraph 15. 20. Headings -------- The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 21. Governing Law ------------- 22 This agreement shall be interpreted and construed in accordance with the laws of the State of New York applicable to agreements entered into and entirely performed therein. 22. Arbitration ----------- Any controversy or claim arising out of or relating to this agreement, or any breach of it, shall be settled by arbitration to be held in New York, New York in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrators shall be entered in any court having jurisdiction. 23. Wholesaler Relationships ------------------------ a. If Warner decides to change a wholesaler with which it currently has a distribution relationship and at least ten percent (10%) of the retail stores that sell the Publication(s) in the effected area (the "Effected Stores") refuse to be serviced by the new wholesaler and such refusal continues for longer than sixty (60) days following the change in wholesaler, then within ten (10) days following the end of such sixty (60) day period Warner shall submit to Publisher a proposal to compete for the business of the Effected Stores on a competitive service and cost basis. b. If Publisher shall be unable to reach an agreement with Warner with respect to the servicing of the Effected Stores, then Publisher shall not grant the right to service the Effected Stores to any third party on terms equal to or less favorable than those offered by Warner, and shall give Warner the opportunity to acquire said rights on the best terms offered to Publisher by any third party (such matching right to apply whether or not Warner submits a proposal as set forth in paragraph 23.a. above). If Warner and Publisher agree that Warner shall acquire said rights, then the Effected Stores shall be serviced by Warner pursuant to the terms hereof, except as such terms may be appropriately modified or replaced in a fully executed written amendment hereto. In no event may Publisher grant such rights to Curtis Circulation Co., Eastern News 23 Distributors, Inc., ICD/Hearst Corporation, Kable News Co., Inc., Murdoch Magazines Distribution Division or to a current subsidiary or current affiliate of any of such companies. 24. Defaults and Right to Cure -------------------------- If either party shall violate any of its obligations or warranties under the terms of this agreement, the other party shall have the right and option, but not the duty, to terminate this agreement upon not less than ninety (90) days' prior written notice; but no neglect or failure to serve such notice shall be deemed to be a waiver of any breach of any covenant or stipulation under this agreement. Such termination of this agreement shall become effective unless the violation complained of shall be completely remedied to the satisfaction of such other party within such ninety (90) day period. If the violation complained of shall be of a kind that a remedy or cure cannot effectively restore the prior circumstances, then this agreement, at the option of such other party, shall terminate forthwith upon service of such notice without any period of grace as aforesaid. The termination of this agreement shall be without prejudice to any rights that such other party may otherwise have against the defaulting party under this agreement or under law. 25. Bankruptcy ---------- If either party shall be adjudicated a bankrupt, shall make any assignment for the benefit of creditors, shall institute proceedings for voluntary bankruptcy, shall apply for or consent to the appointment of a receiver, or if an order shall be entered approving a petition seeking its reorganization or appointing a receiver of it or its property, then upon the happening of any one or more of such events, the other party to this agreement shall have the right to terminate this agreement by giving written notice of its intention to do so. Any termination of this agreement pursuant to this paragraph 25. shall not release either party from any obligation hereunder due and owing to the other party up to the date of such termination. 26. Confidentiality --------------- 24 a. Publisher and Warner agree to treat this agreement as proprietary information and each agrees not to reveal any of the terms hereof to any third party, for any purpose, without the prior written approval of the other party, except that each party may disclose this agreement to outside accountants performing auditing services for such party or except to the extent required by law. Publisher and Warner each agree that, after the date hereof, they will take whatever steps they deem necessary to carry out the intent of this paragraph. b. Any confidential or proprietary information obtained by either party from the other in connection with the furnishing of services pursuant to this agreement shall be kept confidential and shall not be disclosed to any third party without the prior written approval of the other party, except to the extent required by law. WARNER PUBLISHER SERVICES, INC. By /s/ Dan Rubin ---------------------------- Its President ---------------------------- PLAYB0Y ENTERPRISES, INC. By /s/ Marianne Howatson 6/3/97 ------------------------------- Its President. Publishing Division. ------------------------------- 25 EXHIBIT A ATTACHED TO AND MADE A PART OF AGREEMENT DATED MAY 16, 1997 BETWEEN WARNER PUBLISHER SERVICES, INC. ("WPS") AND PLAYBOY ENTERPRISES, INC. ("PEI") Warner Publisher Services ------------------------- PEI Circulation Commitments --------------------------- June, 1997 ---------- I. National Sales and Services Programs ------------------------------------ 1. Distribution Assignments ------------------------ A. PLAYBOY ------- WPS will work the distribution in WPS' prime agencies, which should represent approximately seventy percent (70%) of WPS' Net Billing Dollars, two (2) times a year and will work sixty (60) agencies targeted by PEI, and mutually agreed upon with WPS, two (2) times a year. B. Flats (Specials, Lingerie, Presents, Private Collection) -------------------------------------------------------- WPS will work the distribution of each of the above "flats" in WPS' prime agencies, which should represent approximately seventy percent (70%) of WPS' Net Billing Dollars, one (1) time a year and will work sixty (60) agencies targeted by PEI, and mutually agreed upon with WPS, one (1) time a year. C. Calendars (wall and desk) ------------------------- WPS will work the distribution of each of the above calendars in WPS' prime agencies, which should represent approximately seventy percent (70%) of WPS' Net Billing Dollars, one (1) time a year. 26 D. New Magazine Launches --------------------- WPS will work the distribution of any new PEI publication with a frequency of monthly or greater in accordance with the above distribution commitments for PLAYBOY. WPS will work the distribution of any new PEI publication with a frequency of less than monthly in accordance with the above distribution commitments for the flats or the calendars as appropriate. E. Publisher Sales Programs ("PSP") -------------------------------- The above distribution assignments will be scheduled in conjunction with WPS' quarterly Publisher Sales Programs assignment schedule. F. Blitzes (Team Surveys) ---------------------- WPS will include all pertinent PEI titles, as directed by PEI, in survey agencies as determined by WPS on a quarterly basis. 2. Marketing Assignments --------------------- WPS will complete a targeted marketing assignment quarterly. Targets will be determined by PEI and mutually agreed upon with WPS. WPS will make annual marketing calls on not less than three hundred (300) retailer chains. 3. Point-of-Sale ("POS") --------------------- WPS will complete targeted point-of-sale assignments determined by PEI and mutually agreed upon with WPS. 4. Telemarketing ------------- 27 WPS will continue to use the Telemarketing Department to accomplish specific objectives in agencies not visited as prime or targeted, as mutually agreed upon by PEI and WPS. 5. Wholesale Redistribution Program -------------------------------- WPS will attempt to ensure redistribution of all stock and provide a stock and redistribution report for every issue of each flat in all agencies with a draw of five hundred (500) copies or more of that respective flat. 6. Distribution Maintenance Report ------------------------------- To be provided for each issue of each PEI title in all agencies worked. 7. Authorization Confirmation Report --------------------------------- As mutually agreed upon. 8. Men's General Interest Magazine Sales Trend Report -------------------------------------------------- Monthly. 9. Magazine Category Sales Trend Reports ------------------------------------- Quarterly. 10. Retail Class of Trade Report ---------------------------- Annually. 11. "Unreasonable Sales" Program ---------------------------- As mutually agreed upon. 12. Affidavit Audit Program ----------------------- PLAYBOY will be included on every affidavit audit. Audit agencies will be determined and scheduled by WPS quarterly and publisher will be advised in advance of each quarter. 28 13. Updated WPS Field Training on PEI Procedures and Policy and Sales ----------------------------------------------------------------- Techniques ---------- Publisher access to Warner field staff sales meetings as mutually agreed upon. 14. Trade Show Support ------------------ WPS will provide personnel support at mutually agreed upon trade shows. 15. All Assignments Will Be Recapped and Analyzed Promptly ------------------------------------------------------ II. Operational Support Services ---------------------------- Promotion Services ------------------ . Retail/whole/trade mailings support . Local promotion support . Material production support . Advertising support Censorship ---------- . Maintain awareness of censorship activity . Inform, advise and support WPS personnel . Encourage programs for specific markets . Periodic attendance of The Media Coalition meetings and activity reporting RDA --- . Quarterly payment processing . RDA contract maintenance . On-line and/or batch reporting of RDA history and activity . Targeted audits Order Regulation ---------------- 29 . Maintain print order regulation schedule . Enter allotment changes . Manage reorders and billing adjustments Traffic ------- . Provide shipping documentation to the bindery . Investigate shortage claims/trace shipments . Input and maintain poly-wrap editions . Process Canadian brokerage claims (additional traffic processing requests will be handled as a premium service) ABC Data Gathering and Reporting -------------------------------- . Conduct ABC audit mailings semiannually . Recap and provide ABC county/state breakdown on request . Provide WPS ABC sales analyses E-Mail Communications Link -------------------------- . WPS client services-PEI communications . PEI-WPS field communications (based on mutually agreed to restrictions) 30 EX-10.18(F) 4 AMENDMENT TO PRODUCT LICENSE AGREEMENTS EXHIBIT 10.18 (f) PLAYBOY ENTERPRISES, INC. May 12, 1997 Mr. John Chan Chun Tung Chaifa Investment Limited Unit 1, 17th Floor, Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong Dear Mr. Chan: This letter, when the enclosed copy has been signed, dated and returned by you, will evidence our mutual agreement to further amend the Product License Agreements between Playboy Enterprises, Inc. ("Licensor") and Chaifa Investment Limited ("Licensee") dated as of September 26, 1989 (the "Hong Kong Agreement") and March 4, 1991 (the "PRC Agreement") (collectively the "Agreements"). Our agreement is as follows: 1. Effective immediately, in addition to the Statements required in Paragraph 2.d of the Agreements, Licensee will be required to submit to Licensor on a monthly basis a preliminary, unaudited statement of net sales of the Products (as defined in Paragraph S.6. of the Agreements). Such statements shall be submitted within twenty (20) days after the end of each calendar month and shall include detail as to net sales (segregated between wholesale and retail) listed separately for the PRC and for Hong Kong. 2. Earned Royalties (as defined in Paragraph 2.c. (ii) of the Agreements) due for calendar year 1997 shall be payable as follows: (i) Seventy-five percent (75%) of Earned Royalties that are due and payable for each License Quarter (as defined in Paragraph 1.d. of the Hong Kong Agreement and Paragraph 1.c. of the PRC Agreement) shall be remitted to Licensor by Licensee within one hundred five (105) days after the end of such License Quarter. (ii) The remaining twenty-five percent (25%) of Earned Royalties that are due and payable for each License Quarter shall be remitted to Licensor by Licensee within one hundred sixty-five (165) days after the end of such License Quarter. 3. Licensee shall develop a sufficient computer system that will accurately track all shipments to and returns from any and all distribution centers as 1 well as track inventories in the distribution centers on a yearly/seasonal (spring/summer and fall/winter) basis by using specifically-coded style numbers for each such season. Such computer system must be in operation by April 1, 1997 and must be maintained and operational throughout the remainder of the term under the Agreements. 4. Licensee shall submit to Licensor forty-five (45) days after the end of each License Quarter a breakdown of wholesale sales by month by distributor to retail stores and counters. 5. Licensee shall submit to Licensor within forty-five (45) business days after the end of each License Quarter a breakdown of retail sales of Products by location of all Playboy retail stores and counters operated by Licensee. 6. For purposes of calculating net sales, Earned Royalties and Minimum Net Sales, under no circumstances will returns or refunds exceed thirty percent (30%) of net sales for the applicable License Year. 7. Except as modified above, all of the other terms and conditions of the Agreements, as amended, shall remain in full force and effect. If the above accurately sets forth your understanding of our agreement, please sign, date and return the enclosed copy of this letter. ACCEPTED and AGREED to: Very truly yours, CHAIFA INVESTMENT LIMITED PLAYBOY ENTERPRISES, INC. By: /s/ John Chan Chun Tung By: /s/ Lisa Weaver ----------------------- ------------------------------ Lisa Weaver Title: Chairman Vice President --------------------- International Product Licensing Date: 5/28/97 --------------------- 2 EX-10.19(D) 5 3RD AMENDMENT T0 2/10/95 CREDIT AGREEMENT EXHIBIT 10.19 (d) PLAYBOY ENTERPRISES, INC. THIRD AMENDMENT TO CREDIT AGREEMENT Harris Trust and Savings Bank Chicago, Illinois LaSalle National Bank Chicago, Illinois Ladies and Gentlemen: Reference is hereby made to the Credit Agreement dated as of February 10, 1995, as amended by the First Amendment to Credit Agreement dated as of March 31, 1995 (said Credit Agreement as so amended being referred to herein as the "Credit Agreement") currently in effect by and among, Playboy Enterprises, Inc., a Delaware corporation (the "Company"), and you (the "Lenders"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Company hereby applies to the Lenders to amend the definition of Applicable Margin and the Lenders are willing to do so under the terms and conditions set forth in this Amendment. 1. AMENDMENT. Upon the satisfaction of the conditions precedent set forth in Section 2 hereof, effective as of July 8, 1997, the definition of "Applicable Margin" appearing in Section 5.1 of the Credit Agreement is hereby amended and as so amended shall be restated in its entirety to read as follows: "'Applicable Margin' means 0% with respect to the Domestic Rate Portion of the Notes and 1.75% with respect to each LIBOR Portion of the Notes." 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.01. The Company, the Agent and the Lenders shall have executed and delivered this Amendment. 2.02. No Default or Event of Default shall have occurred and be continuing as of the date this Amendment would otherwise take effect. 2.03. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Lenders and their counsel. Upon the satisfaction of the above conditions precedent, this Amendment shall be effective as of July 8, 1997. 3. REPRESENTATIONS. In order to induce the Lenders to execute and deliver this Amendment, the Company hereby represents to the Lenders that as of the date hereof, the representations and warranties set forth in Section 6 of the Credit Agreement are and shall be and remain true and correct (except that for purposes of this paragraph, (i) the representations contained in Section 6.3 shall be deemed to include this Amendment as and when it refers to Loan Documents and (ii) the representations contained in Section 6.5 shall be deemed to refer to the most recent financial statements of the Company delivered to the Lenders) and the Company is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. 4. MISCELLANEOUS. 4.01. The Company acknowledges and agrees that all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Revolving Credit as modified hereby. The Company further acknowledges and agrees that all references in such Collateral Documents to the Revolving Credit shall be deemed a reference to the Revolving Credit as so modified. The Company further agrees to execute and deliver any and all instruments or documents as may be required by the Agent or Required Lenders to confirm any of the foregoing. 4.02. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement, the Notes, or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 4.03. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. -2- Dated as of September 11, 1997 but effective as of July 8, 1997. PLAYBOY ENTERPRISES, INC. By /s/ Linda Havard --------------------------------- Its CFO ------------------------------ Each of the undersigned acknowledges and agrees that while the following is not required, each confirms that: (i) all of the Collateral Documents to which it is a party remain in full force and effect for the benefit and security of, among other things, the Revolving Credit as modified hereby; (ii) all references in such Collateral Documents to the Credit Agreement shall be deemed a reference to the Credit Agreement as amended hereby; (iii) each of the undersigned will continue to execute and deliver any and all instruments or documents as may be required by the Agent or Required Lenders to confirm any of the foregoing. PLAYBOY ENTERTAINMENT GROUP, INC. By /s/ Robert D. Campbell --------------------------------- Its Treasurer ------------------------------ CRITICS' CHOICE VIDEO, INC. By /s/ Robert D. Campbell --------------------------------- Its Treasurer ------------------------------ LIFESTYLE BRANDS, LTD. By /s/ Robert D. Campbell --------------------------------- Its Treasurer ------------------------------ Accepted and agreed to in Chicago, Illinois as of the date and year last above written. HARRIS TRUST AND SAVINGS BANK By /s/ Scott F. Geik --------------------------------- Its Vice President ------------------------------ LASALLE NATIONAL BANK By /s/ Robert Kastenholz --------------------------------- Its Group Senior Vice President ----------------------------- -3- EX-10.24(B) 6 LEASE TERMINATION AGREEMENT EXHIBIT 10.24 (b) LEASE TERMINATION AGREEMENT --------------------------- THIS LEASE TERMINATION AGREEMENT (this "Agreement") made this 27th day of May, 1997, by and between Teachers' Retirement System of the State of Illinois, a retirement system created pursuant to the laws of the State of Illinois ("Landlord"), and Playboy Enterprises, Inc., a Delaware corporation ("Tenant"). R E C I T A L S: WHEREAS, Landlord and Tenant entered into a certain Industrial Building Lease dated October 20, 1992 (the "Lease") for certain premises (the "Premises"), more particularly described in the Lease in that building (the "Building") located at 800 West Thorndale, Itasca, Illinois; and WHEREAS, Tenant desires to terminate the Lease and Landlord has agreed to such termination on the terms and conditions contained in this Agreement. NOW, THEREFORE, in consideration of the above preambles which, by this reference are incorporated herein, the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Effective as of 11:59 p.m. (Central Standard Time) on August 31, 1997 (the "Early Termination Date") and subject to the agreements, representations, warranties and indemnities contained in this Agreement, the Lease is terminated and the term thereby demised shall expire with the same force and effect as if the term of the Lease by the provisions thereof was fixed to expire on the Early Termination Date. 2. Effective as of the Early Termination Date, Tenant remises, releases, quitclaims and surrenders to Landlord, its successors and assigns, the Lease and all of the estate and rights of Tenant in and to the Lease and the Premises and Tenant forever releases and discharges Landlord from any and all claims, demands or causes of action whatsoever against Landlord or its successors and assigns arising out of or in connection with the Premises or the Lease and forever releases and discharges Landlord from any obligations to be observed or performed by Landlord under the Lease. 3. Subject to the agreements, representations, warranties and indemnities contained in this Agreement, Landlord agrees to accept the surrender of the Lease and the Premises after the Early Termination Date and, effective as of the Early Termination Date, forever releases and discharges Tenant from any obligations to be observed and performed by Tenant under the Lease after the Early Termination Date (subject to Paragraph 6 below) provided that Tenant has satisfied, performed and fulfilled the agreements set forth in Paragraph 4 below, and each of the representations and warranties set forth in Paragraph 5 below are true and correct. 4. On or prior to the Early Termination Date, Tenant shall: (a) Except as otherwise herein provided, fulfill all covenants and obligations under the Lease applicable to the period prior to and including the Early Termination Date. (b) Completely vacate and surrender the Premises to Landlord in accordance with Article XXVI of the Lease. Tenant shall leave the Premises in a broom clean condition and free of all movable furniture and equipment, remove all shelving and bolts attached to the floor so the floor is returned to Landlord in a substantially flat condition and shall deliver the keys to the Premises to Landlord or Landlord's designee. (c) Obtain final utility bills and pay all outstanding charges for utility services up to and including the day immediately preceding the Early Termination Date. 5. Tenant represents and warrants that as of the date hereof (a) Tenant is the rightful owner of all of Tenant's interest in the Lease; (b) Tenant has not made any disposition, assignment, sublease, or conveyance of the Lease or Tenant's interest therein; (c) Tenant has no knowledge of any fact or circumstance which would give rise to any claim, demand, action or cause of action arising out of or in connection with Tenant's occupancy of the Premises; (d) no other person or entity has an interest in the Lease, collateral or otherwise; and (e) there are no outstanding contracts for the supply of labor or material and no work has been done or is being done in, to or about the Premises which has not been fully paid for and for which appropriate waivers of mechanic's liens have not been obtained. 6. As consideration for certain of the covenants and agreements contained herein, and for the early termination of the Lease, Tenant shall pay to Landlord a fee (the "Termination Payment") in an amount equal to Sixty Thousand Dollars ($60,000.00) which represents one hundred percent (100%) of the Rent (as defined in Article 4.1 of the Lease) including, but not limited to, Base Rent (as defined in Article 3 of the Lease), Taxes (as described in Article 5.1 of the Lease), utilities and other impositions (as described in Article 5.2 of the Lease) and any other charges or sums due under the Lease (collectively, hereinafter, the "Rental Obligation") for the period commencing on September 1, 1997, and continuing through and including December 31, 1997. Tenant shall pay the Termination Payment to Landlord on or before July 15, 1997. 7. Notwithstanding anything to the contrary contained herein, Tenant shall indemnify, defend (with counsel approved by Landlord) and hold Landlord harmless from and against any and all liabilities, obligations, damages (direct and/or consequential), penalties, claims, costs, charges and expenses (including, without limitation, attorneys' fees) which may be imposed upon, incurred by, or asserted against Landlord and arising, directly or indirectly, out of or in connection with the use, nonuse, possession, occupancy, condition, operation, maintenance or management of the Premises or any part thereof prior to and including the day immediately preceding the Early Termination Date, any act or omission of Tenant or any of its assignees, concessionaires, agents, contractors, employees or invitees, any injury or damage to any person or property occurring in, on or about the Premises, or any part thereof, prior to and including the day immediately preceding the Early Termination Date, or any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in the Lease to be observed or performed by Tenant. In addition, Tenant hereby agrees to pay to Landlord for each day Tenant retains possession of the Premises or any part thereof after the Early Termination Date all damages, consequential as well as direct, sustained by Landlord by reason of such retention. 8. It is agreed and understood that Tenant may acknowledge only the existence of an agreement between Landlord and Tenant pertaining to the termination of the Lease, and that Tenant may not disclose any of the terms and provisions contained in this Agreement to any other party unless required by applicable law. Tenant acknowledges that any breach by Tenant in this Paragraph 8 shall cause Landlord irreparable harm. The terms and provisions of this Paragraph 8 shall survive the termination of the Lease pursuant to the terms of this Agreement. 9. Notwithstanding anything in this Agreement to the contrary, Tenant shall remain liable for all year-end adjustments with respect to Taxes for years 1996 (payable in 1997) and 1997 (payable in 1998) prorated to the day immediately preceding the Early Termination Date. Such adjustment shall be paid at the time, in the manner and otherwise accordance with the terms of the Lease. 10. This Agreement shall be binding upon and inure to the benefit of Landlord and Tenant, and their respective successors, assigns and related entities. Any term that is capitalized but not defined in this Agreement that is capitalized and defined in the Lease shall have the same meaning for purposes of this Agreement as it has for purposes of the Lease. 2 11. This Agreement may be executed in counterparts, each of which shall constitute an original, and all of which, when taken together, shall constitute one and the same instrument. 12. Notwithstanding anything contained in this Agreement to the contrary, Landlord and Tenant acknowledge and agree that this Agreement is contingent upon Landlord executing a Lease (the "Other Lease") with a new tenant for the Premises on or before June 1, 1997. If the Other Lease is not executed by Landlord on or before June 25, 1997, this Agreement shall automatically terminate and be of no further force or effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement on the day and year first above written. LANDLORD: TEACHERS' RETIREMENT SYSTEM OF THE STATE OF ILLINOIS, a retirement system created pursuant to the laws of the State of Illinois By: Capital Associates Realty Advisors Corp., as Investment Manager, Duly Authorized Agent and Attorney-in-Fact By: /s/ Thomas J. Pabian ---------------------- Name: Thomas J. Pabian Its: Executive Vice President TENANT: PLAYBOY ENTERPRISES, INC., a Delaware corporation By: /s/ Howard Shapiro -------------------------- Name: Howard Shapiro Title: Ex.V.P. 3 EX-10.25(B) 7 AMENDMENT TO 9/6/96 LEASE DATED 6/1/97 EXHIBIT 10.25 (b) AMENDMENT TO LEASE ------------------ THIS AMENDMENT TO LEASE ("Amendment") is dated as of the 1st day of June, 1997, by and between CENTERPOINT REALTY SERVICES CORPORATION, an Illinois corporation ("Landlord") and PLAYBOY ENTERPRISES, INC., a Delaware corporation ("Tenant"). RECITALS -------- A. Landlord and Tenant have entered into that certain Industrial Building Lease dated as of September 6, 1996 ("Lease") with respect to a building ("Initial Improvements") to be constructed by Landlord on certain property located along Old Thorndale Road in Itasca, Illinois as more particularly described in the Lease. Landlord was inadvertently referred to as CenterPoint Properties Corporation in the Lease. The parties acknowledge and agree that the Landlord is CenterPoint Realty Services Corporation. B. Landlord's construction of the Initial Improvements has progressed more quickly than originally anticipated and Tenant would like to occupy the Premises earlier than anticipated. Also, changes have been made to the Initial Improvements. In connection with the foregoing, Landlord and Tenant have agreed to amend the Lease to, among other things, revise the Estimated Office Commencement Date, the Warehouse Commencement Date, the Termination Date and the Base Rent Schedule. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Recitals. The Recitals are incorporated into this Amendment as if fully set forth in this Section 1. 2. Definitions. All terms used herein, unless otherwise specified, shall have the meaning ascribed to them in the Lease. 3. Amendments. The terms of the Lease shall be amended as follows: A. The Base Rent Schedule as defined in Section 1.1D of the Lease is hereby deleted in its entirety and replaced with the following: Period Annual Base Rent ------ ---------------- June 1, 1997 - the day preceding the Office Rent Commencement Date $403,466.52 Office Rent Commencement Date - November 30, 2002 $729,223.12 December 1, 2002 - November 30, 2007 $837,666.00 B. The Estimated Office Commencement Date defined in Section l.1E is hereby changed to July 25, 1997. C. The Initial Term defined in Section l.lM is hereby changed to the period commencing June 1, 1997 and ending November 30, 2007. D. The phrase Office Rent Commencement Date is hereby added as Section 1.1 AE and shall mean the date which is the later of August 25, 1997 or the thirtieth (30th) day after the Office Commencement Date. E. Section 3.1 of the Lease is hereby deleted in its entirety and replaced with the following: "Section 3.1 Term. The Initial Term of this Lease shall commence with respect to the Warehouse Space on June 1, 1997 (hereinafter referred to as the "Commencement Date" and "Warehouse Commencement Date"). The Initial Term of this Lease shall commence with respect to the Office Space on the date (hereinafter referred to as the "Office Commencement Date") which is the Substantial Completion Date of the Office Space, which date is estimated to be the Estimated Office Commencement Date. The Initial Term shall end on November 30, 2007, unless sooner terminated as herein set forth. Concurrent with the actual Warehouse Commencement Date and Office Commencement Date of this Lease, Tenant shall deliver to Landlord an estoppel certificate in accordance with Article XVII hereof." F. The term Lease Year as used in the Lease is hereby changed to calendar year. G. Section 31.1 of the Lease shall be amended to provide (i) the reference to 26,195 is hereby changed to 22,829, (ii) the sentence stating that, "The Expansion Date shall be a date during Lease Year 6 or Lease Year 7" is hereby deleted and replaced with the following: The Expansion Date shall be a date during the period commencing December 1, 2002 and ending November 30, 2004, and (iii) Annual Base Rent for the Expansion Space is hereby reduced to $119,856.00. H. Section 32.1 of the Lease shall be amended to provide that the Annual Base Rent for the Expansion Space is reduced to $119,856.00. I. The first sentence of Section 33.1C of the Lease is hereby deleted and replaced by the following: "All of the terms and provisions of this Lease (except this Article XXXIII) shall be applicable to the Renewal Term, except that Annual Base Rent for the Renewal Term shall be an amount equal to the lesser of (i) one hundred fifteen percent (115%) of the Base Rent then being paid for the Premises, including, but not limited to the Expansion Space, if applicable, or (ii) the Fair Value as defined below." 4. Modifications. Except as herein modified, the terms, conditions and covenants of this Lease shall remain unchanged and in full force and effect. This Amendment may not be modified or amended except by written agreement executed by the parties hereto. 2 5. Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 6. Governing Law. The validity, meaning and effect of this Amendment shall be determined in accordance with the laws of the State of Illinois. 7. Counterparts. This Amendment may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8. Severability. The parties hereto intend and believe that each provision in this Amendment comports with all applicable local, state and federal laws and judicial decisions. However, if any provision in this Amendment is found by a court of law to be in violation of any applicable ordinance, statute, law, administrative or judicial decision, or public policy, and if such court should declare such provision to be illegal, void or unenforceable as written, then such provision shall be given force to the fullest possible extent that the same is legal, valid and enforceable and the remainder of this Amendment shall be construed as if such provision was not contained therein. 9. Construction. The headings of this Amendment are for convenience only and shall not define or limit the provisions hereof. Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders. In the event of a conflict between the terms and conditions of the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail. 10. Legal Review. The parties hereto acknowledge that they have been advised by legal counsel of their choice in connection with the interpretation, negotiation, drafting and effect of this Amendment and they are satisfied with such legal counsel and the advice which they have received. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date set forth above. LANDLORD: TENANT: CENTERPOINT REALTY SERVICES PLAYBOY ENTERPRISES, INC., CORPORATION, an Illinois corporation a Delaware corporation By: /s/ Paul S. Fisher By: /s/ Howard Shapiro ------------------ ----------------------------- Its: Its: Ex.V.P. By: /s/ Michael M. Mullen By: --------------------- ----------------------------- Its: Its: President 3 EX-10.26(G) 8 3RD AMENDMENT TO DEFERRED COMPENSATION PLAN EXHIBIT 10.26 (g) THIRD AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. DEFERRED COMPENSATION PLAN This Third Amendment is made on this ____ day of June, 1997, to be effective as of July 1, 1997. WHEREAS, Playboy Enterprises, Inc. (the "Company") sponsors the Playboy Enterprises, Inc. Deferred Compensation Plan (the "Plan"), as established effective October 1, 1992 and amended twice thereafter; and WHEREAS, pursuant to its reserved power under Section 7.01 of the Plan, the Company wishes to amend the Plan to change the Plan Year to a calendar year, effective January 1, 1998, by creating a short Plan Year from July 1 - December 31, 1997; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. The following sentence is added to the definition of "Determination Date" in Section 2.11: "Effective with the change to a calendar Plan Year beginning January 1, 1998, the last day of each calendar quarter shall be a Determination Date instead of the last day of each fiscal quarter." 2. The following sentence is added to the definition of "Incentive Award" in Section 2.14: "Effective with the change to a calendar Plan Year beginning January 1, 1998, 'Incentive Award' for any Plan Year means the Participant's Management Incentive Plan Award, if any, for the Company fiscal year ending in that Plan Year and which is otherwise payable in cash, considered 'wages' for purposes of FICA and federal income tax withholding, but before any deferral therefrom made pursuant to this Plan." -2- 3. The following sentence is added to the definition of "Plan Year" in Section 2.19: "Effective for periods beginning on or after January 1, 1998, 'Plan Year' shall mean the calendar year, so the Plan Year beginning July 1, 1997 shall be a short year running for six months and ending on December 31, 1997." 4. The following sentence is added to the definition of "Year of Service" in Section 2.26: "For the short Plan Year running from July 1, 1997 to December 31, 1997, a Year of Service shall be credited if the employee completes at least 500 hours of service." 5. The following paragraph is added to the end of Section 3.01: "For only the short Plan Year beginning on July 1, 1997, the $90,000 (indexed) Salary figure in part (a) above shall be reduced by half, but then subject to the same indexing factor as would apply to the $90,000 full-year Salary figure. For each calendar Plan Year beginning on or after January 1, 1998, the indexing (as provided above) of the $90,000 Salary figure under (a) and (b) above shall be based on the ratio of the national Employment Cost Index as of the September immediately preceding the start of the Plan Year to the national Employment Cost Index as of September of the prior calendar year." 6. The following paragraph (e) is added to Section 4.05: "(e) In lieu of paragraph (a) above, the date selected for any interim distribution which is elected on or after January 1, 1998 shall be any January 2nd occurring after the fourth anniversary of the close of the calendar Plan Year in which the election became effective. In addition, every interim distribution made on or after July 1, 1997 shall include a proportionate share of any accumulated earnings (or losses) then credited to the Participant's Deferred Compensation Account." -3- IN WITNESS WHEREOF, this Third Amendment, having been first duly adopted, is executed below by an authorized officer of the Company, to take effect as provided above. PLAYBOY ENTERPRISES, INC. By: ___________________________________ Title: ________________________________ EX-10.26(H) 9 2ND AMENDMENT TO DEFERRED COMPENSATION PLAN EXHIBIT 10.26 (h) SECOND AMENDMENT TO THE PLAYBOY ENTERPRISES, INC. BOARD OF DIRECTORS' DEFERRED COMPENSATION PLAN This Second Amendment is made on this __ day of June, 1997, to be effective as of July 1, 1997. WHEREAS, Playboy Enterprises, Inc. (the "Company") sponsors the Playboy Enterprises, Inc. Board of Directors' Deferred Compensation Plan (the "Plan"), as established effective October 1, 1992 and amended once thereafter; and WHEREAS, pursuant to its reserved power under Section 6.01 of the Plan, the Company wishes to amend the Plan primarily to change the Plan Year to a calendar year, effective January 1, 1998, by creating a short Plan Year from July 1 - December 31, 1997; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. The following sentence is added to the definition of "Determination Date" in Section 2.10: "Effective with the change to a calendar Plan Year beginning January 1, 1998, the last day of each calendar quarter shall be a Determination Date instead of the last day of each fiscal quarter." 2. The following sentence is added to the definition of "Plan Year" in Section 2.16: "Effective for periods beginning on or after January 1, 1998, `Plan Year' shall mean the calendar year, so the Plan Year beginning July 1, 1997 shall be a short year running for six months and ending on December 31, 1997." IN WITNESS WHEREOF, this Second Amendment, having been first duly adopted, is executed below by an authorized officer of the Company, to take effect as provided above. PLAYBOY ENTERPRISES, INC. By: --------------------------------- Title: ------------------------------ EX-10.27(R) 10 LETTER AGREEMENT DATED 9/6/96 RE: PERKINS EMPLOYMENT EXHIBIT 10.27 (r) PLAYBOY ENTERPRISES, INC. CHRISTIE HEFNER CHAIRMAN AND CHIEF EXECUTIVE OFFICER September 6, 1996 Bob Perkins 61 Jane Street, Penthouse E New York, NY 10014 Dear Bob: It is with great pleasure that I offer you the position of Executive Vice President, Chief Marketing Officer of Playboy Enterprises, Inc. You will begin full-time employment on October 1st, 1996. You will be reporting to me. You will office 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. We will also provide you with an office at the Playboy offices in New York. You will be paid a base salary of $400,000 per year, to be paid on a biweekly basis on our normal payroll dates. In addition, you are entitled to participate, pro rata (based on your start date), in a Board approved incentive plan with a Fiscal 1997 maximum potential of 50% of your base salary based upon the Company's performance; $50,000 of which will be guaranteed and payable to you upon commencement of your employment. You will be entitled to participate in all fringe benefits made available to Playboy executives. You will also be a member of the Executive Committee of the Company. You will be entitled to participate in the "parachute plan" that is described on page 13 of Playboy's 1995 proxy statement, copy enclosed. I will recommend to the Company's Compensation Committee that you be granted an option to purchase 100,000 shares of Playboy's 680 NORTH LAKE SHORE DRIVE/CHICAGO, ILLINOIS 60611/312-751-8000 September 6, 1996 To: Bob Perkins Page Two Class B stock and the right to receive up to 15,000 shares of Class B stock under the Company's restricted stock plan, which is triggered by the Company's achieving operating income of $15 million and $20 million according to the terms and conditions of the 1995 Playboy Enterprises, Inc. Stock Incentive Plan. To assist in the disposition of your New York condominium sublease, the Company will reimburse you for brokerage commissions and up to three months rent. If you choose to purchase a new residence in Chicago, you will be reimbursed for customary and reasonable closing costs, to include title costs and attorney or escrow office fees. You will also be reimbursed for the relocation of your household goods. To assist in your transition, the Company will also provide you with temporary furnished housing for up to three months. The Company will also reimburse you for airline travel back/forth from Chicago/New York for you and/or your spouse. If you are terminated at any time not for cause (as defined below), you will be entitled to receive 12 months severance pay based on your salary at that time. "For cause" is defined as conviction of a crime involving dishonesty, fraud or breach of trust, or engaging in conduct materially injurious to Playboy. In the event of such termination you will have no duty to mitigate damages, and you will be free to accept other employment at your discretion. If the above is acceptable, please sign, date and return the enclosed copy of this letter. September 6, 1996 To: Bob Perkins Page Three Once again, welcome to the Playboy family. I look forward to working with you. Sincerely, /s/ Christie Hefner Christie Hefner ACCEPTED: /s/ Bob Perkins - ----------------------- Bob Perkins Date 11 Sept 1996 ------------------- EX-10.27(S) 11 LETTER AGREEMENT DATED 9/4/97 RE: LYNN'S WAIVER EXHIBIT 10.27 (s) PLAYBOY ENTERPRISES, INC. INTEROFFICE CORRESPONDENCE DATE: September 4, 1997 TO: Christie Hefner FROM: Tony Lynn SUBJECT: Compensation This will confirm my decision not to take the fiscal 1998 base salary increase provided for under my employment agreement with the company. I'm not waiving the increase for subsequent fiscal years. /s/ Anthony J. Lynn ______________________ Anthony J. Lynn EX-11 12 COMPUTATION OF NET INCOME PER SHARE PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE for the years ended June 30 (In thousands, except per share amounts)
1997 1996 1995 ------- ------- ------- Primary: - ------- Earnings: Net income $21,394 $ 4,252 $ 629 ======= ======= ======= Shares: Weighted average number of common shares outstanding 20,318 20,014 19,984 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 514 359 218 ------- ------- ------- Weighted average number of common shares outstanding as adjusted 20,832 20,373 20,202 ======= ======= ======= Primary earnings per common share: Net income $ 1.03 1 $ 0.21 1 $ 0.03 1 ======= ======= ======= Fully Diluted: - ------------- Earnings: Net income $21,394 $ 4,252 $ 629 ======= ======= ======= Shares: Weighted average number of common shares outstanding 20,318 20,014 19,984 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 580 424 268 ------- ------- ------- Weighted average number of common shares outstanding as adjusted 20,898 20,438 20,252 ======= ======= ======= Earnings per common shares assuming full dilution: Net income $ 1.02 1 $ 0.21 1 $ 0.03 1 ======= ======= =======
1 This calculation is submitted in accordance with Regulation S-K item 601(b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-13 13 ANNUAL REPORT TO SECURITY HOLDERS SELECTED FINANCIAL AND OPERATING DATA FOR THE YEARS ENDED JUNE 30
(in thousands) 1997 1996* 1995* - ------------------------------------------------------------------------------------------------------------- Net Revenues Publishing Playboy magazine Subscription $ 52,955 $ 51,837 $ 50,531 Newsstand 21,972 24,408 24,876 Advertising 28,414 27,431 27,588 Other 1,651 1,653 1,387 - ------------------------------------------------------------------------------------------------------------- Total Playboy magazine 104,992 105,329 104,382 Other domestic publishing 22,745 21,419 18,718 International publishing 9,951 6,172 4,173 - ------------------------------------------------------------------------------------------------------------- Total Publishing 137,688 132,920 127,273 - ------------------------------------------------------------------------------------------------------------- Entertainment Playboy TV Cable 21,165 21,149 18,938 Satellite direct-to-home 23,065 16,457 9,602 Off-network productions and other 3,052 1,672 420 - ------------------------------------------------------------------------------------------------------------- Total Playboy TV 47,282 39,278 28,960 Domestic home video 8,515 9,370 9,517 International TV and home video 12,218 11,955 11,160 - ------------------------------------------------------------------------------------------------------------- Total Playboy Businesses 68,015 60,603 49,637 AdulTVision 4,487 1,907 - Movies and other 2,214 2,316 2,060 - ------------------------------------------------------------------------------------------------------------- Total Entertainment 74,716 64,826 51,697 - ------------------------------------------------------------------------------------------------------------- Product Marketing 7,968 7,125 6,844 - ------------------------------------------------------------------------------------------------------------- Catalog 76,251 71,716 61,435 - ------------------------------------------------------------------------------------------------------------- Total Net Revenues $296,623 $276,587 $247,249 ============================================================================================================= Operating Income Publishing $ 8,387 $ 9,235 $ 10,709 - ------------------------------------------------------------------------------------------------------------- Entertainment Before programming expense 39,609 30,467 21,097 Programming expense (21,355) (21,263) (20,130) - ------------------------------------------------------------------------------------------------------------- Total Entertainment 18,254 9,204 967 - ------------------------------------------------------------------------------------------------------------- Product Marketing 3,512 3,692 3,428 - ------------------------------------------------------------------------------------------------------------- Catalog 4,795 5,244 5,209 - ------------------------------------------------------------------------------------------------------------- Corporate Administration and Promotion (19,203) (17,882) (17,256) - ------------------------------------------------------------------------------------------------------------- Total Operating Income $ 15,745 $ 9,493 $ 3,057 =============================================================================================================
* Certain reclassifications have been made to conform to the fiscal 1997 presentation. 22
SELECTED FINANCIAL AND OPERATING DATA FOR THE YEARS ENDED JUNE 30 (in thousands, except per share amounts, number of employees and ad pages) 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------- Selected Financial Data Net revenues $296,623 $276,587 $247,249 $218,987 $214,875 $193,749 Interest income (expense), net (354) (592) (569) (779) (131) 1,828 Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 21,394 4,252 629 (16,364) 365 1,822 Net income (loss) 21,394 4,252 629 (9,484) 365 3,510 Per common share Income (loss) from continuing operations before extraordinary item and cumulative effect of change in accounting principle 1.05 0.21 0.03 (0.83) 0.02 0.10 Net income (loss) 1.05 0.21 0.03 (0.48) 0.02 0.19 Cash dividends declared - - - - - - Before items described below(1) Operating income (loss) 15,745 9,493 3,057 (9,610) 3,291 3,548 Net income (loss) 7,908 4,252 629 (12,371) 925 4,069 Net income (loss) per common share 0.39 0.21 0.03 (0.62) 0.05 0.22 Adjusted EBITDA(2) $ 10,904 $ 9,921 $ 6,311 $ (9,333) $ (3,709) $ 316 - ---------------------------------------------------------------------------------------------------------------------------- At Year End Total assets $175,542 $150,869 $137,835 $131,921 $127,767 $121,211 Long-term financing obligations $ - $ 347 $ 687 $ 1,020 $ 1,347 $ 1,669 Shareholders' equity $ 76,133 $ 52,283 $ 47,090 $ 46,311 $ 55,381 $ 43,256 Long-term financing obligations as a percentage of total capitalization -% 0.7% 1.4% 2.2% 2.4% 3.7% Number of shares outstanding Class A 4,749 4,749 4,714 4,709 4,701 4,701 Class B 15,636 15,437 15,276 15,255 15,192 13,830 Number of full-time employees 666 621 600 578 624 637 - ---------------------------------------------------------------------------------------------------------------------------- Operating Data Playboy magazine ad pages 558 569 595 595 660 648 Cash investments in Company-produced and licensed entertainment programming $ 30,747 $ 25,549 $ 21,313 $ 17,185 $ 23,033 $ 16,615 Amortization of investments in Company-produced and licensed entertainment programming $ 21,355 $ 21,263 $ 20,130 $ 18,174 $ 14,076 $ 8,972 Playboy TV (at year end) Cable addressable households 11,200 11,300 10,600 9,600 9,100 7,300 Cable monthly subscribing households 157 192 201 205 232 281 Satellite direct-to-home households 6,277 4,867 3,282 1,926 197 106 Percentage of total U.S. cable addressable households with access to Playboy TV(3) 38.2% 42.8% 45.2% 43.2% 50.1% 43.6% AdulTVision domestic cable addressable households (at year end)(4) 3,121 2,175 - - - - - ----------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of operations and accounting policies, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto, beginning on page 25. Notes to Selected Financial and Operating Data (1) 1997: Federal income tax benefit of $13,486 related to net operating loss and tax credit carryforwards. 1994: Restructuring expenses of $2,875, unusual items of $1,676, primarily due to write-offs of entertainment programming, and nonrecurring expenses of $62. Fiscal 1994 results also included a tax benefit of $7,500 that resulted from the adoption of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which required a change in the method of accounting for income taxes. 1993: Expenses of $1,379 incurred in connection with the relocations of the Entertainment Group's headquarters, the Publishing Group's headquarters and the Catalog Group's operations facility, a $1,000 tax benefit resulting from the settlement of a tax dispute for an amount less than the related reserve and a gain of $665 resulting from the sale of the Catalog Group's former operations facility. Fiscal 1993 results also included nonrecurring expenses of $886, consisting primarily of operating losses and restructuring charges related to the events business. 1992: Expenses of $1,064 incurred in connection with the relocation of the Entertainment Group's headquarters and a gain of $505 resulting from the sale of a note related to the disposition of one of the Company's former properties. (2) Represents earnings before income taxes plus interest expense, depreciation and amortization less cash investments in programming. (3) Based on projections by Paul Kagan Associates, Inc. (4) Network launched in fiscal 1996. 23 FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS FOR THE YEARS ENDED JUNE 30
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Net Revenues/(1)(2)/ Publishing $137,688 $132,920 $127,273 Entertainment 74,716 64,826 51,697 Product Marketing 7,968 7,125 6,844 Catalog 76,251 71,716 61,435 - ------------------------------------------------------------------------------------------------------------ Total $296,623 $276,587 $247,249 ============================================================================================================ Income Before Income Taxes/(2)/ Publishing $ 8,387 $ 9,235 $ 10,709 Entertainment 18,254 9,204 967 Product Marketing 3,512 3,692 3,428 Catalog 4,795 5,244 5,209 Corporate Administration and Promotion/(3)/ (19,203) (17,882) (17,256) Investment income 73 88 139 Interest expense (427) (680) (708) Other, net (640) (452) (52) - ------------------------------------------------------------------------------------------------------------ Total $ 14,751 $ 8,449 $ 2,436 ============================================================================================================ Identifiable Assets Publishing $ 42,137 $ 45,661 $ 38,433 Entertainment 74,279 60,336 53,229 Product Marketing 6,648 5,484 5,964 Catalog 15,627 12,966 14,807 Corporate Administration and Promotion/(4)/ 36,851 26,422 25,402 - ------------------------------------------------------------------------------------------------------------ Total $175,542 $150,869 $137,835 ============================================================================================================ Depreciation and Amortization/(5)/ Publishing $ 1,046 $ 967 $ 909 Entertainment 22,027 21,836 20,606 Product Marketing 176 217 194 Catalog 651 639 673 Corporate Administration and Promotion 2,573 2,682 2,098 - ------------------------------------------------------------------------------------------------------------ Total $ 26,473 $ 26,341 $ 24,480 ============================================================================================================ Capital Expenditures Publishing $ 251 $ 213 $ 101 Entertainment 71 74 22 Product Marketing 14 20 2 Catalog 25 77 10 Corporate Administration and Promotion 310 376 247 - ------------------------------------------------------------------------------------------------------------ Total $ 671 $ 760 $ 382 ============================================================================================================
The accompanying notes are an integral part of these tables. Notes to Financial Information Relating to Industry Segments /(1)/ Net revenues include export sales of $43,032, $36,682 and $30,916 in fiscal 1997, 1996 and 1995, respectively. /(2)/ Intercompany transactions have been eliminated. /(3)/ Corporate Administration and Promotion expenses together with segment selling and administrative expenses comprise the Company's selling and administrative expenses. /(4)/ Corporate assets consist principally of property and equipment, trademarks and net deferred tax assets. /(5)/ Amounts include depreciation of property and equipment, amortization of intangible assets, expenses related to the 1995 Stock Incentive Plan and amortization of investments in entertainment programming. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Results of Operations FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996 The Company's revenues were $296.6 for the fiscal year ended June 30, 1997, a 7% increase over revenues of $276.6 for the fiscal year ended June 30, 1996. This increase was due to higher revenues from all of the Company's Groups, largely the Entertainment Group, primarily driven by an increase from Playboy TV. Also contributing to the increase were higher revenues from the international publishing and other domestic publishing businesses and the Catalog Group. The Company reported operating income of $15.7 for the year ended June 30, 1997 compared to $9.5 for the year ended June 30, 1996. This increase was due to significant growth in operating income of Playboy TV. Net income for the year ended June 30, 1997 was $21.4, or $1.05 per share, compared to $4.3, or $0.21 per share, for the prior year. Net income for fiscal 1997 included a federal income tax benefit of $13.5 related to net operating loss and tax credit carryforwards. Excluding the impact of the $13.5 federal income tax benefit, net income for the year ended June 30, 1997 was $7.9, or $0.39 per share. Net income for the years ended June 30, 1997 and 1996, adjusted to eliminate a noncash net federal income tax benefit and noncash federal income tax expense, respectively, due to the Company's net operating loss and tax credit carryforwards ("tax-adjusted net income"), was $12.2, or $0.60 per share, and $6.7, or $0.33 per share, respectively. Several of the Company's businesses can experience variations in quarterly performance. As a result, the Company's performance in any quarterly period is not necessarily reflective of full-year or longer-term trends. For example, Playboy magazine newsstand revenues vary from issue to issue, with revenues generally higher for holiday issues and any issues including editorial or pictorial features that generate unusual public interest. Advertising revenues also vary from quarter to quarter, depending on product introduction ions by advertising customers, changes in advertising buying patterns and economic conditions. In addition, Entertainment Group revenues vary with the timing of sales to international customers, particularly on a tier basis. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996. This modification results in the revenues from these networks now being recorded on a quarterly basis, which has the effect of smoothing out the fluctuations caused by recording a year's worth of programming sales in one quarter. Previously, the Company scheduled programming for a full year in the quarter during which the network was launched or an agreement was renewed, and recognized the full year of revenues in that quarter. PUBLISHING GROUP Fiscal 1997 Publishing Group revenues of $137.7 increased $4.8, or 4%, compared to fiscal 1996. This was primarily due to higher revenues from international publishing and new media, slightly offset by lower Playboy magazine revenues. Playboy magazine circulation revenues for the year ended June 30, 1997 decreased $1.3, or 2%, due to 10% lower newsstand revenues principally as the result of 13% more U.S. and Canadian newsstand copies sold in the prior year, when two exceptionally strong-selling issues featuring celebrities were published. Although the Company is always looking for celebrity pictorials, there is no certainty that they will occur in any fiscal year. Subscription revenues increased 2% primarily due to an increase in the number of subscriptions served, partially offset by lower revenues from the rental of Playboy's subscriber list. Playboy magazine advertising revenues increased 4% compared to the prior year due to higher average net revenue per page principally due to the mix of pages sold combined with rate increases effective with the January 1997 and 1996 issues, partially offset by 2% fewer ad pages in the current year. Advertising sales for the fiscal 1998 first quarter issues of the magazine are closed, and the Company expects to report a 9% increase in the number of advertising pages compared to the fiscal 1997 first quarter. Revenues from other domestic publishing businesses increased $1.3, or 6%, for the year ended June 30, 1997 compared to the prior year primarily due to higher advertising revenues generated from Playboy.com, the Company's free site on the Internet, combined with higher revenues from other businesses. Fiscal 1997 international publishing revenues increased principally due to higher revenues in the current year related to the purchase of additional equity in March 1996 of VIPress Poland Sp. z o.o. ("VIPress"), publisher of the Polish edition of Playboy magazine, which resulted in its consolidation. For the year ended June 30, 1997, Publishing Group operating income decreased $0.8, or 9%, compared to the prior year. The decrease was primarily due to the lower newsstand revenues and higher editorial costs related to the magazine combined with higher costs for the new media business largely related to developing Playboy Cyber Club, the Company's new pay site on the Internet. Partially offsetting the above were the higher Playboy magazine advertising revenues combined with lower manufacturing costs, primarily due to lower average paper prices which were partially offset by an increase in the magazine's average book size, and higher operating income related to the consolidation of VIPress previously discussed. The National Defense Authorization Act of 1997 was signed into law in September 1996. One section of that legislation that began as the Military Honor and Decency Act (the "Military Act") bans the sale or rental of sexually oriented written or videotaped material on property under the jurisdiction of the Department of Defense. A Federal Court has permanently enjoined enforcement of the Military Act and has prohibited the Department of Defense from changing its acquisition and stocking practices based on the Military Act. The government has filed an appeal and a decision by the Appellate Court is pending. The Military Act, if applicable to the Company's products and enforceable, would prohibit the sale of Playboy magazine, newsstand specials and videos at commissaries, PX's and ship stores, and would adversely affect a portion of the Company's sales attributable to such products. Based on preliminary estimates and current sales levels at such locations, the Company believes that any such impact would be immaterial. ENTERTAINMENT GROUP Fiscal 1997 Entertainment Group revenues of $74.7 increased $9.9, or 15%, compared to fiscal 1996. Operating income of $18.3 increased $9.1, almost double prior year operating income of $9.2. The following discussion focuses on the profit contribution of each Playboy business before Playboy businesses programming expense ("profit contribution"). 25 Playboy TV For the year ended June 30, 1997, revenues of $47.3 from the Company's branded domestic pay television service, Playboy TV, were $8.0, or 20%, higher compared to the prior year. Cable revenues remained stable compared to the prior year as a 9% increase in pay-per-view revenues was offset by a 19% decline in monthly subscription revenues, principally due to some system drops which resulted in a decline in the average number of subscribing households. The increase in pay-per-view revenues was primarily due to higher average buy rates combined with larger favorable adjustments, as reported by cable systems, in fiscal 1997. At June 30, 1997, Playboy TV was available to 11.2 million cable addressable households, a 1% decrease compared to June 30, 1996, while households with 24-hour availability decreased 1.1 million, or 28%, to 2.8 million over the same period. The drop in households with 24-hour availability occurred in the fourth quarter of fiscal 1997 after the enforcement of Section 505 of the Telecommunications Act of 1996 (the "Telecommunications Act"). In February 1996, Congress passed the Telecommunications Act, and President Clinton signed it into law. Certain provisions of the Telecommunications Act are directed exclusively at cable programming in general and adult cable programming in particular. In some cable systems, audio or momentary bits of video of premium or pay-per-view channels may accidentally become available to nonsubscribing cable customers. This is called "bleeding." The practical effect of Section 505 of the Telecommunications Act ("Section 505") is to require many existing cable systems to employ additional blocking technology in every household in every cable system that offers adult programming, whether or not customers request it or need it, to prevent any possibility of bleeding, or to restrict the period during which the programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation of the Telecommunications Act are significant and include fines and imprisonment. Surveying of cable operators and initial results indicate that most will choose to comply with Section 505 by restricting the hours of transmission. On February 26, 1996, one of the Company's subsidiaries filed a civil suit challenging Section 505 on constitutional grounds. On March 7, 1996, the Company was granted a Temporary Restraining Order ("TRO") staying the implementation and enforcement of Section 505. In granting the TRO, the court found that the Company had demonstrated it was likely to succeed on the merits of its claim that Section 505 is unconstitutional. On November 8, 1996, eight months after the TRO was granted, a three-judge panel in United States District Court in Wilmington, Delaware (the "Court") denied the Company's request for preliminary injunction against enforcement of Section 505 of the Act and, in so denying, found that the Company was not likely to succeed on the merits of its claim. The Company appealed the Court's decision to the United States Supreme Court and enforcement of Section 505 was stayed pending that appeal. On March 24, 1997, without opinion, the Supreme Court summarily affirmed the Court's denial of the Company's request for a preliminary injunction. On July 22, 1997, the Company filed a motion for summary judgment on the ground that Section 505 is unconstitutionally vague based on the Supreme Court's decision on June 26, 1997 that certain provisions of the Telecommunications Act regulating speech on the Internet were invalid for numerous reasons, including vagueness. The Company is awaiting a decision on its motion by the Court. Management believes that the Company's revenues attributable to its domestic pay television cable services will continue to be materially adversely affected as a result of enforcement of Section 505 due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers. However, the impact on the fiscal year ended June 30, 1997 was not material as enforcement of Section 505 did not commence until May 18, 1997. Preliminary results which the Company has received from the cable operators indicate that the Entertainment Group's annual revenue decline will be approximately $5 million. The Company intends to pursue in the Court its case challenging on constitutional grounds the validity of Section 505 and to seek a permanent injunction against the enforcement of Section 505. There can be no assurance that the Court will grant such an injunction. The Company's full case on the merits will not be heard or decided by the Court until calendar 1998. Additionally, management believes that the growth in cable access for the Company's domestic pay television businesses has slowed in recent years due to the effects of cable reregulation by the Federal Communications Commission ("FCC"), including the "going-forward rules" announced in fiscal 1995 which provide cable operators with incentives to add basic services. As cable operators have utilized available channel space to comply with "must-carry" provisions, mandated retransmission consent agreements and "leased access" provisions, competition for channel space has increased. Further, the delay of new technology, primarily digital set-top converters which would dramatically increase channel capacity, has contributed to the slowdown. Management believes that growth will continue to be affected in the near term as the cable television industry responds to the FCC's rules and subsequent modifications, and develops new technology. However, as digital technology (which is unaffected by Section 505) becomes more available, the Company believes that ultimately its pay television networks will be available to the vast majority of cable households on a 24-hour basis. Satellite direct-to-home ("DTH") revenues were 40% higher for the year ended June 30, 1997 compared to the prior year. The increase was primarily due to higher DirecTV and PrimeStar revenues, principally as a result of significant increases in their addressable universes, slightly offset by lower revenues, as expected, from TVRO, or the big-dish market. Playboy TV was available to approximately 6.3 million DTH households, including approximately 230,000 monthly subscribers, at June 30, 1997, an increase of 29% compared to June 30, 1996. For the year ended June 30, 1997, revenues from off-network productions and other increased $1.4, or 83%, compared to the prior year primarily due to higher revenues from licensing episodes of Women: Stories of Passion ("Women"), one of the Company's series, to Showtime Networks Inc. ("Showtime"). Profit contribution for Playboy TV increased $11.4 compared to fiscal 1996 primarily due to the significant increase in revenues combined with no royalty expense related to the Company's former distributor in the current year. Royalty payments were discontinued April 30, 1996, when the agreement ended. Also contributing to the increase were lower marketing costs and bad debt expense combined with favorable music licensing settlements in the current year. Domestic Home Video Domestic home video revenues decreased $0.9, or 9%, for the year ended June 30, 1997 compared to the prior year largely due to lower revenues related to the Company's direct-response continuity series, the second of which was launched during the current year, combined with lower net sales of new releases, due in part to extraordinary sales of The Best of Pamela Anderson in the prior year. Although the Company is always looking for releases that feature celebrities, there is no certainty that they will occur in any fiscal year. Partially offsetting the above were higher net revenues from a three-year distribution agreement with Universal Music & Video Distribution ("Uni"; formerly Uni Distribution Corp.) related to backlist titles. The current 26 year included revenues related to the third year of the guarantee, which were higher than the prior year's net revenues related to the guarantees for the first two years. Profit contribution decreased $0.8 for the year ended June 30, 1997 compared to the prior year principally due to the net decrease in revenues combined with the timing of promotion costs. International TV and Home Video For the year ended June 30, 1997, revenues and profit contribution from the international TV and home video business increased $0.3 and decreased $1.7, respectively, compared to the prior year. The decline in profit contribution was due to international home video, principally due to lower revenues primarily as a result of the need to slow down shipments in countries where the distribution pipeline was full. Higher international TV revenues in the current year, largely from Playboy TV networks, were offset by higher costs. Variations in quarterly performance are caused by revenues and profit contribution from tier sales being recognized depending upon the timing of program delivery, license periods and other factors. To allow greater flexibility the Company modified how it programs its international networks effective with the fourth quarter of fiscal 1996 as previously discussed. Playboy Businesses Programming Expense For the year ended June 30, 1997, programming amortization expense associated with the Entertainment Group's Playboy businesses discussed above remained relatively stable compared to the prior year. The current year included lower amortization related to the lower international home video revenues and regular programming on the Playboy TV network. Offsetting these decreases were higher amortization related to an increase in the number of live events on Playboy TV combined with costs related to a pay-per-view special event and home video featuring Farrah Fawcett. Cash investments in entertainment programming for all of the Entertainment Group's businesses, including those businesses discussed below, were $25.5 in fiscal 1996 and $30.7 in fiscal 1997, and are planned for approximately $30.8 in fiscal 1998. These amounts include expenditures for Playboy-branded programming, AdulTVision and feature films. The increase in investments in programming for fiscal 1997 compared to the prior year primarily reflects spending for presold made-for-television and home video programming, co-produced films and a celebrity event. As a result of these higher levels of cash investments, management anticipates that programming amortization expense in fiscal 1998 will be approximately $25.9, or approximately $4.6 higher than in fiscal 1997. AdulTVision AdulTVision revenues increased $2.6, or 135%, for the year ended June 30, 1997 compared to the prior year primarily due to revenues in the current year related to the September 1996 launch of a new network in Latin America. Also contributing to the increase were higher revenues from the domestic network as a result of an increase in its addressable universe and higher buys. At June 30, 1997, the network was available domestically to approximately 5.3 million cable addressable and DTH households, an 18% increase from June 30, 1996. For the year ended June 30, 1997, AdulTVision was profitable, resulting in an increase in operating performance of $1.7. The increase was primarily due to the higher revenues, partially offset by higher distribution costs due to the launch in Latin America and an increase in domestic fees in the current year related to transferring to a new transponder. Movies and Other For the year ended June 30, 1997, revenues and operating income from movies and other businesses decreased $0.1 and $0.2, respectively, compared to the prior year. The Entertainment Group's administrative expenses for the year ended June 30, 1997 increased $1.3 compared to the prior year largely due to higher variable compensation expense related to performance and higher expense related to new business development in the current year. PRODUCT MARKETING GROUP Product Marketing Group revenues of $8.0 increased $0.8, or 12%, for the year ended June 30, 1997 compared to the prior year. The increase was primarily due to higher international product licensing royalties, principally from Asia, combined with royalties in the current year related to the Company's new line of cigars currently being distributed domestically. Operating income of $3.5 decreased $0.2, or 5%, for the year ended June 30, 1997 compared to the prior year due to higher expenses, principally reflecting increased investments in brand marketing, promotion and product design as well as severance, search fees associated with a new division executive and higher legal expenses. CATALOG GROUP Catalog Group revenues of $76.3 increased $4.5, or 6%, for the year ended June 30, 1997 compared to the prior year as a result of higher sales volume from all three of the Company's catalogs. The higher sales volume for the Critics' Choice Video and Collectors' Choice Music catalogs was primarily attributable to higher circulation. Increased sales volume for the Playboy catalog was principally related to higher sales from the Playboy Store, a version of the catalog which launched on Playboy.com in the spring of 1996. In fiscal 1998, the Company plans to continue to increase overall circulation for the catalogs. Shortly after the end of fiscal 1997, the group launched an online version of the Collectors' Choice Music catalog and plans to launch an online version of the Critics' Choice Video catalog by the end of calendar 1997. For the year ended June 30, 1997, Catalog Group operating income of $4.8 decreased $0.4, or 9%, compared to the prior year primarily as a result of lower-than-anticipated response rates from prospective customers. The increase in revenues plus lower paper prices generally were not sufficient to offset higher related costs, due in part to prospecting. Additionally, administrative expenses were higher for the group primarily due to higher salary and related expenses combined with atypical expenses in the current year related to the group's move to a new facility. At the end of fiscal 1997, the catalog operations began moving from its former facility to a larger facility, under terms of a built-to-suit lease, to meet additional space requirements resulting from growth in the business. The new facility is located in the same Chicago suburb. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expense of $19.2 for the year ended June 30, 1997 increased $1.3, or 7%, compared to the prior year largely due to investment spending on corporate marketing. CASINO GAMING In fiscal 1996, the Company announced plans to reenter the casino gaming business. The Company, with a consortium of Greek investors, bid for and won an exclusive casino gaming license on the island of Rhodes, Greece. The Company's consortium executed the contract with the government in October 1996 and is presently renovating the historic Hotel des Roses that will be the Playboy Casino and Beach Hotel, which is expected to open in 27 calendar 1998. The Company is continuing to explore other casino gaming opportunities with a strategy to form joint ventures with strong local partners, in which the Company would receive license fees for the use of the Playboy name and trademarks and would consider taking equity positions. FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995 The Company's revenues were $276.6 for the fiscal year ended June 30, 1996, a 12% increase over revenues of $247.2 for the fiscal year ended June 30, 1995. This increase was due to higher revenues from all of the Company's Groups, primarily driven by increases from Playboy TV, the Catalog Group, other domestic publishing businesses, including Playboy.com, and international publishing. The Company reported operating income of $9.5 for the year ended June 30, 1996 compared to $3.1 for the year ended June 30, 1995. This increase was primarily due to significant growth in operating income of the Entertainment Group, principally as a result of substantial growth of Playboy TV. Net income for the year ended June 30, 1996 was $4.3, or $0.21 per share, compared to $0.6, or $0.03 per share, for the prior year. Tax-adjusted net income for the year ended June 30, 1996 was $6.7, or $0.33 per share, compared to $1.3, or $0.06 per share, for the year ended June 30, 1995. PUBLISHING GROUP Fiscal 1996 Publishing Group revenues of $132.9 increased $5.6, or 4%, compared to fiscal 1995. This was due to higher revenues from all of the Publishing Group businesses. Playboy magazine circulation revenues increased $0.8 for the year ended June 30, 1996 compared to the prior year. Subscription revenues were 3% higher, including an increase in revenues from the rental of Playboy magazine's subscriber list. Newsstand revenues were down slightly as favorable newsstand sales adjustments in fiscal 1995 related to fiscal 1994 issues and 1% fewer U.S. and Canadian newsstand copies sold in fiscal 1996 were mostly offset by a higher average newsstand price primarily due to sales of two exceptionally strong- selling issues featuring celebrities, which were at a higher cover price. Advertising revenues declined 1%, or $0.2, for the year ended June 30, 1996 compared to the prior year primarily as a result of 4% fewer advertising pages in fiscal 1996, mostly offset by higher average net revenue per page, principally due to rate increases effective with the January 1996 and 1995 issues. Revenues from other domestic publishing businesses increased $2.7, or 14%, for the year ended June 30, 1996 compared to the prior year. This increase was principally due to higher revenues from newsstand specials primarily as a result of the favorable impact of a $1.00 increase in the cover price to $6.95 in most of the country in the fourth quarter of fiscal 1995, combined with the publication of three additional newsstand specials in fiscal 1996. Additionally, there was a significant increase in revenues related to developing new media businesses due in part to Playboy.com, which generated advertising revenues in fiscal 1996. Partially offsetting the above were lower revenues from other businesses. Revenues from international publishing increased $2.0, or 48%, due to higher royalty income combined with revenues related to the March 1996 purchase of additional equity in VIPress, which resulted in its consolidation. For the year ended June 30, 1996, Publishing Group operating income decreased $1.5, or 14%, compared to the prior year. The decrease was principally due to higher manufacturing costs, primarily as the result of a significant increase in paper prices. Also contributing to the unfavorable variance was higher variable compensation expense related to the Company's performance and higher employee medical benefit expenses in fiscal 1996. Partially offsetting the above were the higher other domestic publishing businesses, international publishing and Playboy subscription revenues in fiscal 1996. Additionally, fiscal 1996 benefited from lower subscription acquisition amortization, primarily as a result of improving efficiencies by lowering the advertising rate base in fiscal 1996, and lower advertising sales expenses. ENTERTAINMENT GROUP Fiscal 1996 Entertainment Group revenues of $64.8 increased $13.1, or 25%, compared to fiscal 1995. Operating income of $9.2 increased $8.2 compared to prior year operating income of $1.0. The following discussion focuses on the profit contribution of each Playboy business before Playboy businesses programming expense. Playboy TV For the year ended June 30, 1996, revenues of Playboy TV were $10.3, or 36%, higher compared to the prior year. Cable pay-per-view revenues increased 20%, attributable to an increase in the number of cable addressable households to which Playboy TV was available, higher average buy rates, and higher average revenue per buy in fiscal 1996. At June 30, 1996, Playboy TV was available to 11.3 million cable addressable households, a 7% increase compared to June 30, 1995. Of the 11.3 million cable addressable households, 3.9 million could receive Playboy TV on a 24-hour basis, a 30% increase compared to June 30, 1995. Cable monthly subscription revenues declined 2% for the year ended June 30, 1996 compared to the prior year due in part to a decline in the average number of subscribing households. DTH revenues were 71% higher for the year ended June 30, 1996 compared to the prior year. The increase was primarily due to higher DirecTV revenues, as a result of a significant increase in its addressable universe and the Company's change to 24-hour programming in August 1995, and higher revenues from PrimeStar, which launched Playboy TV in the fourth quarter of fiscal 1995, slightly offset by lower revenues from TVRO. Playboy TV was available to approximately 4.9 million DTH households, including approximately 185,000 monthly subscribers, at June 30, 1996, a 48% increase compared to June 30, 1995. Fiscal 1996 revenues from off-network productions and other increased $1.3 primarily due to licensing episodes of Women to Showtime. Profit contribution for Playboy TV increased $8.1, or 65%, compared to fiscal 1995, in spite of higher marketing costs and expenses in fiscal 1996 related to the Section 505 suit, due to the significant increase in revenues. Domestic Home Video Domestic home video revenues decreased $0.1 for the year ended June 30, 1996 compared to the prior year primarily due to recording a higher net guarantee in fiscal 1995 from a three-year distribution agreement with Uni related to backlist titles effective in the fourth quarter of fiscal 1995, and subject to certain earn-out provisions in the final year. Fiscal 1996 included the second year of the guarantee as well as a reserve established related to the first year of the guarantee recorded in fiscal 1995 in the event that the earn-out provisions will not be met in the final year. Fiscal 1995 also included sales and returns of backlist titles prior to the inception of the distribution agreement. Partially offsetting the above were higher sales of new releases in fiscal 1996, in part due to extraordinary sales of The Best of Pamela Anderson. Additionally, there were higher revenues in fiscal 1996 from the Company's first direct-response continuity series. Profit contribution increased $0.5 for the year ended June 30, 1996 compared to the prior year principally due to the timing of promotion costs. 28 International TV and Home Video For the year ended June 30, 1996, revenues and profit contribution from the international TV and home video business increased $0.8 and $2.2, respectively, compared to the prior year. Revenues and profit contribution from the international home video business both increased $1.4 due in part to higher sales to South Korea. An increase in the profit contribution of the international TV business of $0.8 is primarily due to a write-off of $1.3 recorded in fiscal 1995 related to sales to a distributor in fiscal 1994, partially offset by lower revenues in fiscal 1996, primarily due to revenues in fiscal 1995 associated with tier agreements. Variations in quarterly performance are caused 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 increased $1.1 for the year ended June 30, 1996 compared to the prior year. The increase was principally due to higher international home video amortization combined with increased investments in regular programming on the Playboy TV network, partially offset by lower international TV amortization. AdulTVision For the year ended June 30, 1996, revenues for the new network were $1.9. The network reported an operating loss for fiscal 1996, the first year of operation. Movies and Other For the year ended June 30, 1996, revenues from movies and other businesses increased $0.3 primarily due to higher revenues related to feature films. Operating income increased $0.2 compared to the prior year. The Entertainment Group's administrative expenses for the year ended June 30, 1996 increased $0.9 compared to the prior year primarily due to higher variable compensation expense related to performance and higher employee medical benefit expenses in fiscal 1996. PRODUCT MARKETING GROUP Product Marketing Group revenues of $7.1 for the year ended June 30, 1996 increased $0.3, or 4%, compared to the prior year primarily due to 19% higher international product licensing royalties, primarily due to strong sales from Asia. Partially offsetting the above were lower revenues in fiscal 1996 from Special Editions, Ltd., as the Company's art publishing and art products business continues to move from direct sales to licensing, combined with no royalties in fiscal 1996 from a Sarah Coventry licensee that experienced financial difficulties and was terminated in the second quarter of fiscal 1995. Operating income of $3.7 increased $0.3, or 8%, for the year ended June 30, 1996 compared to the prior year principally due to an increase in operating income of international product licensing, primarily due to the higher revenues. Partially offsetting the favorable variance was lower operating income from Sarah Coventry product licensing, principally due to the lower revenues, combined with higher variable compensation expense related to performance and higher employee medical benefit expenses in fiscal 1996. CATALOG GROUP Fiscal 1996 Catalog Group revenues of $71.7 increased $10.3, or 17%, compared to fiscal 1995. The revenue increase was a result of higher sales volume from all of the Company's catalogs. The increase was primarily attributable to higher circulation for all three catalogs combined with a strong response to the Critics' Choice Video catalog's implementation of a competitive pricing strategy in the second quarter of fiscal 1996. This strategy was in reaction to lower response rates in the two prior quarters which the Company believes were due in part to competition from mass marketers which offer popular videos at deeply discounted prices. Additionally, the higher Collectors' Choice Music revenues were also due in part to a new promotion. Fiscal 1996 Catalog Group operating income of $5.2 remained stable compared to fiscal 1995 as incremental profit generated from the higher revenues was sufficient to absorb higher expenses related to paper price and postal rate increases. There were also higher expenses in fiscal 1996 relative to the higher revenues from expanded mailings to prospective customers of the catalogs. CORPORATE ADMINISTRATION AND PROMOTION Corporate administration and promotion expense of $17.9 for the year ended June 30, 1996 increased $0.6, or 4%, compared to the prior year. Expenses were higher in fiscal 1996 primarily due to higher variable compensation expense related to performance and higher employee medical benefit expenses, partially offset by lower marketing expenses. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had $1.3 in cash and cash equivalents and $4.5 in short-term borrowings, compared to $2.4 in cash and cash equivalents and $5.0 in short-term borrowings at June 30, 1996. The Company expects to meet its short- term and long-term cash requirements through its revolving credit agreement and cash generated from operations. Cash Flows From Operating Activities Net cash provided by operating activities was $1.5 for the year ended June 30, 1997 compared to $4.5 for the prior year despite the Company's improved performance. The Company's performance improved $3.7, excluding the $13.5 federal income tax benefit recorded in the current year which is offset by a corresponding change in net deferred tax assets. Cash used for deferred revenues in the current year compared to cash provided in the prior year was due in part to higher subscription production in the prior year. The Company invested $30.7 in Company-produced and licensed entertainment programming during fiscal 1997 compared to $25.5 in the prior year, and expects to invest approximately $30.8 in such programming in fiscal 1998. The increase in investments in programming for fiscal 1997 compared to the prior year primarily reflects spending for presold made-for-television and home video programming, co-produced films and a celebrity event. Net cash provided by operating activities was $4.5 for the year ended June 30, 1996 compared to $3.2 for the prior year. This increase was primarily due to the Company's improved operating performance in fiscal 1996. Additionally, there was an increase in cash provided by accrued salaries, wages and employee benefits during fiscal 1996 primarily due to the timing of payrolls combined with higher accruals at June 30, 1996 related to the 1995 Stock Incentive Plan and employee benefits. Partially offsetting these increases was lower cash provided by accounts payable in fiscal 1996, primarily due to the timing of inventory purchases for the Critics' Choice Video catalog, principally as the result of lower liabilities recorded at June 30, 1996 due to a later mailing date for the July 1996 catalog combined with higher liabilities recorded at June 30, 1995 to support higher circulation for the July 1995 catalog. The Company invested $25.5 in Company-produced and licensed entertainment programming during fiscal 1996 compared to $21.3 in the prior year. 29 CASH FLOWS FROM INVESTING ACTIVITIES Net cash used for investing activities was $2.5 for the year ended June 30, 1997 compared to $4.2 for the prior year. The prior year included investments in equity interests of $3.6 in the first international Playboy TV networks in the United Kingdom and Japan, the casino gaming venture that was awarded an exclusive license on the island of Rhodes, Greece, and an additional equity interest in VIPress. This compares to $1.9 of investments in the current year principally related to additional funding of the network in the United Kingdom and an equity interest as well as additional funding in the new Playboy TV and AdulTVision networks in Latin America. Capital expenditures for the year ended June 30, 1997 were $0.1 lower than in the prior year. In fiscal 1997, the Company also entered into leases of furniture and equipment totaling $2.8, compared to $1.7 in fiscal 1996. The increase in leased assets in fiscal 1997 compared to the prior year is largely related to the new media business and the catalog operations move previously discussed. The Company expects to make capital expenditures of approximately $1.1 and to lease assets totaling approximately $2.8 in fiscal 1998. Net cash used for investing activities was $4.2 for the year ended June 30, 1996 compared to $0.3 for the prior year. Fiscal 1996 included the investments in equity interests of $3.6 discussed above. Capital expenditures for the year ended June 30, 1996 were $0.4 higher than in the prior year. The Company also leased $1.7 of furniture and equipment in fiscal 1996, compared to $1.4 in fiscal 1995. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used for financing activities was $0.2 for the year ended June 30, 1997 compared to net cash provided of $0.6 for the prior year. This decrease was due in part to a $0.5 reduction in short-term borrowings under the Company's revolving line of credit in the current year. Net cash provided by financing activities was $0.6 for the year ended June 30, 1996 compared to net cash used for financing activities of $2.7 in the prior year. This increase was principally due to a payment on July 1, 1994 of $1.5 in promissory notes which reflects partial payment related to the Company's acquisition of the remaining 20% interest in Critics' Choice Video, Inc., combined with a reduction in short-term borrowings under the Company's revolving line of credit of $1.0 in fiscal 1995. INCOME TAXES At June 30, 1997, the Company evaluated its net operating loss carryforwards ("NOLs") and other deferred tax assets and liabilities in relation to the Company's recent earnings history and its projected future earnings. As a result of this review, the Company changed its judgment about the realizability of the deferred tax assets in future years and reduced the valuation allowance balance by $13.5. In fiscal 1997, the Company realized the $4.5 net deferred tax asset recorded at June 30, 1996 by utilizing a portion of the NOLs against fiscal 1997 income. Management believes that the net deferred tax asset of $14.4 at June 30, 1997 is an amount that will more likely than not be realized in future periods. Based on current tax law, the Company must generate approximately $42.4 of future taxable income prior to the expiration of the Company's NOLs for full realization of the $14.4 net deferred tax asset. At June 30, 1997, the Company had NOLs of $20.8 for tax purposes, with $1.2 expiring in 2004, $2.1 expiring in 2007, $1.1 expiring in 2008 and $16.4 expiring in 2009. Management believes that it is more likely than not that a sufficient level of taxable income will be generated in years subsequent to fiscal 1997 and prior to the expiration of the Company's NOLs to realize the $14.4 net deferred tax asset recorded at June 30, 1997. Following is a summary of the bases for management's belief that a valuation allowance of $15.9 at June 30, 1997 is adequate, and that it is more likely than not that the net deferred tax asset of $14.4 at June 30, 1997 will be realized: . In establishing the net deferred tax asset, management reviewed the components of the Company's NOLs and determined that they primarily resulted from several nonrecurring events, which were not indicative of the Company's ability to generate future earnings. . All of the Company's operating groups, particularly the Entertainment Group, continue to generate meaningful earnings, while the Company's substantial investments in the Entertainment Group are anticipated to lead to increased earnings in future years. . The Company has several opportunities to accelerate taxable income into the NOL carryforward period. Tax planning strategies would include the capitalization and amortization versus immediate deduction of circulation expenditures, the immediate inclusion versus deferred recognition of prepaid subscription income, the revision of depreciation and amortization methods for tax purposes and the sale-leaseback of certain property that would generate taxable income in future years. OTHER In January 1993, the Company received a General Notice from the United States Environmental Protection Agency (the "EPA") as a "potentially responsible party" ("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other entities were also identified as PRPs in the notice. The notice relates to actions that may be ordered taken by the EPA to sample for and remove contamination in soils and sediments, purportedly caused by skeet shooting activities at the Resort property. During fiscal 1994, the EPA advised the Company of its position that the area of land requiring remediation is approximately twice the size of the initial site. The Company believes that it has established adequate reserves, which totaled $0.6 at June 30, 1997, to cover the eventual cost of its anticipated share (based on an agreement with one of the other PRPs) of any remediation that may be agreed upon. The Company is also reviewing available defenses and claims it may have against third parties. 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. In the complaint, BrandsElite, an international distributor of premium merchandise, including liquor, perfume, cosmetics and luxury gifts, principally to duty-free retailers, alleges that the Company breached a product license agreement, shortly after its execution by the Company in October 1995. The agreement provided for the appointment of BrandsElite as the exclusive, worldwide licensee of the Playboy trademark and tradename with respect to the sale of cognac and possibly some deluxe whiskeys. The Company has admitted that it advised BrandsElite that it had determined not to proceed with the transaction but disputes strongly BrandsElite's allegation that as a result of the Company's breach, BrandsElite has suffered millions of dollars of damages in future lost profits. BrandsElite also seeks to recoup alleged out-of-pocket expenses, fees and costs incurred in bringing the action, and specific performance of the agreement. The license agreement provides for recovery by a party in any judgment entered in its favor of attorneys' fees and litigation expenses, together with such court costs and damages as are provided by law. The action is currently in discovery. 30 The Company will implement the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128") for financial statements issued for periods ending after December 15, 1997. Statement 128 simplifies the previous standards for computing earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which applies to the Company. Management believes that adoption of Statement 128 will not have a material impact on the Company's EPS amounts. The Company will implement the provisions of Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("Statement 129") for financial statements issued for periods ending after December 15, 1997. Statement 129 establishes standards for disclosing information about an entity's capital structure. There will be no change in the Company's disclosure requirements as a result of adoption of Statement 129. The Company will implement the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income Summary ("Statement 130") for financial statements issued for fiscal years beginning after December 15, 1997. Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Management is evaluating the effect that adoption of Statement 130 will have on the Company's financial statements. The Company will implement the provisions of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131") for financial statements issued for periods beginning after December 15, 1997. Statement 131, which is based on the management approach to segment reporting, includes requirements to report selected segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. Management is evaluating the effect that adoption of Statement 131 will have on the Company's financial statements. FORWARD-LOOKING STATEMENTS This annual report contains "forward-looking statements," including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as to expectations, beliefs, plans, objectives and future financial performance, and assumptions underlying or concerning the foregoing. Such forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. The following are some of the important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements: (1) government actions or initiatives, including (a) attempts to limit or otherwise regulate the sale of adult-oriented materials, including print, video and online materials or businesses such as casino gaming, (b) regulation of the advertisement of tobacco products, or (c) substantive changes in postal regulations or rates, (2) increases in paper prices, (3) changes in distribution technology and/or unforeseen delays in the implementation of such technology by the cable and satellite industries that might affect the Company's plans and assumptions regarding carriage of its program services, (4) increased competition for advertisers from other publications and media or any significant decrease in spending by advertisers generally or with respect to the adult male market, and (5) increased competition for transponders and channel space, and any decline in the Company's access to, and acceptance by, cable systems. 31 Consolidated Statements of Operations for the years ended June 30
(in thousands, except per share amounts) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Net revenues $ 296,623 $ 276,587 $ 247,249 - -------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales (245,023) (234,247) (214,327) Selling and administrative expenses (35,855) (32,847) (29,865) - -------------------------------------------------------------------------------------------------- Total costs and expenses (280,878) (267,094) (244,192) - -------------------------------------------------------------------------------------------------- Operating income 15,745 9,493 3,057 - -------------------------------------------------------------------------------------------------- Nonoperating income (expense) Investment income 73 88 139 Interest expense (427) (680) (708) Other, net (640) (452) (52) - -------------------------------------------------------------------------------------------------- Total nonoperating expense (994) (1,044) (621) - -------------------------------------------------------------------------------------------------- Income before income taxes 14,751 8,449 2,436 Income tax benefit (expense) 6,643 (4,197) (1,807) - -------------------------------------------------------------------------------------------------- Net income $ 21,394 $ 4,252 $ 629 ================================================================================================== Weighted average number of common shares outstanding 20,318 20,014 19,984 ================================================================================================== Net income per common share $ 1.05 $ 0.21 $ 0.03 ==================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 32 Consolidated Balance Sheets as of June 30
(in thousands, except share data) 1997 1996* - ------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 1,303 $ 2,438 Receivables, net of allowance for doubtful accounts of $3,882 and $3,009 32,326 29,110 Inventories 23,304 23,499 Programming costs 41,954 33,873 Deferred subscription acquisition costs 9,077 9,569 Other current assets 12,315 10,420 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 120,279 108,909 - ------------------------------------------------------------------------------------------------------------------------ Property and equipment Land 292 292 Buildings and improvements 8,332 8,333 Furniture and equipment 20,554 20,352 Leasehold improvements 8,653 8,427 - ------------------------------------------------------------------------------------------------------------------------ Total property and equipment 37,831 37,404 Accumulated depreciation (27,524) (25,510) - ------------------------------------------------------------------------------------------------------------------------ Property and equipment, net 10,307 11,894 - ------------------------------------------------------------------------------------------------------------------------ Programming costs--noncurrent 4,673 3,362 Trademarks 13,761 11,887 Net deferred tax assets 14,145 4,191 Other noncurrent assets 12,377 10,626 - ------------------------------------------------------------------------------------------------------------------------ Total assets $175,542 $150,869 ======================================================================================================================== Liabilities Short-term borrowings $ 4,500 $ 5,000 Current financing obligations 347 340 Accounts payable 26,914 22,745 Accrued salaries, wages and employee benefits 7,232 6,941 Reserves for losses on disposals of discontinued operations 628 707 Income taxes payable 1,227 970 Deferred revenues 42,273 44,378 Other liabilities and accrued expenses 7,937 8,940 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 91,058 90,021 - ------------------------------------------------------------------------------------------------------------------------ Long-term financing obligations - 347 Other noncurrent liabilities 8,351 8,218 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 99,409 98,586 - ------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies Shareholders' Equity Common stock, $0.01 par value Class A-7,500,000 shares authorized; 5,042,381 issued 50 50 Class B-30,000,000 shares authorized; 17,029,018 and 16,963,393 issued 170 170 Capital in excess of par value 42,645 40,867 Retained earnings 44,192 22,798 Foreign currency translation adjustment (74) (17) Unearned compensation restricted stock (4,089) (4,549) Less cost of 293,427 Class A common shares and 987,341 and 1,040,045 Class B common shares in treasury (6,761) (7,036) - ------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 76,133 52,283 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $175,542 $150,869 ======================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. * Certain reclassifications have been made to conform to the fiscal 1997 presentation. 33
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1997, 1996 and 1995
Class A Class B Capital in Common Common Excess of Retained (in thousands of dollars) Stock Stock* Par Value* Earnings Other - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 $50 $165 $36,381 $17,917 $ - Net income - - - 629 - Exercise of 4,500 Class A and 20,000 Class B stock options - - 14 - - Issuance of 960 Class B shares as service awards - - 3 - - Issuance of 516,250 Class B shares as restricted stock awards - 5 4,835 - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 50 170 41,233 18,546 - Net income - - - 4,252 - Exercise of 35,000 Class A and 159,750 Class B stock options - - (81) - - Issuance of 1,499 Class B shares as service awards - - 6 - - Issuance of 20,000 Class B shares as restricted stock awards - - 177 - - Forfeiture of 50,000 Class B shares related to restricted stock awards - - (468) - - Foreign currency translation adjustment - - - - (17) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 50 170 40,867 22,798 (17) Net income - - - 21,394 - Exercise of 57,500 Class B stock options - - 264 - - Issuance of 1,147 Class B shares as service awards - - 9 - - Issuance of 68,750 Class B shares as restricted stock awards - - 940 - - Forfeiture of 28,125 Class B shares related to restricted stock awards - - (263) - - Issuance of 19,057 Class B shares under employee stock purchase plan - - 93 - - Vesting of 121,564 Class B restricted stock awards - - - - - Foreign currency translation adjustment - - - - (57) Income tax benefit related to stock plans - - 735 - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 $50 $170 $42,645 $44,192 $ (74) ==================================================================================================================================
Unearned Compensation Restricted Treasury (in thousands of dollars) Stock* Stock Total - ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 $ - $ (8,202) $46,311 Net income - - 629 Exercise of 4,500 Class A and 20,000 Class B stock options - 128 142 Issuance of 960 Class B shares as service awards - 5 8 Issuance of 516,250 Class B shares as restricted stock awards (4,840) - - - ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 (4,840) (8,069) 47,090 Net income - - 4,252 Exercise of 35,000 Class A and 159,750 Class B stock options - 1,025 944 Issuance of 1,499 Class B shares as service awards - 8 14 Issuance of 20,000 Class B shares as restricted stock awards (177) - - Forfeiture of 50,000 Class B shares related to restricted stock awards 468 - - Foreign currency translation adjustment - - (17) - ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 (4,549) (7,036) 52,283 Net income - - 21,394 Exercise of 57,500 Class B stock options - 170 434 Issuance of 1,147 Class B shares as service awards - 6 15 Issuance of 68,750 Class B shares as restricted stock awards (940) - - Forfeiture of 28,125 Class B shares related to restricted stock awards 263 - - Issuance of 19,057 Class B shares under employee stock purchase plan - 99 192 Vesting of 121,564 Class B restricted stock awards 1,137 - 1,137 Foreign currency translation adjustment - - (57) Income tax benefit related to stock plans - - 735 - ---------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 $ (4,089) $ (6,761) $76,133 ==========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. * Certain reclassifications have been made to conform to the fiscal 1997 presentation. 34 Consolidated Statements of Cash Flows for the years ended June 30
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Operating Activities Net income $ 21,394 $ 4,252 $ 629 Adjustments to reconcile net income to net cash provided by operating activities Depreciation of property and equipment 2,210 2,383 2,531 Amortization of intangible assets 1,893 1,783 1,590 Amortization of investments in entertainment programming 21,355 21,263 20,130 Investments in entertainment programming (30,747) (25,549) (21,313) Changes in current assets and liabilities Receivables (3,286) (4,574) (3,498) Inventories 195 (2,061) (2,160) Deferred subscription acquisition costs 492 (393) 910 Other current assets (2,146) (426) (1,586) Accounts payable 4,169 2,931 5,869 Accrued salaries, wages and employee benefits 1,428 2,853 277 Income taxes payable 284 27 92 Deferred revenues (2,105) 1,468 1,171 Other liabilities and accrued expenses (1,003) 224 581 -------------------------------------- Net change in current assets and liabilities (1,972) 49 1,656 -------------------------------------- Increase in trademarks (2,898) (1,766) (1,856) (Increase) decrease in net deferred tax assets (9,954) 2,399 629 Increase in other noncurrent assets (519) (487) (832) Increase in other noncurrent liabilities 106 258 96 Net cash used for discontinued operations (79) (59) (124) Other, net 750 15 44 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 1,539 4,541 3,180 - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities Additions to property and equipment (671) (760) (382) Acquisitions and funding of equity interests in international ventures (1,905) (3,619) - Other, net 126 211 67 - ------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (2,450) (4,168) (315) - ------------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities Decrease in short-term borrowings (500) - (1,000) Repayment of debt (350) (350) (1,850) Proceeds from exercise of stock options 434 944 198 Proceeds from sales under employee stock purchase plan 192 - - - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (224) 594 (2,652) - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (1,135) 967 213 Cash and cash equivalents at beginning of year 2,438 1,471 1,258 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 1,303 $ 2,438 $ 1,471 ==================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED JUNE 30, 1997 (A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition: Revenues from the sale of magazine subscriptions are recognized over the terms of the subscriptions. Sales of magazines and newsstand specials (net of estimated returns), and revenues from the sale of advertisements, are recorded when each issue goes on sale. Pay television revenues are recognized based on pay-per-view buys and monthly subscriber counts reported each month by the system operators. Domestic home video revenues are recognized based on unit sales reported for new releases each month by the Company's distributor and a distribution agreement for backlist titles. International television revenues are recognized either upon identification of programming scheduled for networks, delivery of programming to customers and/or upon the commencement of the license term. Revenues from the direct marketing of catalog products are recognized when the items are shipped. Cash Equivalents: Cash equivalents are temporary cash investments with an original maturity of three months or less at date of purchase and are stated at cost, which approximates market value. Inventories: Inventories are stated at the lower of cost (average cost and specific cost) or market. Property and Equipment: Property and equipment is stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the terms of the related leases. Repair and maintenance costs are expensed as incurred, and major betterments are capitalized. Sales and retirements of depreciable property and equipment are recorded by removing the related cost and accumulated depreciation from the accounts. Gains or losses on sales and retirements of property and equipment are included in nonoperating income or expense. Deferred Subscription Acquisition Costs: Costs associated with the promotion of magazine subscriptions, which consist primarily of postage, costs to produce direct-mail solicitation materials and other costs to attract and renew subscribers, are deferred and amortized over the period during which the future benefits are expected to be received. This is consistent with the provisions of Statement of Position 93-7, Reporting on Advertising Costs, which the Company adopted in fiscal 1995. See Note E. Programming Costs and Amortization: Programming costs include original programming and film acquisition costs, which are capitalized and amortized. The portion of original programming costs assigned to the domestic pay television market is amortized on the straight-line method over three years. The portion of original programming costs assigned to each of the worldwide home video and international television markets are amortized using the individual-film- forecast-computation method. Film acquisition costs are primarily assigned to the domestic pay television market and are principally amortized on the straight-line method over the license term, generally three years. Management believes that this method provides a reasonable matching of expenses with total estimated revenues over the periods that revenues associated with films and programs are expected to be realized. Film and program amortization is adjusted periodically to reflect changes in the estimates of amounts of related future revenues. Film and program costs are stated at the lower of unamortized cost or estimated net realizable value as determined on a specific identification basis. Based on management's estimate of future total gross revenues as of June 30, 1997, substantially all unamortized programming costs applicable to released programs are expected to be amortized during the next three years. See Note D. Intangible Assets: Trademark acquisition costs are capitalized and amortized on the straight-line method over 40 years. Trademark and copyright defense, registration and/or renewal costs are capitalized and amortized on the straight- line method over 15 years. Other intangible assets are comprised substantially of goodwill, which is amortized generally over 40 years. Accumulated amortization of intangible assets was $11,955,000 and $10,062,000 at June 30, 1997 and 1996, respectively. Income per Common Share: Income per common share was computed on the basis of the weighted average number of shares of both Class A and Class B common stock outstanding during each period. Foreign Exchange Forward Contracts: The Company utilizes forward contracts to minimize the impact of currency movements on royalties received denominated in Japanese yen and German marks. The terms of these contracts are generally one year or less. Gains and losses related to these agreements are recorded in income as part of, and concurrent with, the transaction. As of June 30, 1997 and 1996, the Company had approximately $2,330,000 and $2,300,000, respectively, in outstanding contracts. The difference between these contracts' values and the fair market value of these instruments at June 30, 1997 and 1996 in the aggregate was not material. Minority Interest: The Company owns a majority interest in VIPress Poland Sp. z o.o. ("VIPress"), publisher of the Polish edition of Playboy magazine. The financial statements of VIPress are included in the Company's financial statements. The minority interest in the results of operations is included in nonoperating expense in the Consolidated Statements of Operations and the minority interest in the equity of VIPress is included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. Foreign Currency Translation: Assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rate existing at the balance sheet date. The net exchange differences resulting from these translations are recorded as a separate component of shareholders' equity. Revenues and expenses are translated at average rates for the period. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on 36 management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. New Accounting Pronouncements: The Company will implement the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128") for financial statements issued for periods ending after December 15, 1997. Statement 128 simplifies the previous standards for computing earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which applies to the Company. Management believes that adoption of Statement 128 will not have a material impact on the Company's EPS amounts. The Company will implement the provisions of Statement of Financial Accounting Standards No. 129, Disclosure of Information about Capital Structure ("Statement 129") for financial statements issued for periods ending after December 15, 1997. Statement 129 establishes standards for disclosing information about an entity's capital structure. There will be no change in the Company's disclosure requirements as a result of adoption of Statement 129. The Company will implement the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income Summary ("Statement 130") for financial statements issued for fiscal years beginning after December 15, 1997. Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Management is evaluating the effect that adoption of Statement 130 will have on the Company's financial statements. The Company will implement the provisions of Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131") for financial statements issued for periods beginning after December 15, 1997. Statement 131, which is based on the management approach to segment reporting, includes requirements to report selected segment information quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. Management is evaluating the effect that adoption of Statement 131 will have on the Company's financial statements. (B) Income Taxes The income tax provision (benefit) consisted of the following for the years ended June 30 (in thousands):
1997 1996 1995 - ------------------------------------------------------------------------------ Current: Federal $ 354 $ 241 $ 115 State 501 67 65 Foreign 1,721 1,490 998 - ------------------------------------------------------------------------------ Total current 2,576 1,798 1,178 - ------------------------------------------------------------------------------ Deferred: Federal (9,954) 2,399 629 State -- -- -- Foreign -- -- -- - ------------------------------------------------------------------------------ Total deferred (9,954) 2,399 629 - ------------------------------------------------------------------------------ Benefit of stock compensation recorded in capital in excess of par value 735 -- -- - ------------------------------------------------------------------------------ Total income tax provision (benefit) $(6,643) $4,197 $1,807 ==============================================================================
The income tax provision (benefit) differed from a provision computed at the U.S. statutory tax rate as follows for the years ended June 30 (in thousands):
1997 1996 1995 - ------------------------------------------------------------------------------- Statutory rate tax provision $ 5,163 $2,871 $ 828 Increase (decrease) in taxes resulting from: Foreign withholding tax on licensing income 1,452 1,448 998 State income taxes 501 67 65 Nondeductible expenses 342 129 341 Reduction in valuation allowance (13,486) -- -- Tax benefit of foreign taxes paid or accrued (538) (356) (339) Other (77) 38 (86) - ------------------------------------------------------------------------------- Total income tax provision (benefit) $ (6,643) $4,197 $1,807 - -------------------------------------------------------------------------------
The U.S. statutory tax rate applicable to the Company for fiscal 1997, 1996 and 1995 was 35%, 34% and 34%, respectively. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply in the years in which the temporary differences are expected to reverse. At June 30, 1997, the Company evaluated its net operating loss carryforwards and other deferred tax assets and liabilities in relation to the Company's recent earnings history and its projected future earnings. As a result of this review, the Company changed its judgment about the realizability of the deferred tax assets in future years and reduced the valuation allowance balance by $13.5 million. The significant components of the Company's deferred tax assets and deferred tax liabilities as of June 30, 1996 and 1997 are presented below (in thousands):
June 30, Net June 30, 1996 Change 1997 - ------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 12,734 $ (5,677) $ 7,057 Capital loss carryforwards 10,512 -- 10,512 Tax credit carryforwards 5,851 2,161 8,012 Other deductible temporary differences 9,855 694 10,549 - ------------------------------------------------------------------------------- Total deferred tax assets 38,952 (2,822) 36,130 Valuation allowance (27,971) 12,101 (15,870) - ------------------------------------------------------------------------------- Deferred tax assets 10,981 9,279 20,260 - ------------------------------------------------------------------------------- Deferred tax liabilities: Deferred subscription acquisition costs (3,685) 319 (3,366) Other taxable temporary differences (2,824) 356 (2,468) - ------------------------------------------------------------------------------- Deferred tax liabilities (6,509) 675 (5,834) - ------------------------------------------------------------------------------- Net deferred tax assets $ 4,472 $ 9,954 $14,426 ===============================================================================
In the Consolidated Balance Sheet at June 30, 1996, $0.3 million of the $4.5 million net deferred tax asset is included in "Other current assets" and $4.2 million is segregated as "Net deferred tax assets." In the Consolidated Balance Sheet at June 30, 1997, $0.3 million of the $14.4 million net deferred tax asset is included in "Other current assets" and $14.1 million is segregated as "Net deferred tax assets." In addition to the federal tax benefits in the table above, the Company has net operating loss carryforwards available in various states, none of which are reflected in the net deferred tax assets in the Consolidated Balance Sheets at June 30, 1997 and 1996. Realization of the net deferred tax asset is dependent upon the Company's ability to generate taxable income in future years. The recognition of benefits in the financial statements is based upon projections by management of future operating income and the anticipated reversal of temporary differences that will result in taxable income. Projections of future earnings were based on adjusted historical earnings. In order to fully realize the net deferred tax asset of $14.4 million at June 30, 1997, the Company will need to generate future taxable income of approximately $42.4 million. Management believes that it is more likely than not that the required amount of taxable income will be realized. 37 Management will periodically reconsider the assumptions utilized in the projection of future earnings and, if warranted, increase or decrease the amount of deferred tax benefits recognized through an adjustment to the valuation allowance. At June 30, 1997, the Company had operating loss carryforwards of $20.8 million with $1.2 million expiring in 2004, $2.1 million expiring in 2007, $1.1 million expiring in 2008 and $16.4 million expiring in 2009. The Company had capital loss carryforwards of $30.9 million with $1.0 million expiring in 1998 and $29.9 million expiring in 1999. In addition, foreign tax credit carryforwards of $5.2 million and investment tax credit carryforwards of $1.9 million are available to reduce future U.S. federal income taxes. The foreign tax credit carryforwards expire in 1998 through 2002, and the investment tax credit carryforwards expire in 1998 through 2001. (c) Inventories Inventories consisted of the following at June 30 (in thousands): 1997 1996 - ------------------------------------------------------------------------------- Paper $ 7,564 $10,771 Editorial and other prepublication costs 6,213 6,566 Merchandise finished goods 9,527 6,162 - ------------------------------------------------------------------------------- Total inventories $23,304 $23,499 =============================================================================== (D) PROGRAMMING COSTS Current programming costs consisted of the following at June 30 (in thousands): 1997 1996 - ------------------------------------------------------------------------------- Released, less amortization $31,214 $24,040 Completed, not yet released 10,740 9,833 - ------------------------------------------------------------------------------- Total current programming costs $41,954 $33,873 =============================================================================== Noncurrent programming costs of $4.7 million and $3.4 million at June 30, 1997 and 1996, respectively, consist of programs in the process of production. (E) ADVERTISING COSTS Effective July 1, 1994, the Company adopted the provisions of Statement of Position 93-7, Reporting on Advertising Costs. The Company expenses advertising costs as incurred, except for direct- response advertising. Direct-response advertising consists primarily of costs associated with the promotion of magazine subscriptions and the distribution of catalogs for use in the Company's Catalog Group. The capitalized direct-response advertising costs are amortized over the period during which the future benefits are expected to be received, principally six to 12 months. At June 30, 1997 and 1996, advertising costs of $6.3 million and $6.9 million, respectively, were deferred and included in "Deferred subscription acquisition costs" and "Other current assets" in the Consolidated Balance Sheets. For the fiscal years ended June 30, 1997, 1996 and 1995, the Company's advertising expense was $46.5 million, $44.4 million and $43.5 million, respectively. (F) Discontinued Operations During fiscal 1982, the Company discontinued its resort hotel operations. The net current liabilities related to these discontinued operations have been segregated in the Consolidated Balance Sheets at June 30, 1997 and 1996 as "Reserves for losses on disposals of discontinued operations." In January 1993, the Company received a General Notice from the United States Environmental Protection Agency (the "EPA") as a "potentially responsible party" ("PRP") in connection with a site identified as the Southern Lakes Trap & Skeet Club, apparently located at the Resort-Hotel in Lake Geneva, Wisconsin (the "Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other entities were also identified as PRPs in the notice. The notice relates to actions that may be ordered taken by the EPA to sample for and remove contamination in soils and sediments, purportedly caused by skeet shooting activities at the Resort property. During fiscal 1994, the EPA advised the Company of its position that the area of land requiring remediation is approximately twice the size of the initial site. The Company believes that it has established adequate reserves, which totaled $628,000 at June 30, 1997, to cover the eventual cost of its anticipated share (based on an agreement with one of the other PRPs) of any remediation that may be agreed upon. The Company is also reviewing available defenses and claims it may have against third parties. (G) Financing Obligations Long-term financing obligations consisted of the following at June 30 (in thousands): 1997 1996 - ------------------------------------------------------------------------------- 10% note due in installments through October 1997, net of unamortized discount of $3 and $13, respectively, based upon imputed interest rate of 13% $ 347 $687 Less current maturities, net of unamortized discount of $3 and $10, respectively (347) (340) - ------------------------------------------------------------------------------- Total long-term financing obligations $ - $347 =============================================================================== The last annual maturity of long-term debt is scheduled for fiscal 1998 in the amount of $350,000. The carrying value of this debt approximates the fair market value. The Company has a revolving credit agreement with two domestic banks. The line of credit is in the amount of $35.0 million and matures March 1999. The credit agreement provides for interest based on fixed spreads over specified index rates and for commitment fees based on a combination of the unused portion of the total line of credit and cash balances. The credit agreement, which covers short-term borrowings and the issuance of letters of credit, is collateralized by substantially all of the Company's assets and requires the Company to maintain financial covenants pertaining to net worth, leverage and cash flow. Additionally, there are limitations on other indebtedness and investments, and cash dividends are prohibited. The carrying value of these borrowings approximates the fair market value of the debt. At June 30, 1997, short-term borrowings of $4.5 million and letters of credit of $5.4 million were outstanding compared to short-term borrowings and letters of credit outstanding at June 30, 1996 of $5.0 million and $5.4 million, respectively. The weighted average interest rates on the short-term borrowings outstanding at June 30, 1997 and 1996 were 8.50% and 7.77%, respectively. (H) STOCK PLANS The Company has two plans under which stock options or shares may be granted: the 1991 Non-Qualified Stock Option Plan for Non-Employee Directors (the "Directors' Plan") and the Amended and Restated 1995 Stock Incentive Plan for key employees (the "1995 Stock Incentive Plan"). Previously, stock options were also granted under the 1989 Stock Option Plan (the "1989 Option Plan"). However, at this time, there are no shares available for future grant under this plan. The 1989 Option Plan authorized the grant of nonqualified stock options to key employees to purchase up to 342,500 shares of Class A stock and 1,027,500 shares of Class B stock at a price that was equal to the fair market value at date of grant. The remaining 103,000 Class B options available for future grants under the 1989 Option Plan were transferred into the 1995 Stock Incentive Plan and the remaining 175,100 Class A options were cancelled. The Directors' Plan provides for the grant of nonqualified stock options to each nonemployee director to purchase shares of Class B stock at a price that is equal to the fair market value at date of grant. Options 38 to purchase an aggregate of 80,000 shares of Class B stock may be granted under the Directors' Plan. In addition to the Directors' Plan, in November 1996, the Board of Directors authorized the grant of nonqualified stock options to purchase a total of 20,000 shares of the Company's Class B common stock to two nonemployee directors under no specific plan. The resolution provides for the grant of these options at a price that is equal to the fair market value at date of grant. The 1995 Stock Incentive Plan, which currently provides for Non- Qualified Stock Option, Incentive Stock Option and Restricted Stock Agreements, authorizes the issuance of a total of 1,803,000 shares of Class B stock, which includes the previously mentioned 103,000 shares that were transferred from the 1989 Option Plan and an additional 600,000 shares approved by shareholders of the Company in November 1996. The Non-Qualified and Incentive Stock Option Agreements authorize the grant of options to key employees to purchase shares of Class B stock at a price that is not less than the fair market value at date of grant. All options are generally for a term of ten years and are generally exercisable in cumulative annual installments of 25% each year, beginning on the first anniversary of the date such options were initially granted. The Restricted Stock Agreement provides for the issuance of Class B stock to key employees subject to certain restrictions that lapse upon the Company meeting specified operating income objectives pertaining to a fiscal year. Such operating income objectives are set at $7.5 million, $10.0 million, $15.0 million and $20.0 million, after related expenses. However, vesting requirements for certain restricted stock grants will lapse automatically for any remaining restricted stock on June 30, 2005. The first two operating income objectives of $7.5 million and $10.0 million were met in fiscal 1996 and 1997, respectively, and 121,564 and 115,939 shares of restricted stock vested in August 1996 and 1997, respectively. Compensation expense recognized in fiscal 1997, 1996 and 1995 in connection with the 1995 Stock Incentive Plan was $1,078,000, $972,000 and $228,000, respectively. At June 30, 1997, options to purchase 115,000 shares of Class A stock and 620,565 shares of Class B stock were exercisable under the 1989 Option Plan, options to purchase 22,500 shares of Class B stock were exercisable under the Directors' Plan, and options to purchase 180,000 shares of Class B stock were exercisable under the 1995 Stock Incentive Plan. The Board of Directors has reserved treasury shares for issuance upon exercise of options under the 1989 Option Plan and the directors' grants authorized by the Board of Directors in November 1996. Shares issued upon exercise of options granted or shares awarded under the Directors' Plan or the 1995 Stock Incentive Plan may be either treasury shares or newly issued shares. At June 30, 1997, 456,125 shares of Class B stock were available for future grants of options under the Directors' Plan and the 1995 Stock Incentive Plan. Transactions are summarized as follows: - -------------------------------------------------------------------------------- Stock Options Outstanding - -------------------------------------------------------------------------------- Weighted Average Shares Exercise Price ------------------------------------------------- Class A Class B Class A Class B - -------------------------------------------------------------------------------- Outstanding at June 30, 1994 176,600 993,750 6.35 6.58 Granted - 496,250 - 9.28 Exercised (4,500) (20,000) 6.69 5.61 Canceled (22,100) (161,250) 6.69 6.96 - -------------------------------------------------------------------------------- Outstanding at June 30, 1995 150,000 1,308,750 6.29 7.59 Granted - 40,000 - 9.31 Exercised (35,000) (159,750) 4.88 4.84 Canceled - (42,500) - 9.13 - -------------------------------------------------------------------------------- Outstanding at June 30, 1996 115,000 1,146,500 6.72 7.97 Granted - 477,500 - 13.87 Exercised - (57,500) - 7.55 Canceled - (51,250) - 12.72 - -------------------------------------------------------------------------------- Outstanding at June 30, 1997 115,000 1,515,250 6.72 9.74 - -------------------------------------------------------------------------------- The weighted average exercise prices for Class A and Class B exercisable options at June 30, 1995 were $6.28 and $6.38, respectively, and at June 30, 1996 were $6.72 and $7.36, respectively. The following table summarizes information about stock options at June 30, 1997: Options Outstanding Options Exercisable ---------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ------------------------------------------------------------------------------- Class A $6.69--$7.38 115,000 2.55 6.72 115,000 6.72 Class B $5.38--$8.88 695,250 3.95 7.15 646,815 7.07 $9.38--$12.38 510,000 7.69 10.29 176,250 9.51 $13.63--$16.23 310,000 9.39 14.62 - - - ------------------------------------------------------------------------------- Total Class B 1,515,250 6.32 9.74 823,065 7.59 Restricted Stock Awards Outstanding - ------------------------------------------------------------------------------- Class B - ------------------------------------------------------------------------------- Outstanding at June 30, 1994 - Awarded 516,250 Vested - Canceled - - ------------------------------------------------------------------------------- Outstanding at June 30, 1995 516,250 Awarded 20,000 Vested - Canceled (50,000) - ------------------------------------------------------------------------------- Outstanding at June 30, 1996 486,250 Awarded 68,750 Vested (121,564) Canceled (28,125) - ------------------------------------------------------------------------------- Outstanding at June 30, 1997 405,311 =============================================================================== Effective July 1, 1996 the Company established an Employee Stock Purchase Plan (the "Purchase Plan"), which was approved by shareholders of the Company in November 1996, to provide substantially all regular full- and part-time employees an opportunity to purchase shares of its Class B common stock through payroll deductions up to the lower of 10% of base salary, or $25,000 of fair market value of Class B common stock per calendar year (as required by the Internal Revenue Service). The funds are withheld and then used to acquire stock on the last trading day of each quarter, based on the closing price less a 15% discount. Under the Purchase Plan, shares issued upon purchase may be either treasury shares or newly issued shares and a total of 50,000 shares are available for purchase. During fiscal 1997, approximately 19,000 Class B common shares were sold to employees under the Purchase Plan. The Company's Stock Option and Incentive Plans, along with the Company's Employee Stock Purchase Plan, are accounted for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, no compensation expense has been recognized related to these plans other than for restricted stock awards. Under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), compensation expense is measured at the grant date based on the fair value of the award and is recognized over the vesting periods. The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation expense for these plans been determined consistent with SFAS 123, the Company's net income and net income per common share would have been reduced to the following pro forma amounts for the years ended June 30 (in thousands): 1997 1996 - -------------------------------------------------------------------------------- Net Income As Reported $21,394 $ 4,252 Pro Forma $20,832 $ 4,226 Net Income Per Common Share As Reported $ 1.05 $ 0.21 Pro Forma $ 1.03 $ 0.21 - -------------------------------------------------------------------------------- 39 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1996 - -------------------------------------------------------------- Risk-free interest rate 6.56% 5.98% Expected stock price volatility 40.00% 40.00% Expected dividend yield - - - --------------------------------------------------------------
For fiscal 1996 and 1997, an expected life of six years was used for nonqualified stock options, and the weighted average fair value of options granted was $4.55 and $6.87, respectively. For an incentive stock option granted in fiscal 1997, an expected life of five years was used, and the weighted average fair value of that option granted was $6.17. For fiscal 1996 and 1997, the weighted average fair value of restricted stock awarded was $8.88 and $13.67, respectively. The pro forma effect on net income for fiscal 1997 and 1996 may not be representative of the pro forma effect on net income in future years as the SFAS 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to July 1, 1995. (I) ACQUISITIONS On March 29, 1996 the Company acquired an additional 45% interest in VIPress for approximately $315,000, including approximately $85,000 in acquisition costs. Subsequent to this purchase, the Company owned 90% of the capital stock of VIPress. The acquisition was accounted for under the purchase method and, accordingly, the results of VIPress since the date of acquisition have been included in the Company's Consolidated Statements of Operations. Prior to acquiring the additional 45% interest, the investment was accounted for under the equity method and as such, the Company's proportionate share of net income from VIPress prior to the acquisition was included in nonoperating expense. The acquisition resulted in goodwill of approximately $106,000 which is being amortized over five years. The Company's interest in VIPress may be reduced to a minimum of 80% by the end of fiscal year 2000 as a result of shares that may be sold for a nominal amount to two managing minority partners generally pursuant to an incentive plan that requires certain performance objectives to be met. At June 30, 1997 the Company's interest in VIPress was 88%. Pro forma results reflecting this acquisition, assuming it had been made at the beginning of each period presented, would not be materially different from the results reported. The Company owns a 20% interest and has an option to acquire the remaining 80% interest in duPont Publishing, Inc. ("duPont") at a price based on fair market value as of December 31, 1999. duPont is the publisher of three magazines, duPont Registry, A Buyers Gallery of Fine Automobiles, A Buyers Gallery of Fine Homes and A Buyers Gallery of Fine Boats. Previously, the Company was required to make loans to duPont to fund its working capital requirements. These loans, which bear interest at a rate of 1% over the prime rate and amounted to $125,000 at June 30, 1996, were paid off by June 30, 1997. (J) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest and income taxes was as follows during the years ended June 30 (in thousands):
1997 1996 1995 Interest $ 480 $ 610 $ 774 Income taxes 2,293 1,851 1,064
(K) LEASE COMMITMENTS The Company's principal lease commitments are for office space, a satellite transponder used in its pay television operations, and furniture and equipment. The office leases provide for the Company's payment of its proportionate share of operating expenses and real estate taxes in addition to monthly base rent. The Company's corporate headquarters were under terms of a 15-year lease, which commenced September 1, 1989. In August of 1996 the Company renegotiated this lease on more favorable terms, including a lower base rent which will result in savings of approximately $2.0 million over the initial term of the lease, combined with the Company obtaining certain expansion options in the building. Further, the lease term was extended three years to 2007, with a renewal option for an additional five years. The Entertainment Group's Los Angeles office is under terms of a ten-year lease, which commenced April 1, 1992. The Publishing Group's New York office is under a lease with a term of approximately 11 years, which commenced April 1, 1993. The Publishing Group's Los Angeles photo studio is under terms of a ten-year lease, which commenced January 1, 1994. These leases provide for base rent abatements; however, rent expense is being charged to operations on a straight-line basis over the terms of the leases. This resulted in liabilities of $5.4 million and $5.7 million at June 30, 1997 and 1996, respectively, which are included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. In addition, during fiscal 1993, the Company entered into a five-year lease for the Catalog Group's suburban Chicago operations facility. Due to the growth of the catalog business, the Company began leasing a new larger facility in the same Chicago suburb under a 10 1/2 year lease, which commenced June 1, 1997. The lease under the previous facility was terminated early as of August 31, 1997. In December 1992, the Company executed a lease for its current satellite transponder that became effective January 1, 1993. This operating lease is for a term of approximately nine years and includes a purchase option. A $5.0 million letter of credit was issued under the Company's revolving line of credit for the benefit of the lessor to secure the Company's obligations under this lease. This letter of credit can be irrevocably released based upon the achievement of certain criteria related to annual financial results. The Company leases certain furniture and equipment for use in its operations. The leases are for terms of two to five years and include end-of- lease purchase options. Rent expense for fiscal 1997, 1996 and 1995 was $9,611,000, $9,177,000 and $8,854,000, respectively. There was no contingent rent expense or sublease income in any of these fiscal years. The minimum commitment at June 30, 1997, under operating leases with noncancelable terms in excess of one year, was as follows (in thousands):
Operating Year ending June 30 Leases - ------------------------------------------------------------------- 1998 $ 9,880 1999 8,810 2000 8,336 2001 8,055 2002 6,085 Later years 15,239 - ------------------------------------------------------------------- Total minimum lease payments $56,405 ===================================================================
(L) CABLE TELEVISION Effective April 1, 1986, the Company assumed marketing and distribution responsibilities for The Playboy Channel and other North American Playboy pay television products (the "Service") from its former distributor, Rainbow Programming Services Company ("Rainbow"). The termination agreement provided for the assignment to the Company of all distribution contracts with cable system operators and others that carried the Service. 40 Under the termination agreement, Rainbow was to receive a monthly royalty of 5% of revenues received by the Company for the Service, subject to a minimum royalty based on number of subscribers, as long as the Service is in operation. These royalty payments were discontinued April 30, 1996, when the agreement ended. The agreement provided for noncompetition in the North American distribution and production of an adult-oriented pay television service by Rainbow as long as royalty payments were being made. (M) Segment Information The four industry segments in which the Company currently operates are as follows: Publishing, Entertainment, Product Marketing and Catalog. Publishing Group operations include the publication of Playboy magazine; other domestic publishing businesses, comprising newsstand specials, calendars and new media and ancillary businesses; the licensing of international editions of Playboy magazine; and the production of the Playboy Jazz Festival. Entertainment Group operations include the production and marketing of programming through Playboy TV, other domestic television, international television and worldwide home video businesses as well as the worldwide distribution of programming through AdulTVision and the co-production of feature movies. Product Marketing Group operations include licensing the manufacture, sale and distribution of consumer products carrying one or more of the Company's trademarks and the licensing of artwork owned by the Company. Catalog Group operations include the direct marketing of three catalogs: Critics' Choice Video, Collectors' Choice Music and Playboy, combined with an online service, the Playboy Store, which markets Playboy catalog products. Financial information relating to industry segments for fiscal 1997, 1996 and 1995 is presented on page 24 and is an integral part of these consolidated financial statements. (N) Employee Benefit Plan The Company's Employees Investment Savings Plan is a defined contribution plan comprising two components, a profit sharing plan and a 401(k) plan. The profit sharing plan covers all employees who have completed a full year of service of at least 1,000 hours. The Company's discretionary contribution to the profit sharing plan is distributed to each eligible employee's account in an amount equal to the ratio of each eligible employee's compensation, subject to Internal Revenue Service limitations, to the total compensation paid to all such employees. The fiscal 1997, 1996 and 1995 contributions were approximately $1,035,000, $620,000 and $200,000, respectively. Eligibility for the 401(k) plan is either upon date of hire or after an employee has completed a full year of service of at least 1,000 hours, depending on the employee's annual salary. The Company makes matching contributions to the 401(k) plan based on each participating employee's eligible compensation. In fiscal 1997, 1996 and 1995 the maximum matching contributions were 3 1/2%, 2 3/4% and 2 3/4%, respectively, of each employee's eligible compensation, subject to Internal Revenue Service limitations. For fiscal 1998, the maximum match will be 3 1/2% of such compensation. The Company's matching contributions in fiscal 1997, 1996 and 1995 related to this plan were approximately $920,000, $630,000 and $630,000, respectively. Effective October 1, 1992, the Company established a Deferred Compensation Plan, which permits certain employees and directors to annually elect to defer a portion of their compensation. The Deferred Compensation Plan is available to approximately 60 of the Company's most highly compensated employees and all nonemployee directors. Employee participants may defer between 5% and 15% (in 1% increments) of salary, and up to 50% (in 10% increments) of payments due under Executive Incentive Compensation Plans or sales commissions. Directors may defer between 25% and 100% (in 25% increments) of their annual retainer and meeting fees. Amounts deferred under this plan are credited with interest each quarter at a rate equal to the preceding quarter's average composite yield on corporate bonds as published by Moody's Investor's Service, Inc. All amounts deferred and interest credited are 100% vested immediately and are general unsecured obligations of the Company. Such obligations totaled $1,540,000 and $1,186,000 at June 30, 1997 and 1996, respectively, and are included in "Other noncurrent liabilities" in the Consolidated Balance Sheets. (O) Contingencies Playboy TV's programming is delivered primarily through a communications satellite transponder. The Company's current transponder lease, effective January 1, 1993, contains protections typical in the industry against transponder failure, including access to spare transponders on the same satellite as well as transponders on another satellite currently in operation. Access to the transponder may be denied under certain narrowly defined circumstances relating to violations of law or threats to revoke the license of the satellite owner to operate the satellite based on programming content. However, the Company has the right to challenge any such denial and believes that the transponder will continue to be available to it through the end of the expected life of the satellite (currently estimated to be in 2004). In February 1996, the Company filed suit challenging Section 505 of the Telecommunications Act of 1996 which, among other things, regulates the cable transmission of adult programming, such as the Company's domestic pay television programs. The Company's revenues attributable to its domestic pay television cable services will continue to be materially adversely affected as a result of enforcement of Section 505, which commenced May 18, 1997, due to reduced buy rates from the systems that roll back carriage to a 10:00 p.m. start time and possibly reduced carriage from cable operators due to aggressive competition for carriage from all program suppliers. Preliminary results which the Company has received from the cable operators indicate that the Entertainment Group's annual revenue decline will be approximately $5 million. The Company believes that it has established adequate reserves in connection with the General Notice received from the EPA in January 1993 related to its discontinued resort hotel operations. See Note F. (P) Quarterly Results of Operations (Unaudited) The following is a summary of the unaudited quarterly results of operations for the years ended June 30, 1997 and 1996 (in thousands, except per share amounts):
Quarters Ended -------------------------------------------------- 1997 Sept. 30 Dec. 31 Mar. 31 June 30 Year - ------------------------------------------------------------------------------------------------ Net revenues $66,224 $79,779 $73,247 $77,373 $296,623 Gross profit 9,963 13,978 14,394 13,265 51,600 Operating income 2,429 5,265 4,667 3,384 15,745 Income before extraordinary item and cumulative effect of change in accounting principle 1,037 2,825 2,510 15,022 21,394 Net income 1,037 2,825 2,510 15,022 21,394 Income before extraordinary item and cumulative effect of change in accounting principle per common share 0.05 0.14 0.12 0.71* 1.05 Net income per common share 0.05 0.14 0.12 0.71* 1.05 Common stock price Class A high 14 7/8 12 1/2 15 5/8 15 Class A low 12 1/4 9 5/8 9 1/2 10 7/8 Class B high 15 1/4 12 3/4 16 3/8 16 Class B low $12 1/8 $ 9 1/2 $ 9 3/8 $11 1/4
41
Quarters Ended 1996 Sept. 30 Dec. 31 Mar. 31 June 30 Year Net revenues $62,263 $71,618 $66,257 $76,449 $276,587 Gross profit 8,579 11,120 9,555 13,086 42,340 Operating income 1,440 2,854 1,835 3,364 9,493 Income before extraordinary item and cumulative effect of change in accounting principle 1,012 1,138 676 1,426 4,252 Net income 1,012 1,138 676 1,426 4,252 Income before extraordinary item and cumulative effect of change in accounting principle per common share 0.05 0.06 0.03 0.07 0.21 Net income per common share 0.05 0.06 0.03 0.07 0.21 Common stock price Class A high 9 5/8 9 1/2 11 15 3/4 Class A low 7 7/8 8 5/8 8 3/8 10 Class B high 9 3/8 9 1/4 11 1/8 16 1/2 Class B low $ 7 3/8 $ 7 1/2 $ 7 1/2 $ 9 7/8
*Represents fully diluted EPS as dilution was greater than three percent. Primary EPS was $0.72. As only the fourth quarter of fiscal 1997 had dilution of greater than three percent, all other amounts represent simple EPS. Due to the above, the sum of the four quarters does not equal the 1997 fiscal year amount. Net income for the fourth quarter of fiscal 1997 includes a federal income tax benefit of $13,486 related to net operating loss and tax credit carryforwards. See Note B. 42 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Playboy Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Playboy Enterprises, Inc. and its Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Playboy Enterprises, Inc. and its Subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Chicago, Illinois August 5, 1997 REPORT OF MANAGEMENT The consolidated financial statements and all related financial information herein are the responsibility of the Company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements. The Company maintains a system of internal controls that it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and are properly recorded, that assets are safeguarded and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and internal audits. Coopers & Lybrand L.L.P., independent accountants, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of four nonmanagement directors, meets periodically with Coopers & Lybrand L.L.P., management representatives and the Company's internal auditor to review internal accounting control and auditing and financial reporting matters. Both Coopers & Lybrand L.L.P. and the internal auditor have unrestricted access to the Audit Committee and may meet with it without management representatives being present. /s/ Christie Hefner Christie Hefner Chairman and Chief Executive Officer /s/ Linda Havard Linda Havard Executive Vice President, Finance and Operations, and Chief Financial Officer 43 EX-21 14 SUBSIDIARIES PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The accounts of all of the subsidiaries are included in the Company's Consolidated Financial Statements. Set forth below are the names of certain active corporate subsidiaries of the Company as of June 30, 1997. Certain subsidiaries are omitted because such subsidiaries considered individually or in the aggregate would not constitute a significant subsidiary. Indented names are subsidiaries of the company under which they are indented:
Percent Jurisdiction in Ownership which Incorporated By Immediate Name of Company or Organized Parent ---------------------------------- ------------------ ------------ Playboy Enterprises, Inc. (parent) Delaware Lake Shore Press, Inc. Delaware 100% Lifestyle Brands, Ltd. Delaware 100% Playboy Models, Inc. Illinois 100% Playboy Products and Services International, B.V. The Netherlands 100% Playboy Entertainment Group, Inc. Delaware 100% After Dark Video, Inc. Delaware 100% Alta Loma Productions, Inc. Delaware 100% Cameo Films, Inc. Illinois 100% Impulse Productions, Inc. Delaware 100% Precious Films, Inc. California 100% AdulTVision Communications, Inc. Delaware 100% Mystique Films, Inc. California 100% Women Productions, Inc. California 100% Playboy Clubs International, Inc. Delaware 100% Playboy Preferred, Inc. Illinois 100% Critics' Choice Video, Inc. Illinois 100% Special Editions, Ltd. Delaware 100% Playboy Shows, Inc. Delaware 100% Telecom International, Inc. Florida 100% Playboy Gaming International, Ltd. Delaware 100% Playboy Gaming Greece, Ltd. Delaware 100% Playboy Properties, Inc. Delaware 100% VIPress Poland Sp. z o.o Poland 88%
EX-23 15 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements on Form S-8 (File Nos. 33-37666, 33-46113, 33-58145, 33-60631, 333-06843, 333- 30185 and 333-30201) of our report dated August 5, 1997, on our audits of the consolidated financial statements and financial statement schedule of Playboy Enterprises, Inc. as of June 30, 1997 and 1996, and for the years ended June 30, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10- K. Coopers & Lybrand L.L.P. Chicago, Illinois September 24, 1997 EX-27 16 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 1,303 0 36,208 3,882 23,304 120,279 37,831 27,524 175,542 91,058 0 0 0 220 75,913 175,542 296,623 296,623 245,023 280,878 0 0 427 14,751 (6,643) 21,394 0 0 0 21,394 1.03 1.02
-----END PRIVACY-ENHANCED MESSAGE-----