UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ------------------------
Class A Common Stock, par value $0.01 per share ...... New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share ...... New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of Class A Common Stock, par value $0.01 per
share, held by nonaffiliates on February 28, 2002 (based upon the closing sale
price on the New York Stock Exchange) was $19,783,146. The aggregate market
value of Class B Common Stock, par value $0.01 per share, held by
nonaffiliates on February 28, 2002 (based upon the closing sale price on the
New York Stock Exchange) was $214,618,476.
As of February 28, 2002, there were 4,864,102 shares of Class A Common
Stock, par value $0.01 per share, and 19,676,047 shares of Class B Common
Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Notice of Annual Meeting of Stockholders and Proxy Part III, Items 10-13,
the Statement (to be filed) relating to the Annual to the extent described
Meeting of Stockholders to be held in May 2002 therein
1
PLAYBOY ENTERPRISES, INC.
2001 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................................................3
Item 2. Properties.............................................................................................14
Item 3. Legal Proceedings......................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................................15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................................15
Item 6. Selected Financial Data................................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................................30
Item 8. Financial Statements and Supplementary Data............................................................30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................59
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................................59
Item 11. Executive Compensation.................................................................................59
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................59
Item 13. Certain Relationships and Related Transactions.........................................................59
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................................59
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A is being filed with respect to
the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 2001 filed with the Securities and Exchange Commission (the "SEC") on
March 21, 2002 (the "Form 10-K"). The Form 10-K is hereby amended and restated
in its entirety.
2
PART I
Item. 1. Business
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The term "Company" means Playboy Enterprises, Inc., together with its
subsidiaries and predecessors, unless the context otherwise requires. The
Company was organized in 1953 to publish Playboy magazine. Shortly after its
inception, the Company expanded its operations by engaging in entertainment
businesses that are related to the content and style of Playboy magazine, and
licensing its trademarks for use on various consumer products and services.
The Company's businesses have been classified into the following
reportable segments: Entertainment, Publishing, Playboy Online, Catalog and
Licensing Businesses. The sale of the Collectors' Choice Music catalog in
November 2001 ended the Company's presence in the nonbranded print Catalog
Group business. Net revenues, loss from continuing operations before income
taxes and cumulative effect of change in accounting principle, earnings before
interest, taxes, depreciation and amortization ("EBITDA"), depreciation and
amortization and identifiable assets of each reportable segment are set forth
in Note (U) Segment Information of Notes to Consolidated Financial Statements.
The Company's trademarks are critical to the success and potential
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, Spice, Sarah Coventry and numerous domain names
related to its online business.
ENTERTAINMENT GROUP
The Entertainment Group operations include the production and marketing
of programming through domestic TV networks, international TV and worldwide
home video markets.
On July 6, 2001, the Company acquired The Hot Network and The Hot Zone
networks, together with the related television assets of Califa Entertainment
Group, Inc. ("Califa"). In addition, under the asset purchase agreement
related to the Califa networks, upon the resolution of certain contingencies,
the Company will complete the acquisition of the Vivid TV network and the
related television assets of V.O.D., Inc. ("VODI"), a separate entity owned by
Califa's principals. Through provisions in the asset purchase agreement, the
Company is currently operating Vivid TV and has generally assumed the risks
and benefits associated with the ownership of the Vivid TV assets until the
closing. These transactions are referred to collectively as the "Califa
acquisition." The addition of these networks into the Company's television
networks portfolio enables the Company to offer a wider range of adult
programming. See Note (B) Acquisitions of Notes to Consolidated Financial
Statements.
Programming
The Entertainment Group develops, produces and distributes programming
for worldwide TV and home video markets. Its productions have included feature
films, magazine-format shows, reality-based and dramatic series,
documentaries, live events, anthologies of sexy short stories and celebrity
and Playmate features. The Company continues to increase the amount and
variety of quality programming by offering new genres, such as Director's Cut
films. Its programming features stylized eroticism in a variety of
entertaining formats for men and women and does not contain scenes that link
sexuality with violence. The Company's programming is designed to be adapted
easily into a number of formats, enabling the Company to spread its relatively
fixed programming costs over multiple product lines. The majority of the
programming that airs on the movie networks, comprised of Spice, Spice 2, The
Hot Network, The Hot Zone and Vivid TV, is licensed by the Company from third
parties.
The Company invests in high-quality Playboy style programming to
support its expanding businesses. The Company invested $37.3 million, $33.1
million and $35.3 million in entertainment programming in 2001, 2000 and 1999,
respectively. These amounts, which also include expenditures for licensed
programming, resulted in the production of 232, 192 and 172 hours of original
programming, respectively. At December 31, 2001, the Company's library of
primarily exclusive, Playboy branded original programming totaled
approximately 2,000 hours. In 2002, the Company expects to invest
approximately $45 million in Company-produced and licensed programming, which
could vary based on, among other things, the timing of completing productions.
3
The Company also created and markets The Eros Collection, a line of
small-budget, non-Playboy branded movies. These films air on Playboy TV, are
distributed internationally and are available for rent or sale through home
video retailers, such as Blockbuster Video stores. In addition, these movies
frequently air on the HBO and Showtime networks.
The Company has produced or co-produced a number of shows which air on
the domestic Playboy TV network and are also distributed internationally.
Additionally, some episodes have been released as Playboy Home Video titles
and/or have been licensed to other networks, such as HBO and Showtime. Some of
the series in recent years have included Women: Stories of Passion, Red Shoe
Diaries, which was co-produced with Zalman King Entertainment, Inc., Beverly
Hills Bordello and Passion Cove. In 2001, the Company premiered its two newest
series, Sexy Urban Legends and 7 Lives Xposed, Playboy TV's first venture into
reality-based television.
In 2002, the Company expects to move to a new 105,000 square-foot
studio facility where the Company will have a centralized digital, technical
and programming facility for both the Entertainment and Playboy Online Groups.
The move will enable the Company to produce more original programs in a more
efficient and cost effective operating environment.
Domestic TV Networks
The Company currently operates multiple domestic TV networks. Playboy
TV is offered on cable and through the satellite direct-to-home ("DTH") market
on a pay-per-view, video-on-demand ("VOD") and monthly subscription basis. In
1999, the Company acquired Spice Entertainment Companies, Inc. ("Spice"), a
leading provider of adult television entertainment. The Spice and Spice 2
networks are offered on cable on a pay-per-view basis. As previously
discussed, in July 2001, through the Califa acquisition the Company added the
The Hot Network, The Hot Zone and Vivid TV networks to its portfolio, which
are all offered on cable and through the DTH market on a pay-per-view basis.
The Company intends to rebrand these new networks into its Spice branded
portfolio. The Company also recognizes royalty revenues from the license of
its programming to other pay networks.
Pay-per-view programming can be delivered through any number of
delivery methods, including: (a) digital and analog cable television, (b) DTH
to households with small dishes receiving a Ku-band medium or high power
digital signal ("DBS"), such as those currently offered by DirecTV and
EchoStar, or with large satellite dishes receiving a C-band low power analog
or digital signal ("TVRO"), (c) wireless cable systems, and (d) technologies
such as cable modem and the Internet.
The following table illustrates certain information regarding approximate
household units and current average retail rates for the Company's networks
(in millions, except retail rates):
Household Units (1) Average Retail Rates
----------------------- -------------------------------
Dec. 31, Dec. 31, Monthly Pay-
2001 2000 Subscription Per-View
- -----------------------------------------------------------------------------------------------------
Playboy TV
DTH 18.1 15.4 $ 15.60 $ 8.00
Cable digital 10.3 3.2 12.25 7.90
Cable analog addressable 7.8 11.0 14.50 7.75
Movie Networks (2)
DTH 35.3 - - 9.35-11.00
Cable digital 25.3 8.4 - 7.65-10.95
Cable analog addressable 17.0 16.2 $ - $ 7.45-$11.95
- -----------------------------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given
network per carriage platform. A single household can represent multiple
household units if two or more of the Company's networks and/or multiple
platforms (i.e. analog and digital) are available to that household.
(2) Includes The Hot Network, The Hot Zone and the Vivid TV networks from the
Califa acquisition in July 2001.
4
Most cable service in the United States is distributed through large
multiple system operators ("MSOs") and their affiliated cable systems ("cable
affiliates"). Once arrangements are made with an MSO, the Company is able to
negotiate channel space for its networks with the cable affiliates. Individual
cable affiliates determine the retail price of both pay-per-view, which is
dependent on the length of the block of programming, and monthly subscription
services, which can be dependent on the number of premium services to which a
household subscribes. The Company's revenues reflect its contractual share of
the amounts received by the cable affiliates, which are based on both the
retail rates set by the cable affiliates and the number of buys and/or
subscribers.
Growth in the cable pay-per-view market is expected to result
principally from cable system upgrades, utilizing digital compression and
other bandwidth expansion methods that provide cable operators additional
channel capacity. In recent years, cable operators have been shifting from
analog to digital technology in order to upgrade their cable systems and to
counteract competition from DBS operators. Digital cable television has
several advantages over analog cable television, including more channels,
better audio and video quality, advanced set-top boxes that are addressable, a
secure fully scrambled signal, integrated program guides and advanced ordering
technology. Paul Kagan Associates, Inc. ("Kagan"), an independent media
research firm, projects average annual increases of approximately 1% in total
cable households and 35% in cable digital households through December 31,
2004. During this same period, Kagan projects an average annual decrease of
approximately 39% in cable analog addressable households, as customers move
from older analog systems to the digital or DBS platforms.
Additionally, recent technology advances will allow consumers to not
only order programs on a pay-per-view basis, but also to choose VOD, which
differs from traditional pay-per-view in that it allows viewers to purchase a
specific movie or program for a period of time with VCR functionality. The
basic premise is that consumers have a menu of options to choose from and can
buy a program "on demand" without having to adhere to the schedule of a
programmed network. The Company believes it is well positioned for this new
phase of technology because of the power of its brand names, its large library
of original programming and its agreements with leading major adult movie
producers for VOD rights. Growth of this technology will be dependent on a
number of factors including, but not limited to, operator investment,
server/bandwidth capacity, availability of a two-way communication path,
programmer rights issues and consumer acceptance.
In addition to cable, some of the Company's networks are provided via
encrypted signal to home satellite dish viewers. Playboy TV is the only adult
service to be available on all four DBS services in the United States and
Canada. It is currently available on DirecTV and EchoStar in the United States
and ExpressVu and Star Choice in Canada. Playboy TV was previously available
on PrimeStar, which was acquired by DirecTV in 1999. The Hot Network, The Hot
Zone and Vivid TV are all available on DirecTV and, in September 2001, The Hot
Zone also was launched on EchoStar. The Company's revenues reflect its
contractual share of the amounts received by the DTH operators, which are
based on both the retail rates set by the DTH operators and the number of buys
and/or subscribers.
In recent years, the Company has added a significant number of viewers
through the DBS market, providing the Company with an expanded customer base
via digital transmission which has historically produced higher buy rates than
analog cable markets. Kagan projects an average annual increase of
approximately 10% in DBS households through December 31, 2004. In October
2001, EchoStar announced plans to merge with DirecTV. The merger is expected
to close in the second half of 2002, subject to certain conditions precedent.
If this proposed merger becomes effective, the Company believes it will
maintain its position as the leading provider of adult material through the
merged entity, although the actual impact cannot be determined.
Competition among television programming providers is intense for both
channel space and viewer spending. The Company's competition varies in both
the type and quality of programming offered, but consists primarily of other
premium pay services, such as general-interest premium channels like HBO and
Showtime, and other adult movie pay services. The Company competes with the
other pay services as it (a) attempts to obtain or renew carriage with
individual cable affiliates and DTH operators, (b) negotiates fee arrangements
with these operators, and (c) markets its programming to consumers. Over the
past several years, the Company has been adversely impacted by all of the
competitive factors described above. While there can be no assurance that the
Company will be able to maintain its current cable and DTH carriage or fee
structures or maintain or grow its viewership in the face of this competition,
the Company believes that strong Playboy and Spice brand recognition, the
quality of its original programming and its ability to appeal to a broad range
of adult audiences are critical factors which differentiate the Company's
networks from other providers of adult programming. Additionally, in response
to consumers' requests for a wider spectrum of adult-programming choices,
through the Califa acquisition in July 2001, the Company added additional
adult-oriented pay networks to the Company's portfolio. Also, to optimize
revenue potential, the Company is encouraging cable and DTH operators to
market the full range of pay-per-view, VOD and monthly subscription options to
consumers.
5
From time to time, certain groups have sought to exclude the Company's
programming from 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 and DTH systems, but the
nature and impact of any such limitations in the future cannot be determined.
The programming of the Company's domestic TV networks is delivered to
cable and DTH operators through a communications satellite transponder. The
Company's satellite lease agreement for Playboy TV expired in October 2001 and
the Company began service on a replacement transponder under an agreement
which expires in 2010. The Company has an additional transponder service
agreement related to its other networks, the term of which currently extends
through 2015. The Company's current transponder service agreements contain
protections typical in the industry against transponder failure, including
access to spare transponders, and conditions under which the Company's access
may be denied. Major limitations on the Company's access to cable or DTH
systems or satellite transponder capacity could materially adversely affect
the Company's operating performance. There have been no instances in which the
Company has been denied access to transponder service.
International TV
During 1999, Playboy TV International, LLC ("PTVI") was formed as a
joint venture between the Company and a member of the Cisneros Group
("Cisneros"). In 2001, Claxson Interactive Group, Inc. ("Claxson") succeeded
Cisneros as the Company's joint venture partner. PTVI has the exclusive right
to create and launch new television networks under the Playboy and Spice
brands outside of the United States and Canada and, under certain
circumstances, to license programming to third parties. PTVI will also own and
operate all existing international Playboy TV and Spice networks. In addition,
the Company and PTVI have entered into program supply and trademark license
agreements which extend until 2049, unless earlier terminated in accordance
with their terms or the operating agreement. The operating agreement for PTVI
includes a non-competition provision for the venture partners and their
affiliates. These international networks are programmed principally with
U.S.-originated content, which is subtitled or dubbed, and complemented by
local content. As of December 31, 2001, the international networks reached
approximately 31.0 million households, compared to approximately 26.2 million
households at December 31, 2000.
Under the terms of PTVI's operating agreement, the maximum mandatory
capital contributions to the joint venture by the partners is $100 million, of
which $61.6 million has been contributed through December 31, 2001. Each of
the joint venture partners is required to make capital contributions to PTVI
in accordance with its equity interest in PTVI up to the $100 million cap. The
Company owns a 19.9% equity interest in PTVI and, accordingly, has made
capital contributions in the amount of $12.3 million to PTVI through December
31, 2001. After the maximum funding cap has been reached, additional capital
contributions, if required to operate the business, are voluntary. The Company
has the option to increase its equity up to 50%. The option expires on the
earlier to occur of September 15, 2009 and 30 days after the date on which
PTVI reaches "cash breakeven" as specified in PTVI's operating agreement. The
purchase price for the option through September 15, 2003 is the founders'
price plus interest as specified in the operating agreement. Founders' price
as of a specified date means, with respect to the price per one percentage
interest of PTVI acquired by the Company, an amount equal to the sum of the
capital contributions to PTVI by the venture partners through and including
that date, divided by 100. After September 15, 2003, the purchase price is
based on the market value of the acquired interests. The option purchase price
can be paid in cash and/or the Company's Class B common stock ("Class B
stock") at the Company's option.
In return for the exclusive international TV rights for the use of the
Playboy tradename, film and video library, and for the acquisition of the
international rights to the Spice film library, the U.K. and Japan Playboy TV
networks and certain international distribution contracts, PTVI is obligated
to make total payments of $100.0 million to the Company over six years, of
which $42.5 million has been received through the end of 2001. The remaining
payments are owed over the next three years as follows: $7.5 million, $25.0
million and $25.0 million. Under the program supply agreement, PTVI has a
commitment with the Company to license international TV rights to each year's
output production which expires in 2049, with payments representing a
percentage of the Company's annual production spending. Until PTVI generates
sufficient cash flow from operations, PTVI's ability to fund its operations,
including making library license and programming output payments to the
Company, is dependent on receiving capital contributions principally from
Claxson and also from the Company. Under PTVI's operating agreement, if either
member fails to make any mandatory capital contributions when due, PTVI must
send the defaulting member written notice of such default and provide the
defaulting member 15 days from the date of the notice to contribute the
required capital contribution in order to cure the default. If the defaulting
member fails to cure the default, the management committee of PTVI, acting
without the vote of the members of the management committee appointed by the
defaulting member, may elect to permit the non-defaulting member to advance
funds to PTVI to cover the unpaid amounts. Amounts that a non-defaulting
member advances become a demand loan due and owing from the defaulting member
to the non-defaulting member, bearing interest at 150 basis points above the
6
prime rate. If the default is not cured within a further period of 90 days,
the non-defaulting member that has advanced funds may elect to convert all or
a portion of the loan plus accrued interest into a capital contribution to
PTVI. In that event, the percentage interests of the members would be adjusted
to reflect the additional capital contribution by the non-defaulting member.
If a defaulting member fails to contribute mandatory capital contributions on
three occasions, whether or not consecutive, and the defaulting member fails
to cure the defaults within the 15 day cure period, the management committee
may propose to dissolve PTVI in accordance with the operating agreement or may
elect to permit PTVI or the non-defaulting member to purchase the defaulting
member's entire equity interest in PTVI for an amount equal to the positive
balance of the defaulting member's capital account in PTVI less the amount of
unpaid capital contributions or, if advances have been made, the advances plus
interest. In addition, PTVI may be dissolved if, among other things, there is
an uncured breach of a material obligation under the program supply or
trademark license agreements or the commission of a breach of the operating
agreement.
The Company also has the right to terminate the program supply and
trademark license agreements in the event it elects to dissolve PTVI as a
result of Claxson's failure to perform its obligations under PTVI's operating
agreement or PTVI's failure to perform under the program supply and trademark
license agreements, including PTVI's failure to make required payments to the
Company when due, subject to specified rights to cure.
In a recent filing with the SEC, Claxson indicated that it is
evaluating a number of alternatives and taking certain steps which, if not
completed successfully and in a timely manner, would result in its auditors
expressing a "going concern opinion" in connection with the filing of
Claxson's annual report in June 2002. Although Claxson has, to date, funded
its obligations with respect to PTVI, PTVI's independent auditors have
expressed a "going concern opinion" in their report relating to PTVI's
financial statements for the fiscal year ended December 31, 2001. See Note (C)
Playboy TV International, LLC Joint Venture of Notes to Consolidated Financial
Statements. If PTVI fails to make these payments to the Company in a timely
manner, either because of the failure of the partners to make capital
contributions or otherwise, the Company's future financial condition and
operating results could be materially adversely affected.
Prior to the formation of the PTVI joint venture, the Company sold its
television programming internationally either on a tier or program-by-program
basis to foreign broadcasters and pay television services or through local
Playboy TV networks in which the Company owned an equity interest and from
which it received fees for programming and the use of the Playboy brand name.
Worldwide Home Video
The Company also distributes its original programming domestically on
VHS and DVD which are sold in video and music stores and other retail outlets,
through direct mail, including Playboy magazine, and online, including
PlayboyStore.com. In 2001, the Company expanded the home video business into
three distinct product lines. The lines include the flagship Playboy Home
Video line, which features Playmate, celebrity and specials product. The new
product lines include Playboy TV, which features TV shows from the Company's
premium pay television network, and Playboy Exposed, a line of adult
reality-based programming. All three product lines are available on both VHS
and DVD. In addition, the Company also releases titles under its Eros
Collection label.
The Company released 11 new Playboy Home Video titles in 2001, compared
to 21 new titles in 2000 and 16 new titles in 1999. In 2001, the Company also
released two titles under each of the new Playboy TV and Playboy Exposed
labels. Additionally, the Company continues to release library titles on DVD,
which were previously only released on VHS.
The Company's contract with its domestic distributor expired in June
2001 and a contract with a new distributor became effective in October 2001.
The Company's VHS and DVD products are currently distributed in the United
States and Canada by Image Entertainment, Inc. ("Image"). The Company is
responsible for manufacturing the product for sale and for certain marketing
and sales functions. The Company receives advances from Image on all new
release titles in the Playboy Home Video and Playboy TV line. Image receives a
distribution fee on sales of all product and remits a net amount to the
Company.
In 2001, the Company entered into an agreement with Mandalay Direct
("Mandalay"), the creator of Girls Gone Wild, to market a continuity line of
reality-based videos. These programs are advertised on demographically
targeted television programs across a variety of networks and sold directly to
consumers via these offers. In general, the Company and Mandalay are equal
participants in the profits of the series.
7
The Company also distributes, generally through separate distribution
agreements, its home video products to other countries worldwide. These
products are based on the videos produced for the U.S. market, with the
licensee dubbing or subtitling into the local language where necessary.
PUBLISHING GROUP
The Publishing Group operations include the publication of Playboy
magazine, other domestic publishing businesses and the licensing of
international editions of Playboy magazine.
Playboy Magazine
Founded by Hugh M. Hefner in 1953, Playboy magazine continues to be the
best-selling monthly men's magazine in the world. Circulation of the U.S.
edition is approximately 3.2 million copies monthly. Combined average
circulation of the Company's international editions is approximately 1.3
million copies monthly. According to Fall 2001 data published by Mediamark
Research, Inc. ("MRI"), an independent market research firm, the U.S. edition
of Playboy magazine is read by approximately one in every seven men in the
United States aged 18 to 34.
Playboy magazine is a general-interest magazine for men offering a
variety of features. It has gained a loyal customer base and a reputation for
excellence by providing quality entertainment and informative articles on
celebrities, 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 48-year history, exclusive interviews have
included prominent public figures (such as Martin Luther King, Jr., Jimmy
Carter, Fidel Castro, Mike Wallace, Rush Limbaugh and Jesse Ventura), business
leaders (such as Bill Gates, David Geffen, Tommy Hilfiger and Ted Turner),
entertainers (such as Steve Martin, Jerry Seinfeld, David Letterman, Jay Leno,
Mel Gibson, Bruce Willis and John Travolta), authors (such as Salman Rushdie,
Anne Rice, Ray Bradbury, Alex Haley and James Michener) and sports figures
(such as Michael Jordan, Muhammad Ali and Bobby Knight). The magazine also
regularly publishes the works of leading journalists, authors and other
prominent individuals. For example, Playboy magazine has published fiction by
Scott Turow, Jay McInerney, John Updike and Margaret Atwood, articles by
Michael Crichton, Bill Maher and William F. Buckley, and book adaptations by
Tony Horwitz (Middle East correspondent for The Wall Street Journal) and
Pulitzer Prize winning author William Kennedy. It has long been known for its
graphic excellence and features and publishes the work of top artists and
photographers. Playboy magazine also features lifestyle articles on consumer
products, fashion, automobiles and consumer electronics and covers the worlds
of sports and entertainment. It is also renowned for its pictorials of
beautiful women and frequently features celebrities on its cover and in
exclusive pictorials (among them Farrah Fawcett, Pamela Anderson, Elle
Macpherson, Jenny McCarthy, Cindy Crawford, Sharon Stone, Madonna and Katarina
Witt).
The net circulation revenues of the U.S. edition of Playboy magazine
for 2001, 2000 and 1999 were $65.5 million, $72.1 million and $73.9 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 newsstand sales
in any period based on whether or not there are issues featuring major
celebrities.
According to the Audit Bureau of Circulations, an independent audit
agency, with a circulation rate base (the total newsstand and subscription
circulation guaranteed to advertisers) of 3.15 million at December 31, 2001,
Playboy magazine was the 12th highest-ranking U.S. consumer publication.
Playboy magazine's rate base at December 31, 2001 was larger than each of
Newsweek, Cosmopolitan and Maxim, as well as the combined rate bases of
Rolling Stone, GQ and Esquire.
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies are approximately 80% of
total copies sold. The Company believes that managing Playboy's circulation
to be primarily subscription driven, like most major magazines, provides a
stable and desirable circulation base, which is also attractive to
advertisers. According to the MRI data previously mentioned, the median age
of male Playboy readers is 33, with a median annual household income of
$52,000. The Company also derives revenues from the rental of Playboy
magazine's subscriber list, which consists of the subscriber's name, address
and other subscription-related information maintained by the Company.
8
The Company attracts new subscribers to the magazine through its own
direct mail advertising campaigns, subscription agent campaigns and the
Internet, including Playboy.com. 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
periodical mail. The Company attempts to contain these costs through
presorting and other methods. The Publishing Group was impacted by general
postal rate increases of approximately 10% and 3% in January and July of
2001, respectively. Postal rates are expected to increase again in October
2002 by approximately 10%.
Playboy magazine subscriptions are serviced by Communications Data
Services, Inc. ("CDS"). Pursuant to a subscription fulfillment agreement with
the Company, CDS performs a variety of services, including (a) receiving,
verifying, balancing and depositing payments from subscribers, (b) processing
Internet transactions, (c) printing forms and promotional materials, (d)
maintaining master files on all subscribers, (e) issuing bills and renewal
notices to subscribers, (f) issuing labels, (g) resolving customer service
complaints as directed by the Company and (h) furnishing various reports to
monitor all aspects of the subscription operations. The term of the
subscription fulfillment agreement expired June 30, 2001, but has been
extended to June 30, 2006. Either party may terminate the agreement prior to
expiration in the event of material nonperformance by, or insolvency of, the
other party. The Company pays CDS specified fees and charges based on the
types and amounts of service performed under the subscription fulfillment
agreement. The fees and charges are to be fixed at their July 1, 2001 levels
until June 30, 2003, after which they will increase yearly at a rate based on
the rate of increase in the consumer price index, but no more than six percent
in one year. CDS's liability to the Company for a breach of its duties under
the subscription fulfillment agreement is limited to actual damages of up to
$140,000 per event of breach, except in cases of willful breach or gross
negligence, in which case the limit is $280,000. The subscription fulfillment
agreement provides for indemnification by the Company of CDS and its
shareholders against claims arising from actions or omissions by CDS in
compliance with the terms of the agreement or in compliance with the Company's
instructions.
Playboy magazine is one of the highest priced magazines in the United
States. Effective with the April 2001 issue, the basic U.S. newsstand cover
price is $4.99 ($5.99 for the December holiday issue and $6.99 for the January
holiday issue) and the Canadian cover price is C$6.99 for all issues. In
addition, when there is a feature of special appeal, the Company generally
increases the newsstand cover price by $1.00. Prior to the April 2001 issue,
the basic U.S. cover price for Playboy magazine was $4.95 ($5.95 for the
December holiday issue and $6.95 for the January holiday issue) and the
Canadian cover price was C$5.95 (C$6.95 for holiday issues). No general price
increases are currently planned for 2002.
Distribution of the magazine to newsstands and other retail outlets is
accomplished through Warner Publisher Services, Inc. ("Warner"), a national
distributor. Copies of the magazine are shipped in bulk to wholesalers, who
are responsible for local retail distribution. The Company receives a
substantial cash advance from Warner 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 Warner. These revenue adjustments are not material on an
annual basis. 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 Warner based on the number of magazines actually
sold. The number of issues sold on newsstands varies from month to month,
depending in part on consumer interest in the cover, the pictorials and the
editorial features.
Playboy magazine and special editions are printed at Quad/Graphics,
Inc., located in Wisconsin, which ships the product to subscribers and Warner.
The print run varies each month based on expected sales and is determined with
input from Warner. Paper is the principal raw material used in the production
of these publications. The Company uses a variety of types of high-quality
coated paper that is purchased from a number of suppliers. The market for
paper has historically been cyclical resulting in volatility in paper prices,
which can materially affect the Publishing Group's financial results. The
Publishing Group expects paper prices in 2002 to be comparable with 2001.
9
Playboy magazine targets a wide range of advertisers. Advertising by
category, as a percent of total ad pages, and the total number of ad pages
were as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/01 12/31/00 12/31/99
- ----------------------------------------------------------------------------
Beer/Wine/Liquor 28% 25% 21%
Tobacco 23 23 26
Retail/Direct mail 19 19 22
Toiletries/Cosmetics 5 5 6
Apparel/Footwear/Accessories 5 5 4
All other 20 23 21
- ----------------------------------------------------------------------------
Total 100% 100% 100%
=============================================================================
Total ad pages 618 674 640
============================================================================
The Company continues to focus on securing new advertisers, including
from underdeveloped categories. The net advertising revenues of the U.S.
edition of Playboy magazine for 2001, 2000 and 1999 were $37.0 million, $38.4
million and $33.9 million, respectively. Net advertising revenues are gross
revenues less advertising agency commissions, frequency and cash discounts and
rebates. The Company publishes the U.S. edition of Playboy magazine in 15
advertising editions: one upper income zip-coded, eight regional, two state
and four metro. All contain the same editorial material but provide targeting
opportunities for advertisers. The Company implemented 8% cost per thousand
increases in advertising rates effective with both the January 2002 and 2001
issues.
Levels of advertising revenues may be affected by, among other things,
increased competition for and decreased spending by advertisers, general
economic activity and governmental regulation of advertising content, such as
tobacco products. However, as only approximately one-third of Playboy
magazine's revenues and less than 15% of the Company's revenues are from
advertising, the Company is not overly dependent on this source of revenues.
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 48-year history, the
Company has never sold a product that has been judged to be obscene or illegal
in any U.S. jurisdiction.
Magazine publishing companies face intense competition for readers,
advertising and newsstand shelf space. Magazines and Internet sites 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.
Other Domestic Publishing
The Publishing Group has also created media extensions, including
special editions and calendars, which are primarily sold in newsstand outlets
using mostly original photographs. In each of 2001, 2000 and 1999, the group
published 24 special editions. Effective with issues on sale subsequent to
March 1, 2001, the U.S. and Canadian special editions newsstand cover prices
are $6.99 and C$7.99, respectively. Prior to this, the U.S. and Canadian
newsstand cover prices were $6.95 and C$7.95, respectively. No general price
increases are currently planned for 2002.
International Publishing
The Company licenses the right to publish 17 international editions of
Playboy magazine in the following countries: Brazil, Croatia, the Czech
Republic, France, Germany, Greece, Hungary, Italy, Japan, the Netherlands,
Poland, Romania, Russia, Slovakia, Slovenia, Spain and Taiwan. Combined
average circulation of the international editions is approximately 1.3 million
copies monthly. In 2001, the Company sold a majority of its interest in
VIPress Poland Sp. z o. o. ("VIPress"), publisher of the Polish edition of the
magazine. As such, the results of VIPress are no longer consolidated in the
Company's financial statements. Subsequent to the sale, the Company's
remaining 20% interest is accounted for under the equity method and, as such,
the Company's proportionate share of the results of VIPress is included in
nonoperating results. The Company expects to sell its remaining interest in
VIPress in 2002. Also in 2001, the Company sold its 19% joint venture interest
in each of its Romanian and Hungarian editions.
10
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 vary, but in general are for
terms of three to 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 2001, two editions, Brazil and Germany, accounted for approximately 45% of
the total licensing revenues from international editions.
PLAYBOY ONLINE GROUP
The Playboy Online Group is dedicated to the lifestyle and
entertainment interests of young men around the world. The Company believes
that it is well positioned to provide compelling online entertainment
experiences due to the strength of the Playboy brand. The group's online
destinations combine Playboy's distinct attitude with extensive and
original content, a large community of loyal users and a wealth of
e-commerce offerings. The group's sites provide the Company with multiple
revenue streams, including e-commerce, fees for subscription services and
pay-per-view events, advertising and sponsorships, online gaming and
international ventures.
The Playboy.com site offers original Playboy style content and was
recently redesigned with a goal of converting a greater percentage of
visitors to purchasers. It focuses on areas of interest to its target
audience, including Love & Sex, Arts & Entertainment, Style, On Campus,
Sports, World of Playboy, Playboy TV, Home Video and Playmates. The site
also offers pay-per-view events such as lingerie fashion shows, Mardi Gras
and parties at the Playboy Mansion (the "Mansion"). The Company also offers
a members-only Playboy Cyber Club, which is a subscription-based site
offering services such as VIP access to over 50,000 photos, every interview
from Playboy magazine, individual home pages for Playboy Playmates, live
Playmate chats, video clips and free access to some pay-per-view specials.
As of December 31, 2001 and 2000, Playboy Cyber Club had approximately
100,000 and 67,000 subscribers, respectively. Playboy Cyber Club is
currently offered on a monthly basis for $9.95, a quarterly basis for
$20.85 and an annual basis for $59.40.
The group's Playboy branded e-commerce offerings include
PlayboyStore.com, which is the primary destination for purchasing over
2,500 different Playboy branded fashions, videos, jewelry and collectibles.
The PlayboyStore.com Partners Marketplace allows top-notch companies,
including Amazon.com, to sell products such as movies, CDs, books,
software, games and consumer electronics to the very desirable Playboy.com
demographic. The Company also operates auction sites located at
Auctions.Playboy.com and the eBay Playboy Marketplace in order to
capitalize on the market for Playboy collectibles. CCMusic.com, an online
version of the Collectors' Choice Music catalog, was sold in 2001 and
CCVideo.com, an online version of the Critics' Choice Video catalog, was
sold in 2000. The sales of these businesses are discussed in more detail in
the Catalog Group section.
The group's online gaming business currently consists of three
sites, PlayboySportsBook.com, PlayboyCasino.com and PlayboyRacingUSA.com.
PlayboySportsBook.com and PlayboyCasino.com are partnerships with Ladbroke
eGaming Limited, the world's largest bookmaker. PlayboySportsBook.com
offers a full range of sports and event wagering, allowing international
consumers to bet on U.S. and international sports. Safeguards have been
implemented to prevent betting from within the United States and other
places where online sports wagering is illegal. The site includes
highlights of daily sports wagering, event coverage, sports commentary,
scores and statistics. PlayboyCasino.com offers more than 50 casino games,
including roulette, blackjack and slot games. The site uses realistic sound
effects and graphics to give the look and feel of a real casino. The third
gaming site, PlayboyRacingUSA.com, a partnership with Penn National Gaming,
Inc., offers a wide variety of pari-mutuel wagering on horse races in North
America. The site offers an array of interactive tools and resources,
including real-time odds and scratches, past performance programs and
special features like the virtual stable, which allows consumers to follow
specific horses.
The group is expanding its international presence by entering into
joint ventures and/or licensing arrangements in foreign countries to
provide compelling content specifically tailored to those individual
foreign audiences. Its first international joint venture, Playboy.de with
Focus Digital AG, was launched late in 2001. The German version of the web
site has a local, dedicated editorial staff that develops original Playboy
style content, makes use of content from the German edition of Playboy
magazine and translates appropriate U.S.-originated Playboy.com content.
The Company has also announced a relationship with Korea Telecom Hitel Co.,
Ltd. to develop a Playboy site aimed at the Korean marketplace. The Company
is in negotiation in additional countries regarding other international web
sites.
11
A separately branded online adult entertainment site is located at
SpiceTV.com. Capitalizing on the Company's acquisition of Spice, the site
offers over 20,000 adult-oriented products in SpiceTVStore.com, including
videos and DVDs, lingerie and sensual products. SpiceTV Club, a
subscription site relaunched late in 2001, offers adult pictorials, video
clips, interactive features that allow the users to view highly customized
adult-video content, the Spice virtual studio highlighting SpiceTV Club
original content, live chat rooms and Spice Girl of the Month. As of
December 31, 2001, SpiceTV Club had approximately 1,000 subscribers. The
SpiceTV Club is currently offered on a monthly basis for $24.95.
The Internet industry is highly competitive. The Company competes
for visitors and advertisers. The Company believes that the primary
competitive factors include brand recognition, the quality of content and
products, technology, pricing, ease of use, sales and marketing efforts and
user demographics. The Company believes that it competes favorably with
respect to each of these factors. Additionally, the Company has the
advantage of leveraging the power of the Playboy and Spice brands, its
libraries, marketing and promotions and loyal audiences.
CATALOG GROUP
The Catalog Group operations have historically included the direct
marketing of products through the Critics' Choice Video and Collectors' Choice
Music catalogs. In 2000, the Company completed the sale of its Critics' Choice
Video catalog and related Internet business and fulfillment and customer
service operations to Infinity Resources, Inc. ("Infinity"). In 2001, the
Company also sold to Infinity its Collectors' Choice Music catalog and related
Internet business, ending the Company's presence in the nonbranded print
catalog business. Infinity is subleasing an approximately 105,000 square-foot
warehouse facility and related equipment from the Company and is providing
fulfillment and customer service for the Company's e-commerce business.
LICENSING BUSINESSES GROUP
The Licensing Businesses Group combines certain brand-related
businesses, such as the licensing of consumer products carrying one or more
of the Company's trademarks and artwork, as well as Playboy branded casino
gaming opportunities. Also reported within the group are certain
Company-wide marketing activities. This group was formerly named the Other
Businesses Group.
The Company licenses the Playboy and Spice names, Rabbit Head Design
and other images, trademarks and artwork owned by the Company for the
worldwide manufacture, sale and distribution of a variety of consumer
products. The group works with licensees to develop, market and distribute
high-quality Playboy and Spice branded merchandise. The group's licensed
product lines include men's and women's apparel, men's underwear and women's
lingerie, accessories, collectibles, cigars, watches, jewelry, fragrances,
small leather goods, stationery, eyewear, barware and home fashions. The group
also 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 other uses by the Company. Additionally, the Company owns all
of the trademarks and service marks of Sarah Coventry, Inc., which it
licenses. Products are marketed primarily through retail outlets, including
department and specialty stores. While the Company's branded products are
unique, the marketing of apparel, jewelry and cigars is an intensely
competitive business that is extremely sensitive to economic conditions,
shifts in consumer buying habits or fashion trends, as well as changes in the
retail sales environment. The Company is also interested in exploiting
Playboy's brand equity in the location-based entertainment market by entering
into partnerships with companies in which it would contribute its brand name
and marketing expertise in return for licensing fees, and perhaps the option
to earn or purchase equity in these ventures.
Company-wide marketing activities consist of the Playboy Jazz Festival,
Alta Loma Entertainment and Playmate promotions. The Company has produced the
Playboy Jazz Festival on an annual basis in Los Angeles at the Hollywood Bowl
since June 1979. In conjunction with the Playboy Jazz Festival, the Company
continued its community events program by sponsoring free concerts. The
Company has revived Alta Loma, which had been established in the 1980s to
create television programming, so as to take advantage of the market for
Playboy branded and Playboy style entertainment products targeted for film and
television distribution beyond the Playboy networks. Alta Loma can draw upon
material from Playboy magazine and Company franchises like the Mansion to
develop original programming for non-Playboy outlets. Current television and
film productions either under production or consideration, to be produced and
funded by outside parties, include Who Wants to be a Playboy Playmate, A Night
at the Playboy Mansion, Little Annie Fanny and Playboy After Dark. Playmate
promotions encompass Playmates' involvement in ad campaigns, brochures,
celebrity endorsements, commercials, conventions, motion pictures, trade
shows, television and videos for the Company and outside clients.
12
SEASONALITY
The Company's businesses are generally not seasonal in nature. Revenues
and operating results for the quarters ended December 31, however, are
typically impacted by higher newsstand cover prices of holiday issues. These
higher prices, coupled with typically higher sales of subscriptions of Playboy
magazine during those quarters, also result in an increase in accounts
receivable. E-commerce revenues and operating results are typically impacted
by the holiday buying season and decreased Internet traffic during the summer
months.
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. In order to
establish public recognition, the Company, among other activities, purchased
in 1971 the Mansion in Holmby Hills, California, where the Company's founder,
Hugh M. Hefner, lives. The Mansion is used for various corporate activities,
including serving as a valuable location for video production, magazine
photography, online events, business meetings, enhancing the Company's image,
charitable functions and a wide variety of other promotional and marketing
activities. The Mansion generates substantial publicity and recognition which
increase public awareness of the Company and its products and services. As
indicated in Part II. Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" ("MD&A") and Part III. Item 13.
"Certain Relationships and Related Transactions," Hugh M. Hefner pays rent to
the Company for that portion of the Mansion used exclusively for his and his
personal guests' residence as well as the value of meals and other benefits
received by him and his personal guests. The Mansion is included in the
Company's Consolidated Balance Sheet as of December 31, 2001 at a cost,
including all improvements and after accumulated depreciation, of $2.0
million. The Company pays all operating expenses of the Mansion, including
depreciation and taxes, which were $3.2 million, $3.2 million and $3.6 million
for 2001, 2000 and 1999, respectively, net of rent received from Mr. Hefner.
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.
The Company's trademarks are critical to the success and potential
future growth of all of the Company's businesses. The Company actively defends
its trademarks and copyrights throughout the world and monitors the
marketplace for counterfeit products. Consequently, it initiates legal
proceedings from time to time to prevent their unauthorized use.
EMPLOYEES
At February 28, 2002, the Company employed 605 full-time employees
compared to 681 at February 28, 2001. No employees are represented by
collective bargaining agreements. The Company believes it maintains a
satisfactory relationship with its employees.
13
Item 2. Properties
- ------------------
Location Primary Use
- -------- -----------
Office Space Leased:
680 North Lake Shore Drive This space serves as the
Chicago, Illinois Company's corporate headquarters,
and is used by all of the
Company's operating groups,
primarily Publishing and Playboy
Online, and for executive and
administrative personnel.
730 Fifth Avenue This space serves as the Company's
New York, New York Publishing and Playboy Online
Groups' headquarters, and a limited
amount of this space is used by the
Entertainment and Licensing
Businesses Groups, as well as
executive and administrative
personnel.
9242 Beverly Boulevard This space serves as the Company's
Beverly Hills, California Entertainment Group headquarters,
and a limited amount of this space
is used by the Publishing Group, as
well as executive and administrative
personnel.
5055 Wilshire Boulevard This space is primarily used by the
Los Angeles, California Company's Entertainment Group for
general business and film editing,
and a limited amount of this space
is used by the Playboy Online Group.
Operations Facilities Leased:
Itasca, Illinois The Company began subleasing this
warehouse facility to Infinity in
2000. This facility, under separate
agreements with Infinity, is used to
provide direct- and e-commerce order
fulfillment, customer service and
related activities for the Company's
Playboy Online Group and previously
for the Catalog Group, and storage
for the entire Company. The facility
was formerly used by the Company in
the same capacities.
Santa Monica, California This space is used by the Company's
Publishing Group as a photography
studio.
Los Angeles, California This space is used by the Company's
Entertainment Group as a motion
picture production facility.
Property Owned:
Holmby Hills, California The Mansion is used for various
corporate activities, including
serving as a valuable location for
video production, magazine
photography, online events, business
meetings, enhancing the Company's
image, charitable functions and a
wide variety of other promotional
and marketing activities.
In 2002, the Company expects to move to the new 105,000 square-foot
studio facility where the Company will have a centralized digital, technical
and programming facility for both the Entertainment and Playboy Online Groups
and also expects to relocate its Beverly Hills and Los Angeles office space.
Additionally, in 2002 the Company subleased excess space in its New York
office and expects to do the same for its Chicago office as a result of
restructuring efforts in 2001.
14
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 currently engaged in other litigation, most of which is generally
incidental to the normal conduct of its business. Management believes that its
reserves are adequate and that no such action will have a material adverse
impact on the Company's financial condition. There can be no assurance,
however, that the Company's ultimate liability will not exceed its reserves.
See Note (Q) Commitments and Contingencies of Notes to Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 2001.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ----------------------------------------------------------------------------
Stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (W) Quarterly Results of Operations
(Unaudited) of Notes to Consolidated Financial Statements. The Company's
securities are traded on the exchanges listed on the cover page of this Form
10-K Annual Report under the ticker symbols PLA A (Class A voting) and PLA
(Class B nonvoting). As of February 28, 2002, there were 7,387 and 8,590
holders of record of Class A and Class B common stock, respectively. There
were no cash dividends declared during 2001 and 2000. The Company's credit
agreement prohibits the payment of cash dividends.
15
Item 6. Selected Financial Data (1)
- -----------------------------------
(in thousands, except per share amounts,
number of employees and ad pages)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended Ended Ended
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97 6/30/97
- ---------------------------------------------------------------------------------------------------------------------------------
Selected financial data
Net revenues $ 291,226 $ 307,722 $ 347,817 $ 317,618 $ 149,541 $ 296,623
Interest expense, net (13,184) (7,629) (6,179) (1,424) (239) (354)
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle (29,323) (47,626) (5,568) 4,320 2,142 21,394
Net income (loss) (33,541) (47,626) (5,335) 4,320 1,065 21,394
Basic income (loss) per common share
Income (loss) from continuing
operations before cumulative
effect of change in accounting
principle (1.20) (1.96) (0.24) 0.21 0.10 1.05
Net income (loss) (1.37) (1.96) (0.23) 0.21 0.05 1.05
Diluted income (loss) per common share
Income (loss) from continuing
operations before
cumulative effect of change
in accounting principle (1.20) (1.96) (0.24) 0.21 0.10 1.03
Net income (loss) (1.37) (1.96) (0.23) 0.21 0.05 1.03
EBITDA (2) 39,198 23,875 58,722 39,267 17,255 41,519
Cash flows from operating activities (7,945) (31,150) 16,100 (11,110) (3,736) 1,539
Cash flows from investing activities (2,853) (3,889) (68,126) (10,120) (1,991) (2,450)
Cash flows from financing activities $ 12,874 $ 14,045 $ 75,213 $ 20,624 $ 5,371 $ (224)
- ---------------------------------------------------------------------------------------------------------------------------------
At period end
Total assets $ 426,240 $ 388,488 $ 429,402 $ 212,107 $ 185,947 $ 175,542
Long-term financing obligations $ 78,017 $ 94,328 $ 75,000 $ - $ - $ -
Shareholders' equity $ 81,525 $ 114,185 $ 161,281 $ 84,202 $ 78,683 $ 76,133
Long-term financing obligations as a
percentage of total capitalization 49% 45% 32% -% -% -%
Number of common shares outstanding
Class A voting 4,864 4,859 4,859 4,749 4,749 4,749
Class B nonvoting 19,666 19,407 19,288 15,868 15,775 15,636
Number of full-time employees 610 686 780 758 684 666
- ---------------------------------------------------------------------------------------------------------------------------
Selected operating data
Playboy magazine ad pages 618 674 640 601 273 558
Cash investments in Company-produced and
licensed entertainment programming $ 37,254 $ 33,061 $ 35,262 $ 25,902 $ 14,359 $ 30,747
Amortization of investments in
Company-produced and licensed
entertainment programming $ 37,395 $ 33,253 $ 34,341 $ 26,410 $ 11,153 $ 21,355
Playboy TV networks household
units (at period end) (3)
DTH 18,100 15,400 12,400 9,800 6,800 6,300
Cable digital 10,300 3,200 1,300 200 - -
Cable analog addressable 7,800 11,000 11,700 11,700 11,600 11,200
Movie networks household units
(at period end) (3) (4)
DTH 35,300 - - - - -
Cable digital 25,300 8,400 3,900 - - -
Cable analog addressable 17,000 16,200 18,300 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of operations and
accounting policies, please refer to Part II. Item 7. "MD&A" and Part II. Item 8. "Financial
Statements and Supplementary Data."
(1) Certain amounts reported for prior periods have been reclassified to conform to the current year's presentation.
(2) EBITDA represents earnings from continuing operations before interest expense, income taxes, cumulative
effect of change in accounting principle, depreciation of property and equipment, amortization of
intangible assets, amortization of investments in entertainment programming, amortization of deferred
financing fees, expenses related to the vesting of restricted stock awards and equity in operations of
PTVI and other. EBITDA should not be considered an alternative to any measure of performance or
liquidity under generally accepted accounting principles ("GAAP"). Similarly, it should not be inferred
that EBITDA is more meaningful than any of those measures.
(3) Each household unit is defined as one household carrying one given network per carriage platform. A
single household can represent multiple household units if two or more of the Company's networks and/or
multiple platforms (i.e. analog and digital) are available to that household.
(4) The Company acquired Spice in March 1999 and additional networks in connection with the Califa
acquisition in July 2001.
16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
----------------------------------------------------------
Several of the Company's businesses can experience variations in
quarterly performance. As a result, the Company's performance in any quarter
is not necessarily reflective of full-year or longer-term trends. 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 economic conditions, product
introductions by advertising customers and changes in advertising buying
patterns. E-commerce revenues are typically impacted by the holiday buying
season and decreased Internet traffic during the summer months. Additionally,
international TV revenues vary due to the timing of recognizing library
license fees from PTVI.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in conformity with
GAAP, which requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. The
Company believes that of its significant accounting policies, the following
are some of the more complex and critical areas.
PTVI REVENUE RECOGNITION
The Company recognizes revenues from PTVI for the license of the
exclusive international TV rights for the use of the Playboy tradename, film
and video library, and for the acquisition of the international rights to the
Spice film library, the U.K. and Japan Playboy TV networks and certain
international distribution contracts. PTVI is obligated to make total payments
of $100.0 million to the Company related to the above over six years, of which
$42.5 million has been received through the end of 2001. The remaining
payments are owed over the next three years as follows: $7.5 million, $25.0
million and $25.0 million. As the collectibility of these payments is not
reasonably assured, the Company recognizes these revenues as the consideration
is paid to the Company, less the Company's 19.9% intercompany interest in such
transactions. This results in significant volatility in the Company's results
of operations and cash flows from year to year. See Note (C) Playboy TV
International, LLC Joint Venture of Notes to Consolidated Financial
Statements.
TRADEMARKS
The Company's trademarks are critical to the success and potential
future growth of all of the Company's 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 their unauthorized use. As such, the Company incurs certain
costs for acquisition, defense, registration and/or renewal of its trademarks.
Trademark acquisition costs are capitalized and have been amortized using the
straight-line method over 40 years. Trademark defense, registration and/or
renewal costs are capitalized and have been amortized using the straight-line
method over 15 years. Beginning in 2002, all trademark-related costs which
have indefinite lives will no longer be amortized but will be subject to
annual impairment tests in accordance with new accounting standards. As such,
capitalized amounts related to the Company's trademarks are expected to
increase going forward.
17
RESULTS OF OPERATIONS
The following represents the results of operations of the Company for the
periods indicated below (in millions, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES
Entertainment
Domestic TV networks $ 86.6 $ 74.4 $ 74.0
International TV 17.0 17.0 38.0
Worldwide home video 9.6 8.6 10.5
Movies and other 0.6 0.9 3.3
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 113.8 100.9 125.8
- -------------------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 102.7 110.5 107.9
Other domestic publishing 15.5 16.5 18.1
International publishing 9.9 12.9 11.1
- -------------------------------------------------------------------------------------------------------------------
Total Publishing 128.1 139.9 137.1
- -------------------------------------------------------------------------------------------------------------------
Playboy Online 27.5 25.3 16.1
- -------------------------------------------------------------------------------------------------------------------
Catalog 11.0 32.4 60.3
- -------------------------------------------------------------------------------------------------------------------
Licensing Businesses 10.8 9.2 8.5
- -------------------------------------------------------------------------------------------------------------------
Total net revenues $ 291.2 $ 307.7 $ 347.8
===================================================================================================================
NET LOSS
Entertainment
Before programming expense $ 67.3 $ 58.6 $ 78.7
Programming expense (37.4) (33.3) (34.3)
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 29.9 25.3 44.4
- -------------------------------------------------------------------------------------------------------------------
Publishing 1.8 6.9 6.0
- -------------------------------------------------------------------------------------------------------------------
Playboy Online (21.7) (25.2) (9.1)
- -------------------------------------------------------------------------------------------------------------------
Catalog (0.4) - 0.3
- -------------------------------------------------------------------------------------------------------------------
Licensing Businesses 2.6 0.9 (0.5)
- ------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (19.7) (20.9) (27.1)
- ------------------------------------------------------------------------------------------------------------------
Total segment income (loss) (7.5) (13.0) 14.0
Restructuring expenses (3.8) (3.9) (1.1)
Gain (loss) on disposals (0.9) (3.0) 1.7
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) (12.2) (19.9) 14.6
- -------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.8 1.5 1.8
Interest expense (14.0) (9.1) (8.0)
Minority interest (0.7) (0.1) (0.1)
Equity in operations of PTVI and other (0.7) (0.4) (13.8)
Playboy.com registration statement expenses - (1.6) -
Legal settlement - (0.6) -
Other, net (1.5) (1.2) (0.9)
- ------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (16.1) (11.5) (21.0)
- ------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle (28.3) (31.4) (6.4)
Income tax benefit (expense) (1.0) (16.2) 0.9
- -------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before cumulative
effect of change in accounting principle (29.3) (47.6) (5.5)
Gain on disposal of discontinued operations (net of tax) - - 0.2
- -------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (29.3) (47.6) (5.3)
Cumulative effect of change in accounting principle (net of tax) (4.2) - -
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (33.5) $ (47.6) $ (5.3)
===================================================================================================================
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Income (loss) before cumulative effect
of change in accounting principle
From continuing operations $ (1.20) $ (1.96) $ (0.24)
From discontinued operations (net of tax) - - 0.01
- -------------------------------------------------------------------------------------------------------------------
Total (1.20) (1.96) (0.23)
Cumulative effect of change in accounting principle (net of tax) (0.17) - -
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (1.37) $ (1.96) $ (0.23)
===================================================================================================================
18
2001 COMPARED TO 2000
The Company's revenues for 2001 decreased $16.5 million, or 5%,
compared to the prior year primarily due to the sale of its Critics' Choice
Video businesses in October 2000. In November 2001, the Company also sold its
Collectors' Choice Music businesses, ending the Company's presence in the
nonbranded print catalog business. The comparison also reflected lower Playboy
magazine revenues combined with higher domestic TV networks revenues, largely
due to the Califa acquisition in July 2001.
Operating performance improved $7.7 million compared to the prior year
primarily due to the factors discussed above combined with better performance
from the Playboy Online and Licensing Businesses Groups and lower Corporate
Administration and Promotion expenses. The current year operating loss also
included a lower loss related to the sale of Collectors' Choice Music compared
to the loss related to the sale of Critics' Choice Video in the prior year.
The lower net loss for 2001 reflected significantly lower income tax
expense related to the Company's decision in the prior year to increase the
valuation allowance for its deferred tax assets. The current year also
included a noncash charge representing a cumulative effect of change in
accounting principle related to the adoption of Statement of Position 00-2,
Accounting by Producers or Distributors of Films ("SOP 00-2"). Additionally,
the current year reflected higher interest expense primarily due to imputed
noncash interest related to the deferred payment of the purchase price for the
Califa acquisition.
ENTERTAINMENT GROUP
On July 6, 2001, the Company acquired The Hot Network and The Hot Zone
networks, together with the related television assets of Califa. In addition,
under the asset purchase agreement related to the Califa networks, upon the
resolution of certain contingencies, the Company will complete the acquisition
of the Vivid TV network and the related television assets of VODI, a separate
entity owned by Califa's principals. Through provisions in the asset purchase
agreement, the Company is currently operating Vivid TV and has generally
assumed the risks and benefits associated with the ownership of the Vivid TV
assets until the closing. The addition of these networks into the Company's
television networks portfolio enables the Company to offer a wider range of
adult programming.
The following discussion focuses on the profit contribution of each
business before programming expense.
Revenues from domestic TV networks for 2001 increased $12.2 million, or
16%, and profit contribution increased $9.8 million. These increases were
primarily due to the Califa acquisition described above and a $4.9 million
increase in Playboy TV revenues.
The Company's networks were available to the following approximate household
units (in millions):
Dec. 31, Dec. 31,
2001 2000
- -----------------------------------------------------------------------
Playboy TV (1)
DTH 18.1 15.4
Cable digital 10.3 3.2
Cable analog addressable 7.8 11.0
Movie Networks (1) (2)
DTH 35.3 -
Cable digital 25.3 8.4
Cable analog addressable 17.0 16.2
- -----------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given
network per carriage platform. A single household can represent multiple
household units if two or more of the Company's networks and/or multiple
platforms (i.e. analog and digital) are available to that household.
(2) Includes The Hot Network, The Hot Zone and the Vivid TV networks from
the Califa acquisition in July 2001.
19
Revenues from the international TV business for 2001 were flat and
profit contribution decreased $0.2 million. Lower revenues of $2.1 million due
to the timing of library license fees from PTVI were offset by $2.1 million
higher PTVI programming output payments. Although the Company and Claxson
have, to date, funded their respective obligations with respect to PTVI,
PTVI's independent auditors have expressed substantial doubt as to PTVI's
ability to continue as a going concern in their opinion relating to PTVI's
financial statements for the fiscal year ended December 31, 2001. The reasons
cited as the basis for raising substantial doubt as to PTVI's ability to
continue as a going concern are the potential inability of Claxson to make
required capital contributions combined with PTVI's losses from operations. If
Claxson does not make its share of capital contributions or PTVI continues to
incur losses, the Company's future financial condition and operating results
could be materially adversely affected.
Revenues from the worldwide home video business for 2001 increased $1.0
million, or 11%, and profit contribution increased $1.4 million primarily due
to $2.9 million of revenues recorded in the current year in accordance with
SOP 00-2, Accounting by Producers or Distributors of Films, primarily related
to the domestic business. These revenues were related to guarantees from a
backlist distribution agreement that were recorded in prior years. Under the
new rules of SOP 00-2, these previously recognized revenues were considered
not yet earned and therefore were reversed and reported as part of a
cumulative effect of change in accounting principle in the first quarter of
2001. The current year also reflected the impact of the absence of a domestic
distributor in the third quarter. The Company's contract with its domestic
distributor expired in June 2001 and a contract with a new distributor became
effective in October 2001. Additionally, the current year reflected royalties
related to a new continuity series deal.
Both revenues and profit contribution from movies and other businesses
for 2001 decreased $0.3 million, primarily due to lower sales of previously
released movies combined with the timing of library license fees from PTVI.
Programming expense increased $4.1 million in the current year
primarily due to higher amortization for domestic TV networks of $2.9 million
and international TV of $1.5 million, primarily related to the higher
programming output payments from PTVI.
The group's administrative expenses increased $1.7 million in the
current year primarily due to higher performance-related variable compensation
expense and increased staffing.
PUBLISHING GROUP
Playboy magazine revenues decreased $7.8 million, or 7%, for 2001
principally due to 25% fewer U.S. and Canadian newsstand copies sold in the
current year. Additionally, advertising revenues were $1.4 million lower due
to fewer ad pages, partially offset by higher average net revenue per page.
Advertising sales for the 2002 first quarter magazine issues are closed and
the Company expects to report 5% lower ad revenues and 9% fewer ad pages
compared to the 2001 quarter. These declines are largely the result of
industry-wide softness. Philip Morris, a top advertiser to the Company, has
announced that they will significantly reduce their overall spending on print
advertising, including no pages in Playboy magazine for at least 2002. While
this loss of revenues will have an adverse affect on the Company's financial
performance, to mitigate this loss the Company continues to implement cost
reduction measures and to focus on securing new advertisers, including from
underdeveloped categories. Lower revenues from the rental of the magazine's
subscriber list also contributed to the revenue decline, a trend the Company
expects to continue.
Revenues from other domestic publishing businesses decreased $1.0
million, or 6%, for 2001 compared to the prior year. This decline primarily
reflected lower sales of special editions principally as a result of increased
competition for shelf space and erotica on the Internet.
International publishing revenues decreased $3.0 million, or 22%,
primarily due to the Company's sale in July 2001 of a majority of VIPress, its
Polish publishing joint venture, to its local management. As a result, the
joint venture's results are no longer consolidated. Also contributing to the
decline were lower royalties of $0.8 million from the Brazilian edition as a
result of weak economic conditions in that country.
The Publishing Group's segment income for 2001 decreased $5.1 million,
or 74%, compared to the prior year primarily due to the lower Playboy magazine
newsstand and special editions revenues combined with lower subscription
profitability of $1.8 million. Partially offsetting the above were lower
manufacturing costs of $1.5 million, principally related to a smaller Playboy
magazine book size due in part to the fewer advertising pages, and lower
editorial costs of $1.3 million. In 2002, the Company expects continued
profitability of the Publishing Group.
20
PLAYBOY ONLINE GROUP
Playboy Online Group revenues for 2001 increased $2.2 million, or 9%,
to $27.5 million. Higher subscription revenues of $2.6 million and
international revenues of $1.0 million, the latter as a result of licensing
fees generated by the Company's new German and Korean joint ventures, drove
the increase. Additionally, e-commerce revenues increased $0.8 million in
spite of the sales of CCVideo.com in October 2000 and CCMusic.com in November
2001. Weaker advertising and sponsorship revenues of $2.2 million, an ongoing
industry-wide trend, also affected the comparison. In spite of higher
trademark and administrative fees to the parent company and write-offs for
obsolete inventory, primarily related to the remerchandising of the sites, the
segment loss decreased $3.5 million primarily due to cost-saving initiatives,
including restructuring, in the current year. The Company is taking actions to
achieve profitability for the group in 2002 by increasing efforts to convert
visitors to purchasers and continuing to reduce expenses. The Company expects
the restructuring and cost-saving initiatives to continue to favorably impact
the financial performance of the Playboy Online Group.
CATALOG GROUP
Catalog Group revenues for 2001 decreased $21.4 million, or 66%, and
segment performance decreased $0.4 million. These changes were the result of
management's decision to divest this nonbranded noncore business. In October
2000, the Company sold its Critics' Choice Video businesses and related
fulfillment and customer service operations to Infinity. In November 2001, the
Company also sold to Infinity its Collectors' Choice Music businesses, ending
the Company's presence in the nonbranded print catalog business. Infinity is
subleasing an approximately 105,000 square-foot warehouse facility and related
equipment from the Company and is providing fulfillment and customer service
for the Company's e-commerce business.
LICENSING BUSINESSES GROUP
Segment income for 2001 from the Licensing Businesses Group, formerly
the Other Businesses Group, increased $1.7 million on a revenue increase of
$1.6 million, or 16%. Growth in the Company's domestic licensed branded
products business of $1.0 million combined with lower business development
expenses of $0.8 million related to casino gaming opportunities were
responsible for the increased performance. The Company expects to continue to
add new domestic and international licensees in 2002, leading to further
growth in the group's profitability.
The Company believes that the greatest interest in the marketplace for
Playboy branded casino-based entertainment centers is from licensing and
marketing opportunities, as opposed to equity and management deals. Therefore,
as part of its restructuring, the Company has combined the operations of
casino gaming into licensing.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses for 2001 decreased $1.2
million, or 6%, compared to the prior year. This improvement primarily
reflects a reduction of expenses related to higher trademark fees of $1.5
million from the Playboy Online Group.
RESTRUCTURING EXPENSES
In 2001, the Company implemented a restructuring plan in anticipation
of a continuing weak economy. The plan included a reduction in work force
coupled with vacating portions of certain office facilities by combining
operations for greater efficiency, refocusing sales and marketing, outsourcing
some operations and reducing overhead expenses. As a result of these measures,
the Company expects to save approximately $8 million to $10 million on an
annualized basis. Total restructuring charges of $3.7 million related to this
plan were recorded in 2001, of which $2.5 million related to the termination
of 88 employees. Additionally, 16 positions were eliminated through attrition.
Also included in the charge were $1.2 million of expenses related to the
excess space in its Chicago and New York offices.
In 2000, realignment of senior management, coupled with staff
reductions, led to a restructuring charge of $3.7 million related to the
termination of 19 employees.
21
GAIN (LOSS) ON DISPOSALS
In 2001, the Company's sale of its Collectors' Choice Music businesses
resulted in a loss of $1.3 million. Additionally, the Company sold a majority
of its interest in VIPress, publisher of the Polish edition of Playboy
magazine, resulting in a gain of $0.4 million. The prior year included a loss
of $3.0 million related to the sale of the Critics' Choice Video businesses
and fulfillment and customer service operations.
2000 COMPARED TO 1999
The Company's revenues for 2000 decreased 12% compared to the prior
year primarily due to a $30.0 million up-front payment in 1999 from PTVI to
the Entertainment Group toward the $100.0 million purchase principally related
to library license fees, compared to $7.5 million in 2000. The comparison also
reflected the expected decrease of Catalog Group revenues as the Critics'
Choice Video businesses were sold in October 2000.
The Company reported an operating loss of $19.9 million in 2000
compared to operating income of $14.6 million in 1999, primarily due to the
timing and amount of PTVI payments discussed above combined with higher
planned investments in the Playboy Online Group, partially offset by lower
Corporate Administration and Promotion expenses. The operating loss for 2000
also included a loss related to the sale of the Critics' Choice Video
businesses while the prior year included a gain from the sale of the Company's
equity in The Playboy Casino at Hotel des Roses (the "Rhodes Casino") in
Greece. Additionally, 2000 included a higher restructuring charge compared to
the prior year.
The higher net loss for 2000 reflected lower PTVI nonoperating expense,
including the Company's 19.9% equity in PTVI, the elimination of unrealized
profits of certain transactions between the Company and PTVI and gains related
to the transfer of certain assets to PTVI. The prior year also included the
accounting effects of the formation of the PTVI joint venture. The net loss
for 2000 also included a charge incurred in connection with a Playboy.com
registration statement that was subsequently withdrawn and significant noncash
federal income tax expense related to the Company's decision to increase the
valuation allowance for its deferred tax assets.
ENTERTAINMENT GROUP
The following discussion focuses on the profit contribution of each
business before programming expense.
For 2000, revenues from domestic TV networks increased $0.4 million, or
1%, and profit contribution increased $0.5 million, primarily due to the Spice
acquisition. Also contributing were $1.5 million higher sales of programming
to other networks and higher Playboy TV cable pay-per-view revenues of $1.0
million, primarily due to higher retail rates. These increases were mostly
offset by $6.5 million lower Playboy TV DTH revenues, principally due to a
significant decline in PrimeStar subscribers as a result of DirecTV's
acquisition of PrimeStar in 1999. PrimeStar service was discontinued in
September 2000.
The Company's networks were available to the following approximate household
units (in millions):
Dec. 31, Dec. 31,
2000 1999
- ------------------------------------------------------------------------------
Playboy TV (1)
DTH 15.4 12.4
Cable digital 3.2 1.3
Cable analog addressable 11.0 11.7
Movie Networks (1)
Cable digital 8.4 3.9
Cable analog addressable 16.2 18.3
- ------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given
network per carriage platform. A single household can represent multiple
household units if two or more of the Company's networks and/or multiple
platforms (i.e. analog and digital) are available to that household.
International TV business profit contribution for 2000 decreased $19.4
million on a $21.0 million, or 55%, decrease in revenues primarily due to the
$30.0 million PTVI payment in 1999 primarily for library license fees.
22
Revenues from the worldwide home video business for 2000 decreased $1.9
million, or 19%, while profit contribution decreased $1.4 million largely due
to softness in the domestic business.
Profit contribution from movies and other businesses for 2000 decreased
$2.1 million on a $2.4 million, or 72%, decrease in revenues primarily due to
$1.5 million lower sales of previously released movies combined with $1.0
million lower library license fees from PTVI.
Programming expense decreased $1.0 million in 2000 primarily due to the
lower library license fees from PTVI and the lower sales of movies. Higher
amortization for domestic TV networks of $4.1 million primarily offset the
decrease.
The group's administrative expenses decreased $2.1 million in 2000
primarily due to lower performance-related variable compensation expense.
PUBLISHING GROUP
Playboy magazine revenues increased $2.6 million, or 2%, for 2000
compared to the prior year due to $4.5 million higher advertising revenues,
due to both higher average net revenue per page and more ad pages. Partially
offsetting the above were lower circulation revenues, due to both lower
subscription revenues of $1.2 million and lower newsstand revenues of $0.6
million.
Revenues from other domestic publishing businesses decreased $1.6
million, or 9%, for 2000 compared to the prior year. This decline largely
reflected lower sales of special editions primarily as a result of the
previously discussed increased competition.
International publishing revenues increased $1.8 million, or 16%, for
2000 primarily due to higher revenues from VIPress, the Company's
majority-owned Polish publishing joint venture. As previously discussed, the
Company sold a majority of its interest in VIPress in 2001.
The Publishing Group's segment income for 2000 increased $0.9 million,
or 15%, compared to the prior year primarily due to the higher Playboy
magazine advertising revenues, lower manufacturing costs of $1.4 million
related to a reduction in print runs, lower legal and ancillary businesses
expenses of $0.7 million each and lower performance-related variable
compensation expense. Partially offsetting the above was $2.5 million lower
Playboy magazine subscription profitability combined with higher editorial
costs of $2.3 million and the lower special editions and Playboy magazine
newsstand revenues.
PLAYBOY ONLINE GROUP
Playboy Online Group revenues for 2000 were $25.3 million, an increase
of $9.2 million, or 57%, compared to the prior year due to $7.7 million higher
e-commerce revenues and $1.6 million higher subscription revenues.
Contributing significantly to the higher e-commerce revenues was the
integration of the Playboy and Spice direct commerce businesses with
e-commerce effective October 1, 1999. Higher Playboy e-commerce revenues were
offset by a decline in e-commerce revenues from Spice.
The group reported a segment loss for 2000 of $25.2 million compared to
$9.1 million in the prior year. This reflected planned higher expenses of
$25.3 million, principally related to sales and marketing, administration and
content and product development. The higher administrative expenses were due
in part to trademark, content and administrative fees to the parent company.
CATALOG GROUP
Catalog Group revenues for 2000 decreased $27.9 million, or 46%, and
segment performance declined $0.3 million compared to the prior year largely
as the result of management's decision to divest this business. In October
2000, the Company sold its Critics' Choice Video businesses and fulfillment
and customer service operations. Additionally, the lower revenues reflected
planned lower circulation for the Critics' Choice Video catalog, prior to its
sale. The comparison also reflected the absence of 2000 revenues related to
the Playboy and Spice catalogs. The Playboy and Spice catalogs were integrated
as direct commerce businesses within the Company's Playboy Online branded
e-commerce business effective in October 1999.
23
LICENSING BUSINESSES GROUP
Segment performance from the Licensing Businesses Group for 2000
increased $1.4 million on a $0.7 million, or 8%, increase in revenues
primarily due to the strength of the Company's licensed branded products
business, combined with lower expenses primarily due to a reorganization in
1999.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses for 2000 were $6.2
million, or 23%, lower than the prior year primarily reflecting planned lower
marketing spending of $2.9 million and a $2.8 million reduction of expenses
related to the trademark and administrative fees from the Playboy Online
Group.
RESTRUCTURING EXPENSES
In 2000, realignment of senior management, coupled with staff
reductions, led to a restructuring charge of $3.7 million related to the
termination of 19 employees.
In 1999, the Company began a cost reduction effort that led to a work
force reduction through Company-wide layoffs and attrition. A total of 26
employees were terminated (including eight in the first quarter of 2000)
resulting in total restructuring charges of $1.3 million, of which $0.2
million was recorded in the first quarter of 2000. Additionally, 23 positions
were eliminated through attrition.
GAIN (LOSS) ON DISPOSALS
A loss of $3.0 million was recorded in 2000 related to the sale of the
Critics' Choice Video businesses and fulfillment and customer service
operations. The prior year included a gain of $1.7 million related to the sale
of the Company's wholly-owned subsidiary, Playboy Gaming Greece Ltd., which
owned a 12% interest in the Rhodes Casino.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had $4.6 million in cash and cash
equivalents and $101.6 million in total financing obligations compared to $2.5
million in cash and cash equivalents and $103.3 million in total financing
obligations at December 31, 2000. The financing obligations at December 31,
2001 and December 31, 2000 included $20.0 million and $10.0 million,
respectively, in loans made directly from Hugh M. Hefner to Playboy.com. A
total of $15.0 million of the loans from Mr. Hefner are scheduled to mature in
2002.
The Company's current liquidity requirements, excluding those of
Playboy.com, are being provided by a $106.1 million credit facility, comprised
of $71.1 million of term loans and a $35.0 million revolving credit facility.
At December 31, 2001, $10.5 million was outstanding under the revolving credit
facility. The Company plans to finance its working capital requirements
through cash generated from operations and its revolving credit facility. If
additional funds become necessary, the Company will seek additional capital
from the debt and/or equity markets.
Outstanding balances under the credit facility bear interest at rates
equal to specified index rates plus margins that fluctuate based on the
Company's leverage ratio. The term loans consist of two tranches, Tranche A
and Tranche B, which currently bear interest at 3.00% and 4.25% margins,
respectively, over the London Interbank Offering Rate ("LIBOR"). The Company
is assessed a 0.5% commitment fee on the unused portion of the revolving
credit facility. The weighted average interest rates as of December 31, 2001
were 5.11% and 6.37% for the Tranche A and Tranche B term loans, respectively,
and 6.05% for the revolving credit facility. In May 2001, the Company entered
into a two-year interest rate swap which effectively converted $45.0 million
of floating rate debt to a fixed rate of 8.78%. The term loans began
amortizing quarterly on March 31, 2001. The Tranche A term loan and the
revolving credit facility both mature on March 15, 2004 and the Tranche B term
loan matures on March 15, 2006.
24
The Company's obligations under the credit facility are guaranteed by
its subsidiaries (excluding Playboy.com) and are secured by substantially all
of its assets (excluding Playboy.com and its assets). The credit agreement
contains financial covenants requiring the Company to maintain certain
leverage, interest coverage and fixed charge coverage ratios. Other covenants
include limitations on other indebtedness, investments, capital expenditures
and dividends. The credit agreement also requires mandatory prepayments with
net cash proceeds resulting from excess cash flow, asset sales and the
issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement. Based on 2001 results, the Company
will make an excess cash flow payment of $3.6 million on March 31, 2002.
Therefore, total 2002 debt repayments under the credit facility will now be
$8.6 million.
The nominal consideration for the Califa acquisition was $70.0 million.
The Company is obligated to pay up to an additional $12.0 million in
consideration should the acquired assets achieve certain financial performance
targets. The total consideration will be paid over ten years, with the Company
having the option of paying up to $71 million of the scheduled payments in
cash or Class B stock. If the Company elects to make a payment in Class B
stock and the Company does not get the registration statement relating to the
resale of its shares issued in connection with the specified payment effective
within the periods set forth in the asset purchase agreement, the Company is
also obligated to pay the Califa principals interest on the amount of the
payment until the registration statement is declared effective. The interest
payment can be paid in cash or shares of Class B stock at the Company's
option. As of February 28, 2002, approximately $0.4 million in interest had
accrued in connection with the payment of the first installment of
consideration to be paid in Class B stock in accordance with the agreement. On
March 12, 2002, the Company paid the Califa principals $0.3 million in cash as
a partial payment of interest due under the agreement. The Company will pay
the balance of the interest payment in shares of Class B stock.
The credit agreement also contains a maximum funding limitation by the
Company to Playboy.com of $17.5 million, which was met in September 2000. As a
result of this limitation, Playboy.com is dependent on third-party financing
to fund its operations, including its debt repayment obligations, until its
business generates sufficient cash flow. In the event of an initial public
offering ("IPO") of Playboy.com's common stock, all amounts above $10.0
million advanced to Playboy.com after January 1, 2000 shall be repaid from
Playboy.com to the Company. In addition, 10% of the net proceeds of any
Playboy.com equity financing shall be paid to the Company until all amounts
above the $10.0 million have been repaid.
Playboy.com has been in active discussions with strategic partners and
other potential investors in connection with a private placement of its
preferred stock. On each of March 7, 2001 and April 2, 2001, Playboy.com
issued a convertible promissory note in the aggregate principal amount of $5.0
million to two strategic investors. On July 27, 2001, Playboy.com issued a
third convertible promissory note in the aggregate principal amount of $5.0
million to Hugh M. Hefner. On August 13, 2001, each of the three
aforementioned convertible promissory notes, together with accrued and unpaid
interest thereon, was converted into shares of Playboy.com's Series A
Preferred Stock. Playboy.com's Series A Preferred Stock is convertible into
Playboy.com common stock (initially on a one-for-one basis) and is redeemable
by Playboy.com after the fifth anniversary of the date of its issuance at the
option of the holder. In addition, in the event that a holder elects to redeem
Playboy.com's Series A Preferred Stock at any time after the fifth anniversary
of the date of its issuance and before the 180th day thereafter, and
Playboy.com is not able to, or does not, satisfy such obligation, in cash or
stock, the Company has agreed that it shall redeem all or part of the shares
in lieu of redemption by Playboy.com, either in cash, shares of the Company's
Class B stock or any combination thereof at its option.
In September and December 2000, Hugh M. Hefner made loans to
Playboy.com each in the amount of $5.0 million. These loans bear interest at
an annual rate of 10.50% and 12.00%, respectively, with principal and
accumulated interest related to both loans due in September 2002. In September
2001, Hugh M. Hefner made an additional $5.0 million loan to Playboy.com which
bears interest at an annual rate of 8.00%, with principal and accumulated
interest due in July 2002. In December 2001, Hugh M. Hefner agreed to lend up
to an additional $10.0 million to Playboy.com from time to time until December
31, 2002, of which $5.0 million had been borrowed by Playboy.com at December
31, 2001. Outstanding balances under this note bear interest at an annual rate
of 9.00%, with interest payable monthly, and the note is due in August 2006.
Under the terms of the note, Hugh M. Hefner may elect, at any time, to convert
the note into shares of Playboy.com's common stock at a per share price of
$7.1097 (as equitably adjusted for any stock dividends, combinations, splits
or similar transactions).
25
Additionally, in conjunction with the issuance of the note, the Company
has agreed to give Hugh M. Hefner the right to surrender the note to the
Company for shares of its Class B stock on or after certain specified
surrender events. Under the agreement, "surrender event" means any of the
following: (a) August 10, 2006, (b) the date on which the Company is no longer
subject to the terms (except for such terms that expressly survive the payment
in full of the obligations and termination of the commitments thereunder) of
its credit agreement, (c) the occurrence and continuation of an event of
default under the note, including the dissolution of Playboy.com or any vote
in favor thereof by Playboy.com's board of directors or stockholders, certain
insolvency or bankruptcy events relating to Playboy.com, Playboy.com's failure
to pay principal and interest due and payable under the note and Playboy.com's
non-performance of any material covenant or condition under the note which
continues uncured for 15 days after written notice of the default is provided
to Playboy.com, (d) the dissolution of Playboy.com or any vote in favor
thereof by Playboy.com's board of directors or stockholders or (e) certain
insolvency or bankruptcy events relating to Playboy.com. However, the note may
not be surrendered if the surrender of the note or the issuance of the shares
of Class B stock would be prohibited by the Company's credit agreement. In the
event that Mr. Hefner elects to surrender the December 2001 note for shares of
Class B stock in accordance with the foregoing, the Company will issue to Mr.
Hefner the number of shares equal to the outstanding principal and interest on
the note divided by $19.90 (125% of the volume weighted average closing price
of Class B stock (as equitably adjusted for any stock dividends, combinations,
splits or similar transactions) on the five trading days immediately prior to
the date of the note).
As previously discussed, PTVI's ability to finance its operations,
including making library license and programming output payments to the
Company, will depend principally on the ability of Claxson, the Company's
venture partner, and also the Company to make capital contributions, until
PTVI generates sufficient funds from operations. The maximum mandatory capital
contributions by the partners is $100 million, of which $61.6 million has been
contributed through December 31, 2001. Based on the Company's 19.9% equity
interest in PTVI, the Company's remaining mandatory capital contributions
obligation is $7.6 million. The Company is not contractually obligated to make
capital contributions in excess of the maximum mandatory amount, even if
Claxson fails to make its mandatory capital contributions. As of December 31,
2001, the Company's receivables from PTVI were $61.9 million, of which $50.0
million represents the noncurrent portion of the receivable which is offset by
deferred revenue. Of the $11.9 million current portion of the receivable, $2.6
million was collected in the first quarter of 2002, and $7.5 million is not
contractually due until September 2002 which is offset by deferred revenue. If
PTVI is unable to make required payments to the Company in a timely manner,
either because of Claxson's failure to fund its capital contribution
obligations or otherwise, the Company may be required to take steps to address
this by, among other things, restructuring the PTVI agreements, reducing
operating expenses, seeking amendments to its credit facility or seeking
additional capital. If these efforts are not successful, the Company's future
financial condition and operating results could be materially adversely
affected. See Note (C) Playboy TV International, LLC Joint Venture of Notes to
Consolidated Financial Statements.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $7.9 million for 2001, due
primarily to $37.3 million of investments in Company-produced and licensed
entertainment programming, partially offset by positive results (after
adjusting for noncash items), principally from the Entertainment Group. In
2002, the Company expects to invest approximately $45 million in
Company-produced and licensed programming, which could vary based on, among
other things, the timing of completing productions.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $2.9 million for 2001
primarily due to $3.2 million of additions to property and equipment. In 2001,
the Company also entered into leases of furniture and equipment totaling $1.6
million. The Company invested $1.9 million related to funding its equity
interests in international TV ventures. The Califa acquisition resulted in net
cash paid of $0.9 million in the current year. Partially offsetting the above
was $3.3 million of proceeds from disposals, primarily related to the sale of
the Collectors' Choice Music businesses and VIPress.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $12.9 million for 2001
primarily due to the $13.1 million of net proceeds from the sale of
Playboy.com's Series A Preferred Stock. Playboy.com also received the $10.0
million in loans from Hugh M. Hefner. Partially offsetting the above was $7.8
million in payments on the Company's revolving credit facility.
26
INCOME TAXES
In 2000, 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. As a result of this review, the Company
decided to adopt a more conservative approach by increasing the valuation
allowance, which resulted in noncash federal income tax expense of $24.1
million.
RELATED PARTY TRANSACTIONS
HUGH M. HEFNER
The Company owns a 29-room mansion located on 5 1/2 acres in Holmby
Hills, California. The Mansion is used for various corporate activities,
including serving as a valuable location for video production, magazine
photography, online events, business meetings, enhancing the Company's image,
charitable functions and a wide variety of other promotional and marketing
activities. The Mansion generates substantial publicity and recognition which
increase public awareness of the Company and its products and services. Its
facilities include a tennis court, swimming pool, gymnasium and other
recreational facilities as well as extensive film, video, sound and security
systems. The Mansion also includes accommodations for guests and serves as an
office and residence for Hugh M. Hefner, the Company's founder. It has a
full-time staff which performs maintenance, serves in various capacities at
the functions held at the Mansion and provides guests of the Company and Mr.
Hefner with meals, beverages and other services.
Under a 1979 lease the Company entered into with Mr. Hefner, the annual
rent Mr. Hefner pays to the Company for his use of the Mansion is determined
by independent experts who appraise the value of Mr. Hefner's basic
accommodations and access to the Mansion's facilities, utilities and attendant
services based on comparable hotel accommodations. In addition, Mr. Hefner is
required to pay the sum of the per-unit value of nonbusiness meals, beverages
and other benefits he and his personal guests receive. These standard food and
beverage per-unit values are determined by independent expert appraisals based
on fair market values. Valuations for both basic accommodations and standard
food and beverage units are reappraised every three years, and between
appraisals are annually adjusted based on appropriate consumer price indexes.
Mr. Hefner is also responsible for the cost of all improvements in any Hefner
residence accommodations, including capital expenditures, that are in excess
of normal maintenance for those areas.
Mr. Hefner's usage of Mansion services and benefits is recorded through
a system initially developed by the auditing and consulting firm of
PricewaterhouseCoopers LLP and now administered by the Company, with
appropriate modifications approved by the audit and compensation committees of
the Board of Directors. The lease had an initial two-year term which expired
on June 30, 1981, but on its terms continues for ensuing 12-month periods
unless either the Company or Mr. Hefner terminates it. When the Company
changed its fiscal year from a year ending June 30 to a year ending December
31, Mr. Hefner's lease continued for only a six-month period through December
31, 1998 to accommodate this change. On December 31, 1998, the lease renewed
automatically and will continue to renew automatically for 12-month periods
under the terms as previously described. The rent charged to Mr. Hefner during
2001 included the appraised rent and the appraised per-unit value of other
benefits, as described above. Within 120 days after the end of the Company's
fiscal year, the actual charge for all benefits for that year is finally
determined. Mr. Hefner pays or receives credit for any difference between the
amount finally determined and the amount he paid over the course of the year.
The sum of the rent and other benefits payable for 2001 was estimated by the
Company to be $1.3 million, and Mr. Hefner paid that amount during 2001. The
actual rent and other benefits payable for 2000 and 1999 were $1.1 million and
$0.9 million, respectively.
The Company purchased the Mansion in 1971 for $1.1 million and in the
intervening years has made substantial capital improvements at a cost of $13.4
million through 2001 (including $2.5 million to bring the Hefner residence
accommodations to a standard similar to the Mansion's common areas). The
Mansion is included in the Company's Consolidated Balance Sheet as of December
31, 2001 at a cost, including all improvements and after accumulated
depreciation, of $2.0 million. The Company pays all operating expenses of the
Mansion, including depreciation and taxes, which were $3.2 million, $3.2
million and $3.6 million for 2001, 2000 and 1999, respectively, net of rent
received from Mr. Hefner.
As of December 31, 2001, Playboy.com had borrowed a total of $20.0
million from Hugh M. Hefner. This indebtedness is evidenced by the four notes
previously discussed. Also as discussed, Mr. Hefner was the holder of a $5.0
million convertible promissory note which converted into shares of
Playboy.com's Series A Preferred Stock in 2001.
27
From time to time, the Company enters into barter transactions in which
the Company secures air transportation for Mr. Hefner in exchange for
advertising pages in Playboy magazine. Mr. Hefner reimburses the Company for
its direct costs of providing these advertising pages. The Company receives
significant promotional benefit from these transactions.
PTVI
During 1999, PTVI was formed as a joint venture between the Company and
Cisneros. In 2001, Claxson succeeded Cisneros as the Company's joint venture
partner. PTVI has the exclusive right to create and launch new television
networks under the Playboy and Spice brands outside of the United States and
Canada and, under certain circumstances, to license programming to third
parties. PTVI will also own and operate all existing international Playboy TV
and Spice networks. In addition, the Company and PTVI have entered into
program supply and trademark license agreements. Currently, the Company has a
19.9% interest in PTVI with an option to increase its equity up to 50%. The
equity method is used to account for the Company's 19.9% interest in the
common stock of PTVI due to the Company's ability to exercise significant
influence over PTVI's operating and financial policies.
In return for the exclusive international TV rights for the use of the
Playboy tradename, film and video library, and for the acquisition of the
international rights to the Spice film library, the U.K. and Japan Playboy TV
networks and certain international distribution contracts, PTVI is obligated
to make total payments of $100.0 million to the Company over six years, of
which $42.5 million has been received through the end of 2001. The remaining
payments are owed over the next three years as follows: $7.5 million, $25.0
million and $25.0 million. PTVI also has a long-term commitment with the
Company to license international TV rights to each year's output production,
with payments representing a percentage of the Company's annual production
spending. PTVI's ability to finance its operations, including making library
license and programming output payments to the Company, will depend
principally on the ability of Claxson and also the Company to make capital
contributions, until PTVI generates sufficient funds from operations. If these
payments are not made, the Company's future financial condition and operating
results could be materially adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statements of Financial Accounting Standards No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets (collectively,
"Statements 141 and 142"), effective for fiscal years beginning after December
15, 2001. Under the new rules, goodwill and intangible assets with indefinite
lives will no longer be amortized but will be subject to annual impairment
tests in accordance with Statements 141 and 142. Other intangible assets will
continue to be amortized over their useful lives. In compliance with these
statements, goodwill recorded in connection with the Califa acquisition in
July 2001 is not being amortized.
The Company is evaluating the impact that application of the
nonamortization provisions of Statements 141 and 142 will have on the
Company's financial statements. In 2001, annual amortization expense for
goodwill and intangible assets with indefinite lives was approximately $5.8
million. The Company will perform the first of the required impairment tests
of goodwill and indefinite-lived intangible assets as of January 1, 2002. The
Company does not expect to record a charge as a cumulative effect of change in
accounting principle, however, it does expect to record an approximate $5.8
million income tax charge related to the adoption in the first quarter of
2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("Statement 144"), which is effective for fiscal years beginning after
December 15, 2001. Statement 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued
operations. Statement 144 supercedes Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of ("Statement 121"), and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("APB 30"), for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 also amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements ("ARB 51"), to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The Company believes that adoption of Statement 144
will not have a material impact on its financial statements.
28
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains "forward-looking statements,"
including statements in MD&A as to expectations, beliefs, plans, objectives
and future financial performance, and assumptions underlying or concerning the
foregoing. These forward-looking statements involve known and unknown risks,
uncertainties and other factors, which could cause actual results, performance
or outcomes to differ materially from those expressed or implied in the
forward-looking statements. The following are some of the important factors
that could cause actual results, performance or outcomes to differ materially
from those discussed in the forward-looking statements:
(1) foreign, national, state and local government regulation, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print, video
and online materials,
(b) changes in or increased regulation of gaming businesses, which
could limit the Company's ability to obtain licenses, and the
impact of federal and state laws on gaming businesses generally,
(c) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue, or
(d) substantive changes in postal regulations or rates which could
increase the Company's postage and distribution costs;
(2) risks associated with foreign operations, including market acceptance
and demand for the Company's products and the products of its licensees
and the Company's ability to manage the risk associated with its
exposure to foreign currency exchange rate fluctuations;
(3) increases in interest rates;
(4) changes in general economic conditions, consumer spending habits,
viewing patterns, fashion trends or the retail sales environment which,
in each case, could reduce demand for the Company's programming and
products and impact its advertising revenues;
(5) the Company's ability to protect its trademarks and other intellectual
property;
(6) risks as a distributor of media content, including becoming subject to
claims for defamation, invasion of privacy, negligence, copyright,
patent or trademark infringement, and other claims based on the nature
and content of the materials distributed;
(7) the dilution from any potential issuance of additional Company common
stock in connection with acquisitions by the Company and investments in
Playboy.com;
(8) competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally
or with respect to the adult male market;
(9) competition in the cable, DTH, men's magazine and Internet markets;
(10) reliance on third parties for technology and distribution for the
television video-on-demand and Internet businesses;
(11) changes in distribution technology and/or unforeseen delays in the
implementation of that technology by the cable and DTH industries,
which might affect the Company's plans and assumptions regarding
carriage of its networks;
(12) risks associated with losing access to transponders, competition for
transponders and channel space and any decline in the Company's access
to, and acceptance by, cable and DTH systems or any deterioration in
the terms or cancellation of fee arrangements with operators of these
systems;
(13) attempts by consumers or citizens groups to exclude the Company's
programming from pay television distribution;
(14) risks associated with integrating the operations of the networks
related to the Califa acquisition and the risks that the Company may
not realize the expected operating efficiencies, synergies, increased
sales and profits and other benefits from the acquisition;
(15) PTVI's ability to finance its operations, including making library
license and programming output payments to the Company, will depend
principally on the ability of Claxson, the Company's venture partner,
and also the Company to make capital contributions, until PTVI
generates sufficient funds from operations. If these payments are not
made, the Company's future financial condition and operating results
could be materially adversely affected;
(16) increases in paper or printing costs;
(17) effects of the national consolidation of the single-copy magazine
distribution system;
(18) uncertainty of the viability of the Internet gaming, e-commerce,
advertising and subscription businesses; and
(19) the Company's ability to obtain adequate third-party financing,
including equity investments, to fund the Company's Internet
business, and the timing and terms of such financing.
29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company is exposed to certain market risks, including changes in
interest rates and foreign currency exchange rates. In order to manage the
risk associated with its exposure to such fluctuations, the Company enters
into various hedging transactions that have been authorized pursuant to the
Company's policies and procedures. The Company has derivative instruments that
have been designated and qualify as cash flow hedges, which are entered into
in order to hedge the variability of cash flows to be paid related to a
recognized liability and cash flows to be received related to forecasted
royalty revenues. In 2001, the Company entered into an interest rate swap
agreement maturing in May 2003 that effectively converts $45.0 million of its
floating rate debt to fixed rate debt, thus reducing the impact of interest
rate changes on future interest expense. In addition, to protect against the
reduction in value of foreign currency cash flows, the Company hedges portions
of its forecasted royalty revenues denominated in foreign currencies,
primarily Japanese yen and the Euro, with forward contracts. The Company
hedges these royalties for periods not exceeding 12 months. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. The Company links all hedges that are
designated as cash flow hedges to floating rate liabilities or forecasted
transactions on the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the derivatives used
in hedging transactions are effective in offsetting changes in cash flows of
the hedged items. Should it be determined that a derivative is not effective
as a hedge, the Company will discontinue hedge accounting prospectively. The
Company does not use financial instruments for trading purposes.
The Company prepared sensitivity analyses to determine the impact of a
hypothetical one percentage point increase in interest rates. Based on its
sensitivity analyses at December 31, 2001 and 2000, such a change in interest
rates would affect the Company's annual consolidated operating results,
financial position and cash flows by approximately $0.8 million and $0.9
million, respectively. As of December 31, 2001 and 2000, the Company had an
interest rate swap agreement in place to effectively convert $45.0 million of
its floating rate debt to a fixed rate of 8.78% and 9.21%, respectively,
thereby significantly reducing its risk related to interest rate fluctuations.
The Company also prepared sensitivity analyses to determine the impact
of a hypothetical 10% devaluation of the U.S. dollar relative to the foreign
currencies of the countries to which it has exposure, primarily Japan and
Germany. Based on its sensitivity analyses at December 31, 2001 and 2000, such
a change in foreign currency exchange rates would affect the Company's annual
consolidated operating results, financial position and cash flows by
approximately $0.2 million for both years. The Company uses foreign currency
forward contracts to manage the risk associated with its exposure to foreign
currency exchange rate fluctuations.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The following consolidated financial statements of the Company and
supplementary data are set forth in this Form 10-K Annual Report as follows:
Page
----
Consolidated Statements of Operations - Fiscal Years
Ended December 31, 2001, 2000 and 1999 31
Consolidated Balance Sheets - December 31, 2001 and 2000 32
Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 2001, 2000 and 1999 33
Consolidated Statements of Cash Flows - Fiscal Years
Ended December 31, 2001, 2000 and 1999 34
Notes to Consolidated Financial Statements 35
Report of Independent Auditors 56
Report of Independent Accountants 57
Report of Management 58
The supplementary data regarding quarterly results of operations are
set forth in Note (W) Quarterly Results of Operations (Unaudited) of Notes to
Consolidated Financial Statements.
30
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES $ 291,226 $ 307,722 $ 347,817
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (240,691) (265,369) (277,448)
Selling and administrative expenses (58,050) (55,385) (56,390)
Restructuring expenses (3,776) (3,908) (1,091)
Gain (loss) on disposals (955) (2,924) 1,728
- -------------------------------------------------------------------------------------------------------------------
Total costs and expenses (303,472) (327,586) (333,201)
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) (12,246) (19,864) 14,616
- -------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 786 1,519 1,798
Interest expense (13,970) (9,148) (7,977)
Minority interest (704) (125) (92)
Equity in operations of PTVI and other (746) (375) (13,871)
Playboy.com registration statement expenses - (1,582) -
Legal settlement - (622) -
Other, net (1,447) (1,202) (904)
- -------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (16,081) (11,535) (21,046)
- ------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle (28,327) (31,399) (6,430)
Income tax benefit (expense) (996) (16,227) 862
- -------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before cumulative
effect of change in accounting principle (29,323) (47,626) (5,568)
Gain on disposal of discontinued operations (net of tax) - - 233
- -------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (29,323) (47,626) (5,335)
Cumulative effect of change in accounting principle (net of tax) (4,218) - -
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $ (33,541) $ (47,626) $ (5,335)
==================================================================================================================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 24,411 24,240 22,872
===================================================================================================================
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Income (loss) before cumulative effect
of change in accounting principle
From continuing operations $ (1.20) $ (1.96) $ (0.24)
From discontinued operations (net of tax) - - 0.01
- -------------------------------------------------------------------------------------------------------------------
Total (1.20) (1.96) (0.23)
Cumulative effect of change in accounting principle (net of tax) (0.17) - -
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (1.37) $ (1.96) $ (0.23)
==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
31
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 4,610 $ 2,534
Marketable securities 3,182 3,443
Receivables, net of allowance for doubtful accounts of
$6,406 and $5,994, respectively 41,846 45,075
Receivables from related parties 12,417 7,575
Inventories, net 13,962 20,700
Deferred subscription acquisition costs 12,111 12,514
Other current assets 7,857 9,568
- -------------------------------------------------------------------------------------------------------------------
Total current assets 95,985 101,409
- -------------------------------------------------------------------------------------------------------------------
Receivables from related parties 50,000 57,500
Property and equipment, net 10,749 11,532
Programming costs 56,213 55,454
Goodwill, net of accumulated amortization of $7,349 and $4,761, respectively 112,338 87,260
Trademarks, net of accumulated amortization of $17,726 and $14,701, respectively 52,185 52,585
Distribution agreements acquired, net of accumulated amortization of $2,199 26,301 -
Other noncurrent assets 22,469 22,748
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 426,240 $ 388,488
===================================================================================================================
LIABILITIES
Financing obligations $ 8,561 $ 3,922
Financing obligations to related parties 15,000 5,000
Acquisition liability 21,023 -
Accounts payable 19,293 25,295
Accounts payable to related parties 169 718
Accrued salaries, wages and employee benefits 8,717 8,915
Deferred revenues 47,913 41,898
Deferred revenues from related parties 8,382 4,397
Other liabilities and accrued expenses 18,453 16,861
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 147,511 107,006
- -------------------------------------------------------------------------------------------------------------------
Financing obligations 73,017 89,328
Financing obligations to related parties 5,000 5,000
Acquisition liability 41,079 -
Deferred revenues from related parties 44,350 50,875
Net deferred tax liabilities 5,313 4,679
Other noncurrent liabilities 28,445 17,415
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 344,715 274,303
- -------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102
and 4,859,102 issued, respectively 49 49
Class B nonvoting - 30,000,000 shares authorized; 19,930,142
and 19,647,048 issued, respectively 199 196
Capital in excess of par value 123,090 120,519
Accumulated deficit (36,925) (3,384)
Unearned compensation restricted stock (3,019) (2,713)
Accumulated other comprehensive loss (1,869) (482)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 81,525 114,185
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 426,240 $ 388,488
===================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
32
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Retained Unearned Accumulated
Class A Class B Capital in Earnings Comp. Other
Common Common Excess of (Accum. Restricted Comprehensive Treasury
Stock Stock Par Value Deficit) Stock Income (Loss) Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 50 $ 171 $ 44,860 $ 49,577 $ (3,716) $ (169) $(6,571) $ 84,202
Net loss - - - (5,335) - - - (5,335)
Shares issued, vested or
forfeited under stock
plans, net 2 6 5,454 - 92 - 35 5,589
Shares issued related to the
Spice acquisition - 18 47,505 - - - 906 48,429
Shares issued in public equity
offering - 9 24,541 - - - - 24,550
Cancellation of treasury stock (3) (8) (5,619) - - - 5,630 -
Income tax benefit related to
stock plans - - 3,596 - - - - 3,596
Other comprehensive income - - - - - 250 - 250
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 49 196 120,337 44,242 (3,624) 81 - 161,281
Net loss - - - (47,626) - - - (47,626)
Shares issued, vested or
forfeited under stock
plans, net - - 510 - 911 - - 1,421
Other comprehensive loss - - - - - (563) - (563)
Other - - (328) - - - - (328)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 49 196 120,519 (3,384) (2,713) (482) - 114,185
Net loss - - - (33,541) - - - (33,541)
Shares issued, vested or
forfeited under stock
plans, net - 3 2,504 - (306) - - 2,201
Other comprehensive loss - - - - - (1,631) - (1,631)
Disposal - - - - - 244 - 244
Other - - 67 - - - - 67
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 49 $ 199 $123,090 $(36,925) $(3,019) $ (1,869) $ - $ 81,525
====================================================================================================================================
Comprehensive income (loss) was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- --------------------------------------------------------------------------
Net loss $ (33,541) $(47,626) $ (5,335)
Unrealized gain (loss)
on marketable securities (350) (533) 388
Derivative loss (1,184) - -
Foreign currency translation loss (97) (30) (138)
- --------------------------------------------------------------------------
Total other comprehensive income (loss) (1,631) (563) 250
- --------------------------------------------------------------------------
Comprehensive loss $ (35,172) $(48,189) $ (5,085)
==========================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
33
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(33,541) $(47,626) $(5,335)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities
Depreciation of property and equipment 3,897 3,561 2,055
Amortization of intangible assets 10,612 8,097 6,295
Equity in operations of PTVI and other 746 375 13,871
(Gain) loss on disposals 955 2,924 (1,728)
Cumulative effect of change in accounting principle 4,218 - -
Deferred income taxes 634 12,950 (6,663)
Income tax benefit related to stock plans - - 3,596
Amortization of investments in entertainment programming 37,395 33,253 34,341
Changes in current assets and liabilities
Receivables 5,822 (3,305) 5,604
Receivables from related parties (4,458) 4,832 (9,342)
Inventories 3,468 (1,129) 1,854
Deferred subscription acquisition costs 403 1,065 (2,009)
Other current assets 944 1,797 2,378
Accounts payable (6,587) (7,024) 128
Accounts payable to related parties (549) (1,972) 2,690
Accrued salaries, wages and employee benefits (486) 76 2,815
Deferred revenues 1,122 (456) 707
Deferred revenues from related parties 3,985 (2,128) 6,525
Acquisition liability interest 3,777 - -
Other liabilities and accrued expenses 1,034 3,634 (598)
-------- -------- --------
Net change in current assets and liabilities 8,475 (4,610) 10,752
-------- -------- --------
(Increase) decrease in receivables from related parties 6,525 4,350 (54,375)
Investments in entertainment programming (37,254) (33,061) (35,262)
Increase in trademarks (2,625) (7,080) (6,690)
Increase in other noncurrent assets (173) (384) (1,722)
Increase (decrease) in deferred revenues from related parties (6,525) (4,350) 55,225
Increase (decrease) in other noncurrent liabilities (737) (160) 1,188
Other, net (547) 611 552
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (7,945) (31,150) 16,100
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions (935) (1,152) (64,820)
Proceeds from disposals 3,276 5,384 13,573
Additions to property and equipment (3,233) (5,265) (2,702)
Funding of equity interests (1,875) (2,238) (12,069)
Purchase of marketable securities (89) (866) (2,171)
Other, net 3 248 63
- -------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,853) (3,889) (68,126)
- ------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com Series A Preferred Stock 13,066 - -
Proceeds from financing obligations 10,000 10,000 110,000
Repayment of financing obligations (3,922) (15,000) (20,000)
Net proceeds from (payments on) revolving credit facility (7,750) 18,250 (29,750)
Net proceeds from public equity offering - - 24,550
Payment of debt assumed in acquisition - - (10,471)
Deferred financing fees (454) (590) (4,669)
Proceeds from stock plans 2,141 1,385 5,553
Other, net (207) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,874 14,045 75,213
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,076 (20,994) 23,187
Cash and cash equivalents at beginning of year 2,534 23,528 341
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,610 $ 2,534 $ 23,528
===================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Although
these estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from actual
results.
Reclassifications: Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
New accounting pronouncements: In June 2001, the FASB issued Statements 141
and 142, Business Combinations and Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets with indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with
Statements 141 and 142. Other intangible assets will continue to be amortized
over their useful lives. In compliance with these statements, goodwill
recorded in connection with the Califa acquisition in July 2001 is not being
amortized.
The Company is evaluating the impact that application of the nonamortization
provisions of Statements 141 and 142 will have on the Company's financial
statements. In 2001, annual amortization expense for goodwill and intangible
assets with indefinite lives was approximately $5.8 million. The Company will
perform the first of the required impairment tests of goodwill and
indefinite-lived intangible assets as of January 1, 2002. The Company does not
expect to record a charge as a cumulative effect of change in accounting
principle, however, it does expect to record an approximate $5.8 million
income tax charge related to the adoption in the first quarter of 2002.
In August 2001, the FASB issued Statement 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. Statement 144 establishes a single
accounting model for the impairment or disposal of long-lived assets,
including discontinued operations. Statement 144 supercedes Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, and the accounting and reporting provisions of APB 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). Statement 144 also amends ARB 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company
believes that adoption of Statement 144 will not have a material impact on its
financial statements.
Cumulative effect of change in accounting principle: During 2001, the Company
adopted Statement of Financial Accounting Standards No. 139, Rescission of
FASB Statement No. 53 and Amendments to FASB Statements No. 63, 89, and 121
("Statement 139") and SOP 00-2, Accounting by Producers or Distributors of
Films. Statement 139 rescinds FASB Statement No. 53, Financial Reporting by
Producers and Distributors of Motion Picture Films. SOP 00-2 establishes new
film accounting and reporting standards for producers or distributors of
films, including changes in revenue recognition and accounting for marketing,
development and overhead costs. SOP 00-2 also requires all programming costs
to be classified on the balance sheet as noncurrent assets. As a result of the
adoption of SOP 00-2, the Company recorded a noncash charge of $4.2 million,
or $0.17 per basic and diluted common share, in 2001, representing a
cumulative effect of change in accounting principle. There was no related
income tax effect. The charge primarily relates to reversals of previously
recognized revenues which under the new rules were considered not yet earned,
combined with a write-off of marketing costs that were previously capitalized
and are no longer capitalizable under the new rules.
35
Revenue recognition: Domestic TV networks cable and DTH revenues are
recognized based on pay-per-view buys and monthly subscriber counts reported
each month by the system operators. International TV revenues received from
the PTVI joint venture, for the license of the exclusive international TV
rights for the use of the Playboy tradename, film and video library, and for
the acquisition of the international rights to the Spice film library, the
U.K. and Japan Playboy TV networks and certain international distribution
contracts, are recognized as the consideration is paid to the Company over a
six-year period, less the Company's 19.9% intercompany interest in such
transactions. License fees from PTVI for current output production are
recognized as programming is available, less the Company's 19.9% intercompany
interest in such transactions. See Note (C) Playboy TV International, LLC
Joint Venture. Domestic home video revenues generally are recognized based on
unit sales reported each month by the Company's distributor. Revenues from the
sale of Playboy magazine and Internet subscriptions are recognized over the
terms of the subscriptions. Revenues from newsstand sales of Playboy magazine
and special editions (net of estimated returns), and revenues from the sale of
Playboy magazine advertisements, are recorded when each issue goes on sale.
Revenues from direct- and e-commerce 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 fair value.
Marketable securities: Marketable securities are classified as
available-for-sale securities and are stated at fair value. Net unrealized
holding gains and losses are included in "Accumulated other comprehensive
loss."
Inventories: Inventories are stated at the lower of cost (specific cost and
average cost) or fair value.
Property and equipment: Property and equipment is stated at cost. Costs
incurred for computer software developed or obtained for internal use are
capitalized for application development activities and immediately expensed
for preliminary project activities or post-implementation activities.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets. The useful life for buildings and improvements is
ten years, furniture and equipment ranges from four to ten years and software
ranges from one to five years. Leasehold improvements are depreciated using 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, and any related gains or
losses are included in nonoperating results.
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 Playboy magazine
subscriptions, principally the production of direct-mail solicitation
materials and postage, and the distribution of direct- and e-commerce mailings
for use in the Playboy Online Group and the Catalog Group, prior to the sales
of the Company's catalogs. The capitalized direct-response advertising costs
are amortized over the period during which the future benefits are expected to
be received, generally six to 12 months. See Note (L) Advertising Costs.
Programming costs and amortization: Programming costs include original
programming and film acquisition costs, which are generally capitalized and
amortized. The portion of original programming costs assigned to the domestic
TV networks market is principally amortized using the straight-line method
over three years. The portion of original programming costs assigned to the
international TV market is fully amortized upon availability to PTVI. Existing
library original programming costs allocated to the international TV market
are amortized proportionately with license fees recognized related to the PTVI
agreement. The portion of original programming costs assigned to the worldwide
home video market is amortized using the individual-film-forecast-computation
method. Film acquisition costs assigned to domestic markets are amortized
principally using the straight-line method over the license term, generally
three years or less, while those assigned to the international TV market are
fully amortized upon availability to PTVI. Management believes that these
methods provide a reasonable matching of expenses with total estimated
revenues over the periods that revenues associated with films and programs are
expected to be realized. Film and program amortization is adjusted
periodically to reflect changes in the estimates of amounts of related future
revenues. Film and program costs are stated at the lower of unamortized cost
or estimated net realizable value as determined on a specific identification
basis. See Note (C) Playboy TV International, LLC Joint Venture and Note (N)
Programming Costs.
36
Intangible assets: Goodwill, the excess of the purchase price of acquired
businesses over the fair value of net assets acquired, has been amortized
using the straight-line method generally over 40 years. In compliance with
Statements 141 and 142, goodwill recorded in connection with the Califa
acquisition in July 2001 is not being amortized. Trademark acquisition costs
are capitalized and have been amortized using the straight-line method over 40
years. Trademark defense, registration and/or renewal costs are capitalized
and have been amortized using the straight-line method over 15 years.
Beginning in 2002, goodwill and all trademark-related costs which have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with Statements 141 and 142. The Company
acquired certain distribution agreements as a result of the Califa acquisition
that are reported as "Distribution agreements acquired." Certain of these
distribution agreements were deemed to have indefinite lives and, as such, are
not subject to amortization under Statements 141 and 142. Distribution
agreements deemed to have definite lives are being amortized over the life of
the agreements, or approximately two years. The consideration allocated to
noncompete agreements related to the Spice and Califa acquisitions are
amortized using the straight-line method over the life of the agreements,
ranging from five to ten years, and are included in "Other noncurrent assets."
Copyright defense, registration and/or renewal costs are capitalized and
amortized using the straight-line method over 15 years, and are also included
in "Other noncurrent assets."
Derivative financial instruments: Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("Statement 133"), as amended by
Statement of Financial Accounting Standards No. 138, which require all
derivative instruments to be recognized as either assets or liabilities on the
balance sheet at fair value regardless of the purpose or intent for holding
the derivative instrument. The accounting for changes in the fair value of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and further, on the type of relationship.
For those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as either a fair value hedge, a cash flow hedge or a
hedge of a net investment in a foreign operation. The adoption of Statement
133 did not have a material impact on the financial position or results of
operations of the Company.
The Company has derivative instruments that have been designated and qualify
as cash flow hedges, which are entered into in order to hedge the variability
of cash flows to be paid related to a recognized liability and cash flows to
be received related to forecasted royalty revenues. In 2001, the Company
entered into an interest rate swap agreement maturing in May 2003 that
effectively converts $45.0 million of its floating rate debt to fixed rate
debt, thus reducing the impact of interest rate changes on future interest
expense. In addition, to protect against the reduction in value of foreign
currency cash flows, the Company hedges portions of its forecasted royalty
revenues denominated in foreign currencies, primarily Japanese yen and the
Euro, with forward contracts. The Company hedges these royalties for periods
not exceeding 12 months. As of December 31, 2001, the fair value and carrying
value of the Company's interest rate swap was a liability of approximately
$1.2 million recorded in "Other liabilities and accrued expenses." The fair
value and carrying value of the Company's forward contracts was not material.
Since these derivative instruments are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the derivative
instruments is being deferred and reported as a component of "Accumulated
other comprehensive loss" and is reclassified into earnings in the same line
item where the related interest expense or royalty revenue is recognized into
earnings.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. The Company links all hedges that are
designated as cash flow hedges to floating rate liabilities or forecasted
transactions on the balance sheet. The Company also assesses, both at the
inception of the hedge and on an on-going basis, whether the derivatives used
in hedging transactions are effective in offsetting changes in cash flows of
the hedged items. Should it be determined that a derivative is not effective
as a hedge, the Company will discontinue hedge accounting prospectively.
As of December 31, 2001, the Company had net unrealized losses totaling $1.2
million in "Accumulated other comprehensive loss," which represents the
effective portion of changes in fair value of the cash flow hedges. During
2001, $0.2 million of net losses were reclassified from "Accumulated other
comprehensive loss" to the Consolidated Statement of Operations, which were
offset by net gains on the items being hedged. In 2001, there was no amount
included in earnings related to hedging ineffectiveness. The Company expects
the amount to be reclassified from "Accumulated other comprehensive loss" to
earnings within the next 12 months to be losses of approximately $1.1 million.
37
The Company also used interest rate swap agreements and forward contracts for
hedging purposes prior to 2001 and the adoption of Statement 133. For interest
rate swaps, the differential to be paid or received was accrued monthly as an
adjustment to interest expense. For forward contracts, gains and losses were
recorded in operating results as part of, and concurrent with, the hedged
transaction. The fair value of derivative instruments as of December 31, 2000
was $0.2 million, and these contracts were not recorded on the December 31,
2000 Consolidated Balance Sheet.
Earnings per common share: The Company reports both basic and diluted earnings
per share ("EPS") amounts. Basic EPS is computed by dividing net income (loss)
applicable to common shares by the weighted average number of common shares
outstanding during the period. Diluted EPS adjusts basic EPS for the dilutive
effects of stock options and other potentially dilutive financial instruments.
See Note (H) Earnings per Common Share.
Equity in operations of PTVI and other: The equity method is used to account
for the Company's 19.9% interest in the common stock of PTVI due to the
Company's ability to exercise significant influence over PTVI's operating and
financial policies. Equity in operations of PTVI includes the Company's 19.9%
interest in the results of PTVI, the elimination of unrealized profits of
certain transactions between the Company and PTVI and gains related to the
transfer of certain assets to PTVI. Also included in 1999 were the accounting
effects of the formation of the joint venture.
Minority interest: In 2001, a subsidiary of the Company, Playboy.com,
converted three promissory notes, together with accrued and unpaid interest
thereon, into shares of Playboy.com's Series A Preferred Stock. As part of
consolidation, included in "Minority interest" and "Other noncurrent
liabilities" is the accretion of dividends payable and professional fees
related to the preferred stock. Also included in "Other noncurrent
liabilities" is minority interest associated with the preferred stock.
Additionally, in 2001 the Company sold a majority of its interest in VIPress,
publisher of the Polish edition of Playboy magazine. Prior to the sale, the
financial statements of VIPress were included in the Company's financial
statements, along with the related minority interest.
Foreign currency translation: Assets and liabilities in foreign currencies
related to VIPress, prior to the sale in 2001, were translated into U.S.
dollars at the exchange rate existing at the balance sheet date. The net
exchange differences resulting from these translations were included in
"Accumulated other comprehensive loss." Revenues and expenses were translated
at average rates for the period. In addition, the Company records its 19.9%
interest in PTVI's foreign currency translation amounts.
(B) ACQUISITIONS
In July 2001, the Company acquired The Hot Network and The Hot Zone
networks, together with the related television assets of Califa. In addition,
under the asset purchase agreement related to the Califa networks, upon the
resolution of certain contingencies, the Company will complete the acquisition
of the Vivid TV network and the related television assets of VODI, a separate
entity owned by Califa's principals. The asset purchase agreement provides
that the Company will manage the Vivid TV assets in accordance with provisions
contained in the asset purchase agreement until the closing of the purchase of
the Vivid TV assets. These provisions generally allocate to the Company the
risks and benefits associated with the ownership of the Vivid TV assets. The
Vivid TV closing will take place promptly following the earliest to occur of
(a) the Company obtaining the consent of DirecTV, Inc. to the transfer of the
Vivid TV assets or (b) the earlier of the termination of the license agreement
between DirecTV, Inc. and VODI or December 31, 2004.
The addition of these networks into the Company's television networks
portfolio enables the Company to offer a wider range of adult programming. The
Company is accounting for the acquisition under the purchase method of
accounting and, accordingly, the results of Califa and VODI since the
acquisition date have been included in the Company's Consolidated Statement of
Operations. In connection with the acquisition and purchase price allocations,
the Entertainment Group recorded goodwill of $27.9 million which is deductible
for income tax purposes over 15 years. The purchase price has been recorded at
its net present value and is reported in the Consolidated Balance Sheet as
current and noncurrent "Acquisition liability."
Subject to the provisions of Statements 141 and 142, the Company has
recorded $30.8 million of intangible assets separate from goodwill. The
Company recorded $28.5 million for distribution agreements and $2.3 million
for noncompete agreements. All of the noncompete agreements and $7.5 million
of the distribution agreements are being amortized over approximately eight
and two years, respectively, the weighted average lives of these agreements.
Distribution agreements totaling $21.0 million were deemed to have indefinite
lives and are not subject to amortization under Statements 141 and 142.
38
The nominal consideration for Califa's assets was $28.3 million. The
Company also assumed the obligations of Califa related to a note payable and
noncompete liability. The nominal consideration for VODI's assets was $41.7
million. The Company is obligated to pay up to an additional $12.0 million in
consideration should the acquired assets achieve certain financial performance
targets. The total consideration will be paid over ten years, with the Company
having the option of paying up to $71 million of the scheduled payments in
cash or Class B stock. The number of shares, if any, the Company will issue
will be based on the trading prices of the Class B stock surrounding the
applicable payment dates. Prior to each scheduled payment of consideration,
the Company must provide the Califa principals with written notice specifying
the portion of the purchase price payment that the Company intends to pay in
cash and the portion in Class B stock. If the Company notifies the Califa
principals that the Company intends to issue Class B stock, the Califa
principals must elect the portion of the shares that the Califa principals
want the Company to register under the Securities Act, referred to as the
eligible shares. The Company is then obligated to issue eligible shares
registered under the Securities Act. The Califa principals may sell the
eligible shares received during the 90-day period following the date the
eligible shares are issued. If the Company does not get the registration
statement relating to the resale of its shares issued in connection with a
specified payment effective within the periods set forth in the agreement, the
Company is also obligated to pay the Califa principals interest on the amount
of the payment until the registration statement is declared effective. The
interest payment can be paid in cash or shares of Class B stock at the
Company's option. For purposes of this discussion, references to eligible
shares also includes any shares of Class B stock issued to pay any required
interest payments, if applicable. The interest rate will vary depending on the
length of time required after the applicable payment date to get the
registration statement declared effective. The number of eligible shares that
may be sold on any day during a selling period is limited under the asset
purchase agreement. A selling period will be extended if the applicable volume
limitations did not permit all of the eligible shares to be sold during that
selling period, assuming that the maximum number of shares were sold on each
day during the period.
If the Califa principals elect to sell eligible shares during the
applicable selling period and the proceeds from those sales are less than the
aggregate value of the eligible shares sold when the shares were issued, the
Company has agreed to make the Califa principals whole for the shortfall by,
at the Company's option, (a) paying the shortfall in cash, (b) issuing
additional shares of Class B stock in an amount equal to the shortfall,
referred to as the make-whole shares, or (c) increasing the next scheduled
payment of consideration to the Califa principals in an amount equal to the
shortfall plus interest on the shortfall at a specified interest rate until
the next scheduled payment of consideration. The foregoing make-whole
mechanism will apply only to the extent the Califa principals have sold the
maximum number of shares they are entitled to sell during the applicable
selling period in accordance with the applicable volume limitations.
The Company is obligated to issue make-whole shares that are registered
under the Securities Act and the Califa principals are entitled to sell those
shares during a 30-day selling period that follows their issuance. Sales of
make-whole shares are also subject to volume limitations and the selling
periods applicable to make-whole shares will also be extended if the
applicable volume limitations did not permit all of the make-whole shares to
be sold during the applicable selling period, assuming that the maximum number
of shares were sold on each day during the period. If during the applicable
selling period for eligible shares or make-whole shares, the sales proceeds
exceed the amount of the purchase price payment or the amount of the
make-whole payment, the Califa principals will immediately cease the offering
and sale of the remaining eligible shares or make-whole shares, as applicable,
and the remaining eligible shares or make-whole shares, as applicable, will be
returned promptly to the Company along with any excess sales proceeds.
39
The Company is scheduled to make the base payments and any performance-based
payments as follows (in thousands):
Year Ended December 31
- -----------------------------------------------------------------------------
2001 (1) $ 17,000
2002 (2) 7,750
2003 9,500
2004 8,000
2005 8,000
2006 8,000
2007 8,000
2008 1,000
2009 1,000
2010 1,000
2011 750
- -----------------------------------------------------------------------------
Total base payments 70,000
=============================================================================
2003 5,000
2004 7,000
- -----------------------------------------------------------------------------
Total performance-based payments $ 12,000
=============================================================================
(1) As of December 31, 2001, $1.0 million of the scheduled payment had been
paid. The remaining $16.0 million will be paid in shares of Class B stock
upon the effectiveness of a Registration Statement on Form S-3 ("Form
S-3"). Due to a delay in the effectiveness of the Form S-3, as of
February 28, 2002, the Company had accrued an interest penalty of $0.4
million, of which $0.3 million was paid in cash on March 12, 2002. The
remainder of the penalty will also be paid in shares of Class B stock
upon the effectiveness of the Form S-3.
(2) Of this payment, $6.5 million is expected to be paid in shares of Class B
stock upon the effectiveness of the Form S-3.
The following unaudited pro forma information presents a summary of the
results of operations of the Company assuming the acquisition occurred on
January 1, 2000 (in thousands, except per share amounts):
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------
Net revenues $ 298,242 $ 321,438
Loss before cumulative effect of change
in accounting principle (32,835) (54,997)
Net loss (37,053) (55,150)
Basic and diluted EPS
Loss before cumulative effect of
change in accounting principle (1.35) (2.27)
Net loss $ (1.52) $ (2.28)
- ------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
January 1, 2000, or of future results of operations.
The following reflects amounts assigned to assets, excluding goodwill, and
liabilities of Califa and VODI at the acquisition date (in thousands):
Califa VODI
- -----------------------------------------------------------------------------
Current assets $ 4,143 $ 39
Noncurrent assets 29,696 1,150
Current liabilities $ 1,964 $ 99
- -----------------------------------------------------------------------------
In March 1999, the Company completed its acquisition of Spice, a
leading provider of adult television entertainment. The final determination of
the purchase price, including transaction costs and Spice debt, was
approximately $127 million. The purchase was financed through the issuance of
approximately $48 million, or approximately two million shares, of Class B
stock, and the remainder through the payment and issuance of long-term debt.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of Spice since the acquisition date have been
included in the Company's Consolidated Statements of Operations. Goodwill of
approximately $90 million was recorded and has been amortized on a
straight-line basis assuming a 40-year life. However, beginning in 2002,
goodwill will no longer be amortized but will be subject to annual impairment
tests in accordance with Statements 141 and 142.
40
(C) PLAYBOY TV INTERNATIONAL, LLC JOINT VENTURE
During 1999, PTVI was formed as a joint venture between the Company and
Cisneros. In 2001, Claxson succeeded Cisneros as the Company's joint venture
partner. PTVI has the exclusive right to create and launch new television
networks under the Playboy and Spice brands outside of the United States and
Canada and, under certain circumstances, to license programming to third
parties. PTVI will also own and operate all existing international Playboy TV
and Spice networks. In addition, the Company and PTVI have entered into
program supply and trademark license agreements.
Currently, the Company has a 19.9% interest in PTVI with an option to
increase its equity up to 50%. The option expires on the earlier to occur of
September 15, 2009 and 30 days after the date on which PTVI reaches "cash
breakeven" as specified in PTVI's operating agreement. The purchase price for
the option through September 15, 2003 is the founders' price plus interest as
specified in the operating agreement. Founders' price as of a specified date
means, with respect to the price per one percentage interest of PTVI acquired
by the Company, an amount equal to the sum of the capital contributions to
PTVI by the venture partners through and including that date, divided by 100.
After September 15, 2003, the purchase price is based on the market value of
the acquired interests. The option purchase price can be paid in cash and/or
Class B stock at the Company's option.
In return for the exclusive international TV rights for the use of the
Playboy tradename, film and video library, and for the acquisition of the
international rights to the Spice film library, the U.K. and Japan Playboy TV
networks and certain international distribution contracts, PTVI is obligated
to make total payments of $100.0 million to the Company as follows (in
thousands):
Fiscal Year Ended December 31
--------------------------------------------------------------------------
1999 $ 30,000
2000 7,500
2001 5,000
2002 7,500
2003 25,000
2004 25,000
--------------------------------------------------------------------------
Total payments from PTVI $ 100,000
==========================================================================
PTVI also has a long-term commitment with the Company to license
international TV rights to each year's output production, with payments
representing a percentage of the Company's annual production spending. Each
year, an anticipated production budget is determined, detailing what will be
produced. PTVI pays the Company a percentage of this production budget up to a
maximum amount. Quarterly, the Company reviews the actual production dollars
spent to date, and projects the remaining production budget for the year.
Concurrently, the Company adjusts the effective percentage charged to PTVI for
the change in the expected programming, retroactive for the year.
Until PTVI generates sufficient cash flow from operations, PTVI's
ability to fund its operations, including making library license and
programming output payments to the Company, is dependent on receiving capital
contributions principally from Claxson and also from the Company. The maximum
mandatory capital contributions by the partners is $100 million, of which
$61.6 million has been contributed through December 31, 2001. In a March 15,
2002 filing with the SEC, Claxson indicated that it is evaluating a number of
alternatives and taking certain steps which, if not completed successfully and
in a timely manner, would result in its auditors expressing a "going concern
opinion" in connection with the filing of Claxson's annual report in June
2002. Although Claxson has, to date, funded its obligations with respect to
PTVI, PTVI's independent auditors have expressed a "going concern opinion" in
their report relating to PTVI's financial statements for the fiscal year ended
December 31, 2001. The reasons cited as the basis for raising substantial
doubt as to PTVI's ability to continue as a going concern are the potential
inability of Claxson to make required capital contributions combined with
PTVI's losses from operations. If PTVI fails to make these payments to the
Company in a timely manner, either because of the failure of the partners to
make capital contributions or otherwise, the Company's future financial
condition and operating results could be materially adversely affected.
41
In 2001, 2000 and 1999, the Company recognized revenues from PTVI of
$17.0 million, $17.0 million and $35.2 million, respectively, and pre-tax
income, including the Company's equity in the results of PTVI's operations, of
$8.7 million, $10.7 million and $13.8 million, respectively. Amounts related
to PTVI are reflected in the Company's Consolidated Balance Sheets as follows
(in thousands):
Dec. 31, Dec. 31,
2001 2000
- ------------------------------------------------------------------------------
Current receivables from related parties $ 11,935 $ 7,397
Noncurrent receivables from related parties 50,000 57,500
Accounts payable to related parties 169 718
Current deferred revenues from related parties 6,525 4,350
Noncurrent deferred revenues from related parties $ 44,350 $ 50,875
- ------------------------------------------------------------------------------
Summarized financial information for PTVI for the periods indicated, which has
been derived from PTVI audited financial statements, is presented below (in
thousands):
Dec. 31, Dec. 31,
2001 2000
- ------------------------------------------------------------------------------
Current assets $ 15,733 $ 28,713
Noncurrent assets 66,473 61,902
Current liabilities 19,352 12,909
Noncurrent liabilities $ 45,700 $ 45,039
-----------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31,
2001 2000 1999(1)
- ------------------------------------------------------------------------------
Revenues $ 33,669 $ 28,300 $ 9,368
Gross profit 7,648 9,766 4,418
Net loss $ (19,455) $ (9,935) $ (3,029)
-----------------------------------------------------------------------------
(1) For the period from August 31, 1999 (date of commencement) through
December 31, 1999
In calculating the Company's equity in the results of PTVI's
operations, the net loss as reported by PTVI is adjusted for the elimination
of amortization on the assets acquired by PTVI from the Company.
(D) RESTRUCTURING EXPENSES
In 2001, the Company implemented a restructuring plan in anticipation
of a continuing weak economy. The plan included a reduction in work force
coupled with vacating portions of certain office facilities by combining
operations for greater efficiency, refocusing sales and marketing, outsourcing
some operations and reducing overhead expenses. Total restructuring charges of
$3.7 million related to this plan were recorded in 2001. The restructuring
resulted in a work force reduction of 104 employees, or approximately 15%,
through Company-wide layoffs and attrition, approximately half of whom were in
the Playboy Online Group. Of the $3.7 million charge, $2.5 million related to
the termination of 88 employees. Additionally, 16 positions were eliminated
through attrition. Also included in the charge were $1.2 million of expenses
related to the excess space in its Chicago and New York offices. Of the total
$3.7 million of costs related to this plan, approximately $1.1 million was
paid by December 31, 2001, with most of the remainder to be paid in 2002.
In 2000, realignment of senior management, coupled with staff
reductions, led to a restructuring charge related to the termination of 19
employees, or approximately 3% of the work force. Total restructuring charges
of $3.8 million were recorded, including a $0.1 million unfavorable adjustment
to the previous estimate in 2001. A total of $3.7 million related to this
restructuring was paid by December 31, 2001, with the remaining $0.1 million
to be paid through 2003.
In 1999, the Company began a cost reduction effort that led to a work
force reduction of 49 employees, or approximately 6%, through Company-wide
layoffs and attrition. A total of 26 employees were terminated (including
eight in the first quarter of 2000) resulting in total restructuring charges
of $1.3 million, of which $0.2 million was recorded in the first quarter of
2000. Additionally, 23 positions were eliminated through attrition. All
charges related to this restructuring were recorded and paid by December 31,
2000.
42
(E) GAIN (LOSS) ON DISPOSALS
In 2001, the Company sold its Collectors' Choice Music catalog and
related Internet business. In connection with the sale, the Company recorded a
loss of $1.3 million and a related deferred tax benefit of $0.5 million, which
was offset by an increase in the valuation allowance. Also in 2001, the
Company sold a majority of its interest in VIPress, publisher of the Polish
edition of Playboy magazine. In connection with the sale, the Company recorded
a gain of $0.4 million. There was no income tax effect attributable to the
transaction due to the Company's net operating loss carryforward position.
Prior to the sale, the financial statements of VIPress were included in the
Company's financial statements, along with the related minority interest.
Subsequent to the sale, the Company's remaining 20% interest in VIPress is
accounted for under the equity method and, as such, the Company's
proportionate share of the results of VIPress is included in nonoperating
results.
In 2000, the Company sold its Critics' Choice Video catalog and related
Internet business and fulfillment and customer service operations. In
connection with the sale, the Company recorded a loss of $3.0 million and a
related deferred tax benefit of $0.4 million, which was offset by an increase
in the valuation allowance.
In 1999, the Company sold its wholly-owned subsidiary, Playboy Gaming
Greece Ltd., which owned a 12% interest in the Rhodes Casino. The Company
realized a gain before income taxes of $1.7 million on the sale. The taxable
gain on the sale was immaterial and was offset by the application of a capital
loss carryforward.
(F) INCOME TAXES
The income tax provision (benefit) consisted of the following (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State 120 388 740
Foreign 242 2,889 1,591
- -------------------------------------------------------------------------------------------------------------------
Total current 362 3,277 2,331
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 576 12,640 (8,690)
State 58 310 (1,309)
Foreign - - -
- -------------------------------------------------------------------------------------------------------------------
Total deferred 634 12,950 (9,999)
- ------------------------------------------------------------------------------------------------------------------
Benefit of stock compensation recorded
in capital in excess of par value - - 3,596
Benefit of pre-acquisition losses recorded
in goodwill - - 3,336
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 996 $ 16,227 $ (736)
==================================================================================================================
Income tax provision (benefit) applicable to:
Continuing operations $ 996 $ 16,227 $ (862)
Discontinued operations - - 126
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 996 $ 16,227 $ (736)
===================================================================================================================
43
The U.S. statutory tax rate applicable to the Company for each of
2001, 2000 and 1999 was 35%. The income tax provision (benefit) from
continuing operations differed from a benefit computed at the U.S.
statutory tax rate as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- --------------------------------------------------------------------------------------------------------------------
Statutory rate tax benefit $ (9,914) $ (10,990) $ (2,251)
Increase (decrease) in taxes resulting from:
Foreign income and withholding tax on licensing income 242 2,889 1,591
State income taxes 178 698 (569)
Nondeductible expenses 673 658 903
Increase in valuation allowance 9,902 24,142 -
Tax benefit of foreign taxes paid or accrued (85) (1,013) (516)
Other - (157) (20)
- --------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit)
from continuing operations $ 996 $ 16,227 $ (862)
====================================================================================================================
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.
In 2000, the Company reevaluated its valuation allowance for deferred
tax assets related to the 2000 net operating loss as well as the NOLs and tax
credit carryforwards from prior years. As a result of this review, the Company
increased the valuation allowance, which resulted in noncash federal income
tax expense of $24.1 million.
The significant components of the Company's deferred tax assets and deferred
tax liabilities as of December 31, 2000 and 2001 are presented below (in
thousands):
Dec. 31, Net Dec. 31,
2000 Change 2001
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 16,629 $ 9,848 $ 26,477
Capital loss carryforwards 8,914 (890) 8,024
Tax credit carryforwards 12,256 (1,555) 10,701
Temporary difference related to PTVI 8,869 289 9,158
Other deductible temporary differences 16,225 1,867 18,092
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 62,893 9,559 72,452
Valuation allowance (45,044) (9,544) (54,588)
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets 17,849 15 17,864
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (5,803) 233 (5,570)
Intangible assets (12,982) 1,426 (11,556)
Other taxable temporary differences (3,743) (2,308) (6,051)
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (22,528) (649) (23,177)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (4,679) $ (634) $ (5,313)
===================================================================================================================
At December 31, 2001, the Company had NOLs of $75.6 million expiring
from 2004 through 2021. The Company had capital loss carryforwards of $22.9
million expiring in 2004. In addition, foreign tax credit carryforwards of
$9.6 million and minimum tax credit carryforwards of $1.1 million are
available to reduce future U.S. federal income taxes. The foreign tax credit
carryforwards expire in 2002 through 2006. The minimum tax credit
carryforwards have no expiration date.
(G) DISCONTINUED OPERATIONS
During 1986, the Company discontinued operations at its Company-owned
and operated clubs. A reserve was established for estimated costs to fulfill
the court-approved settlement of the Playboy Club keyholder lawsuits. During
1999, the Company reversed its estimate of the remaining liabilities related
to the lawsuits, resulting in a gain on disposal of discontinued operations of
$168,000, net of $90,000 of income tax expense.
44
In 1993, the Company received a General Notice from the United States
Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap
& Skeet Club, located at the Resort-Hotel in Lake Geneva, Wisconsin (the
"Resort"), formerly owned by a subsidiary of the Company. The Resort was sold
by the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two
other entities were also identified as PRPs in the notice. The notice related
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. In September 1998, the Company entered into
a consent decree settling this matter, which was entered by the United States
District Court for the Eastern District of Wisconsin in November 1998. The
Company had established adequate reserves to cover its approximately $525,000
share of the cost (based on an agreement with one of the other PRPs) of the
agreed upon remediation, which was paid in December 1998. During 1999, the
Company reversed its estimate of the remaining liabilities related to this
matter, resulting in a gain on disposal of discontinued operations of $65,000,
net of $36,000 of income tax expense.
(H) EARNINGS PER COMMON SHARE
For 2001, 2000 and 1999, options to purchase approximately 2,245,000,
2,040,000 and 2,520,000 shares, respectively, of the Company's Class A and
Class B common stock combined and approximately 245,000, 270,000 and 325,000
shares, respectively, of Class B restricted stock awards were outstanding but
were not included in the computation of diluted EPS. The inclusion of these
shares would have been antidilutive. As a result, the weighted average number
of basic and diluted common shares outstanding for 2001, 2000 and 1999 were
equivalent.
Upon the effectiveness of the Form S-3, the Company will pay two
installments of consideration in shares of Class B stock under the Califa
asset purchase agreement in the aggregate amount of $22.5 million. Based on a
closing price of $16.37 per share on February 28, 2002, this would result in
the issuance of approximately 1,375,000 shares. Due to a delay in the
effectiveness of the Form S-3, as of February 28, 2002, the Company had
accrued an interest penalty of $0.4 million, of which $0.3 million was paid in
cash on March 12, 2002. The remainder of the penalty will also be paid in
shares of Class B stock upon the effectiveness of the Form S-3, which would
result in the issuance of an additional approximately 10,000 shares. See Note
(B) Acquisitions and Note (R) Stock Plans.
(I) FINANCIAL INSTRUMENTS
Fair Value: The fair value of a financial instrument represents the amount at
which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. For cash and cash
equivalents, receivables, certain other current assets, current maturities of
long-term debt and short-term debt, the amounts reported approximate fair
value due to their short-term nature. For long-term debt related to the
Company's credit agreement, the amount reported approximates fair value as the
interest rate on the debt is generally reset every quarter to reflect current
rates. For the interest rate swap agreement, based on the fair value, $1.2
million reflects the estimated amount that the Company would expect to pay if
it terminated the agreement at December 31, 2001. For related party long-term
debt, the amount reported approximates fair value due to no significant change
in market conditions since December 17, 2001, when the note was issued. For
foreign currency forward contracts, the fair value is estimated using quoted
market prices established by financial institutions for comparable
instruments, which approximates the contracts' values.
Risk Management: The Company uses derivatives for hedging purposes only. In
2001, the Company entered into an interest rate swap agreement maturing in May
2003 that effectively converts $45.0 million of its floating rate debt to
fixed rate debt, thus reducing the impact of interest rate changes on future
interest expense. In addition, to protect against the reduction in value of
foreign currency cash flows, the Company hedges portions of its forecasted
royalty revenues denominated in foreign currencies with forward contracts. The
Company hedges these royalties for periods not exceeding 12 months. When the
dollar strengthens significantly against the foreign currencies, the decline
in the value of future foreign currency revenue is offset by gains in the
value of the forward contracts. Conversely, when the dollar weakens, the
increase in the value of future foreign currency revenue is offset by losses
in the value of the forward contracts. Since these derivative instruments are
designated and qualify as cash flow hedges, the effective portion of the gain
or loss on the derivative instruments is being deferred and reported as a
component of "Accumulated other comprehensive loss" and is reclassified into
earnings in the same line item associated with the transaction when the hedged
transaction occurs. During 2001, the Company reclassified $0.2 million of net
losses from "Accumulated other comprehensive loss" to the Consolidated
Statement of Operations, which were offset by net gains on the items being
hedged. In 2001, there was no amount included in earnings related to hedging
ineffectiveness. The Company expects the amount reclassified from "Accumulated
other comprehensive loss" to earnings within the next 12 months to be losses
of approximately $1.1 million.
45
Concentrations of Credit Risk: Concentration of credit risk with respect to
accounts receivable is limited due to the wide variety of customers and
segments from which the Company's product are sold. However, as of December
31, 2001, the Company's receivables from PTVI were $61.9 million, of which
$50.0 million represents the noncurrent portion of the receivable. Of the
$11.9 million current portion of the receivable, $2.6 million was collected in
the first quarter of 2002, and $7.5 million is not contractually due until
September 2002. The Company does not require collateral for accounts
receivable, and therefore its future financial condition and operating results
could be materially adversely affected if these payments from PTVI are not
made. PTVI's ability to finance its operations, including making library
license and programming output payments to the Company, will depend
principally on the ability of Claxson, the Company's venture partner, and also
the Company to make capital contributions, until PTVI generates sufficient
funds from operations.
(J) MARKETABLE SECURITIES
Marketable securities, primarily purchased in connection with the Company's
deferred compensation plans, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------
Cost of marketable securities $ 3,709 $ 3,620
Gross unrealized holding gains 10 17
Gross unrealized holding losses (537) (194)
- -------------------------------------------------------------------------------
Fair value of marketable securities $ 3,182 $ 3,443
===============================================================================
There were no proceeds from the sale of marketable securities for 2001,
2000 and 1999 respectively, and therefore no gains or losses were realized.
Included in "Total other comprehensive income (loss)" for 2001 and 2000 were
net unrealized holding losses of $0.4 million and $0.5 million, respectively,
and a net unrealized holding gain of $0.4 million in 1999.
(K) INVENTORIES, NET
Inventories, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------
Paper $ 5,189 $ 6,432
Editorial and other prepublication costs 6,140 6,987
Merchandise finished goods 2,633 7,281
- -------------------------------------------------------------------------------
Total inventories, net $ 13,962 $ 20,700
===============================================================================
(L) ADVERTISING COSTS
At December 31, 2001 and 2000, advertising costs of $6.8 million and
$7.4 million, respectively, were deferred and included in "Deferred
subscription acquisition costs" and "Other current assets." For 2001, 2000 and
1999, the Company's advertising expense was $39.2 million, $47.0 million and
$53.5 million, respectively.
(M) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,623 8,512
Furniture and equipment 16,289 15,420
Leasehold improvements 9,927 9,950
Software 5,918 4,075
- -------------------------------------------------------------------------------
Total property and equipment 41,049 38,249
Accumulated depreciation (30,300) (26,717)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 10,749 $ 11,532
===============================================================================
46
(N) PROGRAMMING COSTS
In 2001, the Company adopted SOP 00-2, Accounting by Producers or
Distributors of Films, which establishes new accounting and reporting
standards. Programming costs consisted of the following (in thousands):
Dec. 31, Dec. 31,
2001 2000
- ----------------------------------------------------------------------------
Released, less amortization $ 47,198 $ 44,529
Completed, not yet released 4,815 7,410
In-process 4,200 3,515
- ----------------------------------------------------------------------------
Total programming costs $ 56,213 $ 55,454
============================================================================
Based on management's estimate of future total gross revenues as of
December 31, 2001, approximately 47% of the completed original programming
costs are expected to be amortized during 2002. Approximately 98% of the
released original programming costs are expected to be amortized during the
next three years. Additionally, at December 31, 2001, the Company had $13.2
million of film acquisition costs. Film acquisition costs assigned to domestic
markets are amortized principally using the straight-line method over the
license term, generally three years or less, while those assigned to the
international TV market are fully amortized upon availability to PTVI.
(O) FINANCING OBLIGATIONS
Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Short-term financing obligations to related parties:
Interest at 10.50% $ 5,000 $ -
Interest at 12.00% 5,000 5,000
Interest at 8.00% 5,000 -
- -------------------------------------------------------------------------------------------------------------------
Total short-term financing obligations to related parties $ 15,000 $ 5,000
===================================================================================================================
Long-term financing obligations:
Tranche A term loan, interest at 5.11% and 10.25% at
December 31, 2001 and 2000, respectively $ 12,136 $ 15,333
Tranche B term loan, weighted average interest of 6.37%
and 10.75% at December 31, 2001 and 2000, respectively 58,942 59,667
Revolving credit facility, weighted average interest of 6.05%
and 11.03% at December 31, 2001 and 2000, respectively 10,500 18,250
- -------------------------------------------------------------------------------------------------------------------
Total long-term financing obligations 81,578 93,250
Less current maturities (8,561) (3,922)
- ------------------------------------------------------------------------------------------------------------------
Long-term financing obligations $ 73,017 $ 89,328
===================================================================================================================
Long-term financing obligations to related parties, interest at
9.00% and 10.50% at December 31, 2001 and 2000, respectively $ 5,000 $ 5,000
===================================================================================================================
The aggregate minimum amount of all long-term debt payable, excluding
the revolving credit facility, is approximately $8.6 million, $6.4 million,
$22.2 million, $27.3 million and $11.6 million during 2002, 2003, 2004, 2005
and 2006, respectively.
At December 31, 2001, the Company's credit facility totaled $106.1
million, comprised of $71.1 million of term loans and a $35.0 million
revolving credit facility, with a $10.0 million letter of credit sublimit. At
December 31, 2001, $10.5 million was outstanding under the revolving credit
facility and an additional $0.2 million in letters of credit were outstanding.
Outstanding balances under the credit facility bear interest at rates equal to
specified index rates plus margins that fluctuate based on the Company's
leverage ratio. The term loans consist of two tranches, Tranche A and Tranche
B, which currently bear interest at 3.00% and 4.25% margins, respectively,
over LIBOR. The Company is assessed a 0.5% commitment fee on the unused
portion of the revolving credit facility. The term loans began amortizing
quarterly on March 31, 2001. The Tranche A term loan and the revolving credit
facility both mature on March 15, 2004 and the Tranche B term loan matures on
March 15, 2006.
47
The Company's obligations under the credit facility are guaranteed by
its subsidiaries (excluding Playboy.com) and are secured by substantially all
of its assets (excluding Playboy.com and its assets). The credit agreement
contains financial covenants requiring the Company to maintain certain
leverage, interest coverage and fixed charge coverage ratios. Other covenants
include limitations on other indebtedness, investments, capital expenditures
and dividends. The credit agreement also requires mandatory prepayments with
net cash proceeds resulting from excess cash flow, asset sales and the
issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement. Based on 2001 results, the Company
will make an excess cash flow payment of $3.6 million on March 31, 2002.
Therefore, total 2002 debt repayments under the credit facility will now be
$8.6 million.
The credit agreement also contains a maximum funding limitation by the
Company to Playboy.com of $17.5 million, which was met in September 2000. As a
result of this limitation, Playboy.com is dependent on third-party financing
to fund its operations, including its debt repayment obligations, until its
business generates sufficient cash flow. In the event of an IPO of
Playboy.com's common stock, all amounts above $10.0 million advanced to
Playboy.com after January 1, 2000 shall be repaid from Playboy.com to the
Company. In addition, 10% of the net proceeds of any Playboy.com equity
financing shall be paid to the Company until all amounts above the $10.0
million have been repaid.
Playboy.com has been in active discussions with strategic partners and
other potential investors in connection with a private placement of its
preferred stock. On each of March 7, 2001 and April 2, 2001, Playboy.com
issued a convertible promissory note in the aggregate principal amount of $5.0
million to two strategic investors. On July 27, 2001, Playboy.com issued a
third convertible promissory note in the aggregate principal amount of $5.0
million to Hugh M. Hefner. On August 13, 2001, each of the three
aforementioned convertible promissory notes, together with accrued and unpaid
interest thereon, was converted into shares of Playboy.com's Series A
Preferred Stock. Playboy.com's Series A Preferred Stock is convertible into
Playboy.com common stock (initially on a one-for-one basis) and is redeemable
by Playboy.com after the fifth anniversary of the date of its issuance at the
option of the holder. In addition, in the event that a holder elects to redeem
Playboy.com's Series A Preferred Stock at any time after the fifth anniversary
of the date of its issuance and before the 180th day thereafter, and
Playboy.com is not able to, or does not, satisfy such obligation, in cash or
stock, the Company has agreed that it shall redeem all or part of the shares
in lieu of redemption by Playboy.com, either in cash, shares of the Company's
Class B stock or any combination thereof at its option.
In September and December 2000, Hugh M. Hefner made loans to
Playboy.com each in the amount of $5.0 million. These loans bear interest at
an annual rate of 10.50% and 12.00%, respectively, with principal and
accumulated interest related to both loans due in September 2002. In September
2001, Hugh M. Hefner made an additional $5.0 million loan to Playboy.com which
bears interest at an annual rate of 8.00%, with principal and accumulated
interest due in July 2002. In December 2001, Hugh M. Hefner agreed to lend up
to an additional $10.0 million to Playboy.com from time to time until December
31, 2002, of which $5.0 million had been borrowed by Playboy.com at December
31, 2001. Outstanding balances under this note bear interest at an annual rate
of 9.00%, with interest payable monthly, and the note is due in August 2006.
Under the terms of the note, Hugh M. Hefner may elect, at any time, to convert
the note into shares of Playboy.com's common stock at a per share price of
$7.1097 (as equitably adjusted for any stock dividends, combinations, splits
or similar transactions).
Additionally, in conjunction with the issuance of the note, the Company
has agreed to give Hugh M. Hefner the right to surrender the note to the
Company for shares of its Class B stock on or after certain specified
surrender events. Under the agreement, "surrender event" means any of the
following: (a) August 10, 2006, (b) the date on which the Company is no longer
subject to the terms (except for such terms that expressly survive the payment
in full of the obligations and termination of the commitments thereunder) of
its credit agreement, (c) the occurrence and continuation of an event of
default under the note, including the dissolution of Playboy.com or any vote
in favor thereof by Playboy.com's board of directors or stockholders, certain
insolvency or bankruptcy events relating to Playboy.com, Playboy.com's failure
to pay principal and interest due and payable under the note and Playboy.com's
non-performance of any material covenant or condition under the note which
continues uncured for 15 days after written notice of the default is provided
to Playboy.com, (d) the dissolution of Playboy.com or any vote in favor
thereof by Playboy.com's board of directors or stockholders or (e) certain
insolvency or bankruptcy events relating to Playboy.com. However, the note may
not be surrendered if the surrender of the note or the issuance of the shares
of Class B stock would be prohibited by the Company's credit agreement. In the
event that Mr. Hefner elects to surrender the December 2001 note for shares of
Class B stock in accordance with the foregoing, the Company will issue to Mr.
Hefner the number of shares equal to the outstanding principal and interest on
the note divided by $19.90 (125% of the volume weighted average closing price
of Class B stock (as equitably adjusted for any stock dividends, combinations,
splits or similar transactions) on the five trading days immediately prior to
the date of the note).
48
(P) BENEFIT PLANS
The Company's Employees Investment Savings Plan is a defined
contribution plan consisting of two components, a profit sharing plan and a
401(k) plan. The profit sharing plan covers all employees who have completed
12 months of service of at least 1,000 hours. The Company's discretionary
contribution to the profit sharing plan is distributed to each eligible
employee's account in an amount equal to the ratio of each eligible employee's
compensation, subject to Internal Revenue Service limitations, to the total
compensation paid to all such employees. Contributions for 2001, 2000 and 1999
were approximately $0.5 million, $0.7 million and $0.9 million, respectively.
All employees are eligible to participate in the 401(k) plan upon the
date of hire. The Company offers several mutual fund investment options. The
purchase of Company stock is not an option. The Company makes matching
contributions to the 401(k) plan based on each participating employee's
contributions and eligible compensation. The Company's matching contributions
for 2001, 2000 and 1999 related to this plan were approximately $1.2 million,
$1.3 million and $1.2 million, respectively.
The Company has two nonqualified deferred compensation plans, which
permit certain employees and all nonemployee directors to annually elect to
defer a portion of their compensation. A Company match is provided to
employees who participate in the deferred compensation plan, at a certain
specified minimum level, and whose annual eligible earnings exceed the salary
limitation contained in the 401(k) plan. All amounts deferred and earnings
credited under these plans are 100% immediately vested and are general
unsecured obligations of the Company. Such obligations totaled approximately
$3.9 million and $4.7 million at December 31, 2001 and 2000, respectively, and
are included in "Other noncurrent liabilities."
The Company has an Employee Stock Purchase Plan to provide
substantially all regular full- and part-time employees an opportunity to
purchase shares of its Class B stock through payroll deductions. 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. At December 31, 2001,
a total of approximately 55,000 shares of Class B stock were available for
future purchases under this plan.
(Q) COMMITMENTS AND CONTINGENCIES
The Company's principal lease commitments are for office space,
operations facilities and furniture and equipment. Some of these leases
contain renewal or end-of-lease purchase options.
Rent expense was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------
Minimum rent expense $ 15,406 $ 15,165 $ 13,698
Sublease income (1,372) (395) -
- -------------------------------------------------------------------------------
Net rent expense $ 14,034 $ 14,770 $ 13,698
- -------------------------------------------------------------------------------
There was no contingent rent expense in any of these periods. The
minimum commitments at December 31, 2001, under operating leases with initial
or remaining noncancelable terms in excess of one year, were as follows (in
thousands):
Operating
Fiscal Year Ended December 31 Leases
- -----------------------------------------------------------------------------
2002 $ 7,996
2003 8,207
2004 6,716
2005 5,019
2006 5,002
Later years 30,596
Less minimum sublease income (27,343)
- -----------------------------------------------------------------------------
Net minimum lease commitments $ 36,193
=============================================================================
49
The programming of the Company's domestic TV networks is delivered to
cable and DTH operators through a communications satellite transponder. The
Company's satellite lease agreement for Playboy TV expired in October 2001 and
the Company began service on a replacement transponder under an agreement
which expires in 2010. The Company has an additional transponder service
agreement related to its other networks, the term of which currently extends
through 2015. At December 31, 2001, future commitments related to these two
service agreements were $3.3 million, $3.5 million, $3.5 million, $3.5 million
and $3.5 million for 2002, 2003, 2004, 2005 and 2006, respectively, and $20.2
million thereafter. The Company's current transponder service agreements
contain protections typical in the industry against transponder failure,
including access to spare transponders, and conditions under which the
Company's access may be denied. Major limitations on the Company's access to
cable or DTH systems or satellite transponder capacity could materially
adversely affect the Company's operating performance. There have been no
instances in which the Company has been denied access to transponder service.
(R) STOCK PLANS
The Company has various stock plans for key employees and nonemployee
directors which provide for the grant of nonqualified and incentive stock
options, and shares of restricted stock, deferred stock and other
performance-based equity awards. The exercise price of options granted equals
or exceeds the fair value at the grant date. In general, options become
exercisable over a two- to four-year period from the grant date and expire ten
years from the grant date. Restricted stock awards provide for the issuance of
the Class B stock subject to restrictions that lapse if the Company meets
specified operating income objectives pertaining to a fiscal year. Vesting
requirements for certain restricted stock awards will lapse automatically,
regardless of whether or not the Company has achieved those objectives,
generally ten years from the award date. In addition, one of the plans
pertaining to nonemployee directors also allows for the issuance of Class B
stock as awards and payment for annual retainers and meeting fees.
At December 31, 2001, a total of 1,005,015 shares of Class B stock were
available for future grants under the various stock plans combined. Stock
option transactions are summarized as follows:
Stock Options Outstanding
------------------------------------------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 115,000 1,521,500 $ 6.72 $ 10.29
Granted - 1,008,000 - 23.67
Exercised (110,000) (578,500) 6.69 7.90
Canceled - (115,500) - 17.89
- ------------------------------------------------------------------------------------
Outstanding at December 31, 1999 5,000 1,835,500 7.38 17.91
Granted - 367,500 - 21.42
Exercised - (109,335) - 10.44
Canceled - (252,250) - 20.33
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2000 5,000 1,841,415 7.38 18.72
Granted - 537,000 - 12.28
Exercised (5,000) (235,779) 7.38 8.27
Canceled - (77,500) - 16.77
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2001 - 2,065,136 $ - $18.31
===================================================================================================================
The following table summarizes information regarding stock options at December
31, 2001:
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 B
$8.25-$16.00 997,886 6.78 $12.25 466,844 $ 12.40
16.72-21.00 521,000 6.90 20.70 494,125 20.91
$24.13-$31.50 546,250 7.29 27.11 207,750 25.17
- -------------------------------------------------------------------------------------------------------------------
Total Class B 2,065,136 6.95 $18.31 1,168,719 $ 18.27
- -------------------------------------------------------------------------------------------------------------------
The weighted average exercise prices for Class A and Class B
exercisable options at December 31, 1999 were $7.38 and $12.47, respectively,
and at December 31, 2000 were $7.38 and $14.68, respectively.
50
The following table summarizes transactions related to restricted stock
awards:
Restricted Stock Awards Outstanding Class B
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 330,622
Awarded 26,250
Vested -
Canceled (49,374)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 307,498
Awarded 25,750
Vested -
Canceled (93,124)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 240,124
Awarded 45,000
Vested -
Canceled (21,250)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001 263,874
===================================================================================================================
Stock options are accounted for under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, no compensation expense has been recognized
related to these options. Under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("Statement 123"),
compensation expense is measured at the grant date based on the fair value of
the award and is recognized over the vesting period. The Company has adopted
the disclosure-only provisions of Statement 123.
The following pro forma information presents the Company's net loss and basic
and diluted EPS assuming compensation expense for these options had been
determined consistent with Statement 123 (in thousands, except per share
amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- ------------------------------------------------------------------------------------------------------------------
Net loss
As reported $(33,541) $ (47,626) $ (5,335)
Pro forma (37,716) (51,963) (10,121)
Basic and Diluted EPS
As reported (1.37) (1.96) (0.23)
Pro forma $ (1.55) $ (2.14) $ (0.44)
- ------------------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.98% 6.27% 4.86%
Expected stock price volatility 49.70% 46.10% 44.11%
Expected dividend yield - - -
- -------------------------------------------------------------------------------------------------------------------
For 2001, 2000 and 1999, an expected life of six years was used for all
of the stock options, and the weighted average fair value of options granted
was $6.59, $14.43 and $9.72, respectively. For 2001, 2000 and 1999, the
weighted average fair value of restricted stock awarded was $14.37, $14.20 and
$22.13, respectively.
The pro forma effect on net loss for 1999 may not be representative of
the pro forma effect on results in future years as the Statement 123 method of
accounting for pro forma compensation expense has not been applied to options
granted prior to July 1, 1995.
51
(S) PUBLIC EQUITY OFFERINGS
In 2000, Playboy.com, a component of the Playboy Online Group, filed a
registration statement for a sale of a minority of its equity in an IPO. Due
to market conditions, the registration statement was subsequently withdrawn.
Deferred costs of $1.6 million were written off in 2000 as nonoperating
expense.
In 1999, the Company completed a public equity offering of 2,875,000
shares of Class B stock at a price of $30.00 per share. Two million shares
were sold by a trust established by, and for the benefit of, Hugh M. Hefner,
the Company's founder and principal stockholder, and 875,000 shares were sold
by the Company. Of the Company's shares, 375,000 were sold upon exercise by
the underwriters of their over-allotment option. The Company did not receive
any of the proceeds from the sale of Class B stock by Mr. Hefner. Mr. Hefner
paid for expenses related to this transaction proportionate to the number of
shares he sold to the total number of shares sold in the offering. Net
proceeds to the Company of $24.6 million were used for general corporate
purposes and repayment of term loan financing obligations.
(T) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
Interest $ 8,730 $ 8,281 $ 7,706
Income taxes $ 782 $ 1,728 $ 2,756
- -------------------------------------------------------------------------------------------------------------------
The Company had noncash activities related to both the Spice and Califa acquisitions. See Note (B) Acquisitions.
(U) SEGMENT INFORMATION
The Company's businesses have been classified into the following
reportable segments: Entertainment, Publishing, Playboy Online, Catalog and
Licensing Businesses. Entertainment Group operations include the production
and marketing of programming through the Company's domestic TV networks, other
domestic pay television, international TV and worldwide home video businesses
as well as the distribution of feature films. Publishing Group operations
include the publication of Playboy magazine; other domestic publishing
businesses, comprising special editions, calendars and ancillary businesses;
and the licensing of international editions of Playboy magazine. Playboy
Online Group operations include the Company's network of free, pay and
e-commerce sites on the Internet. The sales of the Critics' Choice Video
business in 2000 and the Collectors' Choice Music business in 2001 ended the
Company's presence in the nonbranded print Catalog Group business. Licensing
Businesses Group operations combine certain brand-related businesses, such as
the licensing of consumer products carrying one or more of the Company's
trademarks and artwork as well as Playboy branded casino gaming opportunities
and certain Company-wide marketing activities.
These reportable segments are based on the nature of the products
offered. The chief operating decision maker of the Company evaluates
performance and allocates resources based on several factors, of which the
primary financial measures are segment operating results and EBITDA. The
accounting policies of the reportable segments are the same as those described
in Note (A) Summary of Significant Accounting Policies.
52
The following table represents financial information by reportable segment (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/01 12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
Net revenues (1)
Entertainment $ 113,833 $ 100,955 $ 125,783
Publishing 128,139 139,870 137,062
Playboy Online 27,499 25,291 16,104
Catalog 10,986 32,360 60,335
Licensing Businesses 10,769 9,246 8,533
- -------------------------------------------------------------------------------------------------------------------
Total $ 291,226 $ 307,722 $ 347,817
===================================================================================================================
Loss from continuing operations before income taxes and
cumulative effect of change in accounting principle
Entertainment $ 29,921 $ 25,287 $ 44,375
Publishing 1,776 6,881 5,977
Playboy Online (21,673) (25,199) (9,066)
Catalog (453) 54 256
Licensing Businesses 2,614 887 (436)
Corporate Administration and Promotion (19,700) (20,942) (27,127)
Restructuring expenses (3,776) (3,908) (1,091)
Gain (loss) on disposals (955) (2,924) 1,728
Investment income 786 1,519 1,798
Interest expense (13,970) (9,148) (7,977)
Minority interest (704) (125) (92)
Equity in operations of PTVI and other (746) (375) (13,871)
Playboy.com registration statement expenses - (1,582) -
Legal settlement - (622) -
Other, net (1,447) (1,202) (904)
- ------------------------------------------------------------------------------------------------------------------
Total $ (28,327) $(31,399) $ (6,430)
==================================================================================================================
EBITDA
Entertainment $ 75,506 $ 64,307 $ 83,557
Publishing 2,336 7,498 6,570
Playboy Online (19,693) (23,497) (9,037)
Catalog (427) 180 500
Licensing Businesses 2,823 1,084 (271)
Corporate Administration and Promotion ( 16,616) (18,865) (23,234)
Restructuring expenses (3,776) (3,908) (1,091)
Gain (loss) on disposals (955) (2,924) 1,728
- -------------------------------------------------------------------------------------------------------------------
Total $ 39,198 $ 23,875 $ 58,722
===================================================================================================================
Depreciation and amortization (2) (3)
Entertainment $ 45,585 $ 39,020 $ 39,182
Publishing 560 617 593
Playboy Online 1,980 1,702 29
Catalog 26 126 244
Licensing Businesses 209 197 165
Corporate Administration and Promotion 3,544 3,249 2,478
- -------------------------------------------------------------------------------------------------------------------
Total $ 51,904 $ 44,911 $ 42,691
===================================================================================================================
Identifiable assets (2) (4)
Entertainment $ 317,848 $ 267,142 $ 281,167
Publishing 49,219 56,191 51,273
Playboy Online 4,463 7,675 4,739
Catalog 1,244 3,797 13,784
Licensing Businesses 4,732 5,003 7,082
Corporate Administration and Promotion 48,734 48,680 71,357
- -------------------------------------------------------------------------------------------------------------------
Total $ 426,240 $ 388,488 $ 429,402
===================================================================================================================
(1) Net revenues include revenues attributable to foreign countries of
approximately $48,522, $50,165 and $71,495 in 2001, 2000 and 1999,
respectively. Revenues from individual foreign countries were not
material. Revenues are generally attributed to countries based on the
location of customers, except product licensing royalties where revenues
are attributed based upon the location of licensees. In 1999, revenues
from PTVI exceeded 10% of the Company's total net revenues. See Note (C)
Playboy TV International, LLC Joint Venture.
(2) Substantially all property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation,
however, is allocated to the reportable segments.
(3) Amounts include depreciation of property and equipment, amortization of
intangible assets and amortization of investments in entertainment
programming.
(4) Long-lived assets of the Company located in foreign countries were not material.
53
(V) RELATED PARTY TRANSACTIONS
In 1971, the Company purchased the Mansion in Holmby Hills, California,
where the Company's founder, Hugh M. Hefner, lives. The Mansion is used for
various corporate activities, including serving as a valuable location for
video production, magazine photography, online events, business meetings,
enhancing the Company's image, charitable functions and a wide variety of
other promotional and marketing activities. The Mansion generates substantial
publicity and recognition which increase public awareness of the Company and
its products and services. Mr. Hefner pays rent to the Company for that
portion of the Mansion used exclusively for his and his personal guests'
residence as well as the value of meals, beverages and other benefits received
by him and his personal guests. The Mansion is included in the Company's
Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000 at a
cost, including all improvements and after accumulated depreciation, of
approximately $2.0 million and $2.1 million, respectively. The operating
expenses of the Mansion, including depreciation and taxes, were approximately
$3.2 million, $3.2 million and $3.6 million for 2001, 2000 and 1999,
respectively, net of rent received from Mr. Hefner. The sum of the rent and
other benefits payable for 2001 was estimated by the Company to be $1.3
million, and Mr. Hefner paid that amount during 2001. The actual rent and
other benefits payable for 2000 and 1999 were $1.1 million and $0.9 million,
respectively.
As of December 31, 2001, Playboy.com had borrowed a total of $20.0
million from Hugh M. Hefner. This indebtedness is evidenced by the four notes
previously discussed. Also as discussed, Mr. Hefner was the holder of a $5.0
million convertible promissory note which converted into shares of
Playboy.com's Series A Preferred Stock in 2001. See Note (O) Financing
Obligations.
From time to time, the Company enters into barter transactions in which
the Company secures air transportation for Mr. Hefner in exchange for
advertising pages in Playboy magazine. Mr. Hefner reimburses the Company for
its direct costs of providing these advertising pages. The Company receives
significant promotional benefit from these transactions.
The Company also has material related party transactions with PTVI. See
Note (C) Playboy TV International, LLC Joint Venture.
(W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for 2001 and 2000 (in thousands, except per share amounts):
Quarters Ended
-----------------------------------------------
2001 Mar. 31 June 30 Sept. 30 Dec. 31 Year
- -------------------------------------------------------------------------------------------------------------------
Net revenues $ 66,319 $ 72,819 $ 74,115 $ 77,973 $ 291,226
Operating income (loss) (4,990) (4,736) 2,546 (5,066) (12,246)
Net loss (11,794) (7,970) (2,088) (11,689) (33,541)
Basic and diluted EPS (0.49) (0.32) (0.09) (0.47) $ (1.37)
Common stock price
Class A high 12.07 14.35 16.51 14.84
Class A low 8.38 8.70 9.82 10.00
Class B high 13.49 16.89 19.75 17.23
Class B low $ 9.75 $ 9.63 $ 11.11 $ 11.72
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended
-----------------------------------------------
2000 Mar. 31 June 30 Sept. 30 Dec. 31 Year
- -------------------------------------------------------------------------------------------------------------------
Net revenues $ 73,103 $ 77,182 $ 77,890 $ 79,547 $ 307,722
Operating loss (6,314) (5,808) (4,746) (2,996) (19,864)
Net loss (6,235) (5,883) (6,506) (29,002) (47,626)
Basic and diluted EPS (0.26) (0.24) (0.27) (1.19) $ (1.96)
Common stock price
Class A high 24.94 16.81 15.00 13.31
Class A low 15.81 10.25 10.88 8.25
Class B high 29.50 20.13 16.00 14.88
Class B low $ 18.38 $ 11.38 $ 11.88 $ 9.44
- -------------------------------------------------------------------------------------------------------------------
54
The net loss for the quarter ended March 31, 2001 included a $4.2
million noncash charge representing a cumulative effect of change in
accounting principle related to the adoption of SOP 00-2, Accounting by
Producers or Distributors of Films. See Note (A) Summary of Significant
Accounting Policies.
The net losses for the quarters ended September 30, and December 31,
2001 reflected higher interest expense largely due to imputed noncash interest
of $1.5 million and $2.5 million, respectively, related to the deferred
payment of the purchase price for the Califa acquisition. See Note (B)
Acquisitions.
The operating loss for the quarter ended December 31, 2001 included
restructuring expenses of $3.5 million. See Note (D) Restructuring Expenses.
The operating loss for the quarter also included a loss on the sale of its
Collectors' Choice Music businesses of $1.3 million. See Note (E) Gain (Loss)
on Disposals.
The operating loss for the quarter ended September 30, 2000 included an
estimated loss on the sale of its Critics' Choice Video businesses of $2.7
million. See Note (E) Gain (Loss) on Disposals. The net loss for the quarter
included nonoperating expense of $1.5 million related to the withdrawal of the
Playboy.com registration statement. See Note (S) Public Equity Offerings.
Additionally, the net loss for the quarter included $0.6 million of
nonoperating expense related to a legal settlement.
The operating loss for the quarter ended December 31, 2000 included
restructuring expenses of $3.7 million. See Note (D) Restructuring Expenses.
The net loss for the quarter included noncash federal income tax expense of
$24.1 million related to the Company's decision to increase the valuation
allowance for its deferred tax assets. See Note (F) Income Taxes.
55
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Playboy
Enterprises, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the two years in the period ended December 31, 2001. Our audits
also included the financial statement schedule for the years ended December
31, 2001 and 2000 listed in the Index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Playboy TV International, LLC ("PTVI"), an unconsolidated
affiliate accounted for using the equity method. Such investment was
$1,750,586 and $2,398,065 at December 31, 2001 and 2000, respectively. Equity
in operations of PTVI was a loss of $826,206 and $283,095 for the years ended
December 31, 2001 and 2000, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and contains an
explanatory paragraph expressing uncertainty about PTVI's ability to continue
as a going concern. Our opinion, insofar as it relates to data included for
PTVI, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Playboy Enterprises, Inc. at
December 31, 2001 and 2000, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
In 2001, as discussed in Note A, Playboy Enterprises Inc. changed its
methods of accounting for production and distribution of films and for
derivative financial instruments, in accordance with new professional
standards.
Ernst & Young LLP
Chicago, Illinois
February 22, 2002
Except for Note C, as to which
the date is March 15, 2002
56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
In our opinion, based on our audits and the report of other auditors,
the accompanying consolidated statement of operations, of shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Playboy Enterprises, Inc. and its subsidiaries at December 31,
1999, and the results of their operations and their cash flows for the fiscal
year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Our audit also included the financial
statement schedule for the fiscal year ended December 31, 1999 listed on the
Index at Item 14(a). In our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein. These financial statements and schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Playboy TV International, LLC ("PTVI"), an unconsolidated
affiliate accounted for using the equity method. Equity in operations of PTVI
was $(12,744,717) in 1999. The financial statements of PTVI (Note C) were
audited by other auditors whose report thereon has been furnished to us, and
our opinion, insofar as it relates to the amounts included for PTVI is based
solely on the report of such other auditors. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit and the report of other auditors provide a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements and financial statement schedule of Playboy Enterprises, Inc. for
any period subsequent to December 31, 1999.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 30, 2000
57
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial
information in this Form 10-K Annual Report are the responsibility of the
Company. The financial statements, which include amounts based on judgments,
have been prepared in accordance with accounting principles generally accepted
in the United States. Other financial information in this Form 10-K 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.
Ernst & Young LLP, independent auditors, have audited and reported on
the Company's consolidated financial statements for the fiscal years ended
December 31, 2001 and 2000. Their audits were performed in accordance with
auditing standards generally accepted in the United States.
The Audit Committee of the Board of Directors, composed of three
nonmanagement directors, meets periodically with Ernst & Young LLP, management
representatives and the Company's internal auditor to review internal
accounting control and auditing and financial reporting matters. Both Ernst &
Young LLP and the internal auditor have unrestricted access to the Audit
Committee and may meet with it without management representatives being
present.
Christie Hefner
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Linda G. Havard
Executive Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
58
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
On November 14, 2000, the Company appointed Ernst & Young LLP as the
Company's independent auditors and dismissed PricewaterhouseCoopers LLP. The
report of PricewaterhouseCoopers LLC on the financial statements of the
Company for the fiscal year ended December 31, 1999 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle. During the fiscal year ended
December 31, 1999, and through November 14, 2000, there were no disagreements
or reportable events. The decision to change firms was approved by the Audit
Committee of the Company's Board of Directors.
PART III
Information required by Items 10, 11, 12 and 13 is contained in the
Company's Notice of Annual Meeting of Stockholders and Proxy Statement (to be
filed) relating to the Annual Meeting of Stockholders to be held in May 2002,
which will be filed within 120 days after the close of the Company's fiscal
year ended December 31, 2001, and is incorporated herein by reference.
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 Company and supplementary data following are
as set forth under Part II. Item 8. of this Form 10-K Annual Report: Page
----
Consolidated Statements of Operations - Fiscal Years Ended
December 31, 2001, 2000 and 1999 31
Consolidated Balance Sheets - December 31, 2001 and 2000 32
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2001, 2000 and 1999 33
Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2001,
2000 and 1999 34
Notes to Consolidated Financial Statements 35
Report of Independent Auditors 56
Report of Independent Accountants 57
Report of Management 58
Schedule II - Valuation and Qualifying Accounts 68
(b) Reports on Form 8-K
On December 27, 2001, the Company filed a Current Report on Form 8-K
under Item 5., announcing that (a) Playboy.com, Inc., a subsidiary of the
Company, borrowed $5.0 million from Hugh M. Hefner pursuant to a promissory
note (the "Note"), dated as of December 17, 2001, issued by Playboy.com, Inc.
to Mr. Hefner and (b) in conjunction with the issuance of the Note, the
Company entered into an agreement, dated as of December 17, 2001, with Mr.
Hefner pursuant to which the Company has given Mr. Hefner the right to
surrender the Note to the Company for shares of the Company's Class B common
stock upon the occurrence of specified surrender events.
(c) Exhibits
See Exhibit Index.
59
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.
April 15, 2002 By s/Linda Havard
--------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer)
60
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
- ------- ----------- -------------
2.1 Agreement and Plan of Merger, dated as of May 29, 1998,
by and among Playboy Enterprises, Inc., New Playboy,
Inc., Playboy Acquisition Corp., Spice Acquisition Corp.
and Spice Entertainment Companies, Inc. (incorporated by
reference to Exhibit 2.1 from the Company's Registration
Statement No. 333-68139 on Form S-4 dated December 1,
1998 (the "December 1, 1998 Form S-4"))
2.2 Amendment, dated as of November 16, 1998, to the
Agreement and Plan of Merger by and among Playboy
Enterprises, Inc., New Playboy, Inc., Playboy
Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference
to Exhibit 2.2 from the December 1, 1998 Form S-4)
2.3 Amendment, dated as of February 26, 1999, to the
Agreement and Plan of Merger by and among Playboy
Enterprises, Inc., New Playboy, Inc., Playboy
Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference
to Exhibit 2.1 from the Current Report on Form 8-K dated
March 9, 1999)
&2.4 Asset Purchase Agreement, dated as of June 29, 2001, by
and among Playboy Enterprises, Inc., Califa
Entertainment Group, Inc., V.O.D., Inc., Steven Hirsch,
Dewi James and William Asher (incorporated by reference
to Exhibit 2.1 from the Current Report on Form 8-K dated
July 6, 2001)
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 from
the Current Report on Form 8-K dated March 15, 1999 (the
"March 15, 1999 Form 8-K"))
3.2 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March
15, 1999 (incorporated by reference to Exhibit 3.2 from
the March 15, 1999 Form 8-K)
3.3 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of the Company, dated March
15, 1999 (incorporated by reference to Exhibit 3.3 from
the March 15, 1999 Form 8-K)
3.4 Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3.4 from the March 15, 1999 Form
8-K)
10.1 Playboy Magazine Printing and Binding Agreement
#a October 22, 1997 Agreement between Playboy
Enterprises, Inc. and Quad/Graphics, Inc.
(incorporated by reference to Exhibit 10.4 from
the Company's transition period report on Form
10-K for the six months ended December 31, 1997
(the "Transition Period Form 10-K"))
#b Amendment to October 22, 1997 Agreement dated as of March
3, 2000 (incorporated by reference to Exhibit 10.1 from
the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 2000)
10.2 Playboy Magazine Distribution Agreement dated as of July
2, 1999 between Playboy Enterprises, Inc. and Warner
Publisher Services, Inc. (incorporated by reference to
Exhibit 10.4 from the Company's quarterly report on Form
10-Q for the quarter ended September 30, 1999 (the
"September 30, 1999 Form 10-Q"))
61
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 Agreement between Communication
Data Services, Inc. and Playboy Enterprises,
Inc. (incorporated by reference to Exhibit
10.12(a) from the Company's annual report on
Form 10-K for the year ended June 30, 1992 (the
"1992 Form 10-K"))
b Amendment dated as of June 1, 1988 to said
Fulfillment Agreement (incorporated by
reference to Exhibit 10.12(b) from the
Company's annual report on Form 10-K for the
year ended June 30, 1993 (the "1993 Form
10-K"))
c Amendment dated as of July 1, 1990 to said
Fulfillment Agreement (incorporated by
reference to Exhibit 10.12(c) from the
Company's annual report on Form 10-K for the
year ended June 30, 1991 (the "1991 Form
10-K"))
d Amendment dated as of July 1, 1996 to said
Fulfillment Agreement (incorporated by
reference to Exhibit 10.5(d) from the Company's
annual report on Form 10-K for the year ended
June 30, 1996 (the "1996 Form 10-K"))
#e Amendment dated as of July 7, 1997 to said
Fulfillment Agreement (incorporated by
reference to Exhibit 10.6(e) from the
Transition Period Form 10-K)
&f Amendment dated as of July 1, 2001 to said
Fulfillment Agreement (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter
ended September 30, 2001 (the "September 30,
2001 Form 10-Q"))
10.4 Transponder Service Agreements
a SKYNET Transponder Service Agreement dated
March 1, 2001 between Playboy Entertainment
Group, Inc. and LORAL SKYNET (incorporated by
reference to Exhibit 10.1 from the Company's
quarterly report on Form 10-Q for the quarter
ended March 31, 2001 (the "March 31, 2001 Form
10-Q"))
@b SKYNET Transponder Service Agreement dated
February 8, 1999 by and between Califa
Entertainment Group, Inc. and LORAL SKYNET
@c Transfer of Service Agreement dated February
22, 2002 between Califa Entertainment Group,
LORAL SKYNET and Spice Hot Entertainment, Inc.
@d Amendment One to the Transponder Service
Agreement between Spice Hot Entertainment, Inc.
and LORAL SKYNET dated February 28, 2002
10.5 Playboy TV International, LLC Agreements
#a Operating Agreement for Playboy TV
International, LLC dated as of August 31, 1999
between Playboy Entertainment Group, Inc. and
Victoria Springs Investments Ltd. (incorporated
by reference to Exhibit 10.1 from the September
30, 1999 Form 10-Q)
b First Amendment to Operating Agreement dated
September 24, 1999
c Second Amendment to Operating Agreement dated
December 28, 2000
(items (b) and (c) incorporated by reference to Exhibits 10.2 and
10.3, respectively, from the March 31, 2001 Form 10-Q)
#d Program Supply Agreement dated as of August 31,
1999 between Playboy Entertainment Group, Inc.,
Playboy TV International, LLC and PTV U.S., LLC
#e Trademark License Agreement dated as of August
31, 1999 between Playboy Enterprises
International, Inc. and Playboy TV
International, LLC
(items (d) and (e) incorporated by reference to Exhibit 10.2 and
10.3, respectively, from the September 30, 1999 Form 10-Q)
&f Binding Letter of Intent dated March 7, 2001
amending the Operating Agreement, Program
Supply Agreement and Trademark License
Agreement (incorporated by reference to Exhibit
10.4 from the March 31, 2001 Form 10-Q)
62
10.6 Affiliation Agreement between Playboy Entertainment
Group, Inc. and DirecTV, Inc. regarding the Satellite
Distribution of Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 Agreement
dated as of April 19, 1994
c Second Amendment to November 15, 1993 Agreement
dated as of July 26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 Agreement
dated August 26, 1997 (incorporated by
reference to Exhibit 10.3 from the Company's
quarterly report on Form 10-Q for the quarter
ended September 30, 1997 (the "September 30,
1997 Form 10-Q"))
#e Fourth Amendment to November 15, 1993 Agreement
dated March 15, 1999 (incorporated by reference
to Exhibit 10.1 from the Company's quarterly
report on Form 10-Q for the quarter ended June
30, 1999 (the "June 30, 1999 Form 10-Q"))
10.7 Fulfillment and Customer Service Services Agreement
dated October 2, 2000 between Infinity Resources, Inc.
and Playboy.com, Inc. (incorporated by reference to
Exhibit 10.13 from the Company's annual report on Form
10-K for the year ended December 31, 2000 (the "2000
Form 10-K"))
10.8 Credit Agreement
a Credit Agreement, dated as of February 26,
1999, among New Playboy, Inc., PEI Holdings,
Inc., the Lenders named in this Credit
Agreement, ING (U.S.) Capital LLC, as
Syndication Agent, and Credit Suisse First
Boston, as Administrative Agent, as Collateral
Agent and as Issuing Bank
b Subsidiary Guarantee Agreement, dated as of
March 15, 1999, among certain subsidiaries of
Playboy Enterprises, Inc. and Credit Suisse
First Boston, as Collateral Agent
c Indemnity, Subrogation and Contribution
Agreement, dated as of March 15, 1999, among
Playboy Enterprises, Inc., PEI Holdings, Inc.,
certain other subsidiaries of Playboy
Enterprises, Inc., and Credit Suisse First
Boston, as Collateral Agent
d Pledge Agreement, dated as of March 15, 1999,
among Playboy Enterprises, Inc., PEI Holdings,
Inc., certain other subsidiaries of Playboy
Enterprises, Inc., and Credit Suisse First
Boston, as Collateral Agent
e Security Agreement, dated as of March 15, 1999,
among Playboy Enterprises, Inc., PEI Holdings,
Inc., certain other subsidiaries of Playboy
Enterprises, Inc., and Credit Suisse First
Boston, as Collateral Agent
(items (a) through (e) incorporated by reference to Exhibits
10.21(a) through (e), respectively, from the Company's annual
report on Form 10-K for the year ended December 31, 1998 (the
"1998 Form 10-K"))
f First Amendment to February 26, 1999 Credit
Agreement dated as of June 14, 1999
g Second Amendment to February 26, 1999 Credit
Agreement dated as of January 31, 2000
(items (f) and (g) incorporated by reference to Exhibits 10.18(f)
and (g), respectively, from the Company's annual report on Form
10-K for the year ended December 31, 1999)
h Third Amendment to February 26, 1999 Credit
Agreement dated as of June 9, 2000
(incorporated by reference to Exhibit 10.1 from
the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 2000)
i Fourth Amendment to February 26, 1999 Credit
Agreement dated as of June 1, 2001
(incorporated by reference to Exhibit 10.1 from
the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 2001 (the "June 30,
2001 Form 10-Q"))
63
10.9 Promissory Notes issued by Playboy.com, Inc. to Hugh M.
Hefner
a Promissory Note dated September 27, 2000
(incorporated by reference to Exhibit 10.2 from
the Company's quarterly report on Form 10-Q for
the quarter ended September 30, 2000 (the
"September 30, 2000 Form 10-Q"))
b Promissory Note dated December 29, 2000
(incorporated by reference to Exhibit 10.15(b)
from the 2000 Form 10-K)
c First Amendment to December 29, 2000 Promissory
Note dated February 15, 2001
&d Second Amendment to December 29, 2000
Promissory Note and Acknowledgement of
Subordination Agreement dated March 7, 2001
(items (c) and (d) incorporated by reference to Exhibits 10.5 and
10.6, respectively, from the March 31, 2001 Form 10-Q)
e Third Amendment to December 29, 2000 Promissory Note
dated May 7, 2001 (incorporated by reference to Exhibit
10.2 from the June 30, 2001 Form 10-Q)
f Promissory Note dated September 26, 2001
(incorporated by reference to Exhibit 10.2 from
the September 30, 2001 Form 10-Q)
g Promissory Note dated December 17, 2001
h Agreement, dated December 17, 2001, by and
between Playboy Enterprises, Inc. and Hugh M.
Hefner relating to that certain Promissory
Note, dated as of December 17, 2001
(items (g) and (h) incorporated by reference to Exhibits 10.1 and
10.2, respectively, from the Current Report on Form 8-K dated
December 27, 2001)
10.10 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)
c Amendment to Lease Agreement dated as of
January 12, 1998 (incorporated by reference to
Exhibit 10.2 from the Company's quarterly
report on Form 10-Q for the quarter ended March
31, 1998 (the "March 31, 1998 Form 10-Q"))
10.11 Los Angeles Offices 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 October
10, 1991
c Amendment to July 25, 1991 Lease dated
September 12, 1996 (incorporated by reference
to Exhibit 10.19(c) from the 1996 Form 10-K)
d Amendment to July 25, 1991 Lease between
Playboy Enterprises, Inc. and Star Property
Fund, L.P. dated March 16, 2001 (incorporated
by reference to Exhibit 10.3 from the June 30,
2001 Form 10-Q)
e Office Lease dated January 6, 1999 between 5055
Wilshire Limited Partnership and Playboy
Enterprises, Inc. (incorporated by reference to
Exhibit 10.24(d) from the 1998 Form 10-K)
@f First Amendment to January 6, 1999 Lease dated
November 2, 2001
64
10.12 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 Company's annual
report on Form 10-K for the year ended June 30,
1995 (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 Company's quarterly
report on Form 10-Q for the quarter ended
December 31, 1992)
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)
f Fifth Amendment to April 7, 1988 Lease dated
March 19, 1998 (incorporated by reference to
Exhibit 10.3 from the March 31, 1998 Form 10-Q)
10.13 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)
10.14 Itasca Warehouse Lease Documents
a Agreement dated as of September 6, 1996 between
Centerpoint Properties Corporation and Playboy
Enterprises, Inc. (incorporated by reference to
Exhibit 10.23 from the 1996 Form 10-K)
b Amendment to September 6, 1996 Lease dated June
1, 1997 (incorporated by reference to Exhibit
10.25(b) from the Company's annual report on
Form 10-K for the year ended June 30, 1997 (the
"1997 Form 10-K"))
c Real Estate Sublease Agreement dated October 2,
2000 between Playboy Enterprises, Inc. and
Infinity Resources, Inc. (incorporated by
reference to Exhibit 10.20(c) from the 2000
Form 10-K)
10.15 Los Angeles Studio Facility Lease Documents
a Agreement of Lease dated September 20, 2001
between Kingston Andrita LLC and Playboy
Entertainment Group, Inc.
b Sublease dated September 20, 2001 between
Playboy Entertainment Group, Inc. and
Directrix, Inc.
c Guaranty dated September 20, 2001 by Playboy
Entertainment Group, Inc. in favor of Kingston
Andrita LLC
(items (a), (b) and (c) incorporated by reference to Exhibits
10.3(a), (b) and (c), respectively, from the September 30, 2001
Form 10-Q)
*10.16 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 Amended and Restated Deferred Compensation Plan
for Employees effective January 1, 1998
c Amended and Restated Deferred Compensation Plan
for Board of Directors' effective January 1,
1998
(items (b) and (c) incorporated by reference to Exhibits 10.2(a)
and (b), respectively, from the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998)
65
*10.17 1989 Option Plan
a Playboy Enterprises, Inc. 1989 Stock Option
Plan, as amended, For Key Employees
(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 (incorporated by
reference to Exhibit 10.4(aa) from the 1991 Form 10-K)
*10.18 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 NonQualified
Stock Option Plan for NonEmployee Directors, as
amended
b Playboy Enterprises, Inc. 1991 NonQualified
Stock Option Agreement for NonEmployee
Directors
(items (a) and (b) incorporated by reference to Exhibits 10.4(rr)
and (nn), respectively, from the 1991 Form 10-K)
*10.19 1995 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc.
1995 Stock Incentive Plan (incorporated by
reference to Exhibit 10.3 from the June 30,
1999 Form 10-Q)
b Form of NonQualified Stock Option Agreement for
NonQualified Stock Options which may be granted
under the Plan
c Form of Incentive Stock Option Agreement for
Incentive Stock Options which may be granted
under the Plan
d Form of Restricted Stock Agreement for
Restricted Stock issued under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3,
4.4 and 4.5, respectively, from the Company's Registration
Statement No. 33-58145 on Form S-8 dated March 20, 1995)
e Form of Section 162(m) Restricted Stock Agreement for
Section 162(m) Restricted Stock issued under the Plan
(incorporated by reference to Exhibit 10.1(e) from the
1997 Form 10-K)
*10.20 1997 Directors' Plan
a 1997 Equity Plan for NonEmployee Directors of
Playboy Enterprises, Inc., as amended
(incorporated by reference to Exhibit 10.25(a)
from the 2000 Form 10-K)
b Form of Restricted Stock Agreement for
Restricted Stock issued under the Plan
(incorporated by reference to Exhibit 10.1(b)
from the September 30, 1997 Form 10-Q)
*10.21 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)
*10.22 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock
Purchase Plan, as amended and restated
(incorporated by reference to Exhibit 10.2 from
the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 1997)
b Amendment to Playboy Enterprises, Inc. Employee
Stock Purchase Plan, as amended and restated
(incorporated by reference to Exhibit 10.4 from
the June 30, 1999 Form 10-Q)
66
*10.23 Selected Employment, Termination and Other Agreements
@a Form of Severance Agreement by and between
Playboy Enterprises, Inc. and each of Michael
Carr, James English, Linda Havard, Christie
Hefner, Martha Lindeman, Richard Rosenzweig,
Howard Shapiro and Alex Vaickus
b Letter Agreement dated November 30, 2000
regarding employment of Michael Carr
c Letter Agreement dated December 30, 2000
regarding employment of James English
(items (b) and (c) incorporated by reference to Exhibits 10.28(f)
and (g), respectively, from the 2000 Form 10-K)
@21 Subsidiaries
+23.1 Consent of Ernst & Young LLP 69
+23.2 Consent of PricewaterhouseCoopers LLP 70
+23.3 Consent of Deloitte & Touche LLP 71
@99 Playboy TV International, LLC Joint Venture financial
statements for the year ended December 31, 2001
- -------------------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
& Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
@ Filed with the SEC on March 21, 2002 in connection with the Form 10-K
+ Filed herewith
67
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(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:
Fiscal Year Ended December 31, 2001:
Allowance for doubtful accounts $ 15,994 $ 584 $ 1,690(a) $ 11,862(b) $ 6,406
=========== =========== =========== ========== ===========
Allowance for returns $ 28,815 $ - $ 52,698(c) $ 50,999(d) $ 30,514
=========== =========== =========== ========== ===========
Deferred tax asset valuation allowance $ 45,044 $ 9,544(e) $ - $ - $ 54,588
=========== ========== =========== ========== ===========
Fiscal Year Ended December 31, 2000:
Allowance for doubtful accounts $ 17,970 $ 723 $ 1,108(a) $ 3,807(b) $ 15,994
=========== =========== =========== ========== ===========
Allowance for returns $ 21,295 $ - $ 51,205(c) $ 43,685(d) $ 28,815
=========== =========== =========== ========== ===========
Deferred tax asset valuation allowance $ 19,783 $ 24,142(e) $ 1,119(f) $ - $ 45,044
=========== ========== =========== ========== ===========
Fiscal Year Ended December 31, 1999:
Allowance for doubtful accounts $ 6,349 $ 1,920 $ 11,670(a) $ 1,969(b) $ 17,970
=========== =========== =========== ========== ===========
Allowance for returns $ 21,644 $ - $ 56,024(c) $ 56,373(d) $ 21,295
=========== =========== =========== ========== ===========
Deferred tax asset valuation allowance $ 15,438 $ - $ 4,345(f) $ - $ 19,783
=========== =========== =========== ========== ===========
Notes:
(a) Includes a $10,000 provision in 1999 related to the Spice acquisition
which was charged to goodwill and applied against a noncurrent note
receivable. Also primarily represents provisions for unpaid
subscriptions charged to net revenues.
(b) Includes a reversal in 2001 of the $10,000 provision discussed above
related to assuming the obligation in the Califa acquisition. Also
primarily represents uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents noncash federal income tax expense related to increasing the
valuation allowance.
(f) Represents the unrealizable portion of the change in the gross deferred
tax asset.
68
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-30185 and Form S-8 POS (as amended) No. 333-74451) of
Playboy Enterprises, Inc. and in the related prospectuses of our report
dated February 22, 2002 (except Note C, as to which the date is March 15,
2002) with respect to the consolidated financial statements and financial
statement schedule of Playboy Enterprises, Inc. included in this Annual
Report (Form 10-K/A, Amendment No. 1) for the year ended December 31, 2001.
/s/ Ernst & Young LLP
Chicago, Illinois
April 11, 2002
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (File No. 333-30185), Form S-8 POS (File No. 333-74451, as
amended) and Amendment No. 1 on Form S-3 (File No. 333-69820) of our report
dated March 30, 2000, on our audit of the consolidated financial statements
and financial statement schedule of Playboy Enterprises, Inc. as of and for
the fiscal year ended December 31, 1999, which report is included in this
Annual Report on Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
April 11, 2002
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30185 on Form S-8 and No. 333-74451, as amended, on Form S-8 POS of
Playboy Enterprises, Inc. of our report dated February 22, 2002 on the
consolidated financial statements of Playboy TV International, LLC, and
subsidiaries as of and for the year ended December 31, 2001 (which report
expresses an unqualified opinion and includes an explanatory paragraph
relating to the entity's ability to continue as a going concern),
incorporated by reference into this Annual Report on Form 10-K/A of Playboy
Enterprises, Inc. for the year ended December 31, 2001.
/s/ Deloitte & Touche LLP
Miami, Florida
April 11, 2002