UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(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)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of July 31, 2000, there were 4,859,102 shares of Class A Common Stock,
par value $0.01 per share, and 19,395,417 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Quarters Ended June 30, 2000 and 1999
(Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Six Months Ended June 30, 2000 and
1999 (Unaudited) 4
Condensed Consolidated Balance Sheets at June 30, 2000
(Unaudited) and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2000 1999
-------- --------
Net revenues $ 77,182 $ 77,759
-------- --------
Costs and expenses
Cost of sales (69,562) (65,421)
Selling and administrative expenses (13,428) (13,318)
-------- --------
Total costs and expenses (82,990) (78,739)
-------- --------
Operating loss (5,808) (980)
-------- --------
Nonoperating income (expense)
Investment income 274 474
Interest expense (2,231) (2,465)
Equity in operations of Playboy TV
International, LLC and other (205) (1,126)
Other, net (318) (267)
-------- --------
Total nonoperating expense (2,480) (3,384)
-------- --------
Loss before income taxes (8,288) (4,364)
Income tax benefit 2,405 1,392
-------- --------
Net loss (5,883) (2,972)
-------- --------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment (25) (3)
Unrealized gain (loss) on marketable securities (125) 88
-------- --------
Total other comprehensive income (loss) (150) 85
-------- --------
Comprehensive loss $ (6,033) $ (2,887)
======== ========
Basic and diluted weighted average number
of common shares outstanding 24,239 23,090
======== ========
Basic and diluted net loss per common share $ (0.24) $ (0.13)
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Six Months Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2000 1999
--------- ---------
Net revenues $ 150,285 $ 151,143
--------- ---------
Costs and expenses
Cost of sales (135,949) (128,729)
Selling and administrative expenses (26,201) (25,385)
Restructuring expenses (257) --
--------- ---------
Total costs and expenses (162,407) (154,114)
--------- ---------
Operating loss (12,122) (2,971)
--------- ---------
Nonoperating income (expense)
Investment income 689 551
Interest expense (4,119) (3,406)
Gain on sale of investment -- 1,728
Equity in operations of Playboy TV
International, LLC and other (808) (1,126)
Other, net (635) (474)
--------- ---------
Total nonoperating expense (4,873) (2,727)
--------- ---------
Loss before income taxes (16,995) (5,698)
Income tax benefit 4,877 1,684
--------- ---------
Net loss (12,118) (4,014)
--------- ---------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment (12) (61)
Unrealized gain on marketable securities 26 95
--------- ---------
Total other comprehensive income 14 34
--------- ---------
Comprehensive loss $ (12,104) $ (3,980)
========= =========
Basic and diluted weighted average number
of common shares outstanding 24,220 22,037
========= =========
Basic and diluted net loss per common share $ (0.50) $ (0.18)
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, Dec. 31,
2000 1999
--------- ---------
Assets
Cash and cash equivalents $ -- $ 23,528
Marketable securities 3,637 3,064
Receivables, net of allowance for doubtful
accounts of $6,278 and $5,738, respectively 32,476 40,670
Receivables from related parties, net of
allowance for doubtful accounts of $2,232 11,715 14,225
Inventories 26,358 23,831
Programming costs 50,175 52,546
Deferred subscription acquisition costs 10,334 13,579
Other current assets 16,259 17,367
--------- ---------
Total current assets 150,954 188,810
--------- ---------
Property and equipment, net 11,387 9,415
Receivables from related parties 62,500 62,500
Programming costs 6,223 3,100
Goodwill, net of amortization of $3,823
and $2,490, respectively 90,588 89,539
Trademarks, net of amortization of $13,160
and $11,819, respectively 49,303 48,387
Net deferred tax assets 11,077 5,390
Other noncurrent assets 21,059 22,261
--------- ---------
Total assets $ 403,091 $ 429,402
========= =========
Liabilities
Financing obligations $ 1,841 $ 15,000
Accounts payable 27,484 31,868
Accounts payable to related parties 349 2,690
Accrued salaries, wages and employee benefits 4,314 8,839
Deferred revenues 38,873 42,354
Deferred revenues from related parties 6,525 6,525
Other liabilities and accrued expenses 16,003 12,395
--------- ---------
Total current liabilities 95,389 119,671
Financing obligations 84,659 75,000
Deferred revenues from related parties 54,375 55,225
Other noncurrent liabilities 18,274 18,225
--------- ---------
Total liabilities 252,697 268,121
--------- ---------
Shareholders' Equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares
authorized; 4,859,102 issued 49 49
Class B nonvoting - 30,000,000 shares
authorized; 19,667,519 and 19,595,358
issued, respectively 197 196
Capital in excess of par value 121,192 120,337
Retained earnings 32,124 44,242
Unearned compensation restricted stock (3,272) (3,624)
Accumulated other comprehensive income 104 81
--------- ---------
Total shareholders' equity 150,394 161,281
--------- ---------
Total liabilities and shareholders' equity $ 403,091 $ 429,402
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30 (Unaudited)
(In thousands)
2000 1999
--------- ---------
Cash Flows From Operating Activities
Net loss $ (12,118) $ (4,014)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation of property and equipment 1,515 946
Amortization of intangible assets 3,904 2,498
Equity in operations of Playboy TV
International, LLC and other 808 1,126
Gain on sale of investment -- (1,728)
Amortization of investments in entertainment
programming 16,392 13,235
Investments in entertainment programming (17,144) (18,633)
Net change in operating assets and liabilities (8,518) (3,716)
Other, net 417 189
--------- ---------
Net cash used for operating activities (14,744) (10,097)
--------- ---------
Cash Flows From Investing Activities
Acquisition of Spice Entertainment Companies, Inc. -- (64,145)
Acquisition of Rouze Media, Inc. (1,125) --
Sale of investments -- 9,693
Additions to property and equipment (3,358) (422)
Funding of equity interests in international ventures (880) (3,713)
Purchase of marketable securities (532) (1,006)
Other, net -- 3
--------- ---------
Net cash used for investing activities (5,895) (59,590)
--------- ---------
Cash Flows From Financing Activities
Repayment of short-term borrowings -- (29,750)
Proceeds from financing obligations -- 110,000
Repayment of financing obligations (15,000) --
Net proceeds from revolving credit facility 11,500 --
Net proceeds from public equity offering -- 24,632
Payment of debt assumed in acquisition of
Spice Entertainment Companies, Inc. -- (10,471)
Deferred financing fees (582) (4,669)
Proceeds from stock plans 1,193 1,332
--------- ---------
Net cash provided by (used for) financing
activities (2,889) 91,074
--------- ---------
Net increase (decrease) in cash and cash equivalents (23,528) 21,387
Cash and cash equivalents at beginning of period 23,528 341
--------- ---------
Cash and cash equivalents at end of period $ -- $ 21,728
======== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is unaudited
but, in the opinion of management, reflects all normal recurring adjustments
necessary for a fair presentation of the results for the interim periods. The
interim results of operations and cash flows are not necessarily indicative of
those results and cash flows for the entire year. These financial statements
should be read in conjunction with the financial statements and notes to the
financial statements contained in the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (the "1999 Form 10-K") of Playboy Enterprises, Inc.
and its subsidiaries (the "Company"). Certain amounts reported for prior periods
have been reclassified to conform to the current presentation.
(B) RESTRUCTURING EXPENSES
In fiscal year 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 fiscal year 2000) representing total restructuring
charges of $1,348,000, of which $257,000 was recorded in the first quarter of
fiscal year 2000. A total of $1,164,000 related to the restructuring had been
paid as of June 30, 2000, resulting in a remaining liability of $184,000.
Additionally, 23 positions were eliminated through attrition. All charges
related to the restructuring were recorded as of March 31, 2000.
(C) INCOME TAXES
The Company's net deferred tax asset increased to $14.0 million at June 30, 2000
as a result of a taxable loss for the current six-month period, and consisted of
$2.9 million of current deferred tax assets and $11.1 million of noncurrent
deferred tax assets. At December 31, 1999, the Company was in a net deferred tax
asset position of $8.3 million that consisted of $2.9 million of current
deferred tax assets and $5.4 million of noncurrent deferred tax assets. As
reported in the Company's 1999 Form 10-K, the deferred tax assets include
principally the anticipated benefit of net operating loss carryforwards
("NOLs"). Realization of those assets is dependent upon the Company's ability to
generate taxable income in future years. The recognition of benefits in the
financial statements is based upon projections by management of future operating
income and the anticipated reversal of temporary differences that will result in
taxable income. Projections of future earnings were based on adjusted historical
earnings.
(D) COMPREHENSIVE INCOME (LOSS)
The following sets forth the components of other comprehensive income (loss),
and the related tax expense or benefit allocated to each item (in thousands):
(Unaudited) (Unaudited)
Quarters Ended Six Months Ended
June 30, June 30,
--------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
Foreign currency translation adjustment (1) ......... $ (25) $ (3) $ (12) $ (61)
Unrealized gain (loss) on marketable securities (2) . $(125) $ 88 $ 26 $ 95
(1) Net of a related tax benefit of $13 and $6 for the quarter and six months
ended June 30, 2000, respectively, and $2 and $33 for the quarter and six
months ended June 30, 1999, respectively.
(2) Net of a related tax benefit of $67 and tax expense of $15 for the quarter
and six months ended June 30, 2000, respectively, and related tax expense
of $47 and $51 for the quarter and six months ended June 30, 1999,
respectively.
7
(E) LOSS PER COMMON SHARE
For the quarter and six months ended June 30, 2000, options to purchase
approximately 2,055,000 and 2,090,000 shares, respectively, of the Company's
Class A and Class B common stock combined and approximately 270,000 and 280,000
shares, respectively, of Class B restricted stock awards outstanding were not
included in the computation of diluted earnings per common share. The inclusion
of these shares would have been antidilutive. As a result, the weighted average
number of basic and diluted common shares outstanding for the quarter and six
months ended June 30, 2000 were equivalent.
(F) INVENTORIES
Inventories, which are stated at the lower of cost (average cost and specific
cost) or fair value, consisted of the following (in thousands):
(Unaudited)
June 30, Dec. 31,
2000 1999
------- -------
Paper ............................................ $ 8,246 $ 6,226
Editorial and other prepublication costs ......... 7,607 6,432
Merchandise finished goods ....................... 10,505 11,173
------- -------
Total inventories .............................. $26,358 $23,831
======= =======
(G) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
(Unaudited)
June 30, Dec. 31,
2000 1999
-------- --------
Land ......................................... $ 292 $ 292
Buildings and improvements ................... 8,504 8,467
Furniture and equipment ...................... 18,469 15,778
Leasehold improvements ....................... 9,479 8,681
-------- --------
Total property and equipment ................. 36,744 33,218
Accumulated depreciation ..................... (25,357) (23,803)
-------- --------
Total property and equipment, net .......... $ 11,387 $ 9,415
======== ========
(H) PUBLIC EQUITY OFFERING
In January 2000, Playboy.com, Inc. ("Playboy.com"), a component of the Playboy
Online Group, filed a registration statement for a planned sale of a minority of
its equity in an Initial Public Offering ("IPO").
(I) FINANCING OBLIGATIONS
Effective June 9, 2000, the Company's credit agreement was amended to increase
the amount of allowable funding from the Company's existing revolving credit
facility to Playboy.com from $10.0 million to a maximum of $17.5 million,
presuming certain conditions are met. Upon completion of the anticipated IPO,
all amounts advanced to Playboy.com above $10.0 million shall be repaid from
Playboy.com to the Company.
8
(J) SEGMENT INFORMATION
The following tables represent financial information by reportable segment (in
thousands):
(Unaudited) (Unaudited)
Quarters Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net Revenues
Entertainment ........................ $ 25,913 $ 26,246 $ 48,517 $ 46,689
Publishing ........................... 31,844 30,790 63,936 64,089
Playboy Online ....................... 6,420 2,764 12,201 5,006
Catalog .............................. 9,425 14,297 20,249 30,036
Other Businesses ..................... 3,580 3,662 5,382 5,323
--------- --------- --------- ---------
Total ............................. $ 77,182 $ 77,759 $ 150,285 $ 151,143
========= ========= ========= =========
Loss Before Income Taxes
Entertainment ........................ $ 5,730 $ 6,039 $ 9,409 $ 10,428
Publishing ........................... (564) 1,059 1,051 2,899
Playboy Online ....................... (6,056) (1,707) (11,769) (3,666)
Catalog .............................. 31 (252) (369) (553)
Other Businesses ..................... 278 159 496 155
Corporate Administration and Promotion (5,227) (6,278) (10,683) (12,234)
Restructuring expenses ............... -- -- (257) --
Investment income .................... 274 474 689 551
Interest expense ..................... (2,231) (2,465) (4,119) (3,406)
Gain on sale of investment ........... -- -- -- 1,728
Equity in operations of Playboy TV
International, LLC and other ...... (205) (1,126) (808) (1,126)
Other, net ........................... (318) (267) (635) (474)
--------- --------- --------- ---------
Total ............................. $ (8,288) $ (4,364) $ (16,995) $ (5,698)
========= ========= ========= =========
EBITDA (1)
Entertainment ........................ $ 15,602 $ 15,195 $ 28,654 $ 25,505
Publishing ........................... (409) 1,205 1,343 3,197
Playboy Online ....................... (5,640) (1,700) (11,096) (3,652)
Catalog .............................. 75 (197) (282) (443)
Other Businesses ..................... 325 200 590 238
Corporate Administration and Promotion (4,350) (5,328) (8,796) (9,105)
Restructuring expenses ............... -- -- (257) --
--------- --------- --------- ---------
Total ............................. $ 5,603 $ 9,375 $ 10,156 $ 15,740
========= ========= ========= =========
(Unaudited)
June 30, Dec. 31,
2000 1999
-------- --------
Identifiable Assets
Entertainment ........................................................ $276,205 $281,167
Publishing ........................................................... 43,570 51,273
Playboy Online ....................................................... 7,893 4,924
Catalog .............................................................. 10,568 13,599
Other Businesses ..................................................... 7,247 7,082
Corporate Administration and Promotion (2) ........................... 57,608 71,357
-------- --------
Total (2) ......................................................... $403,091 $429,402
======== ========
(1) EBITDA represents earnings before income taxes, interest expense,
depreciation of property and equipment, amortization of intangible assets,
amortization of investments in entertainment programming, amortization of
deferred financing fees related to the Spice acquisition and equity in
operations of Playboy TV International, LLC ("PTVI") and other. EBITDA
should not be considered an alternative to any measure of performance or
liquidity under generally accepted accounting principles. Similarly, it
should not be inferred that EBITDA is more meaningful than any of those
measures.
(2) The decrease in identifiable assets since December 31, 1999 is largely due
to the repayment of $15,000 of financing obligations in February 2000.
9
(K) CONTINGENCIES
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act of 1996 (the "Telecommunications Act"), which, among
other things, regulates the cable transmission of adult programming, such as the
Company's domestic pay television programs. Enforcement of Section 505 of the
Telecommunications Act ("Section 505") commenced May 18, 1997. The Company's
full case on the merits was heard by the United States District Court in
Wilmington, Delaware (the "Delaware District Court") in March 1998. On December
28, 1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants appealed this judgment and the United States
Supreme Court (the "Supreme Court") heard the appeal on November 30, 1999. On
May 22, 2000, the Supreme Court upheld the Company's position and the Delaware
District Court's ruling that Section 505 was unconstitutional.
(L) ACQUISITION
On March 15, 1999, the Company completed its acquisition of Spice Entertainment
Companies, Inc. ("Spice"), a leading provider of adult television entertainment.
The final determination of the purchase price, including transaction costs and
Spice debt, is approximately $127 million, which resulted in goodwill recorded
of approximately $90 million.
(M) ACCOUNTING PRONOUNCEMENT
In December 1999, the U.S. Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal year 2000.
Management is evaluating the effect that adoption of SAB 101 will have on the
Company's financial statements.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a summary of the results of operations of the Company for
the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Net Revenues ....................................... $ 77.2 $ 77.8 $ 150.3 $ 151.1
======= ======= ======= =======
Segment Loss ....................................... $ (5.8) $ (1.0) $ (11.9) $ (3.0)
Restructuring Expenses ............................. -- -- (0.2) --
------- ------- ------- -------
Operating Loss ..................................... $ (5.8) $ (1.0) $ (12.1) $ (3.0)
======= ======= ======= =======
Net Loss ........................................... $ (5.9) $ (3.0) $ (12.1) $ (4.0)
======= ======= ======= =======
Basic and Diluted Net Loss per Common Share......... $ (0.24) $ (0.13) $ (0.50) $ (0.18)
======= ======= ======= =======
The Company's revenues for the quarter and six months ended June 30, 2000
overall were relatively flat compared to the prior year periods. For the
quarter, lower Catalog Group revenues were mostly offset by higher Playboy
Online and Publishing Group revenues while for the six-month period, lower
Catalog Group revenues were mostly offset by higher Playboy Online and
Entertainment Group revenues. The Catalog and Playboy Online Group variances
resulted in part from the consolidation of Playboy and Spice direct commerce
with e-commerce, resulting in their revenues being reported in the Playboy
Online Group effective October 1, 1999.
The higher operating losses for both the quarter and six-month period were
primarily due to higher planned investments in the Playboy Online Group combined
with lower performance from the Publishing and Entertainment Groups, partially
offset by lower planned Corporate Administration and Promotion expenses.
The net losses for the current year quarter and six-month period reflect
$0.2 million and $0.8 million nonoperating charges, respectively, related to
PTVI while the prior year periods both included a $1.1 million equity loss
related to the Company's interest in its United Kingdom television networks,
which has since been sold to PTVI. The PTVI charges reflect the Company's 19.9%
equity in operations of PTVI, and the elimination of unrealized profits of
certain transactions between the Company and PTVI. The current year six-month
period also included higher interest expense, primarily due to increased debt
resulting from the acquisition of Spice, while the prior year six-month period
included a $1.7 million gain from the sale of the Company's equity in the
Playboy Casino at Hotel des Roses in Greece.
Beginning with the quarter ended March 31, 2000, certain brand-related
businesses have been combined and are now reported as the Other Businesses
Group. This group includes product marketing and casino gaming, which were
previously reported as separate groups, and certain Company-wide marketing
activities, consisting of Playboy Jazz Festival and Playmate promotions, that
had previously been reported in Corporate Administration and Promotion results.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. For example,
international TV revenues vary due to the timing of recognizing library license
fees related to PTVI. Playboy magazine newsstand revenues vary from issue to
issue, with revenues generally higher for holiday issues and any issues
including editorial or pictorial features that generate unusual public interest.
Advertising revenues also vary from quarter to quarter, depending on product
introductions by advertising customers, changes in advertising buying patterns
and economic conditions. In addition, e-commerce revenues are typically impacted
by the year-end holiday buying season and decreased Internet traffic during the
summer months.
11
ENTERTAINMENT GROUP
The revenues and segment income of the Entertainment Group were as follows
for the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues
Domestic TV Networks ..... $ 19.7 $ 19.3 $ 38.7 $ 36.1
International TV ......... 3.1 1.6 5.2 3.2
Worldwide Home Video ..... 2.9 4.2 4.2 6.1
Movies and Other ......... 0.2 1.1 0.4 1.3
------- ------- ------- -------
Total Revenues ......... $ 25.9 $ 26.2 $ 48.5 $ 46.7
======= ======= ======= =======
Segment Income
Before Programming Expense $ 14.1 $ 13.6 $ 25.8 $ 23.6
Programming Expense ...... (8.4) (7.6) (16.4) (13.2)
------- ------- ------- -------
Total Segment Income ... $ 5.7 $ 6.0 $ 9.4 $ 10.4
======= ======= ======= =======
For the quarter ended June 30, 2000, Entertainment Group revenues
decreased $0.3 million, or 1%, compared to the prior year quarter reflecting
lower worldwide home video and movies and other revenues, mostly offset by
higher international TV revenues. Segment income decreased $0.3 million, or 5%,
reflecting higher programming expense and the decrease in revenues.
For the six months ended June 30, 2000, revenues increased $1.8 million,
or 4%, compared to the prior year primarily due to the Spice acquisition
effective March 15, 1999 combined with higher international TV revenues,
partially offset by lower worldwide home video and movies and other revenues.
Segment income decreased $1.0 million, or 10%, reflecting higher programming
expense which was partially offset by the increase in revenues.
The following discussion focuses on the profit contribution of each
business before programming expense.
Domestic TV Networks
For the quarter, revenues from domestic TV networks of $19.7 million
increased $0.4 million, or 2%, and profit contribution increased $0.3 million.
These increases were primarily due to higher cable pay-per-view revenues for the
Playboy TV and Spice networks, primarily due to increases in digital households
for both networks, combined with higher sales to other networks. These increases
were partially offset by higher Playboy TV direct costs and lower Playboy TV
satellite direct-to-home ("DTH") revenues, principally due to the effect of
DirecTV's acquisition of PrimeStar. The acquisition has resulted in a
significant decline in the number of PrimeStar subscribers. For the six-month
period, revenues of $38.7 million increased $2.6 million, or 7%, and profit
contribution increased $0.9 million, primarily as a result of the Spice
acquisition effective March 15, 1999 combined with the same factors mentioned
above for the quarter.
The approximate number of households were as follows for the periods
indicated below (in millions):
June 30, Dec. 31, June 30,
2000 1999 1999
-------- -------- --------
Cable (1):
Playboy TV Analog Addressable ........ 12.4 11.7 12.3
Playboy TV Digital ................... 1.9 1.3 0.4
Spice Analog Addressable ............. 13.2 13.6 16.6
Spice Digital ........................ 3.4 2.8 1.5
DTH:
Playboy TV ........................... 13.9 12.4 11.2
(1) Currently there is an overlap of cable analog addressable and digital
households due to some cable operators offering both analog and digital
platforms to the same households.
12
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act, which, among other things, regulates the cable
transmission of adult programming, such as the Company's domestic pay television
programs. Enforcement of Section 505 commenced May 18, 1997. The Company's full
case on the merits was heard by the Delaware District Court in March 1998. On
December 28, 1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants appealed this judgment and the Supreme Court
heard the appeal on November 30, 1999. On May 22, 2000, the Supreme Court upheld
the Company's position and the Delaware District Court's ruling that Section 505
was unconstitutional. See Part II. Item 1. "Legal Proceedings."
International TV
For the quarter and six-month period, profit contribution from the
international TV business increased $2.1 million and $3.1 million, respectively,
on revenue increases of $1.5 million, or 88%, and $2.0 million, or 62%,
respectively. These increases were primarily due to output license fees and
trademark royalties from PTVI, which now distributes the Company's TV
programming internationally, except in Canada.
Worldwide Home Video
For the quarter and six-month period, revenues from the worldwide home
video business decreased $1.3 million, or 30%, and $1.9 million, or 31%,
respectively, while profit contribution decreased $1.0 million and $1.3 million,
respectively. These decreases were primarily due to lower domestic sales, due in
part to fewer titles released.
Movies and Other
For the quarter and six-month period, profit contribution from movies and
other businesses decreased $0.8 million and $0.9 million, respectively, on $0.9
million decreases in revenues for both periods primarily due to lower sales of
previously released movies.
The Entertainment Group's administrative expenses increased $0.2 million
for the quarter and decreased $0.3 million for the six-month period.
Programming Expense
Programming expense increased $0.8 million and $3.2 million for the
quarter and six-month period, respectively. These increases were primarily as a
result of higher domestic TV networks amortization and PTVI-related amortization
in the current year periods, partially offset by lower amortization related to
the lower sales of movies.
PUBLISHING GROUP
The revenues and segment income (loss) of the Publishing Group were as
follows for the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues
Playboy Magazine .............. $ 25.2 $ 24.1 $ 50.6 $ 50.8
Other Domestic Publishing ..... 3.6 4.0 7.6 8.2
International Publishing ...... 3.0 2.7 5.7 5.1
------- ------- ------- -------
Total Revenues .............. $ 31.8 $ 30.8 $ 63.9 $ 64.1
======= ======= ======= =======
Segment Income (Loss) ......... $ (0.6) $ 1.1 $ 1.1 $ 2.9
======= ======= ======= =======
For the quarter ended June 30, 2000, Publishing Group revenues increased
$1.0 million, or 3%, compared to the prior year quarter primarily due to higher
advertising revenues for Playboy magazine. For the six months ended June 30,
2000, revenues remained relatively flat compared to the prior year.
13
For the quarter, Playboy magazine revenues increased $1.1 million, or 5%,
compared to the prior year quarter. Advertising revenues increased $1.4 million,
or 18%, primarily due to higher ad pages and average net revenue per page.
Partially offsetting the increased advertising revenues were $0.3 million, or
2%, lower subscription revenues.
For the six-month period, Playboy magazine revenues remained relatively
flat compared to the prior year. Circulation revenues decreased $3.4 million, or
9%, largely due to extraordinary newsstand sales in the prior year of the April
1999 issue featuring Rena Mero, the World Wrestling Federation champion and
character formerly known as Sable. Advertising revenues increased $3.2 million,
or 22%, due to higher ad pages and average net revenue per page. Advertising
sales for the third quarter magazine issues are closed and the Company expects
to report 6% more ad pages and 20% higher ad revenues compared to the quarter
ended September 30, 1999.
Revenues from other domestic publishing businesses decreased $0.4 million,
or 10%, and $0.6 million, or 7%, respectively, for the quarter and six-month
period primarily reflecting lower sales of special editions.
International publishing revenues increased $0.3 million, or 13%, and $0.6
million, or 12%, respectively, for the quarter and six-month period primarily
due to higher revenues from the Company's majority-owned Polish publishing joint
venture.
For the quarter and six-month period, Publishing Group segment performance
decreased $1.7 million and $1.8 million, respectively, compared to the prior
year periods. These decreases were primarily due to higher editorial and
newsstand promotion expenses. For the quarter, Playboy magazine newsstand sales
remained relatively flat and decreased for the six-month period, primarily as a
result of the April 1999 issue of Playboy magazine. Both periods were also
impacted by higher subscription acquisition expenses and higher Playboy magazine
advertising profitability. In addition, the six-month comparison reflected lower
manufacturing costs.
Many magazines receive a significant portion of their advertising revenues
from companies selling tobacco products. Because only approximately 30% of
Playboy magazine's revenues are from advertising, the percentage of ad pages
from tobacco of approximately 25% is a smaller overall revenue percentage than
for many other magazines. Nevertheless, significant legislative or regulatory
limitations on the ability of those companies to advertise in magazines could
materially adversely affect the Company's operating performance. The Food and
Drug Administration (the "FDA") announced a regulation in August 1996 which
prohibited the publication of tobacco advertisements containing drawings, colors
or pictures. After a Federal District Court and a Circuit Court of Appeals
invalidated the FDA's authority to issue regulations restricting tobacco
advertising, the government appealed to the Supreme Court and on March 21, 2000,
the Supreme Court held that the FDA lacks authority to regulate tobacco
products.
PLAYBOY ONLINE GROUP
The revenues and segment losses of the Playboy Online Group were as
follows for the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues ........... $ 6.4 $ 2.8 $ 12.2 $ 5.0
======= ======= ======= =======
Segment Loss ....... $ (6.1) $ (1.7) $ (11.8) $ (3.7)
======= ======= ======= =======
For the quarter and six months ended June 30, 2000, Playboy Online Group
revenues increased $3.6 million, or 132%, and $7.2 million, or 144%,
respectively, compared to the prior year periods. These increases were from all
revenue streams: e-commerce, advertising and sponsorships, and subscription. The
significantly higher e-commerce revenues were due to both the integration of the
Playboy and Spice catalog businesses to e-commerce effective October 1, 1999 and
higher product sales.
For the quarter and six-month period, the group's segment losses increased
$4.4 million and $8.1 million, respectively, reflecting planned higher expenses,
principally related to sales and marketing, content and product development and
administration.
14
In January 2000, Playboy.com, a component of the Playboy Online Group,
filed a registration statement for a planned sale of a minority of its equity in
an IPO. The Company intends to complete the IPO when market conditions improve.
In February 2000, Playboy.com purchased substantially all of the assets and
assumed certain liabilities of Rouze Media, Inc. ("Rouze"), which operated an
Internet site located at www.rouze.com. The aggregate purchase price consisted
of $1.2 million in cash as a guarantee against future revenues, certain assumed
liabilities plus direct costs of the transaction.
CATALOG GROUP
The revenues and segment losses of the Catalog Group were as follows for
the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues .................... $ 9.4 $ 14.3 $ 20.2 $ 30.0
======= ======= ======= =======
Segment Loss ................ $ -- $ (0.3) $ (0.4) $ (0.6)
======= ======= ======= =======
For the quarter and six months ended June 30, 2000, Catalog Group revenues
decreased $4.9 million, or 34%, and $9.8 million, or 33%, respectively, compared
to the prior year periods. These decreases reflected planned lower circulation
for the Critics' Choice Video and Collectors' Choice Music catalogs and the
absence of fiscal year 2000 revenues related to the Playboy and Spice catalogs.
The Playboy and Spice catalogs have been integrated as direct commerce
businesses within the Company's branded e-commerce business and, effective
October 1, 1999, have been included in Playboy Online Group results. For both
the quarter and six-month period, the lower revenues were more than offset by
lower related costs, which resulted in improvements in segment performance of
$0.3 million and $0.2 million, respectively.
In June 2000, the Company signed a letter of intent to sell its
Collectors' Choice Music catalog and related Internet site to Soundies, Inc.,
the sale of which is expected to close in the third quarter. In August 2000, the
Company signed a letter of intent to sell its Critics' Choice Video catalog and
related Internet site and operations to Infinity Resources, Inc., the sale of
which is expected to close by the end of the year. Both deals are subject to the
satisfactory completion of financial, legal and operational due diligence and
customary closing conditions. Completion of these deals will end the Company's
presence in the catalog business.
OTHER BUSINESSES GROUP
The revenues and segment income of the Other Businesses Group were as
follows for the periods indicated below (in millions):
Quarters Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues ............................... $ 3.6 $ 3.7 $ 5.4 $ 5.3
======= ======= ======= =======
Segment Income ......................... $ 0.3 $ 0.2 $ 0.5 $ 0.2
======= ======= ======= =======
For the quarter and six months ended June 30, 2000, revenues and segment
income from the Other Businesses Group were relatively flat compared to the
prior year periods.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses for the quarter of $5.2
million decreased $1.1 million, or 17%, while expenses for the six-month period
of $10.7 million decreased $1.6 million, or 13%, due largely to planned lower
marketing spending.
15
RESTRUCTURING EXPENSES
In fiscal year 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 fiscal year 2000) representing total
restructuring charges of $1,348,000, of which $257,000 was recorded in the first
quarter of fiscal year 2000. A total of $1,164,000 related to the restructuring
had been paid as of June 30, 2000, resulting in a remaining liability of
$184,000. Additionally, 23 positions were eliminated through attrition. All
charges related to the restructuring were recorded as of March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company maintained no cash and cash equivalents and
had $86.5 million in financing obligations compared to $23.5 million in cash and
cash equivalents and $90.0 million in financing obligations at December 31,
1999. In February 2000, the Company made a $15.0 million repayment on the term
loan portion of its financing obligations. During the quarter ended June 30,
2000, the Company borrowed $11.5 million under its revolving credit facility.
The Company expects to meet its short- and long-term cash requirements through
its remaining availability under its $35.0 million revolving credit facility.
Effective June 9, 2000, the Company's credit agreement was amended to
increase the amount of allowable funding from the Company's existing revolving
credit facility to Playboy.com from $10.0 million to a maximum of $17.5 million,
presuming certain conditions are met. The Company is presently funding
Playboy.com until it receives the proceeds of the anticipated IPO or alternative
funding arrangements, which the Company is actively pursuing until IPO proceeds
are available. The IPO is intended to be completed when market conditions
improve. Upon completion of the IPO, all amounts advanced to Playboy.com above
$10.0 million shall be repaid from Playboy.com to the Company.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $14.7 million for the six
months ended June 30, 2000, which reflected $17.1 million of investments in
Company-produced and licensed entertainment programming in the current year.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $5.9 million for the six-month
period primarily due to $3.4 million of additions to property and equipment, and
the Company's acquisition of Rouze, which resulted in cash paid of $1.1 million
in the current year.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash used for financing activities was $2.9 million for the six-month
period principally due to the $15.0 million repayment of financing obligations,
partially offset by the $11.5 million in borrowings from the Company's revolving
credit facility.
INCOME TAXES
Based on current tax law, the Company will need to generate approximately
$24.0 million of future taxable income prior to the expiration of the Company's
NOLs for full realization of the $8.3 million net deferred tax asset at December
31, 1999. At December 31, 1999, the Company had NOLs of $14.9 million for tax
purposes, with $11.7 million expiring in 2009, $2.5 million expiring in 2012 and
$0.7 million expiring in 2019.
Management believes that it is more likely than not that the required
amount of such taxable income will be generated in years subsequent to December
31, 1999 and prior to the expiration of the Company's NOLs to realize the $8.3
million net deferred tax asset at December 31, 1999. The Company's net deferred
tax asset increased to $14.0 million at June 30, 2000 as a result of a taxable
loss for the current six-month period. Following is a summary of the bases for
management's belief that a valuation allowance of $15.9 million at December 31,
1999 is adequate, and that it is more likely than not that the net deferred tax
asset of $8.3 million will be realized:
16
o In establishing the net deferred tax asset, management reviewed the
components of the Company's NOLs and determined that they primarily
resulted from several nonrecurring events, which were not indicative of
the Company's ability to generate future earnings.
o Several of the Company's operating groups continue to generate meaningful
earnings, particularly the Entertainment Group, and the Company's
investments in the Entertainment and Playboy Online Groups and the casino
gaming business are anticipated to lead to increased earnings in future
years.
o The Company has opportunities to accelerate taxable income into the NOL
carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and amortization
methods for tax purposes and the sale-leaseback of certain property that
would generate taxable income in future years.
OTHER
In December 1999, the SEC issued SAB 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal year 2000.
Management is evaluating the effect that adoption of SAB 101 will have on the
Company's financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. These forward-looking statements involve risks and
uncertainties, which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. The following are some
of the important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements: (1)
government actions or initiatives, including (a) attempts to limit or otherwise
regulate the sale of adult-oriented materials, including print, video and online
materials or businesses such as casino gaming, (b) regulation of the
advertisement of tobacco products, or (c) substantive changes in postal
regulations or rates; (2) increases in paper prices; (3) changes in distribution
technology and/or unforeseen delays in the implementation of that technology by
the cable and satellite industries, which might affect the Company's plans and
assumptions regarding carriage of its program services; (4) increased
competition for transponders and channel space and any decline in the Company's
access to, and acceptance by, cable and DTH systems; (5) increased competition
for advertisers from other publications and media or any significant decrease in
spending by advertisers, either generally or with respect to the adult male
market; (6) effects of the consolidation taking place nationally in the
single-copy magazine distribution system; (7) marketing issues facing direct
marketing stamp sheet agents; (8) new competition in the cable and DTH markets;
(9) uncertainty of market acceptance of the Internet as a medium for
information, entertainment, e-commerce and advertising, an increasingly
competitive environment for advertising sales, the impact of competition from
other content and merchandise providers, as well as the Company's reliance on
third parties for technology and distribution for its online business; and (10)
potential adverse effects of unresolved Year 2000 problems, including those that
may be experienced by key suppliers.
17
LEGAL PROCEEDINGS
In February 1996, the Telecommunications Act was enacted. Certain
provisions of the Telecommunications Act are directed exclusively at cable
programming in general and adult cable programming in particular. In some cable
systems, audio or momentary bits of video of premium or pay-per-view channels
may accidentally become available to nonsubscribing cable customers. This is
called "bleeding." The practical effect of Section 505 is to require many
existing cable systems to employ additional blocking technology in every
household in every cable system that offers adult programming to prevent any
possibility of bleeding, or to restrict the period during which adult
programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation
of the Telecommunications Act are significant and include fines and
imprisonment.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the Delaware District Court challenging Section 505 on constitutional
grounds. The suit names as defendants The United States of America, The United
States Department of Justice, Attorney General Janet Reno and the Federal
Communications Commission. On March 7, 1996, the Company was granted a Temporary
Restraining Order ("TRO") staying the implementation and enforcement of Section
505. In granting the TRO, the Delaware District Court found that the Company had
demonstrated it was likely to succeed on the merits of its claim that Section
505 is unconstitutional. On November 8, 1996, eight months after the TRO was
granted, a three-judge panel in the Delaware District Court denied the Company's
request for a preliminary injunction against enforcement of Section 505 and, in
so denying, found that the Company was not likely to succeed on the merits of
its claim. The Company appealed the Delaware District Court's decision to the
Supreme Court and enforcement of Section 505 was stayed pending that appeal. On
March 24, 1997, without opinion, the Supreme Court summarily affirmed the
Delaware District Court's denial of the Company's request for a preliminary
injunction. Enforcement of Section 505 commenced May 18, 1997. On July 22, 1997,
the Company filed a motion for summary judgment on the ground that Section 505
is unconstitutionally vague based on a Supreme Court decision on June 26, 1997
that certain provisions of the Telecommunications Act regulating speech on the
Internet were invalid for numerous reasons, including vagueness. On October 31,
1997, the Delaware District Court denied the motion on the grounds that further
discovery in the case was necessary to assist it in resolving the issues posed
in the motion.
The Company's full case on the merits was heard by the Delaware District
Court in March 1998. On December 28, 1998, the Delaware District Court
unanimously declared Section 505 unconstitutional. The defendants appealed this
judgment and the Supreme Court heard the appeal on November 30, 1999. On May 22,
2000, the Supreme Court upheld the Company's position and the Delaware District
Court's ruling that Section 505 was unconstitutional.
18
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 10, 2000. At
the meeting, the following director nominees were elected:
Nominee Votes For Withheld
- ------- --------- --------
Dennis S. Bookshester .................... 4,428,208 14,765
David I. Chemerow ........................ 4,428,973 14,000
Donald G. Drapkin ........................ 4,428,972 14,001
Christie A. Hefner ....................... 4,427,623 15,350
Sol Rosenthal ............................ 4,427,973 15,000
Richard S. Rosenzweig .................... 4,427,223 15,750
Sir Brian Wolfson ........................ 4,427,208 15,765
Also at the meeting, the shareholders approved, with voting as set forth
below, ratification of PricewaterhouseCoopers LLP as independent auditors
("Auditors"):
Votes Votes Votes
Matter For Against Withheld Non-Vote
- ------ --- ------- -------- --------
Auditors.............................. 4,441,109 1,697 167 N/A
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.1 Third Amendment to February 26, 1999 Credit Agreement dated as
of June 9, 2000
27 Financial Data Schedule
- ----------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
(Registrant)
Date August 8, 2000 By /s/ Linda Havard
---------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
20