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 September 30, 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)
(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 October 31, 2001, there were 4,864,102 shares of Class A common
stock, par value $0.01 per share, and 19,645,906 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 September 30, 2001
and 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Nine Months Ended September 30,
2001 and 2000 (Unaudited) 4
Condensed Consolidated Balance Sheets at September 30, 2001
(Unaudited) and December 31, 2000 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2001 2000
- ---------------------------------------------------------------------------------------------
Net revenues $ 74,115 $ 77,890
- ---------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (58,661) (66,047)
Selling and administrative expenses (13,042) (13,889)
Restructuring expenses (256) --
- ---------------------------------------------------------------------------------------------
Total costs and expenses (71,959) (79,936)
- ---------------------------------------------------------------------------------------------
Operating income (loss) 2,156 (2,046)
- ---------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 81 254
Interest expense (3,972) (2,403)
Equity in operations of Playboy TV International, LLC and other (163) 958
Gain (loss) on disposals 390 (2,700)
Playboy.com registration statement expenses -- (1,524)
Legal settlement -- (622)
Other, net (580) (270)
- ---------------------------------------------------------------------------------------------
Total nonoperating expense (4,244) (6,307)
- ---------------------------------------------------------------------------------------------
Loss before income taxes (2,088) (8,353)
Income tax benefit -- 1,847
- ---------------------------------------------------------------------------------------------
Net loss (2,088) (6,506)
- ---------------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized loss on marketable securities (481) (28)
Derivative loss (1,138) --
Foreign currency translation adjustment (3) 3
- ---------------------------------------------------------------------------------------------
Total other comprehensive loss (1,622) (25)
- ---------------------------------------------------------------------------------------------
Comprehensive loss $ (3,710) $ (6,531)
=============================================================================================
Basic and diluted weighted average number
of common shares outstanding 24,502 24,258
=============================================================================================
Basic and diluted net loss per common share $ (0.09) $ (0.27)
=============================================================================================
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 Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2001 2000
- -------------------------------------------------------------------------------------------
Net revenues $ 213,253 $ 228,175
- -------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (181,228) (201,996)
Selling and administrative expenses (39,239) (40,090)
Restructuring expenses (256) (257)
- -------------------------------------------------------------------------------------------
Total costs and expenses (220,723) (242,343)
- -------------------------------------------------------------------------------------------
Operating loss (7,470) (14,168)
- -------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 701 943
Interest expense (9,342) (6,522)
Equity in operations of Playboy TV International, LLC and other 258 150
Gain (loss) on disposals 290 (2,700)
Playboy.com registration statement expenses -- (1,524)
Legal settlement -- (622)
Other, net (1,417) (905)
- -------------------------------------------------------------------------------------------
Total nonoperating expense (9,510) (11,180)
- -------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect
of change in accounting principle (16,980) (25,348)
Income tax benefit (expense) (654) 6,724
- -------------------------------------------------------------------------------------------
Loss before cumulative effect of change
in accounting principle (17,634) (18,624)
Cumulative effect of change in
accounting principle (4,218) --
- -------------------------------------------------------------------------------------------
Net loss (21,852) (18,624)
- -------------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Unrealized loss on marketable securities (624) (2)
Derivative loss (1,235) --
Foreign currency translation adjustment 61 (9)
- -------------------------------------------------------------------------------------------
Total other comprehensive loss (1,798) (11)
- -------------------------------------------------------------------------------------------
Comprehensive loss $ (23,650) $ (18,635)
===========================================================================================
Basic and diluted weighted average number
of common shares outstanding 24,375 24,233
===========================================================================================
Basic and diluted loss per common share
Loss before cumulative effect of change
in accounting principle $ (0.73) $ (0.77)
Cumulative effect of change in
accounting principle (0.17) --
- -------------------------------------------------------------------------------------------
Net loss $ (0.90) $ (0.77)
===========================================================================================
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)
Sept. 30, Dec. 31,
2001 2000
- ---------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 5,387 $ 2,534
Marketable securities 2,853 3,443
Receivables, net of allowance for doubtful accounts of
$8,495 and $5,994, respectively 40,916 45,075
Receivables from related parties 9,619 7,575
Inventories, net 20,147 20,700
Programming costs -- 51,939
Deferred subscription acquisition costs 12,277 12,514
Other current assets 9,271 11,554
- ---------------------------------------------------------------------------------------------
Total current assets 100,470 155,334
- ---------------------------------------------------------------------------------------------
Receivables from related parties 50,000 57,500
Property and equipment, net 9,704 10,689
Programming costs 57,402 3,515
Goodwill, net of amortization of $6,669 and $4,761, respectively 135,509 87,260
Trademarks, net of amortization of $17,044 and $14,701, respectively 51,616 52,585
Other noncurrent assets 32,319 21,605
- ---------------------------------------------------------------------------------------------
Total assets $ 437,020 $ 388,488
=============================================================================================
Liabilities
Financing obligations $ 4,885 $ 3,922
Financing obligations to related parties 15,000 5,000
Accounts payable 18,545 25,295
Accounts payable to related parties 1,265 718
Accrued salaries, wages and employee benefits 2,500 8,915
Deferred revenues 48,669 41,898
Deferred revenues from related parties 8,497 4,397
Acquisition liability 20,544 --
Other liabilities and accrued expenses 19,021 16,861
- ---------------------------------------------------------------------------------------------
Total current liabilities 138,926 107,006
- ---------------------------------------------------------------------------------------------
Financing obligations 83,734 89,328
Financing obligations to related parties -- 5,000
Deferred revenues from related parties 44,775 50,875
Net deferred tax liabilities 4,679 4,679
Acquisition liability 44,204 --
Other noncurrent liabilities 27,868 17,415
- ---------------------------------------------------------------------------------------------
Total liabilities 344,186 274,303
- ---------------------------------------------------------------------------------------------
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; 19,881,308
and 19,647,048 issued, respectively 199 196
Capital in excess of par value 122,547 120,519
Accumulated deficit (25,236) (3,384)
Unearned compensation restricted stock (2,689) (2,713)
Accumulated other comprehensive loss (2,036) (482)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 92,834 114,185
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 437,020 $ 388,488
=============================================================================================
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 Nine Months Ended September 30 (Unaudited)
(In thousands)
2001 2000
- -------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $(21,852) $(18,624)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation of property and equipment 2,940 2,600
Amortization of intangible assets 6,561 5,970
Equity in operations of Playboy TV International, LLC and other (258) (150)
(Gain) loss on disposals (290) 2,700
Cumulative effect of change in accounting principle 4,218 --
Amortization of investments in entertainment programming 28,046 24,626
Investments in entertainment programming (27,760) (24,638)
Net change in operating assets and liabilities (119) (14,414)
Other, net (872) 641
- -------------------------------------------------------------------------------------------
Net cash used for operating activities (9,386) (21,289)
- -------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals 1,602 887
Additions to property and equipment (2,120) (4,726)
Acquisition of Califa Entertainment Group, Inc. and V.O.D., Inc. (501) --
Acquisition of Rouze Media, Inc. -- (1,152)
Funding of equity interests (1,747) (1,740)
Purchase of marketable securities (34) (538)
Other, net 3 --
- -------------------------------------------------------------------------------------------
Net cash used for investing activities (2,797) (7,269)
- -------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com, Inc. Series A Preferred Stock 13,305 --
Proceeds from financing obligations 5,000 5,000
Repayment of financing obligations (2,881) (15,000)
Net proceeds from (payments on) revolving credit facility (1,750) 16,500
Deferred financing fees (391) (590)
Proceeds from stock plans 1,960 1,312
Other, net (207) --
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,036 7,222
- -------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,853 (21,336)
Cash and cash equivalents at beginning of period 2,534 23,528
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 5,387 $ 2,192
===========================================================================================
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, 2000 of Playboy Enterprises, Inc. and its
subsidiaries (the "Company"). Certain amounts reported for prior periods have
been reclassified to conform to the current year's presentation.
(B) ACQUISITIONS
On July 6, 2001, the Company completed its acquisition of three networks:
The Hot Network and The Hot Zone together with the related television assets of
Califa Entertainment Group, Inc. ("Califa") and Vivid TV and the related
television assets of V.O.D., Inc. ("VODI"). The Company's ownership of VODI is
currently reflected through a management services agreement pending the
resolution of certain contingencies. The Company is combining these television
networks into its Spice-branded television networks portfolio, enabling the
Company to offer a wider range of adult programming. The Company is accounting
for the acquisitions of Califa and VODI 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 Condensed Consolidated Statements of Operations
and Comprehensive Loss. In connection with the acquisitions and preliminary
purchase price allocations, goodwill of approximately $50 million has been
recorded.
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
non-compete 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 approximately $70 million of the scheduled
payments in cash or Class B common stock. The Company is scheduled to make the
base payments and any performance-based payments as follows (in thousands):
Year Ended December 31
- --------------------------------------------------------------------------------
2001 $ 17,000
2002 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
===============================================================================
7
The following unaudited pro forma information presents a summary of the
results of operations of the Company assuming the acquisitions occurred on
January 1, 2000 (in thousands, except per share amounts):
Nine Months Ended
September 30,
-----------------------
2001 2000
- ----------------------------------------------------------------------------------------
Net revenues $ 220,269 $ 239,348
Loss before cumulative effect of change in accounting principle (18,900) (19,476)
Net loss (23,118) (19,629)
Basic and diluted loss per common share
Loss before cumulative effect of change in accounting principle (0.74) (0.76)
Net loss $ (0.90) $ (0.77)
- ---------------------------------------------------------------------------------------
The basic and diluted earnings per common share calculations reflect the
presumed increase in outstanding shares of Class B common stock to be issued in
the fourth quarter of 2001 as part of the consideration to be paid to the owners
of Califa and VODI. The shares to be issued are assumed to be 1,278,000 based on
a recent Class B share price of $12.52, with a total value of $16.0 million.
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. For historical financial information regarding
Califa and VODI, as well as more detailed pro forma information, refer to the
Company's Form 8-K/A filed on September 19, 2001.
The allocation of the purchase price reflected in the Company's September
30, 2001 Condensed Consolidated Financial Statements is preliminary. The final
purchase price allocation, which will be based in part on an independent
valuation of the intangible assets of Califa and VODI, may result in adjustments
to the acquired assets and liabilities and to operating results. The purchase
price has been recorded at its net present value and is reported in the
Condensed Consolidated Balance Sheet as current and noncurrent "Acquisition
liability".
(C) RESTRUCTURING EXPENSES
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. This resulted in a $0.2 million restructuring charge
related to the termination of eight employees in the first quarter of 2000. All
charges related to this restructuring were recorded and paid by December 31,
2000.
In the fourth quarter of 2000, realignment of senior management, coupled
with staff reductions, led to an additional restructuring charge of $3.7 million
related to the termination of 19 employees, or approximately 3% of the work
force. A total of $3.6 million related to this restructuring was paid by
September 30, 2001, with the remainder to be paid through 2003.
In the third quarter of 2001, the Company began a restructuring plan in
light of current economic conditions. The plan includes a reduction in work
force and vacating portions of certain office facilities by combining operations
for greater efficiency, refocusing sales and marketing, outsourcing some
operations and reducing overhead expenses. This resulted in a work force
reduction of 106 employees, or approximately 15%, through Company-wide layoffs
and attrition, approximately half of whom were in the Playboy Online Group. In
the third quarter of 2001, 15 employees were notified of their termination,
which led to a restructuring charge of $0.3 million. Of this, $0.1 million was
paid by September 30, 2001, with most of the remainder to be paid in 2002. The
remaining 74 employees were notified of their termination in the fourth quarter
of 2001, and the Company expects to record an additional $2.0 million to $2.5
million charge in that quarter. Of this, approximately $1.3 million will be paid
by December 31, 2001, with most of the remainder to be paid in 2002.
Additionally, 17 positions were eliminated through attrition. The Company is
also finalizing plans to eliminate excess leased space in its New York and
Chicago offices, and expects to record a related charge in the fourth quarter of
2001.
8
(D) GAIN (LOSS) ON DISPOSALS
In July 2001, the Company sold a majority of its interest in VIPress
Poland Sp. z o.o. ("VIPress"), publisher of the Polish edition of Playboy
magazine, to their local management. In connection with the sale, the Company
recorded a nonoperating gain of $0.4 million in the third quarter of 2001. 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 has been accounted for under the equity method
and, as such, the Company's proportionate share of net income (loss) from
VIPress has been included in nonoperating results.
In 2000, the Company completed the sale of its Critics' Choice Video
catalog and related Internet business and fulfillment and customer service
operations. In connection with the sale, the Company recorded a nonoperating
loss of $2.9 million in 2000 ($2.7 million through the first nine months), and
recorded an additional $0.1 million nonoperating loss in 2001. The Company
recorded a related deferred tax benefit of $0.4 million in 2000, which was
offset by an increase in the valuation allowance.
(E) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 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
Statement of Position 00-2, Accounting by Producers or Distributors of Films
("SOP 00-2"). 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, one-time charge of $4.2
million, or $0.17 per basic and diluted common share, in the first quarter of
2001, representing a cumulative effect of change in accounting principle. 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.
(F) OTHER COMPREHENSIVE INCOME (LOSS)
The following sets forth the components of other comprehensive income (loss),
and any related income tax effect allocated to each item (in thousands):
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Unrealized loss on marketable securities (1) $ (481) $ (28) $ (624) $ (2)
Derivative loss (1,138) -- (1,235) --
Foreign currency translation adjustment (2) $ (3) $ 3 $ 61 $ (9)
- ----------------------------------------------------------------------------------------------
(1) Net of a related tax benefit of $16 and $1 for the quarter and nine months
ended September 30, 2000, respectively.
(2) Net of related tax expense of $1 and a benefit of $5 for the quarter and
nine months ended September 30, 2000, respectively. For the quarter and
nine months ended September 30, 2001, $244 of accumulated other
comprehensive loss was reclassified to earnings related to the sale of
VIPress.
(G) DERIVATIVE 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. 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, cash flow hedge or a hedge of a net investment in a foreign operation.
9
The Company has derivative instruments that have been designated and
qualify as cash flow hedges, which are entered into in order to hedge forecasted
transactions or the variability of cash flows to be paid related to a recognized
liability. 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.
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 other comprehensive income
(loss) and is reclassified into earnings when the hedged transactions occur.
Upon adoption of Statement 133 in 2001, a $0.1 million cumulative effect of
change in accounting principle was recorded as other comprehensive income.
The Company had unrealized losses totaling $1.2 million for the nine
months ended September 30, 2001, which represents the effective portion of
changes in fair value of the cash flow hedges of $1.1 million and $0.1 million
reclassified from other comprehensive income to the Condensed Consolidated
Statements of Operations. The Company does not expect the amount reclassified
from accumulated other comprehensive loss to earnings within the next 12 months
to be material. For the nine-month period, there was no amount included in
earnings related to hedging ineffectiveness.
(H) LOSS PER COMMON SHARE
For the quarter and nine months ended September 30, 2001, options to
purchase approximately 2,150,000 and 2,280,000 shares, respectively, of the
Company's Class B common stock and approximately 240,000 shares of Class B
restricted stock awards were outstanding but were not included in the
computation of diluted earnings per common share as 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 nine-month
period were equivalent.
(I) INVENTORIES, NET
Inventories, net, which are stated at the lower of cost (specific cost and
average cost) or fair value, consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
- --------------------------------------------------------------------------------
Paper $ 5,966 $ 6,432
Editorial and other prepublication costs 6,865 6,987
Merchandise finished goods 7,316 7,281
- --------------------------------------------------------------------------------
Total inventories, net $20,147 $20,700
================================================================================
(J) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,540 8,512
Furniture and equipment 15,517 15,420
Leasehold improvements 9,984 9,950
Software 4,724 3,232
- -------------------------------------------------------------------------------
Total property and equipment 39,057 37,406
Accumulated depreciation (29,353) (26,717)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 9,704 $ 10,689
===============================================================================
10
(K) SEGMENT INFORMATION
The following tables represent financial information by reportable segment (in
thousands):
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 29,947 $ 28,208 $ 80,660 $ 76,725
Publishing 32,616 33,455 95,952 97,391
Playboy Online 6,754 6,556 19,821 18,757
Catalog 2,658 7,862 8,435 28,111
Other Businesses 2,140 1,809 8,385 7,191
- -------------------------------------------------------------------------------------------------------------------
Total $ 74,115 $ 77,890 $ 213,253 $ 228,175
===================================================================================================================
Loss before income taxes and cumulative effect
of change in accounting principle
Entertainment $ 9,967 $ 9,077 $ 20,257 $ 18,486
Publishing 877 1,200 346 2,251
Playboy Online (5,097) (6,188) (16,564) (17,957)
Catalog 5 71 (161) (298)
Other Businesses 618 42 1,721 538
Corporate Administration and Promotion (3,958) (6,248) (12,813) (16,931)
Restructuring expenses (256) -- (256) (257)
Investment income 81 254 701 943
Interest expense (3,972) (2,403) (9,342) (6,522)
Equity in operations of Playboy TV
International, LLC and other (163) 958 258 150
Gain (loss) on disposals 390 (2,700) 290 (2,700)
Playboy.com registration statement expenses -- (1,524) -- (1,524)
Legal settlement -- (622) -- (622)
Other, net (580) (270) (1,417) (905)
- -------------------------------------------------------------------------------------------------------------------
Total $ (2,088) $ (8,353) $ (16,980) $ (25,348)
===================================================================================================================
EBITDA (1)
Entertainment $ 20,463 $ 18,768 $ 52,944 $ 47,422
Publishing 1,030 1,382 842 2,725
Playboy Online (4,616) (5,694) (15,196) (16,790)
Catalog 12 122 (141) (160)
Other Businesses 670 95 1,880 685
Corporate Administration and Promotion (2,899) (9,982) (9,761) (18,778)
Restructuring expenses (256) -- (256) (257)
- -------------------------------------------------------------------------------------------------------------------
Total $ 14,404 $ 4,691 $ 30,312 $ 14,847
===================================================================================================================
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets
Entertainment (2) $ 323,426 $ 267,142
Publishing 49,267 56,191
Playboy Online 6,486 7,675
Catalog 4,342 3,797
Other Businesses 4,968 5,003
Corporate Administration and Promotion 48,531 48,680
- -------------------------------------------------------------------------------------------------------------------
Total (2) $ 437,020 $ 388,488
===================================================================================================================
(1) EBITDA represents earnings 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 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 increase in identifiable assets since December 31, 2000 was primarily
due to the Califa and VODI acquisitions in July 2001.
11
(L) FINANCING OBLIGATIONS
At September 30, 2001, the Company's credit facility totaled $107.1
million, comprised of $72.1 million of term loans and a $35.0 million revolving
credit facility. At September 30, 2001, $16.5 million was outstanding under the
revolver. The weighted average interest rate as of September 30, 2001 was 7.69%
for the term loans and 7.14% for the revolver. The credit agreement contains
financial covenants requiring the Company to maintain certain leverage, interest
coverage and fixed charge coverage ratios. During the quarter ended June 30,
2001, the Company and its lenders amended the credit agreement, which approved
the terms of the acquisition of television networks from Califa and VODI,
revised the financial covenant levels and increased the interest rate margin by
0.25%. See Note (B) Acquisitions.
Playboy.com, Inc. ("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 30, 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 common stock or any
combination thereof at its option.
In September 2001, Hugh M. Hefner made a $5.0 million loan to Playboy.com.
The loan bears interest at an annual rate of 8.00%, with principal and
accumulated interest due in July 2002.
(M) 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, the "Statements"),
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 the
Statements. Other intangible assets will continue to be amortized over their
useful lives. In compliance with the Statements, goodwill recorded in connection
with the acquisitions of Califa and VODI on July 6, 2001 is not being amortized.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. For 2001, the
amortization of goodwill and intangible assets is expected to be approximately
$8 million. The Company is evaluating the impact that application of the
nonamortization provisions of the Statements will have on the Company's
financial statements. The Company will perform the first of the required
impairment tests of goodwill and indefinite-lived intangible assets as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the financial statements of the Company.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a summary of the Company's results of operations (in millions,
except per share amounts):
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2001 2000 2001 2000
- ------------------------------------------------------------------------------------------
Net revenues $ 74.1 $ 77.9 $ 213.3 $ 228.2
==========================================================================================
Segment income (loss) $ 2.5 $ (2.0) $ (7.2) $ (14.0)
Restructuring expenses (0.3) -- (0.3) (0.2)
- ------------------------------------------------------------------------------------------
Operating income (loss) $ 2.2 $ (2.0) $ (7.5) $ (14.2)
==========================================================================================
Net loss $ (2.1) $ (6.5) $ (21.9) $ (18.6)
==========================================================================================
Basic and diluted net loss per common share $ (0.09) $ (0.27) $ (0.90) $ (0.77)
==========================================================================================
The Company's revenues decreased 5% to $74.1 million for the quarter
ended September 30, 2001 compared to the prior year quarter. Revenues for the
nine-month period decreased 7% to $213.3 million. These decreases were primarily
due to the sale of the Critics' Choice Video businesses in October 2000.
For the quarter, operating performance improved $4.2 million, primarily
due to lower Corporate Administration and Promotion expenses combined with
better performance from the Playboy Online and Entertainment Groups. For the
nine-month period, the improvement in operating performance of $6.7 million was
primarily due to lower Corporate Administration and Promotion expenses combined
with better performance from the Entertainment, Playboy Online and Other
Businesses Groups.
The net losses for the current year periods reflected higher interest
expense largely due to imputed noncash interest related to the deferred payment
of the purchase price for the acquisitions of Califa and VODI. The current year
nine-month period also included a noncash, one-time charge for a cumulative
effect of change in accounting principle related to the adoption of SOP 00-2,
Accounting by Producers or Distributors of Films. Both of the prior year periods
included income tax benefits which were not recorded in the current year periods
principally due to the Company's decision to increase the valuation allowance
for its deferred tax assets at the end of 2000. Additionally, the prior year
periods both included an estimated loss related to the sale of Critics' Choice
Video and a charge incurred in connection with a Playboy.com registration
statement that was subsequently withdrawn.
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 year-end 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.
13
ENTERTAINMENT GROUP
The Entertainment Group's results were as follows (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Revenues
Domestic TV networks $ 23.1 $ 18.6 $ 60.2 $ 57.4
International TV 6.1 7.5 12.9 12.7
Worldwide home video 0.5 1.8 7.3 5.9
Movies and other 0.2 0.3 0.3 0.7
- -------------------------------------------------------------------------------
Total revenues $ 29.9 $ 28.2 $ 80.7 $ 76.7
===============================================================================
Segment income
Before programming expense $ 18.8 $ 17.3 $ 48.3 $ 43.1
Programming expense (8.8) (8.2) (28.0) (24.6)
- -------------------------------------------------------------------------------
Total segment income $ 10.0 $ 9.1 $ 20.3 $ 18.5
===============================================================================
The following discussion focuses on the profit contribution of each
business before programming expense.
Domestic TV Networks
On July 6, 2001, the Company acquired two networks together with the
related television assets of Califa, as well as a third network and the related
television assets of VODI, a separate entity owned by Califa's principals. The
Company is combining these television networks into its Spice-branded television
networks portfolio, enabling the Company to offer a wider range of adult
programming.
For the quarter and nine-month period, profit contribution for the
domestic TV networks business increased $3.4 million and $4.0 million,
respectively, on revenue increases of $4.5 million, or 24%, and $2.8 million, or
5%, respectively. These increases were primarily attributable to the acquisition
of the three networks described above, combined with higher Playboy TV revenues.
Revenues from all of the Company's networks were unfavorably impacted by the
events of September 11, 2001, but have rebounded in the fourth quarter of 2001.
The Company's networks were available to the following approximate household
units (in millions):
Sept. 30, Dec. 31, Sept. 30,
2001 2000 2000
- --------------------------------------------------------------------------------
Playboy TV (1):
Cable analog addressable 8.8 11.0 11.9
Cable digital 7.6 3.2 2.6
DTH 17.1 15.4 14.2
Spice (1) (2):
Cable analog addressable 18.4 16.2 18.2
Cable digital 18.5 8.4 7.2
DTH 33.2 -- --
- --------------------------------------------------------------------------------
(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 three additional networks acquired in July 2001.
International TV
Both revenues and profit contribution from the international TV business
decreased $1.4 million for the quarter, due to the timing of library license
fees from PTVI, partially offset by higher programming output payments from
PTVI. Profit contribution increased $0.1 million on a $0.2 million increase in
revenues for the nine-month period, as lower library license fees were more than
offset by higher programming output payments.
14
Worldwide Home Video
Revenues and profit contribution from the worldwide home video business
for the quarter decreased $1.3 million, or 71%, and $0.2 million, respectively,
largely due to the absence of a domestic home video distributor in the current
year 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. Profit contribution increased $1.9 million on a revenue increase of $1.4
million, or 23%, for the nine-month period. These increases were primarily due
to domestic revenues recorded in the current year in accordance with SOP 00-2,
Accounting by Producers or Distributors of Films. These revenues were related to
guarantees from a backlist distribution agreement that were recorded in prior
year periods. 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 the current year. The nine-month comparison also reflected higher
international sales of The Eros Collection movies through a one-time
multi-territory deal in the current year and lower domestic revenues as a result
of the expiration of the distribution contract.
Movies and Other
Both revenues and profit contribution from movies and other businesses
decreased $0.1 million for the quarter. Profit contribution decreased $0.3
million on a $0.4 million, or 52%, decrease in revenues for the nine-month
period. The Entertainment Group's administrative expenses increased $0.3 million
for the quarter and $0.4 million for the nine-month period.
Programming Expense
Programming amortization expense increased $0.6 million for the quarter
primarily due to an increase in amortization for domestic TV networks, partially
offset by a decrease in worldwide home video amortization. Programming
amortization expense increased $3.4 million for the nine-month period, primarily
due to higher amortization for domestic TV networks and international TV.
PUBLISHING GROUP
The Publishing Group's results were as follows (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Revenues
Playboy magazine $ 25.6 $ 26.0 $ 75.5 $ 76.6
Other domestic publishing 4.6 4.5 12.0 12.1
International publishing 2.4 3.0 8.5 8.7
- --------------------------------------------------------------------------------
Total revenues $ 32.6 $ 33.5 $ 96.0 $ 97.4
================================================================================
Segment income $ 0.9 $ 1.2 $ 0.3 $ 2.3
================================================================================
Playboy magazine revenues decreased $0.4 million, or 2%, for the quarter
and $1.1 million, or 2%, for the nine-month period, principally due to
unfavorable variances in newsstand sales adjustments for prior period issues
combined with fewer U.S. and Canadian newsstand copies sold in the current year
periods. Lower revenues from the rental of the magazine's subscriber list also
contributed to the decrease for the nine-month period. Advertising revenues for
both the quarter and nine-month period remained relatively flat compared to the
prior year periods. Advertising sales for the fourth quarter magazine issues are
closed and the Company expects to report 13% lower ad revenues and 22% fewer ad
pages compared to the quarter ended December 31, 2000, resulting in expected 4%
and 9% decreases in ad revenues and ad pages, respectively, for 2001 compared to
2000. This is largely the result of industry-wide softness.
Other domestic publishing revenues remained relatively flat for both the
quarter and nine-month period.
15
International publishing revenues decreased $0.6 million, or 18%, for the
quarter primarily due to the Company's sale in July 2001 of a majority of its
Polish publishing joint venture to their local management. As a result, the
joint venture's results are no longer consolidated. Revenues decreased $0.2
million, or 2%, for the nine-month period primarily due to lower royalties from
the Brazilian edition as a result of weak economic conditions in that country.
Publishing Group segment income for the quarter and nine-month period
decreased $0.3 million and $2.0 million, respectively, compared to the prior
year periods primarily due to lower Playboy magazine subscription and newsstand
profitability, partially offset by higher Playboy magazine advertising
profitability. Lower international publishing royalties also negatively affected
the nine-month comparison.
PLAYBOY ONLINE GROUP
The Playboy Online Group's results were as follows (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Revenues $ 6.8 $ 6.6 $ 19.8 $ 18.8
===============================================================================
Segment loss $ (5.1) $ (6.2) $ (16.6) $ (18.0)
===============================================================================
Playboy Online Group revenues increased $0.2 million, or 3%, for the
quarter. The group's revenues increased $1.0 million, or 6%, for the nine-month
period. Higher subscription and international revenues, the latter as a result
of licensing fees generated by the Company's new German and Korean joint
ventures, drove the increases. E-commerce revenues decreased for the quarter,
primarily due to the sale of CCVideo.com in October 2000, and increased for the
nine-month period. Weaker advertising and sponsorship revenues, an ongoing
industry-wide trend, also affected both comparisons. The segment loss decreased
$1.1 million for the quarter and $1.4 million for the nine-month period, in
spite of higher administrative expenses. These were due to trademark, content
and administrative fees to the parent company, most of which were charged to
Playboy.com beginning in the fourth quarter of 2000. The Company is taking
actions to achieve profitability for the group in 2002 by increasing efforts to
convert visitors to purchasers and reducing expenses. The Company expects the
restructuring and cost-saving initiatives to favorably impact the financial
performance of the Playboy Online Group.
CATALOG GROUP
The Catalog Group's results were as follows (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2001 2000 2001 2000
- -------------------------------------------------------------------------------
Revenues $ 2.7 $ 7.9 $ 8.4 $ 28.1
===============================================================================
Segment income (loss) $ -- $ 0.1 $ (0.2) $ (0.3)
===============================================================================
Revenues decreased $5.2 million, or 66%, for the quarter and $19.7
million, or 70%, for the nine-month period. Segment performance remained
relatively flat compared to the prior year periods. These changes were the
result of management's decision to divest this non-branded, non-core business.
In October 2000, the Company completed the sale of its Critics' Choice Video
businesses and related fulfillment and customer service operations to Infinity
Resources, Inc.
The Company expects to effect a sale of its Collectors' Choice Music
catalog and related Internet business, at which time the Company's presence in
the non-branded print catalog business will end.
16
OTHER BUSINESSES GROUP
The Other Businesses Group's results were as follows (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Revenues $ 2.1 $ 1.8 $ 8.4 $ 7.2
================================================================================
Segment income $ 0.6 $ -- $ 1.7 $ 0.5
================================================================================
Segment income from the Other Businesses Group for the quarter and
nine-month period increased $0.6 million and $1.2 million, respectively, on
revenue increases of $0.3 million, or 18%, and $1.2 million, or 17%,
respectively. Lower business development expenses related to casino gaming
opportunities, combined with growth in the Company's domestic licensed branded
products business, were responsible for the increased performance.
The Company has found that the greatest interest in the marketplace for
Playboy-branded casinos and entertainment centers will be from licensing and
marketing opportunities, as opposed to equity management deals. Therefore, as
part of its restructuring, the Company has combined the operations of casino
gaming into product marketing.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses of $4.0 million decreased
$2.3 million, or 37%, for the quarter. Expenses of $12.8 million decreased $4.1
million, or 24%, for the nine-month period. These decreases reflect a reduction
of expenses related to the trademark, content and administrative fees from the
Playboy Online Group, combined with lower technology expenses. Lower marketing
expenses also favorably impacted the quarter.
RESTRUCTURING EXPENSES
In the third quarter of 2001, the Company began a restructuring plan in
light of current economic conditions. The plan includes a reduction in work
force and 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. A $0.3 million restructuring charge was recorded in the third quarter of
2001 related to the termination of 15 employees. In the fourth quarter of 2001,
the Company expects to record an additional $2.0 million to $2.5 million charge
related to the termination of an additional 74 employees. Additionally, 17
positions were eliminated through attrition. The Company is also finalizing
plans to eliminate excess leased space in its New York and Chicago offices, and
expects to record a related charge in the fourth quarter of 2001.
For the nine months ended September 30, 2000, a $0.2 million restructuring
charge was recorded in the first quarter related to the termination of eight
employees.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had $5.4 million in cash and cash
equivalents and $103.6 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 September 30,
2001 and December 31, 2000 included $15.0 million and $10.0 million,
respectively, in loans made directly to Playboy.com that are non-recourse to the
parent company. The Company plans to finance its working capital and capital
expenditure requirements primarily from cash generated from operations, short-
and long-term borrowings and sales of equity. The Company's current liquidity
requirements are being provided by a $107.1 million credit facility, comprised
of $72.1 million of term loans and a $35.0 million revolving credit facility. At
September 30, 2001, $16.5 million was outstanding under the revolver. The
weighted average interest rate as of September 30, 2001 was 7.69% for the term
loans and 7.14% for the revolver.
The credit agreement contains financial covenants requiring the Company to
maintain certain leverage, interest coverage and fixed charge coverage ratios.
During the quarter ended June 30, 2001, the Company and its lenders amended the
credit agreement, which approved the terms of the acquisition of television
networks from Califa and VODI, revised the financial covenant levels and
increased the interest rate margin by 0.25%.
17
The nominal consideration for Califa's assets previously discussed was
$28.3 million. The Company also assumed the obligations of Califa related to a
note payable and non-compete 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 approximately $70
million of the scheduled payments in cash or Class B common stock.
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 30, 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 common stock or any combination
thereof at its option.
In September 2001, Hugh M. Hefner made a $5.0 million loan to Playboy.com.
The loan bears interest at an annual rate of 8.00%, with principal and
accumulated interest due in July 2002.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $9.4 million for the nine
months ended September 30, 2001, due primarily to $27.8 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.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $2.8 million for the nine-month
period primarily due to $2.1 million of additions to property and equipment and
$1.7 million in funding of its equity interests in international TV ventures.
The Califa and VODI acquisitions resulted in net cash paid of $0.5 million in
the current year. Partially offsetting the above was $1.6 million of proceeds
from disposals, largely related to the sale of VIPress.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $15.0 million for the
nine-month period primarily due to $13.3 million of net proceeds from the sale
of Playboy.com's Series A Preferred Stock. Playboy.com also received the $5.0
million loan from Hugh M. Hefner.
OTHER
In June 2001, the FASB issued the Statements, 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 the Statements. Other intangible assets will
continue to be amortized over their useful lives. In compliance with the
Statements, goodwill recorded in connection with the acquisitions of Califa and
VODI on July 6, 2001 is not being amortized.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. For 2001, the
amortization of goodwill and intangible assets is expected to be approximately
$8 million. The Company is evaluating the impact that application of the
nonamortization provisions of the Statements will have on the Company's
financial statements. The Company will perform the first of the required
impairment tests of goodwill and indefinite-lived intangible assets as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the financial statements of the Company.
18
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 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 three networks
that the Company recently acquired and the risks that the Company may not
realize the expected operating efficiencies, synergies, increased sales
and profits and other benefits from the acquisitions;
(15) increases in paper or printing costs;
(16) effects of the national consolidation of the single-copy magazine
distribution system;
(17) uncertainty of the viability of the Internet gaming, e-commerce,
advertising and subscription businesses; and
(18) 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.
19
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -----------
#2.1 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)
#10.1 Amendment to July 1, 1987 Playboy Magazine Subscription Fulfillment
Agreement between Communications Data Services, Inc. and Playboy
Enterprises International, Inc. dated July 1, 2001
10.2 Promissory note dated September 26, 2001 between Playboy.com, Inc. and
Hugh M. Hefner
10.3 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
- ----------
# Certain information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission
(b) Reports on Form 8-K
On July 23, 2001, the Company filed a Form 8-K relating to its acquisition of
(i) two networks (The Hot Network and The Hot Zone) and the related television
assets of Califa and (ii) a third network (Vivid TV) and the related television
assets of VODI. On September 19, 2001, the Company filed an amendment on Form
8-K/A to update the Form 8-K filed on July 23, 2001 to include applicable
financial statements.
20
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 November 13, 2001 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)
21