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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Class A Common Stock, par value $0.01 per share ............. New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share ............. New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of Class A Common Stock, par value $0.01 per share,
held by nonaffiliates on February 28, 2001 (based upon the closing sale price on
the New York Stock Exchange) was $15,938,762. The aggregate market value of
Class B Common Stock, par value $0.01 per share, held by nonaffiliates on
February 28, 2001 (based upon the closing sale price on the New York Stock
Exchange) was $165,403,220.
As of February 28, 2001, there were 4,859,102 shares of Class A Common Stock,
par value $0.01 per share, and 19,418,234 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- --------- -------------------
Notice of Annual Meeting of Stockholders and Proxy Part III, Items 10-13, to the
Statement (to be filed) relating to the Annual extent described therein
Meeting of Stockholders to be held in May 2001
PLAYBOY ENTERPRISES, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................................................. 3
Item 2. Properties...........................................................12
Item 3. Legal Proceedings....................................................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..............................................................14
Item 6. Selected Financial Data..............................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...........24
Item 8. Financial Statements and Supplementary Data..........................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................50
PART III
Item 10. Directors and Executive Officers of the Registrant...................50
Item 11. Executive Compensation...............................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.......50
Item 13. Certain Relationships and Related Transactions.......................50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....50
2
PART I
Item 1. Business
The term "Company" means Playboy Enterprises, Inc., together with its
subsidiaries and predecessors, unless the context otherwise requires. The
Company was organized in 1953 to publish Playboy magazine. Shortly after its
inception, the Company expanded its operations by engaging in entertainment
businesses that are related to the content and style of Playboy magazine, and
licensing its trademarks for use on various consumer products and services.
The Company's businesses are classified into the following reportable
segments: Entertainment, Publishing, Playboy Online, Catalog and Other
Businesses. Net revenues, income (loss) from continuing operations before income
taxes, EBITDA, depreciation and amortization and identifiable assets of each
reportable segment are set forth in Note (V) Segment Information of Notes to
Consolidated Financial Statements.
The Company's trademarks are vital to the success and future growth of all
of the Company's businesses. The trademarks, which are renewable periodically
and which can be renewed indefinitely, include Playboy, Playmate, Rabbit Head
Design, Spice, Sarah Coventry, Collectors' Choice Music and numerous domain
names related to its online business.
ENTERTAINMENT GROUP
The Entertainment Group operations include the production and marketing of
programming through domestic TV networks, international TV and worldwide home
video markets.
Programming
The Entertainment Group develops, produces and distributes programming for
worldwide TV and home video and DVD markets. Its productions have included
feature films, magazine-format shows, dramatic series, documentaries, live
events, anthologies of sexy short stories and celebrity and Playmate features.
The Company continued to increase the amount and variety of quality programming
by offering new genres, including interactive movies and animation, and by
adding Director's Cut films. Its programming features stylized eroticism in a
variety of entertaining formats for men and women and does not contain scenes
that link sexuality with violence. The Company's programming is designed to be
adapted easily into a number of formats, enabling the Company to spread its
relatively fixed programming costs over multiple product lines. The majority of
the programming that airs on the Spice networks is licensed by the Company from
third parties. In fiscal year 2000, the Company laid the groundwork for future
growth by announcing the expected launch of Spice Platinum networks in fiscal
year 2001.
The Company invests in Playboy-style, original quality programming to
support its expanding businesses. The Company invested $33.1 million, $35.3
million and $25.9 million in entertainment programming in fiscal years 2000,
1999 and 1998, respectively. These amounts, which also include expenditures for
licensed programming, resulted in the production of 192, 172 and 136 hours of
original programming, respectively. At December 31, 2000, the Company's library
of primarily exclusive, Playboy-branded original programming totaled
approximately 1,700 hours. In fiscal year 2001, the Company expects to invest
approximately $42 million in Company-produced and licensed programming, which
could vary based on, among other things, the timing of completion of
productions.
The Company created and markets The Eros Collection, a line of
small-budget, non-Playboy-branded movies. The films air on Playboy TV, are
distributed internationally and are available for rent or sale through home
video retailers, such as Blockbuster Video stores. In addition, these movies
frequently air on the HBO and Showtime networks.
The Company has produced or co-produced a variety of series which air on
the domestic Playboy TV network and are also distributed internationally.
Additionally, some episodes have been released as Playboy Home Video titles
and/or have been licensed to other networks, such as HBO and Showtime. Some of
the series in recent years have included Women: Stories of Passion, Red Shoe
Diaries, which was co-produced with Zalman King Entertainment, Inc., Beverly
Hills Bordello and Passion Cove. In fiscal year 2001, the Company plans to begin
distribution of its newest series, Sexy Urban Legends.
3
Domestic TV Networks
The Company currently operates Playboy and Spice branded domestic TV
networks. On March 15, 1999, the Company completed its acquisition of Spice
Entertainment Companies, Inc. ("Spice"), a leading provider of adult television
entertainment. Playboy TV is offered on cable and through the satellite
direct-to-home ("DTH") market on a pay-per-view and monthly subscription basis.
The Spice networks are offered on cable on a pay-per-view basis. The Company
also recognizes royalty revenues from the license of Playboy TV and Spice
programming to other pay networks.
Pay-per-view programming can be delivered through any number of delivery
methods, including: (a) analog and digital cable television; (b) DTH to
households with large satellite dishes receiving a C-band low power analog or
digital signal ("TVRO") or with small dishes receiving a Ku-band medium or high
power digital signal ("DBS"), such as those currently offered by DirecTV and
EchoStar; (c) wireless cable systems; and (d) new technologies such as cable
modem and the Internet.
The following table illustrates certain information regarding cable households
in general, and Playboy TV and Spice (in thousands):
Dec. 31, Dec. 31,
2000 1999
- ------------------------------------------------------------------------------
Total cable households (a)
Total 68,200 67,100
Analog addressable 26,000 28,500
Digital 11,000 4,700
Playboy TV cable households (b)
Analog addressable 11,000 11,700
Digital 3,200 1,300
Spice cable households (b)
Analog addressable 12,000 13,600
Digital 4,500 2,800
- ------------------------------------------------------------------------------
(a) Source: Information reported by Paul Kagan Associates, Inc. ("Kagan"), an
independent media research firm. Kagan projects approximately 1% and 34%
average annual increases in total cable and cable digital households,
respectively, and an average annual decrease of approximately 14% in cable
analog addressable households through December 31, 2003.
(b) 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.
Most cable service in the United States is distributed through large
multiple system operators ("MSOs") and their affiliated cable systems ("cable
affiliates"). Once arrangements are made with an MSO, the Company is able to
negotiate channel space for its networks with the cable affiliates. Individual
cable affiliates determine the retail price of the pay-per-view service and
prices currently average approximately $6.90 and $7.25 for a block of analog and
digital Playboy TV programming, respectively, and average approximately $6.80
and $7.40 for a block of analog and digital Spice programming, respectively.
Individual cable affiliates also determine the retail price of the monthly
subscription service, where prices average approximately $12.95 for Playboy TV,
largely dependent on the number of premium services to which a household
subscribes.
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. See Part I. Item
3. "Legal Proceedings."
4
Additionally, from time to time, certain groups have sought to exclude the
Company's programming from local pay television distribution because of the
adult-oriented content of the programming. Management does not believe that any
such attempts will materially affect the Company's access to cable systems, but
the nature and impact of any such limitations in the future cannot be
determined.
Growth in the pay-per-view market is expected to result principally from
cable system upgrades, utilizing digital compression, fiber optics or other
bandwidth expansion methods that provide cable operators additional channel
capacity. In recent years, cable operators have begun the shift from analog to
digital technology in order to upgrade their cable systems and to counteract
competition from DTH operators. Digital cable television has several advantages
over analog cable television, including more channels, better audio and video
quality and advanced set-top boxes that are addressable, provide a secure fully
scrambled signal and have integrated program guides and advanced ordering
technology.
In addition to cable, Playboy TV is provided via encrypted signal, on both
a pay-per-view and monthly subscription basis, to home satellite dish viewers.
In recent years, Playboy TV has added a significant number of viewers through
the DBS market. The growth in the DBS market has provided the Company with an
expanded customer base via a digital transmission which has historically
produced higher buy rates than analog cable markets. DBS operators determine the
retail price of the pay-per-view service and U.S. prices average approximately
$7.00 - $8.00 for a block of Playboy TV programming.
Playboy TV was available to approximately 15.4 million and 12.4 million
DTH households at December 31, 2000 and 1999, respectively. Playboy TV is the
only adult service to be available on all four DBS services in the United States
and Canada. It is currently available on DirecTV and EchoStar in the United
States and ExpressVu and Star Choice in Canada. Playboy TV was previously
available on PrimeStar, however, it was acquired by DirecTV in fiscal year 1999,
and service was discontinued as of September 30, 2000.
Competition among television programming providers is intense for both
channel space and viewer spending. The Company competes in the cable and DTH
markets primarily on the basis of its Playboy and Spice brand names and
Playboy's original unique quality programming. Its competition varies in the
type and quality of programming offered, but consists primarily of other premium
pay services, such as general-interest premium channels like HBO, and other
adult movie pay services, which typically provide more sexually explicit
programming. The Company competes with the other premium pay services as it (a)
attempts to obtain or renew carriage with individual cable affiliates and DTH
operators, (b) negotiates fee arrangements with these operators, and (c) markets
its programming to consumers. Over the past several years, the Company has been
adversely impacted by all of the competitive factors described above. While
there can be no assurance that the Company will be able to maintain its current
cable and DTH carriage or fee structures or maintain or grow its viewership in
the face of this competition, the Company believes that strong Playboy and Spice
brand recognition, the quality of its programming and its ability to appeal to a
broad range of adult audiences are critical factors which differentiate the
Company's networks from other providers of adult programming. Additionally, in
response to consumers' requests for a wider spectrum of adult-programming
choices, the Company expects to launch Spice Platinum networks in fiscal year
2001. These networks will offer less edited adult programming. Also, to optimize
revenue potential, the Company is encouraging cable and DTH operators to market
the full range of video-on-demand, pay-per-view and monthly subscription options
to consumers.
The programming of the Company's networks is delivered to cable and DTH
operators through communications satellite transponders. The Company's current
transponder leases contain protections typical in the industry against
transponder failure, including access to spare transponders, and conditions
under which the Company's access may be denied. The current lease term for
Playboy TV expires October 30, 2001 and the Company has recently signed a lease
for a new transponder which will expire in 2010. The current lease term for
Spice extends through the remainder of the satellite's life (currently estimated
to be 2011). Major limitations on the Company's access to cable or DTH systems
or satellite transponder capacity could materially adversely affect the
Company's operating performance. There have been no instances in which the
Company has been denied access to the transponders it leases.
5
International TV
During fiscal year 1999, the Company entered into a joint venture with a
wholly-owned subsidiary of the Cisneros Group of Companies. At the end of 2000,
certain assets of the Cisneros Group of Companies, including the interest in
Playboy TV International, LLC ("PTVI"), were reorganized under two U.S. limited
liability companies. These limited liability companies have guaranteed each
other's obligations under the PTVI agreements and act together with respect to
management decisions and related matters. PTVI has the exclusive right to create
and launch new television networks under the Playboy and Spice brands in
territories outside of the United States and Canada and, under certain
circumstances, to license programming to third parties. PTVI will also own and
operate all existing international Playboy TV and Spice networks. In addition,
the Company and PTVI have entered into program supply and trademark license
agreements. Currently, the Company has a 19.9% interest in PTVI with an option
to increase up to 50% at founder's price for a certain period of time.
In return for the exclusive international rights for the use of the
Playboy tradename, film and video library, and for the acquisition of the
international rights to the Spice film library, the U.K. and Japan Playboy TV
networks and certain international distribution contracts, PTVI will make total
payments of $100.0 million to the Company over six years. During fiscal years
2000 and 1999, the Company received $7.5 million and $30.0 million,
respectively. The remaining payments will be received over the next four years
as follows: $5.0 million, $7.5 million, $25.0 million and $25.0 million,
respectively. PTVI also has a long-term commitment with the Company to license
international TV rights to each year's output production, with payments
representing a percentage of the Company's annual production spending.
Prior to the formation of the PTVI joint venture, the Company sold its
television programming internationally either on a tier or program-by-program
basis to foreign broadcasters and pay television services or through a local
Playboy TV network in which the Company owned an equity interest and from which
it received fees for programming and the use of the Playboy brand name.
Worldwide Home Video
The Company also distributes its original programming domestically via
videocassettes and DVDs which are sold in video and music stores and other
retail outlets, through direct mail, including Playboy magazine, and online,
including the Company's sites. Playboy Home Video is one of the largest-selling
brands of nontheatrically released, special-interest videos in the United
States, and has consistently been named one of Billboard magazine's "Top Video
Sales Labels." The Playboy Home Video format is consistent with the style,
quality and focus of Playboy magazine. The Company also releases titles under
its Eros Collection label.
In fiscal year 2001, the Company plans to expand the home video business
by adding a line of Playboy TV branded programs and a line of total reality
programs, both to be available on video and DVD. In fiscal years 2000, 1999 and
1998, the Company released 21, 16 and 16 new Playboy Home Video titles,
respectively. Additionally, the Company released approximately 30 and 50 new or
library titles on DVD in fiscal years 2000 and 1999, respectively.
The Company's home video and DVD products are distributed in the United
States and Canada by Universal Music & Video Distribution, Inc. ("Uni"). For new
release titles, the Company is responsible for manufacturing the video product
and for certain marketing and sales functions. Uni receives a distribution fee
on sales of these new releases and remits a net amount to the Company. The
Company and Uni have a different distribution agreement related to backlist
titles (titles in release for longer than a year) that shifts manufacturing and
marketing responsibilities to Uni. The Company receives annual guarantees for
the backlist titles, and monies earned on these titles are offset against the
guarantee.
The Company also distributes, through separate distribution agreements,
its home video products to other countries worldwide. These products are based
on the videos produced for the U.S. market, with the licensee dubbing or
subtitling into the local language where necessary.
PUBLISHING GROUP
The Publishing Group operations include the publication of Playboy
magazine, other domestic publishing businesses and the licensing of
international editions of Playboy magazine.
6
Playboy Magazine
Founded by Hugh M. Hefner in 1953, Playboy magazine is the best-selling
men's monthly magazine in the world. Worldwide monthly circulation, which
includes international editions, is approximately 4.5 million copies.
Approximately 3.1 million copies of the U.S. edition are sold monthly. According
to Fall 2000 data published by Mediamark Research, Inc. ("MRI"), an independent
market research firm, the U.S. edition of Playboy magazine is read by
approximately one in every eight men in the United States aged 18 to 34.
Playboy magazine is a general-interest magazine for men offering a variety
of features. It has gained a loyal customer base and a reputation for excellence
by providing quality entertainment and informative articles on celebrities,
current issues and trends. Each issue of Playboy magazine includes an in-depth,
candid interview with a well-known, thought-provoking personality. Over the
magazine's 47-year history, exclusive interviews have included prominent public
figures (such as Martin Luther King, Jr., Jimmy Carter, Fidel Castro, Mike
Wallace, Rush Limbaugh and Jesse Ventura), business leaders (such as Bill Gates,
David Geffen, Tommy Hilfiger and Ted Turner), entertainers (such as Steve
Martin, Jerry Seinfeld, David Letterman, Jay Leno, Mel Gibson, Bruce Willis and
John Travolta), authors (such as Salman Rushdie, Anne Rice, Ray Bradbury, Alex
Haley and James Michener) and sports figures (such as Michael Jordan, Muhammad
Ali and Bobby Knight). The magazine also regularly publishes the works of
leading journalists, authors and other prominent individuals. For example,
Playboy magazine has published fiction by Scott Turow, Jay McInerney, John
Updike and Margaret Atwood, articles by Michael Crichton, Bill Maher and William
F. Buckley, and book adaptations by Tony Horwitz (Middle East correspondent for
The Wall Street Journal) and Pulitzer Prize winning author William Kennedy. It
has long been known for its graphic excellence and features and publishes the
work of top artists and photographers. Playboy magazine also features lifestyle
articles on consumer products, fashion, automobiles and consumer electronics and
covers the worlds of sports and entertainment. It is also renowned for its
pictorials of beautiful women and frequently features celebrities on its cover
and in exclusive pictorials (among them Farrah Fawcett, Pamela Anderson, Elle
Macpherson, Jenny McCarthy, Cindy Crawford, Sharon Stone, Madonna, Chyna and
Katarina Witt).
The net circulation revenues of the U.S. edition of Playboy magazine for
fiscal years 2000, 1999 and 1998 were $72.1 million, $73.9 million and $75.4
million, respectively. Net circulation revenues are gross revenues less
provisions for newsstand returns and unpaid subscriptions, and commissions.
Circulation revenue comparisons may be materially impacted with respect to any
period which includes one or more issues of unusually high public interest.
According to the Audit Bureau of Circulations ("ABC"), an independent
audit agency, with a circulation rate base (the total newsstand and subscription
circulation guaranteed to advertisers) of 3.15 million at December 31, 2000,
Playboy magazine was the 12th highest-ranking U.S consumer publication. Playboy
magazine's rate base at December 31, 2000 was larger than each of Newsweek and
Cosmopolitan, and also greater than the combined rate bases of Rolling Stone, GQ
and Esquire, which have substantial adult male audiences.
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies are generally 80% of total
copies sold. The Company believes that managing Playboy's circulation to be
primarily subscription driven, like most major magazines, provides a stable and
desirable circulation base, which is also attractive to advertisers. According
to the MRI data previously mentioned, the median age of male Playboy readers is
35, with a median annual household income of $51,000. The Company also derives
meaningful income from the rental of Playboy magazine's subscriber list, which
consists of the subscriber's name, address and other information maintained by
the Company.
The Company attracts new subscribers to the magazine through its own
direct mail advertising campaigns, subscription agent campaigns and the
Internet, including Playboy.com. The Company recognizes revenues from magazine
subscriptions over the terms of the subscriptions. Subscription copies of the
magazine are delivered through the U.S. Postal Service as second class mail. The
Company attempts to contain these costs through presorting and other methods.
There were no postal rate increases in fiscal year 2000. Postal rates increased
approximately 10% in January 2001.
Playboy magazine is one of the highest priced magazines in the United
States. The basic U.S. newsstand cover price has been $4.95 ($5.95 for the
December holiday issue and $6.95 for the January holiday issue). Effective with
the April 2001 issue, the basic U.S. cover price will increase to $4.99 ($5.99
for the December 2001 issue and $6.99 for the January 2002 issue). The Canadian
cover price has been C$5.95 (C$6.95 for holiday issues). Effective with the
April 2001 issue, the Canadian cover price will increase to C$6.99 for all
issues. In addition, when there is a feature of special appeal, the Company
generally increases the newsstand cover price by $1.00.
7
Distribution of the magazine to newsstands and other retail outlets is
accomplished through Warner Publisher Services ("Warner"), a national
distributor. Copies of the magazine are shipped in bulk to the wholesalers,
which are responsible for local retail distribution. The Company receives a
substantial cash advance from Warner at the time each issue goes on sale. The
Company recognizes revenues from newsstand sales based on estimated copy sales
at the time each issue goes on sale, and adjusts for actual sales upon
settlement with Warner. These revenue adjustments are not material on an annual
basis. Retailers return unsold copies to the wholesalers who count and then
shred the returned magazines and report the returns via affidavit. The Company
then settles with Warner based on the number of magazines actually sold. The
number of issues sold on newsstands varies from month to month, depending in
part on the cover, the pictorials and the editorial features.
Playboy magazine targets a wide range of advertisers. Advertising by
category, as a percent of total ad pages, and the total number of ad pages were
as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------
Beer/Wine/Liquor 25% 21% 22%
Tobacco 23 26 25
Retail/Direct mail 19 22 23
Home electronics 6 5 6
Media/Advertising 5 1 2
Apparel/Footwear/Accessories 5 4 2
Toiletries/Cosmetics 5 6 6
All other 12 15 14
- -------------------------------------------------------------------------------
Total 100% 100% 100%
===============================================================================
Total ad pages 674 640 601
===============================================================================
The Company continues to focus on securing new advertisers from
underdeveloped categories. The Company implemented 8% and 5% cost per thousand
increases in advertising rates effective with the January 2001 and 2000 issues,
respectively.
The Company publishes the U.S. edition of Playboy magazine in 15
advertising editions: one upper income zip-coded, eight regional, two state and
four metro. All contain the same editorial material but provide targeting
opportunities for advertisers. The net advertising revenues of the U.S. edition
of Playboy magazine for fiscal years 2000, 1999 and 1998 were $38.4 million,
$33.9 million and $30.8 million, respectively. Net advertising revenues are
gross revenues less advertising agency commissions, frequency and cash discounts
and rebates. Levels of advertising revenues may be affected by, among other
things, increased competition for and decreased spending by advertisers, general
economic activity and governmental regulation of advertising content.
Many magazines receive a significant portion of their advertising revenues
from companies selling tobacco products. Because only approximately 25%-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 magazine and special editions are printed at Quad/Graphics, Inc.,
located in Wisconsin, which then ships the product to subscribers and Warner.
The actual print run varies each month and is determined with input from Warner.
Paper is the principal raw material used in the production of these
publications. The Company uses a variety of types of high-quality coated paper
that is purchased from a number of suppliers. The market for paper has
historically been cyclical, resulting in volatility in paper prices. The
Publishing Group expects paper prices in fiscal year 2001 to be comparable with
fiscal year 2000.
8
From time to time, Playboy magazine, and certain of its distribution
outlets and advertisers, have been the target of certain groups who seek to
limit its availability because of its content. In its 47-year history, the
Company has never sold a product that has been judged to be obscene or illegal
in any U.S. jurisdiction.
Magazine publishing companies face intense competition for both readers
and advertising. Magazines and Internet sites primarily aimed at men are Playboy
magazine's principal competitors. In addition, other types of media that carry
advertising, such as newspapers, radio, television and Internet sites, compete
for advertising revenues with Playboy magazine.
Other Domestic Publishing
The Publishing Group has also created media extensions, taking advantage
of the magazine's reputation for quality and its libraries of art, photography
and editorial text. These products include special editions and calendars, which
are primarily sold in newsstand outlets and use both original photographs and
photographs from the Company's library. In fiscal years 2000, 1999 and 1998, the
group published 24, 24 and 23 special editions, respectively. The U.S. and
Canadian newsstand cover prices for special editions have been $6.95 and C$7.95,
respectively. Effective with issues on sale subsequent to March 1, 2001, the
U.S. and Canadian newsstand cover prices increased to $6.99 and C$7.99,
respectively. The Publishing Group also generates revenues from related
businesses, including books.
International Publishing
The Company licenses the right to publish 16 international editions of
Playboy magazine in the following countries: Brazil, Croatia, the Czech
Republic, France, Germany, Greece, Hungary, Italy, Japan, the Netherlands,
Poland, Romania, Russia, Slovakia, Spain and Taiwan. The Company owns a majority
interest in the Polish edition of the magazine and as such, its results are
consolidated in the Company's financial statements. The Company also owns
minority interests in the Romanian and Hungarian editions. Combined average
circulation of the international editions is approximately 1.4 million copies
monthly.
Local publishing licensees tailor their international editions by mixing
the work of their national writers and artists with editorial and pictorial
material from the U.S. edition. The Company monitors the content of the
international editions so that they retain the distinctive style, look and
quality of the U.S. edition, while meeting the needs of their respective
markets. The terms of the license agreements vary, but in general are for terms
of three to five years and carry a guaranteed minimum royalty as well as a
formula for computing earned royalties in excess of the minimum. Royalty
computations are generally based on both circulation and advertising revenues.
In fiscal year 2000, two editions, Brazil and Germany, accounted for
approximately 60% of the total licensing revenues from international editions.
PLAYBOY ONLINE GROUP
The Playboy Online Group is dedicated to the lifestyle and entertainment
interests of young men around the world. It is uniquely positioned to capitalize
on the Playboy brand to provide a compelling online entertainment experience.
The group's online destinations combine Playboy's distinct attitude with
extensive and original content, a large community of loyal users and a wealth of
e-commerce offerings. The group's sites provide the Company with multiple
revenue streams, including e-commerce, advertising and sponsorships, and fees
for subscription services and pay-per-view events. The group will add several
new revenue streams in fiscal year 2001, including online gaming, international
sites and a Spice subscription business.
The Playboy.com site offers original content focusing on areas of interest
to its target audience, including love & sex, arts & entertainment, living in
style, on campus, sports & games and playmates. The site also offers
pay-per-view events such as lingerie fashion shows, Mardi Gras and parties at
the Playboy Mansion. The Company also offers a members-only Playboy Cyber Club,
which is a subscription-based site offering services such as VIP access to over
45,000 photos, every interview from Playboy magazine, individual home pages for
Playboy Playmates, live Playmate chats, video clips and free access to some
pay-per-view specials. As of December 31, 2000 and 1999, Playboy Cyber Club had
approximately 67,000 and 40,000 subscribers, respectively.
9
The group's e-commerce offerings include PlayboyStore.com, which is the
primary destination for purchasing over 3,100 different Playboy-branded
fashions, videos, jewelry and collectibles. The PlayboyStore.com Partners
marketplace allows top-notch companies, such as Amazon.com and Trans World
Entertainment Company, to sell products such as movies, CDs, books, software,
games and consumer electronics to the very desirable Playboy.com demographic.
CCMusic.com, an online version the Collectors' Choice Music catalog, offers
approximately 250,000 selections in every musical genre, including exclusive
releases and titles not found on any other site. The Company expects to effect a
sale of its Collectors' Choice Music business in fiscal year 2001. CCVideo.com,
an online version of the Critics' Choice Video catalog, was sold in October 2000
and is discussed in more detail below. The Company also operates an auction site
located at Auctions.Playboy.com in order to capitalize on the market for Playboy
collectibles.
PlayboySportsBook.com, a partnership with Ladbroke eGaming Limited, will
offer a full range of sports wagering, allowing international consumers to bet
on U.S. and international sports. PlayboySportsBook.com will have safeguards to
prevent betting from within the United States and other places where online
sports wagering is illegal. The site will include highlights of daily sports
wagering, event coverage, sports commentary, scores and statistics.
Its first international joint venture, Playboy.de with Focus Digital AG,
to launch a German version of its web site will have a local, dedicated
editorial staff to develop original Playboy-style content, make use of content
from the German edition of Playboy magazine and translate appropriate
U.S.-originated Playboy.com content.
A separately branded online adult entertainment site is located at
SpiceTV.com. Capitalizing on the Company's acquisition of Spice, the site offers
over 3,500 adult-oriented products in SpiceTVStore.com, including videos and
DVDs, lingerie and sensual products. A subscription site, offering adult
pictorials, video clips and other exclusive content, is scheduled to launch in
fiscal year 2001.
In January 2000, Playboy.com, Inc. ("Playboy.com"), a component of the
Playboy Online Group, filed a registration statement for a sale of a minority of
its equity in an Initial Public Offering ("IPO"). Due to market conditions, the
registration statement was withdrawn in November 2000. The Company will consider
reinitiating an IPO when market conditions allow.
CATALOG GROUP
The Catalog Group operations have included the direct marketing of
products through the Critics' Choice Video and Collectors' Choice Music
catalogs. In October 2000, the Company completed the sale of its Critics' Choice
Video catalog and related Internet site and fulfillment and customer service
operations to Infinity Resources, Inc. ("Infinity"). Infinity is subleasing the
approximately 105,000 square-foot facility and related equipment from the
Company and is providing fulfillment and customer service for PlayboyStore.com,
SpiceTV.com and the Collectors' Choice Music business. The Collectors' Choice
Music catalog contains titles from all music genres on CDs and cassettes and is
a leading music catalog of imports and hard-to-find reissues. The Company
expects to effect a sale of its Collectors' Choice Music catalog and related
Internet business in fiscal year 2001, at which time the Company's presence in
the catalog business will end.
OTHER BUSINESSES GROUP
The Other Businesses Group operations combine certain brand-related
businesses, such as the licensing of consumer products carrying one or more of
the Company's trademarks and artwork owned by the Company, the development of
casino gaming opportunities and certain Company-wide marketing activities.
The Company licenses the Playboy name, Rabbit Head Design and other
trademarks and artwork owned by the Company for the worldwide manufacture, sale
and distribution of a variety of consumer products. The group works with
licensees to develop, market and distribute high-quality, Playboy branded
merchandise. The group's licensed product lines include men's and women's
apparel, lingerie, accessories, collectibles, cigars, watches, jewelry,
fragrances, small leather goods, stationery, eyewear and home fashions. The
group also licenses art-related products based on the Company's extensive
collection of artwork, many of which were commissioned as illustrations for
Playboy magazine and for other uses by the Company. Additionally, the Company
owns all of the trademarks and service marks of Sarah Coventry, Inc., which it
licenses. Products are marketed primarily through retail outlets, including
department and specialty stores. While the Company's branded products are
unique, the marketing of apparel, jewelry and cigars is an intensely competitive
business that is extremely sensitive to economic conditions, shifts in consumer
buying habits or fashion trends, as well as changes in the retail sales
environment.
10
The Company has reentered the casino gaming business to further leverage
its brand image. The Company expects to conclude primarily licensing and
management deals where it will receive fees for gaming-anchored establishments,
and will have the option to earn or purchase equity. Early in fiscal year 2000,
the Company signed a deal with Ladbroke Casinos Limited to open a Playboy casino
and club in London. Since then, however, their land-based business has been sold
and the buyer does not plan to expand its current operations in the near term.
Company-wide marketing activities consist of the Playboy Jazz Festival and
Playmate promotions. The Company has produced the Playboy Jazz Festival on an
annual basis in Los Angeles at the Hollywood Bowl since June 1979. In
conjunction with the Playboy Jazz Festival, the Company continued its community
events program by sponsoring free concerts. Playmate promotions encompasses
Playmates involvement in ad campaigns, brochures, celebrity endorsements,
commercials, conventions, motion pictures, trade shows, television and videos
for the Company and outside clients.
SEASONALITY
The Company's businesses are generally not seasonal in nature. Revenues
and operating results for the quarters ended December 31, however, are typically
impacted by higher newsstand cover prices of holiday issues. These higher
prices, coupled with typically higher sales of subscriptions of Playboy magazine
during those quarters, also result in an increase in accounts receivable.
E-commerce revenues and operating results are typically impacted by the year-end
holiday buying season and decreased Internet traffic during the summer months.
PROMOTIONAL AND OTHER ACTIVITIES
The Company believes that its sales of products and services are enhanced
by the public recognition of Playboy as a lifestyle. In order to establish
public recognition, the Company, among other activities, acquired in 1971 a
mansion in Holmby Hills, California (the "Mansion"), where the Company's
founder, Hugh M. Hefner, lives. The Mansion is used for various corporate
activities, including serving as a valuable location for video production and
magazine photography, online events, business meetings, enhancing the Company's
image, charitable functions and a wide variety of promotional and marketing
activities. The Mansion generates substantial publicity and recognition which
increase public awareness of the Company and its products and services. As
indicated in Part III. Item 13. "Certain Relationships and Related
Transactions," Mr. Hefner pays rent to the Company for that portion of the
Mansion used exclusively for his and his personal guests' residence as well as
the value of meals and other benefits received by him and his personal guests.
The Mansion is included in the Company's financial statements as of December 31,
2000 at a cost, including all improvements and after accumulated depreciation,
of approximately $2.1 million. The operating expenses of the Mansion, including
depreciation and taxes, net of rent received from Mr. Hefner, were approximately
$3.2 million, $3.6 million and $3.6 million for fiscal years 2000, 1999 and
1998, respectively.
Through the Playboy Foundation, the Company supports not-for-profit
organizations and projects concerned with issues historically of importance to
Playboy magazine and its readers, including anti-censorship efforts, civil
rights, AIDS education, prevention and research, and reproductive freedom. The
Playboy Foundation provides financial support to many organizations and also
donates public service advertising space in Playboy magazine and in-kind
printing and design services.
The Company's trademarks are critical to the success and potential future
growth of the Company's businesses. The Company actively defends its trademarks
and copyrights throughout the world and monitors the marketplace for counterfeit
products. Consequently, it initiates legal proceedings from time to time to
prevent their unauthorized use.
EMPLOYEES
At February 28, 2001, the Company employed 681 full-time employees
compared to 792 at February 29, 2000. No employees are represented by collective
bargaining agreements. The Company believes it maintains a satisfactory
relationship with its employees.
11
Item 2. Properties
Location Approximate Size Primary Use
- -------- ---------------- -----------
Office Space Leased:
680 North Lake Shore Drive 130,000 sq. feet This space serves as the Company's corporate headquarters, and
Chicago, Illinois is used by all of the Company's operating groups, primarily
Publishing and Playboy Online, and for executive and
administrative personnel.
730 Fifth Avenue 60,000 sq. feet This space serves as the Company's Publishing and Playboy
New York, New York Online Groups' headquarters, and a limited amount of this
space is used by the Entertainment and Other Businesses
Groups, as well as executive and administrative personnel.
9242 Beverly Boulevard 45,000 sq. feet This space serves as the Company's Entertainment Group
Beverly Hills, California headquarters, and a limited amount of this space is used by
the Publishing Group, as well as executive and administrative
personnel.
5055 Wilshire Boulevard 20,000 sq. feet This space is primarily used by the Company's Entertainment
Los Angeles, California Group for general business and film editing, and a limited
amount of this space is used by the Playboy Online Group.
Operations Facilities Leased:
Itasca, Illinois 105,000 sq. feet The Company began subleasing this warehouse facility to
Infinity in October 2000. This facility, under separate
agreements with Infinity, is used to provide direct- and
e-commerce order fulfillment, customer service and related
activities for the Company's Playboy Online and Catalog
Groups, and storage for the entire Company. The facility was
formerly used by the Company in the same capacities.
Santa Monica, California 10,000 sq. feet This space is used by the Company's Publishing Group as a
photography studio.
Los Angeles, California 10,000 sq. feet This space is used by the Company's Entertainment Group
as a motion picture production facility.
Mansion Owned:
Holmby Hills, California 5 1/2 acres The Mansion is used for various activities, including serving
as a valuable location for video production, magazine
photography, online events, business meetings, enhancing the
Company's image, charitable functions and a wide variety of
promotional and marketing activities.
The Company considers its properties adequate for its present needs.
12
Item 3. Legal Proceedings
The Company is from time to time a defendant in suits for defamation and
violation of rights of privacy, many of which allege substantial or unspecified
damages, which are vigorously defended by the Company. The Company is currently
engaged in other litigation, most of which is generally incidental to the normal
conduct of its business. Management believes that its reserves are adequate and
that no such action will have a material adverse impact on the Company's
financial condition. There can be no assurance, however, that the Company's
ultimate liability will not exceed its reserves. See Note (R) Commitments and
Contingencies of Notes to Consolidated Financial Statements.
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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2000.
13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (W) Quarterly Results of Operations
(Unaudited) of Notes to Consolidated Financial Statements. The registrant's
securities are traded on the exchanges listed on the cover page of this Form
10-K Annual Report. As of February 28, 2001, there were 7,428 and 8,411 holders
of record of Class A and Class B common stock, respectively. There were no cash
dividends declared during fiscal years 2000 and 1999. The Company's credit
agreement prohibits the payment of cash dividends.
Item 6. Selected Financial and Operating Data (1)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
(in thousands) 12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 74,457 $ 74,014 $ 63,035
International TV 16,998 37,966 12,828
Worldwide home video 8,584 10,534 12,922
Movies and other 916 3,269 2,264
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 100,955 125,783 91,049
- -------------------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine
Subscription 49,808 51,035 53,012
Newsstand 22,288 22,863 22,424
Advertising 38,408 33,899 30,761
Other 27 58 604
- -------------------------------------------------------------------------------------------------------------------
Total Playboy magazine 110,531 107,855 106,801
Other domestic publishing 16,475 18,092 18,285
International publishing 12,864 11,115 10,981
- -------------------------------------------------------------------------------------------------------------------
Total Publishing 139,870 137,062 136,067
- -------------------------------------------------------------------------------------------------------------------
Playboy Online 25,291 16,104 7,098
- -------------------------------------------------------------------------------------------------------------------
Catalog 32,360 60,335 74,393
- -------------------------------------------------------------------------------------------------------------------
Other Businesses 9,246 8,533 9,011
- -------------------------------------------------------------------------------------------------------------------
Total net revenues $ 307,722 $ 347,817 $ 317,618
===================================================================================================================
Operating income (loss)
Entertainment
Before programming expense $ 58,540 $ 78,716 $ 52,575
Programming expense (33,253) (34,341) (26,410)
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 25,287 44,375 26,165
- -------------------------------------------------------------------------------------------------------------------
Publishing 6,881 5,977 6,672
- -------------------------------------------------------------------------------------------------------------------
Playboy Online (25,199) (9,066) (6,528)
- -------------------------------------------------------------------------------------------------------------------
Catalog 54 256 4,100
- -------------------------------------------------------------------------------------------------------------------
Other Businesses 887 (436) (1,083)
- -------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (20,942) (27,127) (24,358)
- -------------------------------------------------------------------------------------------------------------------
Total segment income (loss) (13,032) 13,979 4,968
Restructuring expenses (3,908) (1,091) --
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) $ (16,940) $ 12,888 $ 4,968
===================================================================================================================
14
Fiscal Year Fiscal Year Fiscal Year Six Months Fiscal Year Fiscal Year
(in thousands, except per share amounts, Ended Ended Ended Ended Ended Ended
number of employees and ad pages) 12/31/00 12/31/99 12/31/98 12/31/97 6/30/97 6/30/96
- -----------------------------------------------------------------------------------------------------------------------------------
Selected financial data
Net revenues $ 307,722 $ 347,817 $ 317,618 $ 149,541 $ 296,623 $ 276,587
Interest expense, net (7,629) (6,179) (1,424) (239) (354) (592)
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (47,626) (5,568) 4,320 2,142 21,394 4,252
Net income (loss) (47,626) (5,335) 4,320 1,065 21,394 4,252
Basic income (loss) per common share
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (1.96) (0.24) 0.21 0.10 1.05 0.21
Net income (loss) (1.96) (0.23) 0.21 0.05 1.05 0.21
Diluted income (loss) per common share
Income (loss) from continuing operations before
cumulative effect of change in accounting principle (1.96) (0.24) 0.21 0.10 1.03 0.21
Net income (loss) (1.96) (0.23) 0.21 0.05 1.03 0.21
EBITDA (2) 23,875 58,722 39,267 17,255 41,519 35,321
Cash flows from operating activities (31,241) 15,761 (11,524) (3,736) 1,539 4,716
Cash flows from investing activities (3,798) (67,787) (9,706) (1,991) (2,450) (4,168)
Cash flows from financing activities $ 14,045 $ 75,213 $ 20,624 $ 5,371 $ (224) $ 419
- -----------------------------------------------------------------------------------------------------------------------------------
At period end
Total assets $ 388,488 $ 429,402 $ 212,107 $ 185,947 $ 175,542 $ 150,869
Long-term financing obligations $ 94,328 $ 75,000 $ -- $ -- $ -- $ 347
Shareholders' equity $ 114,185 $ 161,281 $ 84,202 $ 78,683 $ 76,133 $ 52,283
Long-term financing obligations as a
percentage of total capitalization 45% 32% --% --% --% 1%
Number of common shares outstanding
Class A voting 4,859 4,859 4,749 4,749 4,749 4,749
Class B nonvoting 19,407 19,288 15,868 15,775 15,636 15,437
Number of full-time employees 686 780 758 684 666 621
- -----------------------------------------------------------------------------------------------------------------------------------
Selected operating data
Playboy magazine ad pages 674 640 601 273 558 569
Cash investments in Company-produced and
licensed entertainment programming $ 33,061 $ 35,262 $ 25,902 $ 14,359 $ 30,747 $ 25,549
Amortization of investments in Company-produced
and licensed entertainment programming $ 33,253 $ 34,341 $ 26,410 $ 11,153 $ 21,355 $ 21,263
Domestic Playboy TV households (at period end)
Cable analog addressable (3) 11,000 11,700 11,700 11,600 11,200 11,300
Cable digital (3) 3,200 1,300 200 -- -- --
Satellite direct-to-home 15,400 12,400 9,800 6,800 6,300 4,900
Domestic Spice households (at period end) (4)
Cable analog addressable (3) 12,000 13,600 -- -- -- --
Cable digital (3) 4,500 2,800 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
For a more detailed description of the Company's financial position, results of
operations and accounting policies, please refer to Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") and Part II. Item 8. "Financial Statements and
Supplementary Data."
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.
(2) EBITDA represents earnings from continuing operations before interest
expense, income taxes, cumulative effect of change in accounting
principle, depreciation of property and equipment, amortization of
intangible assets, amortization of investments in entertainment
programming, amortization of deferred financing fees primarily related to
the Spice acquisition, expenses related to the vesting of restricted stock
awards and equity in operations of PTVI and other. EBITDA should not be
considered an alternative to any measure of performance or liquidity under
generally accepted accounting principles ("GAAP"). Similarly, it should
not be inferred that EBITDA is more meaningful than any of those measures.
(3) 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.
(4) The Company acquired Spice on March 15, 1999.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Beginning with the quarter ended March 31, 2000, certain brand-related
businesses were 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, which were
previously 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 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 product introductions by advertising customers, changes in
advertising buying patterns and economic conditions. 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.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999
The following is a summary of the results of operations of the Company for the
periods indicated below (in millions):
Fiscal Year Fiscal Year
Ended Ended
12/31/00 12/31/99
- -------------------------------------------------------------------------------------------------------------------
Net revenues $307.7 $ 347.8
===================================================================================================================
Segment income (loss) $(13.0) $ 14.0
Restructuring expenses (3.9) (1.1)
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) $(16.9) $ 12.9
===================================================================================================================
Net loss $(47.6) $ (5.3)
===================================================================================================================
Basic and diluted net loss per common share $(1.96) $ (0.23)
===================================================================================================================
The Company's revenues for fiscal year 2000 decreased 12% compared to the
prior year primarily due to a $30.0 million up-front payment in fiscal year 1999
from PTVI to the Entertainment Group toward the $100.0 million purchase
principally related to the international TV rights to the Company's film
library, compared to $7.5 million in fiscal year 2000. The comparison also
reflects the expected decrease of Catalog Group revenues, a business the Company
is exiting. The Critics' Choice Video catalog and Internet business were sold on
October 2, 2000, and the Company is pursuing a sale of the Collectors' Choice
Music business, its last remaining catalog asset.
The Company reported an operating loss of $16.9 million in fiscal year
2000 compared to operating income of $12.9 million in fiscal year 1999,
primarily due to the timing and amount of PTVI payments discussed above combined
with higher planned investments in the Playboy Online Group, partially offset by
lower Corporate Administration and Promotion expenses. The current year also
included a $3.9 million restructuring charge compared to $1.1 million in the
prior year.
The higher net loss for fiscal year 2000 reflects $12.5 million lower PTVI
nonoperating expense, including the Company's 19.9% equity in PTVI, the
elimination of unrealized profits of certain transactions between the Company
and PTVI and gains related to the transfer of certain assets to PTVI. The prior
year also included the accounting effects of the formation of the PTVI joint
venture.
The net loss for the current year also included a $2.9 million loss
related to the sale of Critics' Choice Video and a $1.6 million charge incurred
in connection with the Playboy.com registration statement that was subsequently
withdrawn. In addition, the prior year included a $1.7 million gain from the
sale of the Company's equity in The Playboy Casino at Hotel des Roses (the
"Rhodes Casino") in Greece. Additionally, the net loss for fiscal year 2000
included noncash federal income tax expense of $24.1 million related to the
Company's decision to increase the valuation allowance for its deferred tax
assets.
16
ENTERTAINMENT GROUP
For fiscal year 2000, Entertainment Group revenues were $101.0 million, a
decrease of $24.8 million, or 20%, compared to the prior year primarily due to
the $30.0 million PTVI payment in fiscal year 1999 primarily for library license
fees. Segment income decreased $19.1 million, or 43%, also primarily due to the
higher fiscal year 1999 PTVI payment.
The following discussion focuses on the profit contribution of each
business before programming expense.
Domestic TV Networks
For fiscal year 2000, revenues were $74.5 million from domestic TV
networks, an increase of $0.4 million, or 1%, and profit contribution increased
$0.5 million, primarily due to the Spice acquisition. Also contributing were
higher sales of programming to other networks and higher Playboy TV cable
pay-per-view revenues, primarily due to higher retail rates. These increases
were mostly offset by lower Playboy TV DTH revenues, principally due to a
significant decline in PrimeStar subscribers as a result of DirecTV's
acquisition of PrimeStar in fiscal year 1999. PrimeStar service was discontinued
as of September 30, 2000. The Company has recently experienced an overall
decline in buys as a result of increasing adult programming carried by cable and
DTH operators, which could impact future revenues. The Company is currently
evaluating strategies to mitigate the increased competition, including the
expected launch of its own Spice Platinum networks.
The following is the approximate number of the Company's households for the
periods indicated below (in millions):
Dec. 31, Dec. 31,
2000 1999
- --------------------------------------------------------------------------
Cable (1):
Playboy TV analog addressable 11.0 11.7
Playboy TV digital 3.2 1.3
Spice analog addressable 12.0 13.6
Spice digital 4.5 2.8
DTH:
Playboy TV 15.4 12.4
- --------------------------------------------------------------------------
(1) 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.
International TV
In fiscal year 2000, international TV business profit contribution
decreased $19.4 million on a $21.0 million, or 55%, decrease in revenues
primarily due to the $30.0 million PTVI payment in fiscal year 1999 primarily
for library license fees.
Worldwide Home Video
In fiscal year 2000, revenues from the worldwide home video business
decreased $2.0 million, or 19%, while profit contribution decreased $1.4 million
largely due to softness in the domestic business.
Movies and Other
Profit contribution from movies and other businesses in the current year
decreased $2.1 million on a $2.4 million, or 72%, decrease in revenues primarily
due to lower sales of previously released movies combined with the lower library
license fees from PTVI.
The Entertainment Group's administrative expenses decreased $2.1 million
in the current year primarily due to lower performance-related variable
compensation expense.
Programming Expense
Programming expense decreased $1.1 million in the current year primarily
due to the lower library license fees from PTVI and the lower sales of movies.
Higher amortization for domestic TV networks primarily offset the decrease.
17
PUBLISHING GROUP
For fiscal year 2000, Publishing Group revenues were $139.9 million, an
increase of $2.8 million, or 2%, compared to the prior year.
Playboy magazine revenues increased $2.7 million, or 2%, for fiscal year
2000 compared to the prior year. Advertising revenues increased $4.5 million, or
13%, due to both higher average net revenue per page and more ad pages.
Advertising sales for the fiscal year 2001 first quarter magazine issues are
closed and the Company expects to report 5% lower ad revenues and 12% fewer ad
pages compared to the quarter ended March 31, 2000. Circulation revenues were
$1.8 million, or 2%, lower as a result of $1.2 million, or 2%, lower
subscription revenues and $0.6 million, or 3%, lower newsstand revenues.
Revenues from other domestic publishing businesses decreased $1.6 million,
or 9%, for fiscal year 2000 compared to the prior year. This decline largely
reflected lower sales of special editions primarily as a result of increased
competition for shelf space, entry into retail stores and erotica on the
Internet.
International publishing revenues increased $1.7 million, or 16%, for
fiscal year 2000 primarily due to higher revenues from the Company's
majority-owned Polish publishing joint venture.
For fiscal year 2000, the Publishing Group's segment income increased $0.9
million, or 15%, compared to the prior year primarily due to the higher Playboy
magazine advertising revenues, lower manufacturing costs related to a reduction
in print runs and lower legal, performance-related variable compensation and
ancillary businesses expenses. Partially offsetting the above was lower Playboy
magazine subscription profitability combined with higher editorial costs and the
lower special editions and Playboy magazine newsstand revenues.
PLAYBOY ONLINE GROUP
For fiscal year 2000, Playboy Online Group revenues were $25.3 million, an
increase of $9.2 million, or 57%, compared to the prior year, due to higher
e-commerce and subscription revenues. Contributing significantly to the higher
e-commerce revenues was the integration of the Playboy and Spice direct commerce
businesses with e-commerce effective October 1, 1999. Higher Playboy e-commerce
revenues were offset by a decline in e-commerce revenues from Spice.
For fiscal year 2000, the Playboy Online Group reported a segment loss of
$25.2 million compared to $9.1 million in the prior year. This reflected planned
higher expenses, principally related to sales and marketing, administration and
content and product development. The higher administration expenses were due in
part to arms-length trademark, content and administrative fees to the parent
company from Playboy.com.
In January 2000, Playboy.com, a component of the Playboy Online Group,
filed a registration statement for a sale of a minority of its equity in an IPO.
Due to market conditions, the registration statement was withdrawn in November
2000. Deferred costs of $1.6 million were written off in fiscal year 2000 as
nonoperating expense. The Company will consider reinitiating an IPO when market
conditions allow.
CATALOG GROUP
For fiscal year 2000, revenues decreased $28.0 million, or 46%, to $32.4
million compared to the prior year largely as the result of management's
decision to divest this business. On October 2, 2000, the Company completed the
sale of its Critics' Choice Video business and fulfillment and customer service
operations to Infinity. Infinity is subleasing the facility and related
equipment from the Company and is providing fulfillment and customer service for
PlayboyStore.com, SpiceTV.com and the Collectors' Choice Music business.
Additionally, the lower revenues reflected planned lower circulation for the
Critics' Choice Video catalog, prior to its sale. The comparison also reflected
the absence of fiscal year 2000 revenues related to the Playboy and Spice
catalogs. The Playboy and Spice catalogs were integrated as direct commerce
businesses within the Company's Playboy Online branded e-commerce business
effective October 1, 1999. These lower revenues, mostly offset by lower related
costs, resulted in segment income of $0.1 million for fiscal year 2000 compared
to $0.3 million in the prior year.
The Company expects to effect a sale of its Collectors' Choice Music
catalog and related Internet business in fiscal year 2001, at which time the
Company's presence in the catalog business will end.
18
OTHER BUSINESSES GROUP
For fiscal year 2000, segment performance from the Other Businesses Group
increased $1.3 million on a $0.7 million, or 8%, increase in revenues primarily
due to the strength of the Company's licensed branded products business,
combined with lower expenses primarily due to a reorganization last year.
CORPORATE ADMINISTRATION AND PROMOTION
For fiscal year 2000, Corporate Administration and Promotion expenses were
$20.9 million, $6.2 million, or 23%, lower than the prior year, primarily
reflecting planned lower marketing spending and a reduction of expenses related
to the arms-length trademark, content and administrative fees to the parent
company from Playboy.com.
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) resulting in total
restructuring charges of $1.3 million, of which $0.2 million was recorded in the
first quarter of fiscal year 2000. This amount also included a $0.1 million
favorable adjustment to the previous estimate recorded in the fourth quarter of
fiscal year 2000. Additionally, 23 positions were eliminated through attrition.
All charges related to this restructuring were recorded and paid by December 31,
2000.
In the fourth quarter of fiscal year 2000, realignment of senior
management coupled with staff reductions led to an additional restructuring
charge of $3.7 million. As of December 31, 2000, all of the 19 employees, who
represented approximately 3% of the work force, were notified of their
termination. A total of $0.5 million related to this restructuring was paid by
December 31, 2000, resulting in a remaining liability of $3.2 million, most of
which will be paid in fiscal year 2001.
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
The following is a summary of the results of operations of the Company for the
periods indicated below (in millions):
Fiscal Year Fiscal Year
Ended Ended
12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Net revenues $347.8 $ 317.6
===================================================================================================================
Segment income $ 14.0 $ 5.0
Restructuring expenses (1.1) --
- -------------------------------------------------------------------------------------------------------------------
Operating income $ 12.9 $ 5.0
===================================================================================================================
Net income (loss) $ (5.3) $ 4.3
===================================================================================================================
Basic and diluted net income (loss) per common share $(0.23) $ 0.21
===================================================================================================================
The Company's revenues for fiscal year 1999 increased 10% compared to the
prior year primarily due to higher revenues from the Entertainment Group,
principally due to the $30.0 million PTVI payment primarily for library license
fees. Also contributing to the increase were higher revenues from the Playboy
Online Group, partially offset by lower Catalog Group revenues. The Playboy
Online and Catalog Group variances resulted in part from the previously
mentioned reconfiguration of the e-commerce business.
The increase in operating income of $7.9 million in fiscal year 1999 was
primarily due to the Entertainment Group, principally due to the PTVI-related
revenues. Lower segment income from the Catalog Group plus higher investments in
Playboy Online and Corporate Administration and Promotion, partially offset the
above. Fiscal year 1999 also included a $1.1 million restructuring charge.
19
The net loss for fiscal year 1999 included higher interest expense,
primarily due to increased debt resulting from the acquisition of Spice, and a
$12.7 million nonoperating charge related to PTVI. Fiscal year 1999 also
included the $1.7 million gain from the sale of the Company's interest in the
Rhodes Casino, while the prior year included a $4.3 million gain on the sale of
the Company's interest in duPont Publishing, Inc. ("duPont").
ENTERTAINMENT GROUP
For fiscal year 1999, Entertainment Group revenues of $125.8 million
increased $34.8 million, or 38%, compared to the prior year primarily due to
international TV revenues related to PTVI. Also contributing to the increase
were higher revenues from domestic TV networks, principally attributable to the
acquisition of Spice. Segment income increased $18.2 million primarily due to
the higher revenues, which were partially offset by higher related costs.
The following discussion focuses on the profit contribution of each
business before programming expense.
Domestic TV Networks
For fiscal year 1999, revenues of $74.0 million from domestic TV networks
increased $11.0 million, or 17%, and profit contribution increased $3.2 million.
These increases were primarily due to the Spice acquisition, partially offset by
lower sales of programming to other networks and lower Playboy TV DTH revenues,
principally as a result of DirecTV's acquisition of PrimeStar in fiscal year
1999. Higher revenues from the growth in digital cable households also
contributed to the revenue increase.
The following is the approximate number of the Company's households for the
periods indicated below (in millions):
Dec. 31, Dec. 31,
1999 1998
- ---------------------------------------------------------------------------
Cable (1):
Playboy TV analog addressable 11.7 11.7
Playboy TV digital 1.3 0.2
Spice analog addressable 13.6 --
Spice digital 2.8 --
DTH:
Playboy TV 12.4 9.8
- ---------------------------------------------------------------------------
(1) 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.
By June 1999, the majority of AdulTVision households had been merged into
the Spice networks.
International TV
Profit contribution from the international TV business in fiscal year 1999
increased $26.4 million on a $25.1 million increase in revenues primarily due to
the first year of revenues related to PTVI.
Worldwide Home Video
Fiscal year 1999 revenues from the worldwide home video business decreased
$2.4 million, or 18%, and profit contribution decreased $2.1 million largely due
to softness in the domestic business.
Movies and Other
Fiscal year 1999 profit contribution from movies and other businesses
increased $1.0 million on a $1.1 million increase in revenues, primarily due to
library license fees from PTVI.
The Entertainment Group's administrative expenses increased $2.4 million
in fiscal year 1999 primarily due to higher performance-related variable
compensation expense and staff needed to support the group's growth.
20
Programming Expense
Programming expense increased $7.9 million for fiscal year 1999 primarily
as a result of the programming licensed to PTVI. Higher amortization related to
regular programming on the domestic Playboy TV network and programming
amortization in fiscal year 1999 related to the Spice networks also contributed
to the increase.
PUBLISHING GROUP
Publishing Group revenues were $137.1 million for fiscal year 1999, a 1%
increase over revenues of $136.1 million for fiscal year 1998.
Playboy magazine revenues increased $1.1 million, or 1%, for fiscal year
1999 compared to the prior year. Advertising revenues increased $3.1 million, or
10%, due to increases in both ad pages and average net revenue per page.
Partially offsetting was a $1.5 million, or 2%, decrease in circulation revenues
primarily due to a $2.0 million, or 4%, decrease in subscription revenues,
partially offset by a $0.5 million, or 2%, increase in newsstand revenues.
Revenues from other domestic publishing businesses decreased $0.2 million,
or 1%, for fiscal year 1999 compared to the prior year. The decrease was
primarily due to fewer special editions copies sold, despite an additional issue
in fiscal year 1999, principally as a result of increased competition, primarily
from the Internet. Partially offsetting the above were higher ancillary
businesses revenues.
International publishing revenues increased $0.1 million, or 1%, for
fiscal year 1999 compared to the prior year. The increase was primarily due to
higher revenues from the Polish edition of Playboy magazine, mostly offset by
lower royalties from the Brazilian edition, principally due to economic weakness
in that country.
For fiscal year 1999, the Publishing Group's segment income declined $0.6
million, or 10%. This decrease was primarily due to higher overhead, due in part
to higher performance-related variable compensation expense, editorial,
partially related to the higher newsstand revenues, and ancillary businesses
expenses combined with the lower special editions revenues and international
publishing royalties. Partially offsetting the above were the higher Playboy
magazine advertising revenues, lower paper prices and lower manufacturing costs
related to a reduction in print runs.
PLAYBOY ONLINE GROUP
For fiscal year 1999, Playboy Online Group revenues of $16.1 million
increased $9.0 million, or 127%, compared to the prior year. This increase was
from all revenue streams: e-commerce, advertising and sponsorships, and
subscription. Significantly higher e-commerce revenues were due in part to the
previously mentioned integration of the Playboy and Spice catalog businesses to
e-commerce.
For fiscal year 1999, the Playboy Online Group reported a segment loss of
$9.1 million compared to $6.5 million in the prior year, reflecting higher
planned investments related to the group's continued growth and development.
CATALOG GROUP
For fiscal year 1999, Catalog Group revenues of $60.3 million decreased
$14.1 million, or 19%, compared to the prior year. This decrease reflected a
decline in revenues for all of the Company's catalogs, primarily due to lower
circulation and response rates, except for the Spice catalog, which was launched
during the summer of 1998. The decrease also reflected the absence of fiscal
year 1999 fourth quarter revenues related to the Playboy and Spice catalogs due
to their previously mentioned integration as direct commerce businesses. These
lower net revenues, largely offset by lower related costs, resulted in segment
income of $0.3 million for fiscal year 1999 compared to $4.1 million in the
prior year.
OTHER BUSINESSES GROUP
For fiscal year 1999, Other Businesses Group revenues of $8.5 million
decreased $0.5 million, or 5%, compared to the prior year. The group reported a
segment loss of $0.4 million compared to $1.1 million in the prior year.
21
CORPORATE ADMINISTRATION AND PROMOTION
For fiscal year 1999, Corporate Administration and Promotion expenses were
$27.1 million. This reflects a $2.8 million, or 11%, increase largely due to
higher marketing expenses.
RESTRUCTURING EXPENSES
As previously mentioned, in fiscal year 1999 the Company began a cost
reduction effort that led to a work force reduction. As of December 31, 1999, 18
employees were terminated, resulting in a fourth quarter restructuring charge of
$1.1 million related to severance.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had $2.5 million in cash and cash
equivalents and $103.3 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. Historically, the Company has financed 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 $110.0 million credit
facility, which is comprised of $75.0 million of term loans and a $35.0 million
revolving credit facility. Outstanding balances under the credit facility bear
interest at rates equal to specified index rates plus margins that fluctuate
based on the Company's leverage ratio. The term loans consist of two tranches,
which amortize quarterly beginning on March 31, 2001. Tranche A and Tranche B
currently bear interest at a 3.50% and 4.00% margin, respectively, over LIBOR
and mature on March 15, 2004 and March 15, 2006, respectively. The revolving
credit facility expires on March 15, 2004. At December 31, 2000, $18.3 million
was outstanding under the revolving facility. The Company's obligations under
the credit facility are guaranteed by its subsidiaries (excluding Playboy.com)
and are secured by substantially all of its assets (excluding Playboy.com and
its assets).
The credit agreement contains financial covenants requiring the Company to
maintain certain leverage, interest coverage and fixed charge coverage ratios.
Other covenants include limitations on other indebtedness, investments, capital
expenditures and dividends. The credit agreement also requires mandatory
prepayments with net cash proceeds resulting from excess cash flow, asset sales
and the issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement. On March 28, 2001, the Company
received a preemptive waiver of the March 31, 2001 financial covenants which
will enable the Company to remain in compliance with the credit agreement. The
waiver will be effective through April 30, 2001. The waiver permits the Company
to continue to make ordinary course borrowings under the facility. The Company
is currently in discussions with its lenders to amend the financial covenants
and other terms of the credit agreement. The Company was in compliance with all
financial covenants at December 31, 2000.
The Company's credit agreement also contains a maximum funding limitation
by the Company to Playboy.com of $17.5 million, which was met in September 2000.
In September 2000, Hugh M. Hefner made a $5.0 million loan to Playboy.com. The
loan bears interest at a rate of 10.50%, with principal and accumulated interest
due in September 2002. During November 2000, the registration statement for the
Playboy.com IPO was withdrawn due to market conditions. The Company will
consider reinitiating an IPO when market conditions allow. Upon completion of an
IPO, all amounts above $10.0 million advanced to Playboy.com after January 1,
2000 shall be repaid from Playboy.com to the Company. In December 2000, a second
loan from Mr. Hefner was made to Playboy.com in the amount of $5.0 million. The
loan accumulates interest at a rate of 12.00% and was initially due in February
2001. In connection with obtaining third-party financing for Playboy.com, Mr.
Hefner agreed to amend the note to extend the maturity date to September 2002.
In the event that the amount raised in the Playboy.com financing exceeds
specified thresholds, the maturity of the note will be accelerated to the later
of receipt of those proceeds, or May 2001. The Company is seeking financing from
outside investors to fund Playboy.com's operations, whose investments may be
made as part of the establishment of strategic business alliances.
22
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $31.2 million for fiscal year
2000, which reflected $33.1 million of investments in Company-produced and
licensed entertainment programming.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $3.8 million for fiscal year
2000, principally due to $5.2 million of additions to property and equipment.
The Company also entered into leases of furniture and equipment totaling $1.8
million, principally related to new information technology-related equipment.
The Company invested $2.2 million related to its equity interests. Additionally,
it acquired Rouze Media, Inc. ("Rouze"), an Internet site that now operates as a
section of Playboy.com, which resulted in cash paid of $1.2 million in the
current year. Partially offsetting the above was $5.4 million of proceeds from
asset sales, primarily related to the sale of the Critics' Choice Video
business.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $14.0 million for fiscal
year 2000. This increase was principally due to the $18.3 million in borrowings
from the Company's revolving credit facility and the $10.0 million in loans from
Hugh M. Hefner, partially offset by the $15.0 million repayment of term loan
financing obligations in the current year.
INCOME TAXES
At December 31, 2000, the Company evaluated its net operating loss
carryforwards ("NOLs") and other deferred tax assets and liabilities in relation
to the Company's recent earnings history. As a result of this review, the
Company decided to adopt a more conservative approach by increasing the
valuation allowance, which resulted in noncash federal income tax expense of
$24.1 million. After consideration of the increase in the balance of the
valuation allowance, the Company was in a net deferred tax liability position
which consisted of $4.7 million of noncurrent deferred tax liabilities. At
December 31, 2000, the Company had NOLs of $47.5 million for tax purposes
expiring from 2004 through 2020.
OTHER
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"). Statement 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138 ("Statement 138"), which amends Statement
133 to ease implementation difficulties. Statement 133, which the Company
adopted as of January 1, 2001, requires the Company to recognize all derivatives
as either assets or liabilities on the balance sheet at fair value. It further
provides criteria for derivatives to be designated as fair value, cash flow, or
foreign currency hedges, and establishes accounting standards for reporting
changes in the fair value of the derivatives. Upon adoption, the Company is
required to adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gains or losses as adjustments to be reported in net
income (loss) or other comprehensive income (loss), as appropriate. Adoption of
these new accounting standards resulted in a $0.1 million cumulative effect of
change in accounting principle which is being recorded as other comprehensive
income in the first quarter of fiscal year 2001. The adoption also impacts
assets and liabilities recorded on the balance sheet.
In June 2000, the FASB issued 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"). Statement 139 rescinds FASB Statement No.
53, Financial Reporting by Producers and Distributors of Motion Picture Films
("Statement 53"). In June 2000, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 00-2, Accounting by
Producers or Distributors of Films ("SOP 00-2"), which provides new film
accounting and reporting standards. An entity that is a producer or distributor
of films and that previously applied Statement 53 will be required to follow the
guidance in SOP 00-2. The Company will adopt Statement 139 and SOP 00-2 during
the first quarter of fiscal year 2001 and expects to record a charge of
approximately $4.2 million as a cumulative effect of change in accounting
principle in net income (loss).
23
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains "forward-looking statements,"
including statements in MD&A, as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. These forward-looking statements involve 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) 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 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)
increases in paper or printing costs; (3) 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 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 or any deterioration in the terms of fee
arrangements with operators of these systems; (5) increased 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; (6) effects of the national consolidation of the single-copy magazine
distribution system; (7) marketing issues facing direct marketing stamp sheet
agents; (8) increasing competition in the cable, DTH and Internet markets; (9)
changes in consumer purchasing habits, viewing patterns or fashion trends or
changes in the retail sales environment which could reduce demand for the
Company's products and advertising spending; (10) uncertainty of market
acceptance of the Internet as a medium for information and entertainment,
including online gaming, e-commerce, advertising and subscription; (11) the
Company's ability to obtain adequate third-party financing, including equity
investments, to fund the Company's online business, and the timing and terms of
such financing; (12) reliance on third parties for technology and distribution
for the online business; (13) the Company's ability to obtain licenses and
approvals under applicable jurisdictional gaming laws and regulations; (14)
risks associated with foreign operations, including market acceptance and demand
for the Company's products and the products of its licensees, the Company's
ability to protect its trademarks and other intellectual property and the
Company's ability to manage the risk associated with its exposure to foreign
currency exchange rate fluctuations; (15) changes in interest rates; (16)
general economic conditions which can negatively impact advertising and consumer
spending habits; and (17) attempts by consumers or citizens groups to exclude
the Company's programming from local pay television distribution.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to certain market risks, including changes in
interest rates and foreign currency exchange rates. In order to manage the risk
associated with its exposure to such fluctuations, the Company enters into
various hedging transactions that have been authorized pursuant to the Company's
policies and procedures. The Company does not use financial instruments for
trading purposes.
The Company prepared sensitivity analyses to determine the impact of a
hypothetical one percentage point increase in interest rates. Based on its
sensitivity analyses at December 31, 2000 and 1999, such a change in interest
rates would affect the Company's annual consolidated operating results,
financial position and cash flows by approximately $0.9 million for both fiscal
years. As of December 31, 2000 and 1999, the Company had an interest rate swap
agreement in place to effectively convert $45.0 million of its floating rate
debt to fixed rate debt, thereby significantly reducing its risk related to
interest rate fluctuations.
The Company also prepared sensitivity analyses to determine the impact of
a hypothetical 10% devaluation of the U.S. dollar relative to the foreign
currencies of the countries to which it has exposure, primarily Japan and
Germany. Based on its sensitivity analyses at December 31, 2000 and 1999, such a
change in foreign currency exchange rates would affect the Company's annual
consolidated operating results, financial position and cash flows by
approximately $0.2 million for both fiscal years. The Company uses foreign
currency forward contracts to manage the risk associated with its exposure to
foreign currency exchange rate fluctuations.
24
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and
supplementary data are set forth in this Form 10-K Annual Report as follows:
Page
----
Consolidated Statements of Operations and Comprehensive Income
(Loss) - Fiscal Years Ended December 31, 2000, 1999 and 1998 26
Consolidated Balance Sheets - December 31, 2000 and 1999 27
Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows - Fiscal Years
Ended December 31, 2000, 1999 and 1998 29
Notes to Consolidated Financial Statements 30
Report of Independent Auditors 47
Report of Independent Accountants 48
Report of Management 49
The supplementary data regarding quarterly results of operations are set
forth in Note (W) Quarterly Results of Operations (Unaudited) of Notes to
Consolidated Financial Statements.
25
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
(in thousands, except per share amounts) 12/31/00 12/31/99 12/31/98
- -----------------------------------------------------------------------------------------------------------
Net revenues $ 307,722 $ 347,817 $ 317,618
- -----------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (265,369) (277,448) (269,478)
Selling and administrative expenses (55,385) (56,390) (43,172)
Restructuring expenses (3,908) (1,091) --
- -----------------------------------------------------------------------------------------------------------
Total costs and expenses (324,662) (334,929) (312,650)
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) (16,940) 12,888 4,968
- -----------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 1,519 1,798 127
Interest expense (9,148) (7,977) (1,551)
Equity in operations of PTVI and other (375) (13,871) (378)
Gain (loss) on disposals (2,924) 1,728 4,272
Playboy.com registration statement expenses (1,582) -- --
Legal settlement (622) -- --
Other, net (1,327) (996) (413)
- -----------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (14,459) (19,318) 2,057
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes (31,399) (6,430) 7,025
Income tax benefit (expense) (16,227) 862 (2,705)
- -----------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (47,626) (5,568) 4,320
Gain on disposal of discontinued operations (net of tax) -- 233 --
- -----------------------------------------------------------------------------------------------------------
Net income (loss) (47,626) (5,335) 4,320
- -----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment (19) (90) (4)
Unrealized gain (loss) on marketable securities (346) 252 (21)
- -----------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) (365) 162 (25)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (47,991) $ (5,173) $ 4,295
===========================================================================================================
Weighted average number of
common shares outstanding
Basic 24,240 22,872 20,548
===========================================================================================================
Diluted 24,240 22,872 21,036
===========================================================================================================
Basic and diluted EPS
Income (loss)
From continuing operations $ (1.96) $ (0.24) $ 0.21
From discontinued operations (net of tax) -- 0.01 --
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.96) $ (0.23) $ 0.21
===========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
Dec. 31, Dec. 31,
(in thousands, except share data) 2000 1999
- ---------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 2,534 $ 23,528
Marketable securities 3,443 3,064
Receivables, net of allowance for doubtful accounts of
$5,994 and $5,738, respectively 45,075 40,670
Receivables from related parties, net of allowance for doubtful
accounts of $0 and $2,232, respectively 7,575 14,225
Inventories, net 20,700 23,831
Programming costs 51,939 52,546
Deferred subscription acquisition costs 12,514 13,579
Other current assets 11,554 17,367
- ---------------------------------------------------------------------------------------------------
Total current assets 155,334 188,810
- ---------------------------------------------------------------------------------------------------
Receivables from related parties 57,500 62,500
Property and equipment, net 10,689 9,415
Programming costs 3,515 3,100
Goodwill, net of amortization of $4,761 and $2,490, respectively 87,260 89,539
Trademarks, net of amortization of $14,701 and $11,819, respectively 52,585 48,387
Net deferred tax assets -- 5,390
Other noncurrent assets 21,605 22,261
- ---------------------------------------------------------------------------------------------------
Total assets $ 388,488 $ 429,402
===================================================================================================
Liabilities
Financing obligations $ 3,922 $ 15,000
Financing obligations to related parties 5,000 --
Accounts payable 25,295 31,868
Accounts payable to related parties 718 2,690
Accrued salaries, wages and employee benefits 8,915 8,839
Deferred revenues 41,898 42,354
Deferred revenues from related parties 4,397 6,525
Other liabilities and accrued expenses 16,861 12,395
- ---------------------------------------------------------------------------------------------------
Total current liabilities 107,006 119,671
- ---------------------------------------------------------------------------------------------------
Financing obligations 89,328 75,000
Financing obligations to related parties 5,000 --
Deferred revenues from related parties 50,875 55,225
Net deferred tax liabilities 4,679 --
Other noncurrent liabilities 17,415 18,225
- ---------------------------------------------------------------------------------------------------
Total liabilities 274,303 268,121
- ---------------------------------------------------------------------------------------------------
Commitments and contingencies
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; 19,647,048
and 19,595,358 issued, respectively 196 196
Capital in excess of par value 120,519 120,337
Retained earnings (deficit) (3,384) 44,242
Unearned compensation restricted stock (2,713) (3,624)
Accumulated other comprehensive income (loss) (482) 81
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 114,185 161,281
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 388,488 $ 429,402
===================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
27
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unearned
Class A Class B Capital in Retained Comp.
Common Common Excess of Earnings Treasury Restricted
(in thousands) Stock Stock Par Value (Deficit) Stock Stock Other Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 50 $ 171 $ 43,539 $ 45,257 $ (6,692) $ (3,511) $ (131) $ 78,683
Net income -- -- -- 4,320 -- -- -- 4,320
Shares issued, vested or forfeited
under stock plans, net -- -- 1,163 -- 121 (205) -- 1,079
Income tax benefit related to stock plans -- -- 158 -- -- -- -- 158
Other -- -- -- -- -- -- (38) (38)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 50 171 44,860 49,577 (6,571) (3,716) (169) 84,202
Net loss -- -- -- (5,335) -- -- -- (5,335)
Shares issued, vested or forfeited
under stock plans, net 2 6 5,454 -- 35 92 -- 5,589
Shares issued related to the Spice acquisition -- 18 47,505 -- 906 -- -- 48,429
Shares issued in public equity offering -- 9 24,541 -- -- -- -- 24,550
Cancellation of treasury stock (3) (8) (5,619) -- 5,630 -- -- --
Income tax benefit related to stock plans -- -- 3,596 -- -- -- -- 3,596
Other -- -- -- -- -- -- 250 250
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 49 196 120,337 44,242 -- (3,624) 81 161,281
Net loss -- -- -- (47,626) -- -- -- (47,626)
Shares issued, vested or forfeited
under stock plans, net -- -- 510 -- -- 911 -- 1,421
Other -- -- (328) -- -- -- (563) (891)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 49 $ 196 $ 120,519 $ (3,384) $ -- $ (2,713) $ (482) $ 114,185
===================================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
28
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
(in thousands) 12/31/00 12/31/99 12/31/98
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (47,626) $ (5,335) $ 4,320
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Depreciation of property and equipment 3,561 2,055 2,010
Amortization of intangible assets 8,097 6,295 1,893
Equity in operations of PTVI and other 375 13,871 378
(Gain) loss on disposals 2,924 (1,728) (4,272)
Income tax benefit related to stock plans -- 3,596 158
Amortization of investments in entertainment programming 33,253 34,341 26,410
Investments in entertainment programming (33,061) (35,262) (25,902)
Changes in current assets and liabilities
Receivables (3,305) 5,604 (8,357)
Receivables from related parties 4,832 (9,342) (2,317)
Inventories (1,129) 1,854 (309)
Deferred subscription acquisition costs 1,065 (2,009) 573
Other current assets 4,829 654 (2,294)
Accounts payable (7,024) 128 (1,434)
Accounts payable to related parties (1,972) 2,690 --
Accrued salaries, wages and employee benefits 76 2,815 1,525
Deferred revenues (456) 707 (1,569)
Deferred revenues from related parties (2,128) 6,525 --
Other liabilities and accrued expenses 3,634 (598) 2,353
--------- --------- ---------
Net change in current assets and liabilities (1,578) 9,028 (11,829)
--------- --------- ---------
(Increase) decrease in receivables from related parties 4,350 (54,375) --
Increase in trademarks (7,080) (6,690) (3,645)
(Increase) decrease in net deferred tax assets 5,390 (6,663) 35
Increase in other noncurrent assets (626) (337) (1,221)
Increase (decrease) in deferred revenues from related parties (4,350) 55,225 --
Increase in net deferred tax liabilities 4,679 -- --
Increase (decrease) in other noncurrent liabilities (160) 1,188 548
Net cash provided by (used for) discontinued operations -- 34 (542)
Other, net 611 518 135
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (31,241) 15,761 (11,524)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Acquisition of Spice -- (64,720) (3,345)
Acquisition of Rouze (1,152) (100) --
Proceeds from disposals 5,384 13,573 500
Additions to property and equipment (5,174) (2,363) (1,144)
Funding of equity interests (2,238) (12,069) (5,212)
Purchase of marketable securities (866) (2,171) (537)
Other, net 248 63 32
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (3,798) (67,787) (9,706)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations 10,000 110,000 --
Repayment of financing obligations (15,000) (20,000) --
Net proceeds from (repayment of) revolving credit facility 18,250 (29,750) 19,750
Net proceeds from public equity offering -- 24,550 --
Payment of debt assumed in acquisition of Spice -- (10,471) --
Deferred financing fees (590) (4,669) (175)
Proceeds from employee stock benefit plans 1,385 5,553 1,049
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,045 75,213 20,624
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (20,994) 23,187 (606)
Cash and cash equivalents at beginning of year 23,528 341 947
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,534 $ 23,528 $ 341
========================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. Intercompany
accounts and transactions, which are immaterial, have been eliminated in
consolidation.
Use of estimates: The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Although
these estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from actual
results.
Reclassifications: Certain amounts reported for prior periods have been
reclassified to conform to the current year's presentation.
Revenue recognition: 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 is effective for the
fourth quarter of fiscal years beginning after December 1999. SAB 101 summarizes
the SEC's views on applying GAAP to revenue recognition in financial statements.
The Company performed a comprehensive review of its revenue recognition policies
and determined that it is in compliance with SAB 101. Revenues from the sale of
Playboy magazine and Internet subscriptions are recognized over the terms of the
subscriptions. Newsstand sales of Playboy magazine and special editions (net of
estimated returns), and revenues from the sale of Playboy magazine
advertisements, are recorded when each issue goes on sale. Domestic TV networks
cable and DTH revenues are recognized based on pay-per-view buys and monthly
subscriber counts reported each month by the system operators. International TV
revenues received from the PTVI joint venture, for the license of the exclusive
international rights for the use of the Playboy tradename, film and video
library, for the sale of the international Spice libraries, and for the sale of
the U.K. and Japan Playboy TV networks and certain international Spice
distribution contracts, are recognized as the consideration is paid to the
Company over a six-year period, less the Company's 19.9% intercompany interest
in such transactions. License fees from PTVI for current output production are
recognized as programming is available, less the Company's 19.9% intercompany
interest in such transactions. See Note (C) Playboy TV International, LLC Joint
Venture. Domestic home video revenues generally are recognized based on unit
sales reported for new releases each month by the Company's distributor and a
distribution agreement for backlist titles. Revenues from direct- and e-commerce
are recognized when the items are shipped.
Cash equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates fair value.
Marketable securities: Marketable securities are classified as
available-for-sale securities as defined by Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. These securities are stated at fair value and net unrealized holding
gains and losses are included in "Accumulated other comprehensive income
(loss)."
Inventories: Inventories are stated at the lower of cost (specific cost and
average cost) or fair value.
Property and equipment: Property and equipment is stated at cost. Depreciation
is recorded on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated on a straight-line basis over the
shorter of their estimated useful lives or the terms of the related leases.
Repair and maintenance costs are expensed as incurred, and major betterments are
capitalized. Sales and retirements of depreciable property and equipment are
recorded by removing the related cost and accumulated depreciation from the
accounts. Gains or losses on sales and retirements of property and equipment are
included in nonoperating income (expense). Costs incurred for computer software
developed or obtained for internal use are capitalized for application
development activities and immediately expensed for preliminary project
activities or post-implementation activities.
30
Advertising costs: The Company expenses advertising costs as incurred, except
for direct-response advertising. Direct-response advertising consists primarily
of costs associated with the promotion of Playboy magazine subscriptions,
principally the production of direct-mail solicitation materials and postage,
and the distribution of direct- and e-commerce mailings for use in the Playboy
Online and Catalog Groups. The capitalized direct-response advertising costs are
amortized over the period during which the future benefits are expected to be
received, generally six to 12 months. This is consistent with the provisions of
Statement of Position 93-7, Reporting on Advertising Costs. See Note (N)
Advertising Costs.
Programming costs and amortization: Programming costs include original
programming and film acquisition costs, which are generally capitalized and
amortized. The portion of original programming costs assigned to the domestic TV
networks market is principally amortized on the straight-line method over three
years. The portion of current original programming costs assigned to the
international TV market is fully amortized upon availability to PTVI. Existing
library original programming costs allocated to the international TV market are
amortized proportionately with license fees recognized related to the PTVI
agreement. The portion of original programming costs assigned to the worldwide
home video market is amortized using the individual-film-forecast-computation
method. Film acquisition costs assigned to domestic markets are amortized
principally on the straight-line method over the license term, generally three
years or less, while those assigned to the international TV market are fully
amortized upon availability to PTVI. Management believes that these methods
provide a reasonable matching of expenses with total estimated revenues over the
periods that revenues associated with films and programs are expected to be
realized. Film and program amortization is adjusted periodically to reflect
changes in the estimates of amounts of related future revenues. Film and program
costs are stated at the lower of unamortized cost or estimated net realizable
value as determined on a specific identification basis. Based on management's
estimate of future total gross revenues as of December 31, 2000, substantially
all unamortized programming costs applicable to released programs are expected
to be amortized during the next three years. See Note (C) Playboy TV
International, LLC Joint Venture and Note (M) Programming Costs.
Intangible assets: Goodwill, the excess of the purchase price of acquired
businesses over the fair value of net assets acquired, is amortized on the
straight-line method generally over 40 years. Trademark acquisition costs are
capitalized and amortized on the straight-line method over 40 years. Trademark
and copyright defense, registration and/or renewal costs are capitalized and
amortized on the straight-line method over 15 years. The consideration allocated
to a noncompete agreement related to the Spice acquisition is amortized on the
straight-line method over five years, and is included in "Other noncurrent
assets."
Financial instruments: Financial instruments are primarily utilized by the
Company to manage risks associated with interest rate and foreign exchange
volatility. The Company does not hold or issue financial instruments for trading
purposes. In May 1999, the Company entered into a two-year interest rate swap
agreement which effectively allows the Company to exchange its floating interest
rate on $45.0 million of its financing obligations for a fixed rate. The
differential to be paid or received is accrued monthly as an adjustment to
interest expense. The Company also utilizes forward contracts to minimize the
impact of currency movements on royalties received and certain payments
denominated in foreign currencies, primarily in Japan and Germany. The terms of
these contracts are generally one year or less. Gains and losses related to
these agreements are recorded in operating results as part of, and concurrent
with, the transaction. As of December 31, 2000 and 1999, the Company had
approximately $2.0 million and $1.7 million, respectively, in outstanding
foreign exchange forward contracts.
Income (loss) per common share: The Company reports earnings per share ("EPS")
consistent with the provisions of Statement of Financial Accounting Standards
No. 128, Earnings per Share. Basic EPS is computed by dividing net income (loss)
applicable to common shares by the weighted average number of common shares
outstanding during the period. Diluted EPS adjusts basic EPS for the dilutive
effects of stock options and other potentially dilutive financial instruments.
See Note (I) Income (Loss) per Common Share.
Equity in operations of PTVI and other: In fiscal years 2000 and 1999, equity in
operations of PTVI included the Company's 19.9% interest in the results of PTVI,
the elimination of unrealized profits of certain transactions between the
Company and PTVI and gains related to the transfer of certain assets to PTVI.
Fiscal year 1999 also included the accounting effects of the formation of the
joint venture.
Minority interest: The Company owns a majority interest in VIPress Poland Sp. z
o.o. ("VIPress"), publisher of the Polish edition of Playboy magazine. The
financial statements of VIPress are included in the Company's financial
statements. The minority interest in the results of operations of VIPress is
included in nonoperating income (expense) and the minority interest in the
equity of VIPress is included in "Other noncurrent liabilities."
31
Foreign currency translation: Assets and liabilities in foreign currencies are
translated into U.S. dollars at the exchange rate existing at the balance sheet
date. The net exchange differences resulting from these translations are
included in "Accumulated other comprehensive income (loss)." Revenues and
expenses are translated at average rates for the period.
New accounting pronouncements: In June 1998, the FASB issued Statement 133,
Accounting for Derivative Instruments and Hedging Activities. Statement 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. In June 2000, the FASB issued
Statement 138, which amends Statement 133 to ease implementation difficulties.
Statement 133, which the Company adopted as of January 1, 2001, requires the
Company to recognize all derivatives as either assets or liabilities on the
balance sheet at fair value. It further provides criteria for derivatives to be
designated as fair value, cash flow, or foreign currency hedges, and establishes
accounting standards for reporting changes in the fair value of the derivatives.
Upon adoption, the Company is required to adjust hedging instruments to fair
value in the balance sheet and recognize the offsetting gains or losses as
adjustments to be reported in net income (loss) or other comprehensive income
(loss), as appropriate. Adoption of these new accounting standards resulted in a
$0.1 million cumulative effect of change in accounting principle which is being
recorded as other comprehensive income in the first quarter of fiscal year 2001.
The adoption also impacts assets and liabilities recorded on the balance sheet.
In June 2000, the FASB issued Statement 139, Rescission of FASB Statement
No. 53 and Amendments to FASB Statements No. 63, 89, and 121. Statement 139
rescinds Statement 53, Financial Reporting by Producers and Distributors of
Motion Picture Films. In June 2000, the AICPA issued SOP 00-2, Accounting by
Producers or Distributors of Films, which provides new film accounting and
reporting standards. An entity that is a producer or distributor of films and
that previously applied Statement 53 will be required to follow the guidance in
SOP 00-2. The Company will adopt Statement 139 and SOP 00-2 during the first
quarter of fiscal year 2001 and expects to record a charge of approximately $4.2
million as a cumulative effect of change in accounting principle in net income
(loss).
(B) ACQUISITION
On March 15, 1999, the Company completed its acquisition of Spice, a
leading provider of adult television entertainment. The final determination of
the purchase price, including transaction costs and Spice debt, was
approximately $127 million. The purchase was financed through the issuance of
approximately $48 million, or approximately two million shares, of the Company's
Class B common stock, and the remainder through the payment and issuance of
long-term debt. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of Spice since the acquisition date
have been included in the Company's Consolidated Statements of Operations and
Comprehensive Income (Loss). Goodwill of approximately $90 million has been
recorded and is being amortized over 40 years. Immediately preceding the
acquisition, Spice sold certain of its assets. Receivables of $10.0 million
related to this sale and related gains have been deferred by the Company in
accordance with Staff Accounting Bulletin No. 81 due to the capitalization and
leverage levels of the purchaser.
The following unaudited pro forma information presents a summary of the results
of operations of the Company assuming the acquisition occurred on January 1,
1998 (in thousands, except per share amounts):
Dec. 31, Dec. 31,
1999 1998
- ----------------------------------------------------------------------------
Net revenues $ 354,875 $ 342,659
Net loss (6,905) (754)
Basic and diluted EPS $ (0.30) $ (0.03)
- ----------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional amortization
expense primarily related to goodwill and increased interest expense related to
the debt financing. They do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
January 1, 1998, or of future results of operations.
32
(C) PLAYBOY TV INTERNATIONAL, LLC JOINT VENTURE
During fiscal year 1999, the Company entered into a joint venture with a
wholly-owned subsidiary of the Cisneros Group of Companies. At the end of 2000,
certain assets of the Cisneros Group of Companies, including the interest in
PTVI, were reorganized under two U.S. limited liability companies. These limited
liability companies have guaranteed each other's obligations under the PTVI
agreements and act together with respect to management decisions and related
matters. PTVI has the exclusive right to create and launch new television
networks under the Playboy and Spice brands in territories outside of the United
States and Canada and, under certain circumstances, to license programming to
third parties. PTVI will also own and operate all existing international Playboy
TV and Spice networks. In addition, the Company and PTVI have entered into
program supply and trademark license agreements. Currently, the Company has a
19.9% interest in PTVI with an option to increase up to 50% at founder's price
for a certain period of time.
In return for the exclusive international rights for the use of the Playboy
tradename, film and video library, and for the acquisition of the international
rights to the Spice film library, the U.K. and Japan Playboy TV networks and
certain international Spice distribution contracts, PTVI will make total
payments of $100.0 million to the Company as follows (in thousands):
Fiscal Year Ended December 31
- --------------------------------------------------------------------------------
1999 $ 30,000
2000 7,500
2001 5,000
2002 7,500
2003 25,000
2004 25,000
- --------------------------------------------------------------------------------
Total payments from PTVI $ 100,000
================================================================================
PTVI also has a long-term commitment with the Company to license
international TV rights to each year's output production, with payments
representing a percentage of the Company's annual production spending. In fiscal
years 2000 and 1999, the Company recognized revenues from PTVI of $17.0 million
and $35.2 million, respectively, and pre-tax income, including the Company's
equity in the results of PTVI's operations, of $10.7 million and $13.8 million,
respectively. Amounts related to PTVI are reflected in the Company's
Consolidated Balance Sheets as follows (in thousands):
Dec. 31, Dec. 31,
2000 1999
- --------------------------------------------------------------------------------
Current receivables $ 7,397 $ 14,225
Noncurrent receivables 57,500 62,500
Accounts payable 718 2,690
Current deferred revenues 4,350 6,525
Noncurrent deferred revenues $ 50,875 $ 55,225
- --------------------------------------------------------------------------------
Summarized financial information for PTVI for the fiscal periods ended December
31, 2000 and 1999, which has been derived from PTVI audited financial
statements, is presented below (in thousands):
Dec. 31, Dec. 31,
2000 1999(1)
- -----------------------------------------------------------------------------
Revenues $ 28,300 $ 9,368
Gross profit 9,766 4,418
Net loss (9,935) (3,029)
Current assets 28,713 21,609
Noncurrent assets 61,902 67,461
Current liabilities 12,909 14,986
Noncurrent liabilities $ 45,039 $ 45,717
- -----------------------------------------------------------------------------
(1) For the period from August 31, 1999 (date of commencement) through
December 31, 1999
In calculating the Company's equity in the results of PTVI's operations,
the net loss as reported by PTVI is adjusted for the elimination of amortization
on the assets acquired by PTVI from the Company.
33
(D) 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) resulting in total
restructuring charges of $1.3 million, of which $0.2 million was recorded in the
first quarter of fiscal year 2000. This amount also included a $0.1 million
favorable adjustment to the previous estimate recorded in the fourth quarter of
fiscal year 2000. Additionally, 23 positions were eliminated through attrition.
All charges related to this restructuring were recorded and paid by December 31,
2000.
In the fourth quarter of fiscal year 2000, realignment of senior
management coupled with staff reductions led to an additional restructuring
charge of $3.7 million. As of December 31, 2000, all of the 19 employees, who
represented approximately 3% of the work force, were notified of their
termination. A total of $0.5 million related to this restructuring was paid by
December 31, 2000, resulting in a remaining liability of $3.2 million, most of
which will be paid in fiscal year 2001.
(E) GAIN (LOSS) ON DISPOSALS
In fiscal year 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 the current year and a related deferred tax benefit of
$0.4 million. The deferred tax benefit was offset by an increase in the
valuation allowance.
In fiscal year 1999, the Company sold its wholly-owned subsidiary, Playboy
Gaming Greece Ltd., which owned a 12% interest in the Rhodes Casino. Total
proceeds were $5.2 million and included a repayment of a loan of $1.2 million
owed to the Company by the Rhodes Casino. The Company realized a gain before
income taxes of $1.7 million on the sale. The taxable gain on the sale was
immaterial and was offset by the application of a capital loss carryforward.
In fiscal year 1998, the Company sold back to duPont the 20% interest in
duPont's common stock owned by the Company. Sale proceeds were $5.0 million,
which consisted of $0.5 million of cash and a $4.5 million promissory note
bearing interest at the prime rate, which was paid in fiscal year 1999. The
Company realized a gain before and after income taxes of $4.3 million on the
sale. There was no income tax effect related to this gain due to the application
of a capital loss carryforward.
(F) INCOME TAXES
The income tax provision (benefit) consisted of the following (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ 208
State 388 740 557
Foreign 2,889 1,591 1,747
- -------------------------------------------------------------------------------------------------------------------
Total current 3,277 2,331 2,512
- -------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 12,640 (8,690) 35
State 310 (1,309) --
Foreign -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total deferred 12,950 (9,999) 35
- -------------------------------------------------------------------------------------------------------------------
Benefit of stock compensation recorded
in capital in excess of par value -- 3,596 158
Benefit of pre-acquisition losses recorded
in goodwill -- 3,336 --
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 16,227 $ (736) $ 2,705
===================================================================================================================
Income tax provision (benefit) applicable to:
Continuing operations $ 16,227 $ (862) $ 2,705
Discontinued operations -- 126 --
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit) $ 16,227 $ (736) $ 2,705
===================================================================================================================
34
The income tax provision (benefit) from continuing operations differed from a
provision (benefit) computed at the U.S. statutory tax rate as follows (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Statutory rate tax provision (benefit) $ (10,990) $ (2,251) $ 2,459
Increase (decrease) in taxes resulting from:
Foreign withholding tax on licensing income 2,889 1,591 1,368
Foreign income tax in excess of statutory rates -- -- 127
State income taxes 698 (569) 557
Nondeductible expenses 658 903 399
Increase (decrease) in valuation allowance 24,142 -- (1,543)
Tax benefit of foreign taxes paid or accrued (1,013) (516) (465)
Effect of rate increase -- -- (225)
Other (157) (20) 28
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision (benefit)
from continuing operations $ 16,227 $ (862) $ 2,705
===================================================================================================================
The U.S. statutory tax rate applicable to the Company for each of the
fiscal years 2000, 1999 and 1998 was 35%.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement and
tax bases of assets and liabilities using enacted tax rates expected to apply in
the years in which the temporary differences are expected to reverse.
In the fourth quarter of fiscal year 2000, the Company reevaluated its
valuation allowances for deferred tax assets related to the fiscal year 2000 net
operating loss as well as the NOLs and tax credit carryforwards from prior
years. As a result of this review, the Company increased the valuation
allowance, which resulted in noncash federal income tax expense of $24.1
million.
The significant components of the Company's deferred tax assets and deferred tax
liabilities as of December 31, 1999 and 2000 are presented below (in thousands):
Dec. 31, Net Dec. 31,
1999 Change 2000
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 9,104 $ 7,525 $ 16,629
Capital loss carryforwards 8,914 -- 8,914
Tax credit carryforwards 11,306 950 12,256
Temporary difference related to PTVI 4,449 4,420 8,869
Other deductible temporary differences 19,202 (2,977) 16,225
- -------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 52,975 9,918 62,893
Valuation allowance (19,783) (25,261) (45,044)
- -------------------------------------------------------------------------------------------------------------------
Deferred tax assets 33,192 (15,343) 17,849
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (6,127) 324 (5,803)
Intangible assets (14,409) 1,427 (12,982)
Other taxable temporary differences (4,388) 645 (3,743)
- -------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities (24,924) 2,396 (22,528)
- -------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 8,268 $ (12,947) $ (4,679)
===================================================================================================================
At December 31, 1999, $2.9 million of the $8.3 million net deferred tax
asset was included in "Other current assets" and $5.4 million was segregated as
"Net deferred tax assets."
35
At December 31, 2000, the Company had NOLs of $47.5 million expiring from
2004 through 2020. The Company had capital loss carryforwards of $25.5 million
expiring in 2004. In addition, foreign tax credit carryforwards of $10.9
million, investment tax credit carryforwards of $0.3 million and minimum tax
credit carryforwards of $1.1 million are available to reduce future U.S. federal
income taxes. The foreign tax credit carryforwards expire in 2001 through 2005
and the investment tax credit carryforwards expire in 2001. The minimum tax
credit carryforwards have no expiration date.
(G) DISCONTINUED OPERATIONS
During fiscal year 1986, the Company discontinued operations at its
Company-owned and operated clubs. A reserve was established for estimated costs
to fulfill the court-approved settlement of the Playboy Club keyholder lawsuits.
During fiscal year 1999, the Company reversed its estimate of the remaining
liabilities related to the lawsuits, resulting in a gain on disposal of
discontinued operations of $168,000, net of $90,000 of income tax expense.
In fiscal year 1993, the Company received a General Notice from the United
States Environmental Protection Agency (the "EPA") as a "potentially responsible
party" ("PRP") in connection with a site identified as the Southern Lakes Trap &
Skeet Club, located at the Resort-Hotel in Lake Geneva, Wisconsin (the
"Resort"), formerly owned by a subsidiary of the Company. The Resort was sold by
the Company's subsidiary to LG Americana-GKP Joint Venture in 1982. Two other
entities were also identified as PRPs in the notice. The notice related to
actions that may be ordered taken by the EPA to sample for and remove
contamination in soils and sediments, purportedly caused by skeet shooting
activities at the Resort property. On September 10, 1998, the Company entered
into a consent decree settling this matter, which was entered by the United
States District Court for the Eastern District of Wisconsin on November 25,
1998. The Company had established adequate reserves to cover its approximately
$525,000 share of the cost (based on an agreement with one of the other PRPs) of
the agreed upon remediation, which was paid in fiscal year 1998. During fiscal
year 1999, the Company reversed its estimate of the remaining liabilities
related to this matter, resulting in a gain on disposal of discontinued
operations of $65,000, net of $36,000 of income tax expense.
(H) COMPREHENSIVE INCOME (LOSS)
During fiscal year 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 requires that the Company disclose
comprehensive income (loss) in addition to net income (loss). Comprehensive
income is a more inclusive financial reporting methodology that encompasses net
income (loss) and all other nonshareholder changes in equity (other
comprehensive income (loss)).
The following sets forth the components of other comprehensive income (loss),
and the related income tax expense or benefit allocated to each item (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (1) $ (19) $ (90) $ (4)
Unrealized gain (loss) on marketable securities (2) $(346) $ 252 $ (21)
- ------------------------------------------------------------------------------------------------------------------
(1) Net of a related tax benefit of $11, $48 and $2 for fiscal years 2000,
1999 and 1998, respectively.
(2) Net of a related tax benefit of $187 and $11 for fiscal years 2000 and
1998, respectively, and related tax expense of $136 for fiscal year 1999.
36
(I) INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted EPS (in
thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS -
Income (loss) from continuing operations $ (47,626) $ (5,568) $ 4,320
Gain on disposal of discontinued
operations (net of tax) -- 233 --
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (47,626) $ (5,335) $ 4,320
===================================================================================================================
Denominator:
Denominator for basic EPS -
weighted-average shares 24,240 22,872 20,548
- -------------------------------------------------------------------------------------------------------------------
Effect of dilutive potential common shares:
Stock options -- -- 488
- -------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares -- -- 488
- -------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS -
adjusted weighted-average shares 24,240 22,872 21,036
===================================================================================================================
Basic and diluted EPS
Income (loss)
From continuing operations $ (1.96) $ (0.24) $ 0.21
From discontinued operations (net of tax) -- 0.01 --
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.96) $ (0.23) $ 0.21
===================================================================================================================
For fiscal year 2000, options to purchase approximately 2,040,000 shares
of the Company's Class A and Class B common stock combined and approximately
270,000 shares of Class B restricted stock awards were outstanding but were not
included in the computation of diluted EPS. The inclusion of these shares would
have been antidilutive. As a result, the weighted average number of basic and
diluted common shares outstanding for fiscal year 2000 were equivalent. See Note
(S) Stock Plans.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. For cash and cash
equivalents, receivables, certain other current assets, current maturities of
long-term debt and short-term debt, the amounts reported approximate fair value
due to their short-term nature. For long-term debt related to the Company's
credit agreement, the amount reported approximates fair value as the interest
rate on the debt is generally reset every quarter to reflect current rates. For
interest rate swap agreements, the fair value of $0.1 million reflects the
estimated amount that the Company would expect to receive if it terminated the
agreement at December 31, 2000. For related-party long-term debt, the amount
reported approximates fair value due to no significant change in market
conditions since September 2000, when the debt was issued. For foreign currency
forward contracts, the fair value is estimated using quoted market prices
established by financial institutions for comparable instruments, which
approximates the contracts' values.
37
(K) MARKETABLE SECURITIES
Marketable securities, primarily purchased in connection with the Company's
deferred compensation plans, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2000 1999
- -------------------------------------------------------------------------------
Cost of marketable securities $ 3,620 $ 2,708
Gross unrealized holding gains 17 432
Gross unrealized holding losses (194) (76)
- -------------------------------------------------------------------------------
Fair value of marketable securities $ 3,443 $ 3,064
===============================================================================
There were no proceeds from the sale of marketable securities for fiscal
years 2000, 1999 and 1998, respectively, and therefore no gains or losses were
realized. Included in shareholders' equity for fiscal years 2000 and 1999 was a
net unrealized holding loss of $0.5 million and a net unrealized holding gain of
$0.4 million, respectively.
(L) INVENTORIES, NET
Inventories, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2000 1999
- --------------------------------------------------------------------------------
Paper $ 6,432 $ 6,226
Editorial and other prepublication costs 6,987 6,432
Merchandise finished goods 7,281 11,173
- --------------------------------------------------------------------------------
Total inventories, net $ 20,700 $ 23,831
================================================================================
(M) PROGRAMMING COSTS
Current programming costs consisted of the following (in thousands):
Dec. 31, Dec. 31,
2000 1999
- --------------------------------------------------------------------------------
Released, less amortization $ 44,529 $ 39,332
Completed, not yet released 7,410 13,214
- --------------------------------------------------------------------------------
Total current programming costs $ 51,939 $ 52,546
================================================================================
Noncurrent programming costs of $3.5 million and $3.1 million at December
31, 2000 and 1999, respectively, consisted of programs in the process of
production.
(N) ADVERTISING COSTS
At December 31, 2000 and 1999, advertising costs of $7.4 million and $10.0
million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets." For fiscal years 2000, 1999 and
1998, the Company's advertising expense was $47.0 million, $53.5 million and
$49.5 million, respectively.
(O) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2000 1999
- -------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,512 8,467
Furniture and equipment 15,420 14,453
Leasehold improvements 9,950 8,681
Software 3,232 1,325
- -------------------------------------------------------------------------------
Total property and equipment 37,406 33,218
Accumulated depreciation (26,717) (23,803)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 10,689 $ 9,415
===============================================================================
38
(P) FINANCING OBLIGATIONS
Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31,
2000 1999
- -------------------------------------------------------------------------------------------------------------------
Short-term financing obligations to related parties,
interest at 12.00% $ 5,000 $ --
===================================================================================================================
Long-term financing obligations:
Tranche A term loan, interest at 10.25% and 9.21% at
December 31, 2000 and 1999, respectively $ 15,333 $ 18,400
Tranche B term loan, interest at 10.75% and 9.71% at
December 31, 2000 and 1999, respectively 59,667 71,600
Revolving credit facility, weighted average interest of 11.03% 18,250 --
- -------------------------------------------------------------------------------------------------------------------
Total long-term financing obligations 93,250 90,000
Less current maturities (3,922) (15,000)
- -------------------------------------------------------------------------------------------------------------------
Long-term financing obligations $ 89,328 $ 75,000
===================================================================================================================
Long-term financing obligations to related parties,
interest at 10.50% $ 5,000 $ --
===================================================================================================================
The aggregate minimum amount of all long-term debt payable, excluding the
revolving credit facility, is approximately $3.9 million, $10.3 million, $6.7
million, $23.3 million and $28.8 million during fiscal years 2001, 2002, 2003,
2004 and 2005, respectively, and $7.0 million thereafter.
At December 31, 2000, the Company had a $110.0 million credit facility,
which was comprised of $75.0 million of term loans and a $35.0 million revolving
credit facility with a $10.0 million letter of credit sublimit, of which $0.2
million was outstanding at December 31, 2000 and 1999. Outstanding balances
under the credit facility bear interest at rates equal to specified index rates
plus margins that fluctuate based on the Company's leverage ratio. The term
loans consist of two tranches, which amortize quarterly beginning on March 31,
2001. Tranche A and Tranche B currently bear interest at a 3.50% and 4.00%
margin, respectively, over LIBOR and mature on March 15, 2004 and March 15,
2006, respectively. The revolving credit facility expires on March 15, 2004. At
December 31, 2000, $18.3 million was outstanding under the revolving facility.
The Company is assessed a 0.5% commitment fee on the unused portion of its
revolving credit facility. The Company's obligations under the credit facility
are guaranteed by its subsidiaries (excluding Playboy.com) and are secured by
substantially all of its assets (excluding Playboy.com and its assets).
The credit agreement contains financial covenants requiring the Company to
maintain certain leverage, interest coverage and fixed charge coverage ratios.
Other covenants include limitations on other indebtedness, investments, capital
expenditures and dividends. The credit agreement also requires mandatory
prepayments with net cash proceeds resulting from excess cash flow, asset sales
and the issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement. On March 28, 2001, the Company
received a preemptive waiver of the March 31, 2001 financial covenants which
will enable the Company to remain in compliance with the credit agreement. The
waiver will be effective through April 30, 2001. The waiver permits the Company
to continue to make ordinary course borrowings under the facility. The Company
is currently in discussions with its lenders to amend the financial covenants
and other terms of the credit agreement. The Company was in compliance with all
financial covenants at December 31, 2000.
The Company's credit agreement also contains a maximum funding limitation
by the Company to Playboy.com of $17.5 million, which was met in September 2000.
Upon completion of an IPO, all amounts above $10.0 million advanced to
Playboy.com after January 1, 2000 shall be repaid from Playboy.com to the
Company. In September 2000, Hugh M. Hefner made a $5.0 million loan to
Playboy.com. The loan bears interest at a rate of 10.50%, with principal and
accumulated interest due in September 2002. In December 2000, a second loan from
Mr. Hefner was made to Playboy.com in the amount of $5.0 million. The loan
accumulates interest at a rate of 12.00% and was initially due in February 2001.
In connection with obtaining third-party financing for Playboy.com, Mr. Hefner
agreed to amend the note to extend the maturity date to September 2002. In the
event that the amount raised in the Playboy.com financing exceeds specified
thresholds, the maturity of the note will be accelerated to the later of receipt
of those proceeds, or May 2001.
39
(Q) BENEFIT PLANS
The Company's Employees Investment Savings Plan is a defined contribution
plan consisting of two components, a profit sharing plan and a 401(k) plan. The
profit sharing plan covers all employees who have completed 12 months of service
of at least 1,000 hours. The Company's discretionary contribution to the profit
sharing plan is distributed to each eligible employee's account in an amount
equal to the ratio of each eligible employee's compensation, subject to Internal
Revenue Service limitations, to the total compensation paid to all such
employees. Contributions for fiscal years 2000, 1999 and 1998 were approximately
$0.7 million, $0.9 million and $0.4 million, respectively.
All employees are eligible to participate in the 401(k) plan upon the date
of hire. The Company makes matching contributions to the 401(k) plan based on
each participating employee's contributions and eligible compensation. The
Company's matching contributions for fiscal years 2000, 1999 and 1998 related to
this plan were approximately $1.3 million, $1.2 million and $1.0 million,
respectively.
The Company has two nonqualified deferred compensation plans, which permit
certain employees and all nonemployee directors to annually elect to defer a
portion of their compensation. A Company match is provided to employees who
participate in the deferred compensation plan, at a certain specified minimum
level, and whose annual eligible earnings exceed the salary limitation contained
in the 401(k) plan. All amounts deferred and earnings credited under these plans
are 100% immediately vested and are general unsecured obligations of the
Company. Such obligations totaled approximately $4.7 million and $4.2 million at
December 31, 2000 and 1999, respectively, and are included in "Other noncurrent
liabilities."
(R) COMMITMENTS AND CONTINGENCIES
The Company's principal lease commitments are for office space, satellite
transponders used in its domestic pay television operations, and furniture and
equipment. Some of these leases contain renewal or end-of-lease purchase
options.
Rent expense was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------
Minimum rent expense $ 16,035 $ 14,282 $ 11,250
Sublease income (395) -- --
- -------------------------------------------------------------------------------
Net rent expense $ 15,640 $ 14,282 $ 11,250
- -------------------------------------------------------------------------------
There was no contingent rent expense in any of these periods. The minimum
commitments at December 31, 2000, under operating leases with initial or
remaining noncancelable terms in excess of one year, were as follows (in
thousands):
Operating
Fiscal Year Ended December 31 Leases
- -------------------------------------------------------------------------------
2001 $ 11,358
2002 7,804
2003 6,392
2004 5,118
2005 3,654
Later years 9,149
Less minimum sublease income (6,457)
- -------------------------------------------------------------------------------
Net minimum lease commitments $ 37,018
===============================================================================
40
The programming of the Company's networks is delivered to cable and DTH
operators through communications satellite transponders. The Company's current
transponder leases contain protections typical in the industry against
transponder failure, including access to spare transponders, and conditions
under which the Company's access may be denied. The Company's current lease term
for Playboy TV expires October 30, 2001 and the Company has recently signed a
lease for a new transponder which will expire in 2010. The Company's current
lease term for Spice extends through the remainder of the satellite's life
(currently estimated to be 2011). Major limitations on the Company's access to
cable or DTH systems or satellite transponder capacity could materially
adversely affect the Company's operating performance. There have been no
instances in which the Company has been denied access to the transponders it
leases.
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.
(S) STOCK PLANS
The Company has various stock plans for key employees and nonemployee
directors which provide for the grant of nonqualified and incentive stock
options, and shares of restricted stock, deferred stock and other
performance-based equity awards. The exercise price of options granted equals or
exceeds the fair value at the grant date. In general, options become exercisable
over a two- or four-year period from the grant date and expire 10 years from the
grant date. Restricted stock awards provide for the issuance of Class B common
stock ("Class B stock") subject to restrictions that lapse if the Company meets
specified operating income objectives pertaining to a fiscal year. Vesting
requirements for certain restricted stock awards will lapse automatically,
regardless of whether or not the Company has achieved those objectives,
generally 10 years from the award date. In addition, one of the plans pertaining
to nonemployee directors also allows for the issuance of Class B stock as awards
and payment for annual retainers and meeting fees.
At December 31, 2000, a total of 1,497,250 shares of Class B stock were
available for future grants under the various stock plans combined. Stock option
transactions are summarized as follows:
Stock Options Outstanding
- -------------------------------------------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 115,000 1,570,250 $ 6.72 $ 9.99
Granted -- 167,500 -- 16.15
Exercised -- (76,250) -- 10.96
Canceled -- (140,000) -- 13.60
- ------------------------------------------------------------------------------------
Outstanding at December 31, 1998 115,000 1,521,500 6.72 10.29
Granted -- 1,008,000 -- 23.67
Exercised (110,000) (578,500) 6.69 7.90
Canceled -- (115,500) -- 17.89
- ------------------------------------------------------------------------------------
Outstanding at December 31, 1999 5,000 1,835,500 7.38 17.91
Granted -- 367,500 -- 21.42
Exercised -- (109,335) -- 10.44
Canceled -- (252,250) -- 20.33
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2000 5,000 1,841,415 $ 7.38 $18.72
===================================================================================================================
41
The weighted average exercise prices for Class A and Class B exercisable
options at December 31, 1998 were $6.72 and $8.54, respectively, and at December
31, 1999 were $7.38 and $12.47, respectively. The following table summarizes
information regarding stock options at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------
Class A
$7.38 5,000 0.66 $ 7.38 5,000 $ 7.38
Class B
$5.38-$13.75 588,165 4.19 $ 9.99 476,665 $ 9.40
14.75-21.00 690,250 7.41 19.39 531,750 19.39
$24.13-$31.50 563,000 8.43 27.02 1,500 24.60
- -------------------------------------------------------------------------------------------------------------------
Total Class B 1,841,415 6.69 $18.72 1,009,915 $14.68
- -------------------------------------------------------------------------------------------------------------------
The following table summarizes transactions related to restricted stock awards:
Restricted Stock Awards Outstanding Class B
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 326,872
Awarded 46,250
Vested --
Canceled (42,500)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 330,622
Awarded 26,250
Vested --
Canceled (49,374)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1999 307,498
Awarded 25,750
Vested --
Canceled (93,124)
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 240,124
===================================================================================================================
The Company has an Employee Stock Purchase Plan to provide substantially
all regular full- and part-time employees an opportunity to purchase shares of
its Class B stock through payroll deductions. The funds are withheld and then
used to acquire stock on the last trading day of each quarter, based on the
closing price less a 15% discount. At December 31, 2000, a total of
approximately 66,000 shares of Class B stock were available for future purchases
under this plan.
Stock options are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, no compensation expense has been recognized related to these
options. Under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123"), compensation expense is measured
at the grant date based on the fair value of the award and is recognized over
the vesting period. The Company has adopted the disclosure-only provisions of
Statement 123.
42
The following pro forma information presents the Company's net income (loss) and
basic and diluted EPS assuming compensation expense for these options had been
determined consistent with Statement 123 (in thousands, except per share
amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- --------------------------------------------------------------------------------
Net income (loss)
As reported $(47,626) $ (5,335) $ 4,320
Pro forma (50,649) (10,121) 3,194
Basic EPS
As reported (1.96) (0.23) 0.21
Pro forma (2.09) (0.44) 0.16
Diluted EPS
As reported (1.96) (0.23) 0.21
Pro forma $ (2.09) $ (0.44) $ 0.15
- --------------------------------------------------------------------------------
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- -------------------------------------------------------------------------------
Risk-free interest rate 6.27% 4.86% 5.63%
Expected stock price volatility 46.10% 44.11% 41.47%
Expected dividend yield -- -- --
- -------------------------------------------------------------------------------
For fiscal years 2000, 1999 and 1998, an expected life of six years was
used for all of the stock options, and the weighted average fair value of
options granted was $14.43, $9.72 and $7.91, respectively. For fiscal years
2000, 1999 and 1998, the weighted average fair value of restricted stock awarded
was $14.20, $22.13 and $16.14, respectively.
The pro forma effect on net income (loss) for fiscal years 1999 and 1998
may not be representative of the pro forma effect on net income (loss) in future
years as the Statement 123 method of accounting for pro forma compensation
expense has not been applied to options granted prior to July 1, 1995.
(T) PUBLIC EQUITY OFFERINGS
In January 2000, Playboy.com, a component of the Playboy Online Group,
filed a registration statement for a sale of a minority of its equity in an IPO.
Due to market conditions, the registration statement was withdrawn in November
2000. Deferred costs of $1.6 million were written off in fiscal year 2000 as
nonoperating expense. The Company will consider reinitiating an IPO when market
conditions allow.
In fiscal year 1999, the Company completed a public equity offering of
2,875,000 shares of Class B stock at a price of $30.00 per share. Two million
shares were sold by a trust established by, and for the benefit of, Hugh M.
Hefner, the Company's founder and principal stockholder, and 875,000 shares were
sold by the Company. Of the Company's shares, 375,000 were sold upon exercise by
the underwriters of their over-allotment option. The Company did not receive any
of the proceeds from the sale of Class B stock by Mr. Hefner. Mr. Hefner paid
for expenses related to this transaction proportionate to the number of shares
he sold to the total number of shares sold in the offering. Net proceeds to the
Company of $24.6 million were used for general corporate purposes and repayment
of term loan financing obligations.
43
(U) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/00 12/31/99 12/31/98
- --------------------------------------------------------------------------------
Interest $ 8,281 $ 7,706 $ 1,505
Income taxes $ 1,728 $ 2,756 $ 2,367
- --------------------------------------------------------------------------------
During fiscal year 1998, the Company had noncash investing activities
related to a disposal. See Note (E) Gain (Loss) on Disposals.
The following summarizes noncash investing and financing activities related to
the Spice acquisition (in thousands):
Fiscal Year
Ended
12/31/99
- -------------------------------------------------------------------------------
Fair value of net assets acquired, including goodwill $ 127,409
Acquisition liabilities (3,462)
Payment of debt assumed (10,471)
Common stock issued (48,429)
- -------------------------------------------------------------------------------
Cash paid 65,047
Less: cash acquired (327)
- -------------------------------------------------------------------------------
Net cash paid for the Spice acquisition $ 64,720
===============================================================================
See Note (B) Acquisition.
(V) SEGMENT INFORMATION
During fiscal year 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131, which is
based on the management approach to segment reporting, includes requirements to
report selected segment information quarterly, and annual entity-wide
disclosures related to products and services, geographic areas and major
customers. The adoption of Statement 131 did not affect the results of
operations or financial position of the Company, but did affect the disclosure
of segment information.
The Company's reportable segments are as follows: Entertainment,
Publishing, Playboy Online, Catalog and Other Businesses. Entertainment Group
operations include the production and marketing of programming through domestic
Playboy TV and Spice networks, other domestic pay television, international TV
and worldwide home video businesses as well as the distribution of feature
films. Publishing Group operations include the publication of Playboy magazine;
other domestic publishing businesses, comprising special editions, calendars and
ancillary businesses; and the licensing of international editions of Playboy
magazine. Playboy Online Group operations include the Company's network of free,
pay and e-commerce sites on the Internet. Catalog Group operations have included
the direct marketing of the Company's print catalogs, however, the sale of
Critics' Choice Video in fiscal year 2000 and the planned sale of Collectors'
Choice Music would end the Company's presence in this business. Other Businesses
Group operations combine certain brand-related businesses, such as the licensing
of consumer products carrying one or more of the Company's trademarks and
artwork owned by the Company, the development of casino gaming opportunities and
certain Company-wide marketing activities.
These reportable segments are based on the nature of the products offered.
The chief operating decision maker of the Company evaluates performance and
allocates resources based on several factors, of which the primary financial
measures are segment operating results and EBITDA. The accounting policies of
the reportable segments are the same as those described in Note (A) Summary of
Significant Accounting Policies.
44
The following table represents financial information by reportable segment:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
(in thousands) 12/31/00 12/31/99 12/31/98
- ------------------------------------------------------------------------------------------------
Net revenues (1)
Entertainment $ 100,955 $ 125,783 $ 91,049
Publishing 139,870 137,062 136,067
Playboy Online 25,291 16,104 7,098
Catalog 32,360 60,335 74,393
Other Businesses 9,246 8,533 9,011
- ------------------------------------------------------------------------------------------------
Total $ 307,722 $ 347,817 $ 317,618
================================================================================================
Income (loss) from continuing operations
before income taxes
Entertainment $ 25,287 $ 44,375 $ 26,165
Publishing 6,881 5,977 6,672
Playboy Online (25,199) (9,066) (6,528)
Catalog 54 256 4,100
Other Businesses 887 (436) (1,083)
Corporate Administration and Promotion (20,942) (27,127) (24,358)
Restructuring expenses (3,908) (1,091) --
Investment income 1,519 1,798 127
Interest expense (9,148) (7,977) (1,551)
Equity in operations of PTVI and other (375) (13,871) (378)
Gain (loss) on disposals (2,924) 1,728 4,272
Playboy.com registration statement expenses (1,582) -- --
Legal settlement (622) -- --
Other, net (1,327) (996) (413)
- ------------------------------------------------------------------------------------------------
Total $ (31,399) $ (6,430) $ 7,025
================================================================================================
EBITDA
Entertainment $ 64,307 $ 83,557 $ 52,997
Publishing 7,498 6,570 7,313
Playboy Online (23,497) (9,037) (6,500)
Catalog 180 500 4,564
Other Businesses 1,084 (271) (928)
Corporate Administration and Promotion (21,789) (21,506) (18,179)
Restructuring expenses (3,908) (1,091) --
- ------------------------------------------------------------------------------------------------
Total $ 23,875 $ 58,722 $ 39,267
================================================================================================
Depreciation and amortization (2) (3)
Entertainment $ 39,020 $ 39,182 $ 26,832
Publishing 617 593 641
Playboy Online 1,702 29 28
Catalog 126 244 464
Other Businesses 197 165 155
Corporate Administration and Promotion 3,249 2,478 2,193
- ------------------------------------------------------------------------------------------------
Total $ 44,911 $ 42,691 $ 30,313
================================================================================================
Identifiable assets (2) (4)
Entertainment $ 267,142 $ 281,167 $ 85,783
Publishing 56,191 51,273 50,171
Playboy Online 7,675 4,739 1,282
Catalog 3,797 13,784 17,871
Other Businesses 5,003 7,082 10,410
Corporate Administration and Promotion 48,680 71,357 46,590
- ------------------------------------------------------------------------------------------------
Total $ 388,488 $ 429,402 $ 212,107
================================================================================================
(1) Net revenues include revenues attributable to foreign countries of
approximately $50,165, $71,495 and $45,230 in fiscal years 2000, 1999 and
1998, respectively. Revenues from individual foreign countries were not
material. Revenues are generally attributed to countries based on the
location of customers, except product marketing royalties where revenues
are attributed based upon the location of licensees. In fiscal year 1999,
revenues from PTVI exceeded 10% of the Company's total net revenues. See
Note (C) Playboy TV International, LLC Joint Venture.
(2) Substantially all property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation,
however, is allocated to the reportable segments.
(3) Amounts include depreciation of property and equipment, amortization of
intangible assets and amortization of investments in entertainment
programming.
(4) Long-lived assets of the Company located in foreign countries were not
material.
45
(W) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
fiscal years 2000 and 1999 (in thousands, except per share amounts):
Quarters Ended
----------------------------------------------
2000 Mar. 31 June 30 Sept. 30 Dec. 31 Year
- -------------------------------------------------------------------------------------------------------------------
Net revenues $ 73,103 $ 77,182 $ 77,890 $ 79,547 $ 307,722
Gross profit 6,716 7,620 11,843 16,174 42,353
Operating loss (6,314) (5,808) (2,046) (2,772) (16,940)
Net loss (6,235) (5,883) (6,506) (29,002) (47,626)
Basic and diluted EPS (0.26) (0.24) (0.27) (1.19) $ (1.96)
Common stock price
Class A high 24 15/16 16 13/16 15 13 5/16
Class A low 15 13/16 10 1/4 10 7/8 8 1/4
Class B high 29 1/2 20 1/8 16 14 7/8
Class B low $ 18 3/8 $ 11 3/8 $ 11 7/8 $ 9 7/16
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended
----------------------------------------------
1999 Mar. 31 June 30 Sept. 30 Dec. 31 Year
- -------------------------------------------------------------------------------------------------------------------
Net revenues $ 73,384 $ 77,759 $ 104,240 $ 92,434 $ 347,817
Gross profit 10,076 12,338 32,690 15,265 70,369
Operating income (loss) (1,991) (980) 15,420 439 12,888
Net loss (1,042) (2,972) (1,078) (243) (5,335)
Basic and diluted EPS (0.05) (0.13) (0.05) 0.00 $ (0.23)
Common stock price
Class A high 25 1/8 32 24 11/16 22 3/8
Class A low 16 1/8 20 3/8 16 11/16 16 5/8
Class B high 28 11/16 36 1/8 28 9/16 26 1/2
Class B low $17 15/16 $ 23 5/16 $ 18 11/16 $19 11/16
- -------------------------------------------------------------------------------------------------------------------
Gross profit for the quarter ended March 31, 2000 cannot be calculated
from the Company's Quarterly Report on Form 10-Q as a result of a $0.5 million
reclassification of certain costs from "Cost of sales" to "Selling and
administrative expenses." The net loss for the quarter included restructuring
expenses of $0.2 million. See Note (D) Restructuring Expenses.
The net loss for the quarter ended September 30, 2000 included an
estimated nonoperating loss on the sale of its Critics' Choice Video business of
$2.7 million. See Note (E) Gain (Loss) on Disposals. The net loss for the
quarter also included nonoperating expenses of $1.5 million related to the
withdrawal of the Playboy.com registration statement. See Note (T) Public Equity
Offerings. Additionally, the net loss for the quarter included $0.6 million of
nonoperating expense related to a legal settlement.
The net loss for the quarter ended December 31, 2000 included
restructuring expenses of $3.7 million. See Note (D) Restructuring Expenses. The
net loss for the quarter also included an additional $0.2 million nonoperating
loss on the sale of its Critics' Choice Video business. See Note (E) Gain (Loss)
on Disposals. Additionally, the net loss for the quarter included noncash
federal income tax expense of $24.1 million related to the Company's decision to
increase the valuation allowance for its deferred tax assets. See Note (F)
Income Taxes.
The net loss for the quarter ended March 31, 1999 included a nonoperating
gain on the sale of the Rhodes Casino of $1.7 million. See Note (E) Gain (Loss)
on Disposals.
The financial results for the quarter ended September 30, 1999 included
significant annual library license fees from PTVI. See Note (C) Playboy TV
International, LLC Joint Venture.
The net loss for the quarter ended December 31, 1999 included
restructuring expenses of $1.1 million. See Note (D) Restructuring Expenses.
Additionally, the net loss for the quarter included a gain on disposal of
discontinued operations of $0.2 million, net of tax. See Note (G) Discontinued
Operations.
46
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheet of Playboy
Enterprises, Inc. as of December 31, 2000, and the related consolidated
statements of operations and comprehensive income (loss), shareholders' equity,
and cash flows for the year then ended. Our audit also included the financial
statement schedule for the year ended December 31, 2000 listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. We did not audit the
financial statements of Playboy TV International, LLC ("PTVI"), an
unconsolidated affiliate accounted for using the equity method. Such investment
was $2,398,065 at December 31, 2000, and equity in operations of PTVI was a loss
of $283,095 for the year ended December 31, 2000. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for PTVI, is based solely on the report
of the other auditors.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Playboy Enterprises, Inc. at December 31,
2000, and the consolidated results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Chicago, Illinois
February 20, 2001
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheet and the related consolidated statements
of operations and comprehensive income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Playboy Enterprises, Inc. and its subsidiaries at December 31, 1999, and the
results of their operations and comprehensive income and their cash flows for
the fiscal years ended December 31, 1999 and 1998, in conformity with accounting
principles generally accepted in the United States. Our audit also included the
financial statement schedule for the fiscal years ended December 31, 1999 and
1998 listed on the Index at Item 14(a). In our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein. These financial statements and schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Playboy TV International, LLC ("PTVI"), an
unconsolidated affiliate accounted for using the equity method. Such investment
aggregated $723,264 at December 31, 1999, and equity in operations of PTVI was
$(12,744,717) in 1999. The financial statements of PTVI (Note C) were audited by
other auditors whose report thereon has been furnished to us, and our opinion,
insofar as it relates to the amounts included for PTVI is based solely on the
report of such other auditors. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above. We
have not audited the consolidated financial statements and financial statement
schedule of Playboy Enterprises, Inc. for any period subsequent to December 31,
1999.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 30, 2000
48
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial
information in this Form 10-K Annual Report are the responsibility of the
Company. The financial statements, which include amounts based on judgments,
have been prepared in accordance with accounting principles generally accepted
in the United States. Other financial information in this Form 10-K Annual
Report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and are properly recorded, that assets are
safeguarded and that accountability for assets is maintained. The system of
internal controls is characterized by a control-oriented environment within the
Company, which includes written policies and procedures, careful selection and
training of personnel, and internal audits.
Ernst & Young LLP, independent auditors, have audited and reported on the
Company's consolidated financial statements for the fiscal year ended December
31, 2000. Their audit was performed in accordance with auditing standards
generally accepted in the United States.
The Audit Committee of the Board of Directors, composed of three
nonmanagement directors, meets periodically with Ernst & Young LLP, management
representatives and the Company's internal auditor to review internal accounting
control and auditing and financial reporting matters. Both Ernst & Young LLP and
the internal auditor have unrestricted access to the Audit Committee and may
meet with it without management representatives being present.
Christie Hefner
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Linda G. Havard
Executive Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
49
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On November 14, 2000, the Company appointed Ernst & Young LLP as the
Company's independent auditors and dismissed PricewaterhouseCoopers LLP. The
report of PricewaterhouseCoopers LLC on the financial statements of the Company
for the fiscal years ended December 31, 1999 and 1998 contained no adverse
opinion or disclaimer of opinion and neither of those reports was qualified or
modified as to uncertainty, audit scope or accounting principle. During the
fiscal years ended December 31, 1999 and 1998, and through November 14, 2000,
there were no disagreements or reportable events. The decision to change firms
was approved by the Audit Committee of the Company's Board of Directors.
PART III
Information required by Items 10, 11, 12 and 13 is contained in the
registrant's Notice of Annual Meeting of Stockholders and Proxy Statement (to be
filed) relating to the Annual Meeting of Stockholders to be held in May 2001,
which will be filed within 120 days after the close of the registrant's fiscal
year ended December 31, 2000, and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Certain Documents Filed as Part of the Form 10-K
Financial Statements of the registrant and supplementary data following are
as set forth under Item 8 of this Form 10-K Annual Report:
Page
----
Consolidated Statements of Operations and Comprehensive Income
(Loss) - Fiscal Years Ended December 31, 2000, 1999 and 1998 26
Consolidated Balance Sheets - December 31, 2000 and 1999 27
Consolidated Statements of Shareholders' Equity - Fiscal
Years Ended December 31, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows - Fiscal Years Ended
December 31, 2000, 1999 and 1998 29
Notes to Consolidated Financial Statements 30
Report of Independent Auditors 47
Report of Independent Accountants 48
Report of Management 49
Schedule II - Valuation and Qualifying Accounts 58
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, the Company filed a Form 8-K
Current Report dated October 19, 2000 as amended by an 8-K/A. The Company filed
a Form 8-K/A Current Report dated November 14, 2000 under Item 4 of the report.
The purpose of this report was to announce the dismissal of
PricewaterhouseCoopers LLP as its independent auditors and, upon recommendation
of its Audit Committee, the appointment of Ernst & Young LLP as its new
independent auditors.
(c) Exhibits
See Exhibit Index.
50
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.
March 22, 2001 By /s/ Linda Havard
--------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Christie Hefner March 22, 2001
- ---------------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Richard S. Rosenzweig March 22, 2001
- ---------------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
/s/ Dennis S. Bookshester March 22, 2001
- ---------------------------------------------
Dennis S. Bookshester
Director
/s/ David I. Chemerow March 22, 2001
- ---------------------------------------------
David I. Chemerow
Director
/s/ Donald G. Drapkin March 22, 2001
- ---------------------------------------------
Donald G. Drapkin
Director
/s/ Sol Rosenthal March 22, 2001
- ---------------------------------------------
Sol Rosenthal
Director
/s/ Sir Brian Wolfson March 22, 2001
- ---------------------------------------------
Sir Brian Wolfson
Director
/s/ Linda Havard March 22, 2001
- ---------------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
51
EXHIBIT INDEX
All agreements listed below may have additional exhibits which are not
attached. All such exhibits are available upon request, provided the requesting
party shall pay a fee for copies of such exhibits, which fee shall be limited to
the Company's reasonable expenses incurred in furnishing these documents.
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
2.1 Agreement and Plan of Merger, dated as of May 29, 1998, by and among
Playboy Enterprises, Inc., New Playboy, Inc., Playboy Acquisition
Corp., Spice Acquisition Corp. and Spice Entertainment Companies,
Inc. (incorporated by reference to Exhibit 2.1 from the Company's
Registration Statement No. 333-68139 on Form S-4 dated December 1,
1998 (the "December 1, 1998 Form S-4"))
2.2 Amendment, dated as of November 16, 1998, to the Agreement and Plan
of Merger by and among Playboy Enterprises, Inc., New Playboy, Inc.,
Playboy Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference to Exhibit
2.2 from the December 1, 1998 Form S-4)
2.3 Amendment, dated as of February 26, 1999, to the Agreement and Plan
of Merger by and among Playboy Enterprises, Inc., New Playboy, Inc.,
Playboy Acquisition Corp., Spice Acquisition Corp. and Spice
Entertainment Companies, Inc. (incorporated by reference to Exhibit
2.1 from the Current Report on Form 8-K dated March 9, 1999)
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 from the Current Report on
Form 8-K dated March 15, 1999 (the "March 15, 1999 Form 8-K"))
3.2 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Company, dated March 15, 1999 (incorporated by
reference to Exhibit 3.2 from the March 15, 1999 Form 8-K)
3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Company, dated March 15, 1999 (incorporated by
reference to Exhibit 3.3 from the March 15, 1999 Form 8-K)
3.4 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 from the March 15, 1999 Form 8-K)
10.1 Playboy Magazine Printing and Binding Agreement
#a October 22, 1997 Agreement between Playboy Enterprises, Inc.
and Quad/Graphics, Inc. (incorporated by reference to Exhibit
10.4 from the Company's transition period report on Form 10-K
for the six months ended December 31, 1997 (the "Transition
Period Form 10-K"))
#b Amendment to October 22, 1997 Agreement dated as of March 3,
2000 (incorporated by reference to Exhibit 10.1 from the
Company's quarterly report on Form 10-Q for the quarter ended
March 31, 2000)
10.2 Playboy Magazine Distribution Agreement dated as of July 2, 1999
between Playboy Enterprises, Inc. and Warner Publisher Services,
Inc. (incorporated by reference to Exhibit 10.4 from the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1999 (the "September 30, 1999 Form 10-Q"))
10.3 Playboy Magazine Subscription Fulfillment Agreement
a July 1, 1987 Agreement between Communication Data Services,
Inc. and Playboy Enterprises, Inc. (incorporated by reference
to Exhibit 10.12(a) from the Company's annual report on Form
10-K for the year ended June 30, 1992 (the "1992 Form 10-K"))
52
b Amendment dated as of June 1, 1988 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.12(b) from
the Company's annual report on Form 10-K for the year ended
June 30, 1993 (the "1993 Form 10-K"))
c Amendment dated as of July 1, 1990 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.12(c) from
the Company's annual report on Form 10-K for the year ended
June 30, 1991 (the "1991 Form 10-K"))
d Amendment dated as of July 1, 1996 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.5(d) from
the Company's annual report on Form 10-K for the year ended
June 30, 1996 (the "1996 Form 10-K"))
#e Amendment dated July 7, 1997 to said Fulfillment Agreement
(incorporated by reference to Exhibit 10.6(e) from the
Transition Period Form 10-K)
10.4 Transponder Lease Agreement dated as of December 31, 1992 between
Playboy Entertainment Group, Inc. and General Electric Capital
Corporation (incorporated by reference to Exhibit 10.3 from the
Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1992 (the "December 31, 1992 Form 10-Q"))
10.5 Agreement for Compressed Transponder Services effective as of March
15, 1999 between Califa Entertainment Group, Inc. and Playboy
Entertainment Group, Inc. (incorporated by reference to Exhibit 10.5
from the Company's annual report on Form 10-K for the year ended
December 31, 1999 (the "1999 Form 10-K"))
10.6 Distribution License to Exploit Home Video Rights effective October
1, 1991 between Playboy Video Enterprises, Inc. and Uni Distribution
Corp. (incorporated by reference to Exhibit 10.16 from the 1991 Form
10-K)
10.7 Distribution Agreement between Playboy Entertainment Group, Inc. and
Universal Music & Video Distribution (formerly Uni Distribution
Corp.) regarding licensing and sale of domestic home video product
a Agreement dated as of March 24, 1995 (incorporated by
reference to Exhibit 10.8 from the Company's annual report on
Form 10-K for the year ended June 30, 1995 (the "1995 Form
10-K"))
b Amendment to March 24, 1995 Agreement dated February 28, 1997
(incorporated by reference to Exhibit 10.6 from the Company's
quarterly report on Form 10-Q for the quarter ended March 31,
1997 (the "March 31, 1997 Form 10-Q"))
#c Agreement dated June 5, 1998 (incorporated by reference to
Exhibit 10.1 from the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1998 (the "June 30, 1998 Form
10-Q"))
#10.8 Program Supply Agreement between SEI Inc ApS and SEI 1 ApS dated
June 30, 1999 (incorporated by reference to Exhibit 10.2 from the
Company's quarterly report on Form 10-Q for the quarter ended June
30, 1999 (the "June 30, 1999 Form 10-Q"))
#10.9 Operating Agreement for Playboy TV International, LLC dated as of
August 31, 1999 between Playboy Entertainment Group, Inc. and
Victoria Springs Investments Ltd. (incorporated by reference to
Exhibit 10.1 from the September 30, 1999 Form 10-Q)
#10.10 Program Supply Agreement dated as of August 31, 1999 between Playboy
Entertainment Group, Inc., Playboy TV International, LLC and PTV
U.S., LLC (incorporated by reference to Exhibit 10.2 from the
September 30, 1999 Form 10-Q)
#10.11 Trademark License Agreement dated as of August 31, 1999 between
Playboy Enterprises International, Inc. and Playboy TV
International, LLC (incorporated by reference to Exhibit 10.3 from
the September 30, 1999 Form 10-Q)
53
10.12 Affiliation Agreement between Playboy Entertainment Group, Inc. and
DirecTV, Inc. regarding the Satellite Distribution of Playboy TV
a Agreement dated November 15, 1993
b First Amendment to November 15, 1993 Agreement dated as of
April 19, 1994
c Second Amendment to November 15, 1993 Agreement dated as of
July 26, 1995
(items (a), (b) and (c) incorporated by reference to Exhibits
10.13(a), (b) and (c), respectively, from the 1996 Form 10-K)
#d Third Amendment to November 15, 1993 Agreement dated August
26, 1997 (incorporated by reference to Exhibit 10.3 from the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1997 (the "September 30, 1997 Form 10-Q"))
#e Fourth Amendment to November 15, 1993 Agreement dated March
15, 1999 (incorporated by reference to Exhibit 10.1 from the
June 30, 1999 Form 10-Q)
@10.13 Fulfillment and Customer Service Services Agreement dated October 2,
2000 between Infinity Resources, Inc. and Playboy.com, Inc. 59-73
10.14 Credit Agreement
a Credit Agreement, dated as of February 26, 1999, among New
Playboy, Inc., PEI Holdings, Inc., the Lenders named in this
Credit Agreement, ING (U.S.) Capital LLC, as Syndication
Agent, and Credit Suisse First Boston, as Administrative
Agent, as Collateral Agent and as Issuing Bank
b Subsidiary Guarantee Agreement, dated as of March 15, 1999,
among certain subsidiaries of Playboy Enterprises, Inc. and
Credit Suisse First Boston, as Collateral Agent
c Indemnity, Subrogation and Contribution Agreement, dated as of
March 15, 1999, among Playboy Enterprises, Inc., PEI Holdings,
Inc., certain other subsidiaries of Playboy Enterprises, Inc.,
and Credit Suisse First Boston, as Collateral Agent
d Pledge Agreement, dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit Suisse
First Boston, as Collateral Agent
e Security Agreement, dated as of March 15, 1999, among Playboy
Enterprises, Inc., PEI Holdings, Inc., certain other
subsidiaries of Playboy Enterprises, Inc., and Credit Suisse
First Boston, as Collateral Agent
(items (a) through (e) incorporated by reference to Exhibits
10.21(a) through (e), respectively, from the Company's annual report
on Form 10-K for the year ended December 31, 1998 (the "1998 Form
10-K"))
f First Amendment to February 26, 1999 Credit Agreement dated as
of June 14, 1999
g Second Amendment to February 26, 1999 Credit Agreement dated
as of January 31, 2000
(items (f) and (g) incorporated by reference to Exhibits 10.18(f)
and (g), respectively, from the 1999 Form 10-K)
h Third Amendment to February 26, 1999 Credit Agreement dated as
of June 9, 2000 (incorporated by reference to Exhibit 10.1
from the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 2000)
10.15 Promissory Notes issued by Playboy.com, Inc. to Hugh M. Hefner
a Promissory Note dated September 27, 2000 (incorporated by
reference to Exhibit 10.2 from the Company's quarterly report
on Form 10-Q for the quarter ended September 30, 2000 (the
"September 30, 2000 Form 10-Q"))
@b Promissory Note dated December 29, 2000 74-77
54
10.16 Playboy Mansion West Lease Agreement, as amended, between Playboy
Enterprises, Inc. and Hugh M. Hefner
a Letter of Interpretation of Lease
b Agreement of Lease
(items (a) and (b) incorporated by reference to Exhibits 10.3(a) and
(b), respectively, from the 1991 Form 10-K)
c Amendment to Lease Agreement dated as of January 12, 1998
(incorporated by reference to Exhibit 10.2 from the Company's
quarterly report on Form 10-Q for the quarter ended March 31,
1998 (the "March 31, 1998 Form 10-Q"))
10.17 Los Angeles Offices Lease Documents
a Office Lease dated as of July 25, 1991 between Playboy
Enterprises, Inc. and Beverly Mercedes Place, Ltd.
(incorporated by reference to Exhibit 10.6(c) from the 1991
Form 10-K)
b Amendment to July 25, 1991 Lease dated June 26, 1996
c Amendment to July 25, 1991 Lease dated September 12, 1996
(items (b) and (c) incorporated by reference to Exhibits 10.19(b)
and (c), respectively, from the 1996 Form 10-K)
d Office Lease dated January 6, 1999 between 5055 Wilshire
Limited Partnership and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.24(d) from the 1998
Form 10-K)
10.18 Chicago Office Lease Documents
a Office Lease dated April 7, 1988 by and between Playboy
Enterprises, Inc. and LaSalle National Bank as Trustee under
Trust No. 112912 (incorporated by reference to Exhibit 10.7(a)
from the 1993 Form 10-K)
b First Amendment to April 7, 1988 Lease dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from the 1995
Form 10-K)
c Second Amendment to April 7, 1988 Lease dated June 1, 1992
(incorporated by reference to Exhibit 10.1 from the December
31, 1992 Form 10-Q)
d Third Amendment to April 7, 1988 Lease dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995
Form 10-K)
e Fourth Amendment to April 7, 1988 Lease dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996
Form 10-K)
f Fifth Amendment to April 7, 1988 Lease dated March 19, 1998
(incorporated by reference to Exhibit 10.3 from the March 31,
1998 Form 10-Q)
10.19 New York Office Lease Agreement dated August 11, 1992 between
Playboy Enterprises, Inc. and Lexington Building Co. (incorporated
by reference to Exhibit 10.9(b) from the 1992 Form 10-K)
10.20 Itasca Warehouse Lease Documents
a Agreement dated as of September 6, 1996 between Centerpoint
Properties Corporation and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.23 from the 1996 Form
10-K)
b Amendment to September 6, 1996 Lease dated June 1, 1997
(incorporated by reference to Exhibit 10.25(b) from the
Company's annual report on Form 10-K for the year ended June
30, 1997 (the "1997 Form 10-K"))
@c Real Estate Sublease Agreement dated October 2, 2000 between
Playboy Enterprises, Inc. and Infinity Resources, Inc. 78-81
*10.21 Selected Company Remunerative Plans
a Executive Protection Program dated March 1, 1990 (incorporated
by reference to Exhibit 10.18(c) from the 1995 Form 10-K)
b Amended and Restated Deferred Compensation Plan for Employees
effective January 1, 1998
c Amended and Restated Deferred Compensation Plan for Board of
Directors' effective January 1, 1998
(items (b) and (c) incorporated by reference to Exhibits 10.2(a) and
(b), respectively, from the June 30, 1998 Form 10-Q)
55
*10.22 1989 Option Plan
a Playboy Enterprises, Inc. 1989 Stock Option Plan, as amended,
For Key Employees (incorporated by reference to Exhibit
10.4(mm) from the 1991 Form 10-K)
b Playboy Enterprises, Inc. 1989 Stock Option Agreement
c Letter dated July 18, 1990 pursuant to the June 7, 1990
recapitalization regarding adjustment of options
(items (b) and (c) incorporated by reference to Exhibits 10.19(c)
and (d), respectively, from the 1995 Form 10-K)
d Consent and Amendment regarding the 1989 Option Plan
(incorporated by reference to Exhibit 10.4(aa) from the 1991
Form 10-K)
*10.23 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option Plan
for Non-Employee Directors, as amended
b Playboy Enterprises, Inc. 1991 Non-Qualified Stock Option
Agreement for Non-Employee Directors
(items (a) and (b) incorporated by reference to Exhibits 10.4(rr)
and (nn), respectively, from the 1991 Form 10-K)
*10.24 1995 Stock Incentive Plan
a Amended and Restated Playboy Enterprises, Inc. 1995 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 from
the June 30, 1999 Form 10-Q)
b Form of Non-Qualified Stock Option Agreement for Non-Qualified
Stock Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock
Options which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3,
4.4 and 4.5, respectively, from the Company's Registration Statement
No. 33-58145 on Form S-8 dated March 20, 1995)
e Form of Section 162(m) Restricted Stock Agreement for Section
162(m) Restricted Stock issued under the Plan (incorporated by
reference to Exhibit 10.1(e) from the 1997 Form 10-K)
*10.25 1997 Directors' Plan
@a 1997 Equity Plan for Non-Employee Directors of Playboy
Enterprises, Inc., as amended 82-94
b Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan (incorporated by reference to Exhibit 10.1(b)
from the September 30, 1997 Form 10-Q)
*10.26 Form of Nonqualified Option Agreement between Playboy Enterprises,
Inc. and each of Dennis S. Bookshester and Sol Rosenthal
(incorporated by reference to Exhibit 4.4 from the Company's
Registration Statement No. 333-30185 on Form S-8 dated November 13,
1996)
*10.27 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock Purchase Plan, as
amended and restated (incorporated by reference to Exhibit
10.2 from the March 31, 1997 Form 10-Q)
b Amendment to Playboy Enterprises, Inc. Employee Stock Purchase
Plan, as amended and restated (incorporated by reference to
Exhibit 10.4 from the June 30, 1999 Form 10-Q)
56
*10.28 Selected Employment, Termination and Other Agreements
a Playboy Enterprises, Inc. Severance Agreement (incorporated by
reference to Exhibit 10.4(vv) from the 1991 Form 10-K)
b Amendment to Playboy Enterprises, Inc. Severance Agreement
(incorporated by reference to Exhibit 10.1(a) from the
September 30, 2000 Form 10-Q)
c Letter Agreement dated April 18, 1997 regarding employment of
Linda Havard (incorporated by reference to Exhibit 10.3(f)
from the March 31, 1997 Form 10-Q)
d Letter Agreement dated September 26, 1997 regarding employment
of Garry Saunders (incorporated by reference to Exhibit
10.5(b) from the September 30, 1997 Form 10-Q)
e 1999-2000 Special Incentive/Bonus Plans for Garry Saunders
(incorporated by reference to Exhibit 10.31(j) from the 1999
Form 10-K)
@f Letter Agreement dated November 30, 2000 regarding employment
of Michael Carr 95-96
@g Letter Agreement dated December 30, 2000 regarding employment
of James English 97-100
@21 Subsidiaries 101-102
@23.1 Consent of Ernst & Young LLP 103
@23.2 Consent of Deloitte & Touche LLP 104
@23.3 Consent of PricewaterhouseCoopers LLP 105
@99 Playboy TV International, LLC Joint Venture financial statements for
the period ended December 31, 2000 106-117
- ----------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
@ Filed herewith
57
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
==============================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
----------- ------------ ----------- ----------- ----------- -----------
Allowance deducted in the balance sheet
from the asset to which it applies:
Fiscal Year Ended December 31, 2000:
Allowance for doubtful accounts $ 17,970 $ 723 $ 1,108(a) $ 3,807(b) $ 15,994
============ =========== =========== =========== ===========
Allowance for returns $ 21,295 $ -- $ 51,205(c) $ 43,685(d) $ 28,815
============ =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 19,783 $ 24,142(e) $ 1,119(f) $ -- $ 45,044
============ =========== =========== =========== ===========
Fiscal Year Ended December 31, 1999:
Allowance for doubtful accounts $ 6,349 $ 1,920 $ 11,670(a) $ 1,969(b) $ 17,970
============ =========== =========== =========== ===========
Allowance for returns $ 21,644 $ -- $ 56,024(c) $ 56,373(d) $ 21,295
============ =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 15,438 $ -- $ 4,345(f) $ -- $ 19,783
============ =========== =========== =========== ===========
Fiscal Year Ended December 31, 1998:
Allowance for doubtful accounts $ 4,467 $ 2,371 $ 1,810(a) $ 2,299(b) $ 6,349
============ =========== =========== =========== ===========
Allowance for returns $ 27,187 $ -- $ 58,880(c) $ 64,423(d) $ 21,644
============ =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 16,504 $ -- $ -- $ 1,066 $ 15,438
============ =========== =========== =========== ===========
Notes:
(a) Includes a $10,000 provision in fiscal year 1999 related to the Spice
acquisition which was charged to goodwill and applied against a noncurrent
note receivable. Also primarily represents provisions for unpaid
subscriptions charged to net revenues.
(b) Represents uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents noncash federal income tax expense related to increasing the
valuation allowance.
(f) Represents the unrealizable portion of the change in the gross deferred
tax asset.
58