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, 2003
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 751-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------------
Class A Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
Class B Common Stock, par value $0.01 per share New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No |_|
The aggregate market value of Class A Common Stock held by nonaffiliates
on June 30, 2003 (based upon the closing sale price on the New York Stock
Exchange) was $16,806,720. The aggregate market value of Class B Common Stock
held by nonaffiliates on June 30, 2003 (based upon the closing sale price on the
New York Stock Exchange) was $199,486,772.
At February 29, 2004, there were 4,864,102 shares of Class A Common Stock
and 22,613,151 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part II. Item 5 and Part III. Items 10-14
of this report is incorporated herein by reference to the Notice of Annual
Meeting of Stockholders and Proxy Statement (to be filed) relating to the Annual
Meeting of Stockholders to be held in May 2004.
PLAYBOY ENTERPRISES, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 70
Item 9A. Controls and Procedures 70
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 71
Item 13. Certain Relationships and Related Transactions 71
Item 14. Principal Accounting Fees and Services 71
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K 72
2
PART I
Item 1. Business
Playboy Enterprises, Inc., together with its subsidiaries and
predecessors, will be referred to in this Form 10-K Annual Report by terms such
as "we," "us," "our," "Playboy" and the "Company," unless the context otherwise
requires. We were organized in 1953 to publish Playboy magazine and are now a
worldwide leader in the development and distribution of multi-media
entertainment for adult audiences. The Playboy brand is one of the most widely
recognized and popular brands in the world. The strength of our brand drives our
Entertainment, Publishing, Online and Licensing Groups. Our programming is
carried in the U.S. by all six of the major multiple system operators, or MSOs,
and both of the largest satellite direct-to-home, or DTH, providers. Playboy
magazine, celebrating its 50th Anniversary, is the best-selling monthly men's
magazine in the world, with a worldwide paid monthly circulation of over four
million copies. Our online operations consist of a network of websites that have
an established and growing subscriber and revenue base. Our licensing businesses
leverage the Playboy name, the Rabbit Head Design and our other trademarks in
the worldwide manufacture, sale and distribution of a variety of consumer
products.
Our businesses are currently classified into the following four reportable
segments: Entertainment, Publishing, Online and Licensing. Formerly, we operated
a fifth segment, Catalog, which we divested in connection with our sale of the
Collectors' Choice Music catalog in 2001. Net revenues, loss before income taxes
and cumulative effect of change in accounting principle, depreciation and
amortization and identifiable assets of each reportable segment are set forth in
Note (T) Segment Information of Notes to Consolidated Financial Statements.
Our trademarks and copyrights are critical to the success and potential
growth of all of our businesses. Our trademarks, which are renewable
periodically and which can be renewed indefinitely, include Playboy, the Rabbit
Head Design, Playmate and Spice. We also own numerous domain names related to
our online business.
ENTERTAINMENT GROUP
Our Entertainment Group operations include the production and marketing of
adult television programming for our domestic and international TV networks and
worldwide DVD/home video products.
Programming
Our Entertainment Group develops, produces and distributes a wide range of
high-quality adult television programming for our domestic and international
television networks and worldwide DVD/home video products. Our proprietary
productions include feature films, magazine format shows, reality-based and
dramatic series, documentaries, live events and celebrity and Playmate features.
Our programming features stylized eroticism in a variety of entertaining formats
for men and women and is designed to be adapted easily into a number of formats,
enabling us to amortize our programming costs over multiple distribution
platforms. We have produced a number of shows which air on the domestic and
international Playboy TV networks and are also distributed internationally in
countries where we do not have networks. Additionally, some of our programming
has been released as DVD/home video titles and/or has been licensed to other
networks, such as HBO and Showtime. In 2003, we premiered Totally Busted, a
"Candid Camera" like show, and in 2002 we premiered The Weekend Flash, a
provocative news show. Some of our other series include Women: Stories of
Passion, Passion Cove, Sexy Urban Legends, The Extreme Truth and 7 Lives Xposed,
Playboy TV's first venture into reality-based television.
We invest in high-quality adult-oriented programming to support both our
television and Internet businesses. We invested $44.7 million, $41.7 million and
$37.3 million in entertainment programming in 2003, 2002 and 2001, respectively.
Approximately two-thirds of these expenditures were used to create proprietary
programming for Playboy TV, resulting in the domestic production of 268, 243 and
232 hours of original programming, respectively. At December 31, 2003, our
domestic library of primarily exclusive, Playboy branded original programming
totaled approximately 2,500 hours. The remaining amounts of our programming
expenditures were used to acquire high-quality adult movies in various edit
standards, as the majority of the programming that airs on our movie networks is
licensed, on an exclusive basis, from third parties. In 2004, we expect to
invest approximately $46 million in Company-produced and licensed programming,
which could vary based on, among other things, the timing of completing
productions.
3
Our programming is delivered to DTH and cable operators through
communications satellite transponders. We currently have three transponder
service agreements related to our domestic networks, the terms of which
currently extend through 2006, 2010 and 2015. We also have four international
transponder service agreements, the terms of which currently extend through 2004
and 2006. These service agreements contain protections typical in the industry
against transponder failure, including access to spare transponders, and
conditions under which our access may be denied. Major limitations on our access
to DTH or cable systems or satellite transponder capacity could materially
adversely affect our operating performance. There have been no instances in
which we have been denied access to transponder service.
In 2002, we moved to a new state-of-the-art studio facility in Los Angeles
where we now have a centralized digital, technical and programming facility for
both the Entertainment and Online Groups. The new facility enables us to produce
more original programs in a more efficient and cost effective operating
environment. In 2003, we upgraded our production capabilities so that the
programming we create is now available in high definition format. We are also
utilizing our studio to provide playback, production control and origination
services for third parties, which helps bring efficiencies and allows us to
spread our fixed costs to operate the facility.
Domestic TV Networks
We currently operate multiple domestic TV networks, which include Playboy
TV, Playboy TV en Espanol and seven Spice branded movie networks. Playboy TV,
which airs a variety of original and proprietary programming as well as adult
movies under exclusive license from leading adult studios, is offered through
the DTH market and on cable on a pay-per-view, or PPV, monthly subscription,
video on demand, or VOD, and monthly subscription video on demand, or SVOD,
basis. Playboy TV en Espanol is offered on cable on a PPV basis and on DTH as
part of EchoStar's Dish Latino subscription package. Our Spice branded networks,
Spice, Spice 2, Spice Live, Spice Hot, Spice Platinum, Hot Net and Hot Zone, are
referred to collectively as our movie networks. Our movie networks feature adult
movies under exclusive license from leading adult studios and are offered via
cable and satellite on a PPV or VOD basis. We also recognize royalty revenues
from the license of our Playboy programming to other pay networks.
The following table illustrates certain information regarding approximate
household units and current average retail rates for our networks (in millions,
except retail rates):
Household Units (1) Average Retail Rates
-------------------- -----------------------
Dec. 31, Dec. 31, Monthly
2003 2002 PPV Subscription
- ------------------------------------------------------------------------------
Playboy TV
DTH 21.6 19.2 $ 8.00 $15.15
Digital cable 16.9 14.0 9.90 11.95
Analog addressable cable 4.5 5.7 7.90 10.15
Playboy TV en Espanol
DTH 8.1 7.0 -- --(2)
Digital cable 3.3 2.7 9.40 --
Movie Networks
DTH 42.2 38.4 10.00 --
Digital cable 42.8 36.9 9.50-11.90 --
Analog addressable cable 6.9 10.8 9.20-9.90 --
- ----------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.,
digital and analog) are available to that household.
(2) An average retail rate is not available as Playboy TV en Espanol is
offered with various other Spanish-speaking networks as part of EchoStar's
Dish Latino subscription package.
4
Most of our networks are provided through the DTH market in households
with small dishes receiving a Ku-band medium or high power digital signal, or
DBS, such as those currently offered by DirecTV and EchoStar. 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. As previously mentioned, Playboy
TV en Espanol is offered as part of EchoStar's Dish Latino subscription package.
The Hot Network, The Hot Zone and Spice Platinum networks are all available on
DirecTV and, in 2001, The Hot Zone network also was launched on EchoStar. Paul
Kagan Associates, Inc., or Kagan, an independent media research firm, projects
an average annual increase of approximately 7% in DBS households from 2004
through 2006. Our revenues reflect our contractual share of the amounts received
by the DTH operators, which are based on both the retail rates set by the DTH
operators and the number of buys and/or subscribers.
Our networks are also available to consumers through cable providers. Most
cable service in the United States is distributed through MSOs and their
affiliated cable systems, or cable affiliates. Once arrangements are made with
an MSO, we are able to negotiate channel space for our networks with the cable
affiliates. Individual cable affiliates determine the retail price of both PPV,
which can be dependent on the length of the block of programming, and monthly
subscription services, which can be dependent on the number of premium services
to which a household subscribes. Our revenues reflect our contractual share of
the amounts received by the cable affiliates, which are based on both the retail
rates set by the cable affiliates and the number of buys and/or subscribers.
PPV programming can be delivered through any number of delivery methods,
including (a) DTH, (b) digital and analog cable television, (c) wireless cable
systems and (d) technologies such as cable modem and the Internet. Growth in the
cable PPV market is expected to result principally from cable system upgrades,
utilizing digital compression and other bandwidth expansion methods that provide
cable operators additional channel capacity. In recent years, cable operators
have been shifting from analog to digital technology in order to upgrade their
cable systems and to counteract competition from DBS operators. Digital cable
television has several advantages over analog cable television, including more
channels, better audio and video quality, advanced set-top boxes that are
addressable, a secure, fully scrambled signal, integrated program guides and
advanced ordering technology. Kagan projects average annual increases of less
than 1% in total cable households and 14% in digital cable households through
December 31, 2006. During this same period, Kagan projects an average annual
decrease of approximately 28% in analog addressable cable households, as
customers upgrade from older analog systems to the digital or DBS platforms.
Additionally, recent technology advances have begun to allow digital
consumers to not only order programs on a PPV basis, but also to choose VOD. VOD
differs from traditional PPV in that it allows viewers to purchase a specific
movie or program for a period of time with DVD-like functionality. The basic
premise is that consumers have a menu of options and can choose to buy a program
"on demand" without having to adhere to the schedule of a programmed network. We
are seeking to obtain a leading position in this new phase of technology by
leveraging the power of our brand names, our large library of original
programming and our agreements with leading major adult movie producers for VOD
rights. Currently we are distributing VOD programming through four operators and
are in the process of negotiating agreements with other major operators. Growth
of this technology will be dependent on a number of factors, including, but not
limited to, operator investment, server/bandwidth capacity, availability of a
two-way communication path, programmer rights issues and consumer acceptance.
Kagan projects an average annual increase of approximately 24% in VOD households
from 2004 through 2006.
We currently have agreements with each of the nation's six largest MSOs
and the principal DTH operators in the United States and Canada. Our agreements
with these operators are renewed or renegotiated from time to time in the
ordinary course of business. In some cases, following the expiration of an
agreement, we and the respective operator continue to perform in accordance with
the terms of the expired agreement until a new agreement is negotiated. In any
event, our agreements with MSOs and DTH operators generally may be terminated on
short notice without penalty.
Competition among television programming providers is intense for both
channel space and viewer spending. Our competition varies in both the type and
quality of programming offered, but consists primarily of other premium pay
services, such as general-interest premium channels and other adult movie pay
services. We compete with the other pay services as we (a) attempt to obtain or
renew carriage with DTH operators and individual cable affiliates, (b) negotiate
fee arrangements with these operators and (c) market our programming through
these operators to consumers. Over the past several years, we have been
adversely impacted by all of the competitive factors described above and, in
addition, by consolidation in the cable industry, which has resulted in larger,
but fewer operators. The availability and price pressure from more explicit
content on the Internet and pay television also presents a significant
competitive challenge.
5
While there can be no assurance that we will be able to maintain our
current DTH and cable carriage or fee structures or maintain or grow our
viewership in the face of this competition, we believe that strong Playboy and
Spice brand recognition, the quality of our original programming and our ability
to appeal to a broad range of adult audiences are critical factors which
differentiate our networks from other providers of adult programming. Also, to
optimize revenue potential, we are encouraging DTH and cable operators to market
the full range of PPV, VOD, SVOD and monthly subscription options to consumers
and to offer our services in high definition format.
From time to time, private advocacy groups have sought to exclude our
programming from pay television distribution because of the adult-oriented
content of the programming. Management does not believe that any such attempts
will materially affect our access to DTH and cable systems, but the nature and
impact of any such limitations in the future cannot be determined.
International TV
In December 2002, we completed the restructuring of the ownership of our
international TV joint ventures with Claxson Interactive Group Inc. and its
affiliates, or Claxson. The current scope of our international television
business reflects the significant expansion of our ownership of Playboy TV and
movie networks outside of the United States and Canada that occurred with this
restructuring. See Note (C) Restructuring of Ownership of International TV Joint
Ventures of Notes to Consolidated Financial Statements.
We currently own and operate or license 16 Playboy, Spice and locally
branded movie networks in Europe and the Pacific Far East. Through joint
ventures, we have equity interests in seven additional networks in Japan, Latin
America and Iberia. At December 31, 2003, our international TV networks were
available in approximately 37.0 million household units outside of the United
States and Canada, compared to approximately 30.9 million household units at
December 31, 2002. The increase in household units is primarily due to growth in
existing markets. These networks carry principally U.S.-originated content,
which is subtitled or dubbed and complemented by local content. We also derive
revenues by licensing programming rights from our extensive library of content
to broadcasters in Europe and Australia.
In Europe, we own and operate television networks in the United Kingdom,
which are further distributed through DTH and cable television throughout
greater Europe. We license networks to local partners in Scandinavia, France,
Turkey, Poland, Taiwan, Hong Kong, South Korea, Israel and New Zealand that are
programmed for the cultural sensitivities of each country. Through a joint
venture with Tohokushinsha Film Corp., we hold a 19.9% ownership interest in
Playboy Channel Japan and a local adult service, The Ruby Channel. These
international networks are generally available on both a PPV and monthly
subscription basis.
We own a 19% interest in Playboy TV-Latin America, LLC, or PTVLA, a joint
venture with Claxson that operates Playboy TV networks and a local adult
service, Venus, in Latin America and Iberia. In these markets, PTVLA operates
four networks, distributes Spice Live and exploits the Playboy library by
licensing content to broadcasters in the territory. Under the terms of our
amended PTVLA operating agreement, Claxson maintains management control of
PTVLA, although we have significant management influence. We now provide
programming and use of our trademarks directly to PTVLA in return for 17.5% of
its net revenues with a guaranteed annual minimum. The term of the program
supply and trademark agreement for PTVLA is ten years, unless terminated earlier
in accordance with the terms of the agreement. PTVLA provides the feed for
Playboy TV en Espanol and we pay PTVLA a 20% distribution fee for that feed
based on the network's net revenues in the U.S. Hispanic market. Neither we nor
Claxson are obligated to make any additional capital contributions to the PTVLA
venture. If the management committee of PTVLA determines that additional capital
is necessary for the conduct of PTVLA's business, we would have the option to
contribute our pro rata share of additional capital. We have an option to
purchase up to 49.9% of PTVLA at fair market value over the next ten years. In
addition, we have the option to purchase the remaining 50.1% of PTVLA at fair
market value, exercisable at any time during the period beginning December 23,
2007 and ending December 23, 2008, so long as we have previously or concurrently
exercised the 49.9% buy-up option. We have the option to pay the purchase price
for the 49.9% buy-up option in cash, shares of our Class B common stock, or
Class B stock, or a combination of cash and Class B stock. However, if we
exercise both options concurrently, then we must pay the entire purchase price
for both options in cash.
We seek the most appropriate and profitable manner in which to build on
the powerful Playboy and Spice brands in each international market. In addition,
we seek to generate synergies among our networks by combining operations where
practicable, through innovative programming and scheduling, through joint
programming acquisitions and by coordinating and sharing marketing activities
and materials efficiently throughout the territories in which our programming is
aired. We expect the benefits of these synergies to improve operating margins in
the future as new territories are added to the growing list of our networks.
6
We believe we can grow our international television business through (a)
expanding the distribution reach of existing networks, (b) expanding the number
of countries into which we launch and operate new networks, (c) the continued
rollout in digital addressable television households in our existing
international markets and (d) increasing buy rates driven by new programming and
scheduling tactics as well as more targeted marketing activity.
While there are several similar domestic and international competitive
challenges, a few exist solely within the international marketplace. The
availability and price pressure from more explicit content on the Internet and
pay television presents a significant competitive challenge. Competition abroad
derives from both the availability of less explicit adult content on free
television that is much more prevalent, specifically in Europe, than in the
U.S., and competitive pay services. In the U.K., our two networks compete with a
total of 26 other adult networks and in Japan our two channels compete with 24
adult networks. There are often low barriers to entry, which yield increasing
competition, especially from companies in Asia and parts of Europe providing
"home grown" content as opposed to dubbed American programs. However, we have
used our vast content library and acquisitions to create additional channels
(The Adult Channel, Spice, Spice 2, Spice Platinum and Venus), which complement
the flagship Playboy TV brand in markets with demand for quality English
language adult programming.
Worldwide DVD/Home Video
We also distribute our original programming domestically in the home video
market on both DVD and VHS, which are sold in video and music stores and other
retail outlets, through direct mail, including Playboy magazine, and online,
including PlayboyStore.com. We offer the following three distinct product lines:
Playboy Home Video, which features Playmate, celebrity and specials product;
Playboy TV, which features TV shows from our premium pay television network, and
Playboy Exposed, which features content drawn from adult reality-based
programming. The following table summarizes the number of titles released under
each product line:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------
Playboy Home Video 11 14 11
Playboy TV 7 9 2
Playboy Exposed 9 11 2
- -------------------------------------------------------------------------
Total 27 34 15
=========================================================================
We also distribute various non-Playboy branded movies and we continue to
re-release titles on DVD, which were previously only released on VHS.
Since October 2001, Image Entertainment, Inc., or Image, has distributed
our DVD and VHS products in the United States and Canada. We are responsible for
manufacturing the product for sale and for certain marketing and sales
functions. We receive advances from Image on all new release titles in the
Playboy Home Video and Playboy TV lines, while we receive no advance on Playboy
Exposed titles or miscellaneous releases. Image receives a distribution fee on
sales of all products, which varies depending on the product line, and remits a
net amount to us.
Internationally, we release our proprietary Playboy programming on DVD and
home video formats. Since 2002, our products have been distributed
internationally under a master licensing agreement with Modern Entertainment,
Ltd., or Modern. 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.
Our agreements with Image and Modern are renewed or renegotiated from time
to time in the ordinary course of business. We may, following the expiration of
an agreement, continue to perform in accordance with the terms of the expired
agreement until a new agreement is negotiated.
7
PUBLISHING GROUP
Our Publishing Group operations include the publication of Playboy
magazine, other domestic publishing businesses and the licensing of
international editions of Playboy magazine.
Playboy Magazine
Founded by Hugh M. Hefner, in 1953, Playboy magazine, now in its 50th
Anniversary year, continues to be the best-selling monthly men's magazine in the
U.S. and in the world, based on the combined circulation of the U.S. and
international editions. Circulation of the U.S. edition is approximately 3.1
million copies monthly. Combined average circulation of the 17 licensed
international editions is approximately 1.1 million copies monthly. According to
Fall 2003 data published by Mediamark Research, Inc., or MRI, an independent
market research firm, the U.S. edition of Playboy magazine is read by
approximately one in every seven men in the United States aged 18 to 34.
Playboy magazine plays a key role in driving the continued popularity and
recognition of the Playboy brand. Playboy magazine is a general-interest
magazine targeted to men, with a reputation for excellence founded on providing
high-quality photography, entertainment and articles on current issues,
interests and trends. Playboy consistently includes in-depth, candid interviews
with high profile political, business, entertainment and sports figures;
pictorials of famous women; and content by leading authors, including, the
following:
Interviews Pictorials Leading Authors
---------- ---------- ---------------
Ben Affleck Pamela Anderson William F. Buckley
Halle Berry Drew Barrymore Ethan Coen
George Clooney Cindy Crawford Michael Crichton
John Cusack Carmen Electra David Halberstam
Bill Gates Daryl Hannah William Kennedy
Tommy Hilfiger Rachel Hunter Jay McInerney
Michael Jordan Elle Macpherson Joyce Carol Oates
Jimmy Kimmel Madonna George Plimpton
Jack Nicholson Jenny McCarthy Scott Turow
O.J. Simpson Anna Nicole Smith John Updike
Jesse Ventura Katarina Witt Kurt Vonnegut
Playboy magazine has long been known for its quality of photography,
editorial content and illustration in publishing the work of top photographers,
writers and artists. Playboy magazine also features lifestyle articles on
consumer products, fashion, automobiles and consumer electronics and covers the
worlds of sports and entertainment. In 2003, Playboy magazine underwent a
redesign, including a series of editorial changes. The goal of these changes is
to make the magazine more appealing to young readers by being more contemporary
while remaining consistent with its heritage of sophisticated and excellent
journalism, literature and photography. The front of book sections have been
reconfigured with the addition of many new entry points and regular franchise
items. The feature well has more photographs and a greater focus on must-read
topical articles, focusing on timely, long-form investigative pieces. Writers,
ranging from rising young talents to the nation's most accomplished fiction and
nonfiction authors, are being featured. And a new, eight-page fashion well has
been introduced, spotlighting the best of modern fashion for young men.
The net circulation revenues of the U.S. edition of Playboy magazine for
2003, 2002 and 2001 were $65.9 million, $62.3 million and $63.6 million,
respectively. Net circulation revenues are gross revenues less commissions,
discounts and provisions for newsstand returns and display costs and unpaid
subscriptions. Circulation revenue comparisons may be materially impacted with
respect to newsstand sales in any period based on whether or not there are
issues featuring major celebrities.
According to the Audit Bureau of Circulations, or ABC, an independent
audit agency, at December 31, 2003, Playboy magazine was the 13th
highest-ranking U.S. consumer publication, with a circulation rate base (the
total newsstand and subscription circulation guaranteed to advertisers) of 3.15
million. Playboy magazine's circulation rate base at December 31, 2003 was
larger than each of Newsweek, Cosmopolitan and Maxim and was larger than the
combined rate bases of Stuff, FHM and GQ.
8
Playboy magazine has historically generated approximately two-thirds of
its revenues from subscription and newsstand circulation, with the remainder
primarily from advertising. Subscription copies represent approximately 85% of
total copies sold. We believe that managing Playboy's circulation to be
primarily subscription driven, like most major magazines, provides a stable and
desirable circulation base, which is attractive to advertisers. In addition,
according to the MRI data previously mentioned, the median age of male Playboy
readers is 32, with a median annual household income of $53,000, a demographic
that we believe is also attractive to advertisers. We also derive revenues from
the rental of Playboy magazine's subscriber list, which consists of the
subscriber's name, address and other subscription-related information that we
maintain.
We attract new subscribers to the magazine through our own direct mail
advertising campaigns, subscription agent campaigns and the Internet, including
the Playboy.com website. We recognize revenues from magazine subscriptions over
the terms of the subscriptions. Subscription copies of the magazine are
delivered through the U.S. Postal Service as periodical mail. We attempt to
contain these costs through presorting and other methods. The Publishing Group
was impacted by a general postal rate increase of approximately 10% in July
2002. No postal rate increases are expected in 2004.
Playboy magazine is one of the highest priced magazines in the United
States. Effective with the April 2001 issue, the basic U.S. newsstand cover
price is $4.99 ($6.99 for the December holiday issue and $7.99 for the January
50th Anniversary issue) and the basic Canadian newsstand cover price is C$6.99
(C$7.99 for the December holiday issue and C$8.99 for the January 50th
Anniversary issue). In addition, when there is a feature of special appeal, we
generally increase the newsstand cover price by $1.00. We price test from time
to time, but no general price increases are currently planned for 2004.
Playboy magazine targets a wide range of advertisers. Advertising by
category, as a percent of total advertising pages, and the total number of ad
pages was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
Category 12/31/03 12/31/02 12/31/01
- -----------------------------------------------------------------------------
Retail/Direct mail 25% 26% 19%
Beer/Wine/Liquor 20 25 28
Tobacco 19 19 23
Home electronics 8 8 4
Automotive 4 4 2
Toiletries/Cosmetics 3 4 5
Apparel/Footwear/Accessories 5 4 5
All other 16 10 14
- -----------------------------------------------------------------------------
Total 100% 100% 100%
=============================================================================
Total ad pages 555 515 618
=============================================================================
We continue to focus on securing new advertisers, including expanding
advertising from underserved categories. The net advertising revenues of the
U.S. edition of Playboy magazine for 2003, 2002 and 2001 were $36.1 million,
$32.4 million and $37.0 million, respectively. Net advertising revenues are
gross revenues less advertising agency commissions, frequency and cash discounts
and rebates. We publish 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. We implemented 4% and 8% cost per thousand increases in advertising
rates effective with the January 2004 and 2003 issues, respectively.
Levels of advertising revenues may be affected by, among other things,
increased competition for and decreased spending by advertisers, general
economic activity and governmental regulation of advertising content, such as
tobacco products. However, as only approximately one-third of Playboy magazine's
revenues and less than 15% of the Company's total revenues are from advertising,
we are not overly dependent on this source of revenue.
9
Playboy magazine subscriptions are serviced by Communications Data
Services, Inc., or CDS. Pursuant to a subscription fulfillment agreement, CDS
performs a variety of services, including (a) receiving, verifying, balancing
and depositing payments from subscribers, (b) processing Internet transactions,
(c) printing forms and promotional materials, (d) maintaining master files on
all subscribers, (e) issuing bills and renewal notices to subscribers, (f)
issuing labels, (g) resolving customer service complaints as directed by us and
(h) furnishing various reports to monitor all aspects of the subscription
operations. The term of the previous agreement expired June 30, 2001, but has
been extended to June 30, 2006. Either party may terminate the agreement prior
to expiration in the event of material nonperformance by, or insolvency of, the
other party. We pay CDS specified fees and charges based on the types and
amounts of service performed under the agreement. The fees and charges were
fixed at their July 1, 2001 levels until June 30, 2003, after which they
increase annually based on the consumer price index, to a maximum of six percent
in one year. CDS's liability to us for a breach of its duties under the
agreement is limited to actual damages of up to $140,000 per event of breach,
except in cases of willful breach or gross negligence, in which case the limit
is $280,000. The agreement provides for indemnification by CDS of us and our
shareholders against claims arising from actions or omissions by CDS in
compliance with the terms of the agreement or in compliance with our
instructions.
Distribution of the magazine and special editions to newsstands and other
retail outlets is accomplished through Warner Publisher Services, Inc., or
Warner, our national distributor. The issues are shipped in bulk to wholesalers,
who are responsible for local retail distribution. We receive a substantial cash
advance from Warner 14 days after the date each issue goes on sale. We recognize
revenues from newsstand sales based on estimated copy sales at the time each
issue goes on sale and adjust 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 copies
and report the returns by affidavit. The number of copies sold on newsstands
varies from month to month, depending in part on consumer interest in the cover,
the pictorials and the editorial features.
Playboy magazine and special editions are printed at Quad/Graphics, Inc.,
or Quad, at a single site located in Wisconsin, which ships the product to
subscribers and wholesalers. The print run varies each month based on expected
sales and is determined with input from Warner. Paper is the principal raw
material used in the production of these publications. We use a variety of types
of high-quality coated and uncoated paper that is purchased from a number of
suppliers. The market for paper has historically been cyclical resulting in
volatility in paper prices, which can materially affect the Publishing Group's
financial results. Average paper prices in 2003 were approximately 7% lower than
in 2002 due to soft demand. Paper prices are not expected to increase materially
in 2004.
We rely on CDS, Warner and Quad to produce and distribute our magazine. If
they fail to perform their obligations on a timely basis, our operations could
be adversely affected. Our agreements with these companies are renewed or
renegotiated from time to time in the ordinary course of business. In some
cases, following the expiration of an agreement, we and the respective company
continue to perform in accordance with the terms of the expired agreement until
a new agreement is negotiated.
From time to time, Playboy magazine and certain of its distribution
outlets and advertisers have been the target of private advocacy groups who seek
to limit its availability because of its adult-oriented content. In our 50-year
history, we have never sold a product that has been judged to be obscene or
illegal in any U.S. jurisdiction.
Magazine publishing companies face intense competition for readers,
advertising and newsstand shelf space. Magazines and Internet sites primarily
aimed at men are Playboy magazine's principal competitors. Other types of media
that carry advertising, such as newspapers, radio and television also compete
for advertising revenues with Playboy magazine.
Other Domestic Publishing
Our Publishing Group has also created media extensions, including special
editions and calendars, which are primarily sold in newsstand outlets. We
published 25 special editions in 2003 and 24 in each of 2002 and 2001. We expect
to publish 24 special editions in 2004. Effective with the December 2002 issue,
the U.S. special editions newsstand cover price is $7.99 and effective with the
August 2002 issue, the Canadian special editions newsstand cover price is
C$8.99. No general price increases are currently planned for 2004.
Other domestic publishing also includes ancillary publishing products. In
2003, we published two books: Playboy: Fifty Years: The Photographs and The
Playboy Guide to Bachelor Parties: Everything You Need to Know About Planning
the Groom's Rite of Passage - From Simple to Sinful. We plan to publish three
additional books in 2004. Two of the books, Playboy: Fifty Years: The Cartoons
and Hef's Little Black Book, are expected to be released in the second quarter.
10
International Publishing
We license the right to publish 17 international editions of Playboy
magazine to local partners in the following countries: Brazil, Bulgaria,
Croatia, the Czech Republic, France, Germany, Greece, Hungary, Japan, Mexico,
the Netherlands, Poland, Romania, Russia, Serbia, Slovenia and Spain. Combined
average circulation of the international editions is approximately 1.1 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. We monitor 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 2003, two editions, Germany and
Brazil, accounted for approximately half of our total licensing revenues from
international editions.
ONLINE GROUP
Our Online Group, which provides a wide range of web-based entertainment
experiences under the Playboy and Spice brand names, capitalizes on the
lifestyle and entertainment interests of young men around the world. We believe
that we are well positioned to provide compelling online entertainment
experiences due to the strength of our brands. Our 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. Our sites provide
us with multiple revenue streams, primarily fees for subscription services and
e-commerce, but also advertising, the licensing of international sites and, to a
smaller extent, online gaming. The various international websites generally
mirror the multiple revenue stream model of our domestic online business.
Subscriptions
We offer multiple subscription-based websites and two VOD theaters, or
collections, under the Playboy and Spice names. Subscriptions will remain the
largest revenue stream of this segment in 2004. Average revenue per subscriber
continues to grow as we offer additional as well as higher priced clubs.
The original Playboy Cyber Club, at the website cyber.playboy.com, offers
services such as VIP access to over 100,000 photos, including Playboy.com's
Cyber Girls, an archive of Playboy magazine interviews, individual home pages
for Playboy Playmates, live Playmate chats and exclusive video clips. It is
currently offered on a monthly basis for $19.95 and an annual basis for $95.40.
The PlayboyNet subscription service, at the website playboy.net, was launched in
November 2002 and consists of pictorials and video clips organized by 15
thematic interests. Access to the PlayboyNet is currently offered on a monthly
basis for $29.95 and an annual basis for $155.40. In June 2003, we launched
PlayboyNet Espanol, at the website playboynetespanol.com, a Spanish-language
version of the PlayboyNet service. Access to PlayboyNet Espanol is currently
$29.95 per month. Beginning in May 2003, we partnered with RealNetworks, a
premier provider of broadband content, to launch the Playboy TV Club, at
real.com/partners/PBTV. This club leverages our television and video assets
along with Real Networks' marketing reach and is geared toward giving the
broadband Internet user a unique and high-quality experience. The Playboy TV
Club replaced the Playboy TV Jukebox launched in 2002, which we formerly
operated solely. Membership is currently $24.95 per month. In December 2002, we
launched a VOD service called the Director's Cut Theater, which offers a variety
of viewing packages for our feature-length videos. Packages range from $3.95 to
$29.95 depending upon the length of time purchased.
We also offer a network of sites featuring premium adult entertainment
under the Spice brand. The SpiceNet subscription service, at spicetv.com,
consists of six niche clubs offering video clips, pictorial galleries and
interactive features that allow users to view highly customized video content,
live chat, voyeur cams and original content. SpiceNet is currently being
relaunched and is offered on a monthly basis for $29.95 and an annual basis of
$189.96. The Spice Platinum Theater VOD offering is linked through the website
spicetv.com and offers access to over 10,000 adult movies. Viewing packages
range from $3.95 to $29.95, depending upon the length of time purchased.
11
E-Commerce
Our second largest revenue stream for the Online Group is e-commerce. Our
Playboy branded e-commerce offerings include PlayboyStore.com, which is the
primary destination for purchasing Playboy branded fashions, calendars, DVDs,
videos, jewelry and collectibles as well as issues of Playboy magazine and
foreign and special editions. A Spice branded e-commerce offering, at
spicetvstore.com, offers adult oriented products, including DVDs and videos,
lingerie and sensual products. E-commerce also includes direct commerce, or
printed catalog mailings for both Playboy and Spice products. Fulfillment and
customer service is supplied by Infinity Resources Inc., or Infinity. Infinity
also purchased our Collectors' Choice Music business in 2001 and has been
subleasing our warehouse facility since 2000.
Other
The free Playboy.com site is designed with a goal of converting visitors
to purchasers by directing visitors to our revenue-generating sites while also
generating advertising revenues. Playboy.com offers original content and focuses
on areas of interest to its target audience, including Arts & Entertainment,
Sports, Events, On Campus, World of Playboy and Playmates.
We are expanding our international presence by entering into licensing
arrangements in foreign countries to provide compelling content specifically
tailored to those individual foreign audiences. We currently have international
Playboy sites with partners in Germany, Taiwan and the Netherlands. During 2003,
we announced agreements to launch sites in Brazil, France and Japan with local
partners in those marketplaces. These are currently active and will be fully
launched in the first half of 2004. Our international websites have a local
editorial staff that develops original adult-oriented content, makes use of
content from the local edition of Playboy magazine and translates appropriate
U.S.-originated Playboy.com content. In 2003, we also announced a global deal to
provide content to wireless customers in European and Asian markets where
Hutchison Whampoa Limited provides 3G wireless services, and have entered into
license deals to provide video content to broadband-oriented sites in Korea,
Hong Kong and Israel.
Our online gaming business currently consists of PlayboySportsBook.com and
PlayboyCasino.com, which are licensed by Ladbroke eGaming Limited, the world's
largest bookmaker. They operate the gaming and bookmaking operations, such that
we do not have risk based on the wagering of customers who gamble through our
sites. Additionally, we have implemented safeguards designed to prevent illegal
wagering through our sites.
The Internet industry is highly competitive. We compete for visitors,
subscribers, buyers and advertisers. We believe that the primary competitive
factors affecting our Internet operations include brand recognition, the quality
of our content and products, technology, including the number of broadband
homes, pricing, ease of use, sales and marketing efforts and user demographics.
We believe that we compete favorably with respect to each of these factors.
Additionally, we have the advantage of leveraging the power of the Playboy and
Spice brands in multiple media, content libraries, marketing and loyal
audiences.
12
LICENSING GROUP
Our Licensing Group includes the licensing of consumer products carrying
one or more of our trademarks and images, as well as Playboy branded retail
stores and marketing activities.
We license Playboy, the Rabbit Head Design and other images, trademarks
and artwork as well as the Spice name and trademarks for the worldwide
manufacture, sale and distribution of a variety of consumer products. We work
with licensees to develop, market and distribute high-quality Playboy and Spice
branded merchandise. Our licensed product lines include men's and women's
apparel, men's underwear and women's lingerie, accessories, collectibles, slot
machines, interactive video games, cigars, watches, jewelry, fragrances, small
leather goods, stationery, music, eyewear, barware and home fashions. The group
also licenses art-related products based on our extensive collection of artwork,
most of which were commissioned as illustrations for Playboy magazine.
Occasionally we sell small portions of our art and memorabilia collection
through auction houses such as Butterfields, Christie's and Sotheby's. Products
are marketed primarily through retail outlets, including department and
specialty stores. Our first freestanding fashion retail store, located in an
upscale Tokyo shopping district and funded by one of our licensees, opened in
2002. It offers a full collection of Playboy branded fashion and accessories for
men and women, as well as other Playboy branded products. We plan to open others
in major cities on a licensed basis. We are also interested in exploiting
Playboy's brand equity in the location-based entertainment market by entering
into partnerships with companies in which we would contribute our brand name and
marketing expertise in return for licensing fees, and potentially the option to
earn or purchase equity in these ventures.
While our branded products are unique, we operate in 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.
Company-wide marketing activities consist of Alta Loma Entertainment, the
Playboy Jazz Festival and Playmate Promotions. Since 2001, Alta Loma
Entertainment has functioned as a production company that leverages our assets,
including editorial material as well as icons like the Playmates, Playboy
Mansion and Mr. Hefner, to develop original programming for other television
networks. We have produced the Playboy Jazz Festival on an annual basis in Los
Angeles at the Hollywood Bowl since June 1979 and have continued our sponsorship
of related community events. Playmate Promotions represents the Playmates in ad
campaigns, trade shows, endorsements, commercials, motion pictures, television
and videos for us and outside clients.
SEASONALITY
Our businesses are generally not seasonal in nature. Revenues and
operating results for the quarters ended December 31, however, are typically
impacted by higher newsstand cover prices of holiday issues. These higher
prices, coupled with typically higher sales of subscriptions of Playboy magazine
during those quarters, also result in an increase in accounts receivable.
E-commerce revenues and operating results are typically impacted by the holiday
buying season and online subscription revenues and operating results are
impacted by decreased Internet traffic during the summer months.
PROMOTIONAL AND OTHER ACTIVITIES
We believe that our sales of products and services are enhanced by the
public recognition of the Playboy name as symbolizing a lifestyle. In order to
establish public recognition, we, among other activities, purchased in 1971 the
Playboy Mansion in Los Angeles, California, where our founder, Hugh M. Hefner,
lives. The Playboy Mansion is used for various corporate activities, including
serving as a valuable location for video production, magazine photography,
online events and sales events. It also enhances our image as host for many
charitable and civic functions. The Playboy Mansion generates substantial
publicity and recognition, which increase public awareness of us and our
products and services. As indicated in Part II. Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations," or MD&A, and
Part III. Item 13. "Certain Relationships and Related Transactions," Mr. Hefner
pays us rent for that portion of the Playboy Mansion used exclusively for his
and his personal guests' residence as well as the per-unit value of non-business
meals, beverages and other benefits received by him and his personal guests. The
Playboy Mansion is included in our Consolidated Balance Sheet at December 31,
2003 at a net book value of $1.6 million, including all improvements and after
accumulated depreciation. We incur all operating expenses of the Playboy
Mansion, including depreciation and taxes, which were $2.3 million, $3.6 million
and $3.2 million for 2003, 2002 and 2001, respectively, net of rent received
from Mr. Hefner.
13
Through the Playboy Foundation, we support 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, reproductive freedom and women's leadership
activities. 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.
Our trademarks and copyrights are critical to the success and potential
growth of all of our businesses. We actively protect and defend our trademarks
and copyrights throughout the world and monitor the marketplace for counterfeit
products. Consequently, we initiate legal proceedings from time to time to
prevent their unauthorized use.
EMPLOYEES
At February 29, 2004, we employed 608 full-time employees compared to 580
at February 28, 2003. No employees are represented by collective bargaining
agreements. We believe we maintain a satisfactory relationship with our
employees.
AVAILABLE INFORMATION
We make available free of charge on our website,
www.playboyenterprises.com, our annual, quarterly and current reports, and, if
applicable, amendments to those reports, filed or furnished pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission, or SEC.
Also posted on our website are the charters of the Audit Committee and
Compensation Committee of our Board of Directors, our recently adopted Code of
Business Conduct and our Corporate Governance Guidelines. Amendments to or
waivers from the Code will be posted on our website. Copies of these documents
are available free of charge by sending a request to Investor Relations, Playboy
Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611.
14
Item 2. Properties
Location Primary Use
- -------- -----------
Office Space Leased:
Chicago, Illinois This space serves as our corporate
headquarters and is used by all of our
operating groups, primarily Publishing and
Online, and for executive and administrative
personnel.
Los Angeles, California This space serves as our Entertainment Group's
headquarters and for executive and
administrative personnel.
New York, New York This space serves as our Publishing and Online
Groups' headquarters and a limited amount of
this space is used by the Licensing and
Entertainment Groups, as well as executive and
administrative personnel.
Operations Facilities Leased:
Los Angeles, California This space is used by our Entertainment and
Online Groups as a centralized digital,
technical and programming facility. We also
utilize parts of this facility to handle
similar functions for other clients.
Santa Monica, California This space is used by our Publishing Group as
offices and a photography studio.
Itasca, Illinois We began subleasing this warehouse facility to
Infinity in 2000. This facility, under
separate agreements with Infinity, is used to
provide e-commerce order fulfillment, customer
service and related activities for our Online
Group and previously for the Catalog Group,
and storage for the entire Company. The
facility was formerly used by us in the same
capacities.
Property Owned:
Los Angeles, California The Playboy Mansion is used for various
corporate activities, including serving as a
valuable location for video production,
magazine photography, online events and sales
events. It also enhances our image as host for
many charitable and civic functions.
Due to restructuring efforts, we have subleased a portion of our excess
office space, and are working to sublease or terminate our remaining excess
office space. The term of our New York office lease expires in 2004, and we are
currently exploring our alternatives in the New York area.
15
Item 3. Legal Proceedings
On February 17, 1998, Eduardo Gongora, or Gongora, filed suit in state
court in Hidalgo County, Texas against Editorial Caballero SA de CV, or EC,
Grupo Siete International, Inc., or GSI, collectively the Editorial Defendants,
and us. In the complaint, Gongora alleged that he was injured as a result of the
termination of a publishing license agreement, or the License Agreement, between
us and EC for the publication of a Mexican edition of Playboy magazine, or the
Mexican Edition. We terminated the License Agreement on or about January 29,
1998 due to EC's failure to pay royalties and other amounts due us under the
License Agreement. On February 18, 1998, the Editorial Defendants filed a
cross-claim against us. Gongora alleged that in December 1996 he entered into an
oral agreement with the Editorial Defendants to solicit advertising for the
Mexican Edition to be distributed in the United States. The basis of GSI's
cross-claim was that it was the assignee of EC's right to distribute the Mexican
Edition in the United States and other Spanish-speaking Latin American countries
outside of Mexico. On May 31, 2002, a jury returned a verdict against us in the
amount of $4.4 million. Under the verdict, Gongora was awarded no damages. GSI
and EC were awarded $4.1 million in out-of-pocket expenses and $0.3 million for
lost profits, respectively, even though the jury found that EC had failed to
comply with the terms of the License Agreement. On October 24, 2002, the trial
court signed a judgment against us for $4.4 million plus pre- and post-judgment
interest and costs. On November 22, 2002, we filed post-judgment motions
challenging the judgment in the trial court. The trial court overruled those
motions and we are vigorously pursuing an appeal with the State Appellate Court
sitting in Corpus Christi challenging the verdict. We have posted a bond in the
amount of approximately $7.7 million (which represents the amount of the
judgment, costs and estimated pre- and post-judgment interest) in connection
with the appeal. We, on advice of legal counsel, believe that it is not probable
that a material judgment against us will be sustained. In accordance with
Statement of Financial Accounting Standards, or Statement 5, Accounting for
Contingencies, no liability has been accrued.
On May 17, 2001, Logix Development Corporation, or Logix, D. Keith
Howington and Anne Howington filed suit in state court in Los Angeles County
Superior Court in California against Spice Entertainment Companies, Inc., or
Spice, Emerald Media, Inc., or EMI, Directrix, Inc., or Directrix, Colorado
Satellite Broadcasting, Inc., New Frontier Media, Inc., J. Roger Faherty, Donald
McDonald, Jr., and Judy Savar. On February 8, 2002, plaintiffs amended the
complaint and added as a defendant Playboy, which acquired Spice in 1999. The
complaint alleged 11 contract and tort causes of action arising principally out
of a January 18, 1997 agreement between EMI and Logix in which EMI agreed to
purchase certain explicit television channels broadcast over C-band satellite.
The complaint further sought damages from Spice based on Spice's alleged failure
to provide transponder and uplink services to Logix. Playboy and Spice filed a
motion to dismiss plaintiffs' complaint. After pre-trial motions, Playboy was
dismissed from the case and a number of causes of action were dismissed against
Spice. A trial date for the remaining breach of contract claims against Spice
was set for December 10, 2003, and then continued, first to February 11, 2004
and then to March 17, 2004. Spice and the plaintiffs filed cross-motions for
summary judgment or, in the alternative, for summary adjudication, on September
5, 2003. Those motions were heard on November 19, 2003 and were denied. In
February 2004, prior to the trial, Spice and the plaintiffs agreed to a
settlement in the amount of $8.5 million, which we recorded as a charge in the
fourth quarter of 2003, $6.5 million of which was paid in February 2004. The
remaining $2.0 million will be paid in $1.0 million installments in 2005 and
2006.
On September 26, 2002, Directrix filed suit in the U.S. Bankruptcy Court
in the Southern District of New York against Playboy Entertainment Group, Inc.
In the complaint, Directrix alleged that it was injured as a result of the
termination of a Master Services Agreement under which Directrix was to perform
services relating to the distribution, production and post production of our
cable networks and a sublease agreement under which Directrix would have
subleased office, technical and studio space at our Los Angeles, California
production facility. Directrix also alleged that we breached an agreement under
which Directrix had the right to transmit and broadcast certain versions of
films through C-band satellite, commonly known as the TVRO market, and Internet
distribution. On November 15, 2002, we filed an answer denying Directrix's
allegations, along with counterclaims against Directrix relating to the Sublease
Agreement and the Master Services Agreement and seeking damages. On May 15,
2003, we filed an amended answer and counterclaims. On July 30, 2003, Directrix
moved to dismiss one of the amended counterclaims, and on October 20, 2003, the
Court denied Directrix's motion. Both sides have commenced discovery. We intend
to vigorously defend ourselves against Directrix's claims. We believe its claims
are without merit and that we have good defenses against them. We believe it is
not probable that a material judgment against us will result.
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Stock price information, as reported in the New York Stock Exchange
Composite Listing, is set forth in Note (V) Quarterly Results of Operations
(Unaudited) of Notes to Consolidated Financial Statements. Our securities are
traded on the exchanges listed on the cover page of this Form 10-K Annual Report
under the ticker symbols PLA A (Class A voting) and PLA (Class B nonvoting). At
February 29, 2004, there were 7,275 and 8,880 holders of record of Class A and
Class B common stock, respectively. There were no cash dividends declared during
2003 and 2002. Our revolving credit facility and the indenture related to the
senior secured notes we issued in March 2003 have limitations related to the
payment of dividends.
Other information required under this Item is contained in our Notice of
Annual Meeting of Stockholders and Proxy Statement, or collectively, the Proxy
Statement, (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2004, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2003, and is incorporated herein by reference.
17
Item 6. Selected Financial Data (1)
(in thousands, except per share amounts,
number of employees and ad pages)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
12/31/03 12/31/02 12/31/01 12/31/00 12/31/99
- ---------------------------------------------------------------------------------------------------------------------------
Selected financial data
Net revenues $ 315,844 $ 277,622 $ 287,583 $ 303,360 $ 344,044
Interest expense, net (15,946) (15,022) (13,184) (7,629) (6,179)
Loss from continuing operations before
cumulative effect of change in accounting principle (7,557) (17,135) (29,323) (47,626) (5,568)
Net loss (7,557) (17,135) (33,541) (47,626) (5,335)
Net loss applicable to common shareholders (8,450) (17,135) (33,541) (47,626) (5,335)
Basic and diluted earnings per common share
Loss from continuing operations before
cumulative effect of change in accounting principle (0.31) (0.67) (1.20) (1.96) (0.24)
Net loss (0.31) (0.67) (1.37) (1.96) (0.23)
EBITDA (2)
Net loss (7,557) (17,135) (33,541) (47,626) (5,335)
Adjusted for:
Gain on disposal of discontinued operations
(net of tax) -- -- -- -- (233)
Cumulative effect of change in accounting
principle -- -- 4,218 -- --
Income tax expense (benefit) 4,967 8,544 996 16,227 (862)
Interest expense 16,309 15,147 13,970 9,148 7,977
Depreciation and amortization 49,558 51,619 51,904 44,911 42,691
Amortization of deferred financing fees 1,407 993 905 840 613
Amortization of restricted stock awards 45 2,748 -- -- --
Equity in operations of investments 80 (279) 746 375 13,871
--------- --------- --------- --------- ---------
EBITDA 64,809 61,637 39,198 23,875 58,722
Cash flows from operating activities 4,879 14,328 (7,945) (31,150) 16,100
Cash flows from investing activities (2,047) (3,158) (2,853) (3,889) (68,126)
Cash flows from financing activities 24,382 (11,662) 12,874 14,045 75,213
- ---------------------------------------------------------------------------------------------------------------------------
At period end
Total assets $ 418,060 $ 369,721 $ 426,240 $ 388,488 $ 429,402
Long-term financing obligations $ 115,000 $ 68,865 $ 78,017 $ 94,328 $ 75,000
Shareholders' equity $ 106,636 $ 87,815 $ 81,525 $ 114,185 $ 161,281
Long-term financing obligations as a
percentage of total capitalization 52% 44% 49% 45% 32%
Number of common shares outstanding
Class A voting 4,864 4,864 4,864 4,859 4,859
Class B nonvoting 22,579 21,181 19,666 19,407 19,288
Number of full-time employees 592 581 610 686 780
- ---------------------------------------------------------------------------------------------------------------------------
Selected operating data
Cash investments in Company-produced and
licensed entertainment programming $ 44,727 $ 41,717 $ 37,254 $ 33,061 $ 35,262
Amortization of investments in Company-produced
and licensed entertainment programming $ 40,603 $ 40,626 $ 37,395 $ 33,253 $ 34,341
Household units (at period end) (3)
Playboy TV networks
DTH 21,600 19,200 18,100 15,400 12,400
Digital cable 16,900 14,000 10,300 3,200 1,300
Analog addressable cable 4,500 5,700 7,800 11,000 11,700
Playboy TV en Espanol (4)
DTH 8,100 7,000 -- -- --
Digital cable 3,300 2,700 -- -- --
Movie networks (5)
DTH 42,200 38,400 35,300 -- --
Digital cable 42,800 36,900 25,300 8,400 3,900
Analog addressable cable 6,900 10,800 17,000 16,200 18,300
International TV household units (at period end) (3) 37,000 30,900 29,500 25,700 13,200
Playboy magazine ad pages 555 515 618 674 640
Online subscribers 163 148 102 67 40
- ---------------------------------------------------------------------------------------------------------------------------
18
For a more detailed description of our financial position, results of operations
and accounting policies, please refer to Part II. Item 7. "MD&A" and Part II.
Item 8. "Financial Statements and Supplementary Data."
(1) Certain amounts reported for prior periods have been reclassified to
conform to the current year's presentation.
(2) EBITDA represents earnings from continuing operations before interest
expense, income taxes, cumulative effect of change in accounting
principle, depreciation of property and equipment, amortization of
intangible assets, amortization of investments in entertainment
programming, amortization of deferred financing fees, expenses related to
the vesting of restricted stock awards and equity in operations of
investments. We evaluate our operating results based on several factors,
including EBITDA. We consider EBITDA an important indicator of the
operational strength and performance of our ongoing businesses, including
our ability to provide cash flows to pay interest, service debt and fund
capital expenditures. EBITDA eliminates the uneven effect across business
segments of noncash depreciation of property and equipment and
amortization of intangible assets. Because depreciation and amortization
are noncash charges, they do not affect our ability to service debt or
make capital expenditures. EBITDA also eliminates the impact of how we
fund our businesses and the effect of changes in interest rates, which we
believe relate to general trends in global capital markets but are not
necessarily indicative of our operating performance. Finally, EBITDA is
used to determine compliance with some of our credit facilities. EBITDA
should not be considered an alternative to any measure of performance or
liquidity under accounting principles generally accepted in the United
States, or GAAP. Similarly, EBITDA should not be inferred as more
meaningful than any of those measures.
(3) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(4) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures. Prior to the
restructuring, this network was included in international TV's household
units.
(5) We acquired two Spice networks in March 1999 and three networks in July
2001 in connection with the Califa acquisition.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Since our inception in 1953 as the publisher of Playboy magazine, we have
become a world leader in the development and distribution of multimedia
entertainment for adult audiences. Today, our businesses are classified into
four reportable segments: Entertainment, Publishing, Online and Licensing. We
formerly operated a Catalog segment, which we exited in 2001.
We operate in competitive industries and seek to differentiate ourselves
from our competition by leveraging our worldwide brand strength into multiple
media and by developing and delivering unique high quality content which becomes
part of our extensive libraries of photo images, print and Internet editorial
content and original movies and television programs. Another important aspect of
our businesses consists of the licensing of our trademarks for the worldwide
manufacture, sale and distribution of various consumer products and services.
Our trademarks, which are renewable periodically and which can be renewed
indefinitely, include Playboy, the Rabbit Head Design, Playmate and Spice. We
also own numerous domain names related to our online business.
Our Entertainment Group represents the largest portion of our operating
income, our Online Group is the fastest growing group, and the brand is driven
by our Licensing Group as well as Playboy magazine domestically and worldwide.
Our strategic focus has not changed over the last several years. We
develop unique Playboy-style content that can be leveraged across our various
media platforms and across geographic boundaries. Utilizing multiple technology
and distribution channels, we will seek to extend our audience reach and related
revenues primarily in our high-margin electronic businesses of television and
the Internet. Our 50th Anniversary and the new look of our magazine has
developed momentum in our Publishing group via advertising and newsstand sales
and we will make efforts to continue that momentum in order to increase
profitability and brand equity. We continue to face a number of challenges in
our efforts to profitably grow our businesses and to realize our strategies,
including the continued industry consolidation of cable and satellite
distributors, piracy and theft of service in the television arena, free Internet
content, as well as consolidation of newsstand wholesalers, all of which have
the potential to exert pressure on our margins.
REVENUES
We generate most of our Entertainment Group revenues from PPV and
subscription fees for our television network offerings, including Playboy TV and
Spice branded domestic and international networks. Our network revenues are
affected by marketing and retail price, which are controlled by the
distributors, our revenue splits with distributors, which are negotiated, and
the demand for our programming. A small portion of the Entertainment Group
revenue is from the sale of DVDs and home videos, which stem primarily from our
network programming.
The majority of our Publishing Group revenues are derived from consumers
via subscription and newsstand sales of Playboy magazine and special editions.
Additionally, the group generates advertising sales, as well as royalties on
circulation and advertising, from our 17 licensed international editions. Our
subscription revenues are fairly consistent, while newsstand sales fluctuate and
are typically higher for issues containing celebrity pictorials or other special
content, such as articles or interviews. The group's revenues fluctuate with the
general condition of the local and national economy, which impacts newsstand
sales as well as advertising buying patterns. Revenue can also fluctuate when we
increase the price of issues containing major celebrities, holiday or other
special issues such as our 50th Anniversary issue.
The principal sources of our Online Group revenues are subscription
revenues from our multiple club websites, which offer unique Playboy or Spice
branded content, and from e-commerce sales of Playboy branded and other consumer
products both online and through direct mail. We also generate revenue through
licensing fees from Playboy.com websites outside of the United States as well as
from advertising and online gaming. E-commerce revenues are typically higher
during the holiday buying season and subscription revenues are lower during the
summer months due to decreased Internet traffic.
Licensing Group revenues are principally generated from royalties received
for the international and domestic licensing of our branded consumer products
plus periodic auction sales of small portions of our art and memorabilia
collection.
20
COSTS AND OPERATING EXPENSES
Entertainment Group expenses include programming amortization, network
distribution, sales and marketing and general and administrative expenses.
Amortization expenses relate primarily to the expenditures associated with the
creation of Playboy programming and licensing of third-party programming for our
movie networks.
Publishing Group expenses include manufacturing, subscription promotion,
editorial, shipping and general and administrative expenses. Manufacturing
expenses, which include the production of the magazine, represent the largest
operating expense of the group and fluctuate by issue due mainly to the cost of
paper and the size of the magazine. Postage is also a major cost.
Online Group expenses consist of trademark license and administrative fees
to the parent company, content, product fulfillment, sales and marketing,
hosting and general and administrative expenses.
Licensing Group expenses include promotional expenses and general and
administrative expenses.
Corporate Administration and Promotion expenses include general corporate
costs such as technology, legal, security, human resources, finance, investor
relations and Company-wide marketing, communications and promotion, including
the expenses related to the Playboy Mansion.
21
RESULTS OF OPERATIONS
The following table represents our results of operations (in millions, except
per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 95.3 $ 94.4 $ 86.6
International TV 35.5 16.4 17.0
Worldwide DVD/home video 5.5 10.5 9.6
Other 0.6 0.3 0.6
- ------------------------------------------------------------------------------------------------------
Total Entertainment 136.9 121.6 113.8
- ------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 102.0 94.7 100.8
Other domestic publishing 13.0 11.7 13.8
International publishing 5.7 5.4 9.9
- ------------------------------------------------------------------------------------------------------
Total Publishing 120.7 111.8 124.5
- ------------------------------------------------------------------------------------------------------
Online
Subscriptions 18.2 11.0 6.6
E-commerce 16.8 14.4 17.6
Other 3.8 5.6 3.3
- ------------------------------------------------------------------------------------------------------
Total Online 38.8 31.0 27.5
- ------------------------------------------------------------------------------------------------------
Licensing 19.4 13.2 10.8
- ------------------------------------------------------------------------------------------------------
Catalog -- -- 11.0
- ------------------------------------------------------------------------------------------------------
Total net revenues $ 315.8 $ 277.6 $ 287.6
======================================================================================================
Net loss
Entertainment
Before programming expense $ 68.7 $ 72.9 $ 67.3
Programming expense (40.6) (40.6) (37.4)
- ------------------------------------------------------------------------------------------------------
Total Entertainment 28.1 32.3 29.9
- ------------------------------------------------------------------------------------------------------
Publishing 5.2 2.7 1.8
- ------------------------------------------------------------------------------------------------------
Online 2.8 (8.9) (21.7)
- ------------------------------------------------------------------------------------------------------
Licensing 10.3 4.6 2.6
- ------------------------------------------------------------------------------------------------------
Catalog -- -- (0.4)
- ------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (16.6) (15.8) (19.7)
- ------------------------------------------------------------------------------------------------------
Total segment income (loss) 29.8 14.9 (7.5)
Restructuring expenses (0.3) (6.6) (3.8)
Gain (loss) on disposals -- 0.4 (0.9)
- ------------------------------------------------------------------------------------------------------
Operating income (loss) 29.5 8.7 (12.2)
- ------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.4 0.1 0.8
Interest expense (16.3) (15.1) (14.0)
Amortization of deferred financing fees (1.4) (1.0) (0.9)
Minority interest (1.7) (1.7) (0.7)
Equity in operations of investments (0.1) 0.3 (0.7)
Litigation settlement (8.5) -- --
Debt extinguishment expenses (3.3) -- --
Vendor settlement -- 0.7 --
Other, net (1.2) (0.6) (0.6)
- ------------------------------------------------------------------------------------------------------
Total nonoperating expense (32.1) (17.3) (16.1)
- ------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (2.6) (8.6) (28.3)
Income tax expense (5.0) (8.5) (1.0)
- ------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (7.6) (17.1) (29.3)
Cumulative effect of change in accounting principle (net of tax) -- -- (4.2)
- ------------------------------------------------------------------------------------------------------
Net loss $ (7.6) $ (17.1) $ (33.5)
======================================================================================================
Net loss $ (7.6) $ (17.1) $ (33.5)
Dividend requirements of preferred stock (0.9) -- --
- ------------------------------------------------------------------------------------------------------
Loss applicable to common shareholders $ (8.5) $ (17.1) $ (33.5)
======================================================================================================
Basic and diluted earnings per common share
Loss before cumulative effect of change in accounting principle $ (0.31) $ (0.67) $ (1.20)
Cumulative effect of change in accounting principle (net of tax) -- -- (0.17)
- ------------------------------------------------------------------------------------------------------
Net loss $ (0.31) $ (0.67) $ (1.37)
======================================================================================================
22
2003 COMPARED TO 2002
Our revenues increased approximately $38.2 million, or 14%, compared to
the prior year largely due to the restructuring of our international TV joint
ventures and the resulting consolidation of certain of these businesses in our
operating results. Higher newsstand and advertising revenues for the 50th
Anniversary issue, higher online subscription and e-commerce, and higher
licensing revenues also contributed to the overall increase.
Operating income improved $20.8 million, more than double the prior year,
largely due to the swing to profitability of the Online Group as a result of
growth in high-margin subscription revenues. Increased Playboy magazine revenues
also contributed to the improvement. The positive performance in the Publishing,
Online and Licensing Groups was partially offset by expected lower revenues and
operating income from our worldwide DVD/home video business. Also affecting the
comparison was a $6.6 million restructuring charge taken in 2002 compared to a
$0.3 million restructuring charge in the current year.
Net loss for the current year included an $8.5 million charge related to a
litigation settlement with Logix as well as $3.3 million of debt extinguishment
expenses in connection with financing obligations, which were repaid upon
completion of our debt offering in the first quarter of 2003. The prior year
included a $5.8 million non-cash income tax charge related to our adoption of
Statement 142, Goodwill and Other Intangible Assets.
Entertainment Group
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Revenues from our domestic TV networks business increased $0.9 million, or
1%, for the year. The increase was due, in part, to increases in digital home
coverage; however, we believe that revenues continue to be negatively impacted
by theft of service, which we also believe is an area of focus for the DTH and
cable operators. We also believe that revenues have been impacted by customer
resistance to increases in total prices for services and the resulting
dissatisfaction with the overall value of digital service. In general, our
networks are digital services, carried by DTH and cable operators, and we are
therefore negatively affected by customer churn in digital cable. The year
reflects higher revenues related to Playboy TV en Espanol, which we now own and
operate as part of our domestic television operation.
Profit contribution for our domestic TV networks increased $1.1 million,
or 2%, for the year, which was impacted by lower amortization of intangibles
acquired in the 2001 acquisition described below, offset in part by higher
distribution costs and overhead related to our first year in our new production
facility. In 2004, we anticipate growth opportunities in our domestic TV
business, from expected increases in digital home coverage, from technologies
like SVOD and VOD combined with marketing, in spite of the difficult negotiating
environment with the cable and satellite distributors resulting from industry
consolidation. We are also utilizing our studio to provide playback, production
control and origination services for third parties, which helps bring
efficiencies and allows us to spread our fixed costs to operate the facility. In
July 2001, we acquired The Hot Network, the Hot Zone and the related television
assets of Califa Entertainment Group, Inc., or Califa, and the Vivid TV network
and related television assets of V.O.D., Inc., which we refer to as the Califa
acquisition.
23
The following table illustrates certain information regarding approximate
household units for our networks (in millions):
Household Units (1)
-------------------------
Dec. 31, Dec. 31,
2003 2002
- --------------------------------------------------------------------------------
Playboy TV
DTH 21.6 19.2
Digital cable 16.9 14.0
Analog addressable cable 4.5 5.7
Playboy TV en Espanol
DTH 8.1 7.0
Digital cable 3.3 2.7
Movie Networks
DTH 42.2 38.4
Digital cable 42.8 36.9
Analog addressable cable 6.9 10.8
- --------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
In December 2002, we completed the restructuring of the ownership of our
international TV joint ventures with Claxson. The restructuring resulted in our
acquiring full ownership of Playboy TV and movie networks outside of the United
States and Canada, other than Latin America and Iberia. The operating results of
these networks are now consolidated in our operating results. Prior to the
restructuring, we recorded only revenues from licensing and other fees in our
operating results. Under the terms of the restructuring transaction, we
increased our equity interest in networks in Europe and the Pacific Far East. We
retained our existing 19% ownership interest in the Playboy TV and Spice branded
networks in Latin America and Iberia and acquired the 19.9% equity in two
Japanese networks previously owned by PTVI. Profit contribution from our
international TV business increased on revenue increases of $19.1 million due to
the impact of revenue consolidation from the restructuring. The prior year
included $16.3 million in licensing fees from the PTVI joint venture, in which
we held a minority interest. We believe growth in our international TV business
will come from both existing markets and new territories as the number of
available household units and technology available to deliver television
programming grows.
Profit contribution from our worldwide DVD/home video business decreased,
as expected, on a revenue decrease of $5.0 million, or 47%. The year reflected a
decrease in domestic sales of $3.4 million due to fewer titles released in the
current year, reduced distribution outlets, the absence of a continuity series
and a large sale of backlist titles in the prior year. International revenue
from DVD/home video sales decreased $1.6 million primarily due to the absence of
revenues from a large Korean contract, which were recorded in the prior year.
The group's administrative expenses increased mainly due to higher legal
expenses related to the litigation with Logix in the current year that were
incurred prior to the settlement.
Publishing Group
Playboy magazine revenues increased $7.3 million, or 8%, for 2003 due to
higher newsstand and advertising revenues. Newsstand revenues were $4.1 million
higher principally due to a 12% increase in the number of U.S. and Canadian
newsstand copies sold in the current year. Advertising revenues increased $3.7
million, or 12%, due to the sale of more ad pages, primarily from our 50th
Anniversary issue, combined with higher average net revenue per page.
Advertising sales for the 2004 first quarter magazine issues are closed, and we
expect to report 3.5% more ad pages and 4.5% higher ad revenues compared to the
2003 first quarter. Subscription revenues were essentially flat in 2003 compared
to 2002.
Other domestic publishing revenues increased $1.3 million, or 11%, for
2003 compared to the prior year primarily due to higher revenues from sales of
special editions resulting from the full-year impact of the 2002 price
increases, which more than offset a decline in average copies sold per issue.
24
The group's segment income nearly doubled from $2.7 million in 2002 to
$5.2 million in 2003. Partially offsetting the revenue increases stated above
were higher magazine editorial costs due to celebrity pictorials and higher
advertising and promotion costs related to the 50th Anniversary issue, combined
with the costs associated with moving Playboy's editorial functions from Chicago
to New York. In 2004, we intend to capitalize on the momentum from the redesign
of the magazine and the 50th Anniversary with increased profitability for the
group.
Our circulation rate base (the total newsstand and subscription
circulation guaranteed to advertisers) was 3.15 million at December 31, 2003.
According to ABC, our actual circulation was 1.6% below our circulation rate
base for 2003. We had an increase in newsstand circulation in 2003, at a time
when our principal competitors reported decreases in newsstand circulation.
Also, our renewals, direct mail, newsstand insert cards and advertising on
Playboy.com continue to generate magazine subscriptions. We, like all magazines,
continually analyze our circulation business to make certain that the
circulation rate base is appropriate for our business strategy, but have no
current plans to adjust the rate base at this time.
Online Group
Online Group revenues for 2003 increased $7.8 million, or 25%, to $38.8
million. Subscription revenues represented the largest growth area, which
increased $7.2 million, or 65%, due to growth in members, higher pricing of our
various clubs, as well as the launch of new clubs. E-commerce revenues increased
$2.4 million, or 17%, partly due to increased catalog circulation and improved
marketing strategy for the Spice catalog, combined with increased email
campaigns and special offers for PlayboyStore.com. Other revenues were down $1.8
million, or 32%, primarily as a result of lower advertising revenues, partially
caused by our decision to internally utilize the premium advertising space to
drive traffic to our revenue generating sites. The group's segment performance
increased $11.7 million mainly due to the higher revenues. In accordance with an
agreement, the group's results included trademark fees paid to the parent
company of $6.6 million in 2003 and 2002. The group will pay the same amount in
2004. We expect continued growth in profitability for the group in 2004
principally through anticipated growth of our subscription business with our
current Playboy and Spice clubs as well as through affiliate and third-party
distribution deals, coupled with the increased use of broadband technology and
continued profitable growth in e-commerce.
Licensing Group
Segment income for 2003 from the Licensing Group increased $5.7 million,
or 126%, on a revenue increase of $6.2 million, or 47%. Higher brand licensing
royalties from our international and entertainment products businesses
contributed to the revenue increase. Revenues from the 50th Anniversary auctions
of a portion of our collection of art, manuscripts, cartoons, photographs and
memorabilia, and the earlier auction of an original painting by Salvador Dali,
resulted in combined higher art revenues of $3.8 million in 2003 compared to
$0.9 million in 2002. We intend to grow our royalty revenues in 2004 by
expanding our product lines and distribution outlets, including the opening of
additional retail stores through licensing arrangements, and continuing to
partner with new companies to reach our targeted younger audience. We do not
expect significant art revenues in 2004.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses for 2003 increased $0.8
million, or 5%. We expect Corporate Administration and Promotion expenses to be
approximately 20% higher in 2004 than in 2003 reflecting additions in services
and business development to support our growth.
Restructuring Expenses
In 2003, primarily due to excess space in our Chicago office, we recorded
unfavorable adjustments of $0.1 million and $0.2 million to the previous
estimates related to the 2002 and 2001 restructuring plans, respectively. Of the
total costs related to these restructuring plans, approximately $7.1 million was
paid by December 31, 2003, with most of the remainder to be paid in 2004 and
some payments continuing through 2007.
In 2002, we announced a Company-wide restructuring initiative in order to
reduce our ongoing operating expenses. The restructuring resulted in a workforce
reduction of approximately 11%, or 70 positions. In connection with the
restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million
related to the termination of 53 employees. The remaining positions were
eliminated through attrition. The initiative also involved consolidation of our
office space in Los Angeles and Chicago, resulting in a charge of $2.8 million.
25
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in workforce coupled with
vacating portions of certain office facilities by combining operations for
greater efficiency, refocusing sales and marketing, outsourcing some operations
and reducing overhead expenses. Total restructuring charges of $4.6 million were
recorded, including $0.9 million recorded in 2002 as an unfavorable adjustment
to the original estimate. The adjustment was due primarily to a change in
sublease assumptions. The restructuring resulted in a workforce reduction of
approximately 15%, or 104 positions, through Company-wide layoffs and attrition.
Approximately half of these employees were in the Online Group. Of the $4.6
million charge, $2.6 million related to the termination of 88 employees. The
remaining positions were eliminated through attrition. The charge also included
$2.0 million related to the excess space in our Chicago and New York offices.
In 2000, we realigned senior management and made staff reductions, which
led to a restructuring charge of $3.7 million. There was $0.5 million in
payments made in 2000 and the remaining amount was paid in 2001.
The following table displays the activity and balances of the restructuring
reserve account for the years ended December 31, 2003, 2002 and 2001 (in
thousands):
Consolidation
Workforce of Facilities and
Reduction Operations Total
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 3,243 $ -- $ 3,243
Additional reserve recorded 2,453 1,239 3,692
Adjustment to previous estimate 84 -- 84
Cash payments (4,201) (97) (4,298)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,579 1,142 2,721
Additional reserve recorded 2,938 2,799 5,737
Write-off leasehold improvements -- (437) (437)
Adjustment to previous estimate 100 806 906
Cash payments (1,845) (505) (2,350)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2,772 3,805 6,577
Additional reserve recorded -- -- --
Adjustment to previous estimate (168) 518 350
Cash payments (1,974) (1,760) (3,734)
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193
====================================================================================================
Gain on Disposals
In 2002, we sold our remaining 20% interest in VIPress, our Polish
publishing joint venture, resulting in a gain of $0.4 million.
Nonoperating Income (Expenses)
In 2003, we recorded total nonoperating expense of $32.1 million compared
to $17.3 million in the prior year. The most significant component was interest
expense of $16.3 million, a $1.2 million increase from the prior year due
primarily to an overall increase in our debt at a higher interest rate,
partially offset by additional cash on our balance sheet as a result of the bond
issuance. We also recorded an $8.5 million expense related to the settlement
with Logix and $3.3 million of debt extinguishment expenses in connection with
outstanding financing obligations, which were paid upon completion of our debt
offering in the first quarter of 2003.
2002 COMPARED TO 2001
Our revenues for 2002 decreased $10.0 million, or 3%, compared to the
prior year principally as a result of three transaction-related changes: (a) the
absence of Catalog Group revenues due to the sale of our Collectors' Choice
Music business in November 2001, (b) no library license fees received from PTVI
in 2002 due to the restructuring of the ownership of our international TV joint
ventures as discussed in more detail below and (c) the sale of a majority of our
equity interest in the Polish edition of Playboy magazine in July 2001. See
also, Note (C) Restructuring of Ownership of International TV Joint Ventures of
Notes to the Consolidated Financial Statements. In addition, Playboy magazine
revenues were also lower as the mix of revenues continued to shift away from
print to higher margin businesses. Partially offsetting the above were higher
domestic TV networks revenues as a result of the Califa acquisition in July
2001, and higher Online and Licensing Group revenues due in part to their global
expansion.
Operating performance improved $20.9 million compared to the prior year
due to better performance from all of our operating groups, primarily Online,
combined with lower Corporate Administration and Promotion expenses. In 2002 we
recorded a $6.6 million restructuring charge compared to a $3.8 million charge
in the prior year. The charge in
26
both periods included workforce reductions and consolidation of office space.
The lower net loss for 2002 included a $5.8 million noncash income tax
charge related to our adoption of Statement 142, Goodwill and Other Intangible
Assets. The prior year included a $4.2 million noncash charge representing a
"Cumulative effect of change in accounting principle" related to the adoption of
Statement of Position, or SOP, 00-2, Accounting by Producers or Distributors of
Films.
Entertainment Group
In December 2002, we completed the restructuring of the ownership of our
international TV joint ventures with Claxson. The restructuring significantly
expanded our ownership of Playboy TV and movie networks outside of the United
States and Canada. Under the terms of the restructuring transaction, we
increased our equity interest in networks in Europe and the Pacific Far East and
retained our existing 19.9% ownership interest in the Playboy TV and Spice
branded networks in Latin America and Iberia.
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming expense.
Profit contribution from domestic TV networks for 2002 increased $7.2
million on a revenue increase of $7.8 million, or 9%, primarily due to the
addition of the movie networks from the Califa acquisition.
Our networks were available as follows:
Dec. 31, Dec. 31,
Household units (in millions) (1) 2002 2001
- --------------------------------------------------------------------------------
Playboy TV
DTH 19.2 18.1
Digital cable 14.0 10.3
Analog addressable cable 5.7 7.8
Playboy TV en Espanol (2)
DTH 7.0 --
Digital cable 2.7 --
Movie Networks
DTH 38.4 35.3
Digital cable 36.9 25.3
Analog addressable cable 10.8 17.0
- --------------------------------------------------------------------------------
(1) Each household unit is defined as one household carrying one given network
per carriage platform. A single household can represent multiple household
units if two or more of our networks and/or multiple platforms (i.e.
digital and analog) are available to that household.
(2) We obtained 100% distribution rights of Playboy TV en Espanol in the U.S.
Hispanic market in December 2002 in connection with the restructuring of
the ownership of our international TV joint ventures. Prior to the
restructuring, this network was included in international TV's household
units.
Revenues and profit contribution from the international TV business
decreased $0.6 million and $1.1 million, respectively, due to our not receiving
the September 2002 library license fee payment of $7.5 million from PTVI under
the old joint venture agreement. Partially offsetting the above were higher
sales of output programming to PTVI. As previously discussed, in December 2002,
we restructured the ownership of our international TV joint ventures with
Claxson. We accounted for this transaction as an unwinding of the PTVI joint
venture and final payment under the original sale of assets and licensing
agreement, which resulted in the recognition of $0.5 million in additional
revenues. In return for our increased ownership in PTVI and the other terms of
the restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
would no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson was released
from its remaining funding obligations to PTVI.
Profit contribution from our worldwide DVD/home video business increased
$0.7 million on a revenue increase of $0.9 million, or 10%, mainly due to the
absence of a domestic distributor in the prior year third quarter. The contract
with our previous distributor expired in June 2001, and the contract with our
current distributor became effective in October 2001. Partially offsetting the
above were higher revenues in the prior year of $1.6 million related to a change
in accounting in accordance with SOP 00-2, Accounting by Producers or
Distributors of Films, which primarily impacted the domestic business.
27
Programming amortization expense increased $3.2 million compared to the
prior year as a result of a higher number of original programs premiering on
domestic Playboy TV and the addition of licensed programming for the movie
networks from the Califa acquisition.
The group incurred expenses in 2002 of $1.0 million related to relocating
its California office space and moving to its new studio production facility
during the year.
Publishing Group
Playboy magazine revenues decreased $6.1 million, or 6%, for 2002 due
mostly to lower advertising and newsstand revenues. In spite of this, the
Publishing Group reported improved performance for 2002 of $0.9 million.
Advertising revenues decreased $4.6 million, or 12%, due to fewer ad pages,
partially offset by higher average net revenue per page. Newsstand revenues were
$2.8 million lower principally due to 13% fewer U.S. and Canadian newsstand
copies sold in 2002. Subscription revenues were 3% higher.
Other domestic publishing revenues decreased $2.1 million, or 15%, for
2002 compared to the prior year primarily due to lower newsstand sales of
special editions.
International publishing revenues decreased $4.5 million, or 45%, due to
the sale in July 2001 of the majority of our equity interest in VIPress. As a
result, we no longer consolidate its results. We sold our remaining equity
interest in the joint venture in October 2002.
The group's segment performance for 2002 increased due in part to
cost-reduction measures implemented in the fourth quarter of the prior year.
Additionally, manufacturing costs decreased $4.5 million, driven by lower paper
prices combined with fewer printed pages in Playboy magazine largely as a result
of the fewer ad pages. Significantly lower editorial costs of $3.8 million also
favorably impacted the comparison. The lower Playboy magazine and special
editions newsstand revenues and the lower advertising revenues partially offset
the lower costs and expenses.
Online Group
Online Group revenues for 2002 increased $3.5 million, or 13%, to $31.0
million. Subscription revenues increased $4.4 million, or 66%, due to growth in
members, the up pricing of Playboy Cyber Club and the launch of new clubs. Other
revenues increased $2.3 million, or 69%, primarily as a result of licensing fees
generated by international website deals, including in Germany, Korea, the
Netherlands and Taiwan. E-commerce revenues were down $3.2 million, or 18%,
mostly due to the sale of our Collectors' Choice Music business in November 2001
combined with the continuation of the strategy to increase profit margins with
more targeted circulation. The group's segment loss decreased $12.8 million
mainly due to a combination of the higher revenues plus cost-saving initiatives
implemented in the fourth quarter of 2001. In accordance with an agreement, the
group paid trademark fees to the parent company of $6.6 million in 2002 compared
to $4.6 million in 2001.
Licensing Group
Segment income for 2002 from the Licensing Group increased $2.0 million,
or 75%, on a revenue increase of $2.4 million, or 23%. Higher royalties from our
international licensed branded products business of $1.3 million, revenues of
$0.9 million related to an auction held with Butterfields Auctioneers and eBay
in June 2002 of a small portion of our art and memorabilia collection and the
favorable impact of cost-reduction measures implemented in the fourth quarter of
2001 were responsible for the improved performance.
Catalog Group
In November 2001, we sold our Collectors' Choice Music business, ending
our presence in the nonbranded print catalog business.
Corporate Administration and Promotion
Corporate Administration and Promotion expenses for 2002 decreased $3.9
million, or 20%, compared to the prior year. This improvement was primarily a
result of no longer amortizing trademarks in 2002 due to the adoption of
Statement 142, Goodwill and Other Intangible Assets, lower marketing expenses
and a greater reduction of expenses related to the higher trademark fees from
the Online Group. Partially offsetting the above were expenses related to the
addition of a President and Chief Operating Officer position in 2002.
28
Restructuring Expenses
As previously discussed, in 2002, we announced a Company-wide
restructuring initiative in order to reduce our ongoing operating expenses,
which resulted in a $5.7 million charge in 2002. Also in 2002, a $0.9 million
unfavorable adjustment was made to the 2001 restructuring charges discussed
below primarily due to a change in sublease assumptions.
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in workforce coupled with
vacating portions of certain office facilities by combining operations for
greater efficiency, refocusing sales and marketing, outsourcing some operations
and reducing overhead expenses. Restructuring charges of $3.7 million related to
this plan were recorded in 2001, of which $2.5 million related to the
termination of 88 employees. The charges also included $1.2 million related to
the excess space in our Chicago and New York offices.
Gain (Loss) on Disposals
In 2001, we recorded a loss of $1.3 million related to the sale of our
Collectors' Choice Music business. Also in 2001, we sold a majority of our
equity interest in VIPress, resulting in a gain of $0.4 million. In 2002, we
sold our remaining 20% interest in VIPress resulting in a gain of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had $31.3 million in cash and cash equivalents
and $115.0 million in total financing obligations compared to $4.1 million in
cash and cash equivalents and $92.5 million in total financing obligations at
December 31, 2002. The financing obligations at December 31, 2002 included $27.2
million in obligations payable to Mr. Hefner, our Editor-in-Chief, by
Playboy.com. As discussed below, in 2003, we and Mr. Hefner agreed to exchange
his $27.2 million of promissory notes issued by Playboy.com for cash and our
equity securities.
Our liquidity requirements are being provided by the cash generated from
our offering of $115.0 million in aggregate principal amount of 11% senior
secured notes due 2010, or notes, through one of our wholly-owned subsidiaries,
PEI Holdings, Inc., or Holdings. In addition, we have a $20.0 million revolving
credit facility. At December 31, 2003, there were no borrowings and $9.6 million
in letters of credit outstanding under this facility.
On February 11, 2004, we filed a registration statement with the
Securities and Exchange Commission for approximately 6.9 million shares of our
Class B stock. The offering will consist of approximately 3.2 million shares
offered by us, 2.6 million shares to be offered by Mr. Hefner and 150,000 shares
to be offered by Christie Hefner, our Chairman and Chief Executive Officer. An
additional 0.9 million shares are subject to an over-allotment option granted by
us to the underwriters. We expect to use the net proceeds from the sale to
redeem a portion of the notes issued by Holdings, and the balance for general
corporate purposes.
DEBT FINANCINGS
On March 11, 2003, we completed the offering of $115.0 million in
aggregate principal amount of senior secured notes of our subsidiary, Holdings.
On September 17, 2003, the senior secured notes were exchanged for new
registered senior secured notes. The form and terms of the new senior secured
notes are identical in all material respects (including principal amount,
interest rate, maturity, ranking and covenant restrictions) to the form and
terms of the old notes. The new notes mature on March 15, 2010 and bear interest
at the rate of 11.00% per annum, with interest payable on March 15th and
September 15th of each year, beginning September 15, 2003.
The notes are guaranteed on a senior secured basis by us and by
substantially all of our domestic subsidiaries, referred to as the guarantors,
excluding Playboy.com and its subsidiaries. The notes and the guarantees rank
equally in right of payment with our and the guarantors' other existing and
future senior debt. The notes and the guarantees are secured by a first-priority
lien on our and each guarantor's trademarks, referred to as the primary
collateral, and by a second-priority lien, junior to a lien for the benefit of
the lenders under the new credit facility, as described below, on (a) 100% of
the stock of substantially all of our domestic subsidiaries, excluding the
subsidiaries of Playboy.com, (b) 65% of the capital stock of substantially all
of our indirect first-tier foreign subsidiaries, (c) substantially all of our
and each guarantor's domestic personal property, excluding the primary
collateral and (d) the Playboy Mansion, or collectively, the secondary
collateral. Our ability to pay cash dividends on our common stock is limited
under the terms of the notes.
29
On March 11, 2003, we used $73.3 million of the notes proceeds to repay
$73.0 million in outstanding principal and $0.3 million in accrued interest and
fees on our previously existing credit facility. Effective with this repayment,
that credit facility was terminated. In connection with the termination of the
credit facility, we also terminated our existing interest rate swap agreement
for $0.4 million, which was scheduled to mature in May 2003. On March 14, 2003,
we paid $17.3 million to the Califa principals in satisfaction of substantially
all of our 2003 acquisition payment obligations, which are discussed below. The
remaining $24.0 million of notes proceeds provide liquidity for general
corporate purposes, including the payment of the 2004 Califa obligation, and
fees and expenses associated with the notes offering.
On March 11, 2003, Holdings also entered into a new revolving credit
facility, under which we are permitted to borrow up to $20.0 million in
revolving borrowings, issue letters of credit or a combination of both. For
purposes of calculating interest, revolving loans made under the new credit
facility will be designated at either the offshore dollar inter bank rate, or
IBOR, plus a borrowing margin based on our adjusted EBITDA or, in certain
circumstances, at a base rate plus a borrowing margin based on our adjusted
EBITDA. Letters of credit issued under the new credit facility bear fees at IBOR
plus a borrowing margin based on our adjusted EBITDA. All amounts outstanding
under the new credit facility will mature on March 11, 2006. Our obligations
under the new credit facility are guaranteed by us and each of the guarantors of
the notes. The obligations of us and each of the guarantors under the new credit
facility are secured by a first-priority lien on the secondary collateral and a
second-priority lien on the primary collateral that supports the obligations
under the notes.
FINANCING FROM RELATED PARTY
At December 31, 2002, Playboy.com had an aggregate of $27.2 million of
outstanding indebtedness to Mr. Hefner in the form of three promissory notes.
Upon the closing of the senior secured notes offering on March 11, 2003,
Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the
amount of $10.0 million, was extinguished in exchange for shares of Series A
preferred stock of Holdings, which we refer to as the Holdings Series A
Preferred Stock, with an aggregate stated value of $10.0 million. The two other
promissory notes, in a combined principal amount of $17.2 million, were
extinguished in exchange for $0.5 million in cash and shares of Series B
preferred stock of Holdings, which we refer to as Holdings Series B Preferred
Stock, with an aggregate stated value of $16.7 million. Pursuant to the terms of
an exchange agreement between us, Holdings, Playboy.com and Mr. Hefner and
certificates of designation governing the Holdings Series A and Series B
Preferred Stock, we were required to exchange the Holdings Series A Preferred
Stock for shares of Playboy Class B stock and to exchange the Holdings Series B
Preferred Stock for shares of preferred stock of Playboy, which we refer to as
Playboy Preferred Stock.
In order to issue the Playboy Preferred Stock, we were required to amend
our certificate of incorporation to authorize the issuance, which we refer to as
the certificate amendment. In accordance with applicable law, Mr. Hefner, the
holder of more than a majority of our outstanding Class A voting common stock,
approved the certificate amendment by written consent. As a result, on May 1,
2003, we filed an amendment to our certificate of incorporation and exchanged
the Holdings Series A Preferred Stock plus accumulated dividends for 1,122,209
shares of Playboy Class B stock and exchanged the Holdings Series B Preferred
Stock for 1,674 shares of Playboy Preferred Stock. The Playboy Preferred Stock
accrues dividends at a rate of 8.00% per annum, which are paid semi-annually.
The Playboy Preferred Stock is convertible at the option of Mr. Hefner,
the holder, into shares of our Class B stock at a conversion price of $11.2625,
which is equal to 125% of the weighted average closing price of our Class B
stock over the 90-day period prior to the exchange of Holdings Series B
Preferred Stock for Playboy Preferred Stock. Beginning May 1, 2006, if at any
time the weighted average closing price of our Class B stock for 15 consecutive
trading days equals or exceeds 150% of the conversion price, or $16.89, we will
have the option, by delivering a written notice to the holder of shares of
Playboy Preferred Stock, to convert any or all shares of Playboy Preferred Stock
into the number of shares of Class B stock determined by dividing (a) the sum of
the aggregate stated value of such Playboy Preferred Stock and the amount of
accrued and unpaid dividends by (b) the conversion price.
On September 15, 2010, we will be required to redeem all shares of Playboy
Preferred Stock that are then outstanding at a redemption price equal to $10,000
per share plus the amount of accrued and unpaid dividends. The final redemption
price may be paid, at our option, in either cash or shares of our Class B stock
or any combination of cash and shares of Class B stock. If we elect to pay the
final redemption price in shares of our Class B stock, the number of such shares
to which a holder of shares of Playboy Preferred Stock will be entitled will be
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
weighted average closing price of our Class B stock over the 90-day period prior
to
30
September 15, 2010.
If the announced offering of Class B stock is completed, Mr. Hefner will
convert all of his Playboy Preferred Stock into 1,485,948 shares of Class B
stock, in accordance with the terms of the Playboy Preferred Stock, and those
shares, along with the 1,122,209 Class B shares that he received in exchange for
his Holdings Series A Preferred Stock, will be sold in the offering.
CALIFA ACQUISITION
In connection with the Califa acquisition, we have the option of paying up
to $71 million of the purchase price in cash or Class B stock through 2007. We
have notified the sellers that the base consideration of $7.0 million and the
performance-based payment of $7.0 million that are due in 2004 will be paid in
cash. Under the terms of the agreement, the performance-based payment was paid
in full on March 1, 2004 and the base consideration will be paid in two equal
installments of $3.5 million on May 1, 2004 and November 1, 2004. See the
Contractual Obligations table below for the future cash obligations related to
our acquisitions.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $4.9 million for 2003, a
decrease of $9.4 million from 2002. The decrease in the net loss of $9.6
million, which included non-cash charges of $8.5 million for the Logix
litigation settlement and $3.3 million for the debt extinguishment was partially
offset by a $10.0 million increase in receivables, net of allowances. Net cash
provided by operating activities in 2002 was $14.3 million and included $5.2
million of cash received as part of the PTVI restructuring and also included the
non-cash forgiveness of approximately $12.3 million in current programming and
other receivables due from PTVI. In 2003, we spent $44.7 million in
Company-produced and licensed programming as compared to $41.7 million in 2002.
We expect to invest approximately $46 million in 2004, which could vary based
on, among other things, the timing of completing productions.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $2.0 million for 2003 primarily
due to $2.3 million of additions to property and equipment. In 2003, we also
entered into leases of furniture and equipment totaling $15.6 million.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $24.4 million for 2003
primarily due to proceeds of $115.0 million related to the issuance of senior
secured notes, partially offset by payment of $9.2 million of related financing
fees, repayment of former financing obligations of $65.8 million and payment of
$14.9 million of acquisition liabilities.
31
CONTRACTUAL OBLIGATIONS
The following table reflects a summary of our contractual obligations and
commercial commitments as further discussed in the notes to consolidated
financial statements as of December 31, 2003 (in thousands):
2004 2005 2006 2007 2008 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------
Long Term Financing Obligations $ 12,650 $ 12,650 $ 12,650 $ 12,650 $ 12,650 $133,975 $197,225
Operating Leases 11,718 9,755 9,032 8,415 7,140 31,033 77,093
Purchase Obligations:
Licensed Programming Commitments (1) 9,923 8,323 5,996 3,891 5,224 13,177 46,534
Other (2):
Acquisition Liabilities (3) 17,148 8,000 8,000 8,000 1,000 2,750 44,898
Transponder Service Agreements 5,424 5,123 4,634 3,480 3,480 13,195 35,336
Litigation Settlement 6,500 1,000 1,000 -- -- -- 8,500
- ---------------------------------------------------------------------------------------------------------------
(1) Licensed Programming Commitments represents our non-cancelable obligations
to license adult programming from other studios. Typically, the licensing
of the programming allows us access to specific titles or in some cases
the studio's entire library over an extended period of time. We broadcast
this programming on our networks throughout the world, as appropriate.
(2) We have obligations of $4.2 million recorded in "Other noncurrent
liabilities" under two nonqualified deferred compensation plans, which
permit certain employees and all nonemployee directors to annually elect
to defer a portion of their compensation. These amounts have not been
included in the table as the dates of payment are not known at the balance
sheet date.
(3) We have $5.9 million recorded in the noncurrent portion of "Acquisition
liabilities" that have not been included in the table because, per the
agreement, the timing of the payments is not known at the balance sheet
date.
INCOME TAXES
In 2003, we increased the valuation allowance by $3.3 million, of which
$1.5 million was due to the deferred tax treatment of certain acquired
intangibles and the remainder was primarily due to the deferred tax asset
related to the 2003 net operating loss. Of the $14.6 million increase in the
valuation allowance in 2002, $7.1 million was due to the deferred tax treatment
of certain acquired intangibles as a result of the adoption of Statement 142,
Goodwill and Other Intangible Assets, and the remainder was primarily due to the
deferred tax asset related to the 2002 net operating loss.
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in conformity with GAAP, which
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. We believe that of
our significant accounting policies, the following are the more complex
and critical areas. For additional information about our accounting policies,
see Note (A) Summary of Significant Accounting Policies of Notes to Consolidated
Financial Statements.
REVENUE RECOGNITION
Playboy Magazine
Our Playboy magazine revenues were $102.0 million and $94.7 million for
the years ended December 31, 2003 and 2002, respectively, of which 15.5% and
12.3% were derived from newsstand sales in the respective year. Our print run,
which is developed with input from Warner, varies each month based on expected
sales. Our expected sales are based on historical analyses of demand based on a
number of variables, including content, time of year and the cover price. We
record our revenue for each month's issue utilizing our expected sales. Our
revenues are recorded net of a provision for estimated returns. Substantially
all of the magazines to be returned are returned within 90 days of the date that
the subsequent issue goes on sale. We adjust our provision for returns based on
actual returns of the magazine. Historically, our annual adjustments to Playboy
magazine newsstand revenues have not been material and are driven by differences
in consumer demand as compared to expected sales. At any point, our exposure to
a material adjustment to revenue is mitigated because generally only the most
recent two to three months would not have been fully adjusted to actual based on
actual returns received.
32
Domestic Television
Our domestic television network revenue for the years ended December 31,
2003 and 2002 was $95.3 million and $94.4 million, respectively. In order to
record our revenues, we estimate the number of PPV buys and monthly
subscriptions. We base our estimate of revenue on a number of factors including,
but not exclusively, the average number of buys and subscriptions in the prior
three months based on actual payments received and historical data by geographic
location. Upon recording the revenue, we also record the related receivable. We
have reserves for uncollectible receivables based on our experience and monitor
these reserves on an ongoing basis. At December 31, 2003 and 2002, we had
receivables of $17.0 million and $13.9 million related to domestic television.
We record adjustments to revenue on a monthly basis as we obtain actual payments
from the providers. Actual subscriber information and payment is generally
received within three months. Historically, our adjustments have not been
material. At any point, our exposure to a material adjustment to revenue is
mitigated because generally only the most recent two to three months would not
have been fully adjusted to actual based on payments received.
TRADEMARKS
Our trademarks are critical to the success and potential growth of all of
our businesses. We actively protect and defend our trademarks throughout the
world and monitor the marketplace for counterfeit products. Consequently, we
initiate legal proceedings from time to time to prevent their unauthorized use,
and we incur costs associated with acquisition, defense, registration and/or
renewal of our trademarks. Prior to the implementation of Statement 142,
Goodwill and Other Intangible Assets, in 2002, trademark acquisition costs were
capitalized and amortized using the straight-line method over 40 years, and
trademark defense, registration and/or renewal costs were capitalized and
amortized using the straight-line method over 15 years. Beginning in 2002,
trademark-related costs are no longer being amortized, since our trademarks have
indefinite lives, but are subject to annual impairment tests in accordance with
the new accounting standard. For periods after 2001, capitalized amounts related
to our trademarks are generally higher than they would have been had the old
accounting standards continued to apply.
DEFERRED REVENUES
As of December 31, 2003, $41.8 million and $5.4 million of deferred
revenues related to Playboy magazine subscriptions and online subscriptions,
respectively. Sales of Playboy magazine and online subscriptions, less estimated
cancellations, are deferred and recognized as revenues proportionately over the
subscription period. Our estimates of cancellations are based on historical
experience and current marketplace conditions and they are adjusted monthly on
the basis of actual results. We have not experienced significant deviations
between estimated and actual results.
RELATED PARTY TRANSACTIONS
HUGH M. HEFNER
We own a 29-room mansion located on 5 1/2 acres in Los Angeles,
California. The Playboy Mansion is used for various corporate activities,
including serving as a valuable location for video production, magazine
photography, online events and sales events. It also enhances our image as host
for many charitable and civic functions. The Playboy Mansion generates
substantial publicity and recognition which increases public awareness of us and
our products and services. Its facilities include a tennis court, swimming pool,
gymnasium and other recreational facilities as well as extensive film, video,
sound and security systems. The Playboy Mansion also includes accommodations for
guests and serves as an office and residence for Hugh M. Hefner, our founder. It
has a full-time staff which performs maintenance, serves in various capacities
at the functions held at the Playboy Mansion and provides guests of ours and Mr.
Hefner's with meals, beverages and other services.
Under a 1979 lease we entered into with Mr. Hefner, the annual rent Mr.
Hefner pays to us for his use of the Playboy Mansion is determined by
independent experts who appraise the value of Mr. Hefner's basic accommodations
and access to the Playboy Mansion's facilities, utilities and attendant services
based on comparable hotel accommodations. In addition, Mr. Hefner is required to
pay the sum of the per-unit value of non-business meals, beverages and other
benefits he and his personal guests receive. These standard food and beverage
per-unit values are determined by independent expert appraisals based on fair
market values. Valuations for both basic accommodations and standard food and
beverage units are reappraised every three years, and between appraisals are
annually adjusted based on appropriate consumer price indexes. Mr. Hefner is
also responsible for the cost of all improvements in any Hefner residence
accommodations, including capital expenditures that are in excess of normal
maintenance for those areas.
33
Mr. Hefner's usage of Playboy Mansion services and benefits is recorded
through a system initially developed by the auditing and consulting firm of
PricewaterhouseCoopers LLP and now administered by us, with appropriate
modifications approved by the audit and compensation committees of the Board of
Directors. The lease dated June 1, 1979, as amended, between Mr. Hefner and us
renews automatically at December 31 each year and will continue to renew unless
either we or Mr. Hefner terminate it. The rent charged to Mr. Hefner during 2003
included the appraised rent and the appraised per-unit value of other benefits,
as described above. Within 120 days after the end of our fiscal year, the actual
charge for all benefits for that year is finally determined. Mr. Hefner pays or
receives credit for any difference between the amount finally determined and the
amount he paid over the course of the year. We estimated the sum of the rent and
other benefits payable for 2003 to be $1.5 million, and Mr. Hefner paid that
amount during 2003. The actual rent and other benefits payable for 2002 and 2001
were $1.3 million in each year.
We purchased the Playboy Mansion in 1971 for $1.1 million and in the
intervening years have made substantial capital improvements at a cost of $13.6
million through 2003 (including $2.5 million to bring the Hefner residence
accommodations to a standard similar to the Playboy Mansion's common areas). The
Playboy Mansion is included in our Consolidated Balance Sheet at December 31,
2003 at a net book value of $1.6 million, including all improvements and after
accumulated depreciation. We incur all operating expenses of the Playboy
Mansion, including depreciation and taxes, which were $2.3 million, $3.6 million
and $3.2 million for 2003, 2002 and 2001, respectively, net of rent received
from Mr. Hefner.
From time to time, we enter into barter transactions in which we secure
air transportation for Mr. Hefner in exchange for advertising pages in Playboy
magazine. Mr. Hefner reimburses us for our direct costs of providing these ad
pages. We receive significant promotional benefit from these transactions. There
were no such transactions in 2003.
At December 31, 2002 and at the time of the Hefner debt restructuring,
Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr.
Hefner in the form of three promissory notes. Upon the closing of the senior
secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was
restructured as previously discussed in Liquidity and Capital Resources.
34
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains "forward-looking statements,"
including statements in Business and MD&A, Management's Discussion and Analysis
of Financial Condition and Results of Operations, as to expectations, beliefs,
plans, objectives and future financial performance, and assumptions underlying
or concerning the foregoing. We use words such as "may," "will," "would,"
"could," "should," "believes," "estimates," "projects," "potential," "expects,"
"plans," "anticipates," "intends," "continues" and other similar terminology.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors, which could cause our actual results, performance or outcomes
to differ materially from those expressed or implied in the forward-looking
statements. The following are some of the important factors that could cause our
actual results, performance or outcomes to differ materially from those
discussed in the forward-looking statements:
(1) foreign, national, state and local government regulation, actions or
initiatives, including:
(a) attempts to limit or otherwise regulate the sale, distribution or
transmission of adult-oriented materials, including print, video and
online materials,
(b) limitations on the advertisement of tobacco, alcohol and other
products which are important sources of advertising revenue for us,
or
(c) substantive changes in postal regulations or rates which could
increase our postage and distribution costs;
(2) risks associated with our foreign operations, including market acceptance
and demand for our products and the products of our licensees and our
ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(3) changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(4) our ability to protect our trademarks, copyrights and other intellectual
property;
(5) risks as a distributor of media content, including our becoming subject to
claims for defamation, invasion of privacy, negligence, copyright, patent
or trademark infringement, and other claims based on the nature and
content of the materials we distribute;
(6) dilution from any potential issuance of additional common or convertible
preferred stock in connection with financings or acquisitions;
(7) 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;
(8) competition in the television, men's magazine, Internet and product
licensing markets;
(9) attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(10) the television and Internet businesses' reliance on third parties for
technology and distribution, and any changes in that technology and/or
unforeseen delays in its implementation which might affect our plans and
assumptions;
(11) risks associated with losing access to transponders and competition for
transponders and channel space;
(12) the impact of industry consolidation, any decline in our access to, and
acceptance by, DTH and/or cable systems and the possible resulting
deterioration in the terms, cancellation of fee arrangements or pressure
on margin splits with operators of these systems;
(13) risks that we may not realize the expected increased sales and profits and
other benefits from acquisitions and the restructuring of our
international TV joint ventures;
(14) risks associated with the financial condition of Claxson, our Playboy
TV-Latin America, LLC joint venture partner;
(15) increases in paper or printing costs;
(16) effects of the national consolidation of the single-copy magazine
distribution system; and
(17) uncertainty of the viability of our primarily subscription- and
e-commerce-based Internet model.
35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risk, including changes in foreign
currency exchange rates. In order to manage the risk associated with our
exposure to such fluctuations, we enter into various hedging transactions that
have been authorized pursuant to our policies and procedures. We have derivative
instruments that have been designated and qualify as cash flow hedges, which are
entered into in order to hedge the variability of cash flows to be received
related to forecasted royalty revenues denominated in foreign currencies,
primarily Japanese yen and the Euro. We hedge these royalties with forward
contracts for periods not exceeding 12 months. We formally document all
relationships between hedging instruments and hedged items, as well as our risk
management objectives and strategies for undertaking various hedge transactions.
We link all hedges that are designated as cash flow hedges to forecasted
transactions. We also assess, both at the inception of the hedge and on an
on-going basis, whether the derivatives used in hedging transactions are
effective in offsetting changes in cash flows of the hedged items. Hedge
ineffectiveness is recorded in earnings. We do not use financial instruments for
trading purposes.
Effective with the refinancing of our financing obligations, which
occurred on March 11, 2003, we no longer have any floating interest rate
exposure. All of our current debt is represented by the senior secured notes,
which are fixed rate obligations. In 2001, we entered into an interest rate swap
agreement that was scheduled to mature in May 2003 that effectively converted
$45.0 million of our floating rate debt to fixed rate debt, thus reducing the
impact of interest rate changes on future interest expense. In March 2003, in
connection with the termination of our former credit facility, we also
terminated this swap agreement for $0.4 million.
We 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 we have exposure, primarily Japan and Germany. Based on our
sensitivity analyses at December 31, 2003 and 2002, such a change in foreign
currency exchange rates would affect our annual consolidated operating results,
financial position and cash flows by approximately $0.3 million for both
periods.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and supplementary data are set
forth in this Form 10-K Annual Report as follows:
Page
----
Consolidated Statements of Operations - Fiscal Years Ended
December 31, 2003, 2002 and 2001 37
Consolidated Balance Sheets - December 31, 2003 and 2002 38
Consolidated Statements of Shareholders' Equity - Fiscal
Years Ended December 31, 2003, 2002 and 2001 39
Consolidated Statements of Cash Flows - Fiscal Years Ended
December 31, 2003, 2002 and 2001 40
Notes to Consolidated Financial Statements 41
Report of Independent Auditors 68
Report of Management 69
The supplementary data regarding quarterly results of operations are set
forth in Note (V) Quarterly Results of Operations (Unaudited) of Notes to
Consolidated Financial Statements.
36
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ------------------------------------------------------------------------------------------------------------------
Net revenues $ 315,844 $ 277,622 $ 287,583
- ------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales (229,216) (204,616) (237,048)
Selling and administrative expenses (56,826) (58,117) (58,050)
Restructuring expenses (350) (6,643) (3,776)
- ------------------------------------------------------------------------------------------------------------------
Total costs and expenses (286,392) (269,376) (298,874)
- ------------------------------------------------------------------------------------------------------------------
Gain (loss) on disposals -- 442 (955)
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) 29,452 8,688 (12,246)
- ------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 363 125 786
Interest expense (16,309) (15,147) (13,970)
Amortization of deferred financing fees (1,407) (993) (905)
Minority interest (1,660) (1,724) (704)
Debt extinguishment expenses (3,264) -- --
Equity in operations of investments (80) 279 (746)
Litigation settlement (8,500) -- --
Vendor settlement -- 750 --
Other, net (1,185) (569) (542)
- ------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (32,042) (17,279) (16,081)
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative effect of change
in accounting principle (2,590) (8,591) (28,327)
Income tax expense (4,967) (8,544) (996)
- ------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of change in accounting principle (7,557) (17,135) (29,323)
Cumulative effect of change in accounting principle (net of tax) -- -- (4,218)
- ------------------------------------------------------------------------------------------------------------------
Net loss $ (7,557) $ (17,135) $ (33,541)
==================================================================================================================
Net loss $ (7,557) $ (17,135) $ (33,541)
Dividend requirements of preferred stock (893) -- --
- ------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (8,450) $ (17,135) $ (33,541)
==================================================================================================================
Basic and diluted weighted average number
of common shares outstanding 27,023 25,595 24,411
==================================================================================================================
Basic and diluted loss per common share
Loss before cumulative effect of change in
accounting principle applicable to common shareholders $ (0.31) $ (0.67) $ (1.20)
Cumulative effect of change in accounting principle (net of tax) -- -- (0.17)
- ------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (0.31) $ (0.67) $ (1.37)
==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
37
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Dec. 31, Dec. 31,
2003 2002
- ---------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 31,332 $ 4,118
Marketable securities 3,546 2,677
Receivables, net of allowance for doubtful accounts of
$4,364 and $5,124, respectively 52,230 42,211
Receivables from related parties 1,226 1,542
Inventories, net 12,017 10,498
Deferred subscription acquisition costs 11,759 12,038
Other current assets 10,208 11,296
- ---------------------------------------------------------------------------------------------------
Total current assets 122,318 84,380
- ---------------------------------------------------------------------------------------------------
Property and equipment, net 12,020 11,716
Programming costs, net 57,426 52,347
Goodwill 111,893 111,893
Trademarks 58,159 55,219
Distribution agreements, net of accumulated
amortization of $970 and $6,598, respectively 32,170 34,284
Other noncurrent assets 24,074 19,882
- ---------------------------------------------------------------------------------------------------
Total assets $ 418,060 $ 369,721
===================================================================================================
Liabilities
Financing obligations $ -- $ 6,402
Financing obligations to related parties -- 17,235
Acquisition liabilities 15,392 13,427
Accounts payable 22,899 24,596
Accrued salaries, wages and employee benefits 11,472 10,419
Deferred revenues 53,963 52,633
Accrued litigation settlement 6,500 --
Other liabilities and accrued expenses 19,088 17,648
- ---------------------------------------------------------------------------------------------------
Total current liabilities 129,314 142,360
- ---------------------------------------------------------------------------------------------------
Financing obligations 115,000 58,865
Financing obligations to related parties -- 10,000
Acquisition liabilities 26,982 39,685
Net deferred tax liabilities 13,877 12,375
Accrued litigation settlement 2,000 --
Other noncurrent liabilities 13,170 8,904
- ---------------------------------------------------------------------------------------------------
Total liabilities 300,343 272,189
- ---------------------------------------------------------------------------------------------------
Minority interest 11,081 9,717
Shareholders' equity
Preferred stock, $10,000 par value - 10,000,000 shares authorized;
1,674 issued 16,959 --
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,864,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 22,579,363
and 21,422,321 issued, respectively 226 214
Capital in excess of par value 152,969 146,091
Accumulated deficit (62,510) (54,060)
Unearned compensation - restricted stock -- (2,713)
Accumulated other comprehensive loss (1,057) (1,766)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 106,636 87,815
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 418,060 $ 369,721
===================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
38
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unearned Accumulated
Class A Class B Capital in Comp. - Other
Preferred Common Common Excess of Accum. Restricted Comprehensive
Stock Stock Stock Par Value Deficit Stock Loss (1) Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ -- $ 49 $ 196 $ 120,519 $ (3,384) $ (2,713) $ (482) $ 114,185
Net loss -- -- -- -- (33,541) -- -- (33,541)
Shares issued or vested
under stock plans, net -- -- 3 2,504 -- (306) -- 2,201
Other comprehensive loss -- -- -- -- -- -- (1,631) (1,631)
Disposal -- -- -- -- -- -- 244 244
Other -- -- -- 67 -- -- -- 67
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 -- 49 199 123,090 (36,925) (3,019) (1,869) 81,525
Net loss -- -- -- -- (17,135) -- -- (17,135)
Shares issued or vested
under stock plans, net -- -- -- 6 -- 306 -- 312
Shares issued related to the Califa
acquisition -- -- 15 22,826 -- -- -- 22,841
Other comprehensive income -- -- -- -- -- -- 94 94
Other -- -- -- 169 -- -- 9 178
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 -- 49 214 146,091 (54,060) (2,713) (1,766) 87,815
Net loss -- -- -- -- (7,557) -- -- (7,557)
Shares issued or vested
under stock plans, net -- -- 12 380 -- 2,713 -- 3,105
Conversion of Holdings preferred B
to Playboy preferred A 16,959 -- -- 10,100 -- -- -- 27,059
Preferred stock dividends -- -- -- -- (893) -- -- (893)
Shares issued related to Califa
acquisition -- -- -- (3,602) -- -- -- (3,602)
Other comprehensive income -- -- -- -- -- -- 709 709
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 16,959 $ 49 $ 226 $ 152,969 $ (62,510) $ -- $ (1,057) $ 106,636
==================================================================================================================================
(1) Accumulated other comprehensive loss at December 31, 2003 was as follows:
Unrealized loss on marketable securities $ (265)
Derivative loss (28)
Foreign currency translation loss (764)
-------
$(1,057)
=======
Comprehensive loss was as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- --------------------------------------------------------------------------------------
Net loss $ (7,557) $ (17,135) $ (33,541)
- --------------------------------------------------------------------------------------
Unrealized gain (loss) on marketable
securities 817 (555) (350)
Derivative gain (loss) 656 500 (1,184)
Foreign currency translation
adjustments (764) 149 (97)
- --------------------------------------------------------------------------------------
Total other comprehensive income (loss) 709 94 (1,631)
- --------------------------------------------------------------------------------------
Comprehensive loss $ (6,848) $ (17,041) $ (35,172)
======================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
39
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (7,557) $ (17,135) $ (33,541)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities
Depreciation of property and equipment 3,698 3,781 3,897
Amortization of intangible assets 5,257 7,212 10,612
Amortization of investments in entertainment programming 40,603 40,626 37,395
(Gain) loss on disposals -- (442) 955
Amortization of deferred financing fees 1,407 993 905
Minority interest 1,364 1,724 1,001
Debt extinguishment expenses 3,264 -- --
Equity in operations of investments 80 (279) 746
Deferred income taxes 1,349 7,018 634
Cumulative effect of change in accounting principle -- -- 4,218
Changes in current assets and liabilities
Receivables (10,340) 5,537 5,822
Receivables from related parties 316 (30,164) (4,458)
Inventories (1,519) 3,464 3,468
Other current assets (2,261) (4,225) 944
Accounts payable (1,921) (139) (6,587)
Accrued salaries, wages and employee benefits 3,759 954 (486)
Deferred revenues 2,732 3,892 1,122
Deferred revenues from related parties -- 18,618 3,985
Acquisition liability interest (407) 4,836 3,777
Accrued litigation settlement 6,500 -- --
Other liabilities and accrued expenses 2,148 6,419 888
--------- --------- ---------
Net change in current assets and liabilities (993) 9,192 8,475
--------- --------- ---------
Decrease in receivables from related parties -- 25,000 6,525
Investments in entertainment programming (44,727) (41,717) (37,254)
Increase in trademarks (2,940) (3,034) (2,625)
(Increase) decrease in other noncurrent assets (1,561) 209 (173)
Decrease in deferred revenues from related parties -- (21,325) (6,525)
Increase in accrued litigation settlement 2,000 -- --
Increase (decrease) in other noncurrent liabilities 2,224 (3,277) (1,738)
International TV joint venture restructuring -- 4,738 --
Other, net 1,411 1,044 (1,452)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,879 14,328 (7,945)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions -- (435) (935)
Proceeds from disposals 116 1,517 3,276
Additions to property and equipment (2,342) (4,318) (3,233)
Funding of equity interests -- -- (1,875)
Other, net 179 78 (86)
- ----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,047) (3,158) (2,853)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com Series A Preferred Stock -- -- 13,066
Proceeds from financing obligations 115,000 5,000 10,000
Repayment of financing obligations (65,767) (16,311) (11,672)
Payment of debt extinguishment expenses (356) -- --
Payment of acquisition liabilities (14,892) -- --
Payment of deferred financing fees (9,205) (585) (454)
Payment of preferred stock dividends (669) -- --
Proceeds from stock plans 272 234 2,141
Other, net (1) -- (207)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 24,382 (11,662) 12,874
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27,214 (492) 2,076
Cash and cash equivalents at beginning of year 4,118 4,610 2,534
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 31,332 $ 4,118 $ 4,610
==========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation: The consolidated financial statements include our
accounts and all majority-owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
Stock-based Compensation: At December 31, 2003 and 2002, we had various stock
plans for key employees and non-employee directors, which are more fully
described in Note (Q) Stock Plans. We account for stock options as prescribed by
Accounting Principles Board Opinion No. 25 and disclose pro forma information as
provided by Statement 123, Accounting for Stock Based Compensation.
Pro forma net loss and net loss per common share, presented below (in thousands,
except per share amounts), were determined as if we had accounted for our
employee stock options under the fair value method of Statement 123. The fair
value of these options was estimated at the date of grant using an option
pricing model. Such models require the input of highly subjective assumptions
including the expected volatility of the stock price. For pro forma disclosures,
the options' estimated fair value was amortized over their vesting period. No
stock-based employee compensation expense is recognized because all options
granted under those plans had an exercise price equal to or in excess of the
market value of the underlying common stock at the grant date. If we accounted
for our employee stock options under Statement 123, compensation expense would
have been $2.1 million, $3.1 million and $3.7 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ---------------------------------------------------------------------------------------------------
Net loss
As reported $ (7,557) $ (17,135) $ (33,541)
Pro forma (9,699) (20,240) (37,197)
Basic and diluted EPS applicable to common shareholders
As reported (0.31) (0.67) (1.37)
Pro forma $ (0.39) $ (0.79) $ (1.52)
- ---------------------------------------------------------------------------------------------------
For the pro forma disclosures above, the estimated fair value of the options is
amortized to expense over their respective vesting periods. 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
12/31/03 12/31/02 12/31/01
- ---------------------------------------------------------------------------------------------------
Risk-free interest rate 3.33% 4.64% 4.98%
Expected stock price volatility 48.90% 50.20% 49.70%
Expected dividend yield -- -- --
- ---------------------------------------------------------------------------------------------------
For 2003, 2002 and 2001, an expected life of six years was used for all of the
stock options, and the weighted average fair value of options granted was $5.06,
$7.97 and $6.59, respectively.
41
Cumulative effect of change in accounting principle: During 2001, we adopted
Statement 139, Rescission of FASB Statement No. 53 and Amendments to FASB
Statements No. 63, 89, and 121 and SOP 00-2, Accounting by Producers or
Distributors of Films. Statement 139 rescinded FASB Statement 53, Financial
Reporting by Producers and Distributors of Motion Picture Films. SOP 00-2
established new film accounting and reporting standards for producers or
distributors of films, including changes in revenue recognition and accounting
for marketing, development and overhead costs. SOP 00-2 also requires all
programming costs to be classified on the balance sheet as noncurrent assets. As
a result of the adoption of SOP 00-2, we recorded a noncash charge of $4.2
million, or $0.17 per basic and diluted common share, in 2001, representing a
"Cumulative effect of change in accounting principle." The charge primarily
related to reversals of previously recognized revenues which under the new rules
were considered not yet earned, combined with a write-off of marketing costs
that were previously capitalized and are no longer capitalizable under the new
rules.
Revenue recognition: Domestic TV networks DTH and cable revenues are recognized
based on estimates of PPV buys and monthly subscriber counts reported each month
by the system operators and adjusted to actual. The net adjustments to actual
are not material. International TV revenues are recognized either upon
identification of programming scheduled for networks, delivery of programming to
customers and/or upon the commencement of the license term. Revenues from the
sale of Playboy magazine and online subscriptions are recognized over the terms
of the subscriptions. Revenues from newsstand sales of Playboy magazine and
special editions (net of estimated returns) and revenues from the sale of
Playboy magazine advertisements are recorded when each issue goes on sale.
Revenues from e-commerce are recognized when the items are shipped, which is
when title passes. Royalties from licensing the Company's trademarks in its
international publishing and product licensing businesses are generally
recognized on a straight-line basis over the terms of the related agreements.
Receivables are recorded when revenue is recognized and adjusted as payments are
received. We have established reserves for uncollectible receivables.
Prior to the 2002 restructuring of the ownership of our international TV joint
ventures, more fully explained in Note (C) Restructuring of Ownership of
International TV Joint Ventures, international TV revenues received from PTVI,
for the license of the exclusive international TV rights for the use of the
Playboy tradename, film and video library, and for the acquisition of the
international rights to the Spice film library, the U.K. and Japan Playboy TV
networks and certain international distribution contracts, were recognized
generally as the consideration was paid to us, less our 19.9% ownership interest
in such transactions. License fees from PTVI for current output production were
recognized as programming was available, less our 19.9% ownership interest in
such transactions.
Cash equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates fair value.
Marketable securities: Marketable securities are classified as
available-for-sale securities and are stated at fair value. Net unrealized
holding gains and losses are included in "Accumulated other comprehensive loss."
Inventories: Inventories are stated at the lower of cost (specific cost and
average cost) or fair value.
Property and equipment: Property and equipment are stated at cost. Costs
incurred for computer software developed or obtained for internal use are
capitalized for application development activities and immediately expensed for
preliminary project activities or post-implementation activities. Depreciation
is recorded using the straight-line method over the estimated useful lives of
the assets. The useful life for building improvements is ten years, furniture
and equipment ranges from one to ten years and software ranges from one to five
years. Leasehold improvements are depreciated using a straight-line basis over
the shorter of their estimated useful lives or the terms of the related leases.
Repair and maintenance costs are expensed as incurred and major betterments are
capitalized. Sales and retirements of depreciable property and equipment are
recorded by removing the related cost and accumulated depreciation from the
accounts, and any related gains or losses are recorded.
Advertising costs: We expense 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 Online
Group and previously for the Catalog Group. The capitalized direct-response
advertising costs are amortized over the period during which the future benefits
are expected to be received, generally six to 12 months. See Note (K)
Advertising Costs.
42
Programming costs and amortization: Original programming and film acquisition
costs are primarily assigned to the domestic and international networks and are
capitalized and amortized utilizing the straight-line method over three years.
Prior to the December 2002 PTVI restructuring, the portion of original
programming costs assigned to the international TV market was fully amortized
upon availability to PTVI. Existing library original programming costs allocated
to the international TV market were amortized proportionately with license fees
recognized related to the PTVI agreement. Management believes that these methods
have provided 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 are adjusted periodically to
reflect changes in the estimates of amounts of related future revenues. Film and
program costs are stated at the lower of unamortized cost or estimated net
realizable value as determined on a specific identification basis. See Note (C)
Restructuring of Ownership of International TV Joint Ventures and Note (M)
Programming Costs, Net.
Intangible assets: On January 1, 2002, we adopted Statement 142, Goodwill and
Other Intangible Assets. Under the new rules, goodwill and intangible assets
with indefinite lives are no longer amortized but are subject to annual
impairment tests. Our indefinite-lived intangible assets consist of trademarks
and certain acquired distribution agreements. Other intangible assets continue
to be amortized over their useful lives. Noncompete agreements are being
amortized using the straight-line method over the lives of the agreements,
either five or ten years. Distribution agreements deemed to have definite lives
are being amortized using the straight-line method over the lives of the
agreements, ranging from three months to eight years. A program supply agreement
will be amortized using the straight-line method over the ten-year life of the
agreement. Copyright defense, registration and/or renewal costs are being
amortized using the straight-line method over 15 years. The noncompete
agreements, program supply agreement and copyright costs are all included in
"Other noncurrent assets."
During the first quarter of 2002, we completed the required transitional
impairment tests for goodwill and indefinite-lived intangible assets, which did
not result in an impairment charge. Deferred tax liabilities related to these
assets with indefinite lives will now be realized only if there is a disposition
or an impairment of the value of these intangible assets. We currently have net
operating losses, or NOLs, available to offset deferred tax liabilities realized
within the NOL carryforward period. However, we cannot be certain that NOLs will
be available when the deferred tax liabilities related to these intangible
assets are realized. Therefore, in 2002, we recorded a noncash income tax
provision of $7.1 million for these deferred tax liabilities, which included
$5.8 million related to the cumulative effect of changing the accounting for
amortization from prior years.
The following table represents the pro forma effects as if we had adopted
Statement 142 as of January 1, 2001 (in thousands, except per share amounts):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ---------------------------------------------------------------------------------------------------
Net loss
As reported $ (7,557) $ (17,135) $ (33,541)
Amortization of goodwill and indefinite-lived
intangible assets (net of tax) -- -- 5,762
Income tax benefit (expense) (839) 5,293 (17)
- ---------------------------------------------------------------------------------------------------
Pro forma $ (8,396) $ (11,842) $ (27,796)
===================================================================================================
Basic and diluted EPS applicable to common shareholders
As reported $ (0.31) $ (0.67) $ (1.37)
Pro forma $ (0.34) $ (0.46) $ (1.14)
===================================================================================================
As a result of the restructuring of the ownership of PTVI in December 2002, we
acquired distribution agreements of $3.4 million with a weighted average life of
approximately four years and a program supply agreement of $3.2 million with a
life of ten years. The weighted average life of the aggregate of the
definite-lived intangible assets acquired was approximately seven years. We also
acquired indefinite-lived distribution agreements of $9.0 million, which will
not be amortized but will be subject to the annual impairment testing.
43
Amortizable intangible assets consisted of the following (in thousands):
December 31, 2003 December 31, 2002
-------------------------------------------- --------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
- -------------------------------------------------------------------------------------------------------------------
Noncompete
agreements $ 14,000 $ 12,037 $ 1,963 $ 14,000 $ 9,368 $ 4,632
Distribution
agreements 3,151 970 2,181 10,893 6,598 4,295
Program supply
agreement 3,226 323 2,903 3,226 -- 3,226
Copyrights 2,253 743 1,510 2,156 592 1,564
- -------------------------------------------------------------------------------------------------------------------
Total amortizable
intangible
assets $ 22,630 $ 14,073 $ 8,557 $ 30,275 $ 16,558 $ 13,717
===================================================================================================================
At December 31, 2003 and 2002, our indefinite-lived intangible assets not
subject to amortization included goodwill of $111.9 million for both years, and
trademarks of $58.2 million and $55.2 million, respectively. Also, of the $32.2
million and $34.3 million of distribution agreements on our Consolidated Balance
Sheets at December 31, 2003 and 2002, $30.0 million are indefinite-lived for
both periods.
At December 31, 2003 and 2002, goodwill by reportable segment was $111.4 million
for both periods for the Entertainment Group and $0.5 million for both periods
for the Online Group.
At October 1, 2003, we completed our annual impairment testing of goodwill and
indefinite-lived intangible assets and determined that no impairment exists.
The aggregate amortization expense for intangible assets for 2003, 2002 and 2001
was $5.3 million, $7.2 million and $10.6 million, respectively. Amortization
expense related to intangible assets with definite lives is expected to total
approximately $2.0 million, $1.4 million, $1.1 million, $0.8 million and $0.7
million for each of the next five years, respectively.
Derivative financial instruments: Effective January 1, 2001, we adopted
Statement 133, Accounting for Derivative Instruments and Hedging Activities as
amended by Statement 138, which require all derivative instruments to be
recognized as either assets or liabilities on the balance sheet at fair value
regardless of the purpose or intent for holding the derivative instrument. The
accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of relationship.
We formally document all relationships between hedging instruments and hedged
items, as well as our risk management objectives and strategies for undertaking
various hedge transactions. At December 31, 2003, we had derivative instruments
that have been designated and qualify as cash flow hedges, which are entered
into in order to hedge the variability of cash flows to be received related to
forecasted royalty revenues denominated in foreign currencies, primarily
Japanese Yen and the Euro. We hedge these royalties with forward contracts for
periods not exceeding 12 months. The fair value and carrying value of our
forward contracts were not material. Since these derivative instruments are
designated and qualify as cash flow hedges, the effective portion of the gain or
loss on the derivative instruments is being deferred and reported as a component
of "Accumulated other comprehensive loss" and is reclassified into earnings in
the same line item where the royalty revenue is recognized into earnings.
In 2001, we entered into an interest rate swap agreement that was scheduled to
mature in May 2003 that effectively converted $45.0 million of our floating rate
debt to fixed rate debt, thus reducing the impact of interest rate changes on
future interest expense. The interest rate swap was terminated in March 2003 to
coincide with the termination of our former credit facility. At December 31,
2002, the fair value and carrying value of our interest rate swap was a
liability of approximately $0.6 million, respectively, recorded in "Other
liabilities and accrued expenses."
44
At December 31, 2003 and 2002, we had net unrealized losses totaling $0.03
million and $0.7 million, respectively, in "Accumulated other comprehensive
loss," which represents the effective portion of changes in fair value of the
cash flow hedges. During 2003 and 2002, we reclassified $0.5 million and $1.5
million, respectively, of net losses from "Accumulated other comprehensive loss"
to the Consolidated Statements of Operations, which were offset by net gains on
the items being hedged. In 2003 and 2002, there were no amounts included in
earnings related to hedging ineffectiveness. We do not expect any significant
losses to be reclassified from "Accumulated other comprehensive loss" to
earnings within the next 12 months.
Earnings per common share: Basic EPS is computed by dividing net income (loss)
applicable to common shareholders 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 (G) Earnings per Common Share.
Equity investments: Prior to the restructuring of the ownership of PTVI, the
equity method was used to account for our 19.9% interest in the common stock of
PTVI due to our ability to exercise significant influence over PTVI's operating
and financial policies. Equity in operations of PTVI included our 19.9% interest
in the results of PTVI, the elimination of unrealized profits on certain
transactions between us and PTVI and gains related to the transfer of certain
assets to PTVI. Beginning in 2003, the equity method is used to account for our
investment in PTVLA since the restructuring gave us the ability to exercise
influence over PTVLA. The cost method was used prior to the restructuring.
Minority interest: In 2001, one of our subsidiaries, Playboy.com, converted
three promissory notes, together with accrued and unpaid interest thereon, into
shares of Playboy.com's Series A Preferred Stock. As part of consolidation,
included in "Minority interest" and "Other noncurrent liabilities" is the
accretion of dividends payable and professional fees related to the preferred
stock. Also included in "Other noncurrent liabilities" is minority interest
associated with the preferred stock. As part of the restructuring of the
ownership of PTVI, Claxson agreed to return its shares of the preferred stock.
Additionally, in 2001, we sold a majority of our interest in VIPress. Prior to
the sale, the financial statements of VIPress were included in our financial
statements, along with the related minority interest.
Foreign currency translation: Assets and liabilities in foreign currencies
related to our international TV foreign operations and VIPress, prior to its
sale in 2001, were translated into U.S. dollars at the exchange rate existing at
the balance sheet date. The net exchange differences resulting from these
translations were included in "Accumulated other comprehensive loss." Revenues
and expenses were translated at average rates for the period. In addition, prior
to the restructuring of the ownership of PTVI, we recorded our 19.9% interest in
its foreign currency translation amounts.
(B) ACQUISITION
In July 2001, we acquired The Hot Network and The Hot Zone networks,
together with the related television assets of Califa. In addition, we acquired
the Vivid TV network, now operated as Spice Platinum, and the related television
assets of VODI, a separate entity owned by the sellers. The addition of these
networks into our television networks portfolio enables us to offer a wider
range of adult programming. We accounted for the acquisition under the purchase
method of accounting and, accordingly, the results of these networks since the
acquisition date have been included in our Consolidated Statements of
Operations. In connection with the acquisition and purchase price allocations,
the Entertainment Group recorded goodwill of $27.4 million which is deductible
over 15 years for income tax purposes. The purchase price was recorded at its
net present value and is reported in the Consolidated Balance Sheets as
components of current and noncurrent "Acquisition liabilities."
We recorded $30.8 million of intangible assets separate from goodwill. We
recorded $28.5 million for distribution agreements and $2.3 million for
noncompete agreements. All of the noncompete agreements and $7.5 million of the
distribution agreements are being amortized over approximately eight and two
years, respectively, the weighted average lives of these agreements.
Distribution agreements totaling $21.0 million were deemed to have indefinite
lives and are not subject to amortization.
The total consideration for the acquisition was $70.0 million and is
required to be paid in installments over a ten-year period ending in 2011. The
nominal consideration for Califa's assets was $28.3 million. We also assumed the
obligations of Califa related to a note payable and noncompete liability. The
nominal consideration for VODI's assets was $41.7 million. We were obligated to
pay up to an additional $12.0 million in consideration upon the achievement of
specified financial performance targets, $5.0 million of which we paid on
February 28, 2003 and $7.0 million of which we paid on March 1, 2004. The
amounts were recorded at the acquisition date as part of acquisition
liabilities.
45
We may accelerate all or any portion of the remaining unpaid purchase
price, but only by making the accelerated payments in cash, at a discount rate
to be mutually agreed upon by the parties in good-faith negotiations. However,
if the parties are unable to agree on the discount rate, we may, at our sole
discretion, elect to accelerate the payment at a 10% discount rate if we choose
to accelerate beginning on the 19th month following the closing and until the
36th month following the closing, or at a 12% discount after the 36th month
following the closing.
The Califa acquisition agreement gave us the option of paying up to $71
million of the scheduled payments in cash or Class B stock. The number of
shares, if any, we issue in connection with a particular payment or particular
payments is based on the trading prices of the Class B stock surrounding the
applicable payment dates. Prior to each scheduled payment of consideration, we
must provide the sellers with written notice specifying the portion of the
purchase price payment that we intend to pay in cash and the portion in Class B
stock. If we notify the sellers that we intend to issue Class B stock, the
sellers must elect the portion of the shares that the sellers want us to
register under the Securities Act, referred to as the eligible shares. We are
then obligated to issue eligible shares registered under the Securities Act. The
sellers may sell the eligible shares received during the 90-day period following
the date the eligible shares are issued. If we do not get the registration
statement relating to the resale of our shares issued in connection with a
specified payment effective within the periods set forth in the agreement, we
are also obligated to pay the sellers interest on the amount of the payment
until the registration statement is declared effective. The interest payment can
be paid in cash or shares of Class B stock at our option. For purposes of this
discussion, references to eligible shares also include any shares of Class B
stock issued to pay any required interest payments, if applicable. The interest
rate will vary depending on the length of time required after the applicable
payment date to get the registration statement declared effective. The number of
eligible shares that may be sold on any day during a selling period is limited
under the purchase agreement for the networks. A selling period will be extended
if the applicable volume limitations did not permit all of the eligible shares
to be sold during that selling period, assuming that the maximum number of
shares were sold on each day during the period.
If the sellers elect to sell eligible shares during the applicable selling
period, and the proceeds from the sales of those eligible shares are less than
the aggregate value of those eligible shares at the time of their issuance, we
have agreed to make the sellers whole for the shortfall by, at our option, (a)
paying the shortfall in cash, (b) issuing additional shares of Class B stock in
an amount equal to the shortfall, referred to as the make-whole shares, or (c)
increasing the next scheduled payment of consideration to the sellers in an
amount equal to the shortfall plus interest on the shortfall at a specified
interest rate until the next scheduled payment of consideration. The foregoing
make-whole mechanism will apply only to the extent the sellers have sold the
maximum number of shares they are entitled to sell during the applicable selling
period in accordance with the applicable volume limitations.
We are obligated to issue make-whole shares that are registered under the
Securities Act and the sellers are entitled to sell those shares during a 30-day
selling period that follows their issuance. Sales of make-whole shares are also
subject to volume limitations and the selling periods applicable to make-whole
shares will also be extended if the applicable volume limitations did not permit
all of the make-whole shares to be sold during the applicable selling period,
assuming that the maximum number of shares were sold on each day during the
period. If during the applicable selling period for eligible shares or
make-whole shares, the sales proceeds exceed the amount of the purchase price
payment or the amount of the make-whole payment, the sellers will immediately
cease the offering and sale of the remaining eligible shares or make-whole
shares, as applicable, and the remaining eligible shares or make-whole shares,
as applicable, will be returned promptly to us along with any excess sales
proceeds.
On April 17, 2002, a registration statement for the resale of
approximately 1,475,000 shares became effective. These shares were issued in
payment of the first two installments of consideration, which totaled $22.5
million plus $0.3 million of accrued interest. The sellers elected to sell the
shares and realized net proceeds from the sale of $19.2 million. As a result, we
were required to provide them with a make-whole payment in either cash or Class
B stock of approximately $3.6 million, plus interest until the date payment was
made. On March 14, 2003, we paid the sellers $17.3 million in cash, in
satisfaction of $8.5 million of base consideration due in 2003, a $5.0 million
performance-based payment due in 2003 and the $3.6 million make-whole payment,
plus accrued interest of $0.2 million thereon. The amounts were recorded at the
acquisition date as part of acquisition liabilities.
46
At December 31, 2003, the remaining installments of consideration were due as
follows (in thousands), which includes $7.0 million of performance-based
payments in 2004:
2004 $ 15,000
2005 8,000
2006 8,000
2007 8,000
2008 1,000
2009 1,000
2010 1,000
2011 750
- --------------------------------------------------------------------------------
Total future payments 42,750
================================================================================
(C) RESTRUCTURING OF OWNERSHIP OF INTERNATIONAL TV JOINT VENTURES
On December 24, 2002, we completed the restructuring of the ownership of
our international TV joint ventures with Claxson. The restructuring resulted in
our acquiring full ownership of Playboy TV and movie networks outside of the
United States and Canada other than Latin America, Iberia and Japan. The Claxson
joint ventures originated when PTVI and PTVLA were formed in 1999 and 1996,
respectively, as joint ventures between us and a member of the Cisneros Group,
or Cisneros, for the ownership and operation of Playboy TV networks outside of
the United States and Canada. In 2001, Claxson succeeded Cisneros as our joint
venture partner. Prior to the restructuring transaction, parts of which were
effective as of April 1, 2002, PTVI and PTVLA had exclusive rights to create and
launch new television networks under the Playboy and Spice brands outside of the
United States and Canada, and under specified circumstances, to license
programming to third parties. We owned a 19.9% equity interest in PTVI and a 19%
equity interest in PTVLA before the restructuring. PTVLA is now our sole
remaining joint venture with Claxson.
Under the terms of the restructuring transaction, we (a) increased from
19.9% to 100% our ownership in PTVI, (b) acquired the 19.9% equity in two
Japanese networks previously owned by PTVI, (c) retained our existing 19%
ownership in PTVLA, (d) acquired an option to increase our percentage ownership
of PTVLA, (e) obtained 100% distribution rights to Playboy TV en Espanol in the
U.S. Hispanic market, (f) restructured our Latin American Internet joint venture
with Claxson in favor of revenue share and promotional agreements for our
respective Internet businesses in Latin America and (g) received from Claxson
its preferred stock ownership in Playboy.com (approximately 3% equity in
Playboy.com as if converted).
Prior to the restructuring transaction, in return for the exclusive
international TV rights for the use of the Playboy tradename, film and video
library, and for the acquisition of the international rights to the Spice film
library, the U.K. and Japan Playboy TV networks and certain international
distribution contracts, PTVI was obligated to make total payments of $100.0
million to us, related to the above, over six years, of which $42.5 million had
been received prior to the restructuring transaction. The remaining $57.5
million was to be paid to us from 2002 to 2004. We accounted for these revenues
from the original sale of assets and the licensing payments on an "as received"
basis. In return for our increased ownership in PTVI and the other terms of the
restructuring transaction, among other things, (a) we forgave approximately
$12.3 million in current programming and other receivables due from PTVI, (b) we
will no longer receive the library or output agreement payments that we were
scheduled to receive under the original agreement and (c) Claxson is released
from its remaining funding obligations to PTVI.
We accounted for this transaction as an unwinding of the PTVI joint
venture and final payment under the original sale of assets and licensing
agreement. Accordingly, any assets originally sold by us to PTVI have been
recorded at their book values prior to the formation of PTVI. The majority of
other PTVI net assets, including identifiable intangible assets created
subsequent to PTVI's formation, have been recorded at 80.1% of their fair value
as a result of the 80.1% additional ownership in PTVI that we have acquired. The
Playboy.com preferred stock surrendered by Claxson has been recorded at its
carrying value. The net value received, measured as described above, was $12.8
million. Of this amount, $12.3 million was applied to our current programming
and other receivables from PTVI. The remaining $0.5 million was recorded as of
the transaction date as the final revenue from the original sale of assets and
licensing agreement.
47
The following unaudited pro forma information presents a summary of our results
of operations assuming the restructuring transaction occurred on January 1, 2001
(in thousands, except per share amounts):
Fiscal Year Fiscal Year
Ended Ended
12/31/02 12/31/01
- ------------------------------------------------------------------------------------------------------
Net revenues $ 294,446 $ 301,060
Loss before cumulative effect of change in accounting principle (19,257) (43,804)
Net loss (19,257) (48,022)
Basic and diluted EPS
Loss before cumulative effect of change in accounting principle (0.75) (1.79)
Net loss $ (0.75) $ (1.97)
- -----------------------------------------------------------------------------------------------------
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the restructuring transaction occurred on
January 1, 2001, or of future results of operations.
In 2002 and 2001, we recognized revenues from PTVI of $16.3 million and
$17.0 million, respectively, and pre-tax income, including our equity in the
results of PTVI's operations, of $8.4 million and $8.7 million, respectively.
(D) RESTRUCTURING EXPENSES
In 2003, primarily due to excess space in our Chicago office, we recorded
unfavorable adjustments of $0.1 million and $0.2 million to the previous
estimates related to the 2002 and 2001 restructuring plans, respectively. Of the
total costs related to these restructuring plans, approximately $7.1 million was
paid by December 31, 2003, with most of the remainder to be paid in 2004 and
some payments continuing through 2007.
In 2002, we announced a Company-wide restructuring initiative in order to
reduce our ongoing operating expenses. The restructuring resulted in a workforce
reduction of approximately 11%, or 70 positions. In connection with the
restructuring, we reported a $5.7 million charge in 2002, of which $2.9 million
related to the termination of 53 employees. The remaining positions were
eliminated through attrition. The initiative also involved consolidation of our
office space in Los Angeles and Chicago, resulting in a charge of $2.8 million.
In 2001, we implemented a restructuring plan in anticipation of a
continuing weak economy. The plan included a reduction in workforce coupled with
vacating portions of certain office facilities by combining operations for
greater efficiency, refocusing sales and marketing, outsourcing some operations
and reducing overhead expenses. Total restructuring charges of $4.6 million were
recorded, including $0.9 million recorded in 2002 as an unfavorable adjustment
to the original estimate. The adjustment was due primarily to a change in
sublease assumptions. The restructuring resulted in a workforce reduction of
approximately 15%, or 104 positions, through Company-wide layoffs and attrition.
Approximately half of these employees were in the Online Group. Of the $4.6
million charge, $2.6 million related to the termination of 88 employees. The
remaining positions were eliminated through attrition. The charge also included
$2.0 million related to the excess space in our Chicago and New York offices.
48
The following table displays the activity and balances of the restructuring
reserve account for the year ended December 31, 2003, 2002 and 2001 (in
thousands):
Consolidation
Workforce of Facilities and
Reduction Operations Total
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 3,243 $ -- $ 3,243
Additional reserve recorded 2,453 1,239 3,692
Adjustment to previous estimate 84 -- 84
Cash payments (4,201) (97) (4,298)
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,579 1,142 2,721
Additional reserve recorded 2,938 2,799 5,737
Write-off leasehold improvements -- (437) (437)
Adjustment to previous estimate 100 806 906
Cash payments (1,845) (505) (2,350)
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 2002 2,772 3,805 6,577
Additional reserve recorded -- -- --
Adjustment to previous estimate (168) 518 350
Cash payments (1,974) (1,760) (3,734)
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193
===================================================================================================
(E) GAIN (LOSS) ON DISPOSALS
In 2001, we sold a majority of our equity interest in VIPress, publisher
of the Polish edition of Playboy magazine. In connection with the sale, we
recorded a gain of $0.4 million. Prior to the sale, the financial statements of
VIPress were included in our financial statements, along with the related
minority interest. Subsequent to the sale, our remaining 20% interest in VIPress
was accounted for under the equity method and, as such, our proportionate share
of the results of VIPress was included in nonoperating results. In 2002, we sold
our remaining 20% interest in VIPress resulting in a gain of $0.4 million. There
was no income tax effect attributable to either transaction due to our NOL
carryforward position.
In 2001, we sold our Collectors' Choice Music business. In connection with
the sale, we recorded a loss of $1.3 million and a related deferred tax benefit
of $0.5 million, which was offset by an increase in the valuation allowance.
(F) INCOME TAXES
The income tax provision consisted of the following (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- --------------------------------------------------------------------------------
Current:
Federal $ 67 $ -- $ --
State 152 120 120
Foreign 3,246 1,362 242
- --------------------------------------------------------------------------------
Total current 3,465 1,482 362
- --------------------------------------------------------------------------------
Deferred:
Federal 1,365 6,420 576
State 137 642 58
Foreign -- -- --
- --------------------------------------------------------------------------------
Total deferred 1,502 7,062 634
- --------------------------------------------------------------------------------
Total income tax provision $ 4,967 $ 8,544 $ 996
================================================================================
49
The U.S. statutory tax rate applicable to us was 35% for each of 2003, 2002 and
2001. The income tax provision differed from a provision computed at the U.S.
statutory tax rate as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------------------------------------------------
Statutory rate tax benefit $ (907) $ (3,007) $ (9,914)
Increase (decrease) in taxes resulting from:
Foreign income and withholding tax on licensing income 3,246 1,362 242
State income taxes 289 762 178
Nondeductible expenses 507 345 673
Increase in valuation allowance 3,307 9,479 9,902
Tax benefit of foreign taxes paid or accrued (1,556) (506) (85)
Other 81 109 -
- -------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 4,967 $ 8,544 $ 996
===================================================================================================================
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 2003, we increased the valuation allowance by $3.3 million, of which
$1.5 million was due to the deferred tax treatment of certain acquired
intangibles and the remainder was primarily due to the deferred tax asset
related to the 2003 net operating loss. Of the $14.6 million increase in the
valuation allowance in 2002, $7.1 million was due to the deferred tax treatment
of certain acquired intangibles as a result of the adoption of Statement 142,
Goodwill and Other Intangible Assets, and the remainder was primarily due to the
deferred tax asset related to the 2002 net operating loss.
The significant components of our deferred tax assets and deferred tax
liabilities at December 31, 2002 and 2003 are presented below (in thousands):
Dec. 31, Net Dec. 31,
2002 Change 2003
- ---------------------------------------------------------------------------------------------------
Deferred tax assets:
NOLs $ 25,879 $ (913) $ 24,966
Capital loss carryforwards 10,577 (1,292) 9,285
Tax credit carryforwards 11,014 665 11,679
Temporary difference related to PTVI 15,014 528 15,542
Other deductible temporary differences 19,853 6,743 26,596
- ---------------------------------------------------------------------------------------------------
Total deferred tax assets 82,337 5,731 88,068
Valuation allowance (69,146) (3,307) (72,453)
- ---------------------------------------------------------------------------------------------------
Deferred tax assets 13,191 2,424 15,615
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred subscription acquisition costs (5,700) 217 (5,483)
Intangible assets (16,474) (3,054) (19,528)
Other taxable temporary differences (3,392) (1,089) (4,481)
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities (25,566) (3,926) (29,492)
- ---------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (12,375) $ (1,502) $ (13,877)
===================================================================================================
At December 31, 2003, we had NOLs of $71.3 million expiring from 2009
through 2021. We had capital loss carryforwards of $26.5 million expiring from
2004 through 2007. In addition, foreign tax credit carryforwards of $10.5
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 2004 through 2008, and the minimum tax credit carryforwards have no
expiration date.
50
(G) EARNINGS PER COMMON SHARE
The following table represents the approximate number of shares related to
options to purchase our Class A and Class B common stock and Class B restricted
stock awards that were outstanding which were not included in the computation of
diluted EPS as the inclusion of these shares would have been antidilutive (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- ---------------------------------------------------------------------------
Stock options 2,835 2,670 2,245
Convertible preferred stock 1,506 -- --
Restricted stock awards -- 250 245
- ---------------------------------------------------------------------------
Total 4,341 2,920 2,490
===========================================================================
As a result, the weighted average number of basic and diluted common
shares outstanding for 2003, 2002 and 2001 were equivalent.
On February 11, 2004, we filed a registration statement with the
Securities and Exchange Commission to offer approximately 3.2 million shares of
our Class B stock.
(H) FINANCIAL INSTRUMENTS
Fair Value: The fair value of a financial instrument represents the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. For cash and cash
equivalents, receivables, certain other current assets, current maturities of
long-term debt and short-term debt, the amounts reported approximated fair value
due to their short-term nature. At December 31, 2002, our long-term debt related
to our former credit agreement and the amount reported approximated fair value
as the interest rate on the debt was generally reset every quarter to reflect
current rates. The interest rate swap agreement fair value at December 31, 2002
was $0.6 million, which reflected the amount that we would have to pay if we had
terminated the agreement on that date. In connection with the repayment of our
former credit agreement, we terminated the swap agreement on March 11, 2003 for
a fee of $0.4 million. The related party long-term debt of $10.0 million that
existed at December 31, 2002 represented the approximate fair value, since
interest rates had not materially changed since the time the note was issued.
The related party debt, short-term and long-term, was exchanged for an
equivalent amount of preferred stock on March 11, 2003. At December 31, 2003,
our long-term debt consisted of $115.0 million of senior secured notes, due
2010, with a coupon of 11.00%. The fair value of these notes was determined to
be $131.8 million using market prices. For foreign currency forward contracts,
the fair value was estimated using quoted market prices established by financial
institutions for comparable instruments, which approximated the contracts'
values.
Concentrations of Credit Risk: Concentration of credit risk with respect to
accounts receivable is limited due to the wide variety of customers and segments
from which our products are sold and licensed.
(I) MARKETABLE SECURITIES
Marketable securities, primarily purchased in connection with our deferred
compensation plans, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
- -------------------------------------------------------------------------------
Cost of marketable securities $ 3,811 $ 3,759
Gross unrealized holding gains 50 --
Gross unrealized holding losses (315) (1,082)
- -------------------------------------------------------------------------------
Fair value of marketable securities $ 3,546 $ 2,677
===============================================================================
There were no proceeds from the sale of marketable securities for 2003,
2002 and 2001, and therefore no gains or losses were realized.
Included in "Total other comprehensive income (loss)" for 2003 were net
unrealized holding gains of $0.8 million, and for 2002 and 2001 net unrealized
holding losses of $0.6 million and $0.4 million, respectively.
51
(J) INVENTORIES, NET
Inventories, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
- --------------------------------------------------------------------------------
Paper $ 2,613 $ 2,470
Editorial and other prepublication costs 6,082 5,992
Merchandise finished goods 3,322 2,036
- --------------------------------------------------------------------------------
Total inventories, net $12,017 $10,498
================================================================================
(K) ADVERTISING COSTS
At December 31, 2003 and 2002, advertising costs of $6.9 million and $6.7
million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets." For 2003, 2002 and 2001, our
advertising expense was $34.5 million, $31.4 million and $35.5 million,
respectively.
(L) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
- -------------------------------------------------------------------------------
Land $ 292 $ 292
Buildings and improvements 8,644 8,624
Furniture and equipment 17,745 18,353
Leasehold improvements 11,137 8,616
Software 6,855 7,515
- -------------------------------------------------------------------------------
Total property and equipment 44,673 43,400
Accumulated depreciation (32,653) (31,684)
- -------------------------------------------------------------------------------
Total property and equipment, net $ 12,020 $ 11,716
===============================================================================
(M) PROGRAMMING COSTS, NET
Programming costs, net, consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
- --------------------------------------------------------------------------------
Released, less amortization $44,919 $41,935
Completed, not yet released 5,877 7,714
In-process 6,630 2,698
- --------------------------------------------------------------------------------
Total programming costs, net $57,426 $52,347
================================================================================
Based on management's estimate of future total gross revenues at December
31, 2003, approximately 53% of the completed original programming costs is
expected to be amortized during 2004. We expect to amortize virtually all of the
released original programming costs during the next three years. At December 31,
2003, we had $18.3 million of film acquisition costs. Film acquisition costs are
typically amortized using the straight-line method over the license term,
generally three years or less.
52
(N) FINANCING OBLIGATIONS
Financing obligations consisted of the following (in thousands):
Dec. 31, Dec. 31,
2003 2002
- ------------------------------------------------------------------------------------------
Short-term financing obligations to related parties:
Promissory note, interest of 8.00% $ -- $ 17,235
==========================================================================================
Long-term financing obligations:
Tranche A term loan, interest of 4.42% at
December 31, 2002 $ -- $ 7,232
Tranche B term loan, weighted average interest of
5.67% at December 31, 2002 -- 55,285
Revolving credit facility, weighted average interest of
6.25% at December 31, 2002 -- 2,750
Senior secured notes, interest of 11.00% at December 31, 2003 115,000 --
- ------------------------------------------------------------------------------------------
Total long-term financing obligations 115,000 65,267
Less current maturities -- (6,402)
- ------------------------------------------------------------------------------------------
Long-term financing obligations $115,000 $ 58,865
==========================================================================================
Long-term financing obligations to related parties:
Promissory note, interest of 9.00% $ -- $ 10,000
==========================================================================================
We have no minimum payments required for our long-term financing
obligations until 2010, at which point, our senior secured notes of $115.0
million are due.
Debt Financings
On March 11, 2003, we completed the offering of $115.0 million in
aggregate principal amount of senior secured notes of our subsidiary, Holdings.
On September 17, 2003, the senior secured notes were exchanged for new
registered senior secured notes. The form and terms of the new notes are
identical in all material respects (including principal amount, interest rate,
maturity, ranking and covenant restrictions) to the form and terms of the old
notes. The notes mature on March 15, 2010 and bear interest at the rate of
11.00% per annum, with interest payable on March 15th and September 15th of each
year, beginning September 15, 2003.
The notes are guaranteed on a senior secured basis by us and by
substantially all of our domestic subsidiaries, referred to as the guarantors,
excluding Playboy.com and its subsidiaries. The notes and the guarantees rank
equally in right of payment with our and the guarantors' other existing and
future senior debt. The notes and the guarantees are secured by a first-priority
lien on our and each guarantor's trademarks, referred to as the primary
collateral, and by a second-priority lien, junior to a lien for the benefit of
the lenders under the new credit facility, as described below, on (a) 100% of
the stock of substantially all of our domestic subsidiaries, excluding the
subsidiaries of Playboy.com, (b) 65% of the capital stock of substantially all
of our indirect first-tier foreign subsidiaries, (c) substantially all of our
and each guarantor's domestic personal property, excluding the primary
collateral and (d) the Playboy Mansion, or collectively, the secondary
collateral. Our ability to pay cash dividends on our common stock is limited
under the terms of the notes.
On March 11, 2003, we used $73.3 million of the notes proceeds to repay
$73.0 million in outstanding principal and $0.3 million in accrued interest and
fees on our previous credit facility. Effective with this repayment, that credit
facility was terminated. In connection with the termination of the credit
facility, we also terminated our existing interest rate swap agreement for $0.4
million, which was scheduled to mature in May 2003. On March 14, 2003, we paid
$17.3 million to the Califa principals in satisfaction of substantially all of
our 2003 payment obligations, which are discussed below.
On March 11, 2003, Holdings also entered into an agreement for a new
revolving credit facility, through which we are permitted to borrow up to $20.0
million in revolving borrowings, issue letters of credit or a combination of
both. For purposes of calculating interest, revolving loans made under the new
credit facility will be designated at either the offshore dollar inter bank
rate, or IBOR, plus a borrowing margin based on our adjusted EBITDA or, in
certain circumstances, at a base rate plus a borrowing margin based on our
adjusted EBITDA, as defined in the agreement. Letters of credit issued under the
new credit facility bear fees at IBOR plus a borrowing margin based on our
adjusted EBITDA. All amounts outstanding under the new credit facility will
mature on March 11, 2006. Our obligations under the new credit facility are
guaranteed by us and each of the guarantors of the notes. The obligations of us
and each of the guarantors under the new credit facility are secured by a
first-priority lien on the secondary collateral and a second-priority lien on
the primary collateral that supports obligations under the notes. At December
31, 2003, there were no borrowings and $9.6 million in letters of credit
outstanding under this facility.
53
Financing from Related Party
At December 31, 2002 Playboy.com had an aggregate of $27.2 million of
outstanding indebtedness to Mr. Hefner in the form of three promissory notes.
Upon the closing of the senior secured notes offering on March 11, 2003,
Playboy.com's debt to Mr. Hefner was restructured. One promissory note, in the
amount of $10.0 million, was extinguished in exchange for shares of Holdings
Series A Preferred Stock with an aggregate stated value of $10.0 million. The
two other promissory notes, in the combined principal amount of $17.2 million,
were extinguished in exchange for $0.5 million in cash and shares of Holdings
Series B Preferred Stock with an aggregate stated value of $16.7 million.
Pursuant to the terms of an exchange agreement between us, Holdings, Playboy.com
and Mr. Hefner and certificates of designation governing the Holdings Series A
and Series B Preferred Stock, we were required to exchange the Holdings Series A
Preferred Stock for shares of Playboy Class B stock and to exchange the Holdings
Series B Preferred Stock for shares of Playboy Preferred Stock.
In order to issue the Playboy Preferred Stock, we were required to amend
our certificate of incorporation to authorize the issuance, which we refer to as
the certificate amendment. In accordance with applicable law, Mr. Hefner, the
holder of more than a majority of our outstanding Class A voting common stock,
approved the certificate amendment by written consent. As a result, on May 1,
2003, we filed an amendment to our certificate of incorporation and exchanged
the Holdings Series A Preferred Stock plus accumulated dividends for 1,122,209
shares of Playboy Class B stock and exchanged the Holdings Series B Preferred
Stock for 1,674 shares of Playboy Preferred Stock. The Playboy Preferred Stock
accrues dividends at a rate of 8.00% per annum, which are paid semi-annually.
The Playboy Preferred Stock is convertible at the option of Mr. Hefner,
the holder, into shares of our Class B stock at a conversion price of $11.2625,
which is equal to 125% of the weighted average closing price of our Class B
stock over the 90-day period prior to the exchange of Holdings Series B
Preferred Stock for Playboy Preferred Stock. Beginning May 1, 2006, if at any
time the weighted average closing price of our Class B stock for 15 consecutive
trading days equals or exceeds 150% of the conversion price, or $16.89, we will
have the option, by delivering a written notice to the holder of shares of
Playboy Preferred Stock, to convert any or all shares of Playboy Preferred Stock
into the number of shares of Class B stock determined by dividing (a) the sum of
the aggregate stated value of such Playboy Preferred Stock and the amount of
accrued and unpaid dividends by (b) the conversion price.
On September 15, 2010, we will be required to redeem all shares of Playboy
Preferred Stock that are then outstanding at a redemption price equal to $10,000
per share plus the amount of accrued and unpaid dividends. The final redemption
price may be paid, at our option, in either cash or shares of our Class B stock
or any combination of cash and shares of Class B stock. If we elect to pay the
final redemption price in shares of our Class B stock, the number of such shares
to which a holder of shares of Playboy Preferred Stock will be entitled will be
determined by dividing (a) the sum of the aggregate stated value of such Playboy
Preferred Stock and the amount of accrued and unpaid dividends by (b) the
weighted average closing price of our Class B stock over the 90-day period prior
to September 15, 2010.
If the announced offering of Class B stock is completed, Mr. Hefner will
convert all of his Playboy Preferred Stock into 1,485,948 shares of Class B
stock, in accordance with the terms of the Playboy Preferred Stock, and those
shares, along with the 1,122,209 Class B shares that he received in exchange for
his Holdings Series A Preferred Stock will be sold in the offering.
(O) BENEFIT PLANS
Our 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. Our 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. Total
contributions for 2003, 2002 and 2001 were $1.0 million, $0.5 million and $0.5
million, respectively.
All employees are eligible to participate in the 401(k) plan upon their
date of hire. We offer several mutual fund investment options. The purchase of
our stock is not an option. We make matching contributions to the 401(k) plan
based on each participating employee's contributions and eligible compensation.
Our matching contributions for 2003, 2002 and 2001 related to this plan were
$1.0 million, $1.1 million and $1.2 million, respectively.
54
We have two nonqualified deferred compensation plans, which permit certain
employees and all nonemployee directors to annually elect to defer a portion of
their compensation. A 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
immediately 100% vested and are general unsecured obligations. Such obligations
totaled $4.2 million and $3.4 million at December 31, 2003 and 2002,
respectively, and are included in "Other noncurrent liabilities."
We have an Employee Stock Purchase Plan to provide substantially all
regular full- and part-time employees an opportunity to purchase shares of our
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, 2003, a total of approximately 35,000
shares of Class B stock were available for future purchases under this plan.
(P) COMMITMENTS AND CONTINGENCIES
Our principal lease commitments are for office space, operations
facilities and furniture and equipment. Some of these leases contain renewal or
end-of-lease purchase options. Our restructuring initiatives in 2002 and 2001
included the consolidation of our office space in our Chicago, New York and Los
Angeles locations. In our restructuring efforts, we have subleased a portion of
our excess office space, and are working to sublease our remaining excess office
space. See Note (D) Restructuring Expenses.
Rent expense was as follows (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------------
Minimum rent expense $ 13,755 $ 11,343 $ 15,406
Sublease income (842) (1,036) (1,372)
- -------------------------------------------------------------------------------
Net rent expense $ 12,913 $ 10,307 $ 14,034
===============================================================================
There was no contingent rent expense in any of these periods. The minimum future
commitments at December 31, 2003, under operating leases with initial or
remaining noncancelable terms in excess of one year, were as follows (in
thousands):
2004 $ 12,899
2005 10,762
2006 10,044
2007 9,258
2008 7,140
Later years 31,033
Less minimum sublease income (4,043)
- -------------------------------------------------------------------------------
Net minimum lease commitments $ 77,093
===============================================================================
Our entertainment programming is delivered to DTH and cable operators
through communications satellite transponders. We currently have three
transponder service agreements related to our domestic networks, the terms of
which currently extend through 2006, 2010 and 2015. We also have four
international transponder service agreements as a result of the December 2002
restructuring of the ownership of PTVI, one which expires in 2004 and three
which expire in 2006. At December 31, 2003, future commitments related to these
seven agreements were $5.4 million, $5.1 million, $4.6 million, $3.5 million and
$3.5 million for 2004, 2005, 2006, 2007 and 2008, respectively, and $13.2
million thereafter. These service agreements contain protections typical in the
industry against transponder failure, including access to spare transponders,
and conditions under which our access may be denied. Major limitations on our
access to DTH or cable systems or satellite transponder capacity could
materially adversely affect our operating performance. There have been no
instances in which we have been denied access to transponder service.
55
In 2002, a $4.4 million verdict was entered against us by a state trial
court in Texas in a lawsuit with a former publishing licensee. We terminated the
license in 1998 due to the licensee's failure to pay royalties and other amounts
due to us under the license agreement. We are currently pursuing an appeal. We
have posted a bond in the amount of $7.7 million, which represents the amount of
the judgment, costs and estimated pre and post-judgment interest. We, on advice
of legal counsel, believe that it is not probable that a material judgment
against us will be sustained and have not recorded a liability for this case in
accordance with Statement 5, Accounting for Contingencies.
In the fourth quarter of 2003, we recorded $8.5 million related to
settlement of the Logix litigation, which related to events prior to our 1999
acquisition of Spice. We made a payment of $6.5 million in February 2004 and
will make payments of $1.0 million each in 2005 and 2006.
(Q) STOCK PLANS
We have various stock plans for key employees and nonemployee directors
which provide for the grant of nonqualified and incentive stock options and
shares of restricted stock, deferred stock and other performance-based equity
awards. The exercise price of options granted equals or exceeds the fair value
at the grant date. In general, options become exercisable over a two- to
four-year period from the grant date and expire ten years from the grant date.
Restricted stock awards provided for the issuance of Class B stock subject to
restrictions that lapsed if we met specified operating income objectives
pertaining to a fiscal year. Vesting requirements for certain restricted stock
awards would have lapsed automatically, regardless of whether or not we had
achieved those objectives, generally ten years from the award date. The final
two operating income objectives were met in 2003 and 241,374 shares of
restricted stock vested. In 2002, it was probable that the performance criteria
would be met, so we recorded $2,748,000 of amortization expense in 2002
operating results. 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 committee and meeting fees.
At December 31, 2003, a total of 2,195,896 shares of Class B stock were
available for future grants under the various stock plans combined. Stock option
transactions are summarized as follows:
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000 5,000 1,841,415 $7.38 $18.72
Granted -- 537,000 -- 12.28
Exercised (5,000) (235,779) 7.38 8.27
Canceled -- (77,500) -- 16.77
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2001 -- 2,065,136 -- 18.31
Granted -- 781,250 -- 14.91
Exercised -- (11,500) -- 10.31
Canceled -- (219,000) -- 16.19
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2002 -- 2,615,886 -- 17.51
Granted -- 701,000 -- 10.03
Exercised -- (17,500) -- 10.95
Canceled -- (455,500) -- 14.33
- ------------------------------------------------------------------------------------
Outstanding at December 31, 2003 -- 2,843,886 $ -- $16.22
===================================================================================================================
The following table summarizes information regarding stock options at December
31, 2003:
Options Outstanding Options Exercisable
-------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------
Class B
$8.25-$15.85 1,851,886 7.14 $ 11.97 865,261 $ 12.65
16.72-21.00 472,500 5.17 20.72 472,500 20.72
$24.13-$31.50 519,500 5.39 27.26 519,500 27.26
- -------------------------------------------------------------------------------------------------------------------
Total Class B 2,843,886 6.49 $ 16.22 1,857,261 $ 18.79
===================================================================================================================
The weighted average exercise prices for Class B exercisable options at
December 31, 2002 and 2001 were $18.65 and $18.27, respectively.
56
The following table summarizes transactions related to restricted stock awards:
Restricted Stock Awards Outstanding Class B
- -------------------------------------------------------------------------------
Outstanding at December 31, 2000 240,124
Awarded 45,000
Vested --
Canceled (21,250)
------------------------------------------------------------------------------
Outstanding at December 31, 2001 263,874
Awarded 15,000
Vested --
Canceled (37,500)
------------------------------------------------------------------------------
Outstanding at December 31, 2002 241,374
Awarded --
Vested (241,374)
Canceled --
- -------------------------------------------------------------------------------
Outstanding at December 31, 2003 --
===============================================================================
There was no restricted stock awarded in 2003. For 2002 and 2001, the
weighted average fair value of restricted stock awarded was $11.82 and $14.37,
respectively.
(R) SALE OF SECURITIES
The Califa acquisition agreement gave us the option of paying up to $71
million of the purchase price in cash or Class B stock through 2007. On April
17, 2002, a registration statement for the resale of approximately 1,475,000
shares became effective. These shares were issued in payment of the first two
installments of consideration, which totaled $22.5 million plus $0.3 million of
accrued interest. The sellers elected to sell the shares and realized net
proceeds from the sale of $19.2 million. As a result, we were required to
provide them with a make-whole payment in either cash or Class B stock of
approximately $3.6 million, plus interest until the date payment was made. On
March 14, 2003, we paid the sellers $17.3 million in cash, in satisfaction of
$8.5 million of base consideration due in 2003, a $5.0 million performance-based
payment due in 2003 and the $3.6 million make-whole payment, plus accrued
interest of $0.2 million thereon. The amounts were recorded at the acquisition
date as part of acquisition liabilities.
(S) 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
12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------------
Interest $ 13,720 $ 9,260 $ 8,730
Income taxes $ 3,668 $ 1,485 $ 782
- -------------------------------------------------------------------------------
In 2003, we had noncash activities related to the conversion of three
related party promissory notes. The notes were first converted to Holdings
Series A and Series B Preferred Stock. Subsequently, the Holdings Series A
Preferred Stock was converted to Playboy Class B stock and the Series B
Preferred Stock was converted to Playboy Preferred Stock. See Note (N) Financing
Obligations. In 2002, we had noncash activities related to the conversion of two
related party promissory notes and accrued interest into a new promissory note.
In 2002 and 2001, we had noncash activities related to the Califa acquisition.
See Note (B) Acquisition.
(T) SEGMENT INFORMATION
Our businesses are currently classified into the following four reportable
segments: Entertainment, Publishing, Online and Licensing. Formerly, we operated
a fifth segment, Catalog, which we divested in connection with our sale of the
Collectors' Choice Music catalog in 2001. Entertainment Group operations include
the production and marketing of adult television programming for our domestic
and international TV networks and worldwide DVD/home video products. 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.
Online Group operations include subscription, e-commerce and other Internet
businesses including advertising, international ventures and online gaming.
Licensing Group operations includes the licensing of consumer products carrying
one or more of our trademarks and images, as well as Playboy branded
location-based entertainment and marketing activities.
57
These reportable segments are based on the nature of the products offered.
Our chief operating decision maker evaluates performance and allocates resources
based on several factors, of which the primary financial measure is segment
operating results. The accounting policies of the reportable segments are the
same as those described in Note (A) Summary of Significant Accounting Policies.
The following table represents financial information by reportable segment (in
thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
12/31/03 12/31/02 12/31/01
- -------------------------------------------------------------------------------------------------------------
Net revenues (1)
Entertainment $ 136,891 $ 121,639 $ 113,833
Publishing 120,678 111,802 124,496
Online 38,844 30,964 27,499
Licensing 19,431 13,217 10,769
Catalog -- -- 10,986
- -------------------------------------------------------------------------------------------------------------
Total $ 315,844 $ 277,622 $ 287,583
=============================================================================================================
Income (loss) before income taxes and cumulative effect of change
in accounting principle
Entertainment $ 28,061 $ 32,365 $ 29,921
Publishing 5,160 2,669 1,776
Online 2,762 (8,916) (21,673)
Licensing 10,358 4,581 2,614
Catalog -- -- (453)
Corporate Administration and Promotion (16,539) (15,810) (19,700)
Restructuring expenses (350) (6,643) (3,776)
Gain (loss) on disposals -- 442 (955)
Nonoperating expense (32,042) (17,279) (16,081)
- -------------------------------------------------------------------------------------------------------------
Total $ (2,590) $ (8,591) $ (28,327)
=============================================================================================================
Depreciation and amortization (2) (3)
Entertainment $ 47,096 $ 48,538 $ 45,585
Publishing 397 371 560
Online 796 1,083 1,980
Licensing 33 46 209
Catalog -- -- 26
Corporate Administration and Promotion 1,236 1,581 3,544
- -------------------------------------------------------------------------------------------------------------
Total $ 49,558 $ 51,619 $ 51,904
=============================================================================================================
Identifiable assets (2) (4)
Entertainment $ 265,056 $ 263,416 $ 317,848
Publishing 48,462 43,861 49,219
Online 5,493 4,047 4,463
Licensing 8,199 4,726 4,732
Catalog -- 36 1,244
Corporate Administration and Promotion 90,850 53,635 48,734
- -------------------------------------------------------------------------------------------------------------
Total $ 418,060 $ 369,721 $ 426,240
=============================================================================================================
(1) Net revenues include revenues attributable to foreign countries of
approximately $64,138, $45,695 and $48,522 in 2003, 2002 and 2001,
respectively. Revenues from individual foreign countries were not
material. Revenues are generally attributed to countries based on the
location of customers, except licensing royalties where revenues are
attributed based upon the location of licensees.
(2) The majority of our 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) Our long-lived assets located in foreign countries were not material.
58
(U) RELATED PARTY TRANSACTIONS
In 1971, we purchased the Playboy Mansion in Los Angeles, California,
where our founder, Hugh M. Hefner, lives. The Playboy Mansion is used for
various corporate activities, including serving as a valuable location for video
production, magazine photography, online events and sales events. It also
enhances our image, as host for many charitable and civic functions. The Playboy
Mansion generates substantial publicity and recognition which increase public
awareness of us and our products and services. Mr. Hefner pays us rent for that
portion of the Playboy Mansion used exclusively for his and his personal guests'
residence as well as the per-unit value of non-business meals, beverages and
other benefits received by him and his personal guests. The Playboy Mansion is
included in our Consolidated Balance Sheets at December 31, 2003 and 2002 at a
net book value, including all improvements and after accumulated depreciation,
of $1.6 million and $1.9 million, respectively. The operating expenses of the
Playboy Mansion, including depreciation and taxes, were $2.3 million, $3.6
million and $3.2 million for 2003, 2002 and 2001, respectively, net of rent
received from Mr. Hefner. We estimated the sum of the rent and other benefits
payable for 2003 to be $1.5 million, and Mr. Hefner paid that amount during
2003. The actual rent and other benefits payable for 2002 and 2001 were $1.3
million in each year.
From time to time, we enter into barter transactions in which we secure
air transportation for Mr. Hefner in exchange for advertising pages in Playboy
magazine. Mr. Hefner reimburses us for our direct costs of providing these ad
pages. We receive significant promotional benefit from these transactions. There
were no such transactions in 2003.
At December 31, 2002 and at the time of the Hefner debt restructuring,
Playboy.com had an aggregate of $27.2 million of outstanding indebtedness to Mr.
Hefner in the form of three promissory notes. Upon the closing of the senior
secured notes offering on March 11, 2003, Playboy.com's debt to Mr. Hefner was
restructured as previously discussed in Note (N) Financing Obligations.
Prior to the December 2002 PTVI ownership restructuring, we also had
material related party transactions with PTVI. See Note (C) Restructuring of
Ownership of International TV Joint Ventures.
59
(V) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
2003 and 2002 (in thousands, except per share amounts):
Quarters Ended Fiscal
------------------------------------------------- Year
2003 Mar. 31 June 30 Sept. 30 Dec. 31 Ended
- -------------------------------------------------------------------------------------------------------
Net revenues $ 74,281 $ 75,971 $ 74,448 $ 91,144 $315,844
Operating income 9,450 5,518 5,661 8,823 29,452
Net income (loss) 632 (905) (610) (6,674) (7,557)
Net income (loss) applicable to
common shareholders 632 (1,128) (944) (7,010) (8,450)
Basic and diluted EPS applicable to
common shareholders 0.02 (0.04) (0.03) (0.26) $ (0.31)
Common stock price
Class A high 10.23 12.64 13.86 15.68
Class A low 7.48 8.03 11.64 13.48
Class B high 11.95 13.74 15.11 16.91
Class B low $ 7.92 $ 8.47 $ 12.75 $ 14.45
- -------------------------------------------------------------------------------------------------------
Quarters Ended Fiscal
------------------------------------------------- Year
2002 Mar. 31 June 30 Sept. 30 Dec. 31 Ended
- -------------------------------------------------------------------------------------------------------
Net revenues $ 66,147 $ 70,566 $ 67,372 $ 73,537 $277,622
Operating income 2,249 2,168 4,188 83 8,688
Net loss (9,387) (3,064) (639) (4,045) (17,135)
Basic and diluted EPS (0.38) (0.12) (0.01) (0.16) $ (0.67)
Common stock price
Class A high 15.06 14.65 11.45 9.55
Class A low 12.37 10.72 7.70 6.50
Class B high 17.50 16.75 13.12 10.85
Class B low $ 14.12 $ 12.18 $ 8.50 $ 7.48
- -------------------------------------------------------------------------------------------------------
Net loss for the quarter ended December 31, 2003 included an $8.5 million
charge related to the Logix litigation settlement.
Net income for the quarter ended March 31, 2003 included $3.3 million of
debt extinguishment expenses in connection with financing obligations which were
repaid upon completion of our debt offering in the quarter.
Net loss for the quarter ended March 31, 2002 included a $5.8 million
noncash income tax charge related to our adoption of Statement 142, Goodwill and
Other Intangible Assets. See Note (A) Summary of Significant Accounting
Policies.
Operating income for the quarter ended December 31, 2002 included
restructuring expenses of $6.6 million. See Note (D) Restructuring Expenses. The
net loss for the quarter included a nonoperating gain of $0.7 million related to
a vendor settlement.
60
(W) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On March 11, 2003, Holdings completed an offering of $115.0 million of
11.00% senior secured notes due in 2010, which we refer to as the Old Notes. On
September 17, 2003, the Old Notes were exchanged for new 11.00% senior secured
notes due in 2010, which we refer to as the New Notes. The form and terms of the
New Notes are identical in all material respects (including principal amount,
interest rate, maturity, ranking and covenant restrictions) to the form and
terms of the Old Notes, except that the New Notes (a) have been registered under
the Securities Act of 1933, as amended, or the Securities Act, (b) do not bear
restrictive legends restricting their transfer under the Securities Act, (c) are
not entitled to the registration rights that apply to the Old Notes and (d) do
not contain provisions relating to liquidated damages in connection with the Old
Notes under circumstances related to the timing of the exchange offer. The
payment obligations under the New Notes are fully and unconditionally
guaranteed, jointly and severally, on a senior secured basis, by us and by
substantially all of our domestic subsidiaries, referred to as the guarantors,
excluding Playboy.com and its subsidiaries. All of our remaining subsidiaries,
referred to as the nonguarantors, are wholly-owned by the guarantors except for
Playboy.com and its subsidiaries, which are majority-owned subsidiaries. The
following supplemental Condensed Consolidating Statements of Operations for the
years ended December 31, 2003, 2002 and 2001, the Condensed Consolidating
Balance Sheets at December 31, 2003 and December 31, 2002 and the Condensed
Consolidating Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001, present financial information for (a) us (carrying our investment
in Holdings under the equity method), (b) Holdings, the issuer of the New Notes
(carrying its investment in the guarantors under the equity method), (c) on a
combined basis the guarantors (carrying any investment in nonguarantors under
the equity method) and (d) on a combined basis the nonguarantors. Separate
financial statements of the guarantors are not presented because the guarantors
are jointly, severally, and unconditionally liable under the guarantees, and we
believe that separate financial statements and other disclosures regarding the
guarantors are not material to investors. In general, Holdings has entered into
third-party borrowings and financed its subsidiaries via intercompany accounts.
All intercompany activity has been included as "Net receipts from (payments to)
subsidiaries" in the Condensed Consolidating Statements of Cash Flows. In
certain cases, taxes have been calculated on the basis of a group position that
includes both guarantors and nonguarantors. In such cases, the taxes have been
allocated to individual legal entities based upon each legal entity's actual
contribution to the tax provision.
61
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31, 2003
----------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 256,063 $ 76,580 $ (16,799) $ 315,844
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (188,850) (57,165) 16,799 (229,216)
Selling and administrative expenses -- -- (45,979) (10,847) -- (56,826)
Restructuring expenses -- -- 24 (374) -- (350)
- ----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (234,805) (68,386) 16,799 (286,392)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 21,258 8,194 -- 29,452
- ----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 432 44 (113) 363
Interest expense -- (11,288) (4,584) (550) 113 (16,309)
Amortization of deferred
financing fees -- (1,383) -- (24) -- (1,407)
Minority interest (297) -- (1,363) -- -- (1,660)
Debt extinguishment expenses -- (3,061) -- (203) -- (3,264)
Equity in operations of investments -- -- (80) -- -- (80)
Litigation settlement -- -- (8,500) -- -- (8,500)
Equity income (loss) from subsidiaries (7,260) 8,847 5,453 -- (7,040) --
Other, net -- (375) (663) (147) -- (1,185)
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (7,557) (7,260) (9,305) (880) (7,040) (32,042)
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,557) (7,260) 11,953 7,314 (7,040) (2,590)
Income tax expense -- -- (3,106) (1,861) -- (4,967)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (7,557) $ (7,260) $ 8,847 $ 5,453 $ (7,040) $ (7,557)
==================================================================================================================================
Year Ended December 31, 2002
--------------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 246,020 $ 31,888 $ (286) $ 277,622
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (175,281) (29,621) 286 (204,616)
Selling and administrative expenses -- -- (47,018) (11,099) -- (58,117)
Restructuring expenses -- -- (3,865) (2,778) -- (6,643)
- ----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (226,164) (43,498) 286 (269,376)
- ----------------------------------------------------------------------------------------------------------------------------------
Gain on disposals -- -- 442 -- -- 442
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- -- 20,298 (11,610) -- 8,688
- ----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 91 34 -- 125
Interest expense -- (5,996) (6,847) (2,304) -- (15,147)
Amortization of deferred
financing fees -- (945) -- (48) -- (993)
Minority interest -- -- (1,724) -- -- (1,724)
Equity in operations of investments -- -- 279 -- -- 279
Vendor settlement -- -- 750 -- -- 750
Equity loss from subsidiaries (17,135) (10,131) (14,153) -- 41,419 --
Other, net -- (63) (508) 2 -- (569)
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (17,135) (17,135) (22,112) (2,316) 41,419 (17,279)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (17,135) (17,135) (1,814) (13,926) 41,419 (8,591)
Income tax expense -- -- (8,317) (227) -- (8,544)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (17,135) $ (17,135) $ (10,131) $ (14,153) $ 41,419 $ (17,135)
==================================================================================================================================
62
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31, 2001
--------------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 255,476 $ 32,546 $ (439) $ 287,583
- ----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (192,697) (44,790) 439 (237,048)
Selling and administrative expenses -- -- (49,008) (9,042) -- (58,050)
Restructuring expenses -- -- (1,766) (2,010) -- (3,776)
- ----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (243,471) (55,842) 439 (298,874)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss on disposals -- -- (955) -- -- (955)
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) -- -- 11,050 (23,296) -- (12,246)
- ----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 613 173 -- 786
Interest expense -- (8,388) (3,984) (1,598) -- (13,970)
Amortization of deferred
financing fees -- (905) -- -- -- (905)
Minority interest -- -- (704) -- -- (704)
Equity in operations of investments -- -- (838) 92 -- (746)
Equity loss from subsidiaries (33,541) (24,169) (23,926) -- 81,636 --
Other, net -- (79) (307) (156) -- (542)
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (33,541) (33,541) (29,146) (1,489) 81,636 (16,081)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and
cumulative effect of change in
accounting principle (33,541) (33,541) (18,096) (24,785) 81,636 (28,327)
Income tax benefit (expense) -- -- (2,051) 1,055 -- (996)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of
change in accounting principle (33,541) (33,541) (20,147) (23,730) 81,636 (29,323)
Cumulative effect of change in
accounting principle (net of tax) -- -- (4,022) (196) -- (4,218)
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss $ (33,541) $ (33,541) $ (24,169) $ (23,926) $ 81,636 $ (33,541)
==================================================================================================================================
63
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2003
(In thousands)
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ -- $ 24,445 $ 6,887 $ -- $ 31,332
Marketable securities -- -- 3,546 -- -- 3,546
Receivables, net of allowance for
doubtful accounts -- -- 43,948 8,282 -- 52,230
Receivables from related parties -- -- (7,277) 8,503 -- 1,226
Inventories, net -- -- 9,624 2,393 -- 12,017
Deferred subscription acquisition
costs -- -- 11,759 -- -- 11,759
Other current assets -- -- 8,420 1,788 -- 10,208
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets -- -- 94,465 27,853 -- 122,318
- ----------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 110,843 49,315 -- (160,158) --
Property and equipment, net -- -- 10,621 1,399 -- 12,020
Programming costs, net -- -- 56,442 984 -- 57,426
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 58,159 -- -- 58,159
Distribution agreements, net of
accumulated amortization -- -- 32,170 -- -- 32,170
Investment in subsidiaries 106,636 106,636 (41,990) -- (171,282) --
Other noncurrent assets -- 8,013 16,023 38 -- 24,074
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 106,636 $ 225,492 $ 386,575 $ 30,797 $(331,440) $ 418,060
==================================================================================================================================
Liabilities
Acquisition liabilities $ -- $ -- $ 13,244 $ 2,148 $ -- $ 15,392
Accounts payable -- 131 17,205 5,563 -- 22,899
Accrued salaries, wages and
employee benefits -- -- 11,200 272 -- 11,472
Deferred revenues -- -- 47,098 6,865 -- 53,963
Accrued litigation settlement -- -- 6,500 -- -- 6,500
Other liabilities and accrued expenses -- 3,725 13,896 1,467 -- 19,088
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 3,856 109,143 16,315 -- 129,314
- ----------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 115,000 -- -- -- 115,000
Financing obligations to affiliates -- -- 110,843 49,315 (160,158) --
Acquisition liabilities -- -- 21,107 5,875 -- 26,982
Net deferred tax liabilities -- -- 13,877 -- -- 13,877
Accrued litigation settlement -- -- 2,000 -- -- 2,000
Other noncurrent liabilities -- -- 11,888 1,282 -- 13,170
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 118,856 268,858 72,787 (160,158) 300,343
- ----------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- 11,081 -- -- 11,081
Shareholders' equity 106,636 106,636 106,636 (41,990) (171,282) 106,636
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 106,636 $ 225,492 $ 386,575 $ 30,797 $(331,440) $ 418,060
==================================================================================================================================
64
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2002
(In thousands)
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ -- $ (1,908) $ 6,026 $ -- $ 4,118
Marketable securities -- -- 2,677 -- -- 2,677
Receivables, net of allowance for
doubtful accounts -- -- 33,286 8,925 -- 42,211
Receivables from related parties -- -- (6,926) 8,468 -- 1,542
Inventories, net -- -- 9,489 1,009 -- 10,498
Deferred subscription acquisition
costs -- -- 12,038 -- -- 12,038
Other current assets -- 905 9,387 1,004 -- 11,296
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets -- 905 58,043 25,432 -- 84,380
- ----------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 63,603 27,598 -- (91,201) --
Property and equipment, net -- -- 10,432 1,284 -- 11,716
Programming costs, net -- -- 51,633 714 -- 52,347
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 55,219 -- -- 55,219
Distribution agreements, net of
accumulated amortization -- -- 34,284 -- -- 34,284
Investment in subsidiaries 87,815 87,815 (47,864) -- (127,766) --
Other noncurrent assets -- 1,990 17,723 169 -- 19,882
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 87,815 $ 154,313 $ 318,438 $ 28,122 $(218,967) $ 369,721
==================================================================================================================================
Liabilities
Financing obligations $ -- $ 6,402 $ -- $ -- $ -- $ 6,402
Financing obligations to related parties -- -- -- 17,235 -- 17,235
Acquisition liabilities -- -- 12,525 902 -- 13,427
Accounts payable -- -- 18,281 6,315 -- 24,596
Accrued salaries, wages and
employee benefits -- -- 10,046 373 -- 10,419
Deferred revenues -- -- 48,377 4,256 -- 52,633
Other liabilities and accrued expenses -- 1,231 15,018 1,399 -- 17,648
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 7,633 104,247 30,480 -- 142,360
- ----------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 58,865 -- -- -- 58,865
Financing obligations to related parties -- -- -- 10,000 -- 10,000
Financing obligations to affiliates -- -- 63,603 27,598 (91,201) --
Acquisition liabilities -- -- 31,777 7,908 -- 39,685
Net deferred tax liabilities -- -- 12,375 -- -- 12,375
Other noncurrent liabilities -- -- 8,904 -- -- 8,904
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 66,498 220,906 75,986 (91,201) 272,189
- ----------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- 9,717 -- -- 9,717
Shareholders' equity 87,815 87,815 87,815 (47,864) (127,766) 87,815
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 87,815 $ 154,313 $ 318,438 $ 28,122 $(218,967) $ 369,721
==================================================================================================================================
65
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2003
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net cash provided by (used for)
operating activities $ (186) $ (8,400) $ 5,939 $ 7,526 $ -- $ 4,879
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 116 -- -- 116
Additions to property and equipment -- -- (1,796) (546) -- (2,342)
Other, net -- -- 175 4 -- 179
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing
activities -- -- (1,505) (542) -- (2,047)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 115,000 -- -- -- 115,000
Repayment of financing obligations -- (65,267) -- (500) -- (65,767)
Payment of debt extinguishment
expenses -- (356) -- -- -- (356)
Payment of acquisition liabilities -- -- (13,145) (1,747) -- (14,892)
Payment of deferred financing fees -- (9,205) -- -- -- (9,205)
Payment of preferred stock dividends (669) -- -- -- -- (669)
Proceeds from stock plans 272 -- -- -- -- 272
Other, net (1) -- -- -- -- (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities (398) 40,172 (13,145) (2,247) -- 24,382
- ----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries 584 (31,772) 35,064 (3,876) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash
and cash equivalents -- -- 26,353 861 -- 27,214
Cash and cash equivalents
at beginning of period -- -- (1,908) 6,026 -- 4,118
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 24,445 $ 6,887 $ -- $ 31,332
==================================================================================================================================
Year Ended December 31, 2002
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net cash provided by (used for)
operating activities $ -- $ (6,103) $ 31,634 $ (11,203) $ -- $ 14,328
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions -- -- (435) -- -- (435)
Proceeds from disposals -- -- 1,484 33 -- 1,517
Additions to property and equipment -- -- (3,975) (343) -- (4,318)
Other, net -- -- 78 -- -- 78
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (2,848) (310) -- (3,158)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- -- -- 5,000 -- 5,000
Repayment of financing obligations -- (16,311) -- -- -- (16,311)
Payment of deferred financing fees -- (310) -- (275) -- (585)
Proceeds from stock plans 234 -- -- -- -- 234
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 234 (16,621) -- 4,725 -- (11,662)
- ----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (234) 22,724 (31,150) 8,660 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- -- (2,364) 1,872 -- (492)
Cash and cash equivalents
at beginning of period -- -- 456 4,154 -- 4,610
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ (1,908) $ 6,026 $ -- $ 4,118
==================================================================================================================================
66
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2001
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net cash provided by (used for)
operating activities $ -- $ (9,282) $ 15,000 $ (13,663) $ -- $ (7,945)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Payments for acquisitions -- -- (935) -- -- (935)
Proceeds from disposals -- -- 3,184 92 -- 3,276
Additions to property and equipment -- -- (1,934) (1,299) -- (3,233)
Funding of equity interests -- -- (1,875) -- -- (1,875)
Other, net -- -- (89) 3 -- (86)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (1,649) (1,204) -- (2,853)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from sale of Playboy.com
Series A Preferred Stock -- -- -- 13,066 -- 13,066
Proceeds from financing obligations -- -- -- 10,000 -- 10,000
Repayment of financing obligations -- (11,672) -- -- -- (11,672)
Payment of deferred financing fees -- (454) -- -- -- (454)
Proceeds from stock plans 2,141 -- -- -- -- 2,141
Other, net (207) -- -- -- -- (207)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 1,934 (12,126) -- 23,066 -- 12,874
- ----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (1,934) 21,408 (14,832) (4,642) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- -- (1,481) 3,557 -- 2,076
Cash and cash equivalents
at beginning of period -- -- 1,937 597 -- 2,534
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 456 $ 4,154 $ -- $ 4,610
==================================================================================================================================
67
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Playboy Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Playboy
Enterprises, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2003. Our audits also included the
financial statement schedule for the years ended December 31, 2003, 2002 and
2001 listed in the Index at Item 15(a). These consolidated financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Playboy
Enterprises, Inc. at December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, 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.
As discussed in the notes to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill to conform with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.
Ernst & Young LLP
Chicago, Illinois
February 10, 2004
68
REPORT OF MANAGEMENT
The consolidated financial statements and all related financial
information in this Form 10-K Annual Report are our responsibility. 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.
We maintain a system of internal controls that we believe 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 our
consolidated financial statements for the fiscal years ended December 31, 2003,
2002 and 2001. Their audits were performed in accordance with auditing standards
generally accepted in the United States.
The Audit Committee of the Board of Directors, composed of three
non-management directors, meets periodically with Ernst & Young LLP, management
representatives and our 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)
69
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9a. Controls and Procedures
(a) Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended or the Exchange
Act) as of the end of the period covered by this annual report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by us in the reports that
we file or submit under the Exchange Act.
(b) Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such terms is defined in Rules 13(a)-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
70
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2004,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2003, and is incorporated herein by reference, pursuant to General
Instruction G(3).
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Financial Officer and Corporate Controller. That code is part of
our Code of Business Conduct, which is available free of charge through our
website, www.playboyenterprises.com, and is available in print to any
shareholder who sends a request for a paper copy to: Investor Relations, Playboy
Enterprises, Inc., 680 North Lake Shore Drive, Chicago, Illinois 60611. We
intend to include on our website any amendment to, or waiver from, a provision
of the Code of Business Conduct that applies to our Chief Executive Officer,
Chief Financial Officer and Corporate Controller that relates to any element of
the code of ethics definition enumerated in Item 406(b) of Regulation S-K.
Item 11. Executive Compensation
The information required by Item 11 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2004,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2003, and is incorporated herein by reference (excluding the Report
of the Compensation Committee and the Performance Graph), pursuant to General
Instruction G(3).
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information regarding outstanding options
and shares reserved for future issuance as of December 31, 2003:
Class B Stock
-------------------------------------------------
Weighted
Average Number
Number of Exercise Price of Shares
Options of Options Remaining for
Outstanding Outstanding Future Issuance
- ----------------------------------------------------------------------------------------------------------
Total equity compensation plans approved by
security holders 2,843,886 $ 16.22 2,195,896
==========================================================================================================
The other information required by Item 12 is included in our Proxy
Statement (to be filed) relating to the Annual Meeting of Stockholders to be
held in May 2004, which will be filed within 120 days after the close of our
fiscal year ended December 31, 2003, and is incorporated herein by reference,
pursuant to General Instruction G(3).
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2004,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2003, and is incorporated herein by reference, pursuant to General
Instruction G(3).
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is included in our Proxy Statement (to
be filed) relating to the Annual Meeting of Stockholders to be held in May 2004,
which will be filed within 120 days after the close of our fiscal year ended
December 31, 2003, and is incorporated herein by reference, pursuant to General
Instruction G(3).
71
PART IV
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Certain Documents Filed as Part of the Form 10-K
Our Financial Statements and Supplementary Data following are
as set forth under Part II. Item 8. of this Form 10-K Annual Report: Page
----
Consolidated Statements of Operations - Fiscal Years Ended December 31, 2003,
2002 and 2001 37
Consolidated Balance Sheets - December 31, 2003 and 2002 38
Consolidated Statements of Shareholders' Equity - Fiscal Years Ended
December 31, 2003, 2002 and 2001 39
Consolidated Statements of Cash Flows - Fiscal Years Ended December 31, 2003,
2002 and 2001 40
Notes to Consolidated Financial Statements 41
Condensed Consolidating Statements of Operations - Fiscal Years Ended December 31, 2003,
2002 and 2001 62
Condensed Consolidating Balance Sheets - December 31, 2003 and 2002 64
Condensed Consolidating Statements of Cash Flows - Fiscal Years Ended December 31, 2003,
2002 and 2001 66
Report of Independent Auditors 68
Report of Management 69
Schedule II - Valuation and Qualifying Accounts 83
72
(b) Reports on Form 8-K
On November 5, 2003, we furnished a Current Report on Form 8-K, dated
November 5, 2003, under Item 12., attaching our press release announcing our
financial results for the third quarter of 2003.
On December 9, 2003, we furnished a Current Report on Form 8-K, dated
December 9, 2003, under Item 9., attaching our press release disclosing certain
projections and remarks made during our presentation at the Credit Suisse First
Boston Media Week conference on December 9, 2003.
(c) Exhibits
See Exhibit Index.
73
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 11, 2004 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 11, 2004
- -----------------------------------------
Christie Hefner
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Richard S. Rosenzweig March 11, 2004
- -----------------------------------------
Richard S. Rosenzweig
Executive Vice President and Director
/s/ Dennis S. Bookshester March 11, 2004
- -----------------------------------------
Dennis S. Bookshester
Director
/s/ David I. Chemerow March 11, 2004
- -----------------------------------------
David I. Chemerow
Director
/s/ Donald G. Drapkin March 11, 2004
- -----------------------------------------
Donald G. Drapkin
Director
/s/ Jerome H. Kern March 11, 2004
- -----------------------------------------
Jerome H. Kern
Director
/s/ Russell I. Pillar March 11, 2004
- -----------------------------------------
Russell I. Pillar
Director
/s/ Sol Rosenthal March 11, 2004
- -----------------------------------------
Sol Rosenthal
Director
/s/ Linda Havard March 11, 2004
- -----------------------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
74
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
our reasonable expenses incurred in furnishing these documents.
Exhibit
Number Description
- ------ -----------
#2.1 Asset Purchase Agreement, dated as of June 29, 2001, by and among
Playboy Enterprises, Inc., Califa Entertainment Group, Inc., V.O.D.,
Inc., Steven Hirsch, Dewi James and William Asher (incorporated by
reference to Exhibit 2.1 from the Current Report on Form 8-K dated
July 6, 2001)
3.1 Certificate of Incorporation of Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 3 from our quarterly report
on Form 10-Q dated March 31, 2003)
3.2 Amended and Restated Bylaws of Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 3.4 from the Current Report
on Form 8-K dated March 15, 1999)
4.1 11% Senior Secured Notes due 2010
a Indenture, dated as of March 11, 2003, or the Indenture,
between PEI Holdings, Inc., the Guarantors party thereto and
Bank One, N.A., as Trustee
b Form of 11% Senior Secured Note due 2010 (included in Exhibit
4.1(a))
c Pledge Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank One, N.A., as Trustee under the
Indenture
d Pledge Agreement, dated as of March 11, 2003, among Chelsea
Court Holdings LLC, as the limited partner in 1945/1947 Cedar
River C.V., Candlelight Management LLC, as the general partner
in 1945/1947 Cedar River C.V., and Bank One, N.A., as Trustee
under the Indenture
e Pledge Agreement, dated as of March 11, 2003, between Claridge
Organization LLC and Bank One, N.A., as Trustee under the
Indenture
f Pledge Agreement, dated as of March 11, 2003, between Playboy
Clubs International, Inc. and Bank One, N.A., as Trustee under
the Indenture
g Pledge Agreement, dated as of March 11, 2003, between CPV
Productions, Inc. and Bank One, N.A., as Trustee under the
Indenture
h Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank One, N.A., as Trustee under
the Indenture
i Pledge Agreement, dated as of March 11, 2003, between Playboy
Gaming International, Ltd. and Bank One, N.A., as Trustee
under the Indenture
j Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank One, N.A., as Trustee under
the Indenture
k Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises, Inc. and Bank One, N.A., as Trustee under the
Indenture
l Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises International, Inc. and Bank One, N.A., as Trustee
under the Indenture
m Pledge Agreement, dated as of March 11, 2003, between Planet
Playboy, Inc. and Bank One, N.A., as Trustee under the
Indenture
n Pledge Agreement, dated as of March 11, 2003, between Spice
Entertainment, Inc. and Bank One, N.A., as Trustee under the
Indenture
o Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank One, N.A., as Trustee under the
Indenture
p Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank One, N.A., as Trustee under the
Indenture
q Security Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank One, N.A., in its capacity as Trustee
under the Indenture
r Security Agreement, dated as of March 11, 2003, among Playboy
Enterprises, Inc. and each of the domestic subsidiaries of PEI
Holdings, Inc. set forth on the signature pages thereto and
Bank One, N.A., in its capacity as Trustee under the Indenture
s Trademark Security Agreement, dated as of March 11, 2003, by
AdulTVision Communications, Inc., Alta Loma Entertainment,
Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group,
Inc., Spice Entertainment, Inc., Playboy Enterprises
International, Inc. and Spice Hot Entertainment, Inc. in favor
of Bank One, N.A., in its capacity as Trustee under the
Indenture
75
t Copyright Security Agreement, dated as of March 11, 2003, by
After Dark Video, Inc., Alta Loma Distribution, Inc., Alta
Loma Entertainment, Inc., Impulse Productions, Inc., Indigo
Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc.,
Playboy Entertainment Group, Inc., Precious Films, Inc. and
Women Productions, Inc. in favor of Bank One, N.A., in its
capacity as Trustee under the Indenture
u Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank One, N.A., as Trustee for various noteholders
v Second Priority Deed of Trust with Assignment of Rents,
Security Agreement and Fixture Filing, dated as of March 11,
2003, made and executed by Playboy Enterprises International,
Inc. in favor of Fidelity National Title Insurance Company for
the benefit of Bank One, N.A., as Trustee pursuant to the
Indenture
w Intercreditor Agreement, dated as of March 11, 2003, between
Bank of America, N.A., as agent, and Bank One, N.A., as
trustee
x Registration Rights Agreement, dated as of March 11, 2003, by
and among PEI Holdings, Inc., Playboy Enterprises, Inc., the
subsidiary guarantors listed on the signature pages thereof
and Banc of America Securities LLC and Lazard Freres & Co. LLC
(items (a) through (x) incorporated by reference to Exhibits 4.1(a)
through (x), respectively, from our annual report on Form 10-K for
the year ended December 31, 2002, or the 2002 Form 10-K)
y First Supplemental Indenture, dated as of July 22, 2003, among
PEI Holdings, Inc., Andrita Studios, Inc. and Bank One, N.A.,
as trustee
z First Amendment to Pledge Agreement, dated July 22, 2003,
between Playboy Entertainment Group, Inc. and Bank One, N.A.,
as Trustee under the Indenture
aa Joinder to Security Agreement, dated July 22, 2003, between
Andrita Studios, Inc. and Bank One, N.A., as Trustee under the
Indenture
(items (y), (z) and (aa) incorporated by reference to Exhibit
4.1(a)-1, 4.1(h)-1 and 4.1(r)-1 to Playboy Enterprises, Inc.'s Form
S-4, filed with the Securities Exchange Commission, or SEC, on May
19, 2003, File No. 333-105386, or the May 19, 2003 Form S-4)
4.2 Certificate of Designations, Powers, Preferences and Rights of
Series A Convertible Preferred Stock of Playboy Enterprises, Inc.
(included in Exhibit 3.1)
4.3 Exchange Agreement, dated as of March 11, 2003, among Hugh M.
Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy
Enterprises, Inc. (incorporated by reference to Exhibit 4.2 from the
2002 Form 10-K)
4.4 Credit Agreement, dated as of March 11, 2003, among PEI Holdings,
Inc., each lender from time to time party thereto and Bank of
America, N.A. as Agent (see Exhibit 10.9) (incorporated by reference
to Exhibit 4.3 from the 2002 Form 10-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 our transition period report on Form 10-K for the
six months ended December 31, 1997, or 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 our
quarterly report on Form 10-Q for the quarter ended March 31,
2000)
@c Second Amendment to October 22, 1997 Agreement dated as of
March 2, 2004
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 our quarterly
report on Form 10-Q for the quarter ended September 30, 1999)
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 our annual report on Form 10-K for
the year ended June 30, 1992, or the 1992 Form 10-K)
b Amendment dated as of June 1, 1988 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.12(b) from
our annual report on Form 10-K for the year ended June 30,
1993, or 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
our annual report on Form 10-K for the year ended June 30,
1991, or the 1991 Form 10-K)
76
d Amendment dated as of July 1, 1996 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.5(d) from
our annual report on Form 10-K for the year ended June 30,
1996, or the 1996 Form 10-K)
#e Amendment dated as of July 7, 1997 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.6(e) from
the Transition Period Form 10-K)
#f Amendment dated as of July 1, 2001 to said Fulfillment
Agreement (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q for the quarter ended September
30, 2001, or the September 30, 2001 Form 10-Q)
10.4 Transponder Service Agreements
a SKYNET Transponder Service Agreement dated March 1, 2001
between Playboy Entertainment Group, Inc. and LORAL SKYNET
(incorporated by reference to Exhibit 10.1 from our quarterly
report on Form 10-Q for the quarter ended March 31, 2001)
b SKYNET Transponder Service Agreement dated February 8, 1999 by
and between Califa Entertainment Group, Inc. and LORAL SKYNET
c Transfer of Service Agreement dated February 22, 2002 between
Califa Entertainment Group, LORAL SKYNET and Spice Hot
Entertainment, Inc.
d Amendment One to the Transponder Service Agreement between
Spice Hot Entertainment, Inc. and LORAL SKYNET dated February
28, 2002
(items (b), (c) and (d) incorporated by reference to Exhibits
10.4(b), (c) and (d), respectively, from our annual report on Form
10-K for the year ended December 31, 2001, or the 2001 Form 10-K)
e Transponder Service Agreement dated August 12, 1999 between
British Sky Broadcasting Limited and The Home Video Channel
Limited (incorporated by reference to Exhibit 10.4 from the
2002 Form 10-K)
&10.5 Playboy TV - Latin America, LLC Agreements
a Second Amended and Restated Operating Agreement for Playboy TV
- Latin America, LLC, effective as of April 1, 2002, by and
between Playboy Entertainment Group, Inc. and Lifford
International Co. Ltd. (BVI)
b Playboy TV - Latin America Program Supply and Trademark
License Agreement, dated as of December 23, 2002 and effective
as of April 1, 2002, by and between Playboy Entertainment
Group, Inc. and Playboy TV - Latin America, LLC
(items (a) and (b) incorporated by reference to Exhibits 10.1 and
10.2, respectively, from the Current Report on Form 8-K dated
December 23, 2002 and filed with the SEC on February 12, 2003)
10.6 Transfer Agreement, dated as of December 23, 2002, by and among
Playboy Enterprises, Inc., Playboy Entertainment Group, Inc.,
Playboy Enterprises International, Inc., Claxson Interactive Group
Inc., Carlyle Investments LLC (in its own right and as a successor
in interest to Victoria Springs Investments Ltd.), Carlton
Investments LLC (in its own right and as a successor in interest to
Victoria Springs Investments Ltd.), Lifford International Co. Ltd.
(BVI) and Playboy TV International, LLC. (incorporated by reference
to Exhibit 2.1 from the Current Report on Form 8-K dated December
23, 2002 and filed with the SEC on January 7, 2003)
#10.7 Amended and Restated Affiliation and License Agreement dated May 17,
2002 between DirecTV, Inc. and Playboy Entertainment Group, Inc.,
Spice Entertainment, Inc., Spice Hot Entertainment, Inc. and Spice
Platinum Entertainment, Inc. regarding DBS Satellite Exhibition of
Programming (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q dated June 30, 2002, or the June 30,
2002 Form 10-Q)
@10.8 Master Lease Agreement dated December 22, 2003 between The Walden
Asset Group, LLC and Playboy Entertainment Group, Inc.
a Master Lease Agreement
b Equipment Schedule No. 1
c Acceptance Certificate for Equipment Schedule No. 1
@10.9 Acknowledgement of Assignment dated December 22, 2003 among Playboy
Entertainment Group, Inc., The Walden Asset Group, LLC and General
Electric Capital Corporation
@10.10 Corporate Guaranty dated December 22, 2003 executed by General
Electric Capital Corporation regarding the Master Lease Agreement
dated December 22, 2003
77
10.11 Fulfillment and Customer Service Services Agreement dated October 2,
2000 between Infinity Resources, Inc. and Playboy.com, Inc.
(incorporated by reference to Exhibit 10.13 from our annual report
on Form 10-K for the year ended December 31, 2000, or the 2000 Form
10-K)
10.12 Credit Agreement, dated March 11, 2003, or the Credit Agreement,
among PEI Holdings, Inc., each lender from time to time party
thereto and Bank of America, N.A., as Agent
a Credit Agreement
a-1 Master Corporate Guaranty, dated March 11, 2003
b Security Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank of America, N.A., as Agent under the
Credit Agreement
c Security Agreement, dated as of March 11, 2003, among Playboy
Enterprises, Inc. and each of the domestic subsidiaries of PEI
Holdings, Inc. set forth on the signature pages thereto and
Bank of America, N.A., as Agent under the Credit Agreement
d Pledge Agreement, dated as of March 11, 2003, between PEI
Holdings, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
e Pledge Agreement, dated as of March 11, 2003, among Chelsea
Court Holdings LLC, as the limited partner in 1945/1947 Cedar
River C.V., Candlelight Management LLC, as the general partner
in 1945/1947 Cedar River C.V., and Bank of America, N.A., as
agent for the various financial institutions from time to time
parties to the Credit Agreement
f Pledge Agreement, dated as of March 11, 2003, between Claridge
Organization LLC and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
g Pledge Agreement, dated as of March 11, 2003, between Playboy
Clubs International, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
h Pledge Agreement, dated as of March 11, 2003, between CPV
Productions, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
i Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
j Pledge Agreement, dated as of March 11, 2003, between Playboy
Gaming International, Ltd. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
k Pledge Agreement, dated as of March 11, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement
l Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
m Pledge Agreement, dated as of March 11, 2003, between Playboy
Enterprises International, Inc. and Bank of America, N.A., as
agent for the various financial institutions from time to time
parties to the Credit Agreement
n Pledge Agreement, dated as of March 11, 2003, between Planet
Playboy, Inc. and Bank of America, N.A., as agent for the
various financial institutions from time to time parties to
the Credit Agreement
o Pledge Agreement, dated as of March 11, 2003, between Spice
Entertainment, Inc. and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
p Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
q Pledge Agreement, dated as of March 11, 2003, between Playboy
TV International, LLC and Bank of America, N.A., as agent for
the various financial institutions from time to time parties
to the Credit Agreement
r Trademark Security Agreement, dated as of March 11, 2003, by
AdulTVision Communications, Inc., Alta Loma Entertainment,
Inc., Lifestyle Brands, Ltd., Playboy Entertainment Group,
Inc., Spice Entertainment, Inc., Playboy Enterprises
International, Inc. and Spice Hot Entertainment, Inc. in favor
of Bank of America, N.A., as Agent under the Credit Agreement
78
s Copyright Security Agreement, dated March 11, 2003, by After
Dark Video, Inc., Alta Loma Distribution, Inc., Alta Loma
Entertainment, Inc., Impulse Productions, Inc., Indigo
Entertainment, Inc., MH Pictures, Inc., Mystique Films, Inc.,
Playboy Entertainment Group, Inc., Precious Films, Inc. and
Women Productions, Inc. in favor of Bank of America, N.A., as
Agent under the Credit Agreement
t Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank of America, N.A., as Agent for various lenders
u Deed of Trust with Assignment of Rents, Security Agreement and
Fixture Filing, dated as of March 11, 2003, made and executed
by Playboy Enterprises International, Inc. in favor of
Fidelity National Title Insurance Company for the benefit of
Bank of America, N.A., as agent for Lenders under the Credit
Agreement
(items (a) through (u) incorporated by reference to Exhibits 10.9(a)
through (u), respectively, from the 2002 Form 10-K)
v Pledge Amendment, dated July 22, 2003, between Playboy
Entertainment Group, Inc. and Bank of America, N.A., as agent
for the various financial institutions from time to time
parties to the Credit Agreement (incorporated by reference to
Exhibit 10.9(i)-1 to Playboy Enterprises, Inc.'s May 19, 2003
Form S-4).
10.13 Joinder to Master Corporate Guaranty, dated July 22, 2003, executed
by Andrita Studios, Inc. (incorporated by reference to Exhibit
10.9(a)-2 to Playboy Enterprises, Inc.'s Form S-4, filed with the
SEC on May 19, 2003, File No. 333-105386).
10.14 Joinder to Security Agreement, dated July 22, 2003, executed by
Andrita Studios, Inc. (incorporated by reference to Exhibit
10.9(c)-7 to Playboy Enterprises, Inc.'s Form S-4, filed with the
SEC on May 19, 2003, File No. 333-105386).
10.15 Exchange Agreement, dated as of March 11, 2003, among Hugh M.
Hefner, Playboy.com, Inc., PEI Holdings, Inc. and Playboy
Enterprises, Inc. (see Exhibit 4.2) (incorporated by reference to
Exhibit 10.11 from the 2002 Form 10-K)
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 our quarterly
report on Form 10-Q for the quarter ended March 31, 1998, or
the March 31, 1998 Form 10-Q)
d Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank One, N.A., as Trustee for various noteholders
(see Exhibit 4.1(u))
e Lease Subordination Agreement, dated as of March 11, 2003, by
and among Hugh M. Hefner, Playboy Enterprises International,
Inc. and Bank of America, N.A., as Agent for various lenders
(see Exhibit 10.9(t))
(items (d) and (e) incorporated by reference to Exhibits 10.13(d)
and (e), respectively, from the 2002 Form 10-K)
10.17 Los Angeles Office Lease Documents
a Agreement of Lease dated April 23, 2002 between Los Angeles
Media Tech Center, LLC and Playboy Enterprises, Inc.
(incorporated by reference to Exhibit 10.4 from the June 30,
2002 Form 10-Q)
b First Amendment to April 23, 2002 Lease dated June 28, 2002
(incorporated by reference to Exhibit 10.4 from our quarterly
report on Form 10-Q for the quarter ended September 30, 2002
Form 10-Q, or the September 30, 2002 Form 10-Q)
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)
79
b First Amendment to April 7, 1988 Lease dated October 26, 1989
(incorporated by reference to Exhibit 10.15(b) from our annual
report on Form 10-K for the year ended June 30, 1995, or 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 our quarterly
report on Form 10-Q for the quarter ended December 31, 1992)
d Third Amendment to April 7, 1988 Lease dated August 30, 1993
(incorporated by reference to Exhibit 10.15(d) from the 1995
Form 10-K)
e Fourth Amendment to April 7, 1988 Lease dated August 6, 1996
(incorporated by reference to Exhibit 10.20(e) from the 1996
Form 10-K)
f Fifth Amendment to April 7, 1988 Lease dated March 19, 1998
(incorporated by reference to Exhibit 10.3 from the March 31,
1998 Form 10-Q)
10.19 New York Office Lease Documents
a Agreement of Lease 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)
b Agreement of Sublease between Playboy Enterprises
International, Inc. and Concentra Managed Care Services, Inc.
dated February 13, 2002 (incorporated by reference to Exhibit
10.3 from our quarterly report on Form 10-Q dated March 31,
2002)
10.20 Los Angeles Studio Facility Lease Documents
a Agreement of Lease dated September 20, 2001 between Kingston
Andrita LLC and Playboy Entertainment Group, Inc.
(incorporated by reference to Exhibit 10.3(a) from the
September 30, 2001 Form 10-Q)
b First Amendment to September 20, 2001 Lease dated May 15, 2002
(incorporated by reference to Exhibit 10.3 from the June 30,
2002 Form 10-Q)
c Second Amendment to September 20, 2001 Lease dated July 23,
2002 (incorporated by reference to Exhibit 10.6 from the
September 30, 2002 Form 10-Q)
d Third Amendment to September 20, 2001 Lease dated October 31,
2002
e Fourth Amendment to September 20, 2001 Lease dated December 2,
2002
f Fifth Amendment to September 20, 2001 Lease dated December 31,
2002
g Sixth Amendment to September 20, 2001 Lease dated January 31,
2003
(items (d) through (g) incorporated by reference to Exhibits
10.17(d) through (g), respectively, from the 2002 Form 10-K)
h Guaranty dated September 20, 2001 by Playboy Entertainment
Group, Inc. in favor of Kingston Andrita LLC (incorporated by
reference to Exhibit 10.3(c) from the September 30, 2001 Form
10-Q)
i Seventh Amendment to September 20, 2001 Lease dated July 23,
2003 (incorporated by reference to Exhibit 10.1 from our
quarterly report on Form 10-Q dated September 30, 2003)
10.21 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 our annual
report on Form 10-K for the year ended June 30, 1997, or the
1997 Form 10-K)
c Real Estate Sublease Agreement dated October 2, 2000 between
Playboy Enterprises, Inc. and Infinity Resources, Inc.
(incorporated by reference to Exhibit 10.20(c) from the 2000
Form 10-K)
*10.22 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 our quarterly report on Form 10-Q for the
quarter ended June 30, 1998)
*10.23 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)
80
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)
*10.24 1991 Directors' Plan
a Playboy Enterprises, Inc. 1991 NonQualified Stock Option Plan
for NonEmployee Directors, as amended
b Playboy Enterprises, Inc. 1991 NonQualified Stock Option
Agreement for NonEmployee Directors
(items (a) and (b) incorporated by reference to Exhibits 10.4(rr)
and (nn), respectively, from the 1991 Form 10-K)
*10.25 1995 Stock Incentive Plan
@a Second Amended and Restated Playboy Enterprises, Inc. 1995
Stock Incentive Plan
b Form of NonQualified Stock Option Agreement for NonQualified
Stock Options which may be granted under the Plan
c Form of Incentive Stock Option Agreement for Incentive Stock
Options which may be granted under the Plan
d Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan
(items (b), (c) and (d) incorporated by reference to Exhibits 4.3,
4.4 and 4.5, respectively, from our 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)
*10.26 1997 Directors' Plan
@a Amended and Restated 1997 Equity Plan for NonEmployee
Directors of Playboy Enterprises, Inc.
b Form of Restricted Stock Agreement for Restricted Stock issued
under the Plan (incorporated by reference to Exhibit 10.1(b)
from our quarterly report on Form 10-Q for the quarter ended
September 30, 1997)
*10.27 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 our Registration
Statement No. 333-30185 on Form S-8 dated November 13, 1996)
*10.28 Employee Stock Purchase Plan
a Playboy Enterprises, Inc. Employee Stock Purchase Plan, as
amended and restated (incorporated by reference to Exhibit
10.2 from our quarterly report on Form 10-Q for the quarter
ended March 31, 1997)
b Amendment to Playboy Enterprises, Inc. Employee Stock Purchase
Plan, as amended and restated (incorporated by reference to
Exhibit 10.4 from the quarterly report on Form 10-Q for the
quarter ended June 30, 1999)
*10.29 Selected Employment, Termination and Other Agreements
a Form of Severance Agreement by and between Playboy
Enterprises, Inc. and each of James English, James Griffiths,
Linda Havard, Christie Hefner, Martha Lindeman, Richard
Rosenzweig, Howard Shapiro and Alex Vaickus (incorporated by
reference to Exhibit 10.23(a) from the 2001 Form 10-K)
b Memorandum dated May 21, 2002 regarding severance agreement
for Linda Havard (incorporated by reference to Exhibits 10.5
and 10.6, respectively, from the June 30, 2002 Form 10-Q)
@c Letter Agreement dated October 8, 2003 regarding employment of
James English
@d Amendment to October 8, 2003 Employment Agreement dated
February 10, 2004 regarding employment of James L. English
@e Employment Agreement dated January 8, 2004 regarding
employment of James Griffiths
10.30 11% Senior Secured Notes due 2010 (see Exhibit 4.1) (incorporated by
reference to Exhibits 10.27 from the 2002 Form 10-K)
81
@21 Subsidiaries
@23 Consent of Ernst & Young LLP
@31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
@31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
@32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------
* Indicates management compensation plan
# Certain information omitted pursuant to a request for confidential
treatment filed separately with and granted by the SEC
& Certain information omitted pursuant to a request for confidential
treatment filed separately with the SEC
@ Filed herewith
82
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, 2003:
Allowance for doubtful accounts $ 5,124 $ 1,409 $ 1,451(a) $ 3,620(b) $ 4,364
=========== =========== =========== =========== ===========
Allowance for returns $ 24,595 $ -- $ 47,536(c) $ 44,994(d) $ 27,137
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 69,146 $ 3,307(e) $ -- $ -- $ 72,453
=========== =========== =========== =========== ===========
Fiscal Year Ended December 31, 2002:
Allowance for doubtful accounts $ 6,406 $ 213 $ 2,010(a) $ 3,505(b) $ 5,124
=========== =========== =========== =========== ===========
Allowance for returns $ 30,514 $ -- $ 48,227(c) $ 54,146(d) $ 24,595
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 54,588 $ 14,558(e) $ -- $ -- $ 69,146
=========== =========== =========== =========== ===========
Fiscal Year Ended December 31, 2001:
Allowance for doubtful accounts $ 15,994 $ 584 $ 1,690(a) $ 11,862(b) $ 6,406
=========== =========== =========== =========== ===========
Allowance for returns $ 28,815 $ -- $ 52,698(c) $ 50,999(d) $ 30,514
=========== =========== =========== =========== ===========
Deferred tax asset valuation allowance $ 45,044 $ 9,544(e) $ -- $ -- $ 54,588
=========== =========== =========== =========== ===========
Notes:
(a) Primarily represents provisions for unpaid subscriptions charged to net
revenues. Also, includes a $660 provision in 2002 related to the December
2002 PTVI restructuring.
(b) Includes a reversal in 2001 of a $10,000 provision related to assuming an
obligation in the Califa acquisition. Also, primarily represents
uncollectible accounts less recoveries.
(c) Represents provisions charged to net revenues for estimated returns of
Playboy magazine, other domestic publishing products and domestic home
videos.
(d) Represents settlements on provisions previously recorded.
(e) Represents noncash federal income tax expense related to increasing the
valuation allowance.
83