Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-14790
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
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 |_|
At July 31, 2004, there were 4,864,102 shares of Class A common stock, par
value $0.01 per share, and 28,532,052 shares of Class B common stock, par value
$0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Quarters Ended June 30,
2004 and 2003 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Six Months Ended
June 30, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Balance Sheets at June 30,
2004 (Unaudited) and December 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2004 2003
- --------------------------------------------------------------------------------
Net revenues $ 78,717 $ 75,971
- --------------------------------------------------------------------------------
Costs and expenses
Cost of sales (61,444) (56,229)
Selling and administrative expenses (14,112) (14,224)
- --------------------------------------------------------------------------------
Total costs and expenses (75,556) (70,453)
- --------------------------------------------------------------------------------
Gain on disposal 2 --
- --------------------------------------------------------------------------------
Operating income 3,163 5,518
- --------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 133 113
Interest expense (3,651) (4,216)
Amortization of deferred financing fees (357) (372)
Minority interest (351) (512)
Debt extinguishment expenses (5,908) (1)
Other, net (238) (350)
- --------------------------------------------------------------------------------
Total nonoperating expense (10,372) (5,338)
- --------------------------------------------------------------------------------
Income (loss) before income taxes (7,209) 180
Income tax expense (1,082) (1,085)
- --------------------------------------------------------------------------------
Net loss (8,291) (905)
- --------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities (25) 417
Unrealized gain (loss) on derivatives 65 (10)
Foreign currency translation adjustments 112 (391)
- --------------------------------------------------------------------------------
Total other comprehensive income 152 16
- --------------------------------------------------------------------------------
Comprehensive loss $ (8,139) $ (889)
================================================================================
Net loss $ (8,291) $ (905)
Dividend requirements of preferred stock (93) (223)
- --------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (8,384) $ (1,128)
================================================================================
Basic and diluted weighted average number
of common shares outstanding 32,098 27,051
================================================================================
Basic and diluted loss per common share $ (0.26) $ (0.04)
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Six Months Ended June 30 (Unaudited)
(In thousands, except per share amounts)
2004 2003
- --------------------------------------------------------------------------------
Net revenues $ 159,587 $ 150,252
- --------------------------------------------------------------------------------
Costs and expenses
Cost of sales (120,428) (108,530)
Selling and administrative expenses (28,546) (26,754)
- --------------------------------------------------------------------------------
Total costs and expenses (148,974) (135,284)
- --------------------------------------------------------------------------------
Gain on disposal 2 --
- --------------------------------------------------------------------------------
Operating income 10,615 14,968
- --------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 223 169
Interest expense (7,809) (7,778)
Amortization of deferred financing fees (732) (647)
Minority interest (702) (964)
Debt extinguishment expenses (5,908) (3,264)
Other, net (697) (422)
- --------------------------------------------------------------------------------
Total nonoperating expense (15,625) (12,906)
- --------------------------------------------------------------------------------
Income (loss) before income taxes (5,010) 2,062
Income tax expense (1,393) (2,335)
- --------------------------------------------------------------------------------
Net loss (6,403) (273)
- --------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gain on marketable securities 107 262
Unrealized gain on derivatives 37 599
Foreign currency translation adjustments (308) (238)
- --------------------------------------------------------------------------------
Total other comprehensive income (loss) (164) 623
- --------------------------------------------------------------------------------
Comprehensive income (loss) $ (6,567) $ 350
================================================================================
Net loss $ (6,403) $ (273)
Dividend requirements of preferred stock (428) (223)
- --------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (6,831) $ (496)
================================================================================
Basic and diluted weighted average number
of common shares outstanding 29,788 26,605
================================================================================
Basic and diluted loss per common share $ (0.23) $ (0.02)
================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 30, Dec. 31,
2004 2003
- ---------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 30,733 $ 31,332
Marketable securities 3,672 3,546
Receivables, net of allowance for doubtful accounts of
$4,677 and $4,364, respectively 42,291 52,230
Receivables from related parties 2,291 1,226
Inventories, net 13,040 12,017
Deferred subscription acquisition costs 11,277 11,759
Other current assets 8,330 10,208
- ---------------------------------------------------------------------------------------------------
Total current assets 111,634 122,318
- ---------------------------------------------------------------------------------------------------
Property and equipment, net 11,617 12,020
Long-term receivables 2,755 --
Programming costs, net 57,913 57,426
Goodwill 111,893 111,893
Trademarks 55,385 58,159
Distribution agreements, net of accumulated amortization
of $1,333 and $970, respectively 31,807 32,170
Other noncurrent assets 19,623 24,074
- ---------------------------------------------------------------------------------------------------
Total assets $ 402,627 $ 418,060
===================================================================================================
Liabilities
Acquisition liabilities $ 10,545 $ 15,392
Accounts payable 21,652 22,899
Accrued salaries, wages and employee benefits 7,252 11,472
Deferred revenues 50,830 53,963
Accrued litigation settlement 1,000 6,500
Other liabilities and accrued expenses 17,809 19,088
- ---------------------------------------------------------------------------------------------------
Total current liabilities 109,088 129,314
- ---------------------------------------------------------------------------------------------------
Financing obligations 80,000 115,000
Acquisition liabilities, less current portion 22,095 26,982
Net deferred tax liabilities 13,981 13,877
Accrued litigation settlement, less current portion 1,000 2,000
Other noncurrent liabilities 12,992 13,170
- ---------------------------------------------------------------------------------------------------
Total liabilities 239,156 300,343
- ---------------------------------------------------------------------------------------------------
Minority interest 11,783 11,081
Shareholders' equity
Preferred stock, $10,000 par value - 10,000,000 shares authorized;
0 and 1,674 issued, respectively -- 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 - 75,000,000 and 30,000,000 shares authorized,
respectively; 28,529,559 and 22,579,363 issued, respectively 285 226
Capital in excess of par value 222,278 152,969
Accumulated deficit (69,341) (62,510)
Unearned compensation - restricted stock (362) --
Accumulated other comprehensive loss (1,221) (1,057)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity 151,688 106,636
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 402,627 $ 418,060
===================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Six Months Ended June 30 (Unaudited)
(In thousands)
2004 2003
- --------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (6,403) $ (273)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation of property and equipment 1,624 2,154
Amortization of intangible assets 1,264 3,278
Amortization of investments in entertainment programming 21,504 19,549
Amortization of deferred financing fees 732 647
Debt extinguishment expenses 5,908 3,264
Deferred income taxes 40 69
Net change in operating assets and liabilities (412) (5,239)
Investments in entertainment programming (23,121) (22,967)
Litigation settlement (6,500) --
Other, net 923 920
- --------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (4,441) 1,402
- --------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals 150 116
Additions to property and equipment (1,450) (1,108)
Other, net 201 (2)
- --------------------------------------------------------------------------------------
Net cash used for investing activities (1,099) (994)
- --------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 115,000
Proceeds from public equity offering 51,858 --
Repayment of financing obligations (35,000) (65,767)
Payment of debt extinguishment expenses (3,850) (356)
Payment of acquisition liabilities (7,801) (14,219)
Payment of deferred financing fees -- (6,909)
Payment of preferred stock dividends (651) --
Proceeds from stock plans 385 147
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 4,941 27,896
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (599) 28,304
Cash and cash equivalents at beginning of period 31,332 4,118
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 30,733 $ 32,422
======================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(A) BASIS OF PREPARATION
Playboy Enterprises, Inc., together with its subsidiaries and
predecessors, will be referred to in this Quarterly Report on Form 10-Q by terms
such as "we," "us," "our," "Playboy" and the "Company" unless the context
otherwise requires. The financial information included in these financial
statements is unaudited but, in the opinion of management, reflects all normal
recurring and other adjustments necessary for a fair presentation of the results
for the interim periods. The interim results of operations and cash flows are
not necessarily indicative of those results and cash flows for the entire year.
These financial statements should be read in conjunction with the financial
statements and notes to the financial statements contained in our Annual Report
on Form 10-K for the year ended December 31, 2003. Certain amounts reported for
prior periods have been reclassified to conform to the current year's
presentation.
(B) RESTRUCTURING EXPENSES
In 2004, we made cash payments of $0.9 million on our 2002 and 2001
restructuring plans. Approximately $8.0 million of the total restructuring
charges of $10.3 million for those plans, net of non-cash adjustments, has been
paid as of June 30, 2004 with most of the remainder to be paid in 2004, although
some payments will continue through 2007.
Our 2002 restructuring initiative to reduce our ongoing operating expenses
resulted in a $5.7 million charge, of which $2.9 million related to workforce
reductions and $2.8 million related to consolidation of our office space. Our
2001 restructuring plan resulted in a $4.6 million charge, of which $2.6 million
related to workforce reductions and $2.0 million related to excess office space.
In 2003, we recorded adjustments of $0.3 million related to these charges. In
the second quarter of 2004, we recorded additional charges of $0.2 million to
the 2001 plan and reversed $0.2 million related to the 2002 plan as a result of
changes in assumptions related to the consolidation of facilities and
operations.
The following table displays the activity and balances of the restructuring
reserve for the year ended December 31, 2003 and the six months ended June 30,
2004 (in thousands):
Consolidation
Workforce of Facilities and
Reduction Operations Total
- ------------------------------------------------------------------------------
Balance at December 31, 2002 $ 2,772 $ 3,805 $ 6,577
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
Cash payments (335) (589) (924)
- ------------------------------------------------------------------------------
Balance at June 30, 2004 $ 295 $ 1,974 $ 2,269
==============================================================================
(C) EARNINGS PER COMMON SHARE
The following table represents the approximate number of shares related to
options to purchase our Class B common stock, or Class B 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):
Quarters Ended Six Months Ended
June 30, June 30,
---------------- ----------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Stock options 3,324 2,450 2,323 2,805
Convertible preferred stock -- 1,507 -- 1,507
Restricted stock awards 188 -- 189 --
- --------------------------------------------------------------------------------
Total 3,512 3,957 2,512 4,312
================================================================================
On May 1, 2003, $10.0 million of PEI Holdings, Inc., or Holdings, Series A
Preferred Stock held by Hugh M. Hefner, our Editor-in-Chief, along with
accumulated dividends of $0.1 million, were exchanged for 1,122,209 shares of
Playboy Class B stock.
7
On April 26, 2004, we completed a public offering of 6,021,340 shares of
our Class B stock. Included in this offering were 1,485,948 shares sold by Mr.
Hefner. The shares sold by Mr. Hefner consisted of all of the shares of Class B
common stock he received upon conversion of all of the outstanding shares of
Playboy Series A convertible preferred stock, which we refer to as the Playboy
Preferred Stock, at the time of the offering. See Note (J) Public Equity
Offering for additional information.
(D) INVENTORIES, NET
Inventories, net, which are stated at the lower of cost (specific cost and
average cost) or fair value, consisted of the following (in thousands):
June 30, Dec. 31,
2004 2003
- --------------------------------------------------------------------------------
Paper $ 2,500 $ 2,613
Editorial and other prepublication costs 7,228 6,082
Merchandise finished goods 3,312 3,322
- --------------------------------------------------------------------------------
Total inventories, net $13,040 $12,017
================================================================================
(E) FINANCING OBLIGATIONS
On March 11, 2003, we completed the offering of $115.0 million in
aggregate principal amount of senior secured notes of 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 senior
secured 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.
Under the terms of the indenture governing the notes, at any time prior to
March 15, 2006, we have the right to redeem up to 35% of the original $115.0
million in aggregate principal amount of the notes, or $40.25 million, at a
redemption price of 111.0% of the principal amount of the notes redeemed, plus
accrued and unpaid interest, with the net cash proceeds from a qualifying equity
offering. On June 11, 2004, we used the proceeds of our equity offering, more
fully described in Note (J) Public Equity Offering, to redeem $35.0 million in
aggregate principal amount of the outstanding notes, which reduced our financing
obligations to $80.0 million as of June 30, 2004. We paid a redemption premium
of $3.9 million as well as accrued and unpaid interest of $0.9 million related
to the redeemed principal amount. We also recorded a charge of $2.0 million to
write off the related deferred financing costs.
(F) INCOME TAXES
Our income tax provision consists primarily of foreign income tax related
to our international networks and withholding tax on licensing income for which
we do not receive a current U.S. income tax benefit. The tax provision also
includes deferred federal and state income tax related to the amortization of
goodwill and other indefinite-lived intangibles, which cannot be offset against
deferred tax assets due to the indefinite reversal period of the deferred tax
liabilities. The tax provision for the six months ended June 30, 2004 reflects a
benefit of approximately $1.0 million from the reversal of deferred income taxes
provided in prior periods relating to the tax amortization of the Sarah Coventry
trademarks and service marks, which we sold in the first quarter.
(G) CONTINGENCIES
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 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 of Financial
Accounting Standards, or Statement, 5, Accounting for Contingencies. We are
currently pursuing an appeal.
In the fourth quarter of 2003, we recorded $8.5 million related to the
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.
8
(H) STOCK-BASED COMPENSATION
We account for stock options using the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and disclose pro forma information as provided by Statement 123,
Accounting for Stock Based Compensation as amended by Statement 148, Accounting
for Stock Based Compensation - Transition and Disclosure.
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 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 increased
$0.7 million and $1.4 million for the quarter and six-month period ended June
30, 2004. As a result of the cancellation of a significant number of stock
options during the prior year quarter, compensation expense under Statement 123
would have decreased $0.3 million and increased $0.7 million for the quarter and
six-month period ended June 30, 2003, respectively.
Quarters Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------
Net loss
As reported $ (8,291) $ (905) $ (6,403) $ (273)
Pro forma (8,944) (565) (7,805) (990)
Basic and diluted EPS
As reported $ (0.26) $ (0.04) $ (0.23) $ (0.02)
Pro forma (0.28) (0.03) (0.28) (0.05)
- -------------------------------------------------------------------------------
(I) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
Quarters Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 33,831 $ 33,758 $ 69,302 $ 66,961
Publishing 29,093 28,804 58,770 55,438
Online 9,589 8,311 20,562 17,551
Licensing 6,204 5,098 10,953 10,302
- --------------------------------------------------------------------------------------------
Total $ 78,717 $ 75,971 $ 159,587 $ 150,252
============================================================================================
Income (loss) before income taxes
Entertainment $ 2,340 $ 6,526 $ 8,740 $ 14,478
Publishing 2,065 1,402 3,964 1,909
Online 761 104 1,914 424
Licensing 2,379 1,343 4,950 4,914
Corporate Administration and Promotion (4,384) (3,857) (8,955) (6,757)
Gain on disposal 2 -- 2 --
Investment income 133 113 223 169
Interest expense (3,651) (4,216) (7,809) (7,778)
Amortization of deferred financing fees (357) (372) (732) (647)
Minority interest (351) (512) (702) (964)
Debt extinguishment expenses (5,908) (1) (5,908) (3,264)
Other, net (238) (350) (697) (422)
- --------------------------------------------------------------------------------------------
Total $ (7,209) $ 180 $ (5,010) $ 2,062
============================================================================================
9
June 30, Dec. 31,
2004 2003
- --------------------------------------------------------------------------------
Identifiable assets
Entertainment $263,926 $265,056
Publishing 40,861 48,462
Online 5,727 5,493
Licensing 6,798 8,199
Corporate Administration and Promotion 85,315 90,850
- --------------------------------------------------------------------------------
Total $402,627 $418,060
================================================================================
(J) PUBLIC EQUITY OFFERING
On April 26, 2004, we completed a public offering of 6,021,340 Class B
shares at $12.69 per share, before underwriting discounts. Included in this
offering were 4,385,392 shares sold by Playboy, 1,485,948 shares sold by Hugh
Hefner, and 150,000 shares sold by Christie Hefner, our Chairman and Chief
Executive Officer. Playboy's shares included 3,600,000 initial shares, plus an
additional 785,392 shares due to the underwriters' exercise of their
over-allotment option. The shares sold by Mr. Hefner consisted of all of the
shares of Class B stock he received upon conversion, at the time of the
offering, of all of the outstanding shares of Playboy Preferred Stock.
Net proceeds to us from the sale of our shares were approximately $51.9
million. On June 11, 2004, we used $39.8 million of the net proceeds of this
sale to redeem $35.0 million in aggregate principal of the outstanding 11.00%
senior secured notes due 2010, which included a $3.9 million bond redemption
premium and accrued and unpaid interest of $0.9 million. We used approximately
$0.7 million of net proceeds to pay accrued and unpaid dividends on the Playboy
Preferred Stock up to the time of conversion. The balance of the net proceeds
will be used for general corporate purposes.
(K) SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The payment obligations under the 11% senior secured notes due 2010 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 quarters and six months ended June 30, 2004 and
2003, the Condensed Consolidating Balance Sheets at June 30, 2004 and December
31, 2003 and the Condensed Consolidating Statements of Cash Flows for the six
months ended June 30, 2004 and 2003, present financial information for (a) us
(carrying our investment in Holdings under the equity method), (b) Holdings, the
issuer of the 11% senior secured notes due 2010 (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.
10
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Quarter Ended June 30, 2004 (Unaudited)
----------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 62,139 $ 20,108 $ (3,530) $ 78,717
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (50,119) (14,855) 3,530 (61,444)
Selling and administrative expenses -- -- (11,392) (2,720) -- (14,112)
Restructuring expenses -- -- 31 (31) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (61,480) (17,606) 3,530 (75,556)
- -----------------------------------------------------------------------------------------------------------------------------------
Gain on disposal -- -- 2 -- -- 2
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 661 2,502 -- 3,163
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 141 10 (18) 133
Interest expense -- (2,961) (691) (17) 18 (3,651)
Amortization of deferred
financing fees -- (357) -- -- -- (357)
Minority interest (351) -- -- -- -- (351)
Debt extinguishment expenses -- (5,908) -- -- -- (5,908)
Equity income (loss) from subsidiaries (7,940) 1,391 2,265 -- 4,284 --
Other, net -- (105) (88) (45) -- (238)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (8,291) (7,940) 1,627 (52) 4,284 (10,372)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (8,291) (7,940) 2,288 2,450 4,284 (7,209)
Income tax expense -- -- (897) (185) -- (1,082)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (8,291) $ (7,940) $ 1,391 $ 2,265 $ 4,284 $ (8,291)
===================================================================================================================================
Quarter Ended June 30, 2003 (Unaudited)
----------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 62,714 $ 17,238 $ (3,981) $ 75,971
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (47,031) (13,179) 3,981 (56,229)
Selling and administrative expenses -- -- (11,442) (2,782) -- (14,224)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (58,473) (15,961) 3,981 (70,453)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 4,241 1,277 -- 5,518
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 131 12 (30) 113
Interest expense -- (3,173) (1,043) (30) 30 (4,216)
Amortization of deferred
financing fees -- (372) -- -- -- (372)
Minority interest (178) -- (334) -- -- (512)
Debt extinguishment expenses -- (1) -- -- -- (1)
Equity income (loss) from subsidiaries (727) 2,947 845 -- (3,065) --
Other, net -- (128) (181) (41) -- (350)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (905) (727) (582) (59) (3,065) (5,338)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (905) (727) 3,659 1,218 (3,065) 180
Income tax expense -- -- (712) (373) -- (1,085)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (905) $ (727) $ 2,947 $ 845 $ (3,065) $ (905)
===================================================================================================================================
11
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Six Months Ended June 30, 2004 (Unaudited)
----------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $126,654 $ 41,180 $ (8,247) $159,587
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (97,755) (30,920) 8,247 (120,428)
Selling and administrative expenses -- -- (22,950) (5,596) -- (28,546)
Restructuring expenses -- -- 31 (31) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (120,674) (36,547) 8,247 (148,974)
- -----------------------------------------------------------------------------------------------------------------------------------
Gain on disposal 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 5,982 4,633 -- 10,615
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 238 23 (38) 223
Interest expense -- (6,134) (1,676) (37) 38 (7,809)
Amortization of deferred
financing fees -- (732) -- -- -- (732)
Minority interest (702) -- -- -- -- (702)
Debt extinguishment expenses -- (5,908) -- -- -- (5,908)
Equity income (loss) from subsidiaries (5,701) 7,316 4,182 -- (5,797) --
Other, net -- (243) (360) (94) -- (697)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (6,403) (5,701) 2,384 (108) (5,797) (15,625)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,403) (5,701) 8,366 4,525 (5,797) (5,010)
Income tax expense -- -- (1,050) (343) -- (1,393)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,403) $ (5,701) $ 7,316 $ 4,182 $ (5,797) $ (6,403)
===================================================================================================================================
Six Months Ended June 30, 2003 (Unaudited)
----------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $123,234 $ 35,216 $ (8,198) $150,252
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (89,352) (27,376) 8,198 (108,530)
Selling and administrative expenses -- -- (21,391) (5,363) -- (26,754)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (110,743) (32,739) 8,198 (135,284)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 12,491 2,477 -- 14,968
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 198 34 (63) 169
Interest expense -- (4,945) (2,396) (500) 63 (7,778)
Amortization of deferred
financing fees -- (623) -- (24) -- (647)
Minority interest (297) -- (667) -- -- (964)
Debt extinguishment expenses -- (3,061) -- (203) -- (3,264)
Equity income from subsidiaries 24 8,788 780 -- (9,592) --
Other, net -- (135) (208) (79) -- (422)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) (273) 24 (2,293) (772) (9,592) (12,906)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (273) 24 10,198 1,705 (9,592) 2,062
Income tax expense -- -- (1,410) (925) -- (2,335)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (273) $ 24 $ 8,788 $ 780 $ (9,592) $ (273)
===================================================================================================================================
12
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2004 (Unaudited)
(In thousands)
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ -- $ -- $ 24,461 $ 6,272 $ -- $ 30,733
Marketable securities -- -- 3,672 -- -- 3,672
Receivables, net of allowance for
doubtful accounts -- -- 35,550 6,741 -- 42,291
Receivables from related parties -- -- 2,282 9 -- 2,291
Inventories, net -- -- 10,514 2,526 -- 13,040
Deferred subscription acquisition
costs -- -- 11,277 -- -- 11,277
Other current assets -- -- 6,058 2,272 -- 8,330
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets -- -- 93,814 17,820 -- 111,634
- -----------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 77,371 35,345 -- (112,716) --
Property and equipment, net -- -- 10,211 1,406 -- 11,617
Long-term receivables -- -- 2,755 -- -- 2,755
Programming costs, net -- -- 56,508 1,405 -- 57,913
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 55,385 -- -- 55,385
Distribution agreements, net of
accumulated amortization -- -- 31,807 -- -- 31,807
Investment in subsidiaries 151,688 151,688 (28,663) -- (274,713) --
Other noncurrent assets -- 5,223 14,349 51 -- 19,623
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $151,688 $234,282 $382,881 $ 21,205 $(387,429) $402,627
===================================================================================================================================
Liabilities
Acquisition liabilities $ -- $ -- $ 9,138 $ 1,407 $ -- $ 10,545
Accounts payable -- 3 16,383 5,266 -- 21,652
Accrued salaries, wages and
employee benefits -- -- 6,947 305 -- 7,252
Deferred revenues -- -- 44,100 6,730 -- 50,830
Accrued litigation settlement -- -- 1,000 -- -- 1,000
Other liabilities and accrued expenses -- 2,591 14,813 405 -- 17,809
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 2,594 92,381 14,113 -- 109,088
- -----------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 80,000 -- -- -- 80,000
Financing obligations to affiliates -- -- 84,369 28,347 (112,716) --
Acquisition liabilities, less current portion -- -- 15,889 6,206 -- 22,095
Net deferred tax liabilities -- -- 13,981 -- -- 13,981
Accrued litigation settlement, less
current portion -- -- 1,000 -- -- 1,000
Other noncurrent liabilities -- -- 11,790 1,202 -- 12,992
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 82,594 219,410 49,868 (112,716) 239,156
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- 11,783 -- -- 11,783
Shareholders' equity 151,688 151,688 151,688 (28,663) (274,713) 151,688
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $151,688 $234,282 $382,881 $ 21,205 $(387,429) $402,627
===================================================================================================================================
13
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 related parties -- -- 110,843 49,315 (160,158) --
Acquisition liabilities, less current portion -- -- 21,107 5,875 -- 26,982
Net deferred tax liabilities -- -- 13,877 -- -- 13,877
Accrued litigation settlement, less
current portion -- -- 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
===================================================================================================================================
14
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, 2004 (Unaudited)
----------------------------------------------------------------------------------------
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 $ (702) $ (7,639) $ (9,961) $ 13,861 $ -- $ (4,441)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 150 -- -- 150
Additions to property and equipment -- -- (793) (657) -- (1,450)
Other, net -- -- 201 -- -- 201
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (442) (657) -- (1,099)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from public equity offering 51,858 -- -- -- -- 51,858
Repayment of financing obligations -- (35,000) -- -- -- (35,000)
Payment of debt extinguishment expenses -- (3,850) -- -- -- (3,850)
Payment of acquisition liabilities -- -- (6,966) (835) -- (7,801)
Payment of preferred stock dividends (651) -- -- -- -- (651)
Proceeds from stock plans 385 -- -- -- -- 385
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 51,592 (38,850) (6,966) (835) -- 4,941
- -----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (50,890) 46,489 17,385 (12,984) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents -- -- 16 (615) -- (599)
Cash and cash equivalents
at beginning of period -- -- 24,445 6,887 -- 31,332
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 24,461 $ 6,272 $ -- $ 30,733
===================================================================================================================================
Six Months Ended June 30, 2003 (Unaudited)
----------------------------------------------------------------------------------------
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) $ (1,847) $ (24) $ 3,459 $ -- $ 1,402
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 116 -- -- 116
Additions to property and equipment -- -- (849) (259) -- (1,108)
Other, net -- -- (5) 3 -- (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (738) (256) -- (994)
- -----------------------------------------------------------------------------------------------------------------------------------
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) (1,074) -- (14,219)
Payment of deferred financing fees -- (6,909) -- -- -- (6,909)
Other, net 147 -- -- -- -- 147
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 147 42,468 (13,145) (1,574) -- 27,896
- -----------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries 39 (40,621) 42,195 (1,613) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash
and cash equivalents -- -- 28,288 16 -- 28,304
Cash and cash equivalents
at beginning of period -- -- (1,908) 6,026 -- 4,118
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 26,380 $ 6,042 $ -- $ 32,422
===================================================================================================================================
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table represents our results of operations (in millions, except
per share amounts):
Quarters Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 22.5 $ 23.9 $ 46.9 $ 47.3
International TV 9.9 8.4 19.8 16.9
Worldwide DVD/home video 1.2 1.4 2.3 2.5
Other 0.2 0.1 0.3 0.3
- ---------------------------------------------------------------------------------------------
Total Entertainment 33.8 33.8 69.3 67.0
- ---------------------------------------------------------------------------------------------
Publishing
Playboy magazine
Subscription 12.7 12.5 26.1 24.9
Newsstand 2.6 4.1 6.9 6.7
Advertising 9.5 8.1 17.2 15.5
Other domestic publishing 2.8 2.8 5.5 5.7
International publishing 1.5 1.3 3.1 2.6
- ---------------------------------------------------------------------------------------------
Total Publishing 29.1 28.8 58.8 55.4
- ---------------------------------------------------------------------------------------------
Online
Subscriptions 4.9 4.2 10.1 8.3
E-commerce 3.8 3.3 8.6 7.2
Other 0.9 0.8 1.9 2.1
- ---------------------------------------------------------------------------------------------
Total Online 9.6 8.3 20.6 17.6
- ---------------------------------------------------------------------------------------------
Licensing
International licensing 2.6 1.6 5.8 3.4
Domestic licensing 0.8 0.7 1.6 1.6
Entertainment licensing 0.5 0.3 1.0 0.6
Artwork sales -- -- -- 1.9
Marketing events 2.3 2.5 2.5 2.8
- ---------------------------------------------------------------------------------------------
Total Licensing 6.2 5.1 10.9 10.3
- ---------------------------------------------------------------------------------------------
Total net revenues $ 78.7 $ 76.0 $ 159.6 $ 150.3
=============================================================================================
Net loss
Entertainment
Before programming expense $ 13.5 $ 16.5 $ 30.2 $ 34.0
Programming expense (11.2) (10.0) (21.5) (19.5)
- ---------------------------------------------------------------------------------------------
Total Entertainment 2.3 6.5 8.7 14.5
- ---------------------------------------------------------------------------------------------
Publishing 2.1 1.4 4.0 1.9
- ---------------------------------------------------------------------------------------------
Online 0.7 0.1 1.9 0.4
- ---------------------------------------------------------------------------------------------
Licensing 2.4 1.3 5.0 4.9
- ---------------------------------------------------------------------------------------------
Corporate Administration and Promotion (4.4) (3.8) (9.0) (6.7)
- ---------------------------------------------------------------------------------------------
Operating income 3.1 5.5 10.6 15.0
- ---------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.1 0.1 0.2 0.2
Interest expense (3.6) (4.2) (7.8) (7.8)
Amortization of deferred financing fees (0.3) (0.4) (0.7) (0.7)
Minority interest (0.3) (0.6) (0.7) (1.0)
Debt extinguishment expenses (5.9) -- (5.9) (3.3)
Other, net (0.3) (0.3) (0.7) (0.4)
- ---------------------------------------------------------------------------------------------
Total nonoperating expense (10.3) (5.4) (15.6) (13.0)
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes (7.2) 0.1 (5.0) 2.0
Income tax expense (1.1) (1.0) (1.4) (2.3)
- ---------------------------------------------------------------------------------------------
Net loss $ (8.3) $ (0.9) $ (6.4) $ (0.3)
=============================================================================================
Basic and diluted EPS $ (0.26) $ (0.04) $ (0.23) $ (0.02)
=============================================================================================
16
Our revenues increased approximately 4% for the quarter and 6% for the
six-month period primarily due to higher revenues in each of our groups, except
for our Entertainment Group, which remained flat for the quarter but increased
3% for the six months.
Operating income decreased for the quarter and six-month period due to
lower income from our Entertainment Group as a result of a one-time retroactive
revenue rate adjustment and higher programming amortization, as well as an
increase in Corporate Administration and Promotion expenses. The impact of these
factors was partially offset by increased income from Publishing, Online and
Licensing for both periods.
The net loss for the current quarter and six-month period includes $5.9
million of debt extinguishment expenses related to our redemption of $35 million
aggregate principal amount of our 11% senior secured notes due 2010, comprised
of $3.9 million for the bond redemption premium and approximately $2.0 million
for the non-cash write-off of the related deferred financing costs. The 2003
six-month period included $3.3 million of debt extinguishment expenses in
connection with prior financing obligations, which were paid upon completion of
our debt offering in the first quarter of 2003.
Several of our businesses can experience variations in quarterly
performance. As a result, our performance in any quarter is not necessarily
reflective of full-year or longer-term trends. Playboy magazine newsstand
revenues vary from issue to issue, with revenues generally higher for holiday
issues and any issues including editorial or pictorial features that generate
additional public interest. Advertising revenues also vary from quarter to
quarter depending on economic conditions, holiday issues and changes in
advertising buying patterns. Online subscription revenues and operating results
are impacted by decreased Internet traffic during the summer months, and
e-commerce revenues and operating results are typically impacted by the holiday
buying season and the timing of catalog mailings.
ENTERTAINMENT GROUP
Revenues from our domestic TV networks business decreased $1.4 million, or
6%, and $0.4 million, or 1%, for the quarter and six-month period, respectively.
Included in the quarter was a one-time $1.5 million unfavorable revenue
adjustment to movie network revenues that resulted from the unanticipated
retroactive rate reduction relating to the 2002 acquisition of one large
multiple system operator, or MSO, by another. Revenues were also negatively
impacted in the quarter and the six-month period as a result of some affiliates
of Time Warner, another of our MSOs, replacing our movie networks with other
adult programming. In July 2004, we signed a new carriage agreement with Time
Warner, which will enable us to regain market share via video on demand, or VOD.
The quarterly and year-to-date decreases were partially offset by an increase in
direct-to-home, or DTH, and VOD revenues due to the roll out of VOD service in
additional cable systems. Additionally, renting our studio facility and
providing various related services to third parties also contributed favorably
to revenues.
Revenues from our international TV business increased $1.5 million, or
16%, and $2.9 million, or 17%, for the quarter and six-month period,
respectively, due in part to higher DTH and cable revenues in the U.K. resulting
from the launch of three new cable channels.
The group's administrative expenses increased for both the quarter and
six-month period due in part to a contactually obligated severance charge, as
well as higher legal and technology costs.
The group's segment income before programming expense decreased $3.0
million for the quarter and $3.8 million for the six months due to the
previously stated decrease in revenues from our domestic TV networks, cost
increases related to the launch of three additional networks in the U.K. and the
aforementioned higher administrative expenses. We have taken, and will continue
to take steps to reduce our spending as part of our efforts to positively impact
second half results. These include a hiring freeze and a reduction in
programming and marketing spending.
Programming amortization increased $1.2 million, or 11%, and $2.0 million,
or 10%, for the quarter and six-month period, respectively, due to more live
programming, which has a faster amortization period. We expect our programming
amortization to be approximately $41 million for the year and our programming
cash expenditures to be approximately $44 million for the year, which are
essentially the same as the comparable 2003 amounts.
17
PUBLISHING GROUP
Playboy magazine revenues were up slightly for the quarter and increased
$3.1 million, or 6%, for the six-month period. Newsstand revenues decreased $1.5
million for the quarter and increased $0.2 million for the six-month period. The
decrease in the quarter was largely due to strong sales of the May 2003 issue,
featuring Torrie Wilson of World Wrestling Entertainment. Subscription revenues
increased $0.2 million and $1.2 million for the quarter and six-month period,
respectively. The increase for the six months was primarily due to increased
revenues from direct-to-publisher subscriptions and a favorable adjustment for
paid subscriptions that will not be served, partially offset by a slight
decrease in subscription copies. Advertising revenues increased $1.4 million for
the quarter and $1.7 million for the six-month period primarily due to an 18.5%
and 11.3% increase in ad pages, respectively. Ad sales for the 2004 third
quarter magazine issues are closed, and we expect to report 36% higher ad
revenues and 40% more ad pages compared to the 2003 third quarter.
Revenues from our other domestic publishing businesses remained comparable
to last year's quarter and decreased $0.2 million, or 4%, for the six-month
period as a decrease in the number of copies of special editions sold for the
quarter and six months was mostly offset by royalties from Hef's Little Black
Book and Playboy: 50 Years: The Photographs.
International publishing revenues increased $0.2 million, or 12%, for the
quarter and $0.5 million, or 18%, for the six-month period primarily due to
higher revenues from the Brazilian edition.
The group's segment income increased $0.7 million and $2.1 million for the
quarter and six-month period, respectively, which was attributable to the higher
revenues for both periods partially offset by higher editorial costs for the
six-month period.
ONLINE GROUP
The Online Group's revenues increased $1.3 million, or 15%, for the
quarter and $3.0 million, or 17%, for the six-month period. Subscription
revenues increased $0.7 million, or 16%, for the quarter and $1.8 million, or
22%, for the six-month period due primarily to increases in our revenues per
subscriber of 12% for the quarter and 17% for the six-month period, as customers
are choosing additional higher priced offerings. Increased email campaigns and
special offers combined with increased catalog circulation helped improve
e-commerce revenues by $0.5 million, or 15%, for the quarter and $1.4 million,
or 20%, for the six-month period. The group's segment income increased $0.6
million and $1.5 million for the quarter and six-month period, respectively,
attributable to the higher revenues, partially offset by increases in related
costs.
LICENSING GROUP
Licensing Group revenues increased $1.1 million, or 22%, and $0.6 million,
or 6%, for the quarter and the six-month period, respectively. International
revenues increased $1.0 million for the quarter and $2.4 million for the
six-month period, due to higher royalties from existing licensees in Japan,
Western Europe and Southeast Asia, as well as several new licensing
arrangements. For the six-month period, the international revenue increase was
partially offset by the sale in the prior year period of an original painting by
Salvador Dali for $1.9 million. Segment income from our Licensing Group
increased $1.1 million for the quarter, which was attributable to the increase
in international revenues previously stated. Segment income remained flat for
the six-month period due to increased royalties in the current year partially
offset by the prior year's sale of the Dali painting.
In the first quarter of 2004, we sold our Sarah Coventry trademarks and
service marks for their approximate book value, pursuant to an agreement under
which we will receive payments over a period not to exceed ten years.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses increased $0.6 million, or
14%, for the quarter and $2.3 million, or 33%, for the six-month period related
to the new Senior Executive Vice President position and higher than normal
marketing expenses, partially offset by lower benefit-related expenses for the
quarter.
18
INCOME TAX EXPENSE
Our income tax provision consists primarily of foreign income tax related
to our international networks and withholding tax on licensing income for which
we do not receive a current U.S. income tax benefit. The tax provision also
includes deferred federal and state income tax related to the amortization of
goodwill and other indefinite-lived intangibles, which cannot be offset against
deferred tax assets due to the indefinite reversal period of the deferred tax
liabilities. The tax provision for the six-month period reflects a benefit of
approximately $1.0 million from the reversal of deferred income taxes provided
in prior periods relating to the tax amortization of the Sarah Coventry
trademarks and service marks, which we sold in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had $30.7 million in cash and cash equivalents
compared to $31.3 million in cash and cash equivalents at December 31, 2003.
Total financing obligations were $80.0 million at June 30, 2004, compared to
$115.0 million at December 31, 2003.
At June 30, 2004, our liquidity requirements were being provided by the
cash generated from our March 2003 $115.0 million offering of 11.00% senior
secured notes due 2010 and the net proceeds from our April 2004 public offering
of Class B shares. In addition, we have a $20.0 million revolving credit
facility. At June 30, 2004, there were no borrowings and $9.6 million in letters
of credit outstanding under this facility. We believe that cash on hand,
operating cash flows, together with funds available under our credit facility
and potential access to credit and capital markets will be sufficient to meet
our operating expenses, capital expenditures, debt service requirements and
other contractual obligations as they become due.
On April 26, 2004, we completed a public offering of 6,021,340 Class B
shares at $12.69 per share, before underwriting discounts. Included in this
offering were 4,385,392 shares sold by Playboy, 1,485,948 shares sold by Hugh
Hefner and 150,000 shares sold by Christie Hefner. Playboy's shares included
3,600,000 initial shares, plus an additional 785,392 shares due to the
underwriters' exercise of their over-allotment option. The shares sold by Mr.
Hefner consisted of all of the shares of Class B common stock he received upon
conversion, at the time of the offering, of all of the outstanding shares of
Playboy Preferred Stock.
Net proceeds to us from the sale of our shares were approximately $51.9
million. On June 11, 2004, we used $39.8 million of the net proceeds of this
sale to redeem $35.0 million in aggregate principal of the outstanding 11.00%
senior secured notes due 2010, which included a $3.9 million bond redemption
premium and accrued and unpaid interest of $0.9 million. The balance of the net
proceeds will be used for general corporate purposes. As a result of the
redemption of the senior secured notes, we incurred second quarter charges of
$3.9 million for the bond redemption premium and $2.0 million for the non-cash
write-off of the related deferred financing costs.
DEBT FINANCINGS
On March 11, 2003, we completed the offering of $115.0 million in
aggregate principal amount of senior secured notes. 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 senior
secured 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.
Under the terms of the indenture governing the notes, we have the right at
any time prior to March 15, 2006, to redeem up to 35% of the original $115.0
million in aggregate principal amount of the notes, or $40.25 million, at a
redemption price of 111.0% of the principal amount of the notes redeemed, plus
accrued and unpaid interest, with the net cash proceeds from a qualifying equity
offering. On June 11, 2004, we used a portion of the net proceeds of the stock
offering to redeem $35.0 million in aggregate principal amount of the
outstanding notes, which reduced our financing obligations to $80.0 million.
19
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 a 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.
On May 1, 2003, we 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 with an aggregate stated value of $16.7 million. The Playboy
Preferred Stock accrued dividends at a rate of 8.00% per annum, which are paid
semi-annually.
The Playboy Preferred Stock was 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.
On April 26, 2004, Mr. Hefner converted his $16.7 million of Playboy
Preferred Stock into 1,485,948 shares of our Class B stock and sold these shares
as part of our public equity offering on that date. Mr. Hefner chose not to sell
the 1,122,209 shares that he had previously received in exchange for his
Holdings Series A Preferred Stock, as had been contemplated in our February 11,
2004 registration statement.
CALIFA ACQUISITION
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. 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 is paid in two equal
installments of $3.5 million, one of which was paid on May 3, 2004 and the other
will be paid on November 1, 2004.
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net cash used for operating activities was $4.4 million for the six-month
period, which represents use of an additional $5.8 million compared to the prior
year, primarily due to the payment of $6.5 million of the Logix settlement in
the first quarter of 2004.
CASH FLOWS USED FOR FINANCING ACTIVITIES
Net cash provided by financing activities was $4.9 million for the six
month period principally due to the $51.9 million of proceeds from the April
2004 public equity offering partially offset by the $35.0 million repayment of
senior secured notes, the payment of $4.5 million of Califa acquisition
liabilities and the payment of $3.9 million of debt extinguishment expenses
related to the bond redemption premium.
20
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. 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) The risk our outstanding litigation could result in settlements or
judgments which are material to us;
(7) Dilution from any potential issuance of additional common or convertible
preferred stock in connection with financings or acquisitions;
(8) Competition for advertisers from other publications, media or online
providers or any decrease in spending by advertisers, either generally or
with respect to the adult male market;
(9) Competition in the television, men's magazine, Internet and product
licensing markets;
(10) Attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(11) Our 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;
(12) Risks associated with losing access to transponders and competition for
transponders and channel space;
(13) 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;
(14) 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;
(15) Any charges or costs we incur in connection with cost reduction measures
we may take in the future;
(16) Risks associated with the financial condition of Claxson Interactive Group
Inc., our Playboy TV-Latin America, LLC joint venture partner;
(17) Increases in paper or printing costs;
(18) Effects of the national consolidation of the single-copy magazine
distribution system; and
(19) Uncertainty of the viability of our primarily subscription- and
e-commerce-based Internet model.
21
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. On June 11, 2004, we redeemed $35.0 million of
the $115.0 million outstanding balance. Therefore, the fair value of the $80.0
million senior secured notes will be influenced by changes in market rates and
our credit quality. At June 30, 2004, the notes were trading above par for an
implied fair value of $92.6 million.
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 quarterly 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 term is defined in Rules 13a-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.
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 approximately $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
approximately $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 5, Accounting for Contingencies, no liability has been
accrued.
22
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, or
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 April 12, 2004, Faherty filed suit in the United States District Court
for the Southern District of New York against Spice, Playboy, Playboy
Enterprises International Inc., or PEII, D. Keith Howington, Anne Howington and
Logix. The complaint alleges that Faherty is entitled to statutory and
contractual indemnification from Playboy, PEII and Spice. with respect to
defense costs and liabilities incurred by Faherty in the litigation described in
the preceding paragraph, or the Logix litigation. The complaint further alleges
that Playboy, PEII, Spice, D. Keith Howington, Anne Howington and Logix
conspired to deprive Faherty of his alleged right to indemnification by
excluding him from the settlement of the Logix litigation. On June 18, 2004, a
jury entered a special verdict finding Faherty personally liable for $22,541,846
in damages to the plaintiffs in the Logix litigation. A judgment was entered on
the verdict on or around August 2, 2004. We are advised that Faherty intends to
file post-trial motions and, if necessary, to appeal the verdict. We are further
advised by Faherty's trial counsel that there are grounds to believe that if the
jury verdict is reviewed by the trial court in connection with post-trial
motions or by the appellate court on appeal, the jury verdict may be reversed or
significantly modified to lower the amount of damages. In connection with
Faherty's intended appeal of the jury verdict in the Logix litigation, Faherty
and Playboy have agreed to seek a temporary stay of the indemnification action
filed in the United States District Court for the Southern District of New York.
In the event Faherty's indemnification and conspiracy claims go forward against
us, we believe they are without merit and that we have good defenses against
them. As such, based on the information known to us to date, we do not believe
that it is probable that a material judgment against us will result. In
accordance with Statement 5, Accounting for Contingencies, no liability has been
accrued.
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. In accordance with
Statement 5, Accounting for Contingencies, no liability has been accrued.
23
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of shareholders was held on May 13, 2004. At the
meeting, the following director nominees were elected:
Votes Votes
Nominee For Withheld
- --------------------------------------------------------------------------------
Dennis S. Bookshester 4,543,830 39,273
David I. Chemerow 4,036,273 546,830
Donald G. Drapkin 4,543,752 39,351
Christie A. Hefner 4,033,586 549,517
Jerome H. Kern 4,543,714 39,389
Russell I. Pillar 4,543,852 39,251
Sol Rosenthal 4,026,569 556,534
Richard S. Rosenzweig 4,033,012 550,091
- --------------------------------------------------------------------------------
Also at the meeting, the holders of our Class A common stock and Class B common
stock, each voting as a separate class, approved an amendment to the amended and
restated Certificate of Incorporation of Playboy Enterprises, Inc., with voting
as set forth below:
Class A Common Stock Class B Common Stock
- ---------------------------------------------------------------- -----------------------------------------------------------
Votes Votes Votes Votes Votes Votes
For Against Withheld Non-Vote For Against Withheld Non-Vote
- ---------------------------------------------------------------- -----------------------------------------------------------
4,509,666 72,347 1,090 -- 18,028,692 2,841,203 5,547 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
Also at the meeting, the holders of our Class A common stock, who were the only
holders entitled to vote on the matter, approved the ratification of Ernst &
Young LLP as independent auditors, with voting as set forth below:
Class A Common Stock
--------------------------------------------------------
Votes Votes Votes
For Against Withheld Non-Vote
--------------------------------------------------------
4,569,290 7,769 6,044 N/A
--------------------------------------------------------
24
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
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 Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Playboy Enterprises, Inc.
10.1* Playboy Magazine Distribution Agreement dated as of May 4,
2004 between Playboy Enterprises, Inc. and Warner Publisher
Services, Inc.
10.2* Fulfillment and Customer Service Services Agreement dated
January 2, 2004 between Infinity Resources, Inc. and
Playboy.com, Inc.
10.3 First Amendment to March 11, 2003 Credit Agreement dated July
30, 2004 among PEI Holdings, Inc., each lender from time to
time party thereto and Bank of America, N.A. as Agent
10.4 Second Amendment to August 11, 1992 Lease dated June 28, 2004
between Lexington Building Co. LLC and Playboy Enterprises
International, Inc.
10.5** Employment Agreement dated June 4, 2004 regarding employment
of James English
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
* Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment pursuant to Rule 24b-2 of the Securities and Exchange Act of
1934.
** Management contract
(b) Reports on Form 8-K
On April 9, 2004, we furnished a Current Report on Form 8-K, dated April
9, 2004, under Item 12., attaching additional financial information relating to
our operating performance for fiscal 2003, 2002 and 2001.
On May 6, 2004, we furnished a Current Report on Form 8-K, dated May 6,
2004, under Items 9. and 12., attaching our press release announcing our
financial results for the first quarter of 2004.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date: August 9, 2004 By /s/ Linda Havard
-------------- -------------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
26