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 September 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 October 31, 2004, there were 4,864,102 shares of Class A common stock,
par value $0.01 per share, and 28,513,005 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 Income (Loss) for the Quarters Ended September 30,
2004 and 2003 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Nine Months Ended September 30,
2004 and 2003 (Unaudited) 4
Condensed Consolidated Balance Sheets at September 30,
2004 (Unaudited) and December 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 25
2
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2004 2003
- -------------------------------------------------------------------------------
Net revenues $ 80,258 $ 74,448
- -------------------------------------------------------------------------------
Costs and expenses
Cost of sales (59,314) (54,304)
Selling and administrative expenses (14,239) (14,483)
- -------------------------------------------------------------------------------
Total costs and expenses (73,553) (68,787)
- -------------------------------------------------------------------------------
Operating income 6,705 5,661
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 114 95
Interest expense (2,928) (4,254)
Amortization of deferred financing fees (275) (375)
Minority interest (364) (345)
Other, net (96) (242)
- -------------------------------------------------------------------------------
Total nonoperating expense (3,549) (5,121)
- -------------------------------------------------------------------------------
Income before income taxes 3,156 540
Income tax expense (1,229) (1,150)
- -------------------------------------------------------------------------------
Net income (loss) 1,927 (610)
- -------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gain on marketable securities -- 153
Unrealized gain (loss) on derivatives (3) 20
Foreign currency translation adjustments 99 82
- -------------------------------------------------------------------------------
Total other comprehensive income 96 255
- -------------------------------------------------------------------------------
Comprehensive income (loss) $ 2,023 $ (355)
===============================================================================
Net income (loss) $ 1,927 $ (610)
Dividend requirements of preferred stock -- (334)
- -------------------------------------------------------------------------------
Net income (loss) applicable to common shareholders $ 1,927 $ (944)
===============================================================================
Weighted average number of common shares outstanding
Basic 33,371 27,437
===============================================================================
Diluted 33,384 27,437
===============================================================================
Basic and diluted earnings per common share $ 0.06 $ (0.03)
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
2004 2003
- -------------------------------------------------------------------------------
Net revenues $ 239,845 $ 224,700
- -------------------------------------------------------------------------------
Costs and expenses
Cost of sales (179,742) (162,834)
Selling and administrative expenses (42,785) (41,237)
- -------------------------------------------------------------------------------
Total costs and expenses (222,527) (204,071)
- -------------------------------------------------------------------------------
Gain on disposal 2 --
- -------------------------------------------------------------------------------
Operating income 17,320 20,629
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 337 264
Interest expense (10,737) (12,032)
Amortization of deferred financing fees (1,007) (1,022)
Minority interest (1,066) (1,309)
Debt extinguishment expenses (5,908) (3,264)
Other, net (793) (664)
- -------------------------------------------------------------------------------
Total nonoperating expense (19,174) (18,027)
- -------------------------------------------------------------------------------
Income (loss) before income taxes (1,854) 2,602
Income tax expense (2,622) (3,485)
- -------------------------------------------------------------------------------
Net loss (4,476) (883)
- -------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gain on marketable securities 107 415
Unrealized gain on derivatives 34 619
Foreign currency translation adjustments (209) (156)
- -------------------------------------------------------------------------------
Total other comprehensive income (loss) (68) 878
- -------------------------------------------------------------------------------
Comprehensive loss $ (4,544) $ (5)
===============================================================================
Net loss $ (4,476) $ (883)
Dividend requirements of preferred stock (428) (557)
- -------------------------------------------------------------------------------
Net loss applicable to common shareholders $ (4,904) $ (1,440)
===============================================================================
Basic and diluted weighted average number
of common shares outstanding 30,978 26,881
===============================================================================
Basic and diluted earnings per common share $ (0.16) $ (0.05)
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Sept. 30, Dec. 31,
2004 2003
- ----------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 32,037 $ 31,332
Marketable securities 3,672 3,546
Receivables, net of allowance for doubtful accounts of
$4,640 and $4,364, respectively 39,855 52,230
Receivables from related parties 1,489 1,226
Inventories, net 14,041 12,017
Deferred subscription acquisition costs 12,359 11,759
Other current assets 8,353 10,208
- ----------------------------------------------------------------------------------------------
Total current assets 111,806 122,318
- ----------------------------------------------------------------------------------------------
Property and equipment, net 11,672 12,020
Long-term receivables 2,755 --
Programming costs, net 58,209 57,426
Goodwill 111,893 111,893
Trademarks 55,263 58,159
Distribution agreements, net of accumulated amortization
of $1,573 and $970, respectively 31,566 32,170
Other noncurrent assets 19,310 24,074
- ----------------------------------------------------------------------------------------------
Total assets $ 402,474 $ 418,060
==============================================================================================
Liabilities
Acquisition liabilities $ 10,065 $ 15,392
Accounts payable 20,251 22,899
Accrued salaries, wages and employee benefits 7,425 11,472
Deferred revenues 50,406 53,963
Accrued litigation settlement 1,000 6,500
Other liabilities and accrued expenses 16,990 19,088
- ----------------------------------------------------------------------------------------------
Total current liabilities 106,137 129,314
- ----------------------------------------------------------------------------------------------
Financing obligations 80,000 115,000
Acquisition liabilities, less current portion 21,849 26,982
Net deferred tax liabilities 14,497 13,877
Accrued litigation settlement, less current portion 1,000 2,000
Other noncurrent liabilities 13,081 13,170
- ----------------------------------------------------------------------------------------------
Total liabilities 236,564 300,343
- ----------------------------------------------------------------------------------------------
Minority interest 12,147 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; 28,509,664 and 22,579,363 issued, respectively 285 226
Capital in excess of par value 222,330 152,969
Accumulated deficit (67,414) (62,510)
Unearned compensation - restricted stock (362) --
Accumulated other comprehensive loss (1,125) (1,057)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 153,763 106,636
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 402,474 $ 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 Nine Months Ended September 30 (Unaudited)
(In thousands)
2004 2003
- --------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (4,476) $ (883)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation of property and equipment 2,390 2,962
Amortization of intangible assets 1,711 4,240
Amortization of investments in entertainment programming 31,984 29,216
Amortization of deferred financing fees 1,007 1,022
Debt extinguishment expenses 5,908 3,264
Deferred income taxes 534 222
Net change in operating assets and liabilities (435) (6,143)
Investments in entertainment programming (34,211) (34,461)
Litigation settlement (6,500) --
Other, net 710 1,074
- --------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (1,378) 513
- --------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals 150 116
Additions to property and equipment (2,308) (4,280)
Other, net 201 105
- --------------------------------------------------------------------------------------
Net cash used for investing activities (1,957) (4,059)
- --------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 115,000
Proceeds from public equity offering 51,844 --
Repayment of financing obligations (35,000) (65,767)
Payment of debt extinguishment expenses (3,850) (356)
Payment of acquisition liabilities (8,691) (14,892)
Payment of deferred financing fees -- (9,023)
Payment of preferred stock dividends (651) --
Proceeds from stock plans 407 253
Other (19) --
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 4,040 25,215
- --------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 705 21,669
Cash and cash equivalents at beginning of period 31,332 4,118
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 32,037 $ 25,787
======================================================================================
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
Through September 30, 2004, we have made cash payments of $1.2 million on
our 2002 and 2001 restructuring plans. Approximately $8.3 million of the total
restructuring charges of $10.3 million for those plans, net of non-cash
adjustments, has been paid as of September 30, 2004 with most of the remainder
to be paid by the end of 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 nine months ended September
30, 2004 (in thousands):
Consolidation
Workforce of Facilities
Reduction and 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 (453) (793) (1,246)
- -------------------------------------------------------------------------------
Balance at September 30, 2004 $ 177 $ 1,770 $ 1,947
===============================================================================
7
(C) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share, or EPS (in thousands, except per share amounts):
(Unaudited)
Quarters Ended
September 30,
--------------------
2004 2003
- -------------------------------------------------------------------------------------------------------
Numerator:
For basic and diluted EPS - net income (loss) applicable to common shareholders $ 1,927 $ (944)
=======================================================================================================
Denominator:
For basic EPS - weighted-average shares 33,371 27,437
Effect of dilutive potential common shares:
Employee stock options and other 13 --
- -------------------------------------------------------------------------------------------------------
Dilutive potential common shares 13 --
- -------------------------------------------------------------------------------------------------------
For diluted EPS - weighted-average shares 33,384 27,437
=======================================================================================================
The following table represents the approximate number of shares related to
options to purchase our Class B common stock, or Class B stock, that were
outstanding but were not included in the computation of diluted EPS, as the
inclusion of these shares would have been antidilutive (in thousands):
Quarters Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2004 2003 2004 2003
- --------------------------------------------------------------------------------
Stock options 3,262 2,875 2,636 3,155
Preferred stock -- 1,535 -- 1,535
- --------------------------------------------------------------------------------
Total 3,262 4,410 2,636 4,690
================================================================================
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.
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):
Sept. 30, Dec. 31,
2004 2003
- --------------------------------------------------------------------------------
Paper $ 2,594 $ 2,613
Editorial and other prepublication costs 8,322 6,082
Merchandise finished goods 3,125 3,322
- --------------------------------------------------------------------------------
Total inventories, net $ 14,041 $ 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.
8
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 35.0% 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 nine months ended September 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.
9
(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 income (loss) and net income (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 $2.1 million for the quarter and
the nine-month period ended September 30, 2004, respectively.
Quarters Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2004 2003 2004 2003
- -------------------------------------------------------------------------------
Net income (loss)
As reported $ 1,927 $ (610) $ (4,476) $ (883)
Pro forma (1) 1,238 (1,321) (6,567) (2,311)
Basic and diluted EPS
As reported $ 0.06 $ (0.03) $ (0.16) $ (0.05)
Pro forma (1) 0.04 (0.06) (0.23) (0.11)
- -------------------------------------------------------------------------------
(1) Amounts for the prior year nine-month period reflect the cancellation of a
significant number of stock options.
(I) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
Quarters Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Net revenues
Entertainment $ 36,380 $ 33,598 $105,682 $100,559
Publishing 29,521 28,444 88,291 83,882
Online 9,773 8,981 30,335 26,532
Licensing 4,584 3,425 15,537 13,727
- ------------------------------------------------------------------------------------------
Total $ 80,258 $ 74,448 $239,845 $224,700
==========================================================================================
Income (loss) before income taxes
Entertainment $ 6,719 $ 6,773 $ 15,459 $ 21,251
Publishing 1,275 980 5,239 2,889
Online 1,083 474 2,997 898
Licensing 2,614 1,775 7,564 6,689
Corporate Administration and Promotion (4,986) (4,341) (13,941) (11,098)
Gain on disposal -- -- 2 --
Investment income 114 95 337 264
Interest expense (2,928) (4,254) (10,737) (12,032)
Amortization of deferred financing fees (275) (375) (1,007) (1,022)
Minority interest (364) (345) (1,066) (1,309)
Debt extinguishment expenses -- -- (5,908) (3,264)
Other, net (96) (242) (793) (664)
- ------------------------------------------------------------------------------------------
Total $ 3,156 $ 540 $ (1,854) $ 2,602
==========================================================================================
10
Sept. 30, Dec. 31,
2004 2003
- --------------------------------------------------------------------------------
Identifiable assets
Entertainment $261,761 $265,056
Publishing 41,982 48,462
Online 6,407 5,493
Licensing 6,173 8,199
Corporate Administration and Promotion 86,151 90,850
- --------------------------------------------------------------------------------
Total $402,474 $418,060
================================================================================
On October 15, 2004, we announced a change in our segment reporting. See Note
(K) Subsequent Event for additional information.
(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 Mr.
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 $51.8
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 amount 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 the 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) SUBSEQUENT EVENT
On October 15, 2004, we announced the realignment of our existing Online
and Entertainment businesses into a combined Playboy Entertainment Group. The
new operating structure is designed to streamline operations, maximize return on
content creation and increase responsiveness to customers, but it is not
expected to yield significant cost savings. We expect to take a restructuring
charge of approximately $0.5 million in the fourth quarter as a result of the
consolidation. The new structure will result in a change in segment reporting
effective October 1, 2004 and had no impact on the current quarter financial
reporting.
(L) 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 nine months ended September 30,
2004 and 2003, the Condensed Consolidating Balance Sheets at September 30, 2004
and December 31, 2003 and the Condensed Consolidating Statements of Cash Flows
for the nine months ended September 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.
11
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Quarter Ended September 30, 2004 (Unaudited)
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 64,185 $ 20,551 $ (4,478) $ 80,258
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (47,977) (15,815) 4,478 (59,314)
Selling and administrative expenses -- -- (11,479) (2,760) -- (14,239)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (59,456) (18,575) 4,478 (73,553)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 4,729 1,976 -- 6,705
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 114 14 (14) 114
Interest expense -- (2,216) (711) (15) 14 (2,928)
Amortization of deferred
financing fees -- (275) -- -- -- (275)
Minority interest -- -- (364) -- -- (364)
Equity income from subsidiaries 1,927 4,501 1,698 -- (8,126) --
Other, net -- (83) 9 (22) -- (96)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income
(expense) 1,927 1,927 746 (23) (8,126) (3,549)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,927 1,927 5,475 1,953 (8,126) 3,156
Income tax expense -- -- (974) (255) -- (1,229)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,927 $ 1,927 $ 4,501 $ 1,698 $ (8,126) $ 1,927
===================================================================================================================================
Quarter Ended September 30, 2003 (Unaudited)
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 61,190 $ 17,589 $ (4,331) $ 74,448
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (45,211) (13,424) 4,331 (54,304)
Selling and administrative expenses -- -- (11,721) (2,762) -- (14,483)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (56,932) (16,186) 4,331 (68,787)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 4,258 1,403 -- 5,661
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 120 2 (27) 95
Interest expense -- (3,174) (1,080) (27) 27 (4,254)
Amortization of deferred
financing fees -- (375) -- -- -- (375)
Minority interest -- -- (345) -- -- (345)
Equity income (loss) from subsidiaries (610) 3,055 1,003 -- (3,448) --
Other, net -- (116) (86) (40) -- (242)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (610) (610) (388) (65) (3,448) (5,121)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (610) (610) 3,870 1,338 (3,448) 540
Income tax expense -- -- (815) (335) -- (1,150)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (610) $ (610) $ 3,055 $ 1,003 $ (3,448) $ (610)
===================================================================================================================================
12
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
Nine Months Ended September 30, 2004 (Unaudited)
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 190,839 $ 61,731 $(12,725) $ 239,845
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (145,732) (46,735) 12,725 (179,742)
Selling and administrative expenses -- -- (34,429) (8,356) -- (42,785)
Restructuring expenses -- -- 31 (31) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (180,130) (55,122) 12,725 (222,527)
- -----------------------------------------------------------------------------------------------------------------------------------
Gain on disposal -- -- 2 -- -- 2
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 10,711 6,609 -- 17,320
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 352 37 (52) 337
Interest expense -- (8,350) (2,387) (52) 52 (10,737)
Amortization of deferred
financing fees -- (1,007) -- -- -- (1,007)
Minority interest -- -- (1,066) -- -- (1,066)
Debt extinguishment expenses -- (5,908) -- -- -- (5,908)
Equity income (loss) from subsidiaries (4,476) 11,115 5,880 -- (12,519) --
Other, net -- (326) (351) (116) -- (793)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income
(expense) (4,476) (4,476) 2,428 (131) (12,519) (19,174)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4,476) (4,476) 13,139 6,478 (12,519) (1,854)
Income tax expense -- -- (2,024) (598) -- (2,622)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,476) $ (4,476) $ 11,115 $ 5,880 $(12,519) $ (4,476)
===================================================================================================================================
Nine Months Ended September 30, 2003 (Unaudited)
---------------------------------------------------------------------------------------
Playboy Non- Playboy
Enterprises, Holdings Guarantor Guarantor Enterprises,
Inc. (Parent) (Issuer) Subsidiaries Subsidiaries Eliminations Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Net revenues $ -- $ -- $ 184,424 $ 52,805 $(12,529) $ 224,700
- -----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales -- -- (134,563) (40,800) 12,529 (162,834)
Selling and administrative expenses -- -- (33,112) (8,125) -- (41,237)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses -- -- (167,675) (48,925) 12,529 (204,071)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income -- -- 16,749 3,880 -- 20,629
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income -- -- 318 36 (90) 264
Interest expense -- (8,119) (3,476) (527) 90 (12,032)
Amortization of deferred
financing fees -- (998) -- (24) -- (1,022)
Minority interest (297) -- (1,012) -- -- (1,309)
Debt extinguishment expenses -- (3,061) -- (203) -- (3,264)
Equity income (loss) from subsidiaries (586) 11,843 1,783 -- (13,040) --
Other, net -- (251) (294) (119) -- (664)
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (883) (586) (2,681) (837) (13,040) (18,027)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (883) (586) 14,068 3,043 (13,040) 2,602
Income tax expense -- -- (2,225) (1,260) -- (3,485)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (883) $ (586) $ 11,843 $ 1,783 $(13,040) $ (883)
===================================================================================================================================
13
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
September 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 $ -- $ -- $ 26,312 $ 5,725 $ -- $ 32,037
Marketable securities -- -- 3,672 -- -- 3,672
Receivables, net of allowance for
doubtful accounts -- -- 33,243 6,612 -- 39,855
Receivables from related parties -- -- 1,480 9 -- 1,489
Inventories, net -- -- 11,600 2,441 -- 14,041
Deferred subscription acquisition
costs -- -- 12,359 -- -- 12,359
Other current assets -- -- 5,808 2,545 -- 8,353
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets -- -- 94,474 17,332 -- 111,806
- -----------------------------------------------------------------------------------------------------------------------------------
Receivables from affiliates -- 75,446 33,782 -- (109,228) --
Property and equipment, net -- -- 10,146 1,526 -- 11,672
Long-term receivables -- -- 2,755 -- -- 2,755
Programming costs, net -- -- 56,565 1,644 -- 58,209
Goodwill -- -- 111,370 523 -- 111,893
Trademarks -- -- 55,263 -- -- 55,263
Distribution agreements, net of
accumulated amortization -- -- 31,566 -- -- 31,566
Investment in subsidiaries 153,763 153,763 (24,224) -- (283,302) --
Other noncurrent assets -- 5,043 14,210 57 -- 19,310
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 153,763 $ 234,252 $ 385,907 $ 21,082 $(392,530) $ 402,474
===================================================================================================================================
Liabilities
Acquisition liabilities $ -- $ -- $ 9,600 $ 465 $ -- $ 10,065
Accounts payable -- 98 14,230 5,923 -- 20,251
Accrued salaries, wages and
employee benefits -- -- 7,284 141 -- 7,425
Deferred revenues -- -- 44,334 6,072 -- 50,406
Accrued litigation settlement -- -- 1,000 -- -- 1,000
Other liabilities and accrued expenses -- 391 16,152 447 -- 16,990
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities -- 489 92,600 13,048 -- 106,137
- -----------------------------------------------------------------------------------------------------------------------------------
Financing obligations -- 80,000 -- -- -- 80,000
Financing obligations to affiliates -- -- 84,093 25,135 (109,228) --
Acquisition liabilities, less current portion -- -- 15,888 5,961 -- 21,849
Net deferred tax liabilities -- -- 14,497 -- -- 14,497
Accrued litigation settlement, less
current portion -- -- 1,000 -- -- 1,000
Other noncurrent liabilities -- -- 11,919 1,162 -- 13,081
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities -- 80,489 219,997 45,306 (109,228) 236,564
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- 12,147 -- -- 12,147
Shareholders' equity 153,763 153,763 153,763 (24,224) (283,302) 153,763
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 153,763 $ 234,252 $ 385,907 $ 21,082 $(392,530) $ 402,474
===================================================================================================================================
14
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
===================================================================================================================================
15
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 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 $ -- $ (12,043) $ (4,570) $ 15,235 $ -- $ (1,378)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 150 -- -- 150
Additions to property and equipment -- -- (1,417) (891) -- (2,308)
Other, net -- -- 201 -- -- 201
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (1,066) (891) -- (1,957)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from public equity offering 51,844 -- -- -- -- 51,844
Repayment of financing obligations -- (35,000) -- -- -- (35,000)
Payment of debt extinguishment expenses -- (3,850) -- -- -- (3,850)
Payment of acquisition liabilities -- -- (6,965) (1,726) -- (8,691)
Payment of preferred stock dividends (651) -- -- -- -- (651)
Proceeds from stock plans 407 -- -- -- -- 407
Other, net (19) -- -- -- -- (19)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 51,581 (38,850) (6,965) (1,726) -- 4,040
- -------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (51,581) 50,893 14,468 (13,780) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents -- -- 1,867 (1,162) -- 705
Cash and cash equivalents
at beginning of period -- -- 24,445 6,887 -- 31,332
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 26,312 $ 5,725 $ -- $ 32,037
===============================================================================================================================
Nine Months Ended September 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) $ (8,398) $ 5,352 $ 3,745 $ -- $ 513
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from disposals -- -- 116 -- -- 116
Additions to property and equipment -- -- (3,537) (743) -- (4,280)
Other, net -- -- 102 3 -- 105
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (3,319) (740) -- (4,059)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations -- 115,000 -- -- -- 115,000
Repayment of financing obligations -- (65,267) -- (500) -- (65,767)
Payment of debt extinguishment
expenses -- (356) -- -- -- (356)
Payment of acquisition liabilities -- -- (13,145) (1,747) -- (14,892)
Payment of deferred financing fees -- (9,023) -- -- -- (9,023)
Other, net 253 -- -- -- -- 253
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 253 40,354 (13,145) (2,247) -- 25,215
- -------------------------------------------------------------------------------------------------------------------------------
Net receipts from (payments to)
subsidiaries (67) (31,956) 35,527 (3,504) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents -- -- 24,415 (2,746) -- 21,669
Cash and cash equivalents
at beginning of period -- -- (1,908) 6,026 -- 4,118
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of period $ -- $ -- $ 22,507 $ 3,280 $ -- $ 25,787
===============================================================================================================================
16
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 24.5 $ 23.9 $ 71.4 $ 71.2
International TV 10.5 8.2 30.3 25.1
Worldwide DVD/home video 1.3 1.4 3.6 3.9
Other 0.1 0.1 0.4 0.4
- ---------------------------------------------------------------------------------------------
Total Entertainment 36.4 33.6 105.7 100.6
- ---------------------------------------------------------------------------------------------
Publishing
Playboy magazine
Subscription 12.5 12.7 38.6 37.6
Newsstand 2.7 3.4 9.6 10.1
Advertising 9.4 6.9 26.6 22.4
Other domestic publishing 3.4 4.0 8.9 9.7
International publishing 1.5 1.5 4.6 4.1
- ---------------------------------------------------------------------------------------------
Total Publishing 29.5 28.5 88.3 83.9
- ---------------------------------------------------------------------------------------------
Online
Subscriptions 5.3 4.7 15.4 13.0
E-commerce 3.4 3.5 12.0 10.7
Other 1.0 0.7 2.9 2.8
- ---------------------------------------------------------------------------------------------
Total Online 9.7 8.9 30.3 26.5
- ---------------------------------------------------------------------------------------------
Licensing
International licensing 3.1 2.3 8.9 5.7
Domestic licensing 0.8 0.7 2.4 2.3
Entertainment licensing 0.5 0.4 1.5 1.0
Artwork sales -- -- -- 1.9
Marketing events 0.2 -- 2.7 2.8
- ---------------------------------------------------------------------------------------------
Total Licensing 4.6 3.4 15.5 13.7
- ---------------------------------------------------------------------------------------------
Total net revenues $ 80.2 $ 74.4 $ 239.8 $ 224.7
=============================================================================================
Net income (loss)
Entertainment
Before programming expense $ 17.3 $ 16.4 $ 47.4 $ 50.4
Programming expense (10.5) (9.7) (32.0) (29.2)
- ---------------------------------------------------------------------------------------------
Total Entertainment 6.8 6.7 15.4 21.2
- ---------------------------------------------------------------------------------------------
Publishing 1.2 1.0 5.2 2.9
- ---------------------------------------------------------------------------------------------
Online 1.1 0.5 3.0 0.9
- ---------------------------------------------------------------------------------------------
Licensing 2.6 1.8 7.6 6.7
- ---------------------------------------------------------------------------------------------
Corporate Administration and Promotion (5.0) (4.4) (13.9) (11.1)
- ---------------------------------------------------------------------------------------------
Operating income 6.7 5.6 17.3 20.6
- ---------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.1 0.1 0.3 0.3
Interest expense (2.9) (4.2) (10.7) (12.0)
Amortization of deferred financing fees (0.3) (0.3) (1.0) (1.0)
Minority interest (0.4) (0.3) (1.1) (1.3)
Debt extinguishment expenses -- -- (5.9) (3.3)
Other, net (0.1) (0.3) (0.8) (0.7)
- ---------------------------------------------------------------------------------------------
Total nonoperating expense (3.6) (5.0) (19.2) (18.0)
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes 3.1 0.6 (1.9) 2.6
Income tax expense (1.2) (1.2) (2.6) (3.5)
- ---------------------------------------------------------------------------------------------
Net income (loss) $ 1.9 $ (0.6) $ (4.5) $ (0.9)
=============================================================================================
Basic and diluted EPS $ 0.06 $ (0.03) $ (0.16) $ (0.05)
=============================================================================================
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our revenues increased approximately 8% for the quarter and 7% for the
nine-month period due to higher revenues from all of our groups.
Operating income increased $1.1 million for the quarter due to improved
operating results from each of our groups, except Entertainment, which was flat.
Operating income was $3.3 million lower for the nine-month period due to lower
income from our Entertainment Group as a result of a one-time retroactive
revenue rate adjustment in the second quarter and higher programming
amortization, as well as a planned increase in Corporate Administration and
Promotion expenses. The impact of these factors was partially offset by improved
operating income performance from Publishing, Online and Licensing.
Net income for the quarter was a result of higher operating income
compared to the prior year period as well as lower interest expense, due to the
redemption of $35.0 million aggregate principal amount of our 11.0% senior
secured notes due 2010, as previously discussed. The net loss for the nine-month
period includes $5.9 million of debt extinguishment expenses related to the
redemption, 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 nine-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 increased $0.6 million, or
2%, for the quarter. For the nine-month period, domestic TV networks returned to
growth with an increase of $0.2 million, or 3%, over the prior year period. The
revenue increases for both the quarter and the nine-month period resulted
largely from an increase in direct-to-home, or DTH, subscribers and an increase
in video on demand, or VOD, revenues, which were 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 in both periods. These revenue increases for the quarter
and the nine-month period were partially offset by a decrease in pay-per-view
buys. Revenues were also negatively impacted in both periods as a result of some
affiliates of Time Warner Cable Inc., one of our major multiple systems
operators, or MSOs, replacing our movie networks with other adult programming.
In July 2004, we signed a new carriage agreement with Time Warner, which is
expected to enable us to regain market share via VOD. A one-time $1.5 million
unfavorable adjustment to movie network revenues from the unanticipated
retroactive rate reduction related to the 2002 acquisition of one large MSO by
another was also included in the nine-month period.
Revenues from our international TV business increased $2.3 million, or
29%, for the quarter. For the nine-month period, international TV revenues were
up $5.2 million, or 21%. The increase in both periods is attributed to higher
DTH and cable revenues in the U.K. resulting from the launch of three new cable
channels.
The group's administrative expenses were flat for the quarter. For the
nine-month period, administrative expenses increased 13% due in part to a
contractually obligated severance charge, as well as higher legal and technology
costs.
As a result of the above, the group's segment income before programming
expense increased $0.9 million for the quarter. Segment income before
programming expense was $3.0 million lower for the nine-month period.
Programming amortization increased $0.8 million, or 8%, and $2.8 million,
or 9%, for the quarter and the nine-month period, respectively, due to the mix
of programming. We are on track for our programming amortization to be
approximately $41.0 million for the year and our programming cash expenditures
to be approximately $44.0 million for the year, or flat compared to 2003
amounts.
18
PUBLISHING GROUP
Playboy magazine revenues increased $1.6 million, or 7%, and $4.7 million,
or 7%, for the quarter and the nine-month period, respectively. Newsstand
revenues decreased $0.7 million for the quarter due to strong-selling issues in
the prior year periods. For the nine-month period, newsstand revenues were down
$0.5 million. Advertising pages and revenues increased 42% and $2.5 million,
respectively, for the quarter. For the nine-month period, advertising pages and
revenues increased 21% and $4.2 million, respectively. Subscription revenues
decreased $0.2 million for the quarter and increased $1.0 million for the
nine-month period. The increase for the nine months was primarily due to a
favorable adjustment for paid subscriptions that will not be served, combined
with higher list rental revenues in the current year. Ad sales for the 2004
fourth quarter magazine issues are closed, and we expect to report 30% lower ad
revenues and 25% fewer ad pages compared to the 2003 fourth quarter. This
anticipated decline is due to the Playboy 50th Anniversary issue in the prior
year that had approximately 60 more ad pages compared to the current year
comparative issue. We expect to close the year with approximately 20 more ad
pages and flat revenues in 2004 compared to 2003.
Revenues from our other domestic publishing businesses decreased $0.6
million, or 15%, and $0.8 million, or 8%, for the quarter and the nine-month
period, respectively, primarily due to two fewer calendars published in the
current year periods. Also contributing to the decline in the nine-month period
were fewer copies sold and higher display costs for special editions, mostly
offset by royalties from Hef's Little Black Book and Playboy: 50 Years: The
Photographs.
International publishing revenues were flat for the quarter and increased
$0.5 million, or 12%, for the nine-month period primarily due to higher revenues
from the Brazilian edition.
The group's segment income increased $0.2 million and $2.3 million for the
quarter and the nine-month period, respectively, attributable to the higher
revenues partially offset by higher editorial costs for both periods.
ONLINE GROUP
Online Group revenues increased $0.8 million, or 9%, and $3.8 million, or
14%, for the quarter and the nine-month period, respectively. Subscription
revenues increased $0.6 million, or 13%, for the quarter and $2.4 million, or
18%, for the nine-month period primarily due to increases in our revenues per
subscriber of 5% for the quarter and 13% for the nine-month period, as customers
are choosing additional higher priced offerings as well as an overall increase
in total subscribers. E-commerce revenues were flat for the quarter, due to the
timing of catalog circulation, and increased by $1.3 million, or 12%, for the
nine-month period as a result of increased email campaigns and special offers
combined with increased catalog circulation. The group's segment income
increased $0.6 million, or 128%, and $2.1 million, or 230%, for the quarter and
the nine-month period, respectively, attributable to the higher revenues,
partially offset by increases in related costs and higher marketing expenses.
LICENSING GROUP
Licensing Group revenues increased $1.2 million, or 34%, and $1.8 million,
or 13%, for the quarter and the nine-month period, respectively. International
revenues increased $0.8 million for the quarter and $3.2 million for the
nine-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 nine-month period, the increase in international revenues
was partially offset by the sale in the prior year period of an original
painting by Salvador Dali for $1.9 million. Segment income increased $0.8
million and $0.9 million for the quarter and the nine-month period,
respectively, due to increased royalties in both periods which were partially
offset by higher related expenses and, for the nine-month period, 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
15%, for the quarter. They were $2.8 million, or 25%, higher for the nine-month
period. The quarter was impacted by higher legal expenses partially offset by
lower benefit-related expenses. The increase in expenses for the nine-month
period was related to the new Senior Executive Vice President position, together
with higher marketing, consulting and legal expenses.
19
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 nine-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 September 30, 2004, we had $32.0 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 September 30, 2004, compared
to $115.0 million at December 31, 2003.
Our cash position at September 30, 2004 included cash provided from our
March 2003 $115.0 million offering of 11.00% senior secured notes due 2010, the
net proceeds from our April 2004 public offering of Class B shares and cash from
operations. We also have a $30.0 million revolving credit facility, which was
increased from $20.0 million in September 2004. In addition, we amended the
facility to extend the term to September 1, 2007 and to decrease the applicable
margin by 1.0% on all borrowings and letters of credit. At September 30, 2004,
there were no borrowings and $10.0 million in letters of credit outstanding
under this facility. We believe that cash on hand and 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 Mr.
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 $51.8
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 amount 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.
20
FINANCING FROM RELATED PARTY
At December 31, 2002, Playboy.com had an aggregate of $32.0 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 were 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 gives 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
of which was paid on November 1, 2004.
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net cash used for operating activities was $1.4 million for the nine-month
period, which represents use of an additional $1.9 million compared to the prior
year, which includes the payment of $6.5 million of the Logix settlement in the
first quarter of 2004.
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $4.0 million for the
nine-month period principally due to the $51.8 million of net proceeds from the
April 2004 public equity offering partially offset by the $35.0 million
repayment of senior secured notes, the payment of $8.7 million of acquisition
liabilities and the payment of $3.9 million of debt extinguishment expenses
related to the bond redemption premium.
21
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,
television, including 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;
(3) Our ability to manage the risk associated with our exposure to foreign
currency exchange rate fluctuations;
(4) Changes in general economic conditions, consumer spending habits, viewing
patterns, fashion trends or the retail sales environment which, in each
case, could reduce demand for our programming and products and impact our
advertising revenues;
(5) Our ability to protect our trademarks, copyrights and other intellectual
property;
(6) 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;
(7) The risk our outstanding litigation could result in settlements or
judgments which are material to us;
(8) Dilution from any potential issuance of additional common or convertible
preferred stock in connection with financings or acquisition activities;
(9) 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;
(10) Competition in the television, men's magazine, Internet and product
licensing markets;
(11) Attempts by consumers or private advocacy groups to exclude our
programming or other products from distribution;
(12) 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;
(13) Risks associated with losing access to transponders and competition for
transponders and channel space;
(14) 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;
(15) 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;
(16) Any charges or costs we incur in connection with restructuring measures we
may take in the future;
(17) Risks associated with the financial condition of Claxson Interactive Group
Inc., our Playboy TV-Latin America, LLC joint venture partner;
(18) Increases in paper or printing costs;
(19) Effects of the national consolidation of the single-copy magazine
distribution system; and
(20) Uncertainty of the viability of our primarily subscription- and
e-commerce-based Internet model.
22
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. The fair value of the $80.0 million
senior secured notes will be influenced by changes in market rates and our
credit quality. At September 30, 2004, the notes were trading above par for an
implied fair value of $92.1 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.
23
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. Faherty filed post-trial motions for a judgment
notwithstanding the verdict and a new trial, but these motions were both denied
on or about September 21, 2004. On October 20, 2004, Faherty filed a notice of
appeal from the verdict. In consideration of this appeal 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 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. The parties are engaged in discovery. We believe that we have good
defenses against Directrix's claims. 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.
24
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
*10.1 Affiliation Agreement dated July 8, 2004 between Playboy
Entertainment Group, Inc., Spice Entertainment, Inc., Spice
Hot Entertainment, Inc., and Time Warner Cable Inc.
10.2 Second Amendment to April 23, 2002 Lease dated September 23,
2004 between Los Angeles Media Tech Center, LLC and Playboy
Enterprises, Inc.
10.3 Second Amendment, dated September 15, 2004, to the Credit
Agreement, dated March 11, 2003, among PEI Holdings, Inc.,
each lender from time to time party thereto and Bank of
America, N.A., as Agent.
10.4 First Amendment, dated September 15, 2004, to Deed of Trust
With Assignment of Rents, Security Agreement and Fixture
Filing, dated as of March 11, 2003, made and executed between
Playboy Enterprises International, Inc. and Bank of America,
N.A., as Agent.
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.
(b) Reports on Form 8-K
On August 5, 2004, we furnished a Current Report on Form 8-K, dated August
5, 2004, under Item 12., attaching our press release announcing our financial
results for the second quarter of 2004.
On September 17, 2004, we furnished a Current Report on Form 8-K, dated
September 17, 2004, under Items 1.01 and 9.01, attaching an amendment, dated
September 15, 2004, to our Credit Agreement, dated March 11, 2003, and an
amendment to the related Deed of Trust, dated September 15, 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: November 8, 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