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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 March 31, 2005
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 April 30, 2005, there were 4,864,102 shares of Class A common stock,
par value $0.01 per share, and 28,201,063 shares of Class B common stock, par
value $0.01 per share, outstanding.
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations and
Comprehensive (Loss) Income for the Quarters Ended March 31,
2005 and 2004 (Unaudited) 3
Condensed Consolidated Balance Sheets at March 31,
2005 (Unaudited) and December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 2005 and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 5. Other Information 19
Item 6. Exhibits 21
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
for the Quarters Ended March 31 (Unaudited)
(In thousands, except per share amounts)
2005 2004
- -------------------------------------------------------------------------------
Net revenues $ 83,451 $ 80,870
- -------------------------------------------------------------------------------
Costs and expenses
Cost of sales (59,276) (58,984)
Selling and administrative expenses (13,267) (14,434)
- -------------------------------------------------------------------------------
Total costs and expenses (72,543) (73,418)
- -------------------------------------------------------------------------------
Operating income 10,908 7,452
- -------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 187 90
Interest expense (2,648) (4,158)
Amortization of deferred financing fees (233) (375)
Minority interest (370) (351)
Debt extinguishment expenses (19,280) --
Other, net (476) (459)
- -------------------------------------------------------------------------------
Total nonoperating expense (22,820) (5,253)
- -------------------------------------------------------------------------------
(Loss) income before income taxes (11,912) 2,199
Income tax expense (1,207) (311)
- -------------------------------------------------------------------------------
Net (loss) income (13,119) 1,888
- -------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized (loss) gain on marketable securities (25) 132
Unrealized gain (loss) on derivatives 211 (28)
Foreign currency translation adjustments 276 (420)
- -------------------------------------------------------------------------------
Total other comprehensive income (loss) 462 (316)
- -------------------------------------------------------------------------------
Comprehensive (loss) income $(12,657) $ 1,572
===============================================================================
Net (loss) income $(13,119) $ 1,888
Dividend requirements of preferred stock -- (335)
- -------------------------------------------------------------------------------
Net (loss) income applicable to common shareholders $(13,119) $ 1,553
===============================================================================
Weighted average number of common shares outstanding
Basic 33,354 27,478
===============================================================================
Diluted 33,354 29,323
===============================================================================
Basic and diluted (loss) earnings per common share $ (0.39) $ 0.06
===============================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
Mar. 31, Dec. 31,
2005 2004
- -------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 22,929 $ 26,668
Marketable securities and short-term investments 40,777 24,052
Receivables, net of allowance for doubtful accounts of
$3,738 and $3,897, respectively 41,901 45,084
Receivables from related parties 1,906 1,281
Inventories, net 11,818 12,437
Deferred subscription acquisition costs 13,570 13,104
Other current assets 8,219 8,596
- -------------------------------------------------------------------------------------------------------
Total current assets 141,120 131,222
- -------------------------------------------------------------------------------------------------------
Property and equipment, net 11,729 11,491
Long-term receivables 2,429 2,755
Programming costs, net 55,578 55,997
Goodwill 111,893 111,893
Trademarks 57,146 57,296
Distribution agreements, net of accumulated amortization
of $2,145 and $1,935 respectively 30,995 31,206
Other noncurrent assets 18,681 18,721
- -------------------------------------------------------------------------------------------------------
Total assets $ 429,571 $ 420,581
=======================================================================================================
Liabilities
Acquisition liabilities $ 14,475 $ 10,184
Accounts payable 19,515 21,796
Accrued salaries, wages and employee benefits 5,893 8,286
Deferred revenues 52,157 51,421
Accrued litigation settlement 1,000 1,000
Other liabilities and accrued expenses 14,516 18,040
- -------------------------------------------------------------------------------------------------------
Total current liabilities 107,556 110,727
- -------------------------------------------------------------------------------------------------------
Financing obligations 115,000 80,000
Acquisition liabilities 13,249 19,085
Net deferred tax liabilities 15,638 15,023
Accrued litigation settlement -- 1,000
Other noncurrent liabilities 13,860 13,779
- -------------------------------------------------------------------------------------------------------
Total liabilities 265,303 239,614
- -------------------------------------------------------------------------------------------------------
Minority interest 12,887 12,517
Shareholders' equity
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 shares authorized; 28,579,935
and 28,521,493 issued, respectively 286 285
Capital in excess of par value 222,872 222,285
Accumulated deficit (66,068) (52,949)
Treasury stock, at cost, 381,971 and 0 shares, respectively (5,000) --
Accumulated other comprehensive loss (758) (1,220)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity 151,381 168,450
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 429,571 $ 420,581
=======================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Quarters Ended March 31 (Unaudited)
(In thousands)
2005 2004
- ------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net (loss) income $ (13,119) $ 1,888
Adjustments to reconcile net (loss) income to net cash provided by (used for)
operating activities:
Depreciation of property and equipment 769 776
Amortization of intangible assets 413 875
Amortization of investments in entertainment programming 9,253 10,327
Amortization of deferred financing fees 233 375
Debt extinguishment expenses 19,280 --
Deferred income taxes 614 (470)
Net change in operating assets and liabilities (3,481) (7,340)
Investments in entertainment programming (8,653) (11,477)
Litigation settlement (1,875) (6,500)
Other, net 672 324
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,106 (11,222)
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Additions to property and equipment (1,041) (649)
Purchases of investments (26,750) --
Proceeds from investments 10,000 --
Other, net -- 140
- ------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (17,791) (509)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from financing obligations 115,000 --
Repayment of financing obligations (80,000) --
Payment of debt extinguishment expenses (15,197) --
Payment of acquisition liabilities (1,880) (4,519)
Purchase of treasury stock (5,000) --
Payment of deferred financing fees (3,463) --
Proceeds from stock plans 525 316
Other (39) --
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 9,946 (4,203)
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,739) (15,934)
Cash and cash equivalents at beginning of period 26,668 31,332
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,929 $ 15,398
============================================================================================================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is
unaudited but, in the opinion of management, reflects all normal recurring 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 fiscal year ended December 31, 2004. Certain amounts
reported for prior periods have been reclassified to conform to the current
year's presentation.
Marketable securities and short-term investments include $36.8 million and
$20.0 million of auction rate securities, or ARS, for the periods ended March
31, 2005 and December 31, 2004, respectively, which were previously classified
as cash and cash equivalents in prior periods. ARS generally have long-term
maturities; however, these investments have characteristics similar to
short-term investments because at predetermined intervals, typically every 28
days, there is a new auction process. We account for ARS as trading securities
in accordance with Statement of Financial Accounting Standards, or Statement,
No. 115.
(B) RESTRUCTURING EXPENSES
During the quarter ended March 31, 2005, we made cash payments of $0.4
million related to our various restructuring plans. Approximately $9.4 million
of the total restructuring charges was paid by March 31, 2005, with most of the
remainder to be paid in the current year and some payments continuing through
2007.
In 2004, we recorded a restructuring charge of $0.5 million relating to
the realignment of our entertainment and online businesses. In addition,
primarily due to excess office space, we recorded additional charges of $0.4
million related to the 2002 restructuring plan and reversed $0.2 million related
to the 2001 restructuring plan as a result of changes in plan assumptions.
Our 2002 restructuring initiative to reduce our ongoing operating expenses
resulted in a $5.7 million charge, of which $2.9 million related to the
termination of employees and $2.8 million related to consolidation of our office
space in Los Angeles and Chicago. Our 2001 restructuring plan resulted in a $4.6
million charge, of which $2.6 million related to the termination of employees
and $2.0 million related to excess space in our Chicago and New York offices.
The following table displays the activity and balances of the restructuring
reserve for the year ended December 31, 2004 and the quarter ended March 31,
2005 (in thousands):
Consolidation
Workforce of Facilities and
Reduction Operations Total
- --------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 630 $ 2,563 $ 3,193
Additional reserve recorded 466 -- 466
Adjustment to previous estimate -- 278 278
Cash payments (917) (1,014) (1,931)
- --------------------------------------------------------------------------------------
Balance at December 31, 2004 179 1,827 2,006
Cash payments (169) (227) (396)
- --------------------------------------------------------------------------------------
Balance at March 31, 2005 $ 10 $ 1,600 $ 1,610
======================================================================================
6
(C) EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per share, or EPS (in thousands, except per share amounts):
(Unaudited)
Quarters Ended
March 31,
-----------------------
2005 2004
- ------------------------------------------------------------------------------------
Numerator:
For basic EPS - net (loss) income $ (13,119) $ 1,553
Preferred stock dividends -- 335
- ------------------------------------------------------------------------------------
For diluted EPS - net (loss) income $ (13,119) $ 1,888
====================================================================================
Denominator:
For basic EPS - weighted-average shares 33,354 27,478
Effect of dilutive potential common shares:
Employee stock options and other -- 359
Preferred stock -- 1,486
- ------------------------------------------------------------------------------------
Dilutive potential common shares -- 1,845
- ------------------------------------------------------------------------------------
For diluted EPS - weighted-average shares 33,354 29,323
====================================================================================
Basic and diluted (loss) earnings per common share $ (0.39) $ 0.06
====================================================================================
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 which were not included in the computation of diluted EPS as the
inclusion of these shares would have been antidilutive (in thousands):
(Unaudited)
Quarters Ended
March 31,
-------------------
2005 2004
- ------------------------------------------------------------------------------------
Stock options 3,746 1,322
- ------------------------------------------------------------------------------------
Total 3,746 1,322
====================================================================================
On April 26, 2004, we completed a public offering of 6,021,340 shares of
our Class B stock at $12.69 per share, before underwriting discounts. Included
in this offering were 4,385,392 shares sold by Playboy, 1,485,948 shares sold by
Hugh M. Hefner, our founder and Editor-in-Chief, 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 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. Mr. Hefner and Ms. Hefner paid for expenses related to this
transaction proportionate to the number of shares each sold to the total number
of shares sold in the offering.
(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):
(Unaudited)
Mar. 31, Dec. 31,
2005 2004
- ------------------------------------------------------------------------------------
Paper $ 2,887 $ 2,573
Editorial and other prepublication costs 7,141 7,814
Merchandise finished goods 1,790 2,050
- ------------------------------------------------------------------------------------
Total inventories, net $ 11,818 $ 12,437
====================================================================================
7
(E) INCOME TAXES
Our income tax provision consists 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.
(F) 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
$8.5 million, which represents the amount of the judgment, costs and estimated
pre- and post-judgment interest. We, on advice of legal counsel, believe that it
is not probable that a material judgment against us will be sustained and have
not recorded a liability for this case in accordance with Statement 5,
Accounting for Contingencies. 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 a
payment of $1.0 million in January 2005 and will make the remaining payment of
$1.0 million in 2006.
(G) STOCK-BASED COMPENSATION
We account for stock options as prescribed by Accounting Principles Board
Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and disclose
pro forma information as provided by Statement 123, as amended by Statement 148,
Accounting for Stock Based Compensation. In December 2004, the Financial
Accounting Standards Board (the "FASB") issued Statement 123 (revised 2004),
Share-Based Payment ("Statement 123(R)"), which supersedes APB No. 25, and
amends Statement No. 95, Statement of Cash Flows. The implementation of
Statement 123(R) has since been delayed and will be effective for the first
fiscal year beginning after December 15, 2005. We expect to adopt Statement
123(R) on January 1, 2006 using the modified prospective method and are
currently conducting an analysis of the impact on our financial statements.
Pro forma net (loss) income and net (loss) income 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 related to stock options would have been $0.7 million for each of the
quarters ended March 31, 2005 and 2004.
(Unaudited)
Quarters Ended
March 31,
-----------------------
2005 2004
- -------------------------------------------------------------------------------
Net (loss) income
As reported $ (13,119) $ 1,888
Pro forma (13,823) 1,139
Basic EPS
As reported $ (0.39) $ 0.06
Pro forma (0.41) 0.03
Diluted EPS
As reported $ (0.39) $ 0.06
Pro forma (0.41) 0.03
- -------------------------------------------------------------------------------
We recorded $0.3 million and $0.2 million of compensation expense for the
quarters ended March 31, 2005 and 2004, respectively, related to restricted
stock units, as it was probable that the performance criteria would be met.
8
(H) SEGMENT INFORMATION
The following table represents financial information by reportable segment (in
thousands):
(Unaudited)
Quarters Ended
March 31,
-------------------------
2005 2004
- -------------------------------------------------------------------------------
Net revenues
Entertainment $ 50,476 $ 46,444
Publishing 27,004 29,677
Licensing 5,971 4,749
- -------------------------------------------------------------------------------
Total $ 83,451 $ 80,870
===============================================================================
(Loss) income before income taxes
Entertainment $ 11,896 $ 7,553
Publishing (384) 1,899
Licensing 3,602 2,571
Corporate Administration and Promotion (4,206) (4,571)
Investment income 187 90
Interest expense (2,648) (4,158)
Amortization of deferred financing fees (233) (375)
Minority interest (370) (351)
Debt extinguishment expenses (19,280) --
Other, net (476) (459)
- -------------------------------------------------------------------------------
Total $(11,912) $ 2,199
===============================================================================
Prior period segment information has been restated as a result of the
realignment of our Entertainment and Online businesses, into a combined
Entertainment segment, as announced during the fourth quarter of 2004.
(Unaudited)
Mar. 31, Dec. 31,
2005 2004
- -------------------------------------------------------------------------------
Identifiable assets
Entertainment $266,383 $266,736
Publishing 41,103 45,724
Licensing 5,839 5,344
Corporate Administration and Promotion(1) 116,246 102,777
- -------------------------------------------------------------------------------
Total(1) $429,571 $420,581
===============================================================================
(1) The increase in identifiable assets since December 31, 2004 was primarily
due to our debt refinancing in March 2005. See Footnote (I), Debt Refinancing.
(I) DEBT REFINANCING
On March 15, 2005, we issued and sold in a private placement $100.0
million aggregate principal amount of our 3.00% convertible senior subordinated
notes due 2025, or convertible notes. On March 28, 2005, we issued and sold in a
private placement an additional $15.0 million aggregate principal amount of the
convertible notes due to the initial purchasers' exercise of the over-allotment
option. The net proceeds of approximately $110.3 million from the issuance and
sale of the convertible notes, after deducting the initial purchasers' discount
and estimated offering expenses payable by us, were used, together with
available cash, (i) to complete a tender offer and consent solicitation for, and
to purchase and retire, all $80.0 million outstanding principal amount of the
11.00% senior secured notes of our subsidiary PEI Holdings, Inc., or Holdings,
for a total of approximately $95.2 million, including the bond tender premium
and consent fee of $14.9 million and other expenses of $0.3 million, (ii) to
purchase 381,971 shares of our Class B stock for an aggregate purchase price of
$5.0 million concurrently with the sale of the convertible notes and (iii) for
working capital and general corporate purposes.
9
The convertible notes bear interest at a rate of 3.00% per annum on the
principal amount of the notes, payable semi-annually in arrears on March 15 and
September 15 of each year, beginning on September 15, 2005. In addition, under
certain circumstances beginning in 2012, if the trading price of the convertible
notes exceeds a specified threshold during a prescribed measurement period prior
to any semi-annual interest period, contingent interest will become payable on
the convertible notes for that semi-annual interest period at an annual rate of
0.25%.
The convertible notes are convertible into cash and, if applicable, shares
of our Class B stock based on an initial conversion rate, subject to adjustment,
of 58.7648 shares per $1,000 principal amount of the convertible notes (which
represents an initial conversion price of approximately $17.02 per share), only
under the following circumstances: (1) during any fiscal quarter after the
fiscal quarter ending March 31, 2005, if the closing sale price of our Class B
stock for each of 20 or more consecutive trading days in a period of 30
consecutive trading days ending on the last trading day of the immediately
preceding fiscal quarter exceeds 130% of the conversion price in effect on that
trading day; (2) during the five business day period after any five consecutive
trading day period in which the average trading price per $1,000 principal
amount of convertible notes over that five consecutive trading day period was
equal to or less than 95% of the average conversion value of the convertible
notes during that period; (3) upon the occurrence of specified corporate
transactions, as set forth in the indenture governing the convertible notes; or
(4) if we have called the convertible notes for redemption. Upon conversion of a
convertible note, a holder will receive cash in an amount equal to the lesser of
the aggregate conversion value of the note being converted and the aggregate
principal amount of the note being converted. If the aggregate conversion value
of the convertible note being converted is greater than the cash amount received
by the holder, the holder will also receive an amount in whole shares of Class B
stock equal to the aggregate conversion value less the cash amount received by
the holder. A holder will receive cash in lieu of any fractional shares of Class
B stock.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the notes, plus any accrued and unpaid
interest up to, but excluding, the redemption date. On or after March 15, 2012,
we may at any time redeem any of the convertible notes at the same redemption
price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the
occurrence of a fundamental change, as specified in the indenture governing the
convertible notes, holders may require us to purchase all or a portion of their
convertible notes at a purchase price in cash equal to 100% of the principal
amount of the notes, plus any accrued and unpaid interest up to, but excluding,
the purchase date.
The convertible notes are unsecured senior subordinated obligations of the
issuer, Playboy Enterprises, Inc., and rank junior to all of the issuer's senior
debt, including its guarantee of Holdings' borrowings under our credit facility;
equally with all of the issuer's future senior subordinated debt; and senior to
all of the issuer's future subordinated debt. In addition, the assets of the
issuer's subsidiaries are subject to the prior claims of all creditors,
including trade creditors, of those subsidiaries.
(J) EQUITY OFFERING
On April 26, 2004, we completed a public offering of 6,021,340 shares of
our Class B stock 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 Ms. Hefner. Playboy's shares included
3,600,000 initial shares, plus an additional 785,392 shares due to the
underwriters' exercise of the over-allotment option. The shares sold by Mr.
Hefner consisted of all of the shares of Class B stock he received upon
conversion of all of the outstanding shares of Playboy's Series A convertible
preferred stock, which we refer to as the Playboy Preferred Stock, at the time
of the offering.
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 our outstanding
11.00% senior secured notes due 2010, which included a $3.9 million bond
redemption premium and accrued and unpaid interest of $0.9 million. We used
approximately $0.7 million of net proceeds to pay accrued and unpaid dividends
on the Playboy Preferred Stock up to the time of conversion.
10
ITEM 2. 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
March 31,
-----------------------
2005 2004(1)
- -------------------------------------------------------------------------------------------------------------------
Net revenues
Entertainment
Domestic TV networks $ 25.2 $ 24.4
International 13.4 10.5
Online subscriptions 5.8 5.2
E-commerce 5.2 4.8
Other 0.9 1.6
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 50.5 46.5
- -------------------------------------------------------------------------------------------------------------------
Publishing
Playboy magazine 22.9 25.4
Other domestic publishing 2.3 2.7
International publishing 1.8 1.6
- -------------------------------------------------------------------------------------------------------------------
Total Publishing 27.0 29.7
- -------------------------------------------------------------------------------------------------------------------
Licensing
International licensing 4.4 3.2
Domestic licensing 0.8 0.8
Entertainment licensing 0.6 0.5
Marketing events 0.2 0.2
- -------------------------------------------------------------------------------------------------------------------
Total Licensing 6.0 4.7
- -------------------------------------------------------------------------------------------------------------------
Total net revenues $ 83.5 $ 80.9
===================================================================================================================
Net (loss) income
Entertainment
Before programming amortization and online content expenses $ 21.7 $ 18.5
Programming amortization and online content expenses (9.8) (10.9)
- -------------------------------------------------------------------------------------------------------------------
Total Entertainment 11.9 7.6
- -------------------------------------------------------------------------------------------------------------------
Publishing (0.4) 1.9
- -------------------------------------------------------------------------------------------------------------------
Licensing 3.6 2.6
- -------------------------------------------------------------------------------------------------------------------
Corporate Administration and Promotion (4.2) (4.6)
- -------------------------------------------------------------------------------------------------------------------
Operating income 10.9 7.5
- -------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense)
Investment income 0.2 0.1
Interest expense (2.6) (4.2)
Amortization of deferred financing fees (0.2) (0.4)
Minority interest (0.4) (0.4)
Debt extinguishment expenses (19.3) -
Other, net (0.5) (0.4)
- -------------------------------------------------------------------------------------------------------------------
Total nonoperating expense (22.8) (5.3)
- -------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (11.9) 2.2
Income tax expense (1.2) (0.3)
- -------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (13.1) $ 1.9
===================================================================================================================
Basic and diluted (loss) earnings per common share $ (0.39) $ 0.06
===================================================================================================================
(1) Prior period segment information has been restated as a result of the
realignment of our Entertainment and Online businesses, into a combined
Entertainment segment, as announced during the fourth quarter of 2004.
11
Our revenues and operating income increased approximately 3% and 46%,
respectively, for the quarter primarily due to strong results from our
Entertainment and Licensing Groups, partially offset by anticipated lower
results from our Publishing Group.
The net loss for the current quarter of $13.1 million includes $19.3
million of debt extinguishment expenses related to our redemption of all $80.0
million of our 11.00% senior secured notes due 2010, comprised of $14.9 million
of bond redemption premium combined with $0.3 million of related expenses and
$4.1 million for the non-cash write-off of the related deferred financing costs.
The senior secured notes were repurchased using the proceeds of the issuance of
$115.0 million of 3.00% convertible senior subordinated notes. There were no
such expenses in the prior year quarter. See the Debt Financing section within
Liquidity and Capital Resources for more information regarding the redemption
and the economic benefits associated with the transaction.
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 higher in the fourth
quarter due to the holiday buying season.
ENTERTAINMENT GROUP
The following discussion focuses on the profit contribution of each of our
Entertainment Group businesses before programming amortization and online
content expenses.
Revenues from our domestic TV networks business increased $0.8 million, or
3%, for the quarter. Direct-to-home, or DTH, revenues increased $0.8 million due
to subscriber growth and an increase in average monthly pay-per-view, or PPV,
buys compared to the prior year period. Video-on-demand, or VOD, revenues
increased $0.7 million due to the roll out of VOD service in additional cable
systems as well as growing customer demand. Higher revenues associated with
renting our studio facility and providing various related services to third
parties also contributed. These revenue increases were partially offset by a
decrease in cable PPV buys as cable companies migrate consumers from linear
channels to VOD.
Profit contribution from our domestic TV networks increased $1.4 million,
or 9%, for the quarter, as a result of the revenue growth described above
combined with a decrease in marketing expenses due to the timing of promotional
campaigns. This increase was partially offset by higher overhead costs related
to the operation of our production facility as a result of renting more
production space to third parties compared to the prior year quarter.
International revenues increased $2.9 million, or 28%, for the quarter.
Higher DTH revenues from our networks in the U.K., revenues from several new
third party network licensees and royalties related to wireless license
agreements contributed to the increase in revenues. Profit contribution from our
international business increased $1.6 million, or 36%, from the prior year
quarter, in spite of higher network costs in the U.K., due to the
above-mentioned revenue increases.
Online subscription revenues increased $0.6 million, or 13%, for the
quarter due to an increase in revenues for all Playboy.com clubs. Contributing
to the revenue growth was a higher number of subscriptions and an increase in
average revenue per subscription for our two largest clubs, Cyber Club and
PlayboyNet. Profit contribution from the online subscription business increased
$0.6 million, or 18%, due to the revenue increase described above, partially
offset by higher technology and promotional costs related to Playboy Daily,
which launched in September 2004.
E-commerce revenues increased $0.4 million, or 8%, for the quarter due to
an increase in online store visitors and catalog circulation. Profit
contribution from e-commerce decreased $0.4 million, or 62%, due to higher
production costs related to an anticipated increase in paper costs combined with
higher circulation costs.
Profit contribution from other businesses decreased $0.2 million on a
revenue decrease of $0.7 million, or 43%, primarily due to the expected decline
in worldwide DVD sales.
12
Segment income for the group increased $4.3 million, or 58%, primarily due
to the previously mentioned higher revenues. Segment income was also favorably
impacted by lower programming amortization and online content expenses of $1.1
million, or 11%, compared to the prior year quarter due to the mix of
programming and fewer program premieres. We believe our cash programming and
online content investments will be approximately $40.0 million for the year,
down nearly 10% from last year, and programming amortization and online content
expenses will decline to about $41.0 million for the year.
PUBLISHING GROUP
Playboy magazine revenues decreased $2.5 million, or 10%, for the quarter.
Newsstand revenues were $0.9 million lower largely due to a $0.3 million
unfavorable adjustment related to prior year issues in the current quarter
compared to a $0.3 million favorable adjustment related to prior year issues in
the prior year quarter. Also contributing to the decrease were higher cover
prices related to celebrity pictorials in the prior year quarter. Subscription
revenues decreased $0.9 million primarily due to a higher favorable adjustment
in the prior year quarter for paid subscriptions that will not be served
combined with lower average net revenue per copy. As previously announced,
advertising revenues decreased $0.7 million principally due to the mix of
advertisements which resulted in a decrease in net revenue per page. Advertising
sales for the 2005 second quarter magazine issues are closed, and we expect to
report 20% lower advertising revenues and 14% lower advertising pages compared
to the 2004 second quarter.
Revenues from our other domestic publishing businesses decreased $0.4
million, or 13%, primarily due to an unfavorable adjustment to special editions
newsstand revenues related to prior year issues in the current year quarter
combined with an expected decrease in royalties from Playboy: 50 Years: The
Photographs.
International publishing revenues increased $0.2 million, or 10%,
primarily due to higher royalties from the German edition.
The group's segment profitability decreased $2.3 million, which was
attributable to the lower revenues discussed above as well as anticipated
increases in subscription acquisition amortization expense and paper costs of
$0.5 million and $0.3 million, respectively, partially offset by lower editorial
costs related to celebrity pictorials in the current year quarter.
LICENSING GROUP
Licensing Group revenues increased $1.3 million, or 26%, for the quarter
principally due to higher royalties from existing licensees in Japan and Europe
as well as several new international licensee agreements. Segment income for our
Licensing Group increased $1.0 million, or 40%, due to the revenue increase.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses decreased $0.4 million, or
8%, for the quarter due to a decrease in benefit-related expenses.
INCOME TAX EXPENSE
Our effective income tax rate differs from U.S. statutory rates. The
income tax provision consists 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.
13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, we had $22.9 million in cash and cash equivalents
compared to $26.7 million in cash and cash equivalents at December 31, 2004. At
March 31, 2005, we had $36.8 million of auction rate securities, or ARS,
included in short-term investments compared to $20.0 million at December 31,
2004. During the first quarter of 2005, we determined that investments in ARS
should be classified as short-term investments. Previously, such investments had
been classified as cash and cash equivalents. ARS generally have long-term
maturities; however, these investments have characteristics similar to
short-term investments because at predetermined intervals, typically every 28
days, there is a new auction process. Total financing obligations were $115.0
million and $80.0 million at March 31, 2005 and December 31, 2004, respectively.
At March 31, 2005, our liquidity requirements were being provided by cash
generated from our operating activities, our existing cash, cash equivalents,
short-term investments and net proceeds from the issuance of the convertible
senior subordinated notes described under "Debt Financings" below. At March 31,
2005, we had a $30.0 million credit facility, which was used for revolving
borrowings, issuing letters of credit or a combination of both. At March 31,
2005, there were no borrowings and $10.8 million in letters of credit
outstanding under this facility, permitting $19.2 million of available
borrowings under this facility. Effective April 1, 2005, we amended and restated
the facility to increase the size of the facility to $50.0 million and extend
the term to April 1, 2008. See "Credit Facility" for additional information.
DEBT FINANCINGS
On March 15, 2005, we issued and sold in a private placement $100.0
million aggregate principal amount of our 3.00% convertible senior subordinated
notes due 2025, or convertible notes. On March 28, 2005, we issued and sold in a
private placement an additional $15.0 million aggregate principal amount of the
convertible notes due to the initial purchasers' exercise of the over-allotment
option. The net proceeds of approximately $110.3 million from the issuance and
sale of the convertible notes, after deducting the initial purchasers' discount
and estimated offering expenses payable by us, were used, together with
available cash, (i) to complete a tender offer and consent solicitation for, and
to purchase and retire, all $80.0 million outstanding principal amount of the
11.00% senior secured notes of our subsidiary PEI Holdings, Inc., or Holdings,
for a total of approximately $95.2 million, including the bond tender premium
and consent fee of $14.9 million and other expenses of $0.3 million, (ii) to
purchase 381,971 shares of our Class B common stock, or Class B stock, for an
aggregate purchase price of $5.0 million concurrently with the sale of the
convertible notes and (iii) for working capital and general corporate purposes.
Also, on March 15, 2005, concurrently with the convertible note offering, Hugh
M. Hefner, our founder and Editor-In-Chief, purchased 381,971 shares of our
Class B stock for an aggregate purchase price of $5.0 million.
The convertible notes bear interest at a rate of 3.00% per annum on the
principal amount of the notes, payable semi-annually in arrears on March 15 and
September 15 of each year, beginning on September 15, 2005. In addition,
beginning in March 2012, if the trading price of the convertible notes exceeds a
specified threshold during a prescribed measurement period prior to any
semi-annual interest period, contingent interest will become payable on the
convertible notes for that semi-annual interest period at an annual rate of
0.25%. The notes are convertible under specified circumstances into cash and, if
applicable, shares of our Class B stock based on an initial conversion rate of
58.7648 shares per $1,000 principal amount of the convertible notes (which
represents an initial conversion price of approximately $17.02 per share). In
general, upon conversion of a convertible note, the holder of the note will
receive cash in an amount equal to the principal amount of the note and Class B
stock for the note's conversion value in excess of the principal amount. See
Footnote (I), Debt Refinancing, for additional information.
The convertible notes mature on March 15, 2025. On or after March 15,
2010, if the closing price of our Class B stock exceeds a specified threshold,
we may redeem any of the convertible notes at a redemption price in cash equal
to 100% of the principal amount of the notes, plus any accrued and unpaid
interest to, but excluding, the redemption date. On or after March 15, 2012, we
may at any time redeem any of the convertible notes at the same redemption
price. On each of March 15, 2012, March 15, 2015 and March 15, 2020, or upon the
occurrence of a fundamental change, as specified in the indenture governing the
convertible notes, holders may require us to purchase all or a portion of their
convertible notes at a purchase price in cash equal to 100% of the principal
amount of the notes, plus any accrued and unpaid interest up to, but excluding,
the purchase date.
14
The convertible notes are unsecured senior subordinated obligations of the
issuer, Playboy Enterprises, Inc., and rank junior to all of the issuer's senior
debt, including its guarantee of Holdings' borrowings under our credit facility;
equally with all of the issuer's future senior subordinated debt; and senior to
all of the issuer's future subordinated debt. In addition, the assets of the
issuer's subsidiaries are subject to the prior claims of all creditors,
including trade creditors, of those subsidiaries.
CREDIT FACILITY
Effective April 1, 2005, Holdings and its lenders amended and restated the
credit agreement governing our credit facility, primarily to increase the size
of our credit facility from $30.0 million to $50.0 million. The credit facility
provides for revolving borrowings by Holdings of up to $50.0 million and the
issuance of up to $30.0 million in letters of credit, subject to a maximum of
$50.0 million in combined borrowings and letters of credit outstanding at any
time. Borrowings under the credit facility bear interest at a variable rate,
equal to a specified Eurodollar, LIBOR, or base rate plus a specified borrowing
margin based on our Transactions Adjusted EBITDA, as defined in the credit
agreement. We pay fees on the outstanding amount of letters of credit under the
credit facility based on the borrowing margin that applies to borrowings that
bear interest at a rate based on LIBOR. All amounts outstanding under the credit
facility will mature on April 1, 2008. Holdings' obligations as borrower under
the credit facility are guaranteed by Playboy Enterprises, Inc. and each of our
other U.S. subsidiaries, except for Playboy.com and its subsidiaries. The
obligations of the borrower and each of the guarantors under the credit facility
are secured by a first-priority lien on substantially all of the borrower's and
the guarantors' assets.
CALIFA ACQUISITION
The Califa acquisition agreement gives us the option of paying $21.0
million of the remaining $27.8 million purchase price consideration in cash or
in shares of Class B stock. Under the terms of the agreement, a total of $8.0
million is payable in 2005, all of which will be paid in cash. On May 2, 2005,
we made the first payment in the amount of $3.5 million. We also have the option
of accelerating remaining acquisition payments.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities was $4.1 million, which
represents an increase of $15.3 million from the prior year quarter. This
increase reflects a decrease of $4.6 million in litigation settlement payments
and a decrease in investments in entertainment programming of approximately $2.8
million compared to the prior year quarter. Better overall operations also
contributed to the increase.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities increased $17.3 million due to
investments made in auction rate securities during the current year quarter.
There was no such investment activity in the prior year quarter.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $9.9 million for the quarter
principally due to the proceeds from our sale of $115.0 million aggregate
principal amount of convertible notes partially offset by the payment of $94.9
million in connection with the purchase and retirement of all $80.0 million
outstanding principal amount of Holdings' 11.00% senior secured notes and the
payment of $0.3 million in associated debt extinguishment expenses and $3.5
million of related financing fees. Proceeds from the convertible note offering
were also used to purchase 381,971 shares of our Class B stock for an aggregate
purchase price of $5.0 million. See Footnote (I), Debt Refinancing, for
additional information.
15
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, 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 common or convertible preferred
stock or convertible debt 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) Risks associated with the viability of our primarily subscription- and
e-commerce-based Internet model.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2005, we did not have any floating interest rate exposure.
All of our outstanding debt as of that date consisted of the convertible notes,
which are fixed-rate obligations. The fair value of the $115.0 million aggregate
principal amount of the notes will be influenced by changes in market interest
rates, the share price of our Class B stock and our credit quality. As of March
31, 2005, the convertible senior subordinated notes had an implied fair value of
$113.7 million.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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.
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.
PART II
OTHER INFORMATION
ITEM 1. 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 $8.5 million (which represents the
amount of the judgment, costs and estimated pre- and post-judgment interest) in
connection with the appeal. We, on advice of legal counsel, believe that it is
not probable that a material judgment against us will be sustained. In
accordance with Statement of Financial Accounting Standards, or Statement, 5,
Accounting for Contingencies, no liability has been accrued.
17
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 the 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 2004 and $1.0 million in 2005. The remaining $1.0 million will be paid
in 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
(together, the "Howington defendants") 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 $22.5 million 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. On January 14, 2005, Logix and the Howington
defendants filed a motion to dismiss the Faherty action for, among other things,
lack of personal jurisdiction. On February 15, 2005, Faherty filed a
cross-motion to stay the action pending the outcome of his appeal. The motion
and cross-motions are pending. 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.
In the fourth quarter of 2004, we received a $5.6 million insurance
recovery partially related to the prior year litigation settlement with Logix.
18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 9, 2005, in connection with our issuance and sale of $100.0
million aggregate principal amount of convertible notes, we and Mr. Hefner each,
separately, contingent on the closing of the convertible note offering,
purchased 381,971 shares of our Class B stock from third parties for an
aggregate purchase price in each case of $5.0 million. These purchases, which
were settled concurrently with the closing of the convertible note offering on
March 15, 2005, were effected in negotiated transactions by us and Mr. Hefner,
acting through an agent. The table set forth below provides information with
respect to purchases by us or any "affiliated purchaser" (as defined in Rule 10b
18(a)(3) under the Exchange Act) of our Class B stock during the quarter covered
by this Quarterly Report on Form 10-Q. We have included in the table Mr.
Hefner's purchase described above because Mr. Hefner could be deemed to be an
affiliated purchaser with respect to that transaction, but we disclaim any
implication or inference that Mr. Hefner is in fact such an affiliated purchaser
or that he purchased the shares of Class B stock on our behalf.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Maximum
Total Shares Purchased as Number of Shares
Number of Average Part of Publicly That May Yet Be
Shares Price Paid Announced Plans or Purchased under the
Period Purchased Per Share Programs Plans or Programs
- -------------------------------------------------------------------------------------------------------------------
January 1 -
January 31, 2005 -- $ -- -- --
February 1 -
February 28, 2005 -- -- -- --
March 1 -
March 31, 2005
Purchases by Playboy Enterprises, 381,971 $ 13.09 -- --
Inc.
Purchases by Mr. Hefner 381,971 $ 13.09 -- --
- -------------------------------------------------------------------------------------------------------------------
Total 763,942 $ 13.09 -- --
===================================================================================================================
ITEM 5. OTHER INFORMATION
CREDIT FACILITY
Effective April 1, 2005, Holdings entered into an amended and restated
credit agreement with Bank of America, N.A. and LaSalle Bank National
Association which amended and restated the terms of our credit facility. The
following description of the credit facility is qualified in its entirety by
reference to the complete text of the amended and restated credit agreement,
which is included as Exhibit 10.1 to this Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2005.
The amended and restated credit agreement, subject to the terms and
conditions set forth therein, provides Holdings with a secured revolving credit
facility for borrowing up to $50.0 million for working capital advances and
general corporate purposes, including up to $30.0 million of which is available
for the issuance of letters of credit. As of the effective date of the amended
and restated credit agreement, there were no loans and $10.8 million in letters
of credit outstanding under the credit facility.
Term
All outstanding borrowings under the credit facility are scheduled to
mature on April 1, 2008.
Interest
For purposes of calculating interest, revolving loans under the credit
facility are designated as Eurodollar rate committed loans or, in certain
circumstances, base rate committed loans.
19
Eurodollar rate committed loans bear interest at the London interbank
eurodollar rate, adjusted for reserves, plus a borrowing margin that varies from
1.00% to 2.75% depending on our Transactions Adjusted EBITDA (as defined in the
amended and restated credit agreement). Interest on Eurodollar rate committed
loans is payable at the end of the applicable interest period in the case of
interest periods of one, two or three months and every three months in the case
of interest periods which exceed three months.
Base rate committed loans bear interest at (a) the greater of (i) the rate
most recently announced by Bank of America, N.A. as its "prime rate" or (ii) the
federal funds rate plus 1/2 of 1% per annum plus (b) a borrowing margin that
varies from 0.00% to 1.25% depending on our Transactions Adjusted EBITDA (as
defined in the amended and restated credit agreement). Interest on base rate
committed loans is payable quarterly in arrears.
Letters of credit issued under the credit facility accrue fees at the
applicable Eurodollar rate borrowing margin.
Security and Guarantees
The credit facility provides that any loans made thereunder and any swap
or other hedging arrangements entered into with any of the lenders will be
obligations of Holdings and guaranteed by Playboy Enterprises, Inc. and
substantially all of its other present and future domestic subsidiaries other
than Playboy.com and its subsidiaries. The credit facility provides that
obligations thereunder will be secured by a first priority lien or pledge
(subject to permitted liens) on 100% of the stock of substantially all of
Playboy Enterprises, Inc.'s present and future direct and indirect domestic
subsidiaries other than Playboy.com's subsidiaries and on 65% of the capital
stock of certain of Playboy Enterprises, Inc.'s indirect first-tier foreign
subsidiaries other than subsidiaries of Playboy.com. The credit facility also
provides that obligations thereunder will be secured by a first priority lien or
pledge (subject to permitted liens) on (i) the Playboy Mansion and the personal
property assets of Playboy Enterprises, Inc. and substantially all of its
present and future direct and indirect domestic subsidiaries, other than
Playboy.com and its subsidiaries and (ii) trademarks owned by Playboy
Enterprises, Inc. and substantially all of Playboy Enterprises, Inc.'s present
and future direct and indirect domestic subsidiaries, other than Playboy.com and
its subsidiaries. Under the terms of the amended and restated credit agreement,
Playboy.com and its subsidiaries must provide guarantees of and pledge or grant
security interests in their assets to secure the obligations of the Borrower
under the credit facility on substantially the same terms as applicable to the
existing loan parties if Playboy.com becomes a wholly-owned subsidiary of
Playboy Enterprises, Inc.
Covenants
The credit facility contains representations, affirmative covenants, negative
covenants and financial covenants that restrict our and our subsidiaries'
ability to do specified things, including but not limited to:
o incur or guarantee additional indebtedness;
o pay dividends or make other distributions on capital stock;
o repurchase capital stock;
o make loans and investments;
o enter into agreements restricting the ability of the subsidiaries of
Playboy Enterprises, Inc. to pay dividends;
o create liens;
o sell or otherwise dispose of assets;
o enter new lines of business;
o merge or consolidate with other entities; and
o engage in transactions with affiliates.
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The following financial covenants are included:
o minimum net worth;
o minimum interest coverage ratio; and
o limitation on capital expenditures.
Mandatory Prepayment and Commitment Reduction
In the event of a sale or other disposition of the Playboy Mansion or the
Playboy or Rabbit Head trademark designs, Holdings must apply the net cash
proceeds of such disposition up to the amount necessary to repay its borrowings
under the credit facility, and the banks' commitment under the credit facility
will be reduced permanently by an amount equal to such net cash proceeds, unless
at the time of such disposition no event of default exists, in which case the
commitments shall not be reduced to less than $25.0 million.
Events of Default
The loan documentation for the credit facility contains customary events
of default, including, but not limited to, specified change of control events
and cross defaults to other indebtedness of Playboy Enterprises, Inc. or any
subsidiary that is a restricted subsidiary for purposes of the credit facility.
As of the date of this report, all of Playboy Enterprises, Inc.'s subsidiaries
are restricted subsidiaries for the purposes of the credit facility.
ITEM 6. EXHIBITS
Exhibit Number Description
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4.1 Indenture, dated March 15, 2005, between Playboy Enterprises, Inc.
and LaSalle Bank National Association, as Trustee (incorporated by
reference to Exhibit 4.1 to Playboy Enterprises, Inc.'s Current
Report on Form 8-K filed on March 15, 2005)
4.2 Form of 3.00% Convertible Senior Subordinated Notes due 2025
(included in Exhibit 4.1)
4.3 Registration Rights Agreement, dated March 15, 2005, among Playboy
Enterprises, Inc. and the Initial Purchasers named therein
(incorporated by reference to Exhibit 4.2 to Playboy Enterprises,
Inc.'s Current Report on Form 8-K filed on March 15, 2005)
10.1 Credit Agreement, effective April 1, 2005, or the Credit Agreement,
among PEI Holdings, Inc., as borrower, Bank of America, N.A., as
Agent, and the Other Lenders Party Hereto.
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
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SIGNATURES
Pursuant to the requirements 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: May 10, 2005 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)
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