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 27, 1998
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 00028230
PLANET HOLLYWOOD INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3283783
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8669 COMMODITY CIRCLE
ORLANDO, FLORIDA 32819
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(Address of principal executive office, including zip code)
(407) 363-7827
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(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 [ ]
As of November 9, 1998, there were approximately 97,221,632 shares of
the registrant's Class A voting Common Stock outstanding and approximately
11,764,144 shares of the registrant's Class B non-voting Common Stock
outstanding.
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PLANET HOLLYWOOD INTERNATIONAL, INC.
INDEX
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Condensed Consolidated Balance Sheets - September 27, 1998 and
December 28, 1997.....................................................1
Condensed Consolidated Statements of Operations -
Thirteen Weeks and Thirty-nine Weeks ended September 27, 1998
and September 28, 1997................................................2
Condensed Consolidated Statements of Cash Flows - Thirty-nine
Weeks ended September 27, 1998 and September 28, 1997.................3
Consolidated Statements of Changes in Stockholders' Equity -
Thirty-nine Weeks ended September 28, 1998 and December 28, 1997......4
Notes to Condensed Consolidated Financial Statements..................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................7
Part II OTHER INFORMATION
Item 5. Other Information....................................................14
Item 6. Exhibits and Reports on Form 8-K.....................................15
SIGNATURES.............................................................................15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PLANET HOLLYWOOD INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
STATED IN THOUSANDS OF U.S. DOLLARS
(UNAUDITED)
SEPT. 27, DECEMBER 28,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 119,643 $ 9,089
Accounts receivable, net 22,054 25,084
Inventories 28,426 42,612
Prepaid expenses 7,683 7,082
Other current assets 13,822 17,143
--------- ---------
Total current assets 191,628 101,010
Property and equipment, net 362,832 322,949
Goodwill, net 28,552 29,922
Investment in affiliated entities 42,544 40,404
Other assets, net 28,865 11,274
--------- ---------
$ 654,421 $ 505,559
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 51,861 $ 69,315
Notes payable - current 564 1,264
--------- ---------
Total current liabilities 52,425 70,579
Deferred rentals 11,497 10,798
Notes payable and other 258,333 70,491
Deferred credits 4,636 15,150
--------- ---------
Total liabilities 326,892 167,018
Stockholders' equity:
Common stock - Class A 974 972
Common stock - Class B 118 118
Capital in excess of par value 282,508 279,372
Deferred compensation (3,875) (4,125)
Retained earnings 50,958 66,644
Accumulated other comprehensive income (3,153) (4,440)
--------- ---------
Total stockholders' equity 327,530 338,541
--------- ---------
$ 654,421 $ 505,559
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
1
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PLANET HOLLYWOOD INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS
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THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
--------- --------- --------- ---------
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Revenues $ 110,261 $ 149,598 $ 311,905 $ 373,137
Costs and expenses:
Cost of sales 29,284 38,978 78,241 97,556
Operating expenses 62,123 55,254 174,769 154,287
General and adminstrative expenses 17,181 6,786 35,481 19,447
Preopening costs 5,879 4,583 10,554 12,551
Depreciation and amortization 6,216 4,886 17,413 13,740
--------- --------- --------- ---------
120,683 110,487 316,458 297,581
Income (loss) from operations (10,422) 39,111 (4,553) 75,556
Non-operating expense (income):
Interest expense 7,157 -- 14,461 --
Interest income (2,008) (206) (3,569) (1,227)
Equity in (income) loss of unconsolidated affiliates 581 (850) 76 (6,300)
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect of
accounting principle (16,152) 40,167 (15,521) 83,083
Provision for income taxes (6,057) 14,922 (5,819) 31,016
--------- --------- --------- ---------
Income (loss) before cumulative effect of change in accounting (10,095) 25,245 (9,702) 52,067
Cumulative effect of change in accounting principle -- -- 5,984 --
--------- --------- --------- ---------
Net income (loss) ($10,095) $ 25,245 ($15,686) $ 52,067
========= ========= ========= =========
Earnings per share:
BASIC
Income (loss) before cumulative effect of change in
accounting principle ($ 0.09) $ 0.23 ($ 0.09) $ 0.48
Cumulative effect of change in accounting principle -- -- ( 0.05) --
--------- --------- --------- ---------
Net income (loss) ($ 0.09) $ 0.23 ($ 0.14) $ 0.48
========= ========= ========= =========
DILUTED
Income (loss) before cumulative effect of change in
accounting principle ($ 0.09) $ 0.23 ($ 0.09) $ 0.47
Cumulative effect of change in accounting principle -- -- ($ 0.05) --
--------- --------- --------- ---------
Net income (loss) ($ 0.09) $ 0.23 ($ 0.14) $ 0.47
========= ========= ========= =========
BASIC Weighted Average Shares 109,090 108,784 109,067 108,325
========= ========= ========= =========
DILUTED Weighted Average Shares 109,113 110,510 109,562 109,776
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
2
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PLANET HOLLYWOOD INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
STATED IN THOUSANDS OF U.S. DOLLARS
THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, SEPTEMBER 28,
1998 1997
------------ ------------
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ($ 3,550) $ 32,149
Cash flows from investing activities:
Additions to property and equipment (58,723) (91,121)
Purchase of restaurant from franchisee (2,635) (8,025)
Investment in affiliate (2,487) (15,440)
Other 1,286 (1,361)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (62,559) (115,947)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 19,566
Proceeds from issuance of notes payable 250,000 35,000
Exercise of stock options 61 --
Deferred financing costs (10,751) (481)
Repayment of notes payable (62,858) (431)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 176,452 53,654
--------- ---------
EFFECT OF EXCHANGE RATES ON CASH 211 (1,130)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 110,554 (31,274)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,089 49,831
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 119,643 $ 18,557
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
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PLANET HOLLYWOOD INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
STATED IN THOUSANDS OF U.S. DOLLARS
COMMON STOCK COMMON STOCK
---------------------- ----------------------- CAPITAL IN
CLASS A CLASS B EXCESS OF COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT PAR VALUE INCOME
--------- --------- --------- --------- ---------- ------------
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Balance at December 29, 1996 95,973 $ 960 11,547 $ 115 $ 252,695
Net income $ 52,067
Other comprehensive income:
Currency translation adjustment (172)
---------
Comprehensive income $ 51,895
=========
Celebrity restricted stock options and awards 1,547
Stock issuance 1,087 11 19,555
Employee restricted stock awards
--------- --------- --------- --------- ---------
Balance at September 28, 1997 97,060 $ 971 11,547 $ 115 $ 273,797
========= ========= ========= ========= =========
Balance at December 28, 1997 97,128 $ 972 11,765 $ 118 $ 279,372
Net loss ($ 15,686)
Other comprehensive income:
Currency translation adjustment 1,287
---------
Comprehensive income ($ 14,399)
=========
Stock issuance 190 2 1,198
Celebrity restricted stock options and awards 1,877
Exercise of stock options 8 61
Employee restricted stock awards
--------- --------- --------- --------- ---------
Balance at September 27, 1998 97,326 $ 974 11,765 $ 118 $ 282,508
========= ========= ========= ========= =========
ACCUMULATED
OTHER TOTAL
RETAINED DEFERRED COMPREHENSIVE STOCKHOLDERS'
EARNINGS COMPENSATION INCOME EQUITY
--------- ------------- ------------- ------------
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Balance at December 29, 1996 $ 58,386 ($ 525) $ 500 $ 312,131
Net income 52,067 52,067
Other comprehensive income:
Currency translation adjustment (172) (172)
Comprehensive income
Celebrity restricted stock options and awards 1,547
Stock issuance 19,566
Employee restricted stock awards 150 150
--------- --------- --------- ---------
Balance at September 28, 1997 $ 110,453 ($ 375) $ 328 $ 385,289
========= ========= ========= =========
Balance at December 28, 1997 $ 66,644 ($ 4,125) ($ 4,440) $ 338,541
Net loss (15,686) (15,686)
Other comprehensive income:
Currency translation adjustment 1,287 1,287
Comprehensive income
Stock issuance 1,200
Celebrity restricted stock options and awards 100 1,977
Exercise of stock options 61
Employee restricted stock awards 150 150
--------- --------- --------- ---------
Balance at September 27, 1998 $ 50,958 ($ 3,875) ($ 3,153) $ 327,530
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
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PLANET HOLLYWOOD INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Planet Hollywood International, Inc. have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments (consisting
of only normal recurring accruals and adjustments) which are, in the opinion of
management, necessary to fairly state the operating results for the respective
periods. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
These notes to the condensed consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements contained in
the Company's Form 10-K for the year ended December 28, 1997.
The results for interim periods are not necessarily indicative of
trends or results to be expected for a full year. Certain prior period amounts
in the accompanying condensed consolidated financial statements have been
reclassified to conform with current year presentation.
2. LONG TERM DEBT
On March 25, 1998, the Company issued $250.0 million of 12% Senior
Subordinated Notes (the "Notes") due in 2005. Interest on the Notes is payable
semi-annually in arrears on April 1 and October 1 of each year, commencing on
October 1, 1998. The documents governing the Notes contain certain covenants
which, among other things, limit (i) the issuance of additional debt and stock
by the Company, (ii) the payment of dividends, and (iii) the sales of assets.
Concurrent with the Notes offering, the Company replaced its existing
$155.0 million revolving credit facility with a $65.0 million multi-currency
revolving credit facility and a $35.0 million LIBOR-based leveraged lease
facility (the "Credit Facility"). As a result of operating losses experienced in
the third quarter of fiscal 1998, the Company was not in compliance with certain
financial covenants of the Credit Facility (specifically, EBITDA and Fixed
Charge Ratios, as such terms are defined in the Credit Facility documents).
While the Company does not owe any amounts under the revolving credit portion of
the Credit Facility, approximately $35 million is outstanding under the
leveraged lease portion of the Credit Facility. The Company is currently in
negotiations regarding the amendment and/or waiver of certain terms of the
Credit Facility, which, if successful, will cure the noncompliance. The Company
expects to conclude such negotiations by the end of November 1998. If the
Company is unable to effectuate such amendments and/or waivers, the Company will
repay all amounts outstanding under the Credit Facility and/or arrange
alternative financing with another lender. The Company is currently in full
compliance with the financial covenants of the Notes.
5
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3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share," which requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As required, the Company adopted the
provisions of SFAS No. 128 in the fourth quarter of fiscal 1997. All prior year
weighted average and per share information has been restated in accordance with
SFAS No. 128. Outstanding stock options issued by the Company represent the only
dilutive effect reflected in diluted weighted average shares.
4. NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income," which establishes
standards for the reporting and displaying of comprehensive income and its
components. All items required to be recognized as components of comprehensive
income must be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 became effective for
financial statements with fiscal years beginning after December 15, 1997. All
prior period information presented has been restated to conform to this
pronouncement. The Company's "other comprehensive income" consists solely of
currency translation adjustments.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires companies to expense as incurred all
start-up and preopening costs that are not otherwise capitalizable as long-lived
assets. The Company previously capitalized unit preopening expenses and
amortized such amounts over the unit's first year of operation. The Company
elected to implement SOP 98-5 during the third quarter of fiscal 1998, effective
as of the beginning of fiscal 1998. The cumulative effect of this accounting
change was a charge to operations of $6.0 million, net of $3.6 million of
related tax benefit, for the unamortized balance of preopening costs as of
December 28, 1997. The effect of the change in accounting for the thirteen weeks
ended September 27, 1998 and the thirty-nine weeks ended September 27, 1998,
excluding the cumulative effect of the accounting change, was to increase the
net loss by $2.0 million and $1.1 million, respectively.
The Company has restated its earnings for the first and second quarters
of fiscal 1998 as follows (in thousands of U.S. dollars, except per share
amounts):
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THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
MARCH 29, 1998 JUNE 28, 1998
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Income (loss) before cumulative effect
of change in accounting principle:
As previously reported $ 894 $ (1,404)
========= ==========
As restated $ 1,630 $ (1,236)
========= ==========
Basic and diluted earnings per share:
As previously reported $ 0.01 $ (0.01)
========= ==========
As restated $ 0.02 $ (0.01)
========= ==========
Net income (loss):
As previously reported $ 894 $ (1,404)
========= ==========
As restated $ (4,354) $ (1,236)
========= ==========
Basic and diluted earnings per share:
As previously reported $ 0.01 $ (0.01)
========= ==========
As restated $ (0.04) $ (0.01)
========= ==========
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6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's Condensed Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-Q. All statements contained herein that are
not historical facts including, but not limited to, statements regarding the
Company's current business strategy, the Company's projected sources and uses of
cash, and the Company's plans for future development and operations, are based
upon current expectations. Such statements are forward-looking in nature and
involve a number of risks and uncertainties. Consequently, actual results may
differ materially from the forward- looking statements. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; the impact of competitive products and
pricing; changes in labor, equipment, food and capital costs; changes in, or the
failure to comply with, regulations affecting the Company's business; future
acquisitions or strategic partnerships; the availability, locations and terms of
sites for development; the timing and costs associated with new location
openings; acceptance by new guests of the Company's brands and concepts as the
Company continues to expand into new brands and/or regions; success of the
Company's franchisees and licensees and the manner in which they promote,
operate and develop the Company's brands; general business and economic
conditions; and factors described from time to time in the Company's filings
with the Securities and Exchange Commission. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 30, 1997
REVENUES. Total revenues decreased to $110.3 million for the thirteen weeks
ended September 27, 1998 ("third quarter 1998") from $149.6 million for the
thirteen weeks ended September 28, 1997 ("third quarter 1997"), a decrease of
$39.3 million or 26%. The decrease in total revenues was primarily attributable
to continued declines in same unit revenues and a decrease in promotional and
specialty retail sales.
Direct revenues decreased 25% from $140.4 million for third quarter
1997 to $105.4 million for third quarter 1998. Total same unit revenues
decreased 20% from third quarter 1997 to third quarter 1998 (same unit revenues
exclude promotional and specialty retail sales). Restaurant same unit revenues
decreased 13%, while merchandise same unit revenues declined 31%. The decline in
same unit revenues was primarily due to declines in customer traffic resulting
from increased competition in the theme-dining industry and declines in tourism
in several of the Company's major markets. Restaurant average spends were
relatively consistent with third quarter 1997; however, same unit merchandise
revenues were impacted by a decline in retail average spends. Retail average
spends declined primarily due to the absence of new merchandise introductions as
part of the Company's inventory reduction initiatives. In the near term, the
Company anticipates continued declines in same unit revenues as a result of
decreased customer
7
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traffic, continued declines in retail revenues, and the inclusion of additional
secondary market units in the comparable store base. The decline in revenues was
partially offset by the opening of nine Company-owned units subsequent to
September 28, 1997. As a percentage of direct revenues, merchandise sales
decreased from 46% for third quarter 1997 to 31% for third quarter 1998. The
decline in merchandise sales is primarily attributable to the absence of
significant promotional and specialty retail sales in the third quarter of 1998,
with the balance of the decline due to the Company's expansion into secondary
markets and the expansion of the Official All Star Cafe concept, which has a
lower merchandise sales mix than Planet Hollywood units.
Franchise fees were $3.6 million for third quarter 1998 compared to
$4.8 million in third quarter 1997. The Company recognized revenue for four and
three franchise units, respectively in third quarter 1998 and third quarter
1997. As the Company's and franchisees' expansion continues primarily in
secondary markets, the Company expects to receive lower franchise fees per unit
opening. Franchise royalty revenues decreased from $1.3 million in third quarter
1997 to $1.0 million in third quarter 1998. The decrease was primarily due to
same unit revenue declines among franchised units. Non-franchise royalties and
other revenues decreased from $3.2 million in third quarter 1997 to $0.2 million
in third quarter 1998. The decrease was due to a decline in licensing activities
in third quarter 1998.
COSTS AND EXPENSES. Food and beverage costs increased from 23.3% of food and
beverage revenues in third quarter 1997 to 24.3% in third quarter 1998. This
increase was mainly a result of a decline in higher margin liquor sales as a
percentage of total sales, increases in commodity prices and menu specification
changes. Merchandise costs increased from 32.9% of merchandise revenues in third
quarter 1997 to 35.7% in third quarter 1998, primarily as a result of shifts in
sales composition due to the absence of promotional and specialty retail sales
in third quarter 1998. Operating expenses, which consist primarily of labor,
occupancy and other direct unit operating costs, increased from 39.4% of direct
revenues in third quarter 1997 to 58.9% in third quarter 1998 principally due to
relatively fixed unit operating costs in relation to lower sales volumes and
increased labor and public relations costs associated with the Company's current
promotional and service initiatives. These initiatives include increased
celebrity appearances at the units, sponsorship of major events in cities with
restaurants and improvement of service in order to enhance the overall guest
experience.
General and administrative expenses increased from $6.8 million in
third quarter 1997 to $17.2 million in third quarter 1998, due primarily to the
expansion of the Company's corporate infrastructure, primarily labor and labor
related costs, increased public relations and marketing expenditures associated
with the Company's continued efforts to promote brand awareness, enhance the
guest experience and increase celebrity involvement. As a percent of total
revenues, general and administrative expenses increased from 4.5% in third
quarter 1997 to 15.6% in third quarter 1998.
PREOPENING COSTS. With the adoption of SOP 98-5 in fiscal 1998, the Company now
expenses preopening costs as they are incurred. This change resulted in the
Company recording $5.9 million in preopening costs in third quarter 1998,
primarily for its London Sound Republic unit and the Baltimore and Montreal
Planet Hollywood units. In third quarter 1997, preopening costs were
8
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$4.6 million and reflected the amortization of preopening costs during a unit's
first year of operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
from $4.9 million in third quarter 1997 to $6.2 million in third quarter 1998.
The increase of $1.3 million was primarily due to the Company's continued
expansion of restaurant units, sixteen units were added during fiscal 1997 and
seven units year to date in fiscal 1998, and the construction of the Company's
corporate office, which was completed in fiscal 1998.
INTEREST EXPENSE. Interest expense for third quarter 1998 increased to $7.2
million as a result of the Company's $250.0 million debt offering in March 1998.
INTEREST INCOME. Interest income increased from $0.2 million in third quarter
1997 to $2.0 million in third quarter 1998. The increase was due to the
investment of funds received from the Company's debt offering in March 1998.
EQUITY IN INCOME (LOSSES) OF UNCONSOLIDATED AFFILIATES. Equity in income
(losses) of unconsolidated affiliates decreased from $0.9 million in income for
third quarter 1997 to ($0.6) million in losses for third quarter 1998. The
decline was primarily the result of losses incurred by Planet Hollywood (Asia)
Pte, Ltd. ("PH Asia"), an entity which is owned 50% by the Company, in third
quarter 1998. These losses were due to downturns in tourism throughout Asia,
which resulted in significant declines in revenue for the units owned and
operated by PH Asia.
PROVISION FOR INCOME TAXES. The provision for income taxes was $14.9 million or
37.1% of pretax income in third quarter 1997. In third quarter 1998, the Company
recorded an income tax benefit of $6.1 million or 37.5% of pretax losses.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998, COMPARED TO THIRTY-NINE WEEKS
ENDED SEPTEMBER 28, 1997
REVENUES. Total revenues decreased to $311.9 million for the thirty-nine weeks
ended September 27, 1998 from $373.1 million for the thirty-nine weeks ended
September 28, 1997, a decrease of $61.2 million or 16%. The decrease in total
revenues was principally attributable to continued declines in same unit
revenues and a decrease in promotional and specialty retail sales.
Direct revenues decreased 19% from $357.0 million for the thirty-nine
weeks ended September 28, 1997 to $290.5 million for the thirty-nine weeks ended
September 27, 1998. Total same unit revenues decreased 17% for the thirty-nine
weeks ended September 28, 1997 as compared to the thirty-nine weeks ended
September 27, 1998 (same unit revenues exclude promotional and specialty retail
sales). Restaurant same unit revenues decreased 15%, while merchandise same unit
revenues declined 22%. The decline in same unit revenues was primarily due to
declines in customer traffic resulting from increased competition in the theme
dining industry and declines in tourism in several of the Company's major
markets. Restaurant average spends were consistent with the first thirty-nine
weeks of 1997; however, retail average spends decreased. The decline in retail
average spends was due to the absence of new merchandise
9
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introductions as part of the Company's inventory reduction initiatives. In the
near term, the Company anticipates continued declines in same unit revenues as a
result of decreased customer traffic, and the inclusion of additional secondary
market units in the comparable store base. The decline in revenues was partially
offset by the opening of nine Company-owned units subsequent to September 28,
1997. As a percentage of direct revenues, merchandise sales decreased from 41%
for the thirty-nine weeks ended September 28, 1997 to 31% for the thirty-nine
weeks ended September 27, 1998, due to the decline of promotional and specialty
retail sales; with the balance of the decline due to the Company's expansion
into secondary markets and the expansion of the Official All Star Cafe concept
which has a lower merchandise sales mix than Planet Hollywood units.
Franchise fees were $8.3 million for the thirty-nine weeks ended
September 28, 1997 compared to $11.6 million for the thirty-nine weeks ended
September 27, 1998. The Company recognized revenue for five franchise units for
the thirty-nine weeks ended September 28, 1997 compared to eleven franchise
units for the thirty-nine weeks ended September 27, 1998. As the Company's and
franchisees' expansion continues primarily in secondary markets, the Company
expects to receive lower franchise fees per unit opening. Franchise royalty
revenues decreased from $3.5 million for the thirty-nine weeks ended September
28, 1997 to $3.1 million for the thirty-nine weeks ended September 27, 1998. The
decrease was primarily due to same unit revenue declines among franchised
units. Non-franchise royalties and other revenues increased from $7.9 million
for the thirty-nine weeks ended September 28, 1997 to $9.8 million for the
thirty-nine weeks ended September 27, 1998. The increase was due to $3.8 million
of gains being realized in second quarter 1998 from the sale of 50% of the
Company's interest in three franchised units to a stockholder/franchisee. These
gains were partially offset by current year declines in licensing activities.
COSTS AND EXPENSES. Food and beverage costs increased from 22.8% of food and
beverage revenues for the thirty-nine weeks ended September 28, 1997 to 23.3%
for the thirty-nine weeks ended September 27, 1998. This increase was mainly due
to a decline in higher margin liquor sales as a percentage of total sales,
increases in commodity prices and menu specification changes. Merchandise costs
increased from 33.9% of merchandise revenues for the thirty-nine weeks ended
September 28, 1997 to 35.1% for the thirty-nine weeks ended September 27, 1998.
The increase in merchandise costs was due to shifts in sales composition
resulting from the decline in specialty and promotional sales. Operating
expenses, which consist primarily of labor, occupancy and other direct unit
operating costs, increased from 43.2% of direct revenues for the thirty-nine
weeks ended September 28, 1997 to 60.2% for the thirty-nine weeks ended
September 27, 1998, primarily due to relatively fixed unit operating costs in
relation to lower sales volumes and increased labor and public relations costs
associated with the Company's current promotional and service initiatives. These
initiatives include increased celebrity appearances at the units, sponsorship of
major events in cities with restaurants and improvement of service in order to
enhance the overall guest experience.
General and administrative expenses increased from $19.5 million for
the thirty-nine weeks ended September 28, 1997 to $35.5 million for the
thirty-nine weeks ended September 27, 1998, due primarily to the expansion of
the Corporate infrastructure, primarily labor and labor
10
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related costs, increased public relations expenditures associated with the
Company's continued efforts to promote brand awareness and enhance the guest
experience and increase celebrity involvement. As a percent of total revenues,
general and administrative expenses increased from 5.2% for the thirty-nine
weeks ended September 28, 1997 to 11.4% for the thirty-nine weeks ended
September 27, 1998.
PREOPENING COSTS. With the adoption of SOP 98-5 in fiscal 1998, the Company now
expenses preopening costs as they are incurred. This change resulted in the
Company recording $10.6 million in pre-opening costs for the thirty-nine weeks
ended September 27, 1998, primarily for the seven units opened in fiscal 1998.
For the thirty-nine weeks ended September 27, 1997, preopening costs were $12.6
million and reflected the amortization of preopening costs during a unit's first
year of operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the thirty-nine
weeks ended September 28, 1997 was $13.7 million, compared to $17.4 million for
the thirty-nine weeks ended September 27, 1998. The increase of $3.7 million was
primarily due to the Company's continued expansion of restaurant units, sixteen
units were added during fiscal 1997 and seven units year to date in fiscal 1998,
and the construction of the Company's corporate office, which was completed in
fiscal 1998.
INTEREST EXPENSE. Interest expense for the thirty-nine weeks ended September 27,
1998 increased to $14.5 million as a result of the Company's $250.0 million debt
offering in March 1998.
INTEREST INCOME. Interest income increased from $1.2 million for the thirty-nine
weeks ended September 28, 1997 to $3.6 million for the thirty-nine weeks ended
September 27, 1998. The increase was attributable to the investment of funds
received from the Company's debt offering in March 1998.
EQUITY IN INCOME (LOSSES) OF UNCONSOLIDATED AFFILIATES. Equity in income
(losses) of unconsolidated affiliates decreased from $6.3 million in income for
the thirty-nine weeks ended September 28, 1997 to $(0.1) million in losses for
the thirty-nine weeks ended September 27, 1998. The decline was principally
caused by the sale of a franchise by PH Asia in 1997 and the absence of any such
sales through the third quarter 1998 and a decrease in revenue for PH Asia
resulting from downturns in tourism and the related economic uncertainties
throughout Asia.
PROVISION FOR INCOME TAXES. The provision for income taxes was $31.0 million or
37.3% of pretax income for the thirty-nine weeks ended September 28, 1997. For
the thirty- nine weeks ended September 27, 1998, the Company recorded an income
tax benefit of $5.8 million or 37.5% of pretax losses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities for the thirty-nine
weeks ended September 28, 1997 and September 27, 1998 was $32.2 million and
($3.6) million, respectively.
11
<PAGE>
This decrease was primarily due to the decline in net income and reduction of
accounts payable, and was partially offset by a reduction of receivable and
inventory balances for the thirty-nine weeks ended September 27, 1998.
Net cash used in investing activities for the thirty-nine weeks ended
September 28, 1997 and September 27, 1998 was $116.0 million and $62.6 million,
respectively. The decrease was primarily the result of fewer unit openings in
fiscal 1998. Capital expenditures, consisting primarily of new restaurant
construction and replacement restaurant furniture and equipment for the
thirty-nine weeks ended September 28, 1997 and September 27, 1998 were $91.1
million and $57.6 million, respectively.
Net cash provided from financing activities for the thirty-nine weeks
ended September 28, 1997 and September 27, 1998 was $53.7 million and $176.5
million, respectively. The increase was due to the Company's issuance of $250.0
million of Senior Subordinated Notes in March 1998 (the "Notes"). A portion of
the net proceeds from the Notes was used to repay borrowings under the Company's
credit facility with the remainder expected to be used for capital expenditures
associated with the construction and development of Company-owned restaurants
and joint venture projects.
Concurrent with the Notes offering, the Company replaced its existing
$155.0 million revolving credit facility with a $65.0 million multi-currency
revolving credit facility and a $35.0 million LIBOR-based leveraged lease
facility (the "Credit Facility"). As a result of operating losses experienced in
the third quarter of fiscal 1998, the Company was not in compliance with certain
financial covenants of the Credit Facility (specifically, EBITDA and Fixed
Charge Ratios, as such terms are defined in the Credit Facility documents).
While the Company does not owe any amounts under the revolving credit portion of
the Credit Facility, approximately $35 million is outstanding under the
leveraged lease portion of the Credit Facility. The Company is currently in
negotiations regarding the amendment and/or waiver of certain terms of the
Credit Facility, which, if successful, will cure the noncompliance. The Company
expects to conclude such negotiations by the end of November 1998. There is no
assurance that the Company will be able to effect such amendments and/or waivers
to the Credit Facility on satisfactory terms, if at all. If the Company is
unable to effectuate such amendments and/or waivers, the Company will repay all
amounts outstanding under the Credit Facility and/or arrange alternative
financing with another lender. The Notes and the Credit Facility contain a
cross-acceleration provision. The Company is currently in full compliance with
the terms of the documents governing the Notes. The Company expects cash on hand
and cash generated from other financing alternatives to be sufficient to meet
its anticipated capital requirements for the next twelve months.
YEAR 2000.
The Year 2000 will have a broad impact on the business environment in
which the Company operates due to the possibility that many computerized systems
across all industries will be unable to process information containing dates
beginning in the Year 2000. The Company has established an enterprise-wide
program to prepare its computer systems and applications for the Year 2000 and
is utilizing both internal and external resources to identify,
12
<PAGE>
correct and test the Company's systems for Year 2000 compliance. The Company
anticipates that the majority of its domestic reprogramming will be completed by
December 31, 1998, and testing efforts will be substantially concluded by March
31, 1999. Further validation through testing will be conducted throughout
calendar year 1999. In addition to the reprogramming of existing applications,
the Company is in the process of implementing a new enterprise information
system and a new point of sale system. Both systems will be Year 2000 compliant,
with testing and implementation of the enterprise information system expected to
be completed by April 1999 domestically and September 1999 internationally. The
testing and implementation of the new point of sale system is expected to be
completed by July 1999 domestically and September 1999 internationally.
The nature of the Company's business is such that the business risks
associated with the Year 2000 can be reduced by assessing the vendors supplying
the Company's restaurants with food and related products and also assessing the
Company's franchise and joint venture business partners to ensure that they are
aware of the Year 2000 business risks and are appropriately addressing them.
Because third party failures could have a material impact on the
Company's ability to conduct business, the Company will be sending
questionnaires to substantially all of the Company's vendors and business
partners to obtain reasonable assurance that plans are being developed to
address the Year 2000 issue. The returned questionnaires will be assessed by the
Company, categorized based upon readiness for the Year 2000 issues, and
prioritized in order of significance to the business of the Company. To the
extent that vendors and business partners do not provide the Company with
satisfactory evidence of their readiness to handle Year 2000 issues, contingency
plans will be developed.
The Company anticipates that it will have substantially completed an
inventory of all information technology equipment by December 31, 1998, and will
then address the Year 2000 readiness of such equipment. Non-information
technology equipment will be inventoried by March 31, 1999 at which time the
Company will address the Year 2000 readiness of such equipment.
The enterprise-wide program, including testing and remediation of all
of the Company's systems and applications, is expected to cost approximately
$1.0 million from inception in fiscal 1997 through completion in fiscal 1999. Of
these costs, approximately $0.2 million was incurred through September 27, 1998.
Approximately $0.1 million is expected to be incurred in the remainder of fiscal
1998, with the remaining $0.7 million to be incurred in fiscal 1999. The
Company's new enterprise information system is estimated to cost $5.0 million,
of which $0.8 million has been incurred through September 27, 1998.
Approximately $1.7 million is expected to be incurred in the remainder of fiscal
1998, with the remaining $2.5 million to be incurred in fiscal 1999. The
Company's new point-of-sale system is estimated to cost $8.0 million, with
approximately $1.0 million expected to be incurred in the remainder of fiscal
1998 and $7.0 million in fiscal 1999. All estimated costs have been budgeted and
are expected to be funded by existing cash balances and cash flows from
operations.
The Company does not believe the costs related to the Year 2000
readiness project will be material to its financial position or results of
operations. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on
13
<PAGE>
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans, and other factors. Unanticipated failures by
critical vendors and franchise partners, as well as the failure by the Company
to execute its own remediation efforts, could have a material adverse effect on
the cost of the project and its completion date. Furthermore, any such
unforeseen occurrences, if combined with failures of other third parties or in
the public infrastructure, could have a material adverse effect on the Company's
results of operations, financial condition, and/or cash flows. Consequently,
there can be no assurance that the forward-looking estimates contained herein
will be achieved and the actual cost could differ materially from the
projections contained herein.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In July 1998, the Company announced that it had retained Goldman Sachs
& Co. to join Bear Stearns & Co., Inc., who the Company had retained five months
earlier, in connection with a review of its financial and strategic alternatives
designed to maximize long-term stockholder value.
On July 27, 1998, the Company announced the appointment of William H.
Baumhauer to the position of President and Chief Operating Officer. Mr.
Baumhauer is responsible for all Company-wide operations and oversees and
manages the development of strategic joint ventures, extensions of the Company's
brands and new business opportunities. Mr. Baumhauer also evaluates the
Company's activities to identify opportunities for cost savings and increased
operating efficiencies. Robert Earl continues as the Company's Chief Executive
Officer and is able to devote greater attention to strategic activities and the
creative and marketing aspects of the Company's business.
On September 17, 1998, at a regular meeting of the Company's Board of
Directors, the Board increased the number of directors on the Board from 9 to
10, and elected William Baumhauer to fill such vacancy. Mr. Baumhauer will serve
as a Class I director and his term will expire in 2000. In addition, the Board
expanded the Company's Audit Committee from 4 to 5 members, consisting of
Claudio Gonzalez, Michael Montague (new member), Ong Beng Seng, Isadore Sharp
and Michael Tarnopol. Finally, the Board elected Robert Earl, Michael Montague
(new member) and Isadore Sharp to serve as members of the Company's Compensation
Committee.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 Financial Data Schedule
b. Reports on Form 8-K
On July 30, 1998, the Company filed a Current Report on Form 8-K
(dated July 27, 1998) relating to the appointment of William H. Baumhauer to the
position of President and Chief Operating Officer of the Company.
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.
PLANET HOLLYWOOD INTERNATIONAL,
INC.
DATE: November 12, 1998 By: /s/ WILLIAM H. BAUMHAUER
--------------------------
Name: William H. Baumhauer
Its: President and Chief Operating Officer
DATE: November 12, 1998 By: /s/ THOMAS AVALLONE
------------------------
Name: Thomas Avallone
Its: Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PLANET HOLLYWOOD
INTERNATIONAL, INC. FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 119,643
<SECURITIES> 0
<RECEIVABLES> 23,554
<ALLOWANCES> 1,500
<INVENTORY> 28,426
<CURRENT-ASSETS> 191,628
<PP&E> 417,645
<DEPRECIATION> 54,813
<TOTAL-ASSETS> 654,421
<CURRENT-LIABILITIES> 52,425
<BONDS> 0
0
0
<COMMON> 1,092
<OTHER-SE> 326,438
<TOTAL-LIABILITY-AND-EQUITY> 327,530
<SALES> 290,541
<TOTAL-REVENUES> 311,906
<CGS> 78,241
<TOTAL-COSTS> 316,458
<OTHER-EXPENSES> 76
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,461
<INCOME-PRETAX> (15,521)
<INCOME-TAX> 5,819
<INCOME-CONTINUING> (9,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5,984
<NET-INCOME> (15,686)
<EPS-PRIMARY> (0.14)<F1>
<EPS-DILUTED> (0.14)
<FN>
<F1> Denotes Basic EPS
</FN>
</TABLE>
