<PAGE>
PURSUANT TO RULE NO. 424(b)(4)
REGISTRATION NO. 333-75963
2,500,000 Shares
PLAYBOY[LOGO]
Class B Common Stock
------------
Playboy is selling 500,000 shares of Class B common stock and a selling
stockholder is selling 2,000,000 shares of Class B common stock. The
underwriters have an option to purchase from Playboy a maximum of 375,000
additional shares of Class B common stock to cover over-allotments of
shares.
Our Class B common stock is traded on The New York Stock Exchange and The
Pacific Exchange under the symbol "PLA." Our Class B common stock
has no voting rights, except as required by law. On May 11,
1999, the last reported sale price of our Class B
common stock on The New York Stock Exchange was
$30.75.
Investing in our Class B common stock involves risks. See "Risk Factors" on
page 9.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Playboy Stockholder
-------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Per Share................... $30.00 $1.575 $28.425 $28.425
Total....................... $75,000,000 $3,937,500 $14,212,500 $56,850,000
</TABLE>
Delivery of the shares of Class B common stock will be made on or about May
17, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston ING Baring Furman Selz LLC
Prospectus dated May 11, 1999.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Where You Can Find More Information. i
Incorporation by Reference.......... i
Special Note Regarding Forward-
Looking Statements................. ii
Prospectus Summary.................. 1
Risk Factors........................ 9
Use of Proceeds..................... 13
Dividend Policy..................... 13
Price Range of Class B Common Stock. 14
Capitalization...................... 15
Pro Forma Financial Information..... 16
Selected Historical Financial and
Other Data......................... 23
</TABLE>
<TABLE>
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Page
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<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 25
Business............................................................................... 42
Management............................................................................. 56
Principal and Selling Stockholders..................................................... 59
Description of Capital Stock........................................................... 61
Shares Eligible for Future Sale........................................................ 63
Underwriting........................................................................... 64
Notice to Canadian Residents........................................................... 65
Legal Matters.......................................................................... 66
Experts................................................................................ 66
Index to Financial Statements.......................................................... F-1
</TABLE>
------------
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus may only be used where it is
legal to sell these securities. The information in this prospectus may only be
accurate on the date of this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-3 regarding this offering
with the SEC. This prospectus, which is a part of the registration statement,
does not contain all of the information included in the registration statement,
and you should refer to the registration statement and its exhibits to read
that information. References in this prospectus to any of our contracts or
other documents are not necessarily complete, and you should refer to the
exhibits attached to the registration statement for copies of the actual
contract or document. You may read and copy the registration statement, the
related exhibits and the other materials we file with the SEC at the SEC's
public reference room in Washington, D.C. and at the SEC's regional offices in
Chicago, Illinois and New York, New York. You can also request copies of those
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. The SEC also maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file with the SEC; the site's address is www.sec.gov. You may also
request a copy of these filings, at no cost, by writing or telephoning us as
follows: Corporate Secretary, Playboy Enterprises, Inc., 680 North Lake Shore
Drive, Chicago, IL 60611, (312) 751-8000.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" in this prospectus other
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus; however, to
the extent that there are any inconsistencies between information presented in
this prospectus and information contained in incorporated documents filed with
the SEC before the date of this prospectus, the information in this prospectus
shall be deemed to supersede the earlier information. Information that we file
with the SEC after the date of this prospectus will automatically update and
supersede the information in this prospectus and any earlier filed or
incorporated information. Specifically we incorporate by reference our Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, our Current
Report on Form 8-K filed with the SEC on March 9, 1999, our Current Report on
Form 8-K filed with the SEC on March 15, 1999, our Current Report on Form 8-K/A
filed with the SEC on April 9, 1999, and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act until we sell all
of the securities offered by this prospectus.
i
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information both included and incorporated by reference in this prospectus
may contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may
involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by any forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
The following are some of the important factors that could cause actual
results or outcomes to differ materially from those discussed in forward-
looking statements:
. government actions or initiatives, including (1) attempts to limit or
otherwise regulate the sale of adult-oriented materials, including print,
video and online materials or businesses such as casino gaming, (2)
regulation of the advertisement of tobacco products or (3) substantive
changes in postal regulations or rates;
. increases in paper prices;
. changes in distribution technology and/or unforeseen delays in the
implementation of that technology by the cable and satellite industries,
which might affect our plan and assumptions regarding carriage of our
program services;
. increased competition for transponders and channel space and any decline
in our access to, and acceptance by, cable and DTH systems;
. increased competition for advertisers from other publications and media
or any significant decrease in spending by advertisers, either generally
or with respect to the adult male market;
. effects of the consolidation taking place nationally in the single-copy
magazine distribution system;
. new competition in the cable television market;
. potential problems associated with the integration of our business with
Spice's business;
. uncertainty of market acceptance of the Internet as a medium for
information, entertainment, e-commerce and advertising, an increasingly
competitive environment for advertising sales, the impact of competition
from other content and merchandise providers, as well as our reliance on
third parties for technology and distribution for our online business;
. potential adverse effects of unresolved Year 2000 problems, including
those that may be experienced by key suppliers; and
. other matters discussed in the Risk Factors section of this prospectus.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors, the financial statements and the documents incorporated by
reference into the prospectus.
Playboy
Playboy Enterprises, Inc. is a global multi-media entertainment company with
one of the most recognized brand names in the world. The flagship of our
franchise is Playboy magazine, the world's best-selling men's monthly magazine,
recognized for over 45 years for its high-quality editorial material,
interviews and pictorial features. Our entertainment business, the largest
provider of adult targeted programming in the United States and abroad,
generates most of our earnings and cash flow. Our rapidly growing Internet
business, which includes one of the Internet's most visited destination sites,
generates revenues from advertising, subscription and e-commerce. We have
integrated our e-commerce efforts with the merchandising, order fulfillment and
customer service capabilities of our profitable catalog business. We also
successfully leverage our strong brand identity through product marketing and
casino gaming.
We operate six business groups: Publishing, Entertainment, Playboy Online,
Catalog, Product Marketing and Casino Gaming.
Publishing Group
The Publishing Group publishes Playboy magazine and other print products
that leverage our editorial library and brand, such as newsstand specials,
calendars and books, and licenses or owns international editions of Playboy
magazine. Founded by Hugh M. Hefner in 1953, Playboy is a general-interest
magazine targeted to men, with a reputation for excellence founded on providing
quality entertainment and informative articles on current issues and trends.
Playboy consistently includes interviews with high profile political, business,
entertainment and sports celebrities such as James Carville, Bill Gates, Jerry
Seinfeld, Anne Rice and Michael Jordan. The magazine also features pictorials
of famous women, including in recent issues Cindy Crawford, Katarina Witt and
Pamela Anderson.
Playboy magazine's worldwide monthly circulation is approximately 4.5
million copies (including approximately 3.2 million copies of the U.S.
edition). Approximately one in every eight men in the United States aged 18 to
34 reads the U.S. edition of Playboy, according to Fall 1998 data published by
Mediamark Research, Inc. Playboy magazine's circulation rate base (the total
newsstand and subscription circulation guaranteed to advertisers) is the
highest among monthly men's magazines. At December 31, 1998, it exceeded each
of Newsweek, Cosmopolitan and the combined circulation of Rolling Stone,
Esquire and GQ, according to the Audit Bureau of Circulations, an independent
audit agency. Playboy magazine sells approximately 80% of its total circulation
by subscription. International sales of the U.S. edition and 17 international
editions of Playboy extend the magazine's reach to approximately 50 countries
worldwide.
Entertainment Group
The Entertainment Group operates three branded domestic pay television
networks, Playboy TV, Spice and Spice 2, the leading adult entertainment
networks. In addition, this group owns branded networks overseas and operates a
worldwide home video business.
1
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Playboy TV principally offers unique original programming which generally
can be purchased on a monthly or pay-per-view basis and is available
domestically through cable television, satellite, wireless cable systems and
new technologies. As of December 31, 1998, Playboy TV was available in
approximately 11.7 million U.S. cable addressable (pay-per-view) households. We
have agreements with 19 of the nation's 20 largest multiple system operators,
which we refer to as "MSOs." These MSOs together control, through affiliated
cable systems, access to approximately 55.9 million, or approximately 85%, of
the 65.9 million total U.S. cable households. In addition, as of December 31,
1998, Playboy TV was available in approximately 9.8 million U.S. direct-to-home
households, which we refer to as "DTH" households. Playboy TV is the only adult
entertainment service available on all five major U.S. and Canadian direct
broadcasting satellite systems, which we refer to as "DBS" systems.
In March 1999, we completed the acquisition of Spice Entertainment
Companies, Inc., a leading provider of adult television entertainment
throughout the world. See "--Recent Developments--Spice Acquisition" for
further information about this acquisition. Spice obtains exclusive television
rights to adult movies from third parties and offers these movies on a pay-per-
view basis on two television networks. As of December 31, 1998, these networks
were available in approximately 10.9 million U.S. cable addressable households.
We expect the Spice Acquisition to result in the net addition of approximately
five million new domestic pay television households and the consolidation of
four networks into three, eliminating significant duplicative costs.
We operate and have equity interests in international television networks in
the United Kingdom, Japan, Latin America and Iberia and plan to launch a
network covering Germany and Scandinavia in 1999. In addition, we license
Playboy-branded programming to television broadcasters. Together, our
programming is available in approximately 150 countries and territories
worldwide, creating an ongoing branded presence in international markets. We
also operate Spice television networks in the United Kingdom, Japan and Latin
America and make Spice programming available in numerous countries worldwide.
To accelerate expansion of our international networks, we intend to form
Playboy TV International, a joint venture, to develop, own and operate Playboy
TV and Spice networks outside the United States and Canada. See "--Recent
Developments--Playboy TV International, LLC" for further information about this
joint venture.
We also distribute our original programming domestically and internationally
through videocassettes, laserdiscs and DVDs that are sold in video stores,
music and other retail outlets, through the Internet and direct mail, including
our own catalogs. Playboy Home Video is one of the largest-selling brands of
non-theatrically released, special-interest videos in the United States.
Playboy Home Video has been named one of Billboard magazine's "Top Video Sales
Labels" for each calendar year since 1994.
We believe that the success of Playboy TV and our international television
and worldwide home video businesses is driven by our investment in the
development of original programming. Playboy programming is consistent with the
level of taste and quality established by Playboy magazine over its 45-year
history. The programming consists of stylized eroticism, with an emphasis on
programming for couples, and does not contain depictions of explicit sex or
scenes that link sexuality with violence. We produce more than 100 hours of
programming annually in formats ranging from feature films, magazine-format
shows and dramatic series to live events, anthology series and celebrity and
Playmate features. These programs can be easily adapted for use on the Playboy
TV network in the United States and abroad and as home video and DVD product,
allowing us to spread our relatively fixed programming costs over multiple
product lines. Our library of exclusive Playboy-style quality programming
totals approximately 1,300 hours. This large entertainment library and our
magazine's editorial and pictorial library have considerable value. We believe
that our quality production standards and our widely recognized trademarks give
us a strong competitive advantage over other suppliers of adult entertainment.
2
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Playboy Online Group
The Playboy Online Group operates Playboy.com, our network of sites on the
Internet, a pay site called Playboy Cyber Club and online versions of our
catalogs. This group generates revenues from advertising, subscription and e-
commerce. Playboy.com features a wide and growing range of content that is
original, accessible only online and targeted to the young adult male audience,
as well as editorial features from Playboy magazine and photos from Playboy
pictorials. During March 1999, Playboy.com served a total of approximately 88
million page impressions, according to audited information from Audit Bureau of
Verification Services, Inc., which represents a 79% increase over March 1998.
Approximately 1.7 million unique visitors accessed Playboy.com in March 1999,
according to estimated information from Media Metrix. Playboy Cyber Club
features exclusive Playboy content and online events. As of March 31, 1999,
Playboy Cyber Club had almost 30,000 subscribers. The Playboy Online Group's
revenues in fiscal 1998 increased 83% over the previous calendar year, to more
than $7 million, after more than doubling from fiscal 1996 to fiscal 1997. We
plan to relaunch the Spice site on the Internet in 1999.
Catalog Group
The Catalog Group markets products directly through our four catalogs and
also supports our e-commerce efforts through merchandising, order fulfillment
and customer service. The Critics' Choice Video catalog is one of the largest
circulation catalogs of pre-recorded videocassettes in the United States, with
an inventory of 22,000 titles, including mainstream films such as Titanic, The
Wizard of Oz, Gone With the Wind and The Lion King. The Collectors' Choice
Music catalog is one of America's leading music catalogs for imports and hard-
to-find reissues, with an inventory of over 8,000 titles. The Playboy catalog,
one of our first brand extensions, offers Playboy-branded fashions and
accessories, Playboy Home Video titles, Playboy collectibles and gifts and CD-
ROM products. The recently launched Spice catalog offers over 1,700 adult
videos.
Product Marketing Group
The Product Marketing Group licenses domestically and internationally the
Playboy name, Rabbit Head Design and other trademarks and artwork that we own
for the manufacture, sale and distribution of a variety of consumer products.
Playboy merchandise includes apparel, accessories and Playboy-branded cigars.
Casino Gaming Group
Beginning in April 1999, with the opening of The Playboy Casino at Hotel des
Roses on the Greek island of Rhodes, we began generating licensing revenues
from our casino gaming business. We are currently exploring other location-
based entertainment opportunities anchored by casinos around the world. We
expect to obtain licensing fees and/or management fees from these
establishments and will consider taking equity positions.
Our Business Strategy
Our strategic objective is to build globally the preeminent branded multi-
media entertainment company. Some of the key elements of our strategy are:
. Capitalize on Advances in Entertainment Technology. We have successfully
capitalized on revenue opportunities created by advances in entertainment
technology and intend to continue to exploit these opportunities in the
future. In the near term, we expect that advances in digital
entertainment technology will enable us to increase significantly our
television programming and pay-per-view revenues without a corresponding
increase in programming or operating costs. We believe that advances in
digital technology will expand cable television system channel capacity,
increase the number of cable
3
<PAGE>
addressable (pay-per-view) households, facilitate 24 hour availability to
more customers and make it easier for the consumer to order pay-per-view
programming. Paul Kagan Associates, Inc., which we refer to as "Kagan," a
leading industry analyst, projects that digital cable households will
increase from 1.1 million households in 1998 to 23.2 million households in
2003. In addition, Kagan forecasts that the number of DBS subscribers will
grow 76% from 1998 through 2003.
. Expand Television Networks Globally. As part of our efforts to extend our
recognized brand, we have expanded Playboy TV outside the United States
through the launch of networks in four international territories. Based
on the performance of these networks, we plan to launch additional
Playboy TV and Spice networks in new international markets. To expand
even more rapidly, we have agreed to form a joint venture with another
international media company. See "--Recent Developments--Playboy TV
International, LLC" for a description of this joint venture. We expect
this joint venture to operate all of our existing and new international
television networks. In addition to providing us with significant annual
payments, it would enable us to grow our international television
revenues more rapidly.
. Increase Internet Presence. In the last few years, we have developed a
significant Internet business through the Playboy.com network of web
sites. We intend to continue strengthening our position as one of the
leading destination sites targeted to men aged 18 to 34 by investing in
our network of web sites and entering into alliances and marketing
agreements with partners to enhance the sites' appeal and increase their
overall traffic. We expect that these investments and agreements will
enable us to increase our online advertising, subscription and e-commerce
revenues.
. Strengthen Playboy Magazine's Preeminent Position. Playboy magazine has
been the flagship of the Playboy brand for 45 years. The quality
reputation of the magazine has enabled us to grow Playboy worldwide and
extend the Playboy brand domestically and internationally beyond the
printed page into electronic media. We intend to enhance the profit
margin of Playboy magazine and the overall profitability of our
Publishing Group, while maintaining Playboy magazine's reputation for
quality and its leading position in the men's monthly magazine category.
We expect to accomplish this strategy through a variety of measures,
including strengthening Playboy's editorial and marketing appeal to the
18 to 34 year-old male market and establishing the most economically
sound rate base and pricing structure for the magazine.
. Further Leverage Our Brands Worldwide. We regularly pursue opportunities
to further leverage our brand image. We intend to expand our product
marketing internationally through alliances with major companies and
through e-commerce. In addition, we are exploring and developing Playboy-
branded entertainment establishments anchored by casinos around the world
with a strategy to form joint ventures with strong partners.
Recent Developments
Spice Acquisition
On March 15, 1999, we completed the acquisition of Spice, which we refer to
as the "Spice Acquisition." The total transaction value, including the
assumption of Spice's debt, was approximately $136 million. The Spice
Acquisition provides us with a strong foothold in providing adult entertainment
to cable television and DBS operators. We now own four of the five established
adult entertainment networks currently available to both cable and DBS
consumers.
We entered into a new credit agreement to help finance the Spice
Acquisition, to repay debt we and Spice owed and to fund our future general
working capital and investment needs. Under the new credit agreement, we may
borrow up to an aggregate of $150 million. We borrowed $35 million under a term
loan maturing in March 2004, $75 million under a second term loan maturing in
2006, and we may borrow up to $40 million under a revolving credit facility
until March 2004.
4
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Playboy TV International, LLC
In December 1998, we agreed to create Playboy TV International, LLC, a joint
venture with an affiliate of the Cisneros Group of Companies, which we refer to
as "Cisneros," an international media company and one of Latin America's most
prominent conglomerates and broadcasters, to facilitate an even more rapid
expansion of Playboy TV and Spice into international markets. If completed,
Playboy TV International would own, operate, distribute and develop Playboy TV
and Spice outside the United States and Canada. This joint venture would pay us
$100 million over approximately five years, both to license the Playboy and
Spice brand names and our existing programming library for television rights
outside the United States and Canada and also to acquire some of our interests
in our existing international television channels. In addition, the joint
venture would pay us licensing fees equal to a significant share of annual
programming costs. We would retain our international home video and our
domestic television ownership rights. Initially, we would have a 19.9% interest
in the joint venture, with the option to increase that stake up to 50% of the
total. To complete the joint venture, we are finalizing agreements and must
satisfy closing conditions. The due diligence condition has been satisfied. We
expect to complete the joint venture in the second quarter of 1999.
Fiscal Year 1999 First Quarter
On May 4, 1999, we announced our earnings for fiscal year 1999 first
quarter. Losses in our Playboy Online and Catalog Groups, combined with
increased marketing expenses and lower margins in our Entertainment Group due
to increased costs, contributed to an operating loss in the quarter of $2.0
million. The net loss in the quarter was $1.0 million, or $0.05 per basic and
diluted share. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Developments" for further information about
these results.
Our Address
Our principal executive offices are located at 680 North Lake Shore Drive,
Chicago, Illinois 60611, and our telephone number is (312) 751-8000. Our
corporate web site is located at www.playboy.com. Information contained at our
web sites is not a part of this prospectus.
5
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The Offering
Class B common stock offered 500,000 shares by us
(1)........................... 2,000,000 shares by the selling stockholder
---------
2,500,000 shares
---------
---------
Common stock to be
outstanding after the
offering...................
4,748,954 shares of Class A common stock (2)
18,415,577 shares of Class B common stock
(1)(2)(3)
Voting rights................. Each share of Class A common stock entitles its
holder to one vote on all matters submitted to
the stockholders, including the election of
directors. Each share of Class B common stock
has no voting rights, except as required by
law.
Use of proceeds............... The proceeds of the offering of Class B common
stock by Playboy will be used for general
corporate purposes. We will not receive any of
the proceeds from the sale of Class B common
stock by the selling stockholder.
Stock exchange symbols:
Class A common stock...... PLAA
Class B common stock...... PLA
- --------
(1) Does not include 375,000 shares of Class B common stock that will be
offered by Playboy if the underwriters exercise their over-allotment option
in full. Some of the disclosures in this prospectus will be different if
the underwriters exercise their option. Unless we tell you otherwise, the
information in this prospectus assumes that the underwriters will not
exercise their option.
(2) Does not include 115,000 shares of Class A common stock and 2,350,000
shares of Class B common stock issuable upon the exercise of stock options
outstanding as of April 30, 1999.
(3) Does not include 326,872 shares of unvested restricted stock as of April
30, 1999.
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Summary Consolidated Financial and Other Data
You should read the consolidated financial and other operating data below in
conjunction with the consolidated financial statements and the related notes
appearing elsewhere or incorporated by reference in this prospectus. See "Pro
Forma Financial Information," "Selected Historical Financial and Other Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Pro Forma
Historical As Adjusted(1)
--------------------------------------------- --------------
Fiscal Year Ended Six Months Fiscal Year Ended
------------------ Ended ---------------------------
June 30, June 30, December 31, December 31, December 31,
1996 1997 1997 1998 1998
-------- -------- ------------ ------------ --------------
(In thousands, except per share amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $276,587 $296,623 $149,541 $317,618 $342,659
-------- -------- -------- -------- --------
Operating income........ 9,493 15,745 4,459 4,968 8,664
Nonoperating income
(expense).............. (1,044) (994) (169) 2,057 (4,819)
-------- -------- -------- -------- --------
Income before income
taxes and cumulative
effect of change in
accounting principle... 8,449 14,751 4,290 7,025 3,845
Income tax benefit
(expense).............. (4,197) 6,643 (2,148) (2,705) (4,599)
-------- -------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle... 4,252 21,394 2,142 4,320 (754)
Cumulative effect of
change in accounting
principle (net of tax
benefit)............... -- -- (1,077) -- --
-------- -------- -------- -------- --------
Net income (loss)....... $ 4,252 $ 21,394 $ 1,065 $ 4,320 $ (754)
======== ======== ======== ======== ========
Basic income (loss) per
common share
Income (loss) before
cumulative effect of
change in accounting
principle............. $ 0.21 $ 1.05 $ 0.10 $ 0.21 $ (0.03)
======== ======== ======== ======== ========
Net income (loss)...... $ 0.21 $ 1.05 $ 0.05 $ 0.21 $ (0.03)
======== ======== ======== ======== ========
Diluted income (loss)
per common share
Income (loss) before
cumulative effect of
change in accounting
principle............. $ 0.21 $ 1.03 $ 0.10 $ 0.21 $ (0.03)
======== ======== ======== ======== ========
Net income (loss)...... $ 0.21 $ 1.03 $ 0.05 $ 0.21 $ (0.03)
======== ======== ======== ======== ========
Segment Data:
Net revenues:
Publishing............. $131,800 $135,710 $ 66,329 $137,997 $137,997
Entertainment.......... 64,826 74,716 37,356 91,049 116,090
Product Marketing...... 7,125 7,968 4,199 7,081 7,081
Catalog................ 71,634 75,391 39,340 74,393 74,393
Casino Gaming.......... -- -- -- -- --
Playboy Online......... 1,202 2,838 2,317 7,098 7,098
-------- -------- -------- -------- --------
Total net revenues... $276,587 $296,623 $149,541 $317,618 $342,659
======== ======== ======== ======== ========
Operating income (loss):
Publishing............. $ 9,041 $ 8,665 $ 3,898 $ 6,332 $ 6,332
Entertainment.......... 9,204 18,254 7,991 26,165 29,861
Product Marketing...... 3,692 3,512 1,614 365 365
Catalog................ 5,231 4,630 1,835 4,100 4,100
Casino Gaming.......... -- -- (541) (1,108) (1,108)
Playboy Online......... 207 (113) (943) (6,528) (6,528)
Corporate
Administration and
Promotion............. (17,882) (19,203) (9,395) (24,358) (24,358)
-------- -------- -------- -------- --------
Total operating
income.............. $ 9,493 $ 15,745 $ 4,459 $ 4,968 $ 8,664
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
Pro Forma
Historical As Adjusted(1)
--------------------------------------------- --------------
Fiscal Year Ended Fiscal Year Ended
------------------ ---------------------------
Six Months
Ended
June 30, June 30, December 31, December 31, December 31,
1996 1997 1997 1998 1998
-------- -------- ------------ ------------ --------------
(In thousands, except advertising pages) (unaudited)
<S> <C> <C> <C> <C> <C>
Other Data:
Cash flows from:
Operating activities... $ 4,541 $ 1,539 $(3,853) $(15,044) N/A(6)
Investing activities... $ (4,168) $ (2,450) $(1,874) $ (6,361) N/A(6)
Financing activities... $ 594 $ (224) $ 5,371 $ 20,799 N/A(6)
EBITDA by segment(2)(3):
Publishing............. $ 10,008 $ 9,711 $ 4,223 $ 6,973 $ 6,973
Entertainment.......... 31,040 40,281 19,347 51,696 61,570
Product Marketing...... 3,909 3,688 1,692 520 520
Catalog................ 5,870 5,281 2,072 4,564 4,564
Casino Gaming.......... -- -- (541) (1,108) (1,108)
Playboy Online......... 207 (113) (943) (6,500) (6,500)
Corporate
Administration and
Promotion............. (15,564) (17,197) (8,266) (18,557) (18,557)
-------- -------- ------- -------- --------
Total EBITDA(2)(3)... $ 35,470 $ 41,651 $17,584 $ 37,588 $ 47,462
======== ======== ======= ======== ========
Adjusted EBITDA(2)(3)... $ 9,921 $ 10,904 $ 3,225 $ 12,987 $ 20,357
Depreciation and
amortization(4)........ $ 26,341 $ 26,473 $13,005 $ 29,012 $ 35,190
Amortization of
investments in
entertainment
programming............ $ 21,263 $ 21,355 $11,153 $ 25,109 $ 27,401
Cash investments in
entertainment
programming............ $ 25,549 $ 30,747 $14,359 $ 24,601 $ 27,105
Playboy magazine
advertising pages...... 569 558 273 601 601
Number of total U.S.
cable addressable
households at end of
period(5).............. 26,400 29,350 30,700 33,200 33,200
Approximate number of
total domestic Playboy
TV cable addressable
households at end of
period................. 11,300 11,200 11,600 11,700
Approximate number of
total domestic Playboy
TV DTH households at
end of period.......... 4,900 6,300 6,800 9,800
Balance Sheet Data (at period end):
Cash and cash equivalents.............................. $ 341 $ 28,878
Working capital........................................ 33,426 69,885
Total assets........................................... 212,107 393,509
Long-term debt......................................... -- 110,000
Total shareholders' equity............................. 84,202 146,646
</TABLE>
- --------
(1) Pro forma as adjusted data, except for balance sheet data, give effect to
the Spice Acquisition, as if it had occurred as of January 1, 1998. Pro
forma as adjusted balance sheet data give effect to (a) the Spice
Acquisition and (b) the sale by Playboy of 500,000 shares of Class B common
stock in this offering, as if each had occurred on December 31, 1998.
(2) You should not consider EBITDA and Adjusted EBITDA as alternatives to any
measure of performance or liquidity under generally accepted accounting
principles. Similarly, you should not infer that EBITDA and Adjusted EBITDA
are more meaningful than any of those measures.
(3) EBITDA represents earnings before income taxes and cumulative effect of
change in accounting principle plus interest expense, depreciation and
amortization. Adjusted EBITDA represents EBITDA less cash investments in
entertainment programming. Adjusted EBITDA takes into account the recurring
nature of the significant cash investments we make in entertainment
programming on a yearly basis. These investments are related to the amount
of amortization of investments in entertainment programming. We have
included information concerning EBITDA and Adjusted EBITDA because we
believe they allow you to analyze more completely our results of
operations.
(4) Includes amortization of investments in entertainment programming.
(5) Based on projections by Kagan for each period.
(6) Information not available.
8
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before buying shares
of our Class B common stock in this offering. The risks and uncertainties
described below are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial
may impair our business operations. If any of the following risks actually
occur, our business, results of operations and financial condition could be
materially adversely affected, the trading price of our Class B common stock
could decline and you might lose all or part of your investment. See also
"Special Note Regarding Forward-Looking Statements" for a further discussion of
factors that could cause results of operations to be materially different than
we currently expect.
Government regulations could adversely affect our business.
Telecommunications Act of 1996. We believe that the Telecommunications Act
of 1996 has slowed growth in cable access for our domestic pay television
businesses. For example, Federal Communications Commission reregulation,
including the "going-forward rules," provides cable operators with incentives
to add basic services. Competition for channel space has increased as cable
operators have utilized available channel space to comply with "must-carry"
provisions, mandated retransmission consent agreements and "leased access"
provisions. In addition, we believe that growth will continue to be slow in the
next two to three years as the cable television industry responds to the FCC's
rules and subsequent modifications. We cannot assure you that the growth will
not slow further in the future.
Section 505 of the Telecommunications Act. Section 505 of the
Telecommunications Act effectively requires each cable system that offers adult
programming either to (1) install additional blocking technology in each
household to prevent any momentary fragments of our content from accidentally
becoming available to non-subscribing cable customers or (2) restrict the
period during which adult programming is transmitted to the hours between 10:00
p.m. and 6:00 a.m. Although a United States District Court has unanimously
declared this law unconstitutional and blocked its implementation, the decision
has been appealed. The results of our operations could be materially adversely
affected if Section 505 is found constitutional in a reversal of the court
decision or if cable operators restrict the hours of transmission of our
programming until all appeals have been exhausted. See "Business--Regulation"
for a further discussion of the Telecommunications Act and related litigation.
Food & Drug Administration regulations. Playboy receives a significant
portion of its advertising revenues from companies selling tobacco products.
Significant legislative or regulatory limitations on the ability of those
companies to advertise in Playboy could materially adversely affect our
operating performance. In August 1996, the Food & Drug Administration announced
regulations which include a prohibition on the publication of tobacco
advertisements containing drawings, colors or pictures. This prohibition does
not apply to any magazine which is demonstrated to be an "adult publication" as
defined by the regulations. On August 14, 1998, a federal court of appeals
ruled that the FDA has no authority to regulate tobacco products and struck
down the regulations. The results of our operations could be materially
adversely affected if the United States Supreme Court reverses this ruling and
the FDA decides that Playboy magazine is not an "adult publication." See
"Business--Regulation" for a further discussion of the regulations and related
litigation.
Proposed content regulations in the United States. Governments may impose
additional content regulations on us in the future. We cannot determine the
nature and impact of any limitations in the future.
International content regulations. We sell our products internationally and,
accordingly, we must comply with diverse and evolving regulations. The
governments of some countries have sought to limit the influence of other
cultures by restricting the distribution of products deemed to represent
foreign or "immoral" influences.
9
<PAGE>
We may be severely restricted in our ability to sell products in those markets.
For example, we are not currently able to sell or license our magazine or
television programming in some major international markets such as China or
India due to the nudity contained in the magazine and television programming.
Internet regulation. Federal, state, local and foreign governmental
organizations are considering a number of legislative and regulatory proposals
which may lead to laws or regulations concerning various aspects of the
Internet, including online content, user privacy, taxation, access charges,
liability for third-party activities and jurisdiction. Regulation of the
Internet could materially adversely affect our results of operations by
reducing the growth in the use of the Internet, reducing the demand for our
services or increasing our cost of doing business.
We may not be able to protect our intellectual property rights.
We believe that our trademarks and other proprietary rights are important to
our success and competitive position. Accordingly, we devote substantial
resources to the establishment and protection of our trademarks and proprietary
rights. Our actions to establish and protect our trademarks and other
proprietary rights, however, may be inadequate to prevent imitation of our
products by others or to prevent others from claiming violations of their
trademarks and proprietary rights by us. These concerns are particularly
relevant with regard to those international markets in which it is especially
difficult to enforce intellectual property rights.
Increases in paper prices or postal rates could adversely affect our business.
Paper costs are a substantial component of the manufacturing expenses of
Playboy magazine. The market for paper has historically been cyclical,
resulting in volatility in paper prices. Paper prices also affect our catalog
operations. An increase in paper prices could materially adversely affect our
operating performance unless and until we can pass any increases through to the
consumer.
The cost of postage also affects the profitability of Playboy magazine and
the operations of our Catalog Group. An increase in postage rates could
materially adversely affect our operating performance unless and until we can
pass the increase through to the consumer.
Limits on our access to distribution channels could adversely affect our
business.
Access to satellite transponders. Our cable television operations will
require continued access to satellite transponders to transmit programming to
cable operators. Material limitations on our access to cable systems or
satellite transponder capacity could materially adversely affect our operating
performance. Our access to transponders may be restricted or denied if:
. we or the satellite owner is indicted or otherwise charged as a defendant
in a criminal proceeding;
. the FCC issues an order initiating a proceeding to revoke the satellite
owner's authorization to operate the satellite;
. the satellite owner is ordered by a court or governmental authority to
deny us access to the transponder; or
. we are deemed by a governmental authority to have violated any obscenity
law.
In addition to the above, the access of the Spice networks to transponders may
be restricted or denied if a governmental authority commences an investigation
concerning the content of the Spice transmissions.
Agreements with MSOs. We have agreements with 19 of the nation's 20 largest
MSOs, which control access to approximately 85% of the total U.S. cable
households. If MSOs terminate or do not renew some of these agreements, or do
not renew them on terms as favorable as current agreements, our operating
performance could be materially adversely affected.
10
<PAGE>
Consumer Objections. Our ability to operate successfully depends on our
ability to obtain and maintain distribution channels and outlets for our
products. From time to time, private groups have sought to exclude our
programming from local pay television distribution because of the adult-
oriented content of the programming. In addition, from time to time, private
groups have targeted Playboy magazine and its distribution outlets and
advertisers, seeking to limit the magazine's availability because of its adult-
oriented content.
Our international growth strategy could be delayed, constrain our flexibility
or fail to accelerate international expansion.
Delayed expansion. We cannot assure you that we can complete the joint
venture agreement to create Playboy TV International or that we can complete
this agreement on terms as favorable as we currently contemplate. If we do not
create Playboy TV International as currently contemplated, the acceleration of
our expansion of Playboy TV and Spice into international markets could be
delayed. Based on our current strategy, we may need to identify one or more
alternative joint venture partners for our international expansion and complete
agreements with them.
Constraint on ability to expand internationally through means other than
Playboy TV International. Playboy TV International would become the sole
venture through which we could expand Playboy TV and Spice in the markets
outside the United States and Canada. Consequently, if we complete the joint
venture, we would be limited in our ability to target expansion in specific
international markets through alternatives that may prove to be more attractive
than Playboy TV International in the future.
We may not realize the expected benefits of the Spice Acquisition.
We recently completed the Spice Acquisition. We cannot be sure that we will
succeed in integrating the operations of Spice without encountering
difficulties or that we will realize the expected operating efficiencies, cost
savings, synergies, increased sales and profits and other benefits from the
integration. To achieve these benefits, we must, among other things, integrate
our business with Spice's business in an efficient manner and assimilate
Spice's operations and personnel. In addition, our management must devote
substantial attention to consolidate the operations. The diversion of
management attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on the operating
results of the combined company.
Our Playboy Online Group faces many uncertainties relating to development of
the Internet.
Continuous development. If we fail to continue to develop and introduce new
content, features, functions or services effectively or fail to improve the
consumer experience, our results of operations could be materially adversely
affected.
Internet use growth. If use of the Internet declines we may not realize the
expected benefits of our investments in the Playboy Online Group.
Security risks. Online security breaches could materially adversely affect
our Playboy Online Group business and results of operations. Any well-
publicized compromise of security could deter use of the Internet in general or
use of the Internet to conduct transactions that involve transmitting
confidential information or downloading sensitive materials in particular. In
offering online payment services, we may increasingly rely on technology
licensed from third parties to provide the security and authentication
necessary to effect secure transmission of confidential information, such as
consumer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could compromise
or breach the algorithms that we use to protect our consumers' transaction
data. In addition, experienced programmers may attempt to misappropriate
proprietary information or cause interruptions in our services which could
require us to expend significant capital and resources to protect against these
problems.
11
<PAGE>
We may not be able to successfully compete with larger competitors or with
other forms of entertainment and information.
We cannot assure you that we can remain as competitive as we currently are
with companies which have greater resources or which offer other forms of
leisure-time activities. As a global multi-media entertainment company with
operations principally in publishing, television and catalog sales, we compete
with other large multi-media entertainment companies, many of which have
substantially greater resources. Some of our businesses compete, to varying
degrees, with other leisure-time activities such as print media, television,
movie theaters, radio, personal computers and other alternative sources of
entertainment and information. See "Business" for further discussion of the
competitive factors affecting each of our groups.
Our level of indebtedness could adversely affect our business, results of
operations and our growth strategy.
Our level of indebtedness could limit our ability to secure any necessary
additional financing and our flexibility in managing the growth of our
business. In addition, our competitors with lower levels of indebtedness may be
able to react more quickly to the rapidly changing market conditions and
opportunities we encounter in our multi-media businesses.
Our ownership structure may reduce the liquidity of our Class B common stock
compared to the equity securities of other companies listed on the NYSE.
After the offering, there will be approximately 12,450,000 shares of our
Class B common stock available for trading on the NYSE and The Pacific Exchange
by stockholders other than the selling stockholder. The average daily number of
shares of our Class B common stock traded during the six-month period ended
April 30, 1999 was approximately 72,000. Because of the large percentage of
shares controlled by the selling stockholder and the low average daily trading
volume, any significant position in our Class B common stock may not be as
liquid as a comparable investment in other companies listed on the NYSE.
The selling stockholder owns a majority of our voting Class A common stock; our
Class B common stock has no voting rights, except as required by law.
As of April 30, 1999, the selling stockholder owned approximately 70% of our
outstanding voting Class A common stock. He also owned approximately 44% of our
outstanding Class B common stock and will own approximately 32% of our
outstanding Class B common stock after this offering. Consequently, the selling
stockholder is able to elect the entire board of directors, approve or
disapprove the sale of our company and take any other action requiring a
stockholder vote without the vote of any other stockholder.
Our Class B common stock has no voting rights, except as provided in our
Amended and Restated Certificate of Incorporation and by Delaware law. Holders
of our Class B common stock have no right to vote in the election of directors.
Our Class A common stock and Class B common stock have equal rights with
respect to dividends, and our certificate of incorporation includes provisions
intended for the benefit of holders of our Class B common stock. See
"Description of Capital Stock" for more information about the rights and
limitations associated with our Class B common stock.
The terms of our credit agreement prohibit us from making payments with respect
to our Class B common stock.
The terms of our credit agreement prohibit us from paying any cash dividends
on our common stock. We do not currently intend to pay any cash dividends on
our Class B common stock for the foreseeable future.
12
<PAGE>
We depend on our key personnel.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of some of our
senior management team. If these members of the management team become unable
or unwilling to continue in their present positions, our business and results
of operations could be materially adversely affected.
The Year 2000 problem could disrupt our business.
We recognize that we, like all other businesses, are at risk if key
suppliers in utilities, communications, transportation, banking and government
are not ready for the year 2000. It is also possible that our computer,
software application, internal accounting, customer billing and other business
systems, working either alone or in conjunction with those of third parties who
do business with us, will not accept input of, store, manipulate and output
dates in the year 2000 or after without error. If any of this were to happen,
we may suffer business interruptions or shutdown, reputational harm or legal
liability and, as a result, material financial loss.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of Class B
common stock we are offering, after deduction of the estimated discounts,
commissions and offering expenses payable by us, will be approximately $14.1
million. We estimate that, if the underwriters exercise in full their over-
allotment option, the net proceeds from the sale of the shares of Class B
common stock we are offering, after similar deductions, will be approximately
$24.6 million. We will not receive any of the proceeds from the sale of Class B
common stock by the selling stockholder. We will use our net proceeds from this
offering for general corporate purposes.
DIVIDEND POLICY
We have not paid a cash dividend on our Class B common stock during the four
most recently completed fiscal years or in the current fiscal year. We do not
anticipate paying any cash dividends on our Class B common stock in the
foreseeable future, and we plan to retain our earnings to finance future
growth. The terms of our credit agreement prohibit us from paying any cash
dividends on our common stock. Our board of directors decides whether to
declare and pay dividends on our Class B common stock. Our board's decision to
pay future dividends will depend on our debt agreements, general business
conditions, the effect on our financial condition and other factors our board
may consider to be relevant.
13
<PAGE>
PRICE RANGE OF CLASS B COMMON STOCK
Our Class B common stock is listed under the symbol "PLA" on the NYSE and
The Pacific Exchange.
The table below shows, for the quarters indicated, the reported high and
low sale prices of our Class B common stock on the NYSE.
<TABLE>
<CAPTION>
Playboy Class
B Common
Stock
-------------
High Low
------ ------
<S> <C> <C>
Fiscal 1997
Quarter ended September 30, 1996......................... $15.25 $12.13
Quarter ended December 31, 1996.......................... 12.75 9.50
Quarter ended March 31, 1997............................. 16.38 9.38
Quarter ended June 30, 1997.............................. 16.00 11.25
Transition Period
Quarter ended September 30, 1997......................... 15.38 10.75
Quarter ended December 31, 1997.......................... 16.69 13.50
Fiscal 1998
Quarter ended March 31, 1998............................. 17.81 14.63
Quarter ended June 30, 1998.............................. 19.69 17.00
Quarter ended September 30, 1998......................... 18.75 12.19
Quarter ended December 31, 1998.......................... 22.44 11.88
Fiscal 1999
Quarter ended March 31, 1999............................. 28.69 17.94
Quarter ended June 30, 1999 (through May 11, 1999)....... 36.13 23.31
</TABLE>
On May 11, 1999, the last reported sale price of our Class B common stock
on the NYSE was $30.75.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998 (1) the historical
consolidated capitalization of Playboy, (2) the consolidated pro forma
capitalization of Playboy, after giving effect to the Spice Acquisition and
associated financing, and (3) the consolidated pro forma capitalization of
Playboy, after giving effect to the Spice Acquisition and associated financing
and this offering. The table should be read in conjunction with the
consolidated financial statements, the notes to them and other financial data
contained elsewhere or incorporated by reference into this prospectus. See "Pro
Forma Financial Information" and "Selected Historical Financial and Other
Data."
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------
Pro Forma
Historical Pro Forma As Adjusted
---------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Short-term borrowings......................... $29,750 $ 456 $ 456
======= ======== ========
Long-term debt................................ $ -- $110,000 $110,000
------- -------- --------
Shareholders' equity:
Common stock
Class A (7,500,000 shares authorized and
4,748,954 shares issued and
outstanding(1)).......................... 50 50 50
Class B (30,000,000 shares authorized and
15,868,028, 17,819,167 and 18,319,167
shares issued and outstanding(2))........ 171 191 196
Capital in excess of par.................... 44,860 93,229 107,279
Retained earnings........................... 49,577 49,577 49,577
Other....................................... (10,456) (10,456) (10,456)
------- -------- --------
Total shareholders' equity................ 84,202 132,591 146,646
------- -------- --------
Total capitalization.................... $84,202 $242,591 $256,646
======= ======== ========
</TABLE>
- --------
(1) Excludes 115,000 shares of Class A common stock issuable upon the exercise
of outstanding options at a weighted average exercise price of $6.72 per
share.
(2) Excludes (a) 1,521,500 shares of Class B common stock issuable upon the
exercise of outstanding options at a weighted average exercise price of
$10.29 per share and (b) 330,622 shares of unvested restricted stock.
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is based on the
historical financial statements of Playboy included elsewhere in this
prospectus, adjusted to give effect to the following transactions, which we
refer to as the "Transactions:" (1) the Spice Acquisition, (2) the contribution
of assets and liabilities of Spice immediately before the Spice Acquisition to
Directrix, Inc., a separate public company, the shares of which were
distributed to former Spice shareholders in connection with the Spice
Acquisition, (3) the sale of assets of Spice to Califa Entertainment Group,
Inc. (see Note B to the Unaudited Pro Forma Statement of Operations) and (4)
the sale by Playboy of 500,000 shares of Class B common stock in this offering.
All unaudited pro forma financial information includes adjustments to
historical results (consisting only of normal recurring entries) necessary for
a fair presentation and, in our opinion, have been prepared on the same basis
as the audited financial statements. Some Spice financial information has been
reclassified to conform with the Playboy presentation. The unaudited pro forma
statement of operations gives effect to the Transactions as if they had
occurred as of January 1, 1998, and the unaudited pro forma balance sheet gives
effect to the Transactions as if they had occurred on December 31, 1998. The
unaudited pro forma financial information, other than as described in the notes
to this information, does not reflect the effects of any anticipated changes to
be made by us to the historical operations, is presented for informational
purposes only and does not purport (1) to represent what our results of
operations or financial condition would actually have been had the Transactions
occurred on the dates indicated or (2) to project our results of operations or
financial position for any future period or date.
The unaudited pro forma financial information reflects the Spice Acquisition
using the purchase method of accounting. The acquired assets and assumed
liabilities of Spice are stated at values representing an allocation of the
purchase price based upon the estimated fair market value at the date of the
Spice Acquisition. This allocation is subject to change as the valuation is
finalized.
In February 1996, we filed suit challenging Section 505 of the
Telecommunications Act of 1996, which, among other things, regulates the cable
transmission of adult programming, such as Playboy's and Spice's domestic pay
television programs. Fiscal 1998 revenues attributable to Playboy and Spice
domestic pay television cable services were affected by the enforcement of
Section 505. In December 1998, a federal district court unanimously declared
Section 505 unconstitutional. This ruling gives cable systems the right to
resume 24-hour broadcast. We believe that the effect of Section 505 on our
financial performance may continue until the case is finally decided.
You should read the following pro forma financial information and
accompanying notes in conjunction with the consolidated financial statements
and the related notes and the other financial data appearing elsewhere or
incorporated by reference in this prospectus. See "Selected Historical
Financial and Other Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
16
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro
Playboy Spice(A) Adjustments Forma(L)
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues............... $ 317,618 $ 27,709 $ (2,868)(B) $ 342,659
200 (C)
--------- -------- -------- ---------
Costs and expenses
Cost of sales............. (269,478) (16,182) 180 (D) (283,280)
2,200 (E)
Selling and
administrative expenses.. (43,172) (4,494) (6,178)(F) (50,715)
3,129 (G)
--------- -------- -------- ---------
Total costs and
expenses............... (312,650) (20,676) (669) (333,995)
--------- -------- -------- ---------
Operating income (loss).... 4,968 7,033 (3,337) 8,664
--------- -------- -------- ---------
Nonoperating income
(expense)
Investment income......... 127 127
Interest income
(expense)................ (1,551) (2,141) (6,535)(H) (8,427)
1,800 (I)
Gain on sale of
investment............... 4,272 4,272
Other, net................ (791) (791)
--------- -------- -------- ---------
Total nonoperating
income (expense)....... 2,057 (2,141) (4,735) (4,819)
--------- -------- -------- ---------
Income (loss) before income
taxes..................... 7,025 4,892 (8,072) 3,845
Income tax benefit
(expense)................. (2,705) 104 (1,998)(J) (4,599)
--------- -------- -------- ---------
Net income (loss).......... 4,320 4,996 (10,070) (754)
Preferred dividend......... (135) 135 (K)
--------- -------- -------- ---------
Net income (loss)
applicable to common
stock..................... $ 4,320 $ 4,861 $ (9,935) $ (754)
========= ======== ======== =========
Net income (loss) per
common share
Basic..................... $ 0.21 $ (0.03)(M)
Diluted................... $ 0.21 $ (0.03)(M)
Weighted average number of
common shares outstanding
Basic..................... 20,548 22,499 (M)
Diluted................... 21,036 22,987 (M)
</TABLE>
See accompanying notes to unaudited pro forma statement of operations.
17
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(Dollars in thousands)
A. The Pro Forma Spice financial information reflects (1) the elimination of
Directrix, the results of which are included in the Spice historical financial
statements, and (2) the reversal of the elimination of intercompany
transactions between pro forma Spice and Directrix, as follows:
<TABLE>
<CAPTION>
Less Intercompany Pro Forma
Spice Directrix Eliminations Spice
-------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Net revenues.................... $ 32,125 $ 9,581 $ 5,165 $ 27,709
-------- -------- ------- --------
Costs and expenses
Cost of sales................. (22,441) (11,424) (5,165) (16,182)
Selling and administrative
expenses..................... (6,694) (2,200) (4,494)
-------- -------- ------- --------
Total costs and expenses.... (29,135) (13,624) (5,165) (20,676)
-------- -------- ------- --------
Operating income (loss)......... 2,990 (4,043) 7,033
-------- -------- ------- --------
Interest income (expense)....... (2,280) (139) (2,141)
-------- -------- ------- --------
Income (loss) before income
taxes.......................... 710 (4,182) 4,892
Income tax benefit.............. 104 104
-------- -------- ------- --------
Net income (loss)............... 814 (4,182) 4,996
Preferred dividend.............. (135) (135)
-------- -------- ------- --------
Net income (loss) applicable to
common stock................... $ 679 $ (4,182) $ 4,861
======== ======== ======= ========
</TABLE>
B. In connection with the Spice Acquisition, assets of Spice were sold to
Califa, which we refer to as the "Califa Transaction." In exchange for these
assets, Califa will pay Playboy $500 in cash in two installments in 1999 and
$10,000 under a promissory note due March 15, 2006, which accrues interest at
an annual rate of 18%, payable quarterly. In addition, in exchange for non-
competition covenants, Califa is contractually obligated to pay Playboy $13,300
in cash over the next nine years. The gains related to the Califa Transaction
have been deferred in accordance with Staff Accounting Bulletin 81 due to the
capitalization and leverage levels of Califa. The adjustment reflects the
elimination of revenues associated with the operations transferred to Califa in
connection with the Califa Transaction.
C. The adjustment reflects income that Califa is contractually obligated to
pay to Playboy pursuant to the non-competition agreement entered into in
connection with the Califa Transaction.
D. The adjustment reflects playback costs associated with operations
transferred to Califa in connection with the Califa Transaction.
E. The adjustment reflects the elimination of lease costs associated with
the operation of a transponder that is no longer needed due to the
consolidation of our television networks.
F. The adjustment reflects the incremental amortization expense related to
goodwill and other intangible assets, including the trade name, using recovery
periods of four to 40 years.
G. The adjustment reflects the reduction in salary expense resulting from
actual head count reductions, which was completed in April 1999, in connection
with the Spice Acquisition.
H. The adjustment reflects (1) additional interest expense of $10,100, at
the weighted average interest rate at December 31, 1998 of 9.19%, associated
with debt of $110,000 outstanding under our new credit agreement, (2)
elimination of the historical Playboy interest expense of $1,600 and (3)
elimination of the historical Spice interest expense of $2,000. A change in
interest rate of 1/4% will change annual interest expense by $275 and net
income (loss) by $106.
18
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
I. The adjustment reflects the interest income that Califa is contractually
obligated to pay to Playboy under a promissory note issued to Playboy in
connection with the Califa Transaction.
J. The adjustment reflects the income tax provision based on pre-tax income
plus nondeductible goodwill. The effective tax rate is higher than the
statutory federal income tax rate primarily due to state income taxes, net of a
federal benefit, and foreign operating losses.
K. The adjustment reflects the elimination of dividends on the Spice
Convertible Preferred Stock, which was converted in connection with the Spice
Acquisition.
L. There are no adjustments made to the unaudited pro forma statement of
operations for the offering.
M. The unaudited pro forma basic and diluted net loss per share are based
upon 22,499,000 weighted average number of common shares outstanding (basic)
and 22,987,000 weighted average number of common shares outstanding (diluted),
including dilutive effect of options, of Playboy plus shares issued to former
Spice shareholders. These per share amounts do not include 500,000 shares of
Class B common stock to be issued in connection with the offering, which had no
impact on the pro forma net loss per share.
19
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Offering Pro Forma
Playboy Spice(N) Adjustments Forma Adjustment(Z) As Adjusted
-------- --------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 341 $ 2,178 $ 12,304(O) $ 14,823 $14,055 $ 28,878
Marketable securities... 505 505 505
Accounts receivable,
net.................... 49,879 5,519 (1,609)(P) 54,289 54,289
500 (Q)
Inventories............. 25,685 25,685 25,685
Programming costs....... 43,342 43,342 43,342
Deferred subscription
acquisition costs...... 11,570 13 11,583 11,583
Prepaid expenses and
other current assets... 21,097 2,640 23,737 23,737
Due from related parties
and officers........... 344 344 344
-------- ------- -------- -------- ------- --------
Total current assets. 152,419 10,694 11,195 174,308 14,055 188,363
Property and equipment,
net.................... 9,157 1,969 11,126 11,126
Programming costs....... 5,983 5,983 5,983
Library of movies....... 3,953 (839)(R) 5,400 5,400
2,286 (S)
Net deferred tax assets. 6,525 (6,525)(S)
Deferred financing
costs.................. 127 4,423 (T) 4,550 4,550
Other noncurrent assets. 20,729 473 21,202 21,202
Intangible and other
assets................. 17,294 9,605 129,986 (S) 156,885 156,885
-------- ------- -------- -------- ------- --------
Total assets......... $212,107 $26,821 $140,526 $379,454 $14,055 $393,509
======== ======= ======== ======== ======= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current portion of
obligations under
capital leases......... $ 399 $ 399 $ 399
Short-term
borrowings/current
portion of long-
term debt.............. $ 29,750 10,927 $(40,221)(U) 456 456
Accounts payable........ 30,834 2,746 33,580 33,580
Accrued salaries, wages
and employee benefits.. 6,024 6,024 6,024
Reserves for losses on
disposals of
discontinued
operations............. 68 68 68
Income taxes payable.... 819 819 819
Deferred
revenues/subscription
revenue................ 41,647 893 42,540 42,540
Other liabilities and
accrued expenses....... 9,851 1,741 11,592 11,592
Current portion of
accrued restructuring.. 23,000 (V) 23,000 23,000
-------- ------- -------- -------- ------- --------
Total current
liabilities......... 118,993 16,706 (17,221) 118,478 118,478
New long-term debt...... 110,000 (W) 110,000 110,000
Net deferred tax
liabilities............ 9,139 (S) 9,139 9,139
Other noncurrent
liabilities............ 8,912 8,912 8,912
Deferred
compensation/other..... 334 334 334
-------- ------- -------- -------- ------- --------
Total liabilities.... 127,905 17,040 101,918 246,863 246,863
Common stock............ 221 123 (103)(X) 241 $ 5 246
Capital in excess of par
value.................. 44,860 29,282 19,087 (X) 93,229 14,050 107,279
Unearned compensation... (3,716) (237) 237 (Y) (3,716) (3,716)
Retained
earnings/(accumulated
deficit)............... 49,577 (6,694) 9,142 (Y) 49,577 49,577
(2,448)(P)(R)
Accumulated other
comprehensive income... 1,072 (1,072)(Y)
Transfers from Spice.... (13,765) 13,765 (Y)
Cumulative translation
adjustment............. (137) (137) (137)
Unrealized loss on
marketable securities.. (32) (32) (32)
Less cost of treasury
stock.................. (6,571) (6,571) (6,571)
-------- ------- -------- -------- ------- --------
Total shareholders'
equity.............. 84,202 9,781 38,608 132,591 14,055 146,646
-------- ------- -------- -------- ------- --------
Total liabilities and
shareholders'
equity.............. $212,107 $26,821 $140,526 $379,454 $14,055 $393,509
======== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma balance sheet.
20
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
(Dollars in thousands)
N. The Pro Forma Spice information reflects the elimination of Directrix,
the results of which are included in the Spice historical financial statements,
as follows:
<TABLE>
<CAPTION>
Less Pro Forma
Spice Directrix Spice
-------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................. $ 2,178 $ 2,178
Accounts receivable, net................... 6,274 $ 755 5,519
Deferred subscription acquisition costs.... 13 13
Prepaid expenses and other current assets.. 3,290 650 2,640
Due from related parties and officers...... 344 344
-------- ------- --------
Total current assets.................... 12,099 1,405 10,694
Property and equipment, net................ 4,508 2,539 1,969
Library of movies.......................... 4,792 839 3,953
Deferred financing costs................... 127 127
Other noncurrent assets.................... 524 51 473
Intangible and other assets................ 9,605 9,605
-------- ------- --------
Total assets............................ $ 31,655 $ 4,834 $ 26,821
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of obligations under
capital leases............................ $ 971 $ 572 $ 399
Short-term borrowings/current portion of
long-term debt............................ 10,927 10,927
Accounts payable........................... 2,819 73 2,746
Deferred revenues/subscription revenue..... 893 893
Other liabilities and accrued expenses..... 1,844 103 1,741
-------- ------- --------
Total current liabilities............... 17,454 748 16,706
Obligations under capital leases--long-
term...................................... 36 36
Deferred compensation/other................ 334 334
-------- ------- --------
Total liabilities....................... 17,824 784 17,040
Common Stock............................... 123 123
Capital in excess of par value............. 29,282 29,282
Unearned compensation...................... (237) (237)
Retained earnings/(accumulated deficit).... (16,409) (9,715) (6,694)
Accumulated other comprehensive income..... 1,072 1,072
Transfers from Spice....................... 13,765 (13,765)
-------- ------- --------
Total shareholders' equity.............. 13,831 4,050 9,781
-------- ------- --------
Total liabilities and shareholders'
equity................................. $ 31,655 $ 4,834 $ 26,821
======== ======= ========
</TABLE>
O. The adjustment reflects cash remaining after the Spice Acquisition
(including the borrowings under our new credit agreement as described in Note W
below) and payment of merger related expenses. The cash will be used to pay the
remaining merger related expenses given effect to in the unaudited pro forma
balance sheet.
P. The adjustment reflects the elimination of accounts receivable relating
to the operations of the assets transferred in the Califa Transaction.
Q. The adjustment reflects $500 payable by Califa to Spice in connection
with the Califa Transaction.
R. The adjustment reflects the elimination of certain rights associated with
the portion of the film library transferred in the Califa Transaction.
21
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
S. The adjustment reflects the purchase price of the Spice Acquisition and
the allocation of the purchase price to the tangible and identifiable
intangible and other assets and liabilities of Pro Forma Spice based upon our
estimates of their fair value, with the remainder allocated to goodwill. We
estimate the fair value of the tangible assets to approximate historical book
value, and accordingly the purchase price has been allocated to deferred
financing costs and intangible and other assets.
<TABLE>
<S> <C>
Purchase price:
Shares issued................................................. $ 48,307
Cash paid..................................................... 50,184
Merger related expenses....................................... 26,450
Liabilities assumed........................................... 10,927
--------
135,868
Assets assumed................................................ (18,760)
--------
Intangible and other assets acquired............................ $117,108
========
</TABLE>
In addition, deferred taxes related to the identifiable intangibles
acquired of $15,664 have been recorded.
The intangible and other assets acquired are comprised of film libraries,
non-competition agreements, trade names, goodwill, going concern and other
nonidentifiable intangible assets, with lives ranging from four to 40 years.
The estimated amounts allocated to each intangible and other asset, and the
respective amortization period for each are:
<TABLE>
<CAPTION>
Estimated Amortization
Description of Asset Amount Allocated Period
-------------------- ---------------- ------------
<S> <C> <C>
Goodwill, going concern and other
nonidentifiable intangible assets........ $ 75,922 40 years
Trade name................................ 26,700 40 years
Non-competition agreements................ 11,700 5 years
--------
$114,322
Film library.............................. 2,286 4 years
Califa receivable (see Note Q)............ 500
--------
Total................................. $117,108
========
</TABLE>
The allocation of the purchase price of the Spice Acquisition is subject to
change as the valuation is finalized. In the opinion of our management, the
final purchase price allocation for the Spice Acquisition will not result in
any material changes in the pro forma financial information.
T. The adjustment reflects the incremental deferred financing costs
associated with our new credit agreement entered into in connection with the
Spice Acquisition.
U. The adjustment reflects the repayment of Playboy's and Spice's
outstanding indebtedness in connection with the Spice Acquisition.
V. The adjustment reflects the accrual of $23,000 of merger related
expenses (including $20,100 of severance costs) incurred by Spice and to be
paid by Playboy.
W. The adjustment reflects debt outstanding under our new credit agreement
of $110,000.
X. The adjustment reflects (1) the elimination of Spice shares and (2) the
issuance of new Playboy shares in connection with the Spice Acquisition.
Y. The adjustment reflects the elimination of Spice equity in connection
with the Spice Acquisition.
Z. The adjustment reflects the sale by Playboy of 500,000 shares of Class B
common stock at the offering price of $30.00 per share on May 11, 1999, after
deducting the underwriting discounts and commissions and estimated offering
expenses.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and their related notes appearing elsewhere
in this prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected statement of operations data
shown below for the years ended June 30, 1996 and 1997, the six-month
transition period ended December 31, 1997 and the year ended December 31, 1998
and the balance sheet data as of December 31, 1997 and 1998 are derived from
our audited consolidated financial statements included elsewhere in this
prospectus. The statement of operations data for the years ended June 30, 1994
and 1995 and the balance sheet data as of June 30, 1994, 1995, 1996 and 1997
are derived from audited financial statements which are not included in this
prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Fiscal Year
------------------------------------------ Ended Ended
June 30, June 30, June 30, June 30, December 31, December 31,
1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 218,987 $ 247,249 $ 276,587 $ 296,623 $ 149,541 $ 317,618
--------- --------- --------- --------- --------- ---------
Costs and expenses
Cost of sales.......... (196,817) (214,327) (234,247) (245,023) (126,658) (269,478)
Selling and
administrative
expenses.............. (31,842) (29,865) (32,847) (35,855) (18,424) (43,172)
Restructuring
expenses.............. (2,875) -- -- -- -- --
Unusual items.......... (1,676) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total costs and
expenses............ (233,210) (244,192) (267,094) (280,878) (145,082) (312,650)
--------- --------- --------- --------- --------- ---------
Operating income (loss). (14,223) 3,057 9,493 15,745 4,459 4,968
--------- --------- --------- --------- --------- ---------
Nonoperating income
(expense)
Investment income
(expense), net........ (128) 139 88 73 50 127
Interest expense....... (651) (708) (680) (427) (289) (1,551)
Gain on sale of
investment............ -- -- -- -- -- 4,272
Other, net............. (239) (52) (452) (640) 70 (791)
--------- --------- --------- --------- --------- ---------
Total nonoperating
income (expense).... (1,018) (621) (1,044) (994) (169) 2,057
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations
before income taxes and
cumulative effect of
change in accounting
principle.............. (15,241) 2,436 8,449 14,751 4,290 7,025
Income tax benefit
(expense).............. (1,123) (1,807) (4,197) 6,643 (2,148) (2,705)
--------- --------- --------- --------- --------- ---------
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle... (16,364) 629 4,252 21,394 2,142 4,320
Loss on disposal of
discontinued
operations............. (620) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) before
cumulative effect of
change in accounting
principle.............. (16,984) 629 4,252 21,394 2,142 4,320
Cumulative effect of
change in accounting
principle (net of tax
benefit)............... 7,500 -- -- -- (1,077) --
--------- --------- --------- --------- --------- ---------
Net income (loss)....... $ (9,484) $ 629 $ 4,252 $ 21,394 $ 1,065 $ 4,320
========= ========= ========= ========= ========= =========
Basic income (loss) per
common share
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle.. $ (0.83) $ 0.03 $ 0.21 $ 1.05 $ 0.10 $ 0.21
========= ========= ========= ========= ========= =========
Net income (loss)...... $ (0.48) $ 0.03 $ 0.21 $ 1.05 $ 0.05 $ 0.21
========= ========= ========= ========= ========= =========
Diluted income (loss)
per common share
Income (loss) from
continuing operations
before cumulative
effect of change in
accounting principle.. $ (0.83) $ 0.03 $ 0.21 $ 1.03 $ 0.10 $ 0.21
========= ========= ========= ========= ========= =========
Net income (loss)...... $ (0.48) $ 0.03 $ 0.21 $ 1.03 $ 0.05 $ 0.21
========= ========= ========= ========= ========= =========
Segment Data:
Net revenues:
Publishing............. $ 123,196 $ 127,155 $ 131,800 $ 135,710 $ 66,329 $ 137,997
Entertainment.......... 40,089 51,697 64,826 74,716 37,356 91,049
Product Marketing...... 6,974 6,844 7,125 7,968 4,199 7,081
Catalog................ 48,556 61,435 71,634 75,391 39,340 74,393
Casino Gaming.......... -- -- -- -- -- --
Playboy Online......... 172 118 1,202 2,838 2,317 7,098
--------- --------- --------- --------- --------- ---------
Total net revenues... $ 218,987 $ 247,249 $ 276,587 $ 296,623 $ 149,541 $ 317,618
========= ========= ========= ========= ========= =========
Operating income (loss):
Publishing............. $ 3,850 $ 11,349 $ 9,041 $ 8,665 $ 3,898 $ 6,332
Entertainment.......... (7,304) 967 9,204 18,254 7,991 26,165
Product Marketing...... 2,518 3,428 3,692 3,512 1,614 365
Catalog................ 4,148 5,209 5,231 4,630 1,835 4,100
Casino Gaming.......... -- -- -- -- (541) (1,108)
Playboy Online......... (157) (640) 207 (113) (943) (6,528)
Corporate
Administration and
Promotion............. (17,278) (17,256) (17,882) (19,203) (9,395) (24,358)
--------- --------- --------- --------- --------- ---------
Total operating
income (loss)....... $ (14,223) $ 3,057 $ 9,493 $ 15,745 $ 4,459 $ 4,968
========= ========= ========= ========= ========= =========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Fiscal Year
-------------------------------------- Ended Ended
June 30, June 30, June 30, June 30, December 31, December 31,
1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ------------ ------------
(In thousands, except advertising pages)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Cash flows from:
Operating activities .. $ (4,368) $ 3,180 $ 4,541 $ 1,539 $ (3,853) $(15,044)
Investing activities... $ (2,277) $ (315) $ (4,168) $ (2,450) $ (1,874) $ (6,361)
Financing activities... $ 6,000 $ (2,652) $ 594 $ (224) $ 5,371 $ 20,799
EBITDA by segment(1)(2):
Publishing............. $ 4,874 $ 12,258 $ 10,008 $ 9,711 $ 4,223 $ 6,973
Entertainment.......... 11,269 21,573 31,040 40,281 19,347 51,696
Product Marketing...... 2,700 3,622 3,909 3,688 1,692 520
Catalog................ 4,940 5,882 5,870 5,281 2,072 4,564
Casino Gaming.......... -- -- -- -- (541) (1,108)
Playboy Online......... (157) (640) 207 (113) (943) (6,500)
Corporate
Administration and
Promotion............. (15,774) (15,071) (15,564) (17,197) (8,266) (18,557)
-------- -------- -------- -------- -------- --------
Total EBITDA(1)(2)... $ 7,852 $ 27,624 $ 35,470 $ 41,651 $ 17,584 $ 37,588
======== ======== ======== ======== ======== ========
Adjusted EBITDA(1)(2)... $ (9,333) $ 6,311 $ 9,921 $ 10,904 $ 3,225 $ 12,987
Depreciation and
amortization(3)........ $ 22,442 $ 24,480 $ 26,341 $ 26,473 $ 13,005 $ 29,012
Amortization of
investments in
entertainment
programming............ $ 18,174 $ 20,130 $ 21,263 $ 21,355 $ 11,153 $ 25,109
Cash investments in
entertainment
programming............ $ 17,185 $ 21,313 $ 25,549 $ 30,747 $ 14,359 $ 24,601
Playboy magazine
advertising pages...... 595 595 569 558 273 601
Number of total U.S.
cable addressable
households at end of
period(4).............. 22,200 23,450 26,400 29,350 30,700 33,200
Approximate number of
total domestic Playboy
TV cable addressable
households at end of
period................. 9,600 10,600 11,300 11,200 11,600 11,700
Approximate number of
total domestic Playboy
TV DTH households at
end of period.......... 1,900 3,300 4,900 6,300 6,800 9,800
Balance Sheet Data (at
period end):
Cash and cash
equivalents............ $ 1,258 $ 1,471 $ 2,438 $ 1,303 $ 947 $ 341
Working capital......... 10,906 14,019 18,888 29,221 26,288 33,426
Total assets............ 131,921 137,835 150,869 175,542 185,947 212,107
Long-term debt.......... 1,020 687 347 -- -- --
Total shareholders'
equity................. 46,311 47,090 52,283 76,133 78,683 84,202
</TABLE>
- --------
(1) You should not consider EBITDA and Adjusted EBITDA as alternatives to any
measure of performance or liquidity under generally accepted accounting
principles. Similarly, you should not infer that EBITDA and Adjusted EBITDA
are more meaningful than any of those measures.
(2) EBITDA represents earnings before income taxes and cumulative effect of
change in accounting principle plus interest expense, depreciation and
amortization. Adjusted EBITDA represents EBITDA less cash investments in
entertainment programming. Adjusted EBITDA takes into account the recurring
nature of the significant cash investments we make in entertainment
programming on a yearly basis. These investments are related to the amount
of amortization of investments in entertainment programming. We have
included information concerning EBITDA and Adjusted EBITDA because we
believe they allow you to analyze more completely our results of
operations.
(3) Includes amortization of investments in entertainment programming.
(4) Based on projections by Kagan for each period.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and related notes included elsewhere and incorporated by reference
in this prospectus. The results discussed below are not necessarily indicative
of the results to be expected in any future periods. This discussion contains
forward-looking statements. See "Special Note Regarding Forward-Looking
Statements" for further information about forward-looking statements.
General
We manage and report our businesses in six segments: Publishing,
Entertainment, Product Marketing, Catalog, Casino Gaming and Playboy Online.
Several of our businesses have experienced variations in quarterly
performance. As a result, our performance in any quarterly period is not
necessarily reflective of full-year or longer-term trends. For example, Playboy
magazine newsstand revenues vary from issue to issue, with revenues generally
higher for holiday issues and issues containing editorial or pictorial features
that generate unusual public interest. Advertising revenues also vary from
quarter to quarter, depending on product introductions by advertising
customers, changes in advertising buying patterns and economic conditions. In
addition, Entertainment Group revenues vary with the timing of international
sales.
We have included information concerning EBITDA and Adjusted EBITDA because
we believe that they allow you to analyze more completely our results of
operations. EBITDA represents earnings before income taxes and cumulative
effect of change in accounting principle plus interest expense, depreciation
and amortization. Adjusted EBITDA represents EBITDA less cash investments in
entertaining programming. You should not consider EBITDA and Adjusted EBITDA as
alternatives to any measure of performance or liquidity under generally
accepted accounting principles, which we refer to as "GAAP." Similarly, you
should not infer that EBITDA and Adjusted EBITDA are more meaningful than any
of those measures. Although these measures of performance are not calculated
using GAAP, we have included them because they are generally used in the media
industry as measures of a company's operating performance. More specifically,
we believe that they assist in comparing company performances on a consistent
basis without regard to depreciation and amortization. The concern is that
depreciation and amortization can vary significantly among companies depending
on accounting methods, particularly where acquisitions are involved, or non-
operating factors such as historical cost bases. Additionally, Adjusted EBITDA
takes into account the recurring nature of the significant cash investments we
make in entertainment programming on a yearly basis. These investments are
related to the amount of amortization of investments in entertainment
programming.
Our pro forma 1998 results differ materially from our actual 1998 results
due to the Spice Acquisition. Our actual results do not reflect the operations
of Spice. For the year ended December 31, 1998, pro forma net revenues were
$342.7 million, pro forma EBITDA was $47.5 million and pro forma Adjusted
EBITDA was $20.4 million.
Results of Operations
On November 6, 1997, our board of directors approved a change in our fiscal
year end from June 30 to December 31, which better aligns our businesses with
our customers and partners who also operate and plan on a calendar year basis.
To provide you with a clearer understanding of our results of operations, we
have included below financial data for the pro forma calendar year ended
December 31, 1997 and the six months ended December 31, 1996 for comparative
purposes.
25
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Six Months Six-Month Transition Calendar Year Fiscal Year
Ended Period Ended Ended Ended
12/31/96(1) 12/31/97(1) 12/31/97 12/31/98
----------- -------------------- ------------- -----------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Net Revenues
Publishing
Playboy magazine....... $ 51.7 $ 50.8 $104.0 $108.3
Other domestic
publishing............ 10.5 10.2 20.6 18.7
International
publishing............ 5.2 5.3 10.0 11.0
------ ------ ------ ------
Total Publishing..... 67.4 66.3 134.6 138.0
------ ------ ------ ------
Entertainment
Playboy TV
Cable.................. 10.4 9.6 20.4 21.3
Satellite direct-to-
home.................. 9.9 14.0 27.1 33.9
Off-network
productions and
other................. 2.0 1.3 2.4 2.0
------ ------ ------ ------
Total Playboy TV..... 22.3 24.9 49.9 57.2
Domestic home video.... 3.9 3.3 7.9 11.1
International TV and
home video............ 4.3 4.7 12.6 14.7
------ ------ ------ ------
Total Playboy
businesses.......... 30.5 32.9 70.4 83.0
AdulTVision............ 2.4 2.3 4.4 5.8
Movies and other....... 1.0 2.1 3.4 2.2
------ ------ ------ ------
Total Entertainment.. 33.9 37.3 78.2 91.0
------ ------ ------ ------
Product Marketing....... 4.3 4.2 7.9 7.1
------ ------ ------ ------
Catalog................. 39.1 39.4 75.6 74.4
------ ------ ------ ------
Casino Gaming........... -- -- -- --
------ ------ ------ ------
Playboy Online.......... 1.3 2.3 3.9 7.1
------ ------ ------ ------
Total net revenues..... $146.0 $149.5 $300.2 $317.6
====== ====== ====== ======
Net Income
Publishing.............. $ 3.7 $ 3.9 $ 8.9 $ 6.3
------ ------ ------ ------
Entertainment before
Playboy businesses
programming expenses... 16.7 18.6 40.3 49.4
Playboy businesses
programming expense... (9.0) (10.6) (21.7) (23.2)
------ ------ ------ ------
Total Entertainment.. 7.7 8.0 18.6 26.2
------ ------ ------ ------
Product Marketing....... 2.3 1.6 2.9 0.4
------ ------ ------ ------
Catalog................. 2.8 1.9 3.6 4.1
------ ------ ------ ------
Casino Gaming........... -- (0.6) (0.6) (1.1)
------ ------ ------ ------
Playboy Online.......... 0.1 (0.9) (1.2) (6.5)
------ ------ ------ ------
Corporate Administration
and Promotion.......... (8.9) (9.4) (19.7) (24.4)
------ ------ ------ ------
Operating income....... 7.7 4.5 12.5 5.0
------ ------ ------ ------
Nonoperating income
(expense)
Investment income...... -- -- 0.1 0.1
Interest expense....... (0.3) (0.3) (0.4) (1.6)
Gain on sale of
investment............ -- -- -- 4.3
Other, net............. (0.1) 0.1 (0.5) (0.8)
------ ------ ------ ------
Total nonoperating
income (expense).... (0.4) (0.2) (0.8) 2.0
------ ------ ------ ------
Income before income
taxes and cumulative
effect of change in
accounting principle... 7.3 4.3 11.7 7.0
Income tax benefit
(expense).............. (3.4) (2.1) 8.0 (2.7)
------ ------ ------ ------
Income before cumulative
effect of change in
accounting principle... 3.9 2.2 19.7 4.3
Cumulative effect of
change in accounting
principle (net of tax
benefit)............... -- (1.1) (1.1) --
------ ------ ------ ------
Net income.............. $ 3.9 $ 1.1 $ 18.6 $ 4.3
====== ====== ====== ======
Basic income (loss) per
common share
Income before
cumulative effect of
change in accounting
principle............. $ 0.19 $ 0.10 $ 0.96 $ 0.21
Cumulative effect of
change in accounting
principle (net of tax
benefit).............. -- (0.05) (0.05) --
------ ------ ------ ------
Net income............. $ 0.19 $ 0.05 $ 0.91 $ 0.21
====== ====== ====== ======
Diluted income (loss)
per common share
Income before
cumulative effect of
change in accounting
principle............. $ 0.19 $ 0.10 $ 0.94 $ 0.21
Cumulative effect of
change in accounting
principle (net of tax
benefit).............. -- (0.05) (0.05) --
------ ------ ------ ------
Net income............. $ 0.19 $ 0.05 $ 0.89 $ 0.21
====== ====== ====== ======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Six Months Six-Month Transition Calendar Year Fiscal Year
Ended Period Ended Ended Ended
12/31/96(1) 12/31/97(1) 12/31/97 12/31/98
----------- -------------------- ------------- -----------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
EBITDA
Publishing.............. $ 4.2 $ 4.2 $ 9.7 $ 7.0
----- ----- ----- ------
Entertainment........... 17.6 19.4 42.0 51.7
----- ----- ----- ------
Product Marketing....... 2.4 1.7 3.1 0.5
----- ----- ----- ------
Catalog................. 3.1 2.1 4.2 4.6
----- ----- ----- ------
Casino Gaming........... -- (0.6) (0.6) (1.1)
----- ----- ----- ------
Playboy Online.......... 0.1 (0.9) (1.2) (6.5)
----- ----- ----- ------
Corporate Administration
and Promotion.......... (7.6) (8.3) (17.8) (18.6)
----- ----- ----- ------
Total EBITDA......... $19.8 $17.6 $39.4 $ 37.6
===== ===== ===== ======
Total Adjusted EBITDA... $ 4.3 $ 3.2 $ 9.8 $ 13.0
Entertainment Group
Adjusted EBITDA........ $ 2.1 $ 5.0 $12.4 $ 27.1
</TABLE>
- --------
(1) Certain reclassifications have been made to conform to the current
presentation.
Beginning with the quarter ended March 31, 1998, Playboy Online Group
results, which were previously reported in the Publishing and Catalog Groups,
are reported as a separate operating group.
Fiscal Year ended December 31, 1998 Compared to Pro Forma Calendar Year Ended
December 31, 1997
Our revenues were $317.6 million for the fiscal year ended December 31,
1998, a 6% increase over revenues of $300.2 million for the calendar year ended
December 31, 1997, primarily due to higher revenues from the Entertainment
Group. Also contributing to the increase were higher Playboy magazine and
Playboy Online Group revenues.
We reported operating income of $5.0 million for the fiscal year ended
December 31, 1998 compared to $12.5 million for the calendar year ended
December 31, 1997. This decrease reflected an increase in operating income for
the Entertainment Group, which was more than offset by an increase in planned
investments in the Playboy Online Group, higher Corporate Administration and
Promotion expenses and lower operating income for the Publishing and Product
Marketing Groups. The lower operating income for the Product Marketing Group
was due in part to a settlement of litigation in the current year. The higher
Corporate Administration and Promotion expenses were due in part to increased
investments in systems technology, including Year 2000 expenses.
For the fiscal year ended December 31, 1998, EBITDA of $37.6 million
decreased $1.8 million, or 5%, and Adjusted EBITDA of $13.0 million increased
$3.2 million, or 33%, compared to the prior calendar year.
Net income for the fiscal year ended December 31, 1998 was $4.3 million,
resulting in earnings per share, which we refer to as "EPS," of $0.21 (basic
and diluted), compared to net income of $18.6 million, or basic EPS of $0.91
and diluted EPS of $0.89, for the calendar year ended December 31, 1997. Net
income for fiscal year 1998 included a $4.3 million gain on the sale of our 20%
equity investment in duPont Publishing, Inc. Net income for calendar year 1997
included a federal income tax benefit of $13.5 million related to net operating
loss and tax credit carryforwards and a charge of $1.1 million, primarily
related to development costs of casino gaming ventures, that resulted from our
early adoption of Statement of Position 98-5, Reporting on the Costs of Start-
Up Activities, which we refer to as "SOP 98-5." Excluding the impact of the
$13.5 million federal income tax benefit and the $1.1 million cumulative effect
of change in accounting principle, net income for calendar year 1997 was $6.2
million, or basic and diluted EPS of $0.30.
Publishing Group
Publishing Group revenues were $138.0 million for the fiscal year ended
December 31, 1998, a 3% increase over revenues of $134.6 million for the
calendar year ended December 31, 1997, primarily due to higher revenues from
Playboy magazine.
27
<PAGE>
Playboy magazine revenues increased $4.3 million, or 4%, for the fiscal year
ended December 31, 1998 compared to the prior calendar year. Circulation
revenues increased $1.9 million primarily due to a $1.4 million, or 7%,
increase in newsstand revenues principally due to extraordinary sales of the
October 1998 issue featuring Cindy Crawford and the December 1998 issue
featuring Katarina Witt, both of which also carried a $5.95 cover price. In
general, newsstand revenues have been, and are expected to continue to be,
adversely affected by the consolidation taking place nationally in the single-
copy magazine distribution system. Additionally, subscription revenues
increased $0.5 million, or 1%. Advertising revenues increased $1.8 million, or
6%, primarily due to 6% more ad pages. Advertising sales for the fiscal year
1999 first quarter issues of the magazine are closed, and we expect to report
11% more ad pages and 10% higher ad revenues compared to the quarter ended
March 31, 1998.
Revenues from other domestic publishing businesses decreased $1.9 million,
or 9%, for the fiscal year ended December 31, 1998 compared to the prior year
primarily due to fewer newsstand specials copies sold.
International publishing revenues increased $1.0 million, or 10%, for the
fiscal year ended December 31, 1998, compared to the prior year. The increase
primarily reflected higher revenues from the Polish edition of Playboy
magazine, in which we own a majority interest.
For the fiscal year ended December 31, 1998, Publishing Group operating
income declined $2.6 million, or 29%, primarily due to lower subscription
profitability, the lower revenues from newsstand specials, higher average paper
prices and expenses in the current year related to the search for the Playmate
2000. Partially offsetting this decline were the higher Playboy magazine
advertising and newsstand revenues combined with lower performance-related
variable compensation expense and the vacancy of the division president
position in the current year. We expect an approximate 8% decrease in paper
prices effective with the May 1999 issue.
For the fiscal year ended December 31, 1998, EBITDA of $7.0 million
decreased $2.7 million, or 28%, compared to the prior calendar year.
Entertainment Group
Fiscal year 1998 Entertainment Group revenues of $91.0 million increased
$12.8 million, or 16%, compared to calendar year 1997. Operating income of
$26.2 million increased $7.6 million, or 41%, compared to calendar year 1997
operating income of $18.6 million. Both of these increases were largely
attributable to improved performance of Playboy TV.
For the fiscal year ended December 31, 1998, EBITDA of $51.7 million
increased $9.7 million, or 23%, and Adjusted EBITDA of $27.1 million increased
$14.7 million, or 119%, compared to the prior calendar year.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense ("profit contribution").
Playboy TV
Revenues of $57.2 million from our domestic pay television service, Playboy
TV, were $7.3 million, or 15%, higher for the fiscal year ended December 31,
1998 compared to the calendar year ended December 31, 1997.
Cable revenues increased $0.9 million, or 5%, for the fiscal year ended
December 31, 1998, primarily due to higher retail rates, partially offset by
fewer monthly subscribers and some system drops, due in part to the
implementation of Section 505 of the Telecommunications Act. At December 31,
1998, Playboy TV was available to approximately 11.7 million cable addressable
households, a 1% increase compared to December 31, 1997. See "Business--
Regulation" for more information about Section 505 of the Telecommunications
Act.
28
<PAGE>
DTH revenues increased $6.8 million, or 25%, for the fiscal year ended
December 31, 1998. This improvement was primarily due to significant increases
in addressable universes for DirecTV and PrimeStar and revenue increases from
fiscal year 1998 launches on EchoStar and two Canadian DTH services, ExpressVu
and Star Choice. Unlike cable, DTH is unaffected by Section 505. Revenues from
the large satellite dish market continued to decline, as expected, due to the
maturity of this platform. Playboy TV was available to approximately 9.8
million DTH households at December 31, 1998, an increase of 44% compared to
December 31, 1997.
Revenues from off-network productions and other decreased $0.4 million, or
14%, for the fiscal year ended December 31, 1998, primarily due to higher
revenues in the prior year from licensing episodes of our series to Showtime.
Profit contribution for Playboy TV increased $6.4 million for the fiscal
year ended December 31, 1998 compared to the prior calendar year, primarily due
to the net increase in revenues previously discussed combined with lower legal
fees in the current year related to the Section 505 lawsuit and expenses in the
prior year related to a pay-per-view special featuring Farrah Fawcett.
Partially offsetting these increases were higher marketing expenses in the
current year and the effects in the prior year of favorable music licensing
settlements and a large favorable adjustment to bad debt expense.
Domestic Home Video
Domestic home video revenues increased $3.2 million, and profit contribution
increased $3.0 million for the fiscal year ended December 31, 1998 compared to
the prior year. These increases were primarily due to sales of The Eros
Collection of movies and higher revenues from the sale of DVDs in the current
year.
International TV and Home Video
For the fiscal year ended December 31, 1998, revenues from the international
business increased $2.1 million and profit contribution from the international
business increased $1.6 million, primarily due to higher international network
sales and contractual revenues, which were partially offset by lower
international home video sales. Variances in quarterly performance are caused
in part by revenues and profit contribution from tier sales being recognized
depending upon the timing of program delivery, license periods and other
factors.
Playboy Businesses Programming Expense
For the fiscal year ended December 31, 1998, programming amortization
expense associated with the Entertainment Group's Playboy businesses discussed
above increased $1.5 million compared to the prior year. The increase was
primarily due to higher amortization related to regular programming on the
domestic Playboy TV network.
AdulTVision
AdulTVision revenues increased $1.4 million, or 31%, for the fiscal year
ended December 31, 1998 compared to the prior year. This increase was primarily
due to higher revenues from the domestic network, due principally to a
significant increase in the addressable universe. At December 31, 1998, the
network was available domestically to approximately 9.8 million cable
addressable and DTH households, a 66% increase from December 31, 1997.
Operating income increased $0.7 million for the fiscal year ended December 31,
1998, primarily due to the increase in revenues, partially offset by higher
distribution and contractual marketing costs.
Movies and Other
Revenues from movies and other businesses decreased $1.2 million, and
operating income from movies and other businesses decreased $1.6 million for
the fiscal year ended December 31, 1998, primarily due to a
29
<PAGE>
favorable settlement from a distributor of feature films in the prior year. The
Entertainment Group's administrative expenses increased $1.1 million for the
fiscal year ended December 31, 1998 compared to the prior year largely to
support the growth in the Entertainment Group.
Product Marketing Group
Product Marketing Group revenues of $7.1 million for the fiscal year ended
December 31, 1998 decreased $0.8 million, or 10%, compared to the prior
calendar year. The current year reflects lower international product licensing
royalties, principally from Asia, largely attributable to unfavorable economic
conditions. Higher revenues from Special Editions, Ltd. from a barter agreement
related to the sale of prints and posters from our art publishing inventory
partially offset the decline.
The Product Marketing Group reported operating income of $0.4 million for
the fiscal year ended December 31, 1998, a decrease of $2.5 million, or 87%,
compared to the prior calendar year due in part to a $1.4 million settlement of
litigation related to BrandsElite. The lower Asian royalties previously
discussed also unfavorably impacted the current year. The higher Special
Editions, Ltd. revenues were mostly offset by higher associated costs.
For the fiscal year ended December 31, 1998, EBITDA of $0.5 million
decreased $2.6 million, or 83%, compared to the prior calendar year.
Catalog Group
For the fiscal year ended December 31, 1998, revenues of $74.4 million
decreased $1.2 million, or 2%, compared to the prior calendar year due in part
to the timing of sales cut-offs resulting in an additional week of sales
recorded in the prior year for all of the catalogs. A lower response rate to
the fall catalog also reduced the sales volume for the Playboy catalog.
Revenues in the current year from the new Spice catalog, containing adult video
tapes, which was tested in July 1998 under license from Spice, partially offset
these decreases.
Operating income of $4.1 million for the fiscal year ended December 31, 1998
increased $0.5 million, or 14%, compared to the prior calendar year due to
lower expenses, primarily related to overall lower circulation of the catalogs,
combined with expenses in the prior year related to the group's move to a new
facility.
For the fiscal year ended December 31, 1998, EBITDA of $4.6 million
increased $0.4 million, or 8%, compared to the prior calendar year.
Casino Gaming Group
On November 13, 1998, we entered into an agreement to sell our 12% equity
interest in The Playboy Casino at Hotel des Roses, which will result in a
nonoperating gain of approximately $1.5 million in fiscal year 1999. As part of
the agreement, the purchaser agreed to make guaranteed minimum payments under
the existing licensing agreement for the Rhodes Casino, which began generating
revenues when it opened in April 1999.
We are also continuing to explore additional casino gaming opportunities.
For the fiscal year ended December 31, 1998, the Casino Gaming Group incurred
an operating loss of $1.1 million compared to an operating loss of $0.6 million
for the calendar year ended December 31, 1997. The current year reflected a
full year of expenses whereas, in the prior year, expenses incurred during the
first six months were capitalized and subsequently written off as "Cumulative
effect of change in accounting principle" as provided in SOP 98-5.
For the fiscal year ended December 31, 1998, EBITDA of $(1.1) million
decreased $0.5 million, or 105%, compared to the prior calendar year.
30
<PAGE>
Playboy Online Group
The Playboy Online Group's results include advertising revenues from
Playboy.com, subscription revenues to Playboy Cyber Club and e-commerce
revenues.
For the fiscal year ended December 31, 1998, Playboy Online Group revenues
of $7.1 million increased $3.2 million, or 83%, compared to the prior calendar
year. This increase was across the board coming from higher e-commerce revenues
from CCVideo and CCMusic, online versions of the Critics' Choice Video and
Collectors' Choice Music catalogs, higher subscription revenues and higher
advertising revenues.
For the fiscal year ended December 31, 1998, the Playboy Online Group
reported an operating loss of $6.5 million compared to an operating loss of
$1.2 million in the prior calendar year. The current year included higher
planned investments related to the group's continued growth and development.
For the fiscal year ended December 31, 1998, EBITDA of $(6.5) million
decreased $5.3 million, or 465%, compared to the prior calendar year.
Corporate Administration and Promotion
Corporate Administration and Promotion expense of $24.4 million for the
fiscal year ended December 31, 1998 increased $4.7 million, or 24%, compared to
the calendar year ended December 31, 1997. This increase was largely due to
increased investments in systems technology, including Year 2000 expenses,
combined with increased investment spending on corporate marketing and
promotion and strategic consulting expenses in the current year.
Six-Month Transition Period ended December 31, 1997 Compared to Six Months
ended December 31, 1996
Our revenues were $149.5 million for the transition period, a 2% increase
over revenues of $146.0 million for the six months ended December 31, 1996.
This increase was principally due to higher revenues from the Entertainment
Group, primarily driven by an increase from Playboy TV.
We reported operating income of $4.5 million for the transition period
compared to $7.7 million for the six months ended December 31, 1996. This
decrease was primarily due to lower operating income for the Catalog and
Product Marketing Groups combined with an increase in planned investments in
the Playboy Online Group.
For the six-month transition period ended December 31, 1997, EBITDA of $17.6
million decreased $2.2 million, or 11%, and Adjusted EBITDA of $3.2 million
decreased $1.1 million, or 26%, compared to the same six-month period in the
prior calendar year.
Net income for the transition period was $1.1 million, resulting in EPS of
$0.05 (basic and diluted), compared to net income of $3.9 million, or basic and
diluted EPS of $0.19, for the six months ended December 31, 1996. Net income
for the transition period included the charge of $1.1 million that resulted
from our early adoption of SOP 98-5. Excluding the impact of this $1.1 million
cumulative effect of change in accounting principle, net income for the
transition period was $2.2 million, or basic and diluted EPS of $0.10.
Publishing Group
Publishing Group revenues of $66.3 million for the transition period
decreased $1.1 million, or 2%, compared to the six months ended December 31,
1996 primarily due to lower revenues from Playboy magazine.
31
<PAGE>
Playboy magazine revenues decreased $0.9 million, or 2%, for the transition
period compared to the prior year six-month period. Circulation revenues
decreased $1.4 million, or 4%, compared to the prior year six-month period,
primarily due to lower newsstand revenues principally as the result of 9% fewer
U.S. and Canadian newsstand copies sold in the transition period. Subscription
revenues decreased slightly by 2%. Playboy magazine advertising revenues
increased $0.5 million, or 4%, for the transition period, primarily due to 4%
more ad pages.
Revenues from other domestic publishing businesses decreased $0.3 million,
or 3%, for the transition period compared to the prior year period due to lower
revenues from other businesses. Partially offsetting the decrease were higher
revenues from newsstand specials, primarily due to the publication of an
additional issue in the transition period combined with the mix of titles sold,
offset in part by lower average copies sold per issue in the United States and
Canada.
International publishing revenues increased $0.1 million, or 1%, for the
transition period compared to the prior year six-month period.
Publishing Group operating income increased $0.2 million, or 6%, for the
transition period compared to the prior year period. The increase was primarily
due to lower manufacturing costs, principally due to lower average paper
prices, combined with the higher Playboy magazine advertising revenues.
Partially offsetting the above were the lower Playboy magazine newsstand
revenues, higher editorial costs and expenses associated with the early
termination of an executive contract.
For the six-month transition period ended December 31, 1997, EBITDA of $4.2
million remained flat compared to the same six-month period in the prior
calendar year.
Entertainment Group
Entertainment Group revenues for the transition period of $37.3 million
increased $3.4 million, or 10%, compared to the six months ended December 31,
1996, primarily due to higher revenues from Playboy TV. Operating income of
$8.0 million increased $0.3 million, or 4%, from the prior year six-month
period.
For the six-month transition period ended December 31, 1997, EBITDA of $19.4
million increased $1.8 million, or 10%, and Adjusted EBITDA of $5.0 million
increased $2.9 million, or 134%, compared to the same six-month period in the
prior calendar year.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense.
Playboy TV
For the transition period, Playboy TV revenues of $24.9 million were $2.6
million, or 12%, higher compared to the six months ended December 31, 1996.
Cable revenues were $0.8 million, or 8%, lower compared to the prior year
period, primarily due to the estimated negative effect of the enforcement of
Section 505 combined with a decline in the average number of subscribing
households due to some system drops, partially offset by higher retail rates.
At December 31, 1997, Playboy TV was available to approximately 11.6 million
cable addressable households, a 4% increase compared to December 31, 1996 and a
4% increase compared to June 30, 1997.
More than offsetting the cable decline were higher DTH revenues, which were
$4.1 million, or 41%, higher for the transition period compared to the prior
year period primarily due to significant increases in addressable universes for
PrimeStar and DirecTV and, beginning in March 1997, the availability of monthly
subscriptions through PrimeStar. As expected, revenues from large-dish
satellite systems continued to decline. Playboy TV was available to
approximately 6.8 million DTH households at December 31, 1997, an increase of
21% compared to December 31, 1996 and an increase of 8% compared to June 30,
1997.
32
<PAGE>
For the transition period, revenues from off-network productions and other
decreased $0.7 million, or 33%, compared to the prior year period, primarily
due to licensing to Showtime fewer episodes of Women: Stories of Passion, a
series of 30-minute erotic anthologies written, produced and directed by women.
Profit contribution for Playboy TV increased $2.2 million for the transition
period, primarily due to the net increase in revenues.
Domestic Home Video
Domestic home video revenues for the transition period decreased $0.6
million, or 16%, compared to the prior year six-month period, primarily due to
lower revenues related to our direct-response continuity series combined with
overall lower net sales of new releases, partially offset by significant sales
in the transition period of Farrah Fawcett: All of Me. Profit contribution
decreased $1.0 million, primarily due to the decrease in revenues combined with
higher marketing and promotion costs.
International TV and Home Video
For the transition period, revenues from the international TV and home video
business increased $0.4 million, or 9%, compared to the prior year six-month
period. The higher revenues were due to international TV, primarily as the
result of higher net revenues from Playboy TV networks and Germany, partially
offset by lower revenues from Taiwan. International home video revenues were
lower principally due to revenues from South Korea in the prior year period.
There were no revenues from South Korea in the transition period primarily due
to the poor economic conditions in that country. Profit contribution remained
stable as a decline in international home video, due to the lower revenues, was
offset by higher profit contribution from international TV, which resulted from
the higher revenues, partially offset by higher related costs. Variances in
quarterly performance are caused in part by revenues and profit contribution
from tier sales being recognized depending upon the timing of program delivery,
license periods and other factors.
Playboy Businesses Programming Expense
Programming amortization expense associated with the Entertainment Group's
Playboy businesses discussed above increased $1.6 million for the transition
period compared to the prior year six-month period, primarily related to the
higher revenues from international TV, higher production costs of live events
on domestic Playboy TV and costs related to the home video featuring Farrah
Fawcett. Partially offsetting the above was lower amortization related to the
lower revenues from off-network productions.
AdulTVision
AdulTVision revenues for the transition period decreased $0.1 million, or
3%, compared to the prior year six-month period, while operating income
remained stable. At December 31, 1997, the network was available domestically
to approximately 5.9 million cable addressable and DTH households, a 20%
increase from December 31, 1996 and an 11% increase from June 30, 1997.
Movies and Other
Revenues from movies and other businesses increased $1.1 million and
operating income from these businesses increased $1.2 million for the
transition period primarily due to a favorable settlement from a distributor of
feature films. The Entertainment Group's administrative expenses for the
transition period increased $0.6 million compared to the prior year six-month
period, largely due to higher overall salary and related expenses, including
net higher performance-related variable compensation expense.
33
<PAGE>
Product Marketing Group
Product Marketing Group revenues of $4.2 million for the transition period
decreased $0.1 million, or 2%, compared to the six months ended December 31,
1996, largely due to favorable adjustments in the prior year period for
international product licensing royalties. Partially offsetting these lower
revenues were higher royalties in the transition period related to increased
domestic and international distribution of our line of cigars. Operating income
decreased $0.7 million, or 28%, compared to the prior year period, primarily
due to the net decrease in revenues combined with higher expenses principally
due to bad debt related to licensees in some Asian countries, legal and
increased investments in brand marketing.
For the six-month transition period ended December 31, 1997, EBITDA of $1.7
million decreased $0.7 million, or 28%, compared to the same six-month period
in the prior calendar year.
Catalog Group
Catalog Group revenues of $39.4 million for the transition period increased
$0.3 million, or 1%, compared to the six months ended December 31, 1996, due to
higher revenues for the Collectors' Choice Music and Critics' Choice Video
catalogs, partially offset by lower revenues from the Playboy catalog. For the
transition period, all of the catalogs benefited from an extended sales cut-off
when we changed our fiscal year end from June 30 to December 31. Sales volume
for the Collectors' Choice Music catalog was also slightly higher, primarily
due to significantly higher circulation mostly offset by lower revenues from
promotions. Critics' Choice Video was favorably impacted by sales in the
transition period from the first Big Book available in October 1997, but they
were more than offset by lower circulation and lower response rates from
prospective customers of the catalog. Revenues from the Playboy catalog were
also impacted by lower response rates from prospective customers. We believe
lower response rates were due in part to the negative impact of the United
Parcel Service strike in August 1997.
For the transition period, Catalog Group operating income decreased $0.9
million, or 36%, compared to the prior year six-month period. This decline was
primarily due to lower operating income from the Critics' Choice Video and
Collectors' Choice Music catalogs as the higher revenues were not sufficient to
offset higher costs. Additionally, administrative expenses were higher for the
group, principally due to higher salary and related expenses.
For the six-month transition period ended December 31, 1997, EBITDA of $2.1
million decreased $1.0 million, or 34%, compared to the same six-month period
in the prior calendar year.
Casino Gaming Group
Due to our early adoption of SOP 98-5, we expensed $0.6 million during the
transition period related to development costs for the Rhodes Casino and other
potential casino gaming ventures.
Playboy Online Group
For the transition period, Playboy Online Group revenues of $2.3 million
increased $1.0 million, or 81%, compared to the prior year six-month period.
This increase was primarily due to subscription revenues generated from Playboy
Cyber Club combined with higher e-commerce revenues.
For the transition period, the Playboy Online Group reported an operating
loss of $0.9 million compared to operating income of $0.1 million in the prior
year six-month period. The transition period included higher planned
investments related to the group's continued growth and development.
For the six-month transition period ended December 31, 1997, EBITDA was
$(0.9) million compared to $0.1 million in the same six-month period in the
prior calendar year.
34
<PAGE>
Corporate Administration and Promotion
Corporate administration and promotion expense of $9.4 million for the
transition period increased $0.5 million, or 6%, compared to the six months
ended December 31, 1996, partly due to filling the chief marketing officer
position in October 1996 and higher investment spending on corporate marketing,
combined with filling the chief financial officer position in May 1997.
Fiscal Year ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Our revenues were $296.6 million for the fiscal year ended June 30, 1997, a
7% increase over revenues of $276.6 million for the fiscal year ended June 30,
1996. This increase was due to higher revenues from all of our groups, largely
the Entertainment Group, primarily driven by an increase in revenues from
Playboy TV. Higher revenues from the international publishing business and the
Catalog and Playboy Online Groups also contributed meaningfully to the increase
in revenues.
We reported operating income of $15.7 million for the year ended June 30,
1997 compared to $9.5 million for the year ended June 30, 1996. This increase
was due to significant growth in operating income of Playboy TV.
For the fiscal year ended June 30, 1997, EBITDA of $41.6 million increased
$6.2 million, or 17%, and Adjusted EBITDA of $10.9 million increased $1.0
million, or 10%, compared to the prior fiscal year.
Net income for the fiscal year ended June 30, 1997 was $21.4 million,
resulting in basic EPS of $1.05 and diluted EPS of $1.03. This compared to net
income of $4.3 million, or basic and diluted EPS of $0.21, for the year ended
June 30, 1996. Net income for fiscal year 1997 included a federal income tax
benefit of $13.5 million related to net operating loss and tax credit
carryforwards. Excluding the impact of the $13.5 million federal income tax
benefit, net income for the year ended June 30, 1997 was $7.9 million, or basic
EPS of $0.39 and diluted EPS of $0.38.
Publishing Group
Fiscal year 1997 Publishing Group revenues of $135.7 million increased $3.9
million, or 3%, compared to fiscal year 1996, primarily due to higher revenues
from international publishing.
Playboy magazine revenues for fiscal year 1997 were basically flat compared
to fiscal year 1996. Circulation revenues decreased $1.4 million, or 2%, due to
10% lower newsstand revenues principally as a result of 13% more U.S. and
Canadian newsstand copies sold in fiscal year 1996, when two exceptionally
strong-selling issues featuring celebrities were published. Subscription
revenues increased 2%, primarily due to an increase in the number of
subscriptions served, partially offset by lower revenues from the rental of
Playboy's subscriber list. Playboy magazine advertising revenues increased 4%
compared to fiscal year 1996 due to higher average net revenue per page, due
principally to the mix of pages sold combined with rate increases effective
with the January 1997 and 1996 issues, partially offset by 2% fewer ad pages in
fiscal year 1997.
Revenues from other domestic publishing businesses increased $0.5 million,
or 3%, for the year ended June 30, 1997 compared to the prior year due to
higher revenues from other businesses.
International publishing revenues increased principally due to higher
revenues in fiscal year 1997 related to the purchase of additional equity in
March 1996 in VIPress Poland Sp. z o.o., publisher of the Polish edition of
Playboy magazine, which resulted in its consolidation.
For the year ended June 30, 1997, Publishing Group operating income
decreased $0.4 million, or 4%, compared to the prior year. The decrease was
primarily due to the lower newsstand revenues and higher editorial costs
related to the magazine. Partially offsetting the above were the higher Playboy
magazine
35
<PAGE>
advertising revenues combined with lower manufacturing costs, primarily due to
lower average paper prices, which were partially offset by an increase in the
magazine's average book size, and higher operating income related to the
consolidation of VIPress Poland.
For the fiscal year ended June 30, 1997, EBITDA of $9.7 million decreased
$0.3 million, or 3%, compared to the prior fiscal year.
Entertainment Group
Fiscal year 1997 Entertainment Group revenues of $74.7 million increased
$9.8 million, or 15%, compared to fiscal year 1996. Operating income of $18.2
million increased $9.0 million, almost double fiscal year 1996 operating income
of $9.2 million. Both of these increases were primarily attributable to Playboy
TV.
For the fiscal year ended June 30, 1997, EBITDA of $40.3 million increased
$9.3 million, or 30%, and Adjusted EBITDA of $9.6 million increased $4.1
million, or 74%, compared to the prior fiscal year.
The following discussion focuses on the profit contribution of each Playboy
business before Playboy businesses programming expense.
Playboy TV
For the year ended June 30, 1997, revenues of $47.3 million from Playboy TV
were $8.0 million, or 20%, higher compared to the prior year.
Cable revenues remained stable compared to fiscal year 1996 as a 9% increase
in pay-per-view revenues was offset by a 19% decline in monthly subscription
revenues, principally due to some system drops, which resulted in a decline in
the average number of subscribing households. The increase in pay-per-view
revenues was primarily due to higher average buy rates combined with larger
favorable adjustments, as reported by cable systems, in fiscal year 1997. At
June 30, 1997, Playboy TV was available to approximately 11.2 million cable
addressable households, a 1% decrease compared to June 30, 1996.
DTH revenues were $6.7 million, or 40%, higher for the year ended June 30,
1997 compared to the prior year. The increase was primarily due to higher
DirecTV and PrimeStar revenues, principally from significant increases in the
addressable universes of these services, slightly offset by lower revenues, as
expected, from large-dish satellite systems. Playboy TV was available to
approximately 6.3 million DTH households at June 30, 1997, an increase of 29%
compared to June 30, 1996.
For the year ended June 30, 1997, revenues from off-network productions and
other increased $1.3 million, or 83%, compared to the prior year, primarily due
to licensing more episodes of Women to Showtime.
Profit contribution for Playboy TV increased $11.4 million compared to
fiscal year 1996, primarily due to the significant increase in revenues
combined with no royalty expense related to the former distributor of our pay
television service in fiscal year 1997. Royalty payments were discontinued on
April 30, 1996, when the agreement terminated. Lower marketing costs and bad
debt expense combined with favorable music licensing settlements in fiscal year
1997 also contributed to the increase in profit contribution.
Domestic Home Video
Domestic home video revenues decreased $0.9 million, or 9%, for the year
ended June 30, 1997 compared to the prior year largely due to lower revenues
related to our direct-response continuity series, the second of which was
launched during fiscal year 1997, combined with lower net sales of new
releases, due in part to extraordinary sales of The Best of Pamela Anderson in
fiscal year 1996. Partially offsetting the above were higher net revenues from
a three-year distribution agreement with Universal Music & Video Distribution,
Inc.
36
<PAGE>
related to backlist titles. Fiscal year 1997 included revenues related to the
third year of the guarantee, which were higher than net revenues in fiscal year
1996 related to the guarantees for the first two years. Profit contribution
decreased $0.8 million for the year ended June 30, 1997 compared to the prior
year, principally due to the net decrease in revenues combined with the timing
of promotion costs.
International TV and Home Video
For the year ended June 30, 1997, revenues from the international TV and
home video business increased $0.3 million, and profit contribution from these
businesses decreased $1.7 million, compared to the prior year. The decline in
profit contribution was due to international home video, principally due to
lower revenues resulting primarily from the need to slow down shipments in
countries where the distribution pipeline was full. Higher international TV
revenues in fiscal year 1997, largely from Playboy TV networks, were offset by
higher costs. Variances in quarterly performance are caused in part by revenues
and profit contribution from tier sales being recognized depending upon the
timing of program delivery, license periods and other factors. To allow greater
flexibility, we modified how we program our international networks effective
with the fourth quarter of fiscal year 1996, the effect of which was not
material. This modification results in the revenues from these networks now
being recorded on a quarterly basis, which has the effect of smoothing out the
fluctuations caused by recording a year's worth of programming sales in one
quarter. Previously, we scheduled programming for a full year in the quarter
during which the network was launched or an agreement was renewed, and
recognized the full year of revenues in that quarter.
Playboy Businesses Programming Expense
For the year ended June 30, 1997, programming amortization expense
associated with the Entertainment Group's Playboy businesses discussed above
remained relatively stable compared to the prior year. Fiscal year 1997
included lower amortization related to the lower international home video
revenues and regular programming on the domestic Playboy TV network. Offsetting
these decreases were higher amortization related to an increase in the number
of live events on domestic Playboy TV combined with costs related to the pay-
per-view special event and home video featuring Farrah Fawcett.
AdulTVision
AdulTVision revenues increased $2.6 million, or 135%, for the year ended
June 30, 1997 compared to the prior year, primarily due to revenues related to
the September 1996 launch of a network in Latin America. Higher domestic
network revenues from an increase in its addressable universe and higher buys
also contributed to the increase. At June 30, 1997, the network was available
domestically to approximately 5.3 million cable addressable and DTH households,
an 18% increase from June 30, 1996.
For the year ended June 30, 1997, AdulTVision was profitable, resulting in
an increase in operating performance of $1.7 million. The increase was
primarily due to the higher revenues, partially offset by higher distribution
costs due to the launch in Latin America and an increase in domestic fees in
fiscal year 1997 related to transferring to a different transponder.
Movies and Other
For the year ended June 30, 1997, revenues and operating income from movies
and other businesses both decreased $0.2 million compared to the prior year.
The Entertainment Group's administrative expenses increased $1.3 million
compared to fiscal year 1996 largely due to higher performance-related variable
compensation expense and higher expense related to new business development in
fiscal year 1997.
Product Marketing Group
Product Marketing Group revenues of $8.0 million increased $0.9 million, or
12%, for the year ended June 30, 1997 compared to the prior year. The increase
was primarily due to higher international product licensing royalties,
principally from Asia, combined with royalties in fiscal year 1997 related to
our second line of cigars
37
<PAGE>
distributed domestically. Operating income of $3.5 million decreased $0.2
million, or 5%, for the year ended June 30, 1997 compared to the prior year due
to higher expenses, principally reflecting increased investments in brand
marketing, promotion and product design as well as severance, search fees
associated with a new division executive and higher legal expenses.
For the fiscal year ended June 30, 1997, EBITDA of $3.7 million decreased
$0.2 million, or 6%, compared to the prior fiscal year.
Catalog Group
Catalog Group revenues of $75.4 million increased $3.8 million, or 5%, for
the year ended June 30, 1997 compared to the prior year, primarily due to
higher sales volume from the Critics' Choice Video and Collectors' Choice Music
catalogs, primarily attributable to increased circulation of the catalogs.
For the year ended June 30, 1997, Catalog Group operating income of $4.6
million decreased $0.6 million, or 11%, compared to the prior year, primarily
due to lower-than-anticipated response rates from prospective customers. The
increase in revenues plus lower paper prices generally were not sufficient to
offset higher related costs, due in part to prospecting. Additionally,
administrative expenses were higher for the group, primarily due to higher
salary and related expenses combined with expenses in fiscal year 1997 related
to the group's move to a new facility. At the end of fiscal year 1997, the
catalog operation began moving from its former facility to a larger facility,
under terms of a built-to-suit lease, to meet additional space requirements.
The new facility is located in the same Chicago suburb.
For the fiscal year ended June 30, 1997, EBITDA of $5.2 million decreased
$0.7 million, or 10%, compared to the prior fiscal year.
Playboy Online Group
For the year ended June 30, 1997, Playboy Online Group revenues more than
doubled to $2.8 million from $1.2 million in the prior year. This increase was
primarily due to higher advertising revenues combined with higher e-commerce
revenues from the Playboy Store, a version of the Playboy catalog that launched
in the spring of 1996.
For the year ended June 30, 1997, the Playboy Online Group reported an
operating loss of $0.1 million compared to operating income of $0.2 million in
the prior year. The current year included planned investments largely related
to developing Playboy Cyber Club.
For the fiscal year ended June 30, 1997, EBITDA was $(0.1) million compared
to 0.2 million in the prior fiscal year.
Corporate Administration and Promotion
Corporate administration and promotion expense of $19.2 million for the
fiscal year ended June 30, 1997 increased $1.3 million, or 7%, compared to the
prior fiscal year, largely due to investment spending on corporate marketing.
Liquidity and Capital Resources
At December 31, 1998, we had $0.3 million in cash and cash equivalents and
$29.8 million in short-term borrowings, compared to $0.9 million in cash and
cash equivalents and $10.0 million in short-term borrowings at December 31,
1997. We expect to meet our short- and long-term cash requirements through
internally generated funds and our new credit agreement.
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<PAGE>
In connection with the Spice Acquisition, we entered into a new credit
agreement, dated as of February 26, 1999, for borrowings of up to $150.0
million. The new credit agreement provided financing to (1) acquire all of the
outstanding shares of Spice and pay related acquisition costs, (2) repay our
existing debt and the existing debt of Spice and (3) fund our future general
working capital and investment needs.
The new credit agreement consists of three components: (1) a $40.0 million
revolving credit facility with a $10.0 million letter of credit sublimit, (2) a
$35.0 million tranche A term loan and (3) a $75.0 million tranche B term loan.
The revolving credit facility and tranche A term loan mature on March 15, 2004.
The tranche B term loan matures on March 15, 2006. Loans bear interest at a
rate equal to specified index rates plus margins that fluctuate based on our
ratio of consolidated debt to consolidated adjusted EBITDA. Our obligations
under the new credit agreement are unconditionally guaranteed by each of our
existing and subsequently acquired domestic restricted subsidiaries (currently
all domestic subsidiaries except Playboy Online, Inc.). The new credit
agreement and related guarantees are secured by substantially all of our assets
and those of our domestic restricted subsidiaries.
Under the new credit agreement, we must maintain leverage, cash flow,
interest coverage and fixed charge coverage ratios. The new credit agreement
places limits on other indebtedness, investments, capital expenditures and
dividends. The new credit agreement also requires mandatory prepayments with
net cash proceeds resulting from excess cash flow, asset sales and the issuance
of some debt obligations or equity securities, with some exceptions.
Net cash used for operating activities was $15.0 million for the fiscal year
ended December 31, 1998, primarily due to increases in receivables of $10.7
million and other noncurrent assets of $4.3 million. The increase in
receivables was primarily attributable to international TV sales, international
networks and off-network productions combined with the timing of cash receipts
from the DTH market. Also contributing to the increase in receivables were
higher revenues from the December 1998 issue of Playboy magazine featuring
Katarina Witt. The increase in other noncurrent assets was primarily due to
deferred costs related to the Spice Acquisition. We invested $24.6 million in
Playboy-produced and licensed entertainment programming during fiscal year 1998
and expect to invest approximately $37.0 million in this programming in fiscal
year 1999.
Net cash used for investing activities was $6.4 million for fiscal year
1998. Investments in international ventures of $5.2 million primarily related
to additional funding for the Playboy TV network in the United Kingdom and the
Playboy TV and AdulTVision networks in Latin America. On December 31, 1998, we
sold back to duPont the shares of duPont's common stock owned by us. Sale
proceeds were $5.0 million, which consisted of $0.5 million in cash and a $4.5
million promissory note, which was paid on January 4, 1999. Capital
expenditures for fiscal year 1998 were $1.1 million. We also entered into
leases of furniture and equipment totaling $5.3 million, largely attributable
to growth in the Playboy Online Group.
Net cash provided by financing activities was $20.8 million for fiscal year
1998, principally due to a $19.8 million increase in short-term borrowings
under our revolving line of credit.
Income Taxes
At June 30, 1997, we evaluated our net operating loss carryforwards, which
we refer to as "NOLs," and other deferred tax assets and liabilities in
relation to our recent earnings history and our projected future earnings. This
review induced us to reevaluate the realizability of the deferred tax assets in
future years and to reduce the valuation allowance balance by $13.5 million. In
fiscal year 1998, we realized $0.1 million of the net deferred tax asset
recorded at December 31, 1997.
Based on current tax law, we will need to generate approximately $39.7
million of future taxable income before the expiration of our NOLs for full
realization of the $13.9 million net deferred tax asset recorded at December
31, 1998. At December 31, 1998, we had NOLs of $14.2 million for tax purposes,
with $11.7 million expiring in 2009 and $2.5 million expiring in 2012.
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<PAGE>
We believe that it is more likely than not that we will generate the
required amount of taxable income in years after December 31, 1998 and before
the expiration of our NOLs to realize the $13.9 million net deferred tax asset
at December 31, 1998. Following is a summary of the bases for our belief that a
valuation allowance of $15.4 million at December 31, 1998 is adequate, and that
it is more likely than not that the net deferred tax asset of $13.9 million
will be realized:
. In establishing the net deferred tax asset, we reviewed the components of
our NOLs and determined that they primarily resulted from several
nonrecurring events, which were not indicative of our ability to generate
future earnings.
. Several of our operating groups continue to generate meaningful earnings,
particularly the Entertainment Group, and our substantial investments in
the Entertainment and Playboy Online Groups are anticipated to lead to
increased earnings in future years.
. We have opportunities to accelerate taxable income into the NOL
carryforward period. Tax planning strategies would include the
capitalization and amortization versus immediate deduction of circulation
expenditures, the immediate inclusion versus deferred recognition of
prepaid subscription income, the revision of depreciation and
amortization methods for tax purposes and the sale-leaseback of property
that would generate taxable income in future years.
New Accounting Pronouncement
We will adopt the provisions of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, which we
refer to as "Statement 133," for financial statements issued for fiscal years
beginning after June 15, 1999. Statement 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. We are evaluating the effect that adoption of Statement 133
will have on our financial statements.
Year 2000 Compliance
In response to the Year 2000 problem, we have identified and are
implementing changes to our existing computerized business systems. We are
addressing the issue through a combination of modifications to existing
programs and conversions to Year 2000 compliant software. In addition, we have
communicated with our vendors and other service providers to ensure that their
products and business systems are or will be Year 2000 compliant. If
modifications and conversions by us and those with which we conduct business
are not made in a timely manner, the Year 2000 problem could have a material
adverse effect on our business, financial condition and results of operations.
All of our major systems have either been identified as Year 2000 compliant, or
remediation has been completed to ensure Year 2000 compliance. These major
systems include financial applications, and key operating systems for the
Entertainment, Catalog and Playboy Online Groups. We are currently evaluating
less critical systems, such as desktop applications, with plans for all systems
to be in compliance by the third quarter of fiscal year 1999. We are also
reviewing our non-information technology systems to determine the extent of any
modifications and believe that there will be minimal changes necessary for
compliance. Although we are still quantifying the impact, the current estimate
of the total costs associated with the required modifications and conversions
are expected to be slightly in excess of $1.0 million, of which approximately
$0.7 million was expensed in fiscal year 1998. We expense these costs as we
incur them.
We believe that our technology systems will be ready for the year 2000 and,
therefore, have not developed a comprehensive contingency plan. High-risk
vendors will be examined throughout the year, however, with contingency plans
developed on a case-by-case basis where needed. Additionally, we are aware that
we may experience other isolated incidences of non-compliance and plan to
allocate internal resources and retain dedicated consultants and vendor
representatives to be ready to take action if necessary. Although we value our
established relationships with key vendors and other service providers, if some
vendors are unable to perform on a timely basis due to their own Year 2000
issues, we believe that substitute products or services are available from
other vendors. We also recognize that we, like all other businesses, are at
risk if other key suppliers in utilities, communications, transportation,
banking and government are not ready for the year 2000.
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<PAGE>
Recent Developments
On May 4, 1999, we announced a net loss of $1.0 million, or $0.05 per basic
and diluted share, for the first quarter of 1999 compared to net income of $0.1
million, or $0.0 per basic and diluted share, in the same period last year. We
incurred an operating loss of $2.0 million in the first quarter of 1999,
compared to operating income of $1.2 million in the same period last year.
Revenues increased 3% over the previous year's quarter to $73.6 million.
The Publishing Group reported first quarter 1999 operating income of $1.8
million, compared to $0.2 million in the first quarter 1998, on an 11% increase
in revenues to $33.3 million.
The Entertainment Group reported first quarter 1999 operating income of $4.4
million, versus $4.9 million in the first quarter 1998, on a 12% increase in
revenues to $20.4 million. Playboy TV's revenues increased 11% to $14.9
million, while Playboy worldwide home video revenues increased 18% to $1.9
million and international TV revenues declined 7% to $1.5 million.
The Product Marketing Group reported first quarter 1999 operating income of
$0.3 million, compared to first quarter 1998 operating income of $0.7 million,
on a 39% decline in revenues to $1.6 million.
The Catalog Group reported a first quarter 1999 operating loss of $0.3
million compared to operating income of $1.0 million in first quarter 1998 on a
19% decline in revenues to $15.7 million.
The Casino Gaming Group reported a first quarter 1999 operating loss of $0.3
million comparable to the results in first quarter 1998. We also had non
operating income of $1.7 million from the sale of our equity interest in the
Rhodes Casino.
The Playboy Online Group reported a first quarter 1999 operating loss of
$2.0 million, comparable to the results in fourth quarter 1998, versus an
operating loss of $0.7 million in the first quarter 1998. The Group's revenues
increased 74% to $2.5 million from $1.4 million in first quarter 1998, with
gains in all three revenue streams: advertising, e-commerce and subscription.
Corporate Administration and Promotion expense of $6.0 million for the first
quarter 1999 increased $1.3 million, or 29%, compared to first quarter 1998. We
also reported first quarter 1999 interest expense of $0.9 million, a $0.7
million increase from first quarter 1998.
For first quarter 1999, EBITDA of $6.3 million decreased $0.4 million, or
6%, compared to first quarter 1998.
41
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BUSINESS
Playboy Enterprises, Inc. is a global multi-media entertainment company with
one of the most recognized brand names in the world. The flagship of our
franchise is Playboy magazine, the world's best-selling men's monthly magazine,
recognized for over 45 years for its high-quality editorial material,
interviews and pictorial features. Our entertainment business, the largest
provider of adult targeted programming in the United States and abroad,
generates most of our earnings and cash flow. Our rapidly growing Internet
business, which includes one of the Internet's most visited destination sites,
generates revenues from advertising, subscription and e-commerce. We have
integrated our e-commerce efforts with the merchandising, order fulfillment and
customer service capabilities of our profitable catalog business. We also
successfully leverage our strong brand identity through product marketing and
casino gaming.
We operate six business groups: Publishing, Entertainment, Product
Marketing, Catalog, Casino Gaming and Playboy Online.
Publishing Group
The Publishing Group publishes Playboy magazine and other print products
that leverage our editorial library and brand, such as newsstand specials,
calendars and books, and licenses or owns international editions of Playboy
magazine.
Playboy Magazine
Founded by Hugh M. Hefner in 1953, Playboy magazine is the best-selling
men's monthly magazine in the world. Worldwide monthly circulation, which
includes international editions, is approximately 4.5 million copies.
Approximately 3.2 million copies of the U.S. edition are sold monthly.
International sales of the U.S. edition and 17 international editions of
Playboy extend the magazine's reach to approximately 50 countries worldwide.
According to Fall 1998 data published by Mediamark Research, Inc., the U.S.
edition of Playboy magazine is read by approximately one in every eight men in
the United States aged 18 to 34.
Playboy magazine is a general-interest magazine targeted to men and offers a
balanced variety of features. It has gained a loyal customer base and a
reputation for excellence by providing quality entertainment and informative
articles on current issues and trends. Each issue of Playboy magazine includes
an in-depth, candid interview with a well-known, thought-provoking personality.
Over the magazine's 45 year history, exclusive interview subjects have included
prominent public figures (such as Martin Luther King, Jr., Jimmy Carter, Fidel
Castro, Mike Wallace, Rush Limbaugh and James Carville), business leaders (such
as Bill Gates, David Geffen, Tommy Hilfiger and Ted Turner), entertainers (such
as Steve Martin, Jerry Seinfeld, David Letterman, Jay Leno, Mel Gibson, Bruce
Willis and John Travolta), authors (such as Salman Rushdie, Anne Rice, Ray
Bradbury, Alex Haley and James Michener) and sports figures (such as Michael
Jordan, Muhammad Ali and Brett Favre). The magazine also regularly publishes
the works of leading journalists, authors and other prominent individuals. For
example, Playboy magazine has published fiction by Scott Turow, Jay McInerney,
John Updike and Margaret Atwood, articles by Michael Crichton, Bill Maher and
William F. Buckley, and book adaptations by Tony Horwitz (Middle East
correspondent for The Wall Street Journal) and Pulitzer Prize winning author
William Kennedy. It has long been known for its graphic excellence and features
and publishes the work of top artists and photographers. Playboy magazine also
features lifestyle articles on consumer products, fashion, automobiles and
consumer electronics and covers the worlds of sports and entertainment. It is
also renowned for its pictorials of beautiful women and frequently features
celebrities on its cover and in exclusive pictorials (among them Farrah
Fawcett, Pamela Anderson, Elle Macpherson, Jenny McCarthy, Cindy Crawford,
Sharon Stone, Madonna and Katarina Witt).
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According to Audit Bureau of Circulations, which we refer to as "ABC,"
Playboy magazine's circulation rate base at December 31, 1998 was larger than
each of Newsweek and Cosmopolitan, and also greater than the combined
circulation rate bases of Rolling Stone, Esquire and GQ, which have substantial
adult male audiences. Playboy magazine's rate base compares to that of other
selected publications as noted in the following table:
<TABLE>
<CAPTION>
Selected U.S. Consumer Publications Rate Base (1) Ranking (2)
----------------------------------- ------------- -----------
<S> <C> <C>
Reader's Digest................................. 15.00 1
TV Guide........................................ 11.80 2
National Geographic............................. 8.50 3
Time............................................ 4.00 10
People.......................................... 3.25 11
Playboy......................................... 3.15 12
Sports Illustrated.............................. 3.15 12
Newsweek........................................ 3.10 14
Cosmopolitan.................................... 2.30 18
Rolling Stone................................... 1.25 46
Business Week................................... 0.88 85
Esquire......................................... 0.65 109
GQ.............................................. 0.65 109
</TABLE>
- --------
(1) Represents rate base at December 31, 1998 (in millions) as reported by ABC.
(2) Based on rate base at December 31, 1998 as reported by ABC.
Effective with the January 1996 issue, we reduced the rate base 7% from 3.40
million to 3.15 million to enable us to manage circulation more profitably,
while maintaining the magazine's circulation leadership as the best-selling
men's monthly magazine. We anticipate a further reduction in the rate base to
reflect the growing inefficiencies and costs of maintaining a high-quality,
large circulation, single title publishing operation in an environment of
decreasing results from sweepstakes marketing efforts and consolidation among
magazine wholesalers and distributors.
Playboy magazine has historically generated over two-thirds of its revenues
from subscription and newsstand circulation, with the remainder primarily from
advertising. Subscription copies as a percentage of total copies sold were
approximately 80% for fiscal year 1998. We believe that managing Playboy's
circulation to be primarily subscription driven, like most major magazines,
provides a stable and desirable circulation base, which is also attractive to
advertisers. According to the Mediamark Research, Inc. data previously
mentioned, the median age of male Playboy readers is 32, with a median annual
household income of approximately $43,000. We also derive meaningful income
from the rental of Playboy magazine's subscriber list, which consists of the
subscriber's name, address and other information.
The price of a one-year subscription to Playboy ranges from $14.98 to
$29.88, depending on the source of the subscription and the length of time that
the subscription has been held. We regularly test a variety of subscription
pricing strategies. We attract new subscribers to the magazine through our own
direct mail advertising campaigns, subscription agent campaigns and the
Internet. Playboy magazine has one of the highest cover prices for magazines in
the United States. The basic U.S. newsstand cover price has been $4.95 ($5.95
for holiday issues) since fiscal year 1993.
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<PAGE>
Playboy magazine targets a wide range of advertisers. We continue to focus
on new advertising, such as fashion, fragrance and consumer electronics.
Advertising by category for the fiscal year ended December 31, 1998, as a
percentage of total ad pages, was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
Advertising Category 12/31/98
-------------------- -----------------
<S> <C>
Tobacco................................................. 25%
Retail/Direct Mail...................................... 23
Beer/Wine/Liquor........................................ 22
Home Electronics........................................ 6
Toiletries/Cosmetics.................................... 6
Jewelry/Optical/Photo................................... 5
Drugs/Remedies.......................................... 4
Entertainment........................................... 3
Automotives............................................. 2
Apparel/Footwear/Accessories............................ 2
All Other............................................... 2
---
100%
===
</TABLE>
Playboy magazine includes approximately 550-600 advertising pages per year.
We implemented a 7% cost per thousand, which we refer to as "CPM," increase in
advertising rates effective with the January 1999 issue and a 6% CPM increase
in advertising rates effective with the January 1998 issue. We publish the U.S.
edition of Playboy magazine in 15 advertising editions: one upper income zip-
coded, eight regional, two state and four metro. All contain the same editorial
material but provide targeting opportunities for advertisers.
The Playboy Jazz Festival provides advertisers with sponsorship and
advertising opportunities through the music festival at the Hollywood Bowl, the
published Jazz Festival program, free community concerts and a national public
radio broadcast. We have produced this music event on an annual basis in Los
Angeles at the Hollywood Bowl since 1979.
Magazine publishing companies face intense competition for both readers and
advertising. Magazines primarily aimed at men are Playboy magazine's principal
competitors. In addition, other types of media that carry advertising, such as
newspapers, radio, television and Internet sites, compete for advertising
revenues with Playboy magazine.
Other Domestic Publishing
The Publishing Group has also created media extensions, taking advantage of
Playboy magazine's reputation for quality and its libraries of art, photography
and editorial text. These products include newsstand specials and calendars,
which are primarily sold in newsstand outlets and use both original photographs
and photographs from our library. The group published 23 newsstand specials in
fiscal year 1998. The group expects to publish 24 newsstand specials in fiscal
year 1999. The last increase in the newsstand cover price (to $6.95) for
newsstand specials was implemented in fiscal year 1996. We also generate
revenues from the publication of books that leverage our brand and franchise.
International Publishing
We license the right to publish 17 international editions of Playboy
magazine in the following countries: Australia, Brazil, Croatia, the Czech
Republic, France, Germany, Greece, Italy, Japan, Netherlands, Norway, Poland,
Russia, Slovakia, Spain, Sweden and Taiwan. Our equity interest in the Polish
edition was increased from 45% to a majority interest in March 1996 and its
results are consolidated in our financial statements accordingly. Combined
average monthly circulation of the international editions is approximately 1.3
million copies.
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Local publishing licensees tailor their international editions by mixing the
work of their national writers and artists with editorial and pictorial
material from the U.S. edition. We monitor the content of the international
editions so that they retain the distinctive style, look and quality of the
U.S. edition, while meeting the needs of their respective markets. The terms of
the license agreements for Playboy magazine's international editions vary, but
in general are for terms of three or five years and carry a guaranteed minimum
royalty as well as a formula for computing earned royalties in excess of the
minimum. Royalty computations are generally based on both circulation and
advertising revenues. In fiscal year 1998, the Brazilian and German editions
accounted for approximately 55% of the total licensing revenues from
international editions.
Entertainment Group
The Entertainment Group operates three branded domestic pay television
networks, Playboy TV, Spice and Spice 2, the leading adult entertainment
networks. In addition, this group owns branded networks overseas and operates a
worldwide home video business.
Domestic Television Networks
We own four of the five established adult entertainment networks. We plan to
consolidate these four networks into three.
Playboy TV
Playboy TV airs a variety of Playboy-branded programming, including feature
films, magazine-format shows, dramatic series, documentaries, live events,
anthology series and celebrity and Playmate features. Playboy TV targets
couples and male audiences. When we introduced Playboy TV in 1982, it was
available only through monthly subscriptions. In December 1989, we began to
focus on the then-emerging pay-per-view market by promoting the pay-per-view
option in addition to the monthly subscription option. Pay-per-view television
enables a subscriber with an addressable set-top decoder or satellite receiver
to purchase a block of programming, an individual movie or an event for a set
fee. Pay-per-view also permits customers to purchase only as much of our
programming as they wish and only when they desire to watch the programming in
addition to enabling customers to control the viewing of the programming within
their households. Pay-per-view programming can be delivered through any number
of delivery methods, including: cable television, DTH satellite, wireless cable
systems and new technologies.
Cable. We expanded Playboy TV from a 10-hour per night schedule to 24-hour
availability in May 1994. This change enabled us to increase revenues through
maximum utilization of our transponder on Hughes Communications' Galaxy V
satellite by offering more buying opportunities to the consumer. At December
31, 1998, Playboy TV was available to approximately 11.7 million cable
addressable households.
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The following table illustrates information regarding Playboy TV and cable
households in general (in thousands):
<TABLE>
<CAPTION>
Total Playboy
Total Cable TV Cable
Total Cable Addressable Addressable
Households (a) Households (a) (b) Households (c)
-------------- ------------------ --------------
<S> <C> <C> <C>
June 30, 1996............ 62,850 26,400 11,300
June 30, 1997............ 64,000 29,350 11,200
December 31, 1997........ 64,500 30,700 11,600
December 31, 1998........ 65,900 33,200 11,700
Compound Annual Growth
Rate (June 30, 1996-
December 31, 1998).... 1.9% 9.6% 1.4%
</TABLE>
- --------
(a) Source: Information reported by Kagan for December 31 of each respective
year. We estimated June 30 numbers based on the December 31 information.
Kagan projects approximately 1% average annual increases in total cable
addressable households through calendar year 2001 and 6% average annual
increases in total cable addressable households through calendar year 2001.
(b) Represents the approximate number of cable addressable households to which
pay-per-view was available as of the end of the period.
(c) Represents the approximate number of cable addressable households to which
Playboy TV was available as of the end of the period.
Most cable service in the United States is distributed through large MSOs.
At December 31, 1998, we had agreements with 19 of the nation's 20 largest
MSOs. These 19 MSOs together control, through affiliated cable systems, which
we refer to as "Cable Affiliates," access to approximately 55.9 million, or
approximately 85%, of the 65.9 million total U.S. cable households. Adult
entertainment provides a significant portion of the MSOs' pay-per-view revenue.
Kagan estimated that adult programming constituted 18% of the U.S. pay-per-view
market in 1998.
Once agreements are made with an MSO, we are able to negotiate channel space
for Playboy TV with the Cable Affiliates controlled by that MSO. Acceptance by
Cable Affiliates provides the basis for expanding our access to individual
cable households. Four of these 19 MSOs served approximately 9.6 million, or
82%, of the approximately 11.7 million cable addressable households to which
Playboy TV was available at December 31, 1998. Consistent with industry
practice, our agreements with Cable Affiliates are generally cancelable upon 60
or 90 days' notice by either party.
The performance of Playboy TV in individual cable systems varies based
principally on the pay-per-view ordering technology and the quantity and
quality of marketing done by the Cable Affiliates. Individual Cable Affiliates
determine the retail price of the pay-per-view service and prices average
approximately $5.70 for a block of Playboy TV programming. Individual Cable
Affiliates also determine the retail price of the monthly subscription service,
where prices average approximately $9.35, largely dependent on the number of
premium services to which a household subscribes.
Growth in the pay-per-view market is expected to result in part from cable
system upgrades, utilizing fiber-optic, compression technologies or other
bandwidth expansion methods that provide cable operators with additional
channel capacity. When implemented, compression technology will dramatically
increase channel capacity on those systems where it is employed. Industry
analysts expect a large percentage of this additional channel capacity to be
dedicated to pay-per-view programming. The timing and extent of these
developments and their impact on us cannot yet be determined.
Competition among providers of cable services for channel space and viewer
spending is intense. We compete in this segment of our business primarily on
the basis of our brand name and our original unique quality programming.
Playboy TV's competition varies in the type and quality of programming offered.
We
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believe that a majority of our current fee arrangements with our Cable
Affiliates with respect to Playboy TV are generally less favorable to us as a
service provider than fee arrangements offered by general interest movie
service competitors, like HBO. We believe that strong Playboy brand
recognition, the quality of our programming and our resulting ability to appeal
more effectively to a broader range of adult audiences are critical factors
which will continue to differentiate Playboy TV from our competitors. With the
Spice Acquisition, we expect that the overall package we offer to cable
operators will be more attractive to them, thereby strengthening our
performance in the cable industry.
DTH. In addition to cable, we provide Playboy TV via encrypted signal, on
both a pay-per-view and monthly subscription basis, to home satellite dish
viewers. The DTH market, which is not impacted by Section 505, is the fastest-
growing segment of Playboy TV, with DTH revenues exceeding cable revenues
beginning in fiscal year 1997. Playboy TV was available on a pay-per-view
and/or monthly subscription basis on every major North American DBS service
and, therefore, accessible to all DBS subscribers. The growth in DTH households
has been rapid as shown below (in thousands):
<TABLE>
<CAPTION>
June 30, June 30, Dec. 31, Dec. 31,
1996 1997 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
DTH Households........................ 4,900 6,300 6,800 9,800
</TABLE>
Playboy TV was one of the first networks to be launched on DirecTV, the
first commercial DBS service. This service provides exceptional improvements in
program delivery and consumer interface to households equipped with digital
satellite system receiving units, consisting of an 18-inch satellite antenna, a
digital receiver box and a remote control. Playboy TV was added to a second DBS
service, PrimeStar, and is available on both DirecTV and PrimeStar 24 hours a
day on a pay-per-view as well as a subscription basis. Playboy TV is now also
available on EchoStar in the United States, and on ExpressVu and Star Choice in
Canada, making it the only adult service to be available on all five DBS
services in the United States and Canada. The significant growth in the DBS
market has provided us with an expanded customer base via a digital
transmission which has historically produced higher buy rates than analog cable
markets.
AdulTVision
In July 1995, we launched a second pay television network, AdulTVision, as a
flanker network to Playboy TV. AdulTVision is principally offered on a pay-per-
view basis and is sold primarily in combination with Playboy TV through cable
operators and to the DTH market. At December 31, 1998, the network was
available domestically to approximately 9.8 million cable addressable and DTH
households, a 66% increase from December 31, 1997.
Spice
Unlike Playboy TV, which positions itself in the marketplace as a network
with diverse programming offerings, the Spice network offers only movies on a
pay-per-view basis. Our Spice brand identity will focus on the star power of
the performers in Spice films. Spice 2 will also be primarily a movie service,
featuring a schedule of films different from those offered by Spice. Spice 2
films will have a staggered start time in comparison to Spice, which will
afford consumers increased flexibility and choice. We believe that the
operation of two Spice-branded networks will increase our pay-per-view buy
rates beyond what we could achieve through a single Spice-branded network. As
of December 31, 1998, Spice was available to approximately 10.9 million cable
addressable households, roughly equal to Playboy TV's cable addressable
universe.
International TV and Home Video
Internationally, Playboy-branded programming is available in approximately
150 countries and territories, either on a tier or program-by-program basis or,
in the United Kingdom, Japan, Iberia and approximately 45 Latin America
countries and territories, through a local Playboy TV network in which we own
an equity interest and from which we receive fees for programming and the use
of the Playboy brand name.
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We market and license our programming to foreign broadcasters and pay
television services. The licensees typically customize, dub or subtitle the
programming to meet the needs of individual markets. In countries that can
support a Playboy programming tier, we have expanded our relationships with
foreign broadcasters by entering into exclusive multi-year, multi-product
output agreements with international pay television distributors. These
agreements enable us to have an ongoing branded presence in international
markets and generate higher and more consistent revenues than selling programs
on a show-by-show basis.
In March 1997, we announced that we will launch a Playboy TV network in
South Korea through a partnership with Daewoo Corporation. The launch has been
delayed, however, due to the poor economic conditions in that country.
A Playboy TV network and an international AdulTVision network were launched
in Latin America in the fall of 1996 through a venture with an affiliate of
Cisneros. We hold a 19% interest in the venture, with an option to acquire up
to 49.9% of all equity interests. We also receive licensing fees for our
programming and royalty payments for use of our brand name. The two Latin
American networks are available on cable as well as Galaxy Latin America, a DTH
service majority-owned by Hughes Electronics, which owns DirecTV in the United
States. Our partnership with Cisneros has been expanded to encompass a Playboy
TV network in Iberia, which launched in fiscal year 1998, with plans for a
Playboy TV network in Germany and Scandinavia to launch in fiscal year 1999.
Another international Playboy TV network, in which we own less than a 20%
interest, was launched in Japan in partnership with Tohokushinsha Film Corp.
Under the terms of a long-term program supply agreement, we will provide 700
hours of programming over the first five years of the venture and receive a
royalty for use of our brand name. During fiscal year 1997, the venture was
granted a license to distribute to the DTH market in Japan.
We launched an international Playboy TV network in the United Kingdom in
fiscal year 1995 in a joint-venture agreement with Flextech plc and British Sky
Broadcasting Ltd., which we refer to as "BSkyB." We owned 19% of the network
and The Home Video Channel Ltd., which we refer to as "HVC," a wholly-owned
subsidiary of Spice, acquired the other 81% interest in the network in the
United Kingdom formerly held by Flextech and BSkyB. The economies of scale that
the Spice Acquisition offers, combined with the ability to market attractive
options to consumers, should improve our growth and profit potential in the
United Kingdom.
Spice International is responsible for expanding the global distribution of
Spice's adult television networks and programming. In Europe, Spice
International owns and distributes two networks, The Adult Channel and The Home
Video Channel, through HVC. Spice also distributes the Spice networks
throughout Latin America and Spice programming in Japan.
The Adult Channel is a satellite delivered subscription service originating
from the United Kingdom that features cable version adult movies and related
programming similar to those exhibited on the Spice network. The Adult Channel,
which is broadcast four hours a day commencing at midnight, is available to
approximately two million cable households and approximately four million DTH
households in the United Kingdom. The Adult Channel is also available to DTH
households in more than 40 countries in Europe. HVC also operates a cable
exclusive movie service, featuring action and thriller movies, called The Home
Video Channel. The Home Video Channel is offered during the evening hours and
is programmed during the pre-midnight hours to segue into The Adult Channel.
The two services are offered to cable operators as a seamless 8:00 P.M. to 4:00
A.M. programming service at a package price.
As our international networks grow, the ventures intend to produce
programming specifically targeted to the local markets to maximize the appeal
of Playboy TV among our new customers. For example, the U.S. popularity of
Night Calls, our live call-in talk show, prompted the creation of Night Calls
U.K. in fiscal year 1997.
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<PAGE>
In December 1998, we announced an agreement to create Playboy TV
International to facilitate a more rapid expansion of Playboy TV and Spice into
international markets. As part of the agreement, the joint venture will obtain
all our interests in existing international Playboy and Spice networks. See
"Prospectus Summary--Recent Developments--Playboy TV International, LLC" for
further information about this joint venture.
We also distribute, through separate distribution agreements, our U.S. home
video products to approximately 60 countries and territories in North and South
America, Europe, Australia, Asia and Africa. These products are based on the
videos produced for the U.S. market, with dubbing or subtitling into the local
language where necessary.
Domestic Home Video
We also distribute our original programming domestically through
videocassettes, laserdiscs and DVDs that are sold in video stores, music and
other retail outlets, through the Internet and direct mail, including our own
catalogs. Playboy Home Video is one of the largest-selling brands of non-
theatrically released, special-interest videos in the United States. Playboy
Home Video has been named one of Billboard magazine's "Top Video Sales Labels"
for each calendar year since 1994. The format of Playboy Home Video is
consistent with the style, quality and focus of Playboy magazine. We also
release home video titles under The Eros Collection label.
We plan to release 15 Playboy Home Video titles in fiscal year 1999. In
fiscal year 1998, we released 16 new Playboy Home Video titles, 14 of which had
entered the top 15 on the Sales Chart by the end of fiscal year 1998. Recent
top video titles include Farrah Fawcett: All of Me, The Best of Anna Nicole
Smith and The Best of Jenny McCarthy, each of which reached the number one or
two spot on Billboard magazine's weekly Top Video Sales Chart.
In addition to retail sales, we also sell our videos through direct-
marketing channels, including Playboy magazine, the Playboy catalog, the
Critics' Choice Video catalog and our Internet sites. We have also entered into
various direct marketing alliances for the sale of our continuity series, which
entails selling a series of videos through direct mail efforts. Each month the
customer receives a new video of a Playmate. In fiscal year 1997, we introduced
a second continuity series featuring new products with Sony Music Direct.
Through the Sony agreement, we sell monthly centerfold videos to existing and
new customers. As of June 1997, Sony Music Direct also took over from Time Life
Inc., the marketing and distribution of the first continuity series, which
represents the core retail product line to new direct response customers.
Programming
The Entertainment Group develops, produces and distributes programming for
domestic Playboy TV, other domestic pay television, domestic home video and
international television and home video markets. The group's productions
include feature films, magazine-format shows, dramatic series, documentaries,
live events, anthology series and celebrity and Playmate features. These
programs can be easily adapted for use on the Playboy TV network in the United
States and abroad and as home video and DVD product, allowing us to spread our
relatively fixed programming costs over multiple product lines. It features
stylized eroticism in a variety of entertaining formats for men and women, with
an emphasis on programming for couples. The programming does not contain
depictions of explicit sex or scenes that link sexuality with violence, and is
consistent with the level of taste and quality established by Playboy magazine.
We invest in Playboy-style, original quality programming to support our
expanding businesses. We invested $24.6 million in entertainment programming in
fiscal year 1998 resulting in the production of 136 hours of original
programming. At December 31, 1998, our library of exclusive, primarily Playboy-
branded original programming totaled approximately 1,300 hours. In fiscal year
1999, we expect to invest approximately $37.0 million in Playboy-produced and
licensed programming, which would result in the production of approximately 180
hours of original programming.
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<PAGE>
We release feature films costing in the $1 million to $2 million range under
the Playboy Films label. These films are generally completed under co-
production and distribution agreements with, among others, the Motion Picture
Corporation of America, which we refer to as "MPCA." In fiscal year 1997, we
signed a co-production agreement with Zalman King Entertainment, Inc., which we
refer to as "Zalman King," under which three feature films have been produced
and released to date. We also have deals with two smaller production companies,
Royal Oaks Entertainment, Inc. and MRG Entertainment, Inc., which we refer to
as "MRG." All of the Playboy Films have also aired or will air on domestic
Playboy TV. In addition, we distribute Playboy Films in the domestic home video
market. We created and market The Eros Collection, a line of small-budget, non-
Playboy-branded movies released worldwide through television and home video.
Our series air on domestic and international Playboy TV networks and are
marketed to distributors internationally. Additionally, some episodes have been
released as Playboy Home Video titles and/or have been licensed to other
networks. For example, we have licensed 39 episodes of the Women series to
Showtime. In addition, we and Zalman King have co-produced 18 new episodes of
the popular cable television series Red Shoe Diaries, all of which have been
completed and released. We also have an agreement with MRG related to Beverly
Hills Bordello, a new series of 30-minute erotic anthologies. The series
consists of 27 episodes, of which we have only international distribution
rights for the first 13 episodes. The last 14 episodes were licensed by us to
Showtime in fiscal year 1998, are being distributed in the international TV
market and will air on Playboy TV.
Seeking to leverage our production experience, we created Alta Loma
Entertainment, Inc. in fiscal year 1998 to produce non-Playboy branded
programming for broadcast by other networks. The first series is currently in
production. HBO has exercised its option for an additional 13 episodes,
bringing the initial year's production total to 26 thirty minute programs.
Spice licenses adult movies from the leading producers of adult movies both
in the United States and abroad, acquiring exclusive television rights. Spice
has an extensive library of adult movies with worldwide rights in perpetuity in
more than 450 titles and more limited rights in more than 250 titles for
limited periods of time.
Product Marketing Group
The Product Marketing Group licenses domestically and internationally the
Playboy name, Rabbit Head Design and other trademarks and artwork that we own
for the manufacture, sale and distribution of a variety of consumer products.
The Product Marketing Group works with licensees to develop, market and
distribute high-quality, branded merchandise. Our licensed product lines
include men's and women's clothing, accessories, watches, jewelry, fragrances,
small leather goods, stationery, eyewear and home fashions. Products are
marketed globally, primarily through retail outlets, including department and
specialty stores.
We launched two cigar lines in fiscal year 1997, Playboy by Don Diego and
the limited-edition LeRoy Neiman Selection. In fiscal year 1998, we launched a
new product of tubed individual cigars. These cigars are manufactured by
Consolidated Cigar Corporation and distributed through wine and spirit channels
to nightclubs, cocktail lounges, country clubs and restaurants for on-site
sale.
We maintain control of the design and quality specifications of our licensed
products to ensure that products are consistent with the quality of our image.
To project a consistent image for Playboy-branded products throughout the
world, a global advertising campaign and brand strategy was created to
integrate all of the marketing efforts of the product licensees and to control
the brand more effectively. To capitalize on our international name
recognition, we continue to increase our international product marketing
activities, targeting growth for our licensing business in South America and
Europe as well as supporting and expanding its significant presence throughout
Asia.
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We also license art-related products from our extensive collection of
artwork, many of which were commissioned as illustrations for Playboy magazine
and for use in our other businesses. These include posters, limited-edition
prints, art watches, art ties and collectibles.
In general, royalties are based on a fixed or variable percentage of the
licensee's total net sales, in many cases against a guaranteed minimum. During
fiscal year 1998, approximately 65% of the royalties earned from licensing our
trademarks were derived from licensees in Asia, 25% from the United States and
10% from Europe.
To protect the success and potential future growth of our product marketing
and other businesses, we actively defend our trademarks throughout the world
and monitor the marketplace for counterfeit products.
Catalog Group
Our Catalog Group markets products directly through the Critics' Choice
Video catalog, including The Big Book of Movies, which we refer to as the "Big
Book," the Collectors' Choice Music catalog, the Playboy catalog and the
recently launched Spice catalog. This group also supports our e-commerce
efforts through merchandising, order fulfillment and customer service.
The Critics' Choice Video catalog, one of the largest circulation catalogs
of classic, popular and hard-to-find movies, is published quarterly and
features approximately 2,000 of the 22,000 in-stock movies from all of the
major film studios. The catalog has expanded through alternative distribution
methods such as package inserts, solo mailings and ads in specialty
publications. In October 1997, Critics' Choice Video launched the first Big
Book, a 324-page, perfect-bound oversize catalog featuring 10,000 videos, of
which over 2,000 were offered at a 25% discount. Sales from this catalog
exceeded expectations, which resulted in a second printing in early fiscal year
1998. In October 1998, the second Big Book, containing 372 pages, was released
and is also performing strongly. Planning is in progress for the Big Book for
the year 2000, which will contain over 400 pages and has a projected
circulation of one million. This edition is scheduled for release in September
1999.
The Collectors' Choice Music catalog currently contains more than 2,000
titles from a selection of over 8,000 titles available in stock. It carries
titles from all music genres on CDs and cassettes and is a leading music
catalog of imports and hard-to-find reissues. The Collectors' Choice Music
catalog is published three times annually. To maximize profitability and better
serve our customers, we plan to continue to lower circulation of the catalog
for fiscal year 1999 due to a reduction in prospecting, while increasing the
size of the catalog from 100 pages to 124 pages.
We continue to release exclusive titles produced under the Critics' Choice
Video and Collectors' Choice Music labels. As a result, in fiscal year 1998,
approximately 20 new exclusive titles were released through the Critics' Choice
Video and approximately 55 were released through the Collectors' Choice Music
catalogs. Both catalogs plan to continue to expand their exclusive offerings in
fiscal year 1999.
Playboy catalog products include Playboy-branded fashions, cigars and gifts,
Playboy Home Video titles, Playboy collectibles, such as calendars, back issues
of Playboy magazine and newsstand specials, and CD-ROM products. The Playboy
catalog is published three times annually. Beginning in fiscal year 1999, the
Playboy catalog will focus on offering more Playboy-branded and licensed
product offerings that appeal to 18-34 year old customers. The catalog, with a
new contemporary look, will be designed to showcase new upscale lines.
In July 1998, we tested the Spice catalog under license from Spice. Due to
the success of the test, the catalog will be published three times annually,
and currently features 88 pages. The Spice catalog primarily offers over 1,700
videos in the adult category. The first mailing was approximately one million,
with resulting sales meeting expectations. Significant financial and
circulation growth of the Spice catalog is planned for fiscal year 1999.
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Paper is the principal raw material used in publishing our catalogs. The
market for paper has historically been cyclical, resulting in volatility in
paper prices. The Catalog Group will be adversely affected by a postal rate
increase of approximately 7%, which became effective January 1999. In response
to changes in paper and postage prices, we continue to evaluate different
grades of paper and review circulation plans to operate the business most cost-
effectively.
In the summer of 1997, the catalog operations moved to a larger facility to
meet additional space requirements. This constituted the group's second
expansion in five years. The leased facility features an automated inventory
management system and houses the group's merchandising, marketing, circulation,
customer service and order fulfillment divisions. We are initially occupying
106,000 square feet of space and have an option to lease an additional 23,000
square feet commencing in December 2002. In fiscal year 1999, we expect to
provide order fulfillment services for others to utilize excess capacity.
The catalog business competes with other catalogs and distributors and
retail outlets selling similar merchandise, including Internet sites. To stem
the natural decline in the print catalog business, we are focusing on expanding
our e-commerce offerings in concert with Playboy Online Group. In fiscal year
1997, we purchased from the trustee in bankruptcy selected assets of the Time
Warner Viewer's Edge videocassette catalog.
Casino Gaming Group
Beginning in April 1999, with the opening of The Playboy Casino at Hotel des
Roses on the Greek island of Rhodes, we began generating licensing revenues
from our casino gaming business. We reentered this business to further leverage
our brand image. We are currently exploring other location-based entertainment
opportunities anchored by casinos around the world. We expect to obtain
licensing fees and/or management fees from these establishments and will
consider taking minority equity positions.
Playboy Online Group
The Playboy Online Group operates Playboy.com, our network of sites on the
Internet, a pay site called Playboy Cyber Club and online versions of our
catalogs, Critics' Choice Video, Collectors' Choice Music and Playboy. The
group generates revenues from advertising, subscription and e-commerce.
We were one of the first national magazines to launch a free site on the
Internet in fiscal year 1995 at www.playboy.com. Playboy.com is one of the
Internet's most visited destination sites. During March 1999, it served
approximately 88 million page impressions, according to audited information
from Audit Bureau of Verification Services, Inc. A "page impression" is
recorded each time an Internet page is seen by a user, regardless of the number
of files contained on the page. According to estimated information from Media
Metrix, approximately 1.7 million unique visitors accessed Playboy.com in March
1999. "Unique visitors" represent the estimated number of different individuals
within a designated demographic that access a site among the total number of
projected individuals using the Internet during the month.
Taking full advantage of the technological capabilities of the medium,
Playboy.com features over 3,000 pages containing popular editorial features
from Playboy magazine, such as excerpts of Playboy Interviews, articles and
Playboy Advisor columns, and selected photos from Playmate pictorials. One of
Playboy.com's many new content areas is Pop, which covers arts and
entertainment, books, movies and music. Along with standing features and
dispatches from correspondents, e-commerce opportunities are woven throughout
Pop and the other content areas. Two of the most popular real-time events
offered in fiscal year 1998 were online chats with supermodel Cindy Crawford
and Olympic gold medal figure skater Katarina Witt, which coincided with the
women's cover pictorials in Playboy magazine. The site, which also offers a
Spanish translation, promotes Playboy TV's monthly programming schedule and
sells Playboy magazine subscriptions. We plan to continue to increase the
original content on Playboy.com, including through alliances.
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We began generating revenues from the sale of advertising on Playboy.com in
fiscal year 1996. Playboy.com's advertising base is distinct from that of
Playboy magazine, as it is anchored by Internet-related advertisers from the
technology, telecommunications and entertainment industries. We plan to more
aggressively cross-promote the magazine and Playboy.com and package advertising
opportunities on both. We continue to add new advertisers to the site.
Advertising on Playboy.com is priced on a CPM basis determined by page
impressions and is primarily sold by us. In fiscal year 1998, advertising
revenues increased over 20% compared to the twelve months ended December 31,
1997. We expect to see continued growth in advertising revenues in fiscal year
1999.
The group has an e-commerce business from online versions of the Playboy,
Critics' Choice Video and Collectors' Choice Music catalogs. In April 1996, an
online version of the Playboy catalog, called the Playboy Store, was launched
and can be accessed at www.playboystore.com. The Playboy Store offers the same
products as the print version of the Playboy catalog, but features a wider
selection of items. The Playboy Store was redesigned in fiscal year 1998 to
make it more visually appealing and to provide the customer with easier access
to different departments within the store, which features almost 1,000 items.
Fiscal year 1999 plans include adding "Express Click" ordering, which will
allow the customer to place an order with just one click, and significantly
expanding the branded product offering from our licensees.
Based on the performance of the Playboy Store and consumer interest in
purchasing music and videos online, CCMusic, an online version of the
Collectors' Choice Music catalog, was launched in the summer of 1997 at
www.ccmusic.com. CCMusic offers titles in every musical genre, including
exclusive releases and titles not found on any other Internet site. Encouraged
by our success in fiscal year 1998, we invested in a database late in fiscal
year 1998 that added over 200,000 selections to the CCMusic site, bringing the
total to approximately 250,000. The site also underwent a complete redesign
late in fiscal year 1998, adding new features on the home page, such as
highlighted new releases, imports, exclusives and artists.
CCVideo, an online version of the Critics' Choice Video catalog, was
launched in the fall of 1997 at www.ccvideo.com. CCVideo offers a database of
over 50,000 videos, with over 22,000 in stock for immediate shipment, including
many not easily found in local retail outlets or other Internet sites.
Improvements to the site for fiscal year 1999 include adding new content from
publisher Video Hound, implementing "Express Click" ordering capability and
other customer service upgrades, as well as installing customer profiling and
preference software. CCVideo also operates the Sundance Channel Filmstore at
www.sundancefilmstore.com in partnership with New Video and the Sundance
Channel, which offers an array of independent films screened annually at the
Sundance Film Festival.
An online version of the Spice catalog is scheduled to launch in fiscal year
1999 and will feature over 2,000 late night video products, lingerie and
sensuous life products.
We have commission or bounty arrangements with third parties, including
Amazon.com, K-Tel International, Inc. and Mindspring Enterprises, Inc. We are
considering additional marketing alliances with other sites to increase our e-
commerce revenues.
We launched a pay site on the Internet in July 1997 at
www.cyber.playboy.com. with content that is distinct from, and significantly
greater in scope than, that found on Playboy.com. Playboy Cyber Club, which is
currently offered on a subscription basis for $60 per year, had almost 30,000
subscribers as of March 31, 1999. Designed as an online Playboy fan club,
Playboy Cyber Club allows members to peruse approximately 43,000 pages on the
site. Major attractions include individual home pages for every Playboy
Playmate, every Playboy Interview published in the magazine, Playboy Advisor
columns, video clips of our home videos and Playboy TV shows, the Playboy photo
library, which includes never-before-published images from Playboy magazine's
nine-million-image photo library, and the Playboy Sports Page, which includes
real-time sports scores and sports-related features. Playboy Cyber Club also
features eight chat rooms. In fiscal year 1998, Playboy Cyber Club held its
second annual live webcast of the New Year's Eve bash at the Playboy Mansion,
allowing members to attend an event inside the Playboy Mansion on their
computer. We plan to relaunch a Spice site on the Internet in 1999.
53
<PAGE>
Promotional and Other Activities
We believe that our sales of products and services are enhanced by the
public recognition of Playboy as a lifestyle. To establish public recognition,
we, among other activities, acquired in 1971 a mansion in Holmby Hills,
California, which we refer to as the "Mansion," where our founder, Hugh M.
Hefner, lives. The Mansion is used for various corporate activities, including
serving as a valuable location for video production and magazine photography,
business meetings, enhancing our image, charitable functions and a wide variety
of promotional and marketing purposes. The Mansion generates substantial
publicity and recognition which increase public awareness of us and our
products and services. Mr. Hefner pays rent to us for the Mansion
accommodations used by him and any of his personal guests, as well as for the
value of meals and other benefits received by him and any of his personal
guests.
Through the Playboy Foundation, we support not-for-profit organizations and
projects concerned with issues historically of importance to Playboy magazine
and its readers, including anti-censorship efforts, civil rights, AIDS
education, prevention and research, and reproductive freedom. The Playboy
Foundation provides financial support to many organizations and also donates
public service advertising space in Playboy magazine and in-kind printing and
design services.
Regulation
Section 505 of the Telecommunications Act. Some provisions of the
Telecommunications Act are directed at cable programming in general and adult
cable programming in particular. In some cable systems, audio or momentary bits
of video of premium or pay-per-view channels may accidentally become available
to non-subscribing cable customers, which is called "bleeding." Section 505
effectively requires each cable system that offers adult programming either to
install additional blocking technology in each household to prevent any
possibility of bleeding, or restrict the period during which adult programming
is transmitted to the hours between 10:00 p.m. and 6:00 a.m. We believe that
most of the cable operators that did not install blocking technology in
compliance with Section 505 have complied by restricting the hours of
transmission.
On February 26, 1996, one of our subsidiaries filed a civil suit in the
United States District Court in Wilmington, Delaware, which we refer to as the
"Delaware District Court," challenging Section 505 on constitutional grounds.
On March 7, 1996, the Delaware District Court granted a Temporary Restraining
Order, which we refer to as "TRO," staying the implementation and enforcement
of Section 505. In granting the TRO, the court found that we had demonstrated
that we were likely to succeed on the merits of our claim. On November 8, 1996,
a three-judge panel of the Delaware District Court denied our request for a
preliminary injunction against enforcement of Section 505, finding that we were
not likely to succeed on the merits of our claim. We appealed this decision to
the United States Supreme Court, which stayed enforcement of Section 505
pending that appeal. On March 24, 1997, the Supreme Court affirmed, without
opinion, the Delaware District Court's denial of our request for a preliminary
injunction. On July 22, 1997, we filed a motion for summary judgment on the
ground that Section 505 is unconstitutionally vague, based on a Supreme Court
ruling that some provisions of the Telecommunications Act regulating speech on
the Internet are invalid for numerous reasons, including vagueness. On October
31, 1997, the Delaware District Court denied our motion and ordered further
discovery to assist it in resolving the issues posed in our motion.
The Delaware District Court heard our full case on the merits in March 1998
and on December 28, 1998, the Court unanimously declared Section 505
unconstitutional. Even though the defendants have appealed this judgment, the
ruling gives cable systems the right to resume 24-hour broadcast of adult
services so long as cable systems comply with, and consumers are made aware of,
the "blocking on request" requirement of Section 504 of the Telecommunications
Act. We believe that the effect of Section 505 on our financial performance may
continue until all appeals have been exhausted.
FCC reregulation. Additionally, we believe that the growth in cable access
for our domestic pay television businesses has slowed in recent years due to
the effects of cable reregulation by the FCC, including the "going-forward
rules" which provide cable operators with incentives to add basic services. As
cable operators
54
<PAGE>
have utilized available channel space to comply with "must-carry" provisions,
mandated retransmission consent agreements and "leased access" provisions,
competition for channel space has increased. Further, the delay of new
technology, primarily digital set-top converters which would dramatically
increase channel capacity, has contributed to the slowdown. The major reason
for this delay has been the unexpected engineering problems and expenses
associated with developing an affordable digital set-top converter. We believe
that growth will continue to be slow in the next two to three years as the
cable television industry responds to the FCC's rules and subsequent
modifications, and develops new technology. Cable operators have begun to
introduce digital technology to upgrade their cable systems and to counteract
competition from DTH operators. Digital cable television has several advantages
over analog cable television, including more channels, better audio and video
quality and advanced set-top boxes that are addressable, provide a secure fully
scrambled signal and have integrated program guides and advanced ordering
technology. We believe that as digital technology, which is unaffected by the
relevant sections of the Telecommunications Act, becomes more available our
television networks will be available to the majority of cable households on a
24-hour basis.
FDA tobacco regulation. Playboy receives a significant portion of its
advertising revenues from companies selling tobacco products. Significant
legislative or regulatory limitations on the ability of those companies to
advertise in Playboy could materially adversely affect our operating
performance. In August 1996, the FDA announced regulations which include a
prohibition on the publication of tobacco advertisements containing drawings,
colors or pictures. The regulation would not have applied to any magazine which
is demonstrated to be an "adult publication" which the regulation defined to
mean a publication (1) the readers of which are younger than 18 years of age
constitute no more than 15% of total readership and (2) which is read by fewer
than two million persons younger than 18 years of age, in each case as measured
by competent and reliable survey evidence. On August 14, 1998, the United
States Court of Appeals for the Fourth Circuit ruled that the FDA has no
authority to regulate tobacco products and struck down the regulations. The
government has filed a petition asking the United States Supreme Court to
review this decision.
Employees
At February 28, 1999, we employed 773 full-time employees, none of whom are
union members. We believe that we maintain a satisfactory relationship with our
employees.
55
<PAGE>
MANAGEMENT
The following table shows information regarding our executive officers and
directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Christie A. Hefner...... 46 Chairman, Chief Executive Officer and Director
Hugh M. Hefner.......... 73 Editor-in-Chief
Linda G. Havard......... 44 Executive Vice President, Finance and Operations and Chief
Financial Officer
Herbert M. Laney........ 54 Executive Vice President and President, Catalog Group
Anthony J. Lynn......... 46 Executive Vice President and President, Entertainment Group
Alex Mironovich......... 46 Executive Vice President and President, Publishing Group
Richard S. Rosenzweig... 63 Executive Vice President and Director
Garry W. Saunders....... 47 Executive Vice President and President, Casino Gaming Group
Howard Shapiro.......... 51 Executive Vice President, Law and Administration, General
Counsel and Secretary
Helen Isaacson.......... 52 Senior Vice President and President, Product Marketing Group
Martha O. Lindeman...... 48 Senior Vice President, Corporate Communications and Investor
Relations
Dennis S. Bookshester... 60 Director
David I. Chemerow....... 47 Director
Donald G. Drapkin....... 51 Director
Sol Rosenthal........... 64 Director
Sir Brian Wolfson....... 63 Director
</TABLE>
Christie A. Hefner--Ms. Hefner was appointed as our Chairman of the Board
and Chief Executive Officer in November 1988. From September 1986 to November
1988, she was Vice Chairman of the Board, President and Chief Operating
Officer. From February 1984 to September 1986, she was President and Chief
Operating Officer; she had been President since April 1982. From January 1978
to April 1982, she was a Corporate Vice President. She joined us in 1975 as
Special Assistant to the Chairman of the Board. Ms. Hefner is the daughter of
Hugh M. Hefner, Editor-in-Chief.
Hugh M. Hefner--Mr. Hefner founded Playboy in 1953. He was appointed to his
present position in November 1988. From October 1976 to November 1988, Mr.
Hefner served as Chairman of the Board and Chief Executive Officer, and before
that he served as Chairman, President and Chief Executive Officer. Mr. Hefner
is the father of Ms. Christie A. Hefner, Chairman of the Board and Chief
Executive Officer.
Linda G. Havard--Ms. Havard was appointed to her present position in May
1997. From August 1982 to May 1997, she held various financial and management
positions at Atlantic Richfield Company ("ARCO"). From October 1996 to May
1997, Ms. Havard served as ARCO's Senior Vice President in the Global Energy
Ventures division. She also served as ARCO's Vice President of Corporate
Planning from January 1994 to December 1996. Her other positions with ARCO
included Vice President, Finance, Planning and Control, ARCO Transportation Co.
and President, ARCO Pipe Line Co.
Herbert M. Laney--Mr. Laney was promoted to his present position in December
1996, having been Senior Vice President and President, Catalog Group from
September 1995 to December 1996. In June 1993, he was named President, Catalog
Group, having been Senior Vice President, Catalog Group from August 1990 to
June 1993. From June 1988 to August 1990, he served as Senior Vice President,
Direct Marketing. In May 1987, Mr. Laney started Critics' Choice Video Inc.
From July 1984 to May 1987, he served as Vice President, Sales, at Cosmetique,
Inc. From November 1976 to July 1984, he served first as Merchandising Manager,
then as Marketing Manager and, lastly, as General Manager, Speciality Catalogs,
of Spiegel Holdings Inc.
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<PAGE>
Anthony J. Lynn--Mr. Lynn was appointed to his present position in June
1992. From 1991 to 1992, he served as President of international television
distribution and worldwide pay television at MGM-Pathe Communications Co.,
where he served as Executive Vice President from 1987 to 1991. During 1987, he
served as President of Cable, Pay TV and Home Video at Coca Cola
Telecommunications, Inc.
Alex Mironovich--Mr. Mironovich was appointed to his present position in
February 1999. From 1998 to 1999, he was employed at Meredith Corporation where
he served as Group Publisher. From 1993 to 1998, he served as Associate
Publisher and then Publisher of Better Homes and Gardens.
Richard S. Rosenzweig--Mr. Rosenzweig has been an Executive Vice President
since November 1988. From May 1982 to November 1988, he served as Executive
Vice President, Office of the Chairman, and from July 1980 to May 1982, he
served as Executive Vice President, Corporate Affairs. Before that, from
January 1977 to June 1980, he served as Executive Vice President, West Coast
Operations. His other positions with us have included Executive Vice President,
Publications Group, and Associate Publisher, Playboy magazine. He has been with
Playboy since 1958.
Garry W. Saunders--Mr. Saunders was appointed to his present position in
March 1998 after serving as an independent consultant to Playboy from October
1997. From July 1995 to July 1997, he served as Executive Vice President and
Director of Gaming Operations at ITT Caesars World, a casino resort
corporation. From February 1994 to July 1995, he served as Executive Vice
President and Director of Gaming Operations of ITT Sheraton, a hotel and casino
company. From 1987 to 1993, he served as Executive Vice President of the Sands
Hotel and Casino in Atlantic City.
Howard Shapiro--Mr. Shapiro was appointed to his present position in May
1996. From September 1989 to May 1996, he served as Executive Vice President,
Law and Administration and General Counsel. From May 1985 to September 1989,
Mr. Shapiro served as Senior Vice President, Law and Administration and General
Counsel. From July 1984 to May 1985, he served as Senior Vice President and
General Counsel. From September 1983 to July 1984, he served as Vice President
and General Counsel. From May 1981 to September 1983, he served as Corporate
Counsel. From June 1978 to May 1981, he served as Division Counsel. From
November 1973 to June 1978, he served as Staff Counsel.
Helen Isaacson--Ms. Isaacson was appointed to her present position in
October 1997. From January 1997 to October 1997, she served as Executive Vice
President of worldwide licensing at the Marvel Comics Group, an entertainment
company. From November 1991 to December 1996, Ms. Isaacson served as Senior
Vice President of international licensing and merchandising at Turner Home
Entertainment, a wholly-owned subsidiary of Time Warner, Inc.
Martha O. Lindeman--Ms. Lindeman was appointed to her present position in
September 1998. From 1992 to 1998, she served as Vice President, Corporate
Communications and Investor Relations. From 1986 to 1992, she served as Manager
of Communications at the Tribune Company, a leading information and
entertainment company.
Dennis S. Bookshester--Mr. Bookshester has been Chairman of the Board of
Cutanix Corporation, a company principally engaged in scientific skin research,
since November 1997. Before his current position, Mr. Bookshester was an
independent business consultant. From December 1990 to May 1991, he served as
Chief Executive Officer of Zale Corporation, a company principally involved in
the retail sale of jewelry. Mr. Bookshester was Corporate Vice Chairman,
Chairman and Chief Executive Officer of the Retail Group of Carson Pirie Scott
& Co., positions which he held from 1984 to 1989. In addition, Mr. Bookshester
is a member of the Board of Directors of Evans, Inc., Fruit of the Loom, Inc.,
Sundance Homes and Arthur Treachers, Inc. Mr. Bookshester is on the Visiting
Committee of the University of Chicago Graduate School of Business. Mr.
Bookshester is Chairman of the Audit Committee of our board of directors and is
a member of the Compensation Committee of our board of directors.
57
<PAGE>
David I. Chemerow--Mr. Chemerow has been President and Chief Operating
Officer of GT Interactive Software Corp., a company principally engaged in
publishing computer games, since April 1998; he was Executive Vice President
and Chief Operating Officer from May 1997 to April 1998. Before that, he was
Executive Vice President and Chief Financial Officer of ENTEX Information
Services, Inc., a company principally involved in personal computer systems
integration, from April 1996. Before joining ENTEX, he was our Executive Vice
President, Finance and Operations, and Chief Financial Officer from 1990. From
1988 to 1990, he served as President of Beechwood Capital Corporation, an
investment company involved in acquiring and operating businesses. Mr. Chemerow
is also a member of the Board of Directors of Dunham's Athleisure Corporation.
Mr. Chemerow is a member of the Audit Committee of our board of directors.
Donald G. Drapkin--Mr. Drapkin has been Vice Chairman and Director of
MacAndrews & Forbes Holdings Inc. and various affiliates since 1987. Before his
current position, Mr. Drapkin was a partner in the New York law firm of
Skadden, Arps, Slate, Meagher & Flom from 1977 to 1987. In addition, Mr.
Drapkin serves as Director of Algos Pharmaceutical Corporation, Anthracite
Capital, Inc., BlackRock Asset Investors, Cardio Technologies, Inc., The Molson
Companies Limited, Revlon Consumer Products Corporation, Revlon, Inc., VIMRx
Pharmaceuticals Inc., and Weider Nutritional International, Inc. Mr. Drapkin is
a member of the Compensation Committee of our board of directors.
Sol Rosenthal--Mr. Rosenthal has been Of Counsel to the Los Angeles law firm
of Blanc Williams Johnston & Kronstadt, L.L.P. since May 1996. Before that, he
was a senior partner in the law firm of Buchalter, Nemer, Fields & Younger from
1974 through April 1996. He has served as an Arbitrator in entertainment
industry disputes since 1977 and as the Writers-Guild Association of Talent
Agents Negotiator since 1978. Mr. Rosenthal is a former member of the Board of
Governors, Academy of Television Arts & Sciences, on which he served from 1990
to 1992; he is a former President of the Beverly Hills Bar Association and a
former President of the Los Angeles Copyright Society. In addition, Mr.
Rosenthal is a Director of Artista Management, A.G. Mr. Rosenthal is Chairman
of the Compensation Committee of our board of directors.
Sir Brian Wolfson--Sir Brian Wolfson has been Chairman of Global Health
Alternatives Inc., a company principally involved in health products, from
October 1995 to February 1988. From January 1986 to June 1995, he served as
Chairman of Wembley plc., a company engaged in the sports and entertainment
industry. From 1967 to 1970, he served as joint managing director of Granada
Group. He is currently a Director of Fruit of the Loom, Inc., Kepner-Tregoe
Inc., and Autotote Inc., Chairman of Natural Health Trends, and a governor of
the Joseph H. Lauder Institute of the University of Pennsylvania. Sir Brian
Wolfson is a member of the Audit Committee of our board of directors.
58
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following tables shows information about the beneficial ownership of our
Class A common stock and Class B common stock as of March 31, 1999, except as
noted, by (1) each person who we know beneficially owns more than five percent
(5%) of our Class A common stock and Class B common stock (including the
selling stockholder); (2) each of our Directors; (3) each of our Named
Executive Officers as defined under the Exchange Act; and (4) all Directors and
Executive Officers as a group:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class B Class B Shares
Beneficially Owned Beneficially Shares Beneficially
Before and After Owned Before Being Owned After
this Offering(1) this Offering(1) Offered this Offering(1)
--------------------- ----------------- --------- -----------------
Name Number Percent Number Percent Number Number Percent
- ---- ----------- --------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Hugh M. Hefner,
Trustee(2)............. 3,321,836 69.9% 7,965,508 44.6% 2,000,000 5,965,508 32.5%
FMR Corp.(3)............ 0 * 2,630,200 14.7 0 2,630,200 14.3
Wellington Management
Co.(4)................. 0 * 860,000 4.8 0 860,000 4.7
Dennis S.
Bookshester(5)(6)...... 3,000 * 24,063 * 0 24,063 *
David I. Chemerow(5)(6). 800 * 39,700 * 0 39,700 *
Donald G. Drapkin(5)(6). 0 * 7,500 * 0 7,500 *
Linda G. Havard(5)(6)... 0 * 57,500 * 0 57,500 *
Christie A.
Hefner(5)(6)........... 72,274 1.5 566,428 3.1 0 566,428 3.0
Anthony J. Lynn(5)(6)... 600 * 216,669 1.2 0 216,669 1.2
Sol Rosenthal(5)(6)..... 252 * 23,108 * 0 23,108 *
Richard S.
Rosenzweig(5)(6)....... 25,365 * 116,230 * 0 116,230 *
Sir Brian Wolfson(5)(6). 2,500 * 12,852 * 0 12,852 *
All Directors and
Executive Officers as a
Group
(17 persons)(5)(6)..... 3,461,692 71.2 9,391,542 49.2 2,000,000 7,391,542 37.7
</TABLE>
- --------
*Less than 1% of the total shares of the class outstanding.
(1) In each case, beneficial ownership consists of sole voting and investment
power, with the exception of Mr. Rosenthal, who owns two shares of Class A
common stock and six shares of Class B common stock as custodian for his
son. Mr. Rosenthal disclaims beneficial ownership of those shares. As of
March 31, 1999, all Directors and Executive Officers as a Group shared
voting and investment power over 52 shares of Class A common stock and
31,886 shares of Class B common stock.
(2) Mr. Hefner, founder of Playboy and Editor-in-Chief, owns these shares
through The Hugh M. Hefner 1991 Trust. Mr. Hefner has sole investment and
voting power over these shares. The address of The Hugh M. Hefner 1991
Trust is 9242 Beverly Boulevard, Beverly Hills, California 90210.
(3) As reported on a Schedule 13G/A filed with the SEC on February 12, 1999.
The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(4) As reported on a Schedule 13G/A filed with the SEC on February 9, 1996. The
address of Wellington Management Co. is 75 State Street, Boston,
Massachusetts 02109.
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<PAGE>
(5) Includes the following shares of Class A common stock and Class B common
stock which are covered by installments of stock option grants made under
our 1989 Option Plan, 1995 Stock Incentive Plan and 1991 Directors' Plan,
which were either exercisable on, or are exercisable within 60 days of,
March 31, 1999.
<TABLE>
<CAPTION>
Class A Class B
Director or Common Common
Named Executive Officer Stock Stock
----------------------- ------- ---------
<S> <C> <C>
Mr. Bookshester........................................ 0 15,000
Mr. Chemerow........................................... 0 5,000
Mr. Drapkin............................................ 0 2,500
Ms. Havard............................................. 0 37,500
Ms. Hefner............................................. 55,000 447,500
Mr. Lynn............................................... 0 183,750
Mr. Rosenthal.......................................... 0 15,000
Mr. Rosenzweig......................................... 25,000 95,000
Sir Brian Wolfson...................................... 0 7,500
All Directors and Executive Officers as a Group (15
persons).............................................. 115,000 1,045,000
</TABLE>
(6) Includes the following shares of Class B common stock which have not vested
under the restricted stock awards made under our 1995 Stock Incentive Plan
and 1997 Equity Plan for Non-Employee Directors of Playboy Enterprises,
Inc.
<TABLE>
<CAPTION>
Director or Initial Unvested
Named Executive Officer Grant Portion
----------------------- ------- --------
<S> <C> <C>
Mr. Bookshester......................................... 5,000 5,000
Mr. Chemerow............................................ 5,000 5,000
Mr. Drapkin............................................. 5,000 5,000
Ms. Havard.............................................. 20,000 20,000
Ms. Hefner.............................................. 75,000 37,500
Mr. Lynn................................................ 26,250 13,124
Mr. Rosenthal........................................... 5,000 5,000
Mr. Rosenzweig.......................................... 20,000 10,000
Sir Brian Wolfson....................................... 5,000 5,000
All Directors and Executive Officers as a Group (16
persons)............................................... 288,750 194,374
</TABLE>
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General. Our authorized capital stock consists of 37,500,000 shares of
common stock, of which 7,500,000 shares are Class A common stock, par value
$0.01 per share, and 30,000,000 shares are Class B common stock, par value
$0.01 per share. All outstanding shares of our Class A common stock and Class B
common stock are validly issued, fully paid and non-assessable.
Voting. Each share of Class A common stock entitles its holder to one vote
on all matters submitted to the stockholders, including the election of
directors. Each share of Class B common stock has no voting rights, other than
those as described below or as required by law. Under the Delaware General
Corporation Law, which we refer to as "DGCL," holders of Class B common stock
are entitled to vote on proposals to increase or decrease the number of
authorized shares of Class B common stock, to change the par value of the Class
B common stock or to alter or change the powers, preferences or special rights
of the shares of Class B common stock which may affect them adversely.
Dividends and Other Distributions (including Distributions upon Liquidation
or Sale of Playboy). Each share of Class A common stock and Class B common
stock is equal with respect to dividends and other distributions in cash, stock
or property (including distributions upon liquidation, dissolution or winding
up of Playboy), except as described below. Dividends or other distributions
payable on our capital stock in shares of stock will be made to all holders of
our capital stock and may be made either (a) in shares of Class B common stock
or any security other than Class A common stock to the record holders of both
Class A common stock and Class B common stock, or (b) in shares of Class A
common stock to the record holders of Class A common stock and shares of Class
B common stock to the record holders of Class B common stock. In no event will
either Class A common stock or Class B common stock be split, divided or
combined unless the other is proportionately split, divided or combined.
Non-Convertibility. Neither the Class A common stock nor the Class B common
stock is convertible into the other, or any of our other securities.
Minority Protection Transactions. If any person or group acquires beneficial
ownership of additional Class A common stock (other than upon original issuance
by us, by operation of law, by will or the laws of descent and distribution, by
gift or by foreclosure of a bona fide loan), or any persons holding Class A
common stock form a group, and the acquisition or formation results in that
person or group owning 10% or more of the Class A common stock then
outstanding, which we refer to as a "Related Person," and the Related Person
does not then own an equal or greater percentage of all outstanding shares of
Class B common stock, the Related Person must, within a 90-day period beginning
the day after becoming a Related Person, make a public tender offer to acquire
additional shares of Class B common stock, which we refer to as a "Minority
Protection Transaction." For purposes of this provision, "beneficial ownership"
and "group" have the respective meanings of those terms as used in Rule 13d-3
and Rule 15d-5(b) under the Exchange Act or any successor statute or
regulations.
In a Minority Protection Transaction, the Related Person must offer to
acquire from the holders of Class B common stock that number of shares of
additional Class B common stock, which we refer to as the "Additional Shares,"
determined by (1) multiplying the percentage of outstanding Class A common
stock beneficially owned by the Related Person by the total number of shares of
Class B common stock outstanding on the date the person or group became a
Related Person, and (2) subtracting the total number of shares of Class B
common stock beneficially owned by the Related Person on that date (including
shares acquired on that date or before the time the person or group became a
Related Person). The Related Person must acquire all shares validly tendered
or, if the number of shares tendered exceeds the number determined under the
formula, a proportionate amount from each tendering holder.
The offer price for any shares required to be purchased by the Related
Person in a Minority Protection Transaction is the greater of (1) the highest
price per share paid by the Related Person for any share of Class A common
stock in the six month period ending on the date the person or group became a
Related Person, or (2)
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<PAGE>
the highest bid price of a share of the Class A common stock or Class B common
stock on the NYSE on the date the person or group became a Related Person.
A Minority Protection Transaction will also be required by any Related
Person, and any other person or group beneficially owning 10% or more of the
outstanding Class A common stock, which we refer to as an "Interested Common
Stockholder," that acquires additional Class A common stock (other than upon
issuance or sale by us, by operation of law, by will or the laws of descent and
distribution, by gift or by foreclosure of a bona fide loan) or joins with
other persons to form a group, whenever an additional acquisition or formation
results in the Related Person or Interested Common Stockholder owning the next
highest integral multiple of 5% (e.g. 15%, 20%, 25%, etc.) of the outstanding
Class A common stock and the Related Person or Interested Common Stockholder
does not own an equal or greater percentage of all outstanding shares of Class
B common stock. The Related Person or Interested Common Stockholder will be
required to extend an offer to buy that number of Additional Shares prescribed
by the formula stated above, and must acquire all shares validly tendered or a
proportionate amount as specified above at the price determined above, even if
a previous offer resulted in fewer shares of Class B common stock being
tendered than the previous offer included.
The requirement to engage in a Minority Protection Transaction is satisfied
by making the requisite offer and purchasing validly tendered shares, even if
the number of shares tendered is less than the number of shares included in the
required offer. The penalty applicable to any Related Person or Interested
Common Stockholder that fails to make a required offer, or to purchase shares
validly tendered (after proration, if any), is to suspend automatically the
voting rights of the shares of Class A common stock owned by the Related Person
or Interested Common Stockholder until completion of the required offer or
until divestiture of the shares of Class A common stock that triggered the
offer requirement. Neither the Minority Protection Transaction requirement nor
the related penalty apply to any increase in percentage ownership of Class A
common stock resulting solely from a change in the total amount of Class A
common stock outstanding.
Similar requirements apply to any purchases by Playboy, except that treasury
shares will be included in the calculations. All calculations are based upon
numbers of shares reported by Playboy in its most recent annual or quarterly
report filed under the Exchange Act, or any current report filed on Form 8-K.
This provision of our Amended and Restated Certificate of Incorporation may
be amended in a manner adversely affecting the holders of Class B common stock
(including amendments effected in any merger or consolidation involving us)
only if the amendment is approved by a majority vote of holders of Class B
common stock who are not Related Persons or Interested Common Stockholders.
Preemptive Rights. Our capital stock does not carry any preemptive rights
enabling a holder to subscribe for or receive shares of any class of our
capital stock or any other securities convertible into shares of any class of
our capital stock.
Mergers and Acquisitions. Each holder of Class B common stock will be
entitled to receive the same per share consideration as the per share
consideration, if any, received by any holder of the Class A common stock in a
merger or consolidation of Playboy (whether or not we are the surviving
corporation). Any issuance of shares of Class A common stock in a merger or
other acquisition transaction must be approved by the holders of a majority of
the shares of Class A common stock unless shares of Class B common stock are
also issued in the transaction and the quotient determined by dividing the
number of shares of Class B common stock to be so issued by the number of
shares of Class A common stock to be so issued is at least equal to the
quotient determined, immediately before the transaction, by dividing the total
number of outstanding shares of Class B common stock by the total number of
outstanding shares of Class A common stock and Class B common stock taken
together.
Section 203 of the DGCL generally prohibits some Delaware corporations from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the person became an interested stockholder, unless
(1) before the time the board approved either the business combination or the
62
<PAGE>
transaction that resulted in the stockholder becoming an interested
stockholder, (2) when the transaction resulting in the person becoming an
interested stockholder was completed, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding, for purposes of determining the number of
shares outstanding, shares owned by some directors or some employee stock
plans), or (3) on or after the time the stockholder became an interested
stockholder, the business combination is approved by the board of directors and
authorized by the affirmative vote (and not by written consent) of at least
two-thirds of the outstanding voting stock excluding any stock owned by the
interested stockholder. A "business combination" includes a merger, asset sale
and some other transactions resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who (other
than the corporation and any direct or indirect majority owned subsidiary of
the corporation), together with affiliates and associates, owns (or, is an
affiliate or associate of the corporation and, within three years prior, did
own) 15% or more of the corporation's outstanding voting stock. A Delaware
corporation may "opt out" from the application of Section 203 of the DGCL
through a provision in its certificate of incorporation. Our Amended and
Restated Certificate of Incorporation does not contain a provision of that
kind, and we have not "opted out" from the application of Section 203 of the
DGCL.
Transfer Agent and Registrar. The transfer agent and registrar for our
capital stock is Harris Trust and Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
When this offering is completed, we will have an aggregate of approximately
18,415,577 shares of Class B common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options.
Substantially all of these shares will be freely tradable without restriction
or further registration under the Securities Act, unless held by persons who
are our "affiliates" because they, directly or indirectly through one or more
intermediaries control, or are controlled by, or are under common control, with
us. When this offering is completed, our affiliates will hold approximately
6,152,168 shares of Class B common stock.
The selling stockholder and all of our directors and executive officers have
agreed with the underwriters that, for a period of 90 days from the date of
this prospectus, they will not offer to sell or otherwise sell, dispose of or
grant rights with respect to any shares of common stock that they now own or
subsequently acquire or with respect to which they have the power of
disposition, otherwise than with the prior written consent of Credit Suisse
First Boston Corporation. These contractual restrictions will apply even if the
provisions of Rules 144, 144(k) and 701 of the Securities Act would permit
earlier sales. Accordingly, shares subject to the lock-up agreements will not
be salable until the agreements expire or unless prior written consent is
received from Credit Suisse First Boston Corporation. Any early waiver of the
lock-up agreements by the underwriters, which, if granted, could permit sales
of a substantial number of shares and could adversely affect the trading price
of our shares, may not be accompanied by an advance public announcement by us.
In general, under Rule 144 a person, or persons whose shares are aggregated,
who has beneficially owned "restricted shares" for at least one year, including
persons who may be deemed one of our "affiliates," would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the number of shares of Class B common stock then
outstanding or the average weekly trading volume of our Class B common stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to the sale. Sales under Rule 144 are also governed by the manner of sale
provisions, notice requirements and the availability of current public
information about us. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned for at least two years the shares proposed to be sold, would
be entitled to sell them under Rule 144(k) without regard to those
requirements. We are unable to estimate accurately the number of restricted
shares that will be sold under Rule 144 because this will depend on the market
price for our Class B common stock, the personal circumstances of the seller
and other factors.
63
<PAGE>
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement dated
May 11, 1999, we and the selling stockholder have agreed to sell to the
underwriters named below, for which Credit Suisse First Boston Corporation and
ING Baring Furman Selz LLC are acting as representatives, the following
respective numbers of shares of Class B common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation.......................... 1,357,422
ING Baring Furman Selz LLC...................................... 814,453
Allen & Company Incorporated.................................... 46,875
Burnham Securities Inc. ........................................ 46,875
EVEREN Securities, Inc. ........................................ 46,875
Gabelli & Company, Inc. ........................................ 46,875
Invemed Associates, Inc. ....................................... 46,875
Ryan, Beck & Co., Inc. ......................................... 46,875
Charles Schwab & Co., Inc. ..................................... 46,875
---------
Total....................................................... 2,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of Class B common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering of Class B common stock may be terminated.
Playboy has granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 375,000 additional Class B shares at the initial public
offering price less underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of Class B common stock.
The underwriters propose to offer the shares of Class B common stock
initially at the public offering price on the cover page of this prospectus and
to selling group members at that price less a concession of $0.945 per share.
The underwriters and selling group members may allow a discount of $0.100 per
share on sales to other broker/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses that
Playboy and the selling stockholder have agreed to pay in proportion to the
number of shares of Class B common stock that each of them sells in the
offering.
<TABLE>
<CAPTION>
Total
-------------------------
With
Per Without Over-
Share Over-allotment allotment
------ -------------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Playboy...................................... $1.575 $ 787,500 $1,378,125
Expenses payable by Playboy................... $ 0.31 $ 156,000 $ 237,000
Underwriting discounts and commissions paid by
the selling stockholder...................... $1.575 $3,150,000 $3,150,000
Expenses payable by the selling stockholder... $ 0.31 $ 624,000 $ 543,000
</TABLE>
We, all of our directors and executive officers and the selling stockholder
have agreed that none of us will offer, sell, contract to sell, announce our
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the SEC a registration statement under the Securities Act relating to
any shares of our common
64
<PAGE>
stock or securities convertible into or exchangeable or exercisable for any of
our common stock without the prior written consent of Credit Suisse First
Boston Corporation for a period of 90 days after the date of this prospectus,
except that these restrictions will not apply to (1) our ability to grant
employee or director stock options under the terms of plans in effect on the
date of this prospectus or to the issuance of common stock upon any exercise of
these options and (2) issuances and sales of common stock under the employee
stock purchase plan in effect on the date of this prospectus.
We and the selling stockholder have agreed to indemnify the underwriters
against liabilities under the Securities Act or contribute to payments which
the underwriters may be required to make in that respect.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Class B common stock in the open market
after the distribution has been completed to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the Class B common stock originally sold by the syndicate
member is purchased in a syndicate covering transaction to cover syndicate
short positions. These stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Class B common stock
to be higher than it would otherwise be in the absence of these transactions.
These transactions may be effected on The New York Stock Exchange, The Pacific
Exchange or otherwise and, if commenced, may be discontinued at any time.
In the ordinary course of business, certain of the underwriters (including
both of the representatives) and their affiliates have provided and may in the
future provide financial advisory, investment banking and general financing and
banking services for us and our affiliates for customary fees.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Class B common stock in Canada is being made only on
a private placement basis exempt from the requirement that we and the selling
shareholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of Class B common stock are effected.
Accordingly, any resale of the Class B common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or by virtue of a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice before any resale of the Class B common stock.
Representations of Purchasers
Each purchaser of Class B common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling shareholder and the
dealer from which the purchase confirmation is received that (1) the purchaser
is entitled under applicable provincial securities laws to purchase the Class B
common stock without the benefit of a prospectus qualified under those
securities laws, (2) where required by law, the purchaser is purchasing as
principal and not as agent, and (3) the purchaser has reviewed the text above
under "Resale Restrictions."
65
<PAGE>
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named in
this document and the selling stockholder may be located outside of Canada and,
as a result, it may not be possible for Canadian purchasers to effect service
of process within Canada upon the issuer or those persons. All or a substantial
portion of the assets of the issuer and those other persons may be located
outside of Canada and, as a result, it may not be possible to satisfy a
judgment against the issuer or those persons in Canada or to enforce a judgment
obtained in Canadian courts against the issuer or those persons outside of
Canada.
Notice to British Columbia Residents
A purchaser of Class B common stock to whom the Securities Act (British
Columbia) applies is advised that the purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Class B common stock acquired by the purchaser in this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of Class B common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Class B common stock should consult their own legal
and tax advisors with respect to the tax consequences of an investment in the
Class B common stock in their particular circumstances and with respect to the
eligibility of the Class B common stock for investment by the purchaser under
relevant Canadian legislation.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York will pass upon
the validity of the shares of Class B common stock for us and the selling
stockholder in connection with this offering. Cravath, Swaine & Moore, New
York, New York represents the underwriters. Glassman, Browning & Saltsman,
Incorporated, Beverly Hills, California represents the selling stockholder.
EXPERTS
The Playboy financial statements included in and incorporated in this
prospectus by reference to the Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, have been incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
The Spice financial statements incorporated in this prospectus by reference
to the Current Report on Form 8-K/A filed with the SEC on April 9, 1999, have
been incorporated in reliance on the report of Grant Thornton LLP, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Statements of Operations--Fiscal Years Ended June 30, 1996
and 1997, Six-Month Transition Period Ended December 31, 1997 and Fiscal
Year Ended December 31, 1998.............................................. F-3
Consolidated Balance Sheets--December 31, 1997 and 1998................... F-4
Consolidated Statements of Shareholders' Equity--Fiscal Years Ended June
30, 1996 and 1997, Six-Month Transition Period Ended December 31, 1997 and
Fiscal Year Ended December 31, 1998....................................... F-5
Consolidated Statements of Cash Flows--Fiscal Years Ended June 30, 1996
and 1997, Six-Month Transition Period Ended December 31, 1997 and Fiscal
Year Ended December 31, 1998.............................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Playboy Enterprises, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Playboy Enterprises, Inc. and its subsidiaries as of December 31, 1998, and
1997, and the results of their operations and their cash flows for the fiscal
year ended December 31, 1998, the six-month transition period ended December
31, 1997, and the two fiscal years ended June 30, 1997 and 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in the Note D to the Consolidated Financial Statements, the
Company changed its method of recognizing costs related to start-up activities
in the six-month transition period ended December 31, 1997.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 9, 1999, except for Note W which is dated March 15, 1999
F-2
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Fiscal Six Fiscal
Year Year Months Year
(in thousands, except per share Ended Ended Ended Ended
amounts) 6/30/96 6/30/97 12/31/97 12/31/98
- ------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues........................ $ 276,587 $ 296,623 $ 149,541 $ 317,618
--------- --------- --------- ---------
Costs and expenses
Cost of sales..................... (234,247) (245,023) (126,658) (269,478)
Selling and administrative
expenses......................... (32,847) (35,855) (18,424) (43,172)
--------- --------- --------- ---------
Total costs and expenses........ (267,094) (280,878) (145,082) (312,650)
--------- --------- --------- ---------
Operating income.................... 9,493 15,745 4,459 4,968
--------- --------- --------- ---------
Nonoperating income (expense)
Investment income................. 88 73 50 127
Interest expense.................. (680) (427) (289) (1,551)
Gain on sale of investment........ -- -- -- 4,272
Other, net........................ (452) (640) 70 (791)
--------- --------- --------- ---------
Total nonoperating income
(expense)...................... (1,044) (994) (169) 2,057
--------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle............... 8,449 14,751 4,290 7,025
Income tax benefit (expense)........ (4,197) 6,643 (2,148) (2,705)
--------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle..... 4,252 21,394 2,142 4,320
Cumulative effect of change in
accounting principle (net of tax
benefit)........................... -- -- (1,077) --
Net income.......................... 4,252 21,394 1,065 4,320
--------- --------- --------- ---------
Other comprehensive loss (net of tax
benefit)
Foreign currency translation
adjustment....................... (11) (37) (37) (4)
Unrealized loss on marketable
securities....................... -- -- -- (21)
--------- --------- --------- ---------
Total other comprehensive loss.. (11) (37) (37) (25)
--------- --------- --------- ---------
Comprehensive income................ $ 4,241 $ 21,357 $ 1,028 $ 4,295
========= ========= ========= =========
Weighted average number of common
shares outstanding
Basic............................. 20,014 20,318 20,487 20,548
========= ========= ========= =========
Diluted........................... 20,261 20,694 20,818 21,036
========= ========= ========= =========
Basic EPS
Income before cumulative effect of
change in accounting principle... $ 0.21 $ 1.05 $ 0.10 $ 0.21
Cumulative effect of change in
accounting principle (net of tax
benefit)......................... -- -- (0.05) --
--------- --------- --------- ---------
Net income........................ $ 0.21 $ 1.05 $ 0.05 $ 0.21
========= ========= ========= =========
Diluted EPS
Income before cumulative effect of
change in accounting principle... $ 0.21 $ 1.03 $ 0.10 $ 0.21
Cumulative effect of change in
accounting principle (net of tax
benefit)......................... -- -- (0.05) --
--------- --------- --------- ---------
Net income........................ $ 0.21 $ 1.03 $ 0.05 $ 0.21
========= ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
(in thousands, except share data) 1997 1998
- --------------------------------- -------- --------
<S> <C> <C> <C>
Assets
Cash and cash equivalents................................. $ 947 $ 341
Marketable securities..................................... -- 505
Receivables, net of allowance for doubtful accounts of
$4,467 and $6,349........................................ 33,324 49,879
Inventories............................................... 25,376 25,685
Programming costs......................................... 41,504 43,342
Deferred subscription acquisition costs................... 12,143 11,570
Other current assets...................................... 11,910 21,097
-------- --------
Total current assets.................................. 125,204 152,419
-------- --------
Property and equipment
Land.................................................... 292 292
Buildings and improvements.............................. 8,386 8,412
Furniture and equipment................................. 21,030 22,068
Leasehold improvements.................................. 8,237 8,270
-------- --------
Total property and equipment.......................... 37,945 39,042
Accumulated depreciation................................ (27,892) (29,885)
-------- --------
Property and equipment, net........................... 10,053 9,157
-------- --------
Programming costs--noncurrent............................. 8,329 5,983
Trademarks................................................ 14,978 17,294
Net deferred tax assets................................... 13,688 6,525
Other noncurrent assets................................... 13,695 20,729
-------- --------
Total assets.............................................. $185,947 $212,107
======== ========
Liabilities
Short-term borrowings..................................... $ 10,000 $ 29,750
Accounts payable.......................................... 32,258 30,834
Accrued salaries, wages and employee benefits............. 4,499 6,024
Reserves for losses on disposals of discontinued
operations............................................... 610 68
Income taxes payable...................................... 627 819
Deferred revenues......................................... 43,216 41,647
Other liabilities and accrued expenses.................... 7,706 9,851
-------- --------
Total current liabilities............................. 98,916 118,993
-------- --------
Noncurrent liabilities.................................... 8,348 8,912
-------- --------
Total liabilities..................................... 107,264 127,905
-------- --------
Commitments and contingencies
Shareholders' Equity
Common stock, $0.01 par value
Class A voting--7,500,000 shares authorized; 5,042,381
issued................................................. 50 50
Class B nonvoting--30,000,000 shares authorized;
17,076,518 and 17,149,691 issued....................... 171 171
Capital in excess of par value............................ 43,539 44,860
Retained earnings......................................... 45,257 49,577
Foreign currency translation adjustment................... (131) (137)
Unearned compensation restricted stock.................... (3,511) (3,716)
Unrealized loss on marketable securities.................. -- (32)
Less cost of 293,427 Class A common shares and 974,227 and
951,041 Class B common shares in treasury................ (6,692) (6,571)
-------- --------
Total shareholders' equity............................ 78,683 84,202
-------- --------
Total liabilities and shareholders' equity................ $185,947 $212,107
======== ======== ===
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-4
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital
Class Class in Unearned
A B Excess Comp.
Common Common of Par Retained Restricted Treasury
(in thousands of dollars) Stock Stock Value Earnings Other Stock Stock Total
- ------------------------- ------ ------ ------- -------- ----- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995. $50 $170 $41,233 $18,546 $ -- $(4,840) $(8,069) $47,090
Net income.............. -- -- -- 4,252 -- -- -- 4,252
Exercise of 35,000 Class
A and 159,750 Class B
stock options.......... -- -- (81) -- -- -- 1,025 944
Issuance of 1,499 Class
B shares as service
awards................. -- -- 6 -- -- -- 8 14
Issuance of 20,000 Class
B shares as restricted
stock awards........... -- -- 177 -- -- (177) -- --
Forfeiture of 50,000
Class B shares related
to restricted stock
awards................. -- -- (468) -- -- 468 -- --
Foreign currency
translation adjustment. -- -- -- -- (17) -- -- (17)
--- ---- ------- ------- ----- ------- ------- -------
Balance at June 30, 1996. 50 170 40,867 22,798 (17) (4,549) (7,036) 52,283
Net income.............. -- -- -- 21,394 -- -- -- 21,394
Exercise of 57,500 Class
B stock options........ -- -- 264 -- -- -- 170 434
Issuance of 1,147 Class
B shares as service
awards................. -- -- 9 -- -- -- 6 15
Issuance of 68,750 Class
B shares as restricted
stock awards........... -- -- 940 -- -- (940) -- --
Forfeiture of 28,125
Class B shares related
to restricted stock
awards................. -- -- (263) -- -- 263 -- --
Issuance of 19,057 Class
B shares under employee
stock purchase plan.... -- -- 93 -- -- -- 99 192
Vesting of 121,564 Class
B restricted stock
awards................. -- -- -- -- -- 1,137 -- 1,137
Foreign currency
translation adjustment. -- -- -- -- (57) -- -- (57)
Income tax benefit
related to stock plans. -- -- 735 -- -- -- -- 735
--- ---- ------- ------- ----- ------- ------- -------
Balance at June 30, 1997. 50 170 42,645 44,192 (74) (4,089) (6,761) 76,133
Net income.............. -- -- -- 1,065 -- -- -- 1,065
Exercise of 15,000 Class
B stock options........ -- -- 93 -- -- -- 27 120
Issuance of 337 Class B
shares as service
awards................. -- -- 4 -- -- -- 2 6
Issuance of 37,500 Class
B shares as restricted
stock awards........... -- 1 526 -- -- (527) -- --
Issuance of 7,777 Class
B shares under employee
stock purchase plan.... -- -- 61 -- -- -- 40 101
Vesting of 115,939 Class
B restricted stock
awards................. -- -- -- -- -- 1,105 -- 1,105
Foreign currency
translation adjustment. -- -- -- -- (57) -- -- (57)
Income tax benefit
related to stock plans. -- -- 210 -- -- -- -- 210
--- ---- ------- ------- ----- ------- ------- -------
Balance at December 31,
1997.................... 50 171 43,539 45,257 (131) (3,511) (6,692) 78,683
Net income.............. -- -- -- 4,320 -- -- -- 4,320
Exercise of 76,250 Class
B stock options........ -- -- 796 -- -- -- 39 835
Issuance of 1,151 Class
B shares as service
awards................. -- -- 13 -- -- -- 6 19
Issuance of 46,250 Class
B shares as restricted
stock awards........... -- -- 742 -- -- (742) -- --
Forfeiture of 42,500
Class B shares related
to restricted stock
awards................. -- -- (537) -- -- 537 -- --
Issuance of 14,534 Class
B shares under employee
stock purchase plan.... -- -- 138 -- -- -- 76 214
Issuance of 673 Class B
shares under the 1997
Directors' Plan........ -- -- 11 -- -- -- -- 11
Foreign currency
translation adjustment. -- -- -- -- (6) -- -- (6)
Unrealized loss on
marketable securities.. -- -- -- -- (32) -- -- (32)
Income tax benefit
related to stock plans. -- -- 158 -- -- -- -- 158
--- ---- ------- ------- ----- ------- ------- -------
Balance at December 31,
1998.................... $50 $171 $44,860 $49,577 $(169) $(3,716) $(6,571) $84,202
=== ==== ======= ======= ===== ======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
<PAGE>
PLAYBOY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Fiscal Six Fiscal
Year Year Months Year
Ended Ended Ended Ended
(in thousands) 6/30/96 6/30/97 12/31/97 12/31/98
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income............................ $ 4,252 $ 21,394 $ 1,065 $ 4,320
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities
Depreciation of property and
equipment.......................... 2,383 2,210 1,007 2,010
Amortization of intangible assets... 1,783 1,893 845 1,893
Gain on sale of investment.......... -- -- -- (4,272)
Amortization of investments in
entertainment programming.......... 21,263 21,355 11,153 25,109
Investments in entertainment
programming........................ (25,549) (30,747) (14,359) (24,601)
Changes in current assets and
liabilities
Receivables........................ (4,574) (3,286) (998) (10,674)
Inventories........................ (2,061) 195 (2,072) (309)
Deferred subscription acquisition
costs............................. (393) 492 (3,066) 573
Other current assets............... (426) (2,146) 367 (2,200)
Accounts payable................... 2,931 4,169 5,344 (1,434)
Accrued salaries, wages and
employee benefits................. 2,853 1,428 (1,628) 1,525
Income taxes payable............... 27 284 (600) 208
Deferred revenues.................. 1,468 (2,105) 943 (1,569)
Other liabilities and accrued
expenses.......................... 224 (1,003) (231) 2,145
-------- -------- -------- --------
Net change in current assets and
liabilities...................... 49 (1,972) (1,941) (11,735)
-------- -------- -------- --------
Increase in trademarks.............. (1,766) (2,898) (1,767) (3,645)
(Increase) decrease in net deferred
tax assets......................... 2,399 (9,954) 457 35
Increase in other noncurrent assets. (487) (519) (466) (4,344)
Increase (decrease) in noncurrent
liabilities........................ 258 106 (3) 548
Net cash used for discontinued
operations......................... (59) (79) (18) (542)
Other, net.......................... 15 750 174 180
-------- -------- -------- --------
Net cash provided by (used for)
operating activities............. 4,541 1,539 (3,853) (15,044)
-------- -------- -------- --------
Cash Flows From Investing Activities
Sale of investment.................... -- -- -- 500
Additions to property and equipment... (760) (671) (765) (1,144)
Acquisitions and funding of equity
interests in international ventures.. (3,619) (1,905) (1,109) (5,212)
Purchase of marketable securities..... -- -- -- (537)
Other, net............................ 211 126 -- 32
-------- -------- -------- --------
Net cash used for investing
activities....................... (4,168) (2,450) (1,874) (6,361)
-------- -------- -------- --------
Cash Flows From Financing Activities
Increase (decrease) in short-term
borrowings........................... -- (500) 5,500 19,750
Repayment of debt..................... (350) (350) (350) --
Proceeds from exercise of stock
options.............................. 944 434 120 835
Proceeds from sales under employee
stock purchase plan.................. -- 192 101 214
-------- -------- -------- --------
Net cash provided by (used for)
financing activities............. 594 (224) 5,371 20,799
-------- -------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... 967 (1,135) (356) (606)
Cash and cash equivalents at beginning
of period............................ 1,471 2,438 1,303 947
-------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 2,438 $ 1,303 $ 947 $ 341
======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and all majority-owned subsidiaries. Intercompany
accounts and transactions, which are immaterial, have been eliminated in
consolidation.
Change in Fiscal Year: On November 6, 1997, the Board approved a change in
the Company's fiscal year end from June 30 to December 31, which better aligns
the Company's businesses with its customers and partners who also operate and
plan on a calendar-year basis. The Company's financial statements and
accompanying notes for the fiscal year ended December 31, 1998 represent the
first full calendar year subsequent to this change.
Revenue Recognition: Revenues from the sale of magazine subscriptions are
recognized over the terms of the subscriptions. Sales of magazines and
newsstand specials (net of estimated returns), and revenues from the sale of
advertisements, are recorded when each issue goes on sale. Domestic pay
television revenues are recognized based on pay-per-view buys and monthly
subscriber counts reported each month by the system operators. Domestic home
video revenues are recognized based on unit sales reported for new releases
each month by the Company's distributor and a distribution agreement for
backlist titles. International television revenues are recognized either upon
identification of programming scheduled for networks, delivery of programming
to customers and/or upon the commencement of the license term. Revenues from
the direct marketing of catalog products are recognized when the items are
shipped.
Cash Equivalents: Cash equivalents are temporary cash investments with an
original maturity of three months or less at date of purchase and are stated at
cost, which approximates market value.
Marketable Securities: Marketable securities are classified as available-
for-sale securities as defined by Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
These securities are stated at fair value and unrealized holding gains and
losses are reflected as a net amount as a separate component of shareholders'
equity.
Inventories: Inventories are stated at the lower of cost (average cost and
specific cost) or market.
Property and Equipment: Property and equipment is stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are depreciated on a straight-line
basis over the shorter of their estimated useful lives or the terms of the
related leases. Repair and maintenance costs are expensed as incurred, and
major betterments are capitalized. Sales and retirements of depreciable
property and equipment are recorded by removing the related cost and
accumulated depreciation from the accounts. Gains or losses on sales and
retirements of property and equipment are included in nonoperating income or
expense.
Deferred Subscription Acquisition Costs: Costs associated with the promotion
of magazine subscriptions, which consist primarily of postage, costs to produce
direct-mail solicitation materials and other costs to attract and renew
subscribers, are deferred and amortized over the period during which the future
benefits are expected to be received. This is consistent with the provisions of
Statement of Position 93-7, Reporting on Advertising Costs. See Note J.
Programming Costs and Amortization: Programming costs include original
programming and film acquisition costs, which are capitalized and amortized.
The portion of original programming costs assigned to the domestic pay
television market is principally amortized on the straight-line method over
three years. The portion of original programming costs assigned to each of the
worldwide home video and international
F-7
<PAGE>
television markets are amortized using the individual-film-forecast-computation
method. Film acquisition costs are assigned to domestic and international
markets as appropriate, and are amortized principally on the straight-line
method over the license term, generally three years, and the premiere schedule,
respectively. Management believes that these methods provide a reasonable
matching of expenses with total estimated revenues over the periods that
revenues associated with films and programs are expected to be realized. Film
and program amortization is adjusted periodically to reflect changes in the
estimates of amounts of related future revenues. Film and program costs are
stated at the lower of unamortized cost or estimated net realizable value as
determined on a specific identification basis. Based on management's estimate
of future total gross revenues as of December 31, 1998, substantially all
unamortized programming costs applicable to released programs are expected to
be amortized during the next three years. See Note I.
Intangible Assets: Trademark acquisition costs are capitalized and amortized
on the straight-line method over 40 years. Trademark and copyright defense,
registration and/or renewal costs are capitalized and amortized on the
straight-line method over 15 years. Other intangible assets are comprised
substantially of goodwill, which is amortized generally over 40 years.
Accumulated amortization of intangible assets was $12,800,000 and $14,546,000
at December 31, 1997 and 1998, respectively.
Income (Loss) per Common Share: During the transition period, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 128,
Earnings per Share ("Statement 128"). Statement 128 simplifies the previous
standards for computing EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. See Note E.
Foreign Exchange Forward Contracts: The Company utilizes forward contracts
to minimize the impact of currency movements on royalties received and certain
payments denominated primarily in Japanese yen and German marks. The terms of
these contracts are generally one year or less. Gains and losses related to
these agreements are recorded in operating results as part of, and concurrent
with, the transaction. As of December 31, 1997 and 1998, the Company had
approximately $1,025,000 and $2,155,000, respectively, in outstanding
contracts. At their respective balance sheet dates, the difference between
these contracts' values and the fair market value of these instruments in the
aggregate was not material.
Minority Interest: The Company owns a majority interest in VIPress,
publisher of the Polish edition of Playboy magazine. The financial statements
of VIPress are included in the Company's financial statements. The minority
interest in the results of operations is included in nonoperating income or
expense in the Consolidated Statements of Operations and the minority interest
in the equity of VIPress is included in "Noncurrent liabilities" in the
Consolidated Balance Sheets.
Foreign Currency Translation: Assets and liabilities in foreign currencies
are translated into U.S. dollars at the exchange rate existing at the balance
sheet date. The net exchange differences resulting from these translations are
recorded as a separate component of shareholders' equity. Revenues and expenses
are translated at average rates for the period.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future, they
may ultimately differ from actual results.
New Accounting Pronouncements: The Company will adopt the provisions of
Statement 133, Accounting for Derivative Instruments and Hedging Activities,
for financial statements issued for fiscal years beginning after June 15, 1999.
Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Management
is evaluating the effect that adoption of Statement 133 will have on the
Company's financial statements.
F-8
<PAGE>
(B) GAIN ON SALE OF INVESTMENT
The Company owned a 20% interest and had an option to acquire the remaining
80% interest in duPont Publishing, Inc. at a price based on fair market value
as of December 31, 1999.
On December 31, 1998, the Company sold back to duPont the shares of duPont's
common stock owned by the Company. Sale proceeds were $5,000,000, which
consisted of $500,000 of cash and a $4,500,000 promissory note bearing interest
at the prime rate, which was paid on January 4, 1999. The Company realized a
gain before and after income taxes of $4,272,000 on the sale. There was no
income tax effect related to this gain due to the application of a capital loss
carryforward.
(C) INCOME TAXES
The income tax provision (benefit) consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Current:
Federal....................... $ 241 $ 354 $ -- $ 208
State......................... 67 501 180 557
Foreign....................... 1,490 1,721 747 1,747
------ ------- ------ ------
Total current............... 1,798 2,576 927 2,512
------ ------- ------ ------
Deferred:
Federal....................... 2,399 (9,954) 457 35
State......................... -- -- -- --
Foreign....................... -- -- -- --
------ ------- ------ ------
Total deferred.............. 2,399 (9,954) 457 35
------ ------- ------ ------
Benefit of stock compensation
recorded
in capital in excess of par
value.......................... -- 735 210 158
Benefit recorded as part of
cumulative
effect of change in accounting
principle...................... -- -- 554 --
------ ------- ------ ------
Total income tax provision
(benefit)...................... $4,197 $(6,643) $2,148 $2,705
====== ======= ====== ======
</TABLE>
The income tax provision (benefit) differed from a provision computed at the
U.S. statutory tax rate as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Statutory rate tax provision.... $2,871 $ 5,163 $1,459 $ 2,459
Increase (decrease) in taxes
resulting from:
Foreign withholding tax on
licensing income.............. 1,448 1,452 747 1,368
Foreign income tax in excess of
statutory rates............... -- -- -- 127
State income taxes............. 67 501 180 557
Nondeductible expenses......... 129 342 180 399
Reduction in valuation
allowance..................... -- (13,486) -- (1,543)
Tax benefit of foreign taxes
paid or accrued............... (356) (538) (328) (465)
Effect of rate increase........ -- -- -- (225)
Other.......................... 38 (77) (90) 28
------ -------- ------ -------
Total income tax provision
(benefit)...................... $4,197 $ (6,643) $2,148 $ 2,705
====== ======== ====== =======
</TABLE>
F-9
<PAGE>
The U.S. statutory tax rate applicable to the Company for fiscal years 1996
and 1997, the transition period and fiscal year 1998 was 34%, 35%, 34% and 35%,
respectively.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences attributable to differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates expected to
apply in the years in which the temporary differences are expected to reverse.
At June 30, 1997, the Company evaluated its NOLs and other deferred tax
assets and liabilities in relation to the Company's recent earnings history and
its projected future earnings. As a result of this review, the Company reduced
the valuation allowance balance by $13.5 million as a result of reevaluating
the realizability of the deferred tax assets in future years.
The significant components of the Company's deferred tax assets and deferred
tax liabilities as of December 31, 1997 and 1998 are presented below (in
thousands):
<TABLE>
<CAPTION>
Dec. 31, Net Dec. 31,
1997 Change 1998
-------- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 7,901 $(2,929) $ 4,972
Capital loss carryforwards........................ 10,512 (1,598) 8,914
Tax credit carryforwards.......................... 8,976 1,373 10,349
Other deductible temporary differences............ 11,244 1,779 13,023
-------- ------- --------
Total deferred tax assets........................ 38,633 (1,375) 37,258
Valuation allowance.............................. (16,504) 1,066 (15,438)
-------- ------- --------
Deferred tax assets............................ 22,129 (309) 21,820
-------- ------- --------
Deferred tax liabilities:
Deferred subscription acquisition costs........... (4,514) 244 (4,270)
Other taxable temporary differences............... (3,646) 30 (3,616)
-------- ------- --------
Deferred tax liabilities....................... (8,160) 274 (7,886)
-------- ------- --------
Net deferred tax assets............................ $ 13,969 $ (35) $ 13,934
======== ======= ========
</TABLE>
In the Consolidated Balance Sheet at December 31, 1997, $0.3 million of the
$14.0 million net deferred tax asset is included in "Other current assets" and
$13.7 million is segregated as "Net deferred tax assets." In the Consolidated
Balance Sheet at December 31, 1998, $7.4 million of the $13.9 million net
deferred tax asset is included in "Other current assets" and $6.5 million is
segregated as "Net deferred tax assets."
In addition to the federal tax benefits in the table above, the Company has
NOLs available in various states, none of which are reflected in the net
deferred tax assets in the Consolidated Balance Sheets at December 31, 1997 and
1998.
Realization of the net deferred tax asset is dependent upon the Company's
ability to generate taxable income in future years. The recognition of benefits
in the financial statements is based upon projections by management of future
operating income and the anticipated reversal of temporary differences that
will result in taxable income. Projections of future earnings were based on
adjusted historical earnings.
In order to fully realize the net deferred tax asset of $13.9 million at
December 31, 1998, the Company will need to generate future taxable income of
approximately $39.7 million prior to the expiration of the Company's NOLs.
Management believes that it is more likely than not that the required amount of
such taxable income will be realized. Management will periodically reconsider
the assumptions utilized in the projection of future earnings and, if
warranted, increase or decrease the amount of deferred tax assets through an
adjustment to the valuation allowance.
F-10
<PAGE>
At December 31, 1998, the Company had NOLs of $14.2 million with $11.7
million expiring in 2009 and $2.5 million expiring in 2012. The Company had
capital loss carryforwards of $25.5 million expiring in 1999. In addition,
foreign tax credit carryforwards of $7.9 million, investment tax credit
carryforwards of $1.4 million and minimum tax credit carryforwards of $1.1
million are available to reduce future U.S. federal income taxes. The foreign
tax credit carryforwards expire in 1999 through 2003 and the investment tax
credit carryforwards expire in 1999 through 2001. The minimum tax credit
carryforwards have no expiration.
(D) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
A $1,077,000 charge, net of an income tax benefit of $554,000, was reported
in the transition period as "Cumulative effect of change in accounting
principle" as a result of the Company's change in accounting for certain start-
up costs to conform to the accounting required by SOP 98-5, Reporting on the
Costs of Start-Up Activities. This statement requires the expense recognition,
as opposed to capitalization, of costs related to start-up activities. The
expenses were primarily related to development costs of casino gaming ventures
that had previously been capitalized prior to July 1, 1997, the date of the
Company's early adoption. The impact of this change in accounting principle on
operating income in the transition period resulted in expenses of $576,000.
Pro forma amounts, assuming SOP 98-5 was applied beginning in fiscal year
1996, follow with comparisons to actual results (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months
Ended Ended Ended
6/30/96 6/30/97 12/31/97
----------- ----------- ----------
<S> <C> <C> <C>
Income before cumulative effect of
change in accounting principle
As reported.............................. $4,252 $21,394 $2,142
Pro forma................................ 4,179 20,857 2,142
Net income
As reported.............................. 4,252 21,394 1,065
Pro forma................................ 4,179 20,857 2,142
Income per common share before
cumulative effect of change in accounting
principle
Basic, as reported....................... 0.21 1.05 0.10
Basic, pro forma......................... 0.21 1.03 0.10
Diluted, as reported..................... 0.21 1.03 0.10
Diluted, pro forma....................... 0.21 1.01 0.10
Net income per common share
Basic, as reported....................... 0.21 1.05 0.05
Basic, pro forma......................... 0.21 1.03 0.10
Diluted, as reported..................... 0.21 1.03 0.05
Diluted, pro forma....................... $ 0.21 $ 1.01 $ 0.10
</TABLE>
F-11
<PAGE>
(E) INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted EPS (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Fiscal Six Fiscal
Year Year Months Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
------- ------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
For basic and diluted EPS--income (loss)
available to common shareholders:
Income before cumulative effect of change
in accounting principle................. $4,252 $21,394 $2,142 $4,320
Cumulative effect of change in accounting
principle (net of tax benefit).......... -- -- (1,077) --
------ ------- ------ ------
Net income............................... $4,252 $21,394 $1,065 $4,320
====== ======= ====== ======
Denominator:
Denominator for basic EPS--weighted-average
shares.................................... 20,014 20,318 20,487 20,548
------ ------- ------ ------
Effect of dilutive potential common shares:
Stock options............................ 217 315 331 488
Nonvested restricted stock awards........ 30 61 -- --
------ ------- ------ ------
Dilutive potential common shares....... 247 376 331 488
------ ------- ------ ------
Denominator for diluted EPS--adjusted
weighted-average shares................... 20,261 20,694 20,818 21,036
====== ======= ====== ======
Basic EPS
Income before cumulative effect of change
in accounting principle................... $ 0.21 $ 1.05 $ 0.10 $ 0.21
Cumulative effect of change in accounting
principle (net of tax benefit)............ -- -- (0.05) --
------ ------- ------ ------
Net income................................. $ 0.21 $ 1.05 $ 0.05 $ 0.21
====== ======= ====== ======
Diluted EPS
Income before cumulative effect of change
in accounting principle................... $ 0.21 $ 1.03 $ 0.10 $ 0.21
Cumulative effect of change in accounting
principle (net of tax benefit)............ -- -- (0.05) --
------ ------- ------ ------
Net income................................. $ 0.21 $ 1.03 $ 0.05 $ 0.21
====== ======= ====== ======
</TABLE>
During the fiscal year ended December 31, 1998, approximately 340,000
weighted-average shares of Class B restricted stock awards outstanding were not
included in the computation of diluted EPS as the operating income objectives
applicable to these restricted awards were not met during that period.
Additionally, options to purchase approximately 115,000 weighted-average shares
of Class B common stock were outstanding during fiscal year 1998 but were not
included in the computation of diluted EPS as the options' exercise prices were
greater than the average market price of the Class B common stock, the effect
of which was antidilutive. For additional disclosure regarding the Company's
stock plans, see Note N.
(F) COMPREHENSIVE INCOME
During fiscal year 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"). Statement 130 requires that the Company disclose
comprehensive income in addition to net income. Comprehensive income is a more
inclusive financial reporting methodology that encompasses net income and all
other non-shareholder changes in equity (other comprehensive income or loss).
F-12
<PAGE>
The following sets forth the components of other comprehensive loss, and the
related income tax benefit allocated to each item (in thousands):
<TABLE>
<CAPTION>
Fiscal Fiscal Six Fiscal
Year Year Months Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
------- ------- -------- --------
<S> <C> <C> <C> <C>
Foreign currency
translation adjustment
(1)................... $(11) $(37) $(37) $ (4)
Unrealized loss on
marketable securities
(2)................... $ -- $ -- $ -- $(21)
---- ---- ---- ----
</TABLE>
- --------
(1) Net of a related tax benefit of $6,000, $20,000, $20,000 and $2,000 for
fiscal years 1996 and 1997, the transition period and fiscal year 1998,
respectively.
(2) Net of a related tax benefit of $11,000 for fiscal year 1998.
(G) MARKETABLE SECURITIES
Marketable securities, purchased in connection with the Company's Deferred
Compensation Plans, at December 31, 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Holding Holding Fair
Cost Gains Losses Value
---- ---------- ---------- -----
<S> <C> <C> <C> <C>
Equity Securities.............................. $537 $-- $32 $505
---- --- --- ----
</TABLE>
(H) INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. Dec.
31, 31,
1997 1998
------- -------
<S> <C> <C>
Paper.......................................................... $ 7,573 $ 8,277
Editorial and other prepublication costs....................... 6,002 6,052
Merchandise finished goods..................................... 11,801 11,356
------- -------
Total inventories.............................................. $25,376 $25,685
======= =======
</TABLE>
(I) PROGRAMMING COSTS
Current programming costs consisted of the following (in thousands):
<TABLE>
<CAPTION>
Dec. Dec.
31, 31,
1997 1998
------- -------
<S> <C> <C>
Released, less amortization.................................... $32,601 $34,573
Completed, not yet released.................................... 8,903 8,769
------- -------
Total current programming costs................................ $41,504 $43,342
======= =======
</TABLE>
Noncurrent programming costs of $8.3 million and $6.0 million at December
31, 1997 and 1998, respectively, consisted of programs in the process of
production.
F-13
<PAGE>
(J) ADVERTISING COSTS
The Company expenses advertising costs as incurred, except for direct-
response advertising. Direct-response advertising consists primarily of costs
associated with the promotion of magazine subscriptions, principally the
production of direct-mail solicitation materials and postage, and the
distribution of catalogs for use in the Catalog Group. The capitalized direct-
response advertising costs are amortized over the period during which the
future benefits are expected to be received, principally six to 12 months.
At December 31, 1997 and 1998, advertising costs of $9.1 million and $9.9
million, respectively, were deferred and included in "Deferred subscription
acquisition costs" and "Other current assets" in the Consolidated Balance
Sheets. For fiscal years 1996 and 1997, the transition period and fiscal year
1998, the Company's advertising expense was $44.3 million, $46.2 million, $23.9
million and $49.5 million, respectively.
(K) FINANCING OBLIGATIONS
The final principal payment of long-term debt was paid in October 1997 in
the amount of $350,000.
At December 31, 1997, the Company had a $35.0 million revolving credit
agreement with two domestic banks, which expired in March 1999. In December
1998, the credit agreement was amended to increase the line to $40.0 million,
while all other terms and conditions remained the same. The credit agreement
provided for interest based on fixed spreads over specified index rates and for
commitment fees based on a combination of the unused portion of the total line
of credit and cash balances. The credit agreement, which covered short-term
borrowings and the issuance of letters of credit, was collateralized by
substantially all of the Company's assets and required the Company to maintain
financial covenants pertaining to net worth, leverage and cash flow.
Additionally, there were limitations on other indebtedness and investments, and
cash dividends were prohibited. The carrying value of these borrowings
approximated the fair market value of the debt. See Note W "Subsequent Events."
At December 31, 1997, short-term borrowings of $10.0 million and a letter of
credit of $0.4 million were outstanding compared to short-term borrowings and a
letter of credit outstanding at December 31, 1998 of $29.8 million and $0.2
million, respectively. The weighted average interest rates on the short-term
borrowings outstanding at December 31, 1997 and 1998 were 8.04% and 7.16%,
respectively.
(L) DISCONTINUED OPERATIONS
In the early 1980's, the Company discontinued its resort hotel operations,
and the related liabilities have been segregated in the Consolidated Balance
Sheets at December 31, 1997 and 1998 as "Reserves for losses on disposals of
discontinued operations." In January 1993, the Company received a General
Notice from the EPA as a PRP in connection with a site identified as the
Southern Lakes Trap & Skeet Club, located at the Resort, formerly owned by a
subsidiary of the Company. The Resort was sold by the Company's subsidiary to
LG Americana-GKP Joint Venture in 1982. Two other entities were also identified
as PRPs in the notice. The notice related to actions that may be ordered taken
by the EPA to sample for and remove contamination in soils and sediments,
purportedly caused by skeet shooting activities at the Resort property. On
September 10, 1998, the Company entered into a consent decree settling this
matter, which was entered by the Wisconsin District Court on November 25, 1998.
The Company had established adequate reserves to cover its $0.5 million share
of the cost (based on an agreement with one of the other PRPs) of the agreed
upon remediation, which was paid in December 1998.
(M) CONTINGENCIES
Playboy TV's cable programming is delivered primarily through a
communications satellite transponder. The Company's current transponder lease,
effective January 1, 1993, contains protections typical in the industry against
transponder failure, including access to spare transponders. Access to the
transponder may be denied
F-14
<PAGE>
under certain narrowly defined circumstances relating to violations of law or
threats to revoke the license of the satellite owner to operate the satellite
based on programming content. The Company has the right, however, to challenge
any such denial and believes that the transponder will continue to be available
to it through the end of the expected life of the satellite (currently
estimated to be 2004). The Company's current lease term expires October 30,
2001 and can be renewed for an additional three years. Material limitations on
the Company's access to cable systems or satellite transponder capacity could
materially adversely affect the Company's operating performance. There have
been no instances in which the Company has been denied access to the
transponder it leases.
In February 1996, the Company filed suit challenging Section 505, which,
among other things, regulates the cable transmission of adult programming, such
as the Company's domestic pay television programs. Enforcement of Section 505
commenced May 18, 1997. The Company's full case on the merits was heard by the
Delaware District Court in March 1998. In December 1998, the Delaware District
Court unanimously declared Section 505 unconstitutional. Even though the
defendants have appealed this judgment, the ruling gives cable systems the
right to resume 24-hour broadcast of adult services so long as cable systems
comply with, and consumers are made aware of, the "blocking on request"
requirement of Section 504. Management believes that the effect of Section 505
on the Company's financial performance may continue until the case is finally
decided.
(N) STOCK PLANS
The Company presently has three plans under which stock options or shares
may be granted: the 1991 Non-Qualified Stock Option Plan for Non-Employee
Directors (the "1991 Directors' Plan"), the Amended and Restated 1995 Stock
Incentive Plan for key employees (the "1995 Stock Incentive Plan") and the 1997
Equity Plan for Non-Employee Directors of Playboy Enterprises, Inc., as Amended
(the "1997 Directors' Plan"). Previously, stock options were also granted under
the 1989 Stock Option Plan (the "1989 Option Plan"). There are no shares
available for future grant under this plan.
The 1989 Option Plan authorized the grant of nonqualified stock options to
key employees to purchase up to 342,500 shares of Class A common stock ("Class
A stock") and 1,027,500 shares of Class B common stock ("Class B stock") at a
price that was equal to the fair market value at date of grant. The remaining
103,000 Class B shares available for future grants under the 1989 Option Plan
were transferred into the 1995 Stock Incentive Plan and the remaining 175,100
Class A shares that were not yet granted were canceled.
The 1991 Directors' Plan provides for the grant of nonqualified stock
options to each nonemployee director to purchase shares of Class B stock at a
price that is equal to the fair market value at date of grant. Options to
purchase an aggregate of 80,000 shares of Class B stock may be granted under
the 1991 Directors' Plan.
The 1995 Stock Incentive Plan provides for the grant of nonqualified and
incentive stock options, shares of restricted stock and deferred stock and
other performance-based equity awards. Non-Qualified Stock Option, Incentive
Stock Option and Restricted Stock Agreements are presently outstanding under
the 1995 Stock Incentive Plan. At December 31, 1998, a total of 1,803,000
shares of Class B stock were authorized under the 1995 Stock Incentive Plan,
which includes the previously mentioned 103,000 shares that were transferred
from the 1989 Option Plan. The Non-Qualified and Incentive Stock Option
Agreements authorize the grant of options to key employees to purchase shares
of Class B stock at a price that is not less than the fair market value at date
of grant. The Restricted Stock Agreements provide for the issuance of Class B
stock to key employees subject to certain restrictions that lapse upon the
Company meeting specified operating income objectives pertaining to a fiscal
year. Such operating income objectives are set at $7.5 million, $10.0 million,
$15.0 million and $20.0 million, after related expenses. However, vesting
requirements for certain restricted stock grants will lapse automatically for
any remaining restricted stock, generally 10 years from the date awarded. The
first two operating income objectives of $7.5 million and $10.0 million were
met in fiscal years 1996 and 1997, respectively, and 121,564 and 115,939 shares
of restricted stock vested in August 1996 and
F-15
<PAGE>
1997, respectively. The remaining two operating income objectives of $15.0
million and $20.0 million have not been met as of December 31, 1998, and, as a
result, no additional shares of restricted stock have vested and thus no
related compensation expense has been recognized. Compensation expense
recognized in fiscal years 1996 and 1997 in connection with the 1995 Stock
Incentive Plan was $972,000 and $1,078,000, respectively.
In November 1996, the Board authorized the grant of nonqualified stock
options to purchase a total of 20,000 shares of the Company's Class B stock to
two nonemployee directors under no specific plan (the "Board Grant"). The
resolution provided for the grant of these options at a price equal to the fair
market value at date of grant.
The 1997 Directors' Plan authorizes the issuance of a total of 200,000
shares of Class B stock and (a) authorizes the grant of stock options, shares
of restricted stock and stock awards to nonemployee directors of the Company,
(b) provides for the receipt by such directors of all compensation (other than
deferred compensation) paid to them for attendance at Board and committee
meetings in the form of shares of Class B stock, and (c) authorizes such
directors to elect to receive up to 100% of their annual retainer in the form
of shares of Class B stock. The exercise price of options granted to
nonemployee directors under the 1997 Directors' Plan must equal or exceed the
fair market value at date of grant. As of December 31, 1998, Class B stock had
been granted as restricted stock awards and issued as payment to the members of
the Board for attendance at Board and committee meetings under the 1997
Directors' Plan. The restricted stock awards are subject to certain
restrictions that lapse upon the Company meeting specified operating income
objectives pertaining to a fiscal year. Such operating income objectives are
set at $15.0 million and $20.0 million, after related expenses, upon attainment
of which the restrictions lapse as to 30% and 70% of the shares of restricted
stock, respectively. However, vesting requirements for the restricted stock
grants will lapse automatically for any remaining restricted stock, generally
10 years from the date awarded. As previously discussed, the operating income
objectives of $15.0 million and $20.0 million have not been met as of December
31, 1998, and, as a result, no shares of restricted stock have vested and thus
no related compensation expense has been recognized in connection with the 1997
Directors' Plan.
F-16
<PAGE>
Stock options under all of the plans discussed above are generally for a
term of 10 years and are generally exercisable in cumulative annual
installments of 25% each year, beginning on the first anniversary of the date
such options were initially granted. At December 31, 1998, options to purchase
115,000 shares of Class A stock and 637,750 shares of Class B stock were
exercisable under the 1989 Option Plan, options to purchase 32,500 shares of
Class B stock were exercisable under the 1991 Directors' Plan, options to
purchase 353,750 shares of Class B stock were exercisable under the 1995 Stock
Incentive Plan and options to purchase 10,000 shares of Class B stock were
exercisable under the Board Grant. The Board has reserved treasury shares for
issuance upon exercise of options under the 1989 Option Plan and the Board
Grant. Shares issued upon exercise of options granted or shares awarded under
the 1991 Directors' Plan, the 1995 Stock Incentive Plan and the 1997 Directors'
Plan may be either treasury shares or newly issued shares. At December 31,
1998, a total of 516,702 shares of Class B stock were available for future
grants under the 1991 Directors' Plan, the 1995 Stock Incentive Plan and the
1997 Directors' Plan combined. Stock option transactions are summarized as
follows:
Stock Options Outstanding
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------------ ------------------
Class A Class B Class A Class B
------- --------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995............ 150,000 1,308,750 6.29 7.59
Granted................................. -- 40,000 -- 9.31
Exercised............................... (35,000) (159,750) 4.88 4.84
Canceled................................ -- (42,500) -- 9.13
------- ---------
Outstanding at June 30, 1996............ 115,000 1,146,500 6.72 7.97
Granted................................. -- 477,500 -- 13.87
Exercised............................... -- (57,500) -- 7.55
Canceled................................ -- (51,250) -- 12.72
------- ---------
Outstanding at June 30, 1997............ 115,000 1,515,250 6.72 9.74
Granted................................. -- 70,000 -- 15.03
Exercised............................... -- (15,000) -- 7.96
Canceled................................ -- -- -- --
------- ---------
Outstanding at December 31, 1997........ 115,000 1,570,250 6.72 9.99
Granted................................. -- 167,500 -- 16.15
Exercised............................... -- (76,250) -- 10.96
Canceled................................ -- (140,000) -- 13.60
------- ---------
Outstanding at December 31, 1998........ 115,000 1,521,500 6.72 10.29
======= ========= ======= ========
</TABLE>
The weighted average exercise prices for Class A and Class B exercisable
options at June 30, 1996 were $6.72 and $7.36, respectively, and at June 30,
1997 were $6.72 and $7.59, respectively. The weighted average exercise prices
for Class A and Class B exercisable options at December 31, 1997 were $6.72 and
$8.00, respectively. The following table summarizes information regarding stock
options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Class A
$6.69-$7.38................. 115,000 1.15 6.72 115,000 6.72
Class B
$5.38-$9.38................. 960,165 3.50 7.82 877,373 7.67
$10.31-$13.31............... 116,335 5.56 11.36 56,627 10.95
$13.63-$17.69............... 445,000 8.40 15.33 100,000 14.79
--------- ---- ----- --------- -----
Total Class B............... 1,521,500 5.09 10.29 1,034,000 8.54
</TABLE>
F-17
<PAGE>
The following table summarizes transactions related to restricted stock
awards:
Restricted Stock Awards Outstanding
<TABLE>
<CAPTION>
Class B
--------
<S> <C>
Outstanding at June 30, 1995.......................................... 516,250
Awarded............................................................... 20,000
Vested................................................................ --
Canceled.............................................................. (50,000)
--------
Outstanding at June 30, 1996.......................................... 486,250
Awarded............................................................... 68,750
Vested................................................................ (121,564)
Canceled.............................................................. (28,125)
--------
Outstanding at June 30, 1997.......................................... 405,311
Awarded............................................................... 37,500
Vested................................................................ (115,939)
Canceled.............................................................. --
--------
Outstanding at December 31, 1997...................................... 326,872
Awarded............................................................... 46,250
Vested................................................................ --
Canceled.............................................................. (42,500)
--------
Outstanding at December 31, 1998...................................... 330,622
========
</TABLE>
Effective July 1, 1996, the Company established an Employee Stock Purchase
Plan (the "Purchase Plan") to provide substantially all regular full- and part-
time employees an opportunity to purchase shares of its Class B stock through
payroll deductions up to the lower of 10% of base salary, or $25,000 of fair
market value of Class B stock per calendar year (as required by the Internal
Revenue Service). The funds are withheld and then used to acquire stock on the
last trading day of each quarter, based on the closing price less a 15%
discount. Under the Purchase Plan, shares issued upon purchase may be either
treasury shares or newly issued shares. At December 31, 1998, an aggregate of
50,000 shares of Class B stock have been authorized under the Purchase Plan, of
which a total of approximately 41,500 have been sold to employees.
Stock options are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, no compensation expense has been recognized related to these
options. Under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123"), compensation expense is
measured at the grant date based on the fair value of the award and is
recognized over the vesting period. The Company has adopted the disclosure-only
provisions of Statement 123. Had compensation expense for these options been
determined consistent with Statement 123, the Company's net income and basic
and diluted EPS would have been reduced to the following pro forma amounts (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
6/30/96* 6/30/97* 12/31/97* 12/31/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income
As reported.................... $4,252 $21,394 $1,065 $4,320
Pro forma...................... 4,227 21,008 658 3,194
Basic EPS
As reported.................... 0.21 1.05 0.05 0.21
Pro forma...................... 0.21 1.03 0.03 0.16
Diluted EPS
As reported.................... 0.21 1.03 0.05 0.21
Pro forma...................... $ 0.21 $ 1.02 $ 0.03 $ 0.15
------ ------- ------ ------
</TABLE>
F-18
<PAGE>
* Certain reclassifications have been made to conform to the current
presentation.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Risk-free interest rate. 5.98% 6.56% 6.14% 5.63%
Expected stock price
volatility............. 40.00% 40.00% 40.07% 41.47%
Expected dividend yield. -- -- -- --
----- ----- ----- -----
</TABLE>
For fiscal years 1996 and 1997, the transition period and fiscal year 1998,
an expected life of six years was used for all of the stock options except one
as noted below, and the weighted average fair value of options granted was
$4.55, $6.87, $7.35 and $7.91, respectively. For one incentive stock option
granted in fiscal year 1997 with a shorter term, an expected life of five years
was used, and the weighted average fair value of that option was $6.17. For
fiscal years 1996 and 1997, the transition period and fiscal year 1998, the
weighted average fair value of restricted stock awarded was $8.88, $13.67,
$14.05 and $16.14, respectively.
The pro forma effect on net income for fiscal years 1996 and 1997, the
transition period and fiscal year 1998 may not be representative of the pro
forma effect on net income in future years as the Statement 123 method of
accounting for pro forma compensation expense has not been applied to options
granted prior to July 1, 1995.
(O) ACQUISITIONS
On March 29, 1996, the Company acquired an additional 45% interest in
VIPress, publisher of the Polish edition of Playboy magazine, for approximately
$315,000, including approximately $85,000 in acquisition costs. Subsequent to
this purchase, the Company owned 90% of the capital stock of VIPress. The
acquisition was accounted for under the purchase method and, accordingly, the
results of VIPress since the date of acquisition have been included in the
Company's Consolidated Statements of Operations. Prior to acquiring the
additional 45% interest, the investment was accounted for under the equity
method and, as such, the Company's proportionate share of net income or loss
from VIPress prior to the acquisition was included in nonoperating income or
expense. The acquisition resulted in goodwill of approximately $106,000 which
is being amortized over five years. The Company's interest in VIPress may be
reduced to a minimum of 80% by the end of fiscal year 2000 as a result of
shares that may be sold for a nominal amount to two managing minority partners
under an incentive plan that requires certain performance objectives to be met.
At December 31, 1998, the Company's interest in VIPress was 84%. Pro forma
results reflecting this acquisition, assuming it had been made at the beginning
of fiscal year 1996, would not be materially different from the results
reported.
(P) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest and income taxes was as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Six Months Fiscal Year
Ended Ended Ended Ended
6/30/96 6/30/97 12/31/97 12/31/98
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Interest......................... $ 610 $ 480 $ 268 $1,505
Income taxes..................... $1,851 $2,293 $1,545 $2,367
------ ------ ------ ------
</TABLE>
During the fiscal year ended December 31, 1998, the Company had noncash
investing activities related to the sale of an investment. See Note B.
(Q) LEASE COMMITMENTS
The Company's principal lease commitments are for office space, a satellite
transponder used in its domestic pay television operations, and furniture and
equipment. The office leases provide for the Company's payment of its
proportionate share of operating expenses and real estate taxes in addition to
monthly base rent.
F-19
<PAGE>
The Company's corporate headquarters located in Chicago were under terms of
a 15-year lease, which commenced September 1, 1989. In August 1996, the Company
renegotiated this lease on more favorable terms, including a lower base rent
which results in savings of approximately $2.0 million over the original term
of the lease, combined with the Company obtaining certain expansion options in
the building. Further, the lease term was extended three years to 2007, with a
renewal option for an additional five years. The Company exercised its options
to expand in July 1998 due to growth of the Playboy Online Group. The
Entertainment Group's Los Angeles principal office is under terms of a 10-year
lease, which commenced April 1, 1992. The Publishing Group's New York office is
under a lease with a term of approximately 11 years, which commenced April 1,
1993. The Publishing Group's Los Angeles photography studio is under terms of a
10-year lease, which commenced January 1, 1994. The Catalog Group's suburban
Chicago operations facility is under terms of a 10 1/2 year lease, which
commenced June 1, 1997. These leases provide for base rent abatements; however,
rent expense is being charged to operations on a straight-line basis over the
terms of the leases.
The Company's lease for its current satellite transponder commenced January
1, 1993. This operating lease is for a term of approximately nine years and
includes an end-of-lease purchase option.
The Company leases certain furniture and equipment for use in its
operations. The leases are for terms of two to five years and generally include
end-of-lease purchase options.
Rent expense for fiscal years 1996 and 1997, the transition period and
fiscal year 1998 was $9,177,000, $9,611,000 $5,232,000 and $11,250,000,
respectively. There was no contingent rent expense or sublease income in any of
these periods.
The minimum commitments at December 31, 1998, under operating leases with
noncancelable terms in excess of one year, were as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal year ending December 31 Leases
- ------------------------------ ---------
<S> <C>
1999.................................................................. $11,564
2000.................................................................. 11,131
2001.................................................................. 9,812
2002.................................................................. 5,125
2003.................................................................. 4,488
Later years........................................................... 11,056
-------
Total minimum lease payments.......................................... $53,176
=======
</TABLE>
(R) SEGMENT INFORMATION
During fiscal year 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131, which is
based on the management approach to segment reporting, includes requirements to
report selected segment information quarterly, and annual entity-wide
disclosures related to products and services, geographic areas and major
customers. The adoption of Statement 131 did not affect results of operations
or financial position of the Company, but did affect the disclosure of segment
information.
The Company's six reportable segments are as follows: Publishing,
Entertainment, Product Marketing, Catalog, Casino Gaming and Playboy Online.
Publishing Group operations include the publication of Playboy magazine; other
domestic publishing businesses, comprising newsstand specials, calendars and
ancillary businesses; and the licensing of international editions of Playboy
magazine. Entertainment Group operations include the production and marketing
of programming through domestic Playboy TV, other domestic pay television,
international television and worldwide home video businesses as well as the
worldwide distribution of programming through AdulTVision and the production or
co-production and distribution of feature films.
F-20
<PAGE>
Product Marketing Group operations include licensing the manufacture, sale and
distribution of consumer products carrying one or more of the Company's
trademarks and the licensing of artwork owned by the Company. Catalog Group
operations include the direct marketing of four catalogs: Critics' Choice
Video, Collectors' Choice Music, Playboy and Spice. Casino Gaming Group
operations include the development of casino gaming opportunities. Playboy
Online Group operations include the development and operation of the Company's
Internet sites, including Playboy.com, Playboy Cyber Club and e-commerce sites
for the Company's catalogs.
F-21
<PAGE>
These reportable segments are based on the nature of the products offered.
The chief operating decision maker of the Company evaluates performance and
allocates resources based on several factors, of which the primary financial
measure is segment operating results. The accounting policies of the reportable
segments are the same as those described in Note A. The following table
represents financial information by reportable segment:
<TABLE>
<CAPTION>
Fiscal Fiscal Six Fiscal
Year Year Months Year
Ended Ended Ended Ended
(in thousands) 6/30/96* 6/30/97* 12/31/97* 12/31/98
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues (1)
Publishing............................ $131,800 $135,710 $ 66,329 $137,997
Entertainment......................... 64,826 74,716 37,356 91,049
Product Marketing..................... 7,125 7,968 4,199 7,081
Catalog............................... 71,634 75,391 39,340 74,393
Casino Gaming......................... -- -- -- --
Playboy Online........................ 1,202 2,838 2,317 7,098
-------- -------- -------- --------
Total................................. $276,587 $296,623 $149,541 $317,618
======== ======== ======== ========
Income (Loss) Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle
Publishing............................ $ 9,041 $ 8,665 $ 3,898 $ 6,332
Entertainment......................... 9,204 18,254 7,991 26,165
Product Marketing..................... 3,692 3,512 1,614 365
Catalog............................... 5,231 4,630 1,835 4,100
Casino Gaming......................... -- -- (541) (1,108)
Playboy Online........................ 207 (113) (943) (6,528)
Corporate Administration and
Promotion............................ (17,882) (19,203) (9,395) (24,358)
Investment income..................... 88 73 50 127
Interest expense...................... (680) (427) (289) (1,551)
Gain on sale of investment............ -- -- -- 4,272
Other, net............................ (452) (640) 70 (791)
-------- -------- -------- --------
Total................................. $ 8,449 $ 14,751 $ 4,290 $ 7,025
======== ======== ======== ========
Identifiable Assets (2) (3)
Publishing............................ $ 41,353 $ 37,974 $ 46,579 $ 50,400
Entertainment......................... 57,947 72,251 71,353 85,783
Product Marketing..................... 5,196 6,404 6,589 5,764
Catalog............................... 12,542 15,338 18,931 17,871
Casino Gaming......................... 2,499 2,936 1,863 4,416
Playboy Online........................ 432 704 636 1,282
Corporate Administration and
Promotion............................ 30,900 39,935 39,996 46,591
-------- -------- -------- --------
Total................................. $150,869 $175,542 $185,947 $212,107
======== ======== ======== ========
Depreciation and Amortization (2) (4)
Publishing............................ $ 967 $ 1,046 $ 325 $ 641
Entertainment......................... 21,836 22,027 11,356 25,531
Product Marketing..................... 217 176 78 155
Catalog............................... 639 651 237 464
Casino Gaming......................... -- -- -- --
Playboy Online........................ -- -- -- 28
Corporate Administration and
Promotion............................ 2,682 2,573 1,009 2,193
-------- -------- -------- --------
Total................................. $ 26,341 $ 26,473 $ 13,005 $ 29,012
======== ======== ======== ========
</TABLE>
*Certain reclassifications have been made to conform to the current
presentation.
F-22
<PAGE>
- --------
(1) Net revenues include revenues attributable to foreign countries of $35,932,
$42,956, $21,292 and $45,231 in fiscal years 1996 and 1997, the transition
period and fiscal year 1998, respectively. Revenues from individual foreign
countries were not material. Revenues are attributed to countries based on
the location of customers, except Product Marketing royalties where
revenues are attributed based upon the location of licensees.
(2) Substantially all property and equipment and capital expenditures are
reflected in Corporate Administration and Promotion; depreciation, however,
is allocated to the reporting segments.
(3) Long-lived assets of the Company located in foreign countries were not
material.
(4) Amounts include depreciation of property and equipment, amortization of
intangible assets, expenses related to the 1995 Stock Incentive Plan and
amortization of investments in entertainment programming.
(S) BENEFIT PLANS
The Company's Employees Investment Savings Plan is a defined contribution
plan consisting of two components, a profit sharing plan and a 401(k) plan. The
profit sharing plan covers all employees who have completed 12 months of
service of at least 1,000 hours. The Company's discretionary contribution to
the profit sharing plan is distributed to each eligible employee's account in
an amount equal to the ratio of each eligible employee's compensation, subject
to Internal Revenue Service limitations, to the total compensation paid to all
such employees. Contributions for fiscal years 1996 and 1997, the transition
period and fiscal year 1998 were approximately $620,000, $1,035,000, $275,000
and $420,000, respectively.
Eligibility for the 401(k) plan is either upon date of hire or after an
employee has completed 12 months of service of at least 1,000 hours, depending
on the employee's annual salary. The Company makes matching contributions to
the 401(k) plan based on each participating employee's contributions and
eligible compensation. In fiscal year 1996 the maximum matching contributions
were 2 3/4%, and in fiscal year 1997, the transition period and fiscal year
1998, the maximum matching contributions were 3 1/2%, of each employee's
eligible compensation, subject to Internal Revenue Service limitations. For
fiscal year 1999, the maximum matching contribution will continue to be 3 1/2%
of such compensation. The Company's matching contributions for fiscal years
1996 and 1997, the transition period and fiscal year 1998 related to this plan
were approximately $630,000, $920,000, $455,000 and $1,015,000, respectively.
The Company has two non-qualified Deferred Compensation Plans, which permit
certain employees and nonemployee directors to annually elect to defer a
portion of their compensation. The Deferred Compensation Plan for employees is
available to approximately 80 of the Company's most highly compensated
employees. The Board's Deferred Compensation Plan is available to nonemployee
directors. Effective January 1, 1998, the Company amended both plans which,
among other things, increased the maximum deferral percentages, added new
investment alternatives, and added a Company match which applies to certain
contributions made by employees. Employee participants can defer between 6% and
25% (in 1% increments) of salary, and up to 100% (in 10% increments) of
payments due under executive incentive compensation plans or sales commissions.
Directors receive annual retainers and meeting fees for their services.
Directors may defer between 25% and 100% (in 25% increments) of their annual
retainers, or they may be paid in cash, Class B stock, or in a combination
thereof, at the director's option. Directors' meeting fees are paid in Class B
stock, and can be deferred at the director's option. Amounts deferred under
these plans are credited each quarter with (a) interest at a rate equal to the
preceding quarter's average composite yield on corporate bonds as published by
Moody's Investor's Service, Inc. or (b) earnings equal to the performance of
selected mutual funds, depending on the participant's investment allocations.
In addition, stock deferrals by the directors track the performance of the
Company's Class B stock. A Company match is provided to employees who
participate in the Deferred Compensation Plan, at a certain specified minimum
level, and whose annual eligible earnings exceed the salary limitation
contained in the 401(k) plan. All amounts deferred and earnings credited are
100% vested immediately and are general unsecured obligations of the Company.
Such obligations totaled $1,722,000 and $2,580,000 at December 31, 1997 and
1998, respectively, and are included in "Noncurrent liabilities" in the
Consolidated Balance Sheets.
F-23
<PAGE>
(T) CABLE TELEVISION
Effective April 1, 1986, the Company assumed marketing and distribution
responsibilities for The Playboy Channel and other North American Playboy pay
television products (the "Service") from its former distributor, Rainbow
Programming Services Company ("Rainbow"). The termination agreement provided
for the assignment to the Company of all distribution contracts with cable
system operators and others that carried the Service.
Under the termination agreement, Rainbow was to receive a monthly royalty of
5% of revenues received by the Company for the Service, subject to a minimum
royalty based on number of subscribers, as long as the Service is in operation.
These royalty payments were discontinued April 30, 1996, when the agreement
ended. The agreement provided for noncompetition in the North American
distribution and production of an adult-oriented pay television service by
Rainbow as long as royalty payments were being made.
(U) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal year 1997, the transition period and fiscal year 1998 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Quarters Ended Fiscal
---------------------------------------- Year
Fiscal Year Ended June 30, Sept. Ended
1997 30 Dec. 31 Mar. 31 June 30 6/30/97
- -------------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............... $66,224 $79,779 $73,247 $77,373 $296,623
Gross profit............... 9,963 13,978 14,394 13,265 51,600
Operating income........... 2,429 5,265 4,667 3,384 15,745
Net income................. 1,037 2,825 2,510 15,022 21,394
Basic EPS.................. 0.05 0.14 0.12 0.74 1.05
Diluted EPS................ 0.05 0.14 0.12 0.72 1.03
Common stock price.........
Class A high............. 14 7/8 12 1/2 15 5/8 15
Class A low.............. 12 1/4 9 5/8 9 1/2 10 7/8
Class B high............. 15 1/4 12 3/4 16 3/8 16
Class B low.............. $ 12 1/8 $ 9 1/2 $ 9 3/8 $ 11 1/4
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
------------------ Six Months
Sept. Ended
Six Months Ended December 31, 1997 30 Dec. 31 12/31/97
- ---------------------------------- ------- ------- ----------
<S> <C> <C> <C>
Net revenues................................. $68,214 $81,327 $149,541
Gross profit................................. 11,121 11,762 22,883
Operating income............................. 2,328 2,131 4,459
Income before cumulative effect of change in
accounting principle........................ 1,095 1,047 2,142
Net income (loss)............................ 1,095 (30) 1,065
Basic and diluted EPS........................
Income before cumulative effect of change in
accounting principle........................ 0.05 0.05 0.10
Net income................................... 0.05 0.00 0.05
Common stock price...........................
Class A high............................... 13 7/8 15 1/8
Class A low................................ 10 3/8 12 3/16
Class B high............................... 15 3/8 16 11/16
Class B low................................ $ 10 3/4 $ 13 1/2
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Fiscal
Quarters Ended Year
Fiscal Year Ended December ---------------------------------------------- Ended
31, 1998 Mar. 31 June 30 Sept. 30 Dec. 31 12/31/98
- -------------------------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.............. $71,762 $77,820 $ 75,655 $92,381 $317,618
Gross profit.............. 10,002 14,352 9,097 14,689 48,140
Operating income (loss)... 1,244 3,991 (2,442) 2,175 4,968
Net income (loss)......... 60 2,079 (2,689) 4,870 4,320
Basic and diluted EPS..... 0.00 0.10 (0.13) 0.24 0.21
Common stock price........
Class A high............ 16 11/16 18 3/8 17 20 1/4
Class A low............. 13 1/2 15 3/4 11 1/8 11
Class B high............ 17 13/16 19 11/16 18 3/4 22 7/16
Class B low............. $ 14 5/8 $ 17 $ 12 3/16 $ 11 7/8
</TABLE>
Net income for the quarter ended June 30, 1997 includes a federal income tax
benefit of $13,486 related to net operating loss and tax credit carryforwards.
See Note C.
The net loss for the quarter ended December 31, 1997 includes a charge of
$1,077 reported as "Cumulative effect of change in accounting principle" as a
result of the Company's early adoption of SOP 98-5. See Note D.
Net income for the quarter ended December 31, 1998 includes a gain on sale
of investment of $4,272. See Note B.
(V) RELATED PARTIES
The Company holds less than 20% interests in several investments in
international ventures. During fiscal years 1996 and 1997, the transition
period and fiscal year 1998, the Company sold approximately $0.7 million, $3.0
million, $2.0 million and $7.0 million, respectively, of entertainment
programming to these ventures. As of December 31, 1997 and 1998, the Company
had net receivables from these ventures of $1.5 million and $5.0 million,
respectively.
(W) SUBSEQUENT EVENTS
On March 15, 1999, the Company completed its acquisition of Spice, a leading
provider of adult television entertainment. For each share of Spice common
stock, stockholders of Spice received $3.60 in cash and 0.1133 shares of the
Company's Class B stock. The total transaction value, including assumption of
debt, was approximately $136 million. Spice stockholders also retained
ownership of Directrix, Inc., a former subsidiary of Spice that owns Spice's
digital operations center, an option to acquire Emerald Media, Inc. and certain
rights to Spice's library of adult films.
In connection with the Company's acquisition of Spice, the Company entered
into a new credit agreement dated as of February 26, 1999 for borrowings of up
to $150.0 million. The new agreement provided financing (a) to purchase all of
the outstanding shares of Spice and to pay related acquisition costs, (b) to
repay the existing debt of the Company and Spice, and (c) to fund future
general working capital and investment needs.
The new agreement consists of three components: a $40.0 million revolving
credit facility with a $10.0 million letter of credit sublimit; a $35.0 million
tranche A term loan; and a $75.0 million tranche B term loan. The revolving
credit facility and tranche A term loan mature on March 15, 2004. The tranche B
term loan matures on March 15, 2006. Loans bear interest at a rate equal to
specified index rates plus margins that fluctuate based on the Company's ratio
of consolidated debt to consolidated adjusted EBITDA. The Company's obligations
under the agreement are unconditionally guaranteed by each of the Company's
existing and
F-25
<PAGE>
subsequently acquired domestic restricted subsidiaries (all domestic
subsidiaries except Playboy Online, Inc.). The agreement and related guarantees
are collateralized by substantially all of the Company's and domestic
restricted subsidiaries' assets.
The agreement contains financial covenants requiring the Company to maintain
certain leverage, cash flow, interest coverage and fixed charge coverage
ratios. Other covenants include limitations on other indebtedness, investments,
capital expenditures and dividends. The agreement also requires mandatory
prepayments with net cash proceeds resulting from excess cash flow, asset sales
and the issuance of certain debt obligations or equity securities, with certain
exceptions as described in the agreement.
F-26
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