UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ....................
Commission file number 1-6813
Playboy Enterprises, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4249478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 North Lake Shore Drive, Chicago, IL 60611
(Address of principal executive offices) (Zip Code)
(312) 751-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes|X| No|_|
As of October 31, 2000, there were 4,859,102 shares of Class A Common Stock,
par value $0.01 per share, and 19,398,260 shares of Class B Common Stock, par
value $0.01 per share, outstanding.
<PAGE>
PLAYBOY ENTERPRISES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Page
Item 1. Financial Statements ----
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Quarters Ended September 30,
2000 and 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss for the Nine Months Ended September 30,
2000 and 1999 (Unaudited) 4
Condensed Consolidated Balance Sheets at September 30,
2000 (Unaudited) and December 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
2
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Quarters Ended September 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net revenues $ 77,890 $ 104,240
--------- ---------
Costs and expenses
Cost of sales (66,047) (71,550)
Selling and administrative expenses (13,889) (17,270)
--------- ---------
Total costs and expenses (79,936) (88,820)
--------- ---------
Operating income (loss) (2,046) 15,420
--------- ---------
Nonoperating income (expense)
Investment income 254 489
Interest expense (2,403) (2,470)
Equity in operations of Playboy TV International, LLC and other 958 (12,324)
Loss on sale related to Critics' Choice Video (2,700) --
Playboy.com registration statement expenses (1,524) --
Legal settlement (622) --
Other, net (270) (268)
--------- ---------
Total nonoperating expense (6,307) (14,573)
--------- ---------
Income (loss) before income taxes (8,353) 847
Income tax benefit (expense) 1,847 (1,925)
--------- ---------
Net loss (6,506) (1,078)
--------- ---------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment 3 1
Unrealized loss on marketable securities (28) (38)
--------- ---------
Total other comprehensive loss (25) (37)
--------- ---------
Comprehensive loss $ (6,531) $ (1,115)
========= =========
Basic and diluted weighted average number
of common shares outstanding 24,258 23,583
========= =========
Basic and diluted net loss per common share $ (0.27) $ (0.05)
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
for the Nine Months Ended September 30 (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net revenues $ 228,175 $ 255,383
--------- ---------
Costs and expenses
Cost of sales (201,996) (200,279)
Selling and administrative expenses (40,090) (42,655)
Restructuring expenses (257) --
--------- ---------
Total costs and expenses (242,343) (242,934)
--------- ---------
Operating income (loss) (14,168) 12,449
--------- ---------
Nonoperating income (expense)
Investment income 943 1,040
Interest expense (6,522) (5,876)
Equity in operations of Playboy TV International, LLC and other 150 (13,450)
Loss on sale related to Critics' Choice Video (2,700) --
Playboy.com registration statement expenses (1,524) --
Legal settlement (622) --
Gain on sale of investment -- 1,728
Other, net (905) (742)
--------- ---------
Total nonoperating expense (11,180) (17,300)
--------- ---------
Loss before income taxes (25,348) (4,851)
Income tax benefit (expense) 6,724 (241)
--------- ---------
Net loss (18,624) (5,092)
--------- ---------
Other comprehensive income (loss) (net of tax)
Foreign currency translation adjustment (9) (60)
Unrealized gain (loss) on marketable securities (2) 57
--------- ---------
Total other comprehensive loss (11) (3)
--------- ---------
Comprehensive loss $ (18,635) $ (5,095)
========= =========
Basic and diluted weighted average number
of common shares outstanding 24,233 22,558
========= =========
Basic and diluted net loss per common share $ (0.77) $ (0.23)
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,192 $ 23,528
Marketable securities 3,599 3,064
Receivables, net of allowance for doubtful accounts of
$6,686 and $5,738, respectively 37,413 40,670
Receivables from related parties, net of allowance for doubtful
accounts of $2,232 6,198 14,225
Inventories 28,956 23,831
Programming costs 49,447 52,546
Deferred subscription acquisition costs 12,176 13,579
Other current assets 14,642 17,367
--------- ---------
Total current assets 154,623 188,810
--------- ---------
Property and equipment, net 11,671 9,415
Receivables from related parties 57,500 62,500
Programming costs 6,211 3,100
Goodwill, net of amortization of $4,051 and $2,490, respectively 87,984 89,539
Trademarks, net of amortization of $13,906 and $11,819, respectively 50,293 48,387
Net deferred tax assets 13,416 5,390
Other noncurrent assets 22,681 22,261
--------- ---------
Total assets $ 404,379 $ 429,402
========= =========
Liabilities
Financing obligations $ 2,881 $ 15,000
Accounts payable 29,726 31,868
Accounts payable to related parties 609 2,690
Accrued salaries, wages and employee benefits 3,160 8,839
Deferred revenues 41,653 42,354
Deferred revenues from related parties 4,933 6,525
Other liabilities and accrued expenses 15,216 12,395
--------- ---------
Total current liabilities 98,178 119,671
Financing obligations 88,619 75,000
Financing obligations to related parties 5,000 --
Deferred revenues from related parties 51,300 55,225
Other noncurrent liabilities 17,636 18,225
--------- ---------
Total liabilities 260,733 268,121
--------- ---------
Shareholders' Equity
Common stock, $0.01 par value
Class A voting - 7,500,000 shares authorized; 4,859,102 issued 49 49
Class B nonvoting - 30,000,000 shares authorized; 19,678,957
and 19,595,358 issued, respectively 197 196
Capital in excess of par value 121,242 120,337
Stock receivable (328) --
Retained earnings 25,618 44,242
Unearned compensation restricted stock (3,196) (3,624)
Accumulated other comprehensive income 64 81
--------- ---------
Total shareholders' equity 143,646 161,281
--------- ---------
Total liabilities and shareholders' equity $ 404,379 $ 429,402
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months Ended September 30 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $ (18,624) $ (5,092)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation of property and equipment 2,600 1,424
Amortization of intangible assets 5,970 4,382
Equity in operations of Playboy TV International, LLC and other (150) 13,450
Loss on sale related to Critics' Choice Video 2,700 --
Gain on sale of investment -- (1,728)
Amortization of investments in entertainment programming 24,626 25,913
Investments in entertainment programming (24,638) (28,366)
Net change in operating assets and liabilities (14,414) 6,855
Other, net 641 390
--------- ---------
Net cash provided by (used for) operating activities (21,289) 17,228
--------- ---------
Cash Flows From Investing Activities
Acquisition of Spice Entertainment Companies, Inc. -- (64,600)
Acquisition of Rouze Media, Inc. (1,152) --
Sale of investments 975 9,693
Additions to property and equipment (4,726) (687)
Funding of equity interests in international ventures (1,740) (7,632)
Purchase of marketable securities (538) (2,014)
Other, net (88) (16)
--------- ---------
Net cash used for investing activities (7,269) (65,256)
--------- ---------
Cash Flows From Financing Activities
Repayment of short-term borrowings -- (29,750)
Proceeds from financing obligations 5,000 110,000
Repayment of financing obligations (15,000) (20,000)
Net proceeds from revolving credit facility 16,500 --
Net proceeds from public equity offering -- 24,561
Payment of debt assumed in acquisition of Spice Entertainment Companies, Inc. -- (10,471)
Deferred financing fees (590) (4,669)
Proceeds from stock plans 1,312 1,522
--------- ---------
Net cash provided by financing activities 7,222 71,193
--------- ---------
Net increase (decrease) in cash and cash equivalents (21,336) 23,165
Cash and cash equivalents at beginning of period 23,528 341
--------- ---------
Cash and cash equivalents at end of period $ 2,192 $ 23,506
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
6
<PAGE>
PLAYBOY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) BASIS OF PREPARATION
The financial information included in these financial statements is unaudited
but, in the opinion of management, reflects all normal recurring adjustments
necessary for a fair presentation of the results for the interim periods. The
interim results of operations and cash flows are not necessarily indicative of
those results and cash flows for the entire year. These financial statements
should be read in conjunction with the financial statements and notes to the
financial statements contained in the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (the "1999 Form 10-K") of Playboy Enterprises, Inc.
and its subsidiaries (the "Company"). Certain amounts reported for prior periods
have been reclassified to conform to the current presentation.
(B) RESTRUCTURING EXPENSES
In fiscal year 1999, the Company began a cost reduction effort that led to a
work force reduction of 49 employees, or approximately 6%, through company-wide
layoffs and attrition. A total of 26 employees were terminated (including eight
in the first quarter of fiscal year 2000) representing total restructuring
charges of $1,348,000, of which $257,000 was recorded in the first quarter of
fiscal year 2000. A total of $1,276,000 related to the restructuring had been
paid as of September 30, 2000, resulting in a remaining liability of $72,000.
Additionally, 23 positions were eliminated through attrition. All charges
related to the restructuring were recorded as of March 31, 2000.
(C) LEGAL SETTLEMENT
In October 2000, the Company paid a legal settlement. The net expense of $0.6
million was recorded as nonoperating expense in the third quarter of fiscal year
2000.
(D) INCOME TAXES
The Company's net deferred tax asset increased to $16.3 million at September 30,
2000 as a result of a taxable loss for the current nine-month period, and
consisted of $2.9 million of current deferred tax assets and $13.4 million of
noncurrent deferred tax assets. At December 31, 1999, the Company was in a net
deferred tax asset position of $8.3 million that consisted of $2.9 million of
current deferred tax assets and $5.4 million of noncurrent deferred tax assets.
As reported in the Company's 1999 Form 10-K, the deferred tax assets include
principally the anticipated benefit of net operating loss carryforwards
("NOLs"). Realization of those assets 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.
(E) COMPREHENSIVE INCOME (LOSS)
The following sets forth the components of other comprehensive income (loss),
and the related tax expense or benefit allocated to each item (in thousands):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Foreign currency translation adjustment(1)........... $ 3 $ 1 $ (9) $ (60)
Unrealized gain (loss) on marketable securities(2)... $ (28) $ (38) $ (2) $ 57
</TABLE>
(1) Net of related tax expense of $1 and a tax benefit of $5 for the quarter and
nine months ended September 30, 2000, respectively, and a related tax
benefit of $33 for the nine months ended September 30, 1999. There was no
related income tax expense for the quarter ended September 30, 1999.
(2) Net of a related tax benefit of $16 and $1 for the quarter and nine months
ended September 30, 2000, respectively, and a related tax benefit of $21 and
tax expense of $30 for the quarter and nine months ended September 30, 1999,
respectively.
7
<PAGE>
(F) LOSS PER COMMON SHARE
For the quarter and nine months ended September 30, 2000, options to purchase
approximately 2,020,000 and 2,065,000 shares, respectively, of the Company's
Class A and Class B common stock combined and approximately 270,000 and 280,000
shares, respectively, of Class B restricted stock awards outstanding were not
included in the computation of diluted earnings per common share. The inclusion
of these shares would have been antidilutive. As a result, the weighted average
number of basic and diluted common shares outstanding for the quarter and nine
months ended September 30, 2000 were equivalent.
(G) INVENTORIES
Inventories, which are stated at the lower of cost (average cost and specific
cost) or fair value, consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
2000 1999
------- -------
Paper ............................................ $ 8,496 $ 6,226
Editorial and other prepublication costs ......... 8,327 6,432
Merchandise finished goods ....................... 12,133 11,173
------- -------
Total inventories .............................. $28,956 $23,831
======= =======
(H) PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
(Unaudited)
Sept. 30, Dec. 31,
2000 1999
------- -------
Land ............................................. $ 292 $ 292
Buildings and improvements ....................... 8,510 8,467
Furniture and equipment .......................... 19,377 15,778
Leasehold improvements ........................... 9,934 8,681
------- -------
Total property and equipment ..................... 38,113 33,218
Accumulated depreciation ......................... (26,442) (23,803)
------- -------
Total property and equipment, net .............. $11,671 $ 9,415
======= =======
(I) PUBLIC EQUITY OFFERING
In January 2000, Playboy.com, Inc. ("Playboy.com"), a component of the Playboy
Online Group, filed a registration statement for a planned sale of a minority of
its equity in an Initial Public Offering ("IPO"). Due to current market
conditions, the registration statement has been withdrawn. Deferred costs of
$1.5 million were written off in the third quarter of fiscal year 2000 as
nonoperating expense. An IPO is expected to be completed when market conditions
allow.
(J) FINANCING OBLIGATIONS
Effective June 9, 2000, the Company's credit agreement was amended to increase
the amount of allowable funding from the Company's existing revolving credit
facility to Playboy.com from $10.0 million to a maximum of $17.5 million. Upon
completion of an IPO, all amounts advanced to Playboy.com above $10.0 million
shall be repaid from Playboy.com to the Company. During September 2000, Hugh M.
Hefner made a $5.0 million loan to Playboy.com. The loan bears interest at
10.50% and is due two years from the date of the loan.
8
<PAGE>
(K) SEGMENT INFORMATION
The following tables represent financial information by reportable segment (in
thousands):
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarters Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Revenues
Entertainment ...................................... $ 28,208 $ 52,009 $ 76,725 $ 98,698
Publishing ......................................... 33,455 33,586 97,391 97,675
Playboy Online ..................................... 6,556 3,089 18,757 8,095
Catalog ............................................ 7,862 13,776 28,111 43,812
Other Businesses ................................... 1,809 1,780 7,191 7,103
--------- --------- --------- ---------
Total ........................................... $ 77,890 $ 104,240 $ 228,175 $ 255,383
========= ========= ========= =========
Income (Loss) Before Income Taxes
Entertainment ...................................... $ 9,077 $ 25,537 $ 18,486 $ 35,965
Publishing ......................................... 1,200 542 2,251 3,441
Playboy Online ..................................... (6,188) (1,919) (17,957) (5,585)
Catalog ............................................ 71 (704) (298) (1,257)
Other Businesses ................................... 42 (236) 538 (81)
Corporate Administration and Promotion ............. (6,248) (7,800) (16,931) (20,034)
Restructuring expenses ............................. -- -- (257) --
Investment income .................................. 254 489 943 1,040
Interest expense ................................... (2,403) (2,470) (6,522) (5,876)
Equity in operations of Playboy TV
International, LLC and other .................... 958 (12,324) 150 (13,450)
Loss on sale related to Critics' Choice Video ...... (2,700) -- (2,700) --
Playboy.com registration statement expenses......... (1,524) -- (1,524) --
Legal settlement ................................... (622) -- (622) --
Gain on sale of investment ......................... -- -- -- 1,728
Other, net ......................................... (270) (268) (905) (742)
--------- --------- --------- ---------
Total ........................................... $ (8,353) $ 847 $ (25,348) $ (4,851)
========= ========= ========= =========
EBITDA (1)
Entertainment ...................................... $ 18,768 $ 39,698 $ 47,422 $ 65,203
Publishing ......................................... 1,382 689 2,725 3,886
Playboy Online ..................................... (5,694) (1,912) (16,790) (5,564)
Catalog ............................................ 122 (649) (160) (1,092)
Other Businesses ................................... 95 (195) 685 43
Corporate Administration and Promotion ............. (9,982) (6,758) (18,778) (15,863)
Restructuring expenses ............................. -- -- (257) --
--------- --------- --------- ---------
Total ........................................... $ 4,691 $ 30,873 $ 14,847 $ 46,613
========= ========= ========= =========
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
2000 1999
--------- ---------
<S> <C> <C>
Identifiable Assets
Entertainment .................................... $ 267,732 $ 281,167
Publishing ....................................... 50,592 51,273
Playboy Online ................................... 8,054 4,924
Catalog .......................................... 9,598 13,599
Other Businesses ................................. 5,336 7,082
Corporate Administration and Promotion (2) ....... 63,067 71,357
--------- ---------
Total (2) ..................................... $ 404,379 $ 429,402
========= =========
</TABLE>
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation of property and equipment, amortization of intangible assets,
amortization of investments in entertainment programming, amortization of
deferred financing fees related to the Spice acquisition and equity in
operations of Playboy TV International, LLC ("PTVI") and other. EBITDA
should not be considered an alternative to any measure of performance or
liquidity under generally accepted accounting principles. Similarly, it
should not be inferred that EBITDA is more meaningful than any of those
measures.
(2) The decrease in identifiable assets since December 31, 1999 is primarily
due to cash and cash equivalents, largely due to the repayment of $15,000
of financing obligations in February 2000.
9
<PAGE>
(L) CONTINGENCIES
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act of 1996 (the "Telecommunications Act"), which, among
other things, regulates the cable transmission of adult programming, such as the
Company's domestic pay television programs. Enforcement of Section 505 of the
Telecommunications Act ("Section 505") commenced May 18, 1997. The Company's
full case on the merits was heard by the United States District Court in
Wilmington, Delaware (the "Delaware District Court") in March 1998. On December
28, 1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants appealed this judgment and the United States
Supreme Court (the "Supreme Court") heard the appeal on November 30, 1999. On
May 22, 2000, the Supreme Court upheld the Company's position and the Delaware
District Court's ruling that Section 505 was unconstitutional.
(M) ACQUISITION
On March 15, 1999, the Company completed its acquisition of Spice Entertainment
Companies, Inc. ("Spice"), a leading provider of adult television entertainment.
The final determination of the purchase price, including transaction costs and
Spice debt, was approximately $127 million, which resulted in goodwill recorded
of approximately $90 million.
(N) ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("Statement 133"). Statement 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The effective date of this statement was
delayed in June 1999 through the issuance of Statement of Financial Accounting
Standards No. 137 ("Statement 137"). The effective date has been extended to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138 ("Statement 138"), which
amends Statement 133 to ease implementation difficulties. Management is
evaluating the effect that adoption of Statement 133, as amended, will have on
the Company's financial statements.
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
139, Rescission of FASB Statement No. 53 and Amendments to FASB Statements No.
63, 89, and 121 ("Statement 139"). Statement 139 rescinds FASB Statement No. 53,
Financial Reporting by Producers and Distributors of Motion Picture Films
("Statement 53"). In June 2000, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 00-2, Accounting by
Producers or Distributors of Films ("SOP 00-2"), which provides new film
accounting and reporting standards. An entity that is a producer or distributor
of films and that previously applied Statement 53 will be required to follow the
guidance in SOP 00-2. Statement 139 and SOP 00-2 are effective for fiscal years
beginning after December 15, 2000. Management believes that adoption of
Statement 139 and SOP 00-2 will not have a material impact on the Company's
financial statements.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125
("Statement 140"). Statement 140 revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures. This statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. Management believes that adoption of Statement 140 will not have
a material impact on the Company's financial statements.
In December 1999, the U.S. Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal year 2000.
Management is evaluating the effect that adoption of SAB 101 will have on the
Company's financial statements.
(O) SUBSEQUENT EVENT
In October 2000, the Company completed the sale of its Critics' Choice Video
catalog and related Internet site and operations. In connection with the sale,
the Company recorded an estimated nonoperating loss of $2.7 million in the third
quarter of fiscal year 2000.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a summary of the results of operations of the Company for
the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues ....................................... $ 77.9 $ 104.2 $ 228.2 $ 255.4
======= ======= ======= =======
Segment Income (Loss) .............................. $ (2.0) $ 15.4 $ (14.0) $ 12.4
Restructuring Expenses ............................. -- -- (0.2) --
------- ------- ------- -------
Operating Income (Loss) ............................ $ (2.0) $ 15.4 $ (14.2) $ 12.4
======= ======= ======= =======
Net Loss ........................................... $ (6.5) $ (1.1) $ (18.6) $ (5.1)
======= ======= ======= =======
Basic and Diluted Net Loss per Common Share......... $(0.27) $ (0.05) $ (0.77) $ (0.23)
======= ======= ======= =======
</TABLE>
The Company's revenues decreased 25% to $77.9 million for the quarter ended
September 30, 2000 compared to the prior year quarter. Revenues were $228.2
million for the nine months ended September 30, 2000, an 11% decrease compared
to the prior year. These decreases were primarily due to the timing of scheduled
payments from PTVI to the Entertainment Group of the $100.0 million purchase
primarily related to the international TV rights to the Company's film library,
and the expected decline of Catalog Group revenues.
The declines in operating performance of $17.4 million and $26.6 million
for the quarter and nine-month period, respectively, were primarily due to the
same timing of PTVI payments to the Entertainment Group combined with higher
planned investments in the Playboy Online Group.
The net losses for all periods reflect PTVI joint venture results that are
reported as nonoperating items, including the Company's 19.9% equity in
operations of PTVI, the elimination of unrealized profits of certain
transactions between the Company and PTVI and gains related to the transfer of
certain assets to PTVI. The prior year periods also include the accounting
effects of the formation of the PTVI joint venture.
Beginning with the quarter ended March 31, 2000, certain brand-related
businesses were combined and are now reported as the Other Businesses Group.
This group includes product marketing and casino gaming, which were previously
reported as separate groups, and certain Company-wide marketing activities,
consisting of Playboy Jazz Festival and Playmate promotions, that had previously
been reported in Corporate Administration and Promotion results.
Several of the Company's businesses can experience variations in quarterly
performance. As a result, the Company's performance in any quarterly period is
not necessarily reflective of full-year or longer-term trends. Playboy magazine
newsstand revenues vary from issue to issue, with revenues generally higher for
holiday issues and any issues including editorial or pictorial features that
generate 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. E-commerce revenues are
typically impacted by the year-end holiday buying season and decreased Internet
traffic during the summer months. Additionally, international TV revenues vary
due to the timing of recognizing library license fees related to PTVI.
11
<PAGE>
ENTERTAINMENT GROUP
The revenues and segment income of the Entertainment Group were as follows
for the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Domestic TV Networks ........... $ 18.6 $ 19.0 $ 57.4 $ 55.1
International TV ............... 7.5 29.7 12.7 32.9
Worldwide Home Video ........... 1.8 1.8 5.9 7.8
Movies and Other ............... 0.3 1.5 0.7 2.9
------- ------- ------- -------
Total Revenues ............... $ 28.2 $ 52.0 $ 76.7 $ 98.7
======= ======= ======= =======
Segment Income
Before Programming Expense ..... $ 17.3 $ 38.2 $ 43.1 $ 61.9
Programming Expense ............ (8.2) (12.7) (24.6) (25.9)
------- ------- ------- -------
Total Segment Income ......... $ 9.1 $ 25.5 $ 18.5 $ 36.0
======= ======= ======= =======
</TABLE>
Entertainment Group revenues and segment income decreased primarily due to
scheduled lower library license fee payments from PTVI, partially offset by
lower related expenses.
The following discussion focuses on the profit contribution of each
business before programming expense.
Domestic TV Networks
For the quarter, revenues from domestic TV networks of $18.6 million
decreased $0.4 million, or 2%, primarily due to lower Playboy TV satellite
direct-to-home ("DTH") revenues, principally due to a significant decline in
PrimeStar subscribers as a result of DirecTV's acquisition of PrimeStar.
PrimeStar service was discontinued as of September 30, 2000. Profit contribution
increased $0.2 million for the quarter as the lower revenues were more than
offset by overall lower direct costs, primarily marketing.
For the nine-month period, revenues of $57.4 million increased $2.3
million, or 4%, and profit contribution increased $1.1 million, primarily due to
higher revenues from Spice. Also contributing were higher Playboy TV cable
pay-per-view revenues, due in part to an increase in digital households, and
higher sales of programming to other networks. These increases were partially
offset by lower Playboy TV DTH revenues, principally related to PrimeStar, and
overall higher direct costs, partially related to the Spice acquisition. The
Company has recently experienced an overall decline in buys as a result of
increasing competition from more explicit networks.
The approximate number of households were as follows for the periods
indicated below (in millions):
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
--------- --------- ----------
Cable (1):
Playboy TV Analog Addressable............. 11.9 11.7 12.3
Playboy TV Digital........................ 2.6 1.3 0.7
Spice Analog Addressable.................. 12.8 13.6 14.9
Spice Digital............................. 3.9 2.8 1.6
DTH:
Playboy TV................................ 14.2 12.4 11.9
(1) Currently there is an overlap of cable analog addressable and digital
households due to some cable operators offering both analog and digital
platforms to the same households.
12
<PAGE>
In February 1996, the Company filed suit challenging Section 505 of the
Telecommunications Act, 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. On
December 28, 1998, the Delaware District Court unanimously declared Section 505
unconstitutional. The defendants appealed this judgment and the Supreme Court
heard the appeal on November 30, 1999. On May 22, 2000, the Supreme Court upheld
the Company's position and the Delaware District Court's ruling that Section 505
was unconstitutional. See Part II. Item 1. "Legal Proceedings."
International TV
For the quarter and nine-month period, profit contribution from the
international TV business decreased $21.7 million and $18.5 million,
respectively, on $22.2 million, or 75%, and $20.2 million, or 61%, decreases in
revenues, respectively. These decreases were due to the timing of library
license fees from PTVI.
Worldwide Home Video
For the quarter, revenues and profit contribution from the worldwide home
video business were relatively flat. For the nine-month period, revenues
decreased $1.9 million, or 24%, while profit contribution decreased $1.3
million. These decreases were largely due to lower average domestic sales per
title for Playboy Home Video new releases combined with lower domestic sales
from The Eros Collection.
Movies and Other
For the quarter and nine-month period, profit contribution from movies and
other businesses decreased $1.1 million and $2.0 million, respectively, on $1.2
million, or 79%, and $2.2 million, or 76%, decreases in revenues primarily due
to scheduled lower library license fees from PTVI. Also contributing to the
decrease for the nine-month comparison were lower sales of previously released
movies.
The Entertainment Group's administrative expenses decreased $1.7 million
for the quarter and $2.0 million for the nine-month period primarily due to
lower accruals for performance-related variable compensation.
Programming Expense
Programming expense decreased $4.5 million and $1.3 million for the quarter
and nine-month period, respectively. These decreases were primarily related to
the scheduled lower library license fees from PTVI. Higher amortization for
domestic TV networks largely offset the decrease for the nine-month comparison.
PUBLISHING GROUP
The revenues and segment income of the Publishing Group were as follows for
the periods indicated below (in millions):
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Playboy Magazine ............... $ 26.0 $ 25.9 $ 76.6 $ 76.7
Other Domestic Publishing ...... 4.5 5.6 12.1 13.8
International Publishing ....... 3.0 2.1 8.7 7.2
------- ------- ------- -------
Total Revenues ............... $ 33.5 $ 33.6 $ 97.4 $ 97.7
======= ======= ======= =======
Segment Income ................. $ 1.2 $ 0.5 $ 2.3 $ 3.4
======= ======= ======= =======
</TABLE>
For both the quarter and nine months ended September 30, 2000, Publishing
Group revenues remained relatively flat compared to the prior year periods.
13
<PAGE>
For the quarter, Playboy magazine revenues were relatively flat compared to
the prior year quarter. Advertising revenues increased $1.3 million, or 17%, due
to both higher ad pages and average net revenue per page. Lower circulation
revenues of $1.2 million, or 6%, as a result of $0.8 million, or 14%, lower
newsstand revenues and $0.4 million, or 3%, lower subscription revenues mostly
offset the increased advertising revenues. The lower newsstand revenues were
largely a result of an unfavorable variance related to newsstand sales
adjustments for prior issues.
For the nine-month period, Playboy magazine revenues were relatively flat
compared to the prior year. Advertising revenues increased $4.5 million, or 20%,
due to both higher ad pages and average net revenue per page. Advertising sales
for the fourth quarter magazine issues are closed and the Company expects to
report relatively flat ad revenues and 5% fewer ad pages compared to the quarter
ended December 31, 1999, resulting in expected 13% and 5% increases in ad
revenues and ad pages, respectively, for fiscal year 2000 compared to fiscal
year 1999. Lower circulation revenues of $4.6 million, or 8%, offset the
increased advertising revenues largely due to extraordinary newsstand sales in
the prior year of the April 1999 issue featuring Rena Mero, the World Wrestling
Federation champion and character formerly known as Sable. Subscription revenues
decreased $0.9 million, or 2%.
Revenues from other domestic publishing businesses decreased $1.1 million,
or 19%, and $1.7 million, or 12%, respectively, for the quarter and nine-month
period largely reflecting lower sales of special editions.
International publishing revenues increased $0.9 million, or 41%, and $1.5
million, or 21%, respectively, for the quarter and nine-month period primarily
due to higher revenues from the Company's majority-owned Polish publishing joint
venture combined with higher royalties.
For the quarter, Publishing Group segment income increased $0.7 million, or
121%, compared to the prior year quarter primarily due to the higher Playboy
magazine advertising revenues, lower accruals for performance-related variable
compensation and lower ancillary businesses expenses. The lower Playboy magazine
newsstand and special editions revenues combined with lower Playboy magazine
subscription profitability partially offset the above. For the nine-month
period, segment income decreased $1.1 million, or 35%, primarily due to the
lower Playboy magazine newsstand and special editions revenues combined with
lower Playboy magazine subscription profitability and higher editorial costs.
Higher Playboy magazine advertising profitability, lower accruals for
performance-related variable compensation and lower manufacturing and ancillary
businesses expenses partially offset the above.
Many magazines receive a significant portion of their advertising revenues
from companies selling tobacco products. Because only approximately 30% of
Playboy magazine's revenues are from advertising, the percentage of ad pages
from tobacco of approximately 25% is a smaller overall revenue percentage than
for many other magazines. Nevertheless, significant legislative or regulatory
limitations on the ability of those companies to advertise in magazines could
materially adversely affect the Company's operating performance. The Food and
Drug Administration (the "FDA") announced a regulation in August 1996 which
prohibited the publication of tobacco advertisements containing drawings, colors
or pictures. After a Federal District Court and a Circuit Court of Appeals
invalidated the FDA's authority to issue regulations restricting tobacco
advertising, the government appealed to the Supreme Court and on March 21, 2000,
the Supreme Court held that the FDA lacks authority to regulate tobacco
products.
PLAYBOY ONLINE GROUP
The revenues and segment losses of the Playboy Online Group were as follows
for the periods indicated below (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues ....................... $ 6.6 $ 3.1 $ 18.8 $ 8.1
======= ======= ======= =======
Segment Loss ................... $ (6.2) $ (1.9) $ (18.0) $ (5.6)
======= ======= ======= =======
For the quarter and nine months ended September 30, 2000, Playboy Online
Group revenues increased $3.5
14
<PAGE>
million, or 112%, and $10.7 million, or 132%, respectively, compared to the
prior year periods. These increases were primarily due to higher e-commerce and
subscription revenues. The significantly higher e-commerce revenues were due to
both the integration of the Playboy and Spice catalog businesses to e-commerce
effective October 1, 1999 and higher product sales. The nine-month period also
reflected higher advertising and sponsorships revenues.
For the quarter and nine-month period, the group's segment losses increased
$4.3 million and $12.4 million, respectively, reflecting planned higher
expenses, principally related to sales and marketing, content and product
development and administration. In February 2000, Playboy.com purchased
substantially all of the assets and assumed certain liabilities of Rouze Media,
Inc. ("Rouze"), an Internet site that is currently being redesigned and will be
relaunched and operated as a new section of Playboy.com. The aggregate purchase
price consisted of $1.2 million in cash as a guarantee against future revenues,
certain assumed liabilities plus direct costs of the transaction.
In January 2000, Playboy.com, a component of the Playboy Online Group,
filed a registration statement for a planned sale of a minority of its equity in
an IPO. Due to current market conditions, the registration statement has been
withdrawn. Deferred costs of $1.5 million were written off in the third quarter
of fiscal year 2000 as nonoperating expense. An IPO is expected to be completed
when market conditions allow.
CATALOG GROUP
The revenues and segment income (losses) of the Catalog Group were as
follows for the periods indicated below (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues ....................... $ 7.9 $ 13.8 $ 28.1 $ 43.8
======= ======= ======= =======
Segment Income (Loss) .......... $ 0.1 $ (0.7) $ (0.3) $ (1.3)
======= ======= ======= =======
For the quarter and nine months ended September 30, 2000, Catalog Group
revenues decreased $5.9 million, or 43%, and $15.7 million, or 36%,
respectively, compared to the prior year periods. These decreases reflected
planned lower circulation for the Critics' Choice Video and Collectors' Choice
Music catalogs and the absence of fiscal year 2000 revenues related to the
Playboy and Spice catalogs. The Playboy and Spice catalogs have been integrated
as direct commerce businesses within the Company's branded e-commerce business
and, effective October 1, 1999, have been included in Playboy Online Group
results. For both the quarter and nine-month period, the lower revenues were
more than offset by lower related costs, which resulted in improvements in
segment performance of $0.8 million and $1.0 million, respectively.
In October 2000, the Company completed the sale of its Critics' Choice
Video catalog and related Internet site and operations to Infinity Resources,
Inc. ("Infinity"). Infinity will sublease the 106,000 square-foot customer
service and order fulfillment facility and related equipment from the Company
and will provide fulfillment services for PlayboyStore.com, Cyberspice.com and
the Collectors' Choice Music catalog.
The Company is actively pursuing buyers for the planned sale of its
Collectors' Choice Music catalog and related Internet site and expects to
complete this sale by the end of the year which will end the Company's presence
in the catalog business.
OTHER BUSINESSES GROUP
The revenues and segment income (losses) of the Other Businesses Group were
as follows for the periods indicated below (in millions):
Quarters Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
Revenues ....................... $ 1.8 $ 1.8 $ 7.2 $ 7.1
======= ======= ======= =======
Segment Income (Loss) .......... $ -- $ (0.2) $ 0.5 $ (0.1)
======= ======= ======= =======
15
<PAGE>
For the quarter ended September 30, 2000, revenues and segment performance
from the Other Businesses Group were relatively flat compared to the prior year.
For the nine-month period, revenues were relatively flat while segment
performance increased $0.6 million.
CORPORATE ADMINISTRATION AND PROMOTION
Corporate Administration and Promotion expenses for the quarter of $6.2
million decreased $1.6 million, or 20%, while expenses for the nine-month period
of $16.9 million decreased $3.1 million, or 15%. These decreases were due
largely to planned reductions in marketing spending combined with lower accruals
for performance-related variable compensation.
RESTRUCTURING EXPENSES
In fiscal year 1999, the Company began a cost reduction effort that led to
a work force reduction of 49 employees, or approximately 6%, through
company-wide layoffs and attrition. A total of 26 employees were terminated
(including eight in the first quarter of fiscal year 2000) representing total
restructuring charges of $1.3 million, of which $0.2 million was recorded in the
first quarter of fiscal year 2000. A total of $1.2 million related to the
restructuring had been paid as of September 30, 2000, resulting in a remaining
liability of $0.1 million. Additionally, 23 positions were eliminated through
attrition. All charges related to the restructuring were recorded as of March
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $2.2 million in cash and cash
equivalents and $96.5 million in financing obligations compared to $23.5 million
in cash and cash equivalents and $90.0 million in financing obligations at
December 31, 1999. In February 2000, the Company made a $15.0 million repayment
on the term loan portion of its financing obligations. At September 30, 2000,
the Company had borrowed $16.5 million under its revolving credit facility. The
Company expects to meet its short- and long-term cash requirements through the
remaining availability under its $35.0 million revolving credit facility.
Effective June 9, 2000, the Company's credit agreement was amended to
increase the amount of allowable funding from the Company's existing revolving
credit facility to Playboy.com from $10.0 million to a maximum of $17.5 million.
Due to current market conditions, the registration statement for the planned
Playboy.com IPO has been withdrawn. An IPO is expected to be completed when
market conditions allow. Upon completion of an IPO, all amounts advanced to
Playboy.com above $10.0 million shall be repaid from Playboy.com to the Company.
During September 2000, Hugh M. Hefner made a $5.0 million loan to Playboy.com.
The loan bears interest at 10.50% and is due two years from the date of the
loan. The Company is presently in discussions with several potential investors,
who have expressed an interest in making an investment in Playboy.com in
connection with strategic business alliances that would result in additional
revenues. The loan, combined with anticipated funding from these investors, is
expected to provide Playboy.com with sufficient liquidity until the market for
an IPO improves.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities was $21.3 million for the nine
months ended September 30, 2000, which reflected $24.6 million of investments in
Company-produced and licensed entertainment programming in the current year. The
nine-month period also reflected $14.4 million of cash used from operating
assets and liabilities primarily due to an increase in net deferred tax assets
as a result of the taxable loss in the current nine-month period. Additionally,
Playboy magazine inventories were higher at September 30, 2000 primarily due to
costs related to the November and holiday issues.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used for investing activities was $7.3 million for the nine-month
period primarily due to $4.7 million of additions to property and equipment. The
Company invested $1.7 million related to its equity interests in international
ventures and acquired Rouze, which resulted in cash paid of $1.2 million in the
current year.
16
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $7.2 million for the
nine-month period principally due to the $16.5 million in borrowings from the
Company's revolving credit facility and the $5.0 million loan from Hugh M.
Hefner, partially offset by the $15.0 million repayment of financing obligations
in the current year.
INCOME TAXES
Based on current tax law, the Company will need to generate approximately
$24.0 million of future taxable income prior to the expiration of the Company's
NOLs for full realization of the $8.3 million net deferred tax asset at December
31, 1999. At December 31, 1999, the Company had NOLs of $14.9 million for tax
purposes, with $11.7 million expiring in 2009, $2.5 million expiring in 2012 and
$0.7 million expiring in 2019.
Management believes that it is more likely than not that the required
amount of such taxable income will be generated in years subsequent to December
31, 1999 and prior to the expiration of the Company's NOLs to realize the $8.3
million net deferred tax asset at December 31, 1999. The Company's net deferred
tax asset increased to $16.3 million at September 30, 2000 as a result of a
taxable loss for the current nine-month period. Following is a summary of the
bases for management's belief that a valuation allowance of $15.9 million at
December 31, 1999 is adequate, and that it is more likely than not that the net
deferred tax asset of $8.3 million will be realized:
o In establishing the net deferred tax asset, management reviewed the
components of the Company's NOLs and determined that they primarily resulted
from several nonrecurring events, which were not indicative of the Company's
ability to generate future earnings.
o Several of the Company's operating groups continue to generate meaningful
earnings, particularly the Entertainment Group, and the Company's investments
in the Entertainment and Playboy Online Groups and the casino gaming business
are anticipated to lead to increased earnings in future years.
o The Company has 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 certain property that would generate
taxable income in future years.
OTHER
In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The effective date of this statement was delayed in June
1999 through the issuance of Statement 137. The effective date has been extended
to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement 138, which amends Statement 133 to ease implementation difficulties.
Management is evaluating the effect that adoption of Statement 133, as amended,
will have on the Company's financial statements.
In June 2000, the FASB issued Statement 139, Rescission of FASB Statement
No. 53 and Amendments to FASB Statements No. 63, 89, and 121. Statement 139
rescinds Statement 53, Financial Reporting by Producers and Distributors of
Motion Picture Films. In June 2000, the AICPA issued SOP 00-2, Accounting by
Producers or Distributors of Films, which provides new film accounting and
reporting standards. An entity that is a producer or distributor of films and
that previously applied Statement 53 will be required to follow the guidance in
SOP 00-2. Statement 139 and SOP 00-2 are effective for fiscal years beginning
after December 15, 2000. Management believes that adoption of Statement 139 and
SOP 00-2 will not have a material impact on the Company's financial statements.
In September 2000, the FASB issued Statement 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125. Statement 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. This statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Management believes that adoption of Statement
140 will not have a material impact on the Company's financial statements.
17
<PAGE>
In December 1999, the SEC issued SAB 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 no later than the fourth quarter of fiscal year 2000.
Management is evaluating the effect that adoption of SAB 101 will have on the
Company's financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Quarterly Report contains "forward-looking statements,"
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as to expectations, beliefs, plans,
objectives and future financial performance, and assumptions underlying or
concerning the foregoing. These forward-looking statements involve risks and
uncertainties, which could cause actual results or outcomes to differ materially
from those expressed in the forward-looking statements. The following are some
of the important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements: (1)
government actions or initiatives, including (a) attempts to limit or otherwise
regulate the sale of adult-oriented materials, including print, video and online
materials or businesses such as casino gaming, (b) regulation of the
advertisement of tobacco products, or (c) substantive changes in postal
regulations or rates; (2) increases in paper prices; (3) changes in distribution
technology and/or unforeseen delays in the implementation of that technology by
the cable and satellite industries, which might affect the Company's plans and
assumptions regarding carriage of its program services; (4) increased
competition for transponders and channel space and any decline in the Company's
access to, and acceptance by, cable and DTH systems; (5) 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; (6) effects of the consolidation taking place nationally in the
single-copy magazine distribution system; (7) marketing issues facing direct
marketing stamp sheet agents; (8) new competition in the cable and DTH markets;
(9) 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 the Company's reliance on
third parties for technology and distribution for its online business; and (10)
potential adverse effects of unresolved Year 2000 problems, including those that
may be experienced by key suppliers.
18
<PAGE>
LEGAL PROCEEDINGS
In February 1996, the Telecommunications Act was enacted. Certain
provisions of the Telecommunications Act are directed exclusively 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 nonsubscribing cable customers. This is
called "bleeding." The practical effect of Section 505 is to require many
existing cable systems to employ additional blocking technology in every
household in every cable system that offers adult programming to prevent any
possibility of bleeding, or to restrict the period during which adult
programming is transmitted from 10:00 p.m. to 6:00 a.m. Penalties for violation
of the Telecommunications Act are significant and include fines and
imprisonment.
On February 26, 1996, one of the Company's subsidiaries filed a civil suit
in the Delaware District Court challenging Section 505 on constitutional
grounds. The suit names as defendants The United States of America, The United
States Department of Justice, Attorney General Janet Reno and the Federal
Communications Commission. On March 7, 1996, the Company was granted a Temporary
Restraining Order ("TRO") staying the implementation and enforcement of Section
505. In granting the TRO, the Delaware District Court found that the Company had
demonstrated it was likely to succeed on the merits of its claim that Section
505 is unconstitutional. On November 8, 1996, eight months after the TRO was
granted, a three-judge panel in the Delaware District Court denied the Company's
request for a preliminary injunction against enforcement of Section 505 and, in
so denying, found that the Company was not likely to succeed on the merits of
its claim. The Company appealed the Delaware District Court's decision to the
Supreme Court and enforcement of Section 505 was stayed pending that appeal. On
March 24, 1997, without opinion, the Supreme Court summarily affirmed the
Delaware District Court's denial of the Company's request for a preliminary
injunction. Enforcement of Section 505 commenced May 18, 1997. On July 22, 1997,
the Company filed a motion for summary judgment on the ground that Section 505
is unconstitutionally vague based on a Supreme Court decision on June 26, 1997
that certain provisions of the Telecommunications Act regulating speech on the
Internet were invalid for numerous reasons, including vagueness. On October 31,
1997, the Delaware District Court denied the motion on the grounds that further
discovery in the case was necessary to assist it in resolving the issues posed
in the motion.
The Company's full case on the merits was heard by the Delaware District
Court in March 1998. On December 28, 1998, the Delaware District Court
unanimously declared Section 505 unconstitutional. The defendants appealed this
judgment and the Supreme Court heard the appeal on November 30, 1999. On May 22,
2000, the Supreme Court upheld the Company's position and the Delaware District
Court's ruling that Section 505 was unconstitutional.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -------------
10.1 Selected Employment, Termination and Other Agreements
a Amendment to Playboy Enterprises, Inc. Severance Agreement
10.2 Promissory note dated September 27, 2000 between Playboy.com, Inc. and
Hugh M. Hefner
27 Financial Data Schedule
---------
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PLAYBOY ENTERPRISES, INC.
-------------------------
(Registrant)
Date November 14, 2000 By /s/ Linda Havard
----------------- -------------------
Linda G. Havard
Executive Vice President,
Finance and Operations,
and Chief Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)
20
